Q3 2022 Mettler-Toledo International Inc Earnings Call
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Good afternoon.
My name is Andre and I will be your conference operator today.
At this time I would like to welcome everyone to the Mettler Toledo third quarter 2022 earnings call. Today's conference is being recorded all.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again.
At this time I would like to turn the conference over to Adam Uhlman at Investor Relations. Please go ahead.
Thanks Ali and good evening, everyone I'm at a moment I'm responsible for Investor relations at Mettler, Toledo, and I'm happy to welcome you all to this call Im joined by Patrick Kaltenbach, Our CEO and Shawn Vadala, our CFO and Mary Finnegan, let.
Let me cover some administrative matters. This call is being webcast and available for replay on our website at <unk> Dot com a copy of the press release and the presentation that we will 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.
Active <unk> 1993, and the Securities Exchange Act of $19 34. These statements involve risks uncertainties and other factors that may cause 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 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 statement, except as required by law on today's call. We may use non-GAAP financial measures a reconciliation to these non-GAAP financial measures to the most directly comparable.
GAAP measures is provided in the 8-K.
Available on our website, let me now turn the call over to Patrick.
Thanks, Adam and good evening, everyone. We appreciate you joining our call I.
I am pleased to report another quarter of strong results and some of the <unk> sales and marketing programs, our innovative product portfolio and our supply chain agility continues to be strong competitive advantages.
The highlights of our third quarter performance are detailed on page three of the presentation.
Local currency sales in the quarter increased 10% compared to the prior year.
With particularly strong results in the Americas and in China.
We had very good growth in our laboratory and core industrial businesses.
Our robust sales growth and effective execution of our margin initiatives resulted in very good growth in adjusted operating profit and <unk>.
Adjusted earnings growth, despite significant foreign exchange headwinds.
As we look towards the remainder of the year and on into 2023.
Forecasting remains challenging and we acknowledged as greater uncertainty in the macroeconomic environment.
These uncertainties will require us to remain agile and focused on factors we can control.
Namely leveraging our strong strategic programs to identify and target profitable growth opportunities.
We continue to strengthen our market position and benefit from the strong execution of our growth initiatives as well as favorable market trends such as automation and digitalization.
Based on market conditions today, we believe febrile generate good sales growth for the remainder of the year and in 2023.
Continued execution of our margin and productivity initiatives will support strong financial results.
Later I will have some additional comments on our business, but let me now turn it to Shawn to cover the financials and guidance, Sean Thanks, Patrick and good evening, everyone sales in the quarter were $985 8 million, which represented a local currency increase of 10% on.
On a U S dollar basis sales increased 4% as currency reduced sales growth by 6% we.
We estimate that the impact of reduced sales in Russia due to the war was a headwind of about 1% to sales growth on.
On slide number four we show sales growth by region local currency sales increased 11% in the Americas, 1% in Europe , and 15% in Asia rest of the world local currency sales increased 15% in China in the quarter.
Excluding Russia, our sales in Europe grew 5%.
On slide number five we show sales growth by region on a year to date basis local currency sales grew 11% for the first nine months with 13% growth in the Americas, 5% growth growth in Europe .
15% growth in Asia rest of the world.
Local currency sales increased 15% in China on a year to date basis, excluding Russia, our sales in Europe grew 7% 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 10% industrial increased 10% with core industrial up 13% and product inspection up 6%.
Food retail grew 7% in the quarter.
The next slide shows local currency sales growth by product area on a year to date basis laboratory sales increased 13% industrial increased 10%, including 12% growth in core industrial and product inspection up 7%.
Food retail declined 2% on a year to date basis.
Let me now move to the rest of the P&L, which is summarized on slide number eight.
For the third quarter gross margin was better than expected at 59, 3% an increase of 90 basis points, we benefited from favorable pricing and volume growth, which was offset in part by higher material costs.
R&D amounted to $44 $1 million in the quarter, which is a 10% increase in local currency over the prior year prior period, reflecting increased project activity.
SG&A amounted to $233 4 million, a 3% increase in local currency over the prior year and includes increased sales and marketing investments.
Adjusted operating profit amounted to $307 2 million in the quarter, a 13% increase.
Currency reduced operating profit growth by approximately 6%.
Adjusted operating margin was 31, 2%, which represents an increase of 250 basis points over the prior year.
A couple of final comments on the P&L.
Amortization amounted to $16 7 million in the quarter interest expense was $14 $5 million in the quarter.
Other income in the quarter amounted to $1 9 million.
Really reflecting non service related pension income.
Our effective tax rate was 19% in the quarter.
This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter we.
We expect to maintain this rate in Q4 and in 2023.
Fully diluted shares amounted to $22 6 million in the quarter, which is a 3% decline from the prior year.
Adjusted EPS for the quarter was $10 18.
A 17% increase over the prior year for a 24% increase excluding unfavorable foreign currency.
On a reported basis in the quarter EPS was $9 76 is.
As compared to $8 71 in the prior year.
Reported EPS includes <unk> of purchased intangible amortization <unk>.
<unk> <unk> of restructuring and the 13th headwind due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises.
We're very happy with our year to date results, which are summarized on the next slide.
Local currency sales grew 11% for the nine month period, adjusted operating income increased 13% or 17%, excluding unfavorable foreign currency and our operating margin expanded 150 basis points.
Adjusted EPS grew 17% on a year to date basis or 22.
2%, excluding unfavorable currency.
That covers the P&L now let me cover cash flow.
In the quarter adjusted free cash flow amounted to $224 $7 million.
<unk> was flat compared to prior year levels at 35 days, while <unk> was three seven times.
Let me now turn to guidance and begin with some overall considerations for our guidance for the remainder of this year and next year.
First forecasting remains very challenging there is greater uncertainty in the macro environment, including the impacts of the global economy from higher interest rates The war in Ukraine, and China's zero Covid policies we.
We recognize the importance of being agile and able to react quickly if market conditions change.
We are basing our guidance for Q4 in 2023, assuming market conditions remain as they are today.
Second we feel very good about our business in particular, we believe we have strategies in place to identify and pursue growth opportunities and we have an innovative product portfolio that supports these growth growth initiatives.
We also continue to benefit from a more favorable business mix as well as global market trends and automation digitalization and investments in on and near shoring.
We also believe we will continue to execute well on our margin initiatives.
Third supply chain challenges remain but are improving our team has done an outstanding job of overcoming the various dynamics of the supply chain over the last three years, we believe our ability to continue to meet customer demands as a competitive advantage, but acknowledge risks remain in the global supply chain.
Finally, we have significantly greater headwinds with respect to currency as compared to the last time. We spoke in particular has I know you're all aware currency has moved dramatically since early September creating significant headwind for Q4 and for 2023.
To a lesser degree higher interest rates are also a bit of a headwind.
Fortunately, we have limited floating rate debt. However, the significant movement in rates has increased our expense.
I thought it would be helpful to provide this guidance overview and now let me comment on cover the specifics for.
For the full year 2022, we now expect local currency sales growth to be approximately 10%.
This compares to our previous guidance of 9% to 10%.
We expect full year adjusted EPS to be in the range of $38 95.
To $39 five.
Which represents a growth rate of about 15%.
The midpoint of our adjusted EPS guidance is slightly higher than our previous guidance as stronger than expected Q3 performance has been largely offset by greater currency headwinds in the fourth quarter spin.
Specifically, we expect currency to be a headwind to adjusted EPS growth in the fourth quarter of approximately 10%.
6% for the full year.
At the time of our last earnings call. We had expected earnings we had expected currency to be a headwind to fourth quarter adjusted EPS growth of approximately 6% and four 5% for the full year.
With respect to the fourth quarter, we would expect local currency sales growth to be approximately 7% and adjusted EPS to be in the range of $11 55 to.
To $11 65.
This represents a growth rate of 10% to 11% and as I. Just mentioned includes a currency headwind of approximately 10%.
For the full year 2023 based on our assessment of market conditions. Today, we would expect local currency sales growth to be approximately 5% and adjusted EPS to be in a range of $42 to $42 40.
Which represents a growth rate of 8% 9%.
This includes an estimated currency headwind of approximately four 5%.
Some further comments on our 2023 guidance, we expect interest interest expense to be approximately $73 million.
Total amortization, including purchased intangible amortization to be $71 million.
Purchased intangible amortization is excluded from adjusted EPS and is estimated at $24 million on a pre tax basis or <unk> 83 per share.
Other income, which is below operating profit and reflects non service pension income is forecast to be approximately $12 million.
We expect our tax rate before discrete items will be 19% for both 2022 and 2023.
Now, let's turn to cash flow for 2022, we now expect full year free cash flow in the range of $780 million, which is below our previous guidance.
While our supply chain team has done an exemplary job in overcoming challenges in meeting customer demand. It has required us to hold higher a higher inventory level than we had expected. We believe it has been necessary given the challenges in the global supply chain and expect we will return to more normal levels in 2000.
'twenty three.
I also want to remind you that our free cash flow in both 2020 in 2021 was excellent exceeding 25% growth on a per share basis in each year.
For 2023, we expect free cash flow in the range of $900 million, which.
Resents a growth rate of 19% on a per share basis, and a conversion rate of 97%.
Of net income, we would expect to repurchase approximately $1 billion of shares in 2023, which would allow us to maintain our net debt to EBITDA ratio of approximately one five times.
As we have done in the past, we will aim to repurchase our shares evenly throughout the year. We have also announced today that our board has authorized an additional $2 5 billion to the share repurchase program to be utilized over the next few years, which is in addition to the $1 to $2 billion remaining on our previous year repurchase.
<unk>.
Lastly, with respect to the impact of currency on sales growth, we expect currency to reduce our sales growth by five 5% in 2022, including an eight 5% sales growth headwind in Q4.
At today's foreign exchange rates currency would reduce our sales growth by an additional 4% for the full year 2023.
That is it from my side and now I'll turn it back to Patrick.
Thanks, Sean.
Shown on a reasonably completed our annual global budget tour.
Meeting Republic colleagues around the world for in depth reviews of strategic frameworks and key initiatives of our operating units.
Those of you that have followed us closely know.
This is an important element of our annual planning process as it allows us to spend considerable time with our colleagues to discuss and analyze the opportunities across our diverse business.
Although uncertainty exists.
In the outlook for the global economy.
Over the next year I feel very good.
About the underlying strategies, we have in place.
And believe we are well positioned to enhance our market position going forward.
We are quite confident that we can continue to gain share and generated good earnings in 2022 and 2023.
Let me share with you some comments on our operating results as well as more details on our outlook for 2023.
Starting with our lab business I am very pleased with the strong sales growth, we have delivered this quarter and year to date.
And we saw good results.
Across most of our portfolio.
We expect good sales performance continuing in the fourth quarter and next year.
As we think about our lab business over the medium term, we expect investment by pharma and Biopharma into new drug modalities will provide great opportunities for us to support them with our solutions.
<unk> trend of Digitalization and labs has also accelerated and our solutions helps customers realized productivity gains and address growing compliance and data validation requirements.
We also will look to.
Todd was significant growth occurring in hot segments, like lithium ion batteries semiconductors, green hydrogen and sustainable polymers to name a few.
Deleverage a highly agile approach to capture growth in these segments applying a systematic voice of the customer approach on a segment and application level to identify attractive opportunities and ensure we have the correct strategies product roadmaps at marketing efforts in place to take advantage of them.
Switching now to the industrial business core.
Core industrial had very strong results in the third quarter and year to date.
What are the coming years.
Additionally, new product development has been critical to almost success in meeting customer needs for automation solutions and be provided equipment that is very easy to integrate into customers control systems and also needs to most stringent data integrity and sidles acuity requirements.
Yeah also optimistic about our product portfolio and exciting innovations we have brought your mortgage.
And your products to come.
For example, and dish in addition to a strong growth we have seen the whole compact automation offering a new line of hygienic bench and flow scaled the positions as well to win the farmer in food customers in the coming years.
Turning now to product inspection business, we had good growth with strong demand in the Americas, which was offset in part by more cautious investment activity in Europe .
Some of all packaged food manufacturing customers phase and more challenging operating environment and now focused.
On mitigating March and precious from inflation and supply chain disruptions. However.
However.
People would still expect overall growth in the fourth quarter and into 2023 [noise].
Why does the pandemic high input costs and the ward Ukraine have resulted in global relative sales growth for public inspection and the reasons years.
Remain convinced that the longterm growth dynamics remains strong.
Yeah, not standing stealing continued to seek out.
Pockets of growth, including check leaning in with industry farmer and confectionery customers.
And be epic spun the double meat range.
I'll meet market coverage, if new product offerings, an X ray and mental detection.
I'd also love to remind you that.
That service is very important until a product inspection customers and we have new initiatives on the way to support our customers uptime wine at the same time, improving our service technician productivity.
These include augmented reality for remote customer support.
And advanced remote diagnostics do I identify and recommend quick repairs to keep our fruit manufacturing customers up and running.
Lastly.
Food retail business to live with strongly cells into food quota for strengthening America's offset by weakness in China due to the pandemic related lockdowns.
Our team is built good momentum recently and hasn't attractive product pipeline for 2023, and we are optimistic that we can generate profitable growth over the next year.
Let me make some comments by geography.
We had very good performance in the Americas.
Against strong growth in last year's food quota with strong growth across product inspection co industrial and retail.
You have a favorable I would look for the remainder of the year and in 2023.
Switching to Europe , I will say screw about 5%, excluding the impact of Russia.
The war in the Ukraine has led to sharply higher energy costs across the region and his weight on some of our customers investments appetite.
Particularly packaged food manufacturers and some can't make your customers.
You still see good investment levels from other customer segments, including Biopharma and firms involved in the development and production of electric vehicles.
We expect moderate growth in Q4 and next year.
Finally, what Asia and the rest of the world. They had very strong growth in the third quarter, what team successfully navigated challenging operating conditions with the pandemic and COVID-19 Lockdowns.
And also executed very well when I was strategic initiatives.
Going forward.
To continue to optimize the same schools guidance activities in China to pursue attractive opportunities.
And we will also increase of a focus on level of Ching digital approaches to generate customer leaves.
Oh, well lap and industrial business have performed very well this year, which we expect to persist for the rest of the year and in 2023.
You remain optimistic about several key long term market drive was in China, including the continued development of pharmaceutical biotechnology.
Electrical vehicles, Micromet electronic and your material industries.
Yeah, very well positioned to take advantage of these growth opportunities and have continued to invest in sales and marketing efforts to support our growth in China.
Why don't we remain optimistic about the long term.
Acknowledged there is uncertainty to show to them and we know from the past that economic conditions can change very quickly in China.
Wiring us to remain agile.
So that is a summary of football I would look for the fourth quarter and next year.
If you think about all along to them.
If you think about the longer to them.
Be very strongly believes that favorable market dynamics.
Growth initiatives and improve business makes a supportive or a longterm growth I would go with him of 6% plus local currency sales growth and mid teens earnings growth.
This will be accomplished by gaining additional market share through strong execution of spinnaker.
Which includes optimizing I will say, its fullest guidance and cross selling and initiatives.
Increasing customer engagement with digital tools and selling services at the point of sale.
Our team will continue to pursue the most attractive fast growing and it was silly market segments.
You will also continue to invest in new product innovations and you'll.
You'll be in that will be the foundation of future growth.
And I would note that our portfolio and go to Margaret approach is uniquely positioned to believe let one customer requirements for automation and digitally station.
Our strategies and initiatives are well developed and Duane ingrained throughout the organization.
And will continue to be critical and gaining market share and driving sales and operating marching drums.
Cause that concludes our prepared remarks, and and I want to open to call for questions.
Thank you and this time I would like to remind everyone in order to ask a question press the start and the number one on your telephone keypad keypad.
We'll take our first question from Derek Debriefing that bank of America.
Hi. Thank you. This is Peter on for Derek just real quick cause you guys are just maybe walk through your assumptions by segment for the fourth quarter and next year as well and also by geography too.
Yeah, Hey, Peter to this is Shaun I'll I'll take that one so let me start with with our lab business. So for the fourth quarter. We we estimate high single digit growth in queue for which would be low double digit growth for the full year in mid to high single digit growth for 2023.
For our core industrial business, we estimate mid single digit growth for Q4, which would be approximately 10% growth for the full year and low to mid single digit growth for 2023.
For product inspection, we estimate.
Low single digit growth for Q4, which would approximate mid single digit growth for the full year.
And low to mid single digit growth for 2023.
And for food retailing, we estimate approximately 10 per cent growth in queue for which would be.
Be about low single digit growth for the full year in mid single digit growth for 2023.
And then if I kind of go through that by region in the Americas, We estimate high single digit growth in Q4.
Which would be low double digit growth for the full year in mid single digit growth for next year.
For Europe , where estimating low to mid single digit growth in queue for which would be mid single digit growth for the full year in low single digit growth for 2023.
And then for China, we're estimating approximately 10% growth in Q4.
Which would translate to double digit growth for for the full year and we estimate high single digit growth from 2023.
Okay. Thank you and could you guys give us an update on on pricing I guess, maybe come and tell them. What you did on the third quarter and I guess updated expectations for 22, and what's embedded for twenty-three.
Yeah, Yeah. So we were very pleased with our execution of the organization in the quarter.
We also continue to see how our value propositions really are valued in this environment, especially as as customers seek more solutions towards the automation and digitalization at.
At the beginning of the quarter, we were estimating about 5%.
Price realisation for Q3, when we actually came in at in the six per cent kind of arrange.
As we kind of look forward. So we did better than expected as we kind of look at Q4 were kind of expecting a similar.
Price realisation again in the six per cent kind of a range and then as we looked at 2023, we're estimating about something and the 4% kind of a range, but I would I would say it's important to think that will do a little bit better than the first half of the year, because we'll get some benefits from from some of our pricing actions that happened during 2000.
22.
And the second half of the year.
Super helpful. Thank you so much.
You're welcome.
We'll take our next question from Josh Waldman at Cleveland Research.
Hey, Thanks for taking my questions. John I appreciate you talking to the segment in G O assumptions.
I guess, though at a high level.
I'm, assuming the 5% is more of a base escaping where we are you know to start the year.
How much variance do you think there is to that 5% number I mean, you know, giving you you expect 4% price.
Next year, you know I guess only appoint a volume it seems like that's fairly conservative.
Yeah, I mean, hey, I feel like we're we're doing very well we feel continue to feel good about the things we can control the.
The teams are executing well we feel like we are gaining market share. We think that there's a lot of good friends in the world that we talk about like automation and digitalization in on and near scoring.
But of course, yeah, there's uncertainty in the world as well and I think more importantly, we are coming off a period of really strong multi year comparisons I mean, if you look at like our three year <unk> over the last three years I think it's about 9% organically.
And so that's that's something that I think we also need to kind of keep in mind as well too. So so overall, we feel like this is a good guide at this point in time.
Of course, you know, we will see how things play out as we kind of get into the year and update as we as we kind of go along but otherwise you know there's been no change to our planning process and how we approach things from from the past.
Got it and then Patrick <unk> for the first time in a while I didn't hear you talk about Linux wondering if you could provide an update there.
You ever come up in the research quite often but wondered if you could talk through maybe the opportunities G. C forthcoming and maybe talk around metrics that you kind of gauge against internally.
Hey, good thanks for the question Josh Yeah. So those lab acts we are really happy how plavix is being rolled out to more customers around the world is a very strong reputation in the market for those who are motivated not we don't know tobacco on all that makes its own instrument controlled soft fur.
For a while that products for most of all that politics actually it'll only controls instrument. It also reflects scam title workflows. So it's a very strong software solution that helps our customers also on the compliance and data integrity side. It's it's definitely one of the strong.
Selling points for us for a farmer customers and lots of our customers who are even more strict compliance rich.
Sections, and as we increasingly connect more home 11 instruments to laugh accidents, becoming.
Strap, a strong different jada for us as well positioning all products and they put all that space.
Again, B continued ruled out to roll this out the other one is key accounts who have several accounts.
I'm using up all that back software on a broader base, but ER B C. A very strong success.
And this into a wallet app space M. B as I said, we continue to connect more instruments moving forward I won't goal is to have an emotional wall instruments connected to a lab mix and helping our customers have said to reflect anti it works a lot with all my instruments and having to sulfa backbone.
To another one you still have data, but also reflective work clothes, etc, really strong strong.
Setting proposition for us and I'm also against civil competitiveness is that who don't have a similar solution. So I'm really happy with where we are in the country near to add features and again connect more instruments moving forward.
I appreciate you guys.
Thanks.
We'll go next to D J Tomorrow Evercore ISI.
Hey, this is Jordan on for D. J. Thanks for taking my question.
I was wondering if you could talk about your marching assumptions for the remainder of the year.
<unk> is he going to escalate your 23.
Yeah, Hey, I'll take that.
So like I said before we.
We were very pleased with our performance with pricing.
Q3, and and I already provided guidance for Q4 and for next year and I think that's you know that's certainly a key lever in our margin assumption. If you kind of look at Q3, we we we expanded our gross margin by 90 basis points.
As we kind of look to queue for you know we're looking at about 150 basis points of gross margin expansion. We're looking at a similar amount in 2023 of about 150 basis points and then if you're kind of dropped down to operating margin we.
We expanded our margin by about 250 basis points in Q3 as.
As we kind of look too Q4, we're gonna be just under 300 basis points, probably about 290 basis points and as we look at next year.
We're gonna look we're looking at about 160 basis points and.
Ingredient will be our price realisation as we go forward as we kind of look towards Q4, we still will see some elevated.
Headwinds in terms of Ah up inflation on material costs, but maybe to a slightly less a degree than what we saw in Q3.
Great and at that time so.
One quick follow up I was wondering if you could.
Talk about what you're seeing across geography, I know you touched upon it in your opening remarks, but maybe can you talk about what you're seeing from an order of perspective in Europe kind of kind of some factors.
Bet, you've seen in the corner and your expectations moving forward.
Yeah. So you know in terms of orders you know as as you as you're probably familiar we don't we only typically out of about a month and a half or so of backlog. So we typically don't comment on on orders a backlog, but you know of course, we consider that in our guidance for the fourth quarter and for next year.
In terms of of Europe , I don't know if I'd add too much to what Patrick said in our opening remarks, I mean, one area that we have seen some.
Some slow down to a certain degree as as in packaged foods and particularly the impact on our product inspection businesses companies are are.
You know delaying investments in Capex in that area and product inspection would fit into Capex, which is not the typical part of our portfolio a lot of our most of our.
Sales are in below $10000, but a product inspection is above that.
And then as we kind of look at the energy crisis I mean, we we still hear good things from our organization, but we're also mindful of the overall situation and and the potential impact on industries like the chemical industry.
Great. Thank you.
Yeah.
We'll go next to 10 daily at Wells Fargo.
Great. Thanks first question wanted to touch on China here. So previously you were expecting about 10 per cent in the quarter delivered 15, and I think previously you were talking about low double digits for the year and I think today, you said double digits. So just curious is is you know what's been going on there what drove the upside.
In the corner and you know how exactly has your outlook for the or changed I guess.
Hello. This is Patrick B are very pleased with all the results in China and she Saturday at 15% in Dakota and be able to forecast double digit growth for the fourth quarter Soviet really happy at all with giant China is supporting for US we have a very strong organization to yeah, and that's really perform extreme you.
If you have not been effective big time by the corporate lock towns our manufacturing sites continue to manufacture on the restrictions, but they they have been operational.
B C L a sales team.
As we said in the remarks also really fully leveraging the spinnaker tool said to really reach out to customers and capture the.
Fast growing segments in China, as well, there's a lot of momentum behind like some electrical vehicles. So badly segment of the lithium ion segment. What he also seeing still very good growth in farm on Biopharma in China. So we all make sure we continue to be very pleasantly surprised by the performance that can be happy and optimistic.
Four Q3.
Jose came in as expected or even better and I'll I'll I'll look for China is still positive long term of course, it. So anyway positive short time, they'll always risk in China of course, I would ask me all the components that can be short term lockdown impacts of all those but I think you should look at China from a long term growth perspective.
Yeah. It's it is very promising I think they'll continue to see growth.
You have an organization there that is very strong both on the on the sales and marketing side, but also don't forget we have manufacturing and R&D down as well.
And and and from that perspective, I think you have a really good understanding about what drives market momentum in China and can also quickly adopt too fast growing segments and it kept on those.
Alright, that's very helpful than a bit of a two party here on margins first on kind of price costs and inflation and then the second is going to be on the F X impact. So on the praise cost just you know thank you for the the outlook on that kind of four points of pricing next year, but you know should inflation come in higher or lower.
Then you know currently forecast are currently embedded in the outlook you know how should be thinking about that impact to the margin. You know is it pretty much expect to be consistent if inflation comes in higher upside lowered downside or general thoughts and then on the F X side of things.
You know ethics and pack to the top line and the operating income lines seem to be similar in the quarter and on the outlook I think that's consistent as well. So is that the best rule of thumb. We can use you know kind of like for like impact on ethics to the top line and the bottom line.
Yeah, Hey, good good good questions.
And he said the first one let me start with the all kind of and with the second one I'll start with the second one first so I think the best way I recognize what you're saying that relationship between sales and EPS, but I I would say probably the best way to think about it is R to look at our major.
Major exposures.
So our largest exposure would be the U S dollar to the Roman D and so for about every 1% change and and the Roman be to the to the U S. Dollar that would affect our operating profit of about.
Three and a half the $4 million and then if he had the second largest exposure would be our Swiss franc two to the euro. So so if you think about it we are long and euro, but we're short and Frank and it kind of creates an inherent natural.
Natural hedge within the company and so we look at the cross right and so as the Swiss franc changes or the you know as that cross rate changes.
Every 1%.
In fact of about $2 million on our on our operating profit.
And so I think that's that's how I would probably look at it and then I don't have a really good proxy for the dollar against the rest of the basket of currencies, but but those are the two major impacts on our on our.
On our earnings.
In terms of what was the first.
Price costs, Okay, Yeah, yeah, yeah.
Yeah in terms of price cause I mean, I had thank you saw that.
That we were able to respond very well to inflationary headwinds in 2022, you know of course it. It can take it can take a quarter or two for us to be able to actually get the actions into the market, but but if we were confronted with a similar situation next year I think we would.
React exactly the same way and I think that the market understands inflation or organization was able to.
Do a great job articulating in explaining that to the market and then and then I think most importantly, we're providing really strong value propositions to the market that they appreciate and the ability to support them and provide these value propositions is highly appreciated and also supports our price realisation going forward.
Great. Thank you so much.
Yep. Thank you.
Our next question comes from the lines of Garcia at E. P. S.
Evening guys. Thanks, so much.
You know I get to start off with.
I just wanted to.
Actually dig into a little bit.
Which kind of it honestly.
Talk a little bit about kind of.
Supply chain and kind of the challenges that you've been able to kind of manage and had to think about the cadence, but if you could kind of help us understand kind of.
You talk about electrical components in previously and how that can prove they kind of had to think about the balance of 2023 kind of how.
How do you think about kind of is maybe.
Impact to margins any improvement there and what you're kind of expecting into the guidance.
Yeah, Hey, Lisa So you can imagine here's a lot of moving parts in terms of our gross margin assumption in in our different material categories. You know there are going to be some some some benefits next year, where you know we've seen you know things like electronic components, we we have seen or expect.
To see some some benefits next year, but of course, there's other categories like where we've had a do broker buys this year going out several months, where we're going to have to carry additional cost into next year.
As to like simple examples I think the best way to think about the.
The impact on margin next year is that you know overall, we were expecting 150 basis point improvement in our in our gross margin.
About 170 basis points of that will come from.
Our pricing assumption and then and then it will be offset by a wide range.
Range of other categories and this inflation basket and as you kind of think about material cost assumptions for next year.
I think we're gonna right now we're planning on something more modest probably in the in the low single digit kind of arrange.
Great and I know <unk> is at this point quite a bit organic number but it would be great to kind of just kind of get a contextual Diane.
<unk> performance in the corner and how the company with maybe performing relative to kind of <unk>.
[noise] occasion.
Yeah, absolutely I'll I'll take that look that we are very happy with her pen to take is performing it has been 41 of one of the best decisions in terms of all growth that I may help.
Total holding but all growth, it's it's pretty exceeding all expectations.
Very happy we are still seeing strongly mountain from a wine customers and.
We continue to to to build out with the organization you started as you know mainly the pleasure centers in the future. We will look into a visual single you essentials as well it's now in the meantime, beating rail connected an ingrained in the overall product.
Process business so.
Really I'm very optimistic outlook for the for the business moving forward.
Alright, thanks, so much.
Well move next to Patrick Dolly It's city.
Hi, This is lizzie on for Patrick Thanks for taking my question I was wondering if you can tell a little bit into what you're seeing in Europe . He said that maybe there's not <unk> infection.
Besides you know a particular country is it is it the entire again I'm just any barclay there won't be helpful. Thank you and I have one more.
Thank you I'll I'll take that question, Okay in Europe and product inspection.
You know a lot of them large international multinational companies and what they're seeing is that they are not canceling punching, but they are delaying projects I think overall, they have become a bit more cautious with their projects and how they are spending the money.
At least in this quota and probably also in queue for so they are postponing projects on they have about I would say <unk> line of sight of how things develop in in Europe , It's not specific to any particular country in Europe Saturday would say cause he just for most of them from several customers, but it's not linked to one country alone.
Great. Thank you and then in terms of the Investor day, coming up anything or running a sure what we can expect for that.
I'm not that for me thanks.
Yeah, Hey, I think you'll you know you'll see an update on our business and our different initiatives. You know we will walk you through that and then we'll we'll kind of also talk about some of our exciting opportunities to continue to expand our margins through supply chain and and pricing and then.
It's gonna be the Investor day is going to be based actually we're here right now in Massachusetts that are processed analytics business and so we're going to feature that business until you. You know show you showcase at business and a lot more detail and then kind of also.
Show you kind of how we serve.
Value stream of a typical biopharma customer.
Great. Thank you.
We'll go next to Matt Sykes at Goldman Sachs.
Hey, Thanks for taking my questions. Maybe the first question you know Patrick Sean just as you look into twenty-three who's obviously.
Risks out there, whether it's inflation or supply chain or Europe weakness and I'm sure you've baked them into the guidance you've presented.
One of those work too to improve meaning not become a risk is there a certain one of those three or others. They could really change.
The dynamic of one how you think about the progression of the year, but also the dynamics of the business and the growth in certain areas.
[laughter] I can't take this [laughter], okay. We're flipping a coin [laughter] that would be that of course, I'll still ongoing political risks Mister Maloney, it's not only grew up again and China, even talking potentially about you know continued lockdowns when he's recovering my team, but it is not yet clear with Ya.
Is it a little further talk maybe four I mean.
About Europe , I mean <unk>.
War in Europe at related to energy crisis et cetera, just throw was.
Quite some uncertainty in the alto confronted twenty-three of course that would be resolved he would see outside to wanted to them to travel current projection, but ER.
Who knows I mean, it's there's no short term resolution and inside and just actually also not really clear about how big those impacts will be right. How many of the chemical customers will be affected will get to you.
Yeah.
Entergy outages what does this mean for the entire strategy B took of course that all into concentration and try to make it very reasonable forecast for port 22, 23, but we tend to know we cannot neglect. These risks right in downtown and I'm a forecast.
Those would go away and pushed it wouldn't be outside right, yeah, exactly and you know how much is really hard to quantify it yeah.
And how often customers were responded disguises and I and I think the key is like kind of go back to Josh kind of asked about an upside downside at the beginning.
In the end it is going to be a lot to do with the macro you know like you know there are a lot of big.
Big topics out there in the world and if they go away you know any one of them would could be enough you know could be a good upside for us and if they worse than I mean, it could be a downside and those are things out of her control and you know as an organization. We you know we just try to stay agile and we and we continue to try to monitor these situations very closely and and make sure we can have.
<unk> can react quickly I mean, what if what I wanted to say she also looking back at just the last crisis. We know went into COVID-19 in our organization has really demonstrated incredible agility to adjusted to market conditions and we will apply similar same missiles is moving forward if any new new crisis comes up I think yeah variable.
Trained and very anti alien to have demonstrated actually probably can react to changing market conditions and the flexibility to your from organizations and the tools. We have in place as I said those anyway Ah remarks at the beginning they have these tools in place, but it became very big quickly identify the pockets of growth in the market in Santa will say it seems that.
Those and capture those opportunities as they come up.
Thanks for Indulging me and that question I appreciate the color and just a second question a quick follow up and if you look at food retail. It's obviously a smaller part of your business, it's been fairly volatile than any comps obviously impacting that as you look at that mid single digit growth for next year should we expect to decrease maybe in the volatility of revenue.
For that business or those things that you've done there to better manage that or help to manage that or has that been single digits sort of an average of the volatility that we might see continuing to twenty-three.
Well look at it as you rightfully said, it's a smaller portable businesses about five per cent of the total business.
Yup, you have seen really good projects.
Over the last couple of months wherever you had been really successful will be also looking into a roll out. So often you know upgrade the portfolio of products somebody optimistic before the product behalf, but in terms of the overall volatility in the market.
Don't see any short term changes again I mentioned also mnemonics. If you have in China currently facing an issue if if the lockdown, which affects a lot of the retail cost him was there and we don't know exactly how long that will continue if it uses up there is probably some upside.
But.
Volatility I don't expect a total a significant change in 2023, what we what we do.
I wanted to say is that we have a candidate for destroying portfolio and also the the number of projects. We have one over the last couple of months also gives us comprehensible for Ya.
Great. Thank you very much.
And our next question comes from Rachel That's that's all it J P. Morgan.
Hi, This is now on for Rachel.
Thanks for taking a question.
Could you give us some color for some additional color on inventory last quarter you an update.
On customer inventory levels, known anything had come down a bit on paper had kept up your customers had stockpiled during the day.
Hi to the pandemic you talk a bit about how your inventory levels in relation to.
Free cash flow had changed so could you provide us some more color here on you know both customer inventory like how are they looking at what's missing byproduct and then kinda tended to keep.
<unk> products, they're like and have you noticed any material change your in your inventory levels.
Hey, maybe I'll I'll take it and if Patrick wants to add something from the customer perspective, let me start with our internal so.
The first comment I would say that we're extremely happy with our global supply chain organization really tremendous just really great job in terms of supporting customers for the last few years during the pandemic and it's been a competitive advantage. It really has we Patrick and I were just traveling around the world.
Visiting our different businesses and we just heard several antidotes from around the world about how we're able to our delivery times they might be a little longer than they were in the past, but they are significantly better than competition and and that's allowed us to gain share and different cases, and so so we feel really good about that now.
Of course, the other side of that is we've carried higher inventory.
Inventory levels, you know higher safety stocks and in different categories to be able to to make sure that we could do that as we I mean I don't think it's I don't I don't think.
It's necessary to get into any particular detail with one category or another there's different types of components in in in the different that are key to a wide range of our portfolio. We about 130000 skews. So you can imagine it's pretty complex and I think blue Ocean is allowed us to have the visibility through the supply chain.
To manage that complexity and know where we had to.
Increased safety stocks, but you know now is we kind of look to 2023, you know and with with shifting times, especially.
Especially coming from China to the U S dramatically shortening just recently, we feel like we are in a position also to to reduce those levels in 2023, which was included of course in art.
And our and our outlook in our guidance for for 2023 from a from a customer perspective, you know probably the one area that we we have heard some noises in the area of pipette tips.
Difficult to quantify exactly you know how much that is two you know kind of in our business I mean, our but you know overall, we're very pleased with with our overall pipette to business. The instrument sales are actually continuing to grow very well with really good to.
Men and ER Biopharma research, but you know as you say on the on the consumable side, we we were down in the in the third quarter and then you know.
It's it's hard to have visibility through our customers and that but it's also not a significant impact to our overall business. Yeah, I would say no significant goals because we didn't so it is sort of the majority of the coffee testing labs right I want majority, Sean answers that had been Biopharma research labs et cetera.
Which ah.
Didn't overstock to the same extent as a lot of testing customer.
Often that's super helpful. And then just one more you know you'd notice previously that you know there had been some rumblings of potential government stimulus you know in different regions, and particularly China that could probably benefit the region and you know have you noticed any sort of update.
That'd be heard any updates on that.
And that's it thank you so much.
One thing I can't actually good question, but no we have not heard any significant impact on changes driven by any government and there's just at the moment.
Awesome.
[noise] that does conclude the question and answer session and concludes today's conference call. Thank you for your participation you may now disconnect.
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