Q4 2022 Mettler-Toledo International Inc Earnings Call

Okay.

Good morning, 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 fourth quarter 2022 earnings call Today's conference is being recorded.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

To ask a question during this time simply press the Star key followed by the number one on your telephone keypad.

I would like to withdraw your question Press Star one again.

At this time I would like to turn the conference over to Adam Uhlman head of Investor Relations. Please go ahead.

Hey, Thanks Andre.

Good morning, everyone I'm happy to welcome you all to this call I'm joined with Patrick Kaltenbach, Our Chief Executive Officer, and Sean Videla, Chief Financial Officer, Let me cover some administrative matters. This call is being webcast and is available for replay on our website at <unk> Dot com a copy of the press release and the presentation.

Patients that were referred 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 $19 33 in the U S Securities Exchange Act of $19 34. These statements involve risks uncertainties and other factors that may cause.

Our actual results financial condition performance achievements to be materially different than 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 current reports filed with the SEC.

Yes.

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 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.

Thanks, Ed and good morning, everyone. We appreciate you joining our call that we are doing from Switzerland.

2020, a junior was another year, where our company's unique strength and culture of execution led to strong performance and success in overcoming significant external challenges.

Our team's resilience and agility to quickly react and adapt to the changing environment allowed us to meet customer demand gain market share and deliver robust financial results.

We also finished the year with excellent sales growth in the fourth quarter and benefited from very good broad based growth across geography geographic regions and product categories.

Highlights of the fourth quarter performance are detailed on page three of the presentation.

Local currency sales in the quarter increased 9% as compared to the prior year.

With broad based growth across all regions and most of our product portfolio.

Strong sales growth combined with benefits from our margin initiatives and good cost control contributed to excellent growth in adjusted operating profit and adjusted EPS offsetting very significant currency headwinds.

As we look ahead to this year, we expect continued uncertainty regarding the global economy and face challenging multi year sales growth comparisons I.

I am confident that the diligent execution of our growth and productivity initiatives.

And precision is very real to gain market share and deliver solid 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 the guidance.

Thanks, Patrick and good morning, everyone sales in the quarter were 105 8 billion.

Each represented our local currency increase of 9% on.

On a U S dollar basis sales increased 2% as currency reduced sales growth by 7%.

We estimate that the impact of not shipping to Russia was a headwind of about 1% to sales growth.

On slide number four we show sales growth by region, we had broad based sales growth in Q4 as local currency sales increased 8% in the Americas, 9% in Europe , and 9% in Asia rest of the world.

Local currency sales increased 11% in China in the quarter.

Excluding Russia, our sales in Europe grew 13%.

On slide number five we show sales growth by region for the full year 2020 to.

Local currency sales grew 11% for the year with 12% growth in the Americas, 6% in Europe , and 13% in Asia rest of the world.

Local currency sales increased 14% in China in 2022, excluding.

Excluding Russia, our sales in Europe grew 9% for the full year.

On slide number six we summarized local currency sales growth by product area.

For the quarter laboratory sales increased 10% industrial increased 6% with core industrial up 5% and product inspection up 9%.

Retail grew 12% in the quarter.

The next slide shows local currency sales growth by product area for the full year.

Laboratory sales increased 12% industrial increased 9%, including 10% growth in core industrial and 7% growth and product inspection.

Food retail grew 1% in 2022.

Let me now move to the rest of the P&L, which is summarized on slide number eight for.

For the fourth quarter gross margin was 59, 8% an increase of 130 basis points, we benefited from favorable pricing and volume growth, which was offset in part by higher costs.

R&D amounted to $45 $9 million in the quarter, which is a 7% increase in local currency over the prior period, reflecting increased project activity.

SG&A amounted to $227 6 million, a 1% decrease in local currency over the prior year and included lower variable compensation related to our strong prior year results.

Adjusted operating profit amounted to $358 $6 million in the quarter, a 12% increase.

Currency reduced operating profit growth by approximately 9%.

Adjusted operating margin was 33, 9%, which represent an increase of 310 basis points over the prior year.

A couple of final comments on the P&L.

Amortization amounted to $16 5 million in the quarter interest expense was $16 $8 million in the quarter.

Other income in the quarter amounted to $1 $5 million, primarily reflecting non service related pension income.

We reduced our effective tax rate from 19% to 18, 5% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter.

We are pleased with this reduction and expect to maintain an 18, 5% rate in 2023.

Fully diluted shares amounted to $22 4 million in the quarter, which is a three 5% decline from the prior year.

Adjusted EPS for the quarter was $12 10.

A 15% increase over the prior year or a 24% increase excluding unfavorable foreign currency.

On a reported basis in the quarter EPS was $11 86 at.

As compared to $9 94.

In the prior year.

Reported EPS in the quarter includes 21, <unk> of purchased intangible amortization and <unk> <unk> of restructuring and other costs.

We also had two items impacting reported income taxes this quarter.

We had a <unk> <unk> headwind due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises and we also had a <unk> <unk> benefit from adjusting our tax rate to 18, 5% for the first three quarters of the year.

The next slide summarizes our full year 2022 financial results, which were very proud of considering the unexpected challenges our team faced over the last year.

Local currency sales grew 11% for the year adjusted operating income increased 13% or 18%, excluding unfavorable foreign currency and our operating margin expanded 190 basis points.

Adjusted EPS grew 17% for the full year or 23% excluding unfavorable currency.

That covers the P&L, let me now comment on cash flow in the quarter adjusted free cash flow amounted to $272 $9 million DSO was 37 days, while <unk> was three six times.

Let me now turn to guidance to start off forecasting remains challenging and market conditions remain dynamic we are basing our guidance for the first quarter and the full year assuming market conditions remain as they are today.

While some factors impacting our outlook have improved like foreign exchange rates, we still face uncertainty, including the risk of recession in certain countries. We also faced difficult multi year sales growth comparisons.

Regardless, we remain focused on the factors, we can control and believe our unique sales and marketing strategies and innovative product portfolio will support market share gains and profitable growth this year.

For the full year 2023, we have left our local currency sales growth guidance of approximately 5% unchanged.

We expect full year adjusted EPS to be in the range of $43 55.

To $43 95.

Representing a growth rate of about 10% to 11% or approximately 11% to 12% excluding unfavorable foreign currency.

This compares to our previous guidance of adjusted EPS in the range of $42 to $42 40.

And reflects the impact of three items.

First foreign exchange based on today's rates is expected to be a 1% headwind to profit growth down from our previous guidance of a four 5% headwind due to the strengthening of the renminbi among other currencies.

Secondly, we now expect our effective tax rate for 2023 to be approximately 18, 5% down slightly from our prior estimate and a modest benefit to EPS.

Lastly, somewhat offsetting these benefits to adjusted EPS is an increase in interest rates and related interest <unk>.

Interest expense as well as a decrease in foreign and forecast pension income.

Specifically, we now expect interest expense to be approximately $78 million.

Other income, which is below operating profit and largely reflects non service pension income is forecast to be approximately $1 million.

Total amortization, including purchased intangible amortization is forecast to be $73 million.

Purchased intangible amortization is excluded from adjusted EPS and is estimated at $27 million on a pretax basis or <unk> 97 per share.

Now, let's turn to cash flow for 2023, we continue to expect free cash flow in the range of $900 million.

And we still expect to repurchase approximately $1 billion of our shares this year.

This would be this would allow us to maintain a net debt EBITDA ratio of approximately one five times that is it from my side and I'll now turn it back to Patrick.

Thanks, Sean.

Let me start with some comments on our operating businesses, starting with lap, which had strong sales growth in the quarter with strong growth across most of our product portfolio.

Especially in general medical instruments and process analytics.

While our pipette business was down due to a decline in pipette tips.

Overall, we continue to see growth with pharma and Biopharma customers.

The faster growing segments, such as the lithium batteries and all of those and expect favorable results in 2023.

Turning now to our industrial business, our core industrial had solid growth in each region and continues to benefit from market trends towards automation and digitalization.

Our outlook for this year is positive although I would note. This business is not immune to potential changes in the economy and will require us to remain agile.

Identify and target growth opportunities.

Product inspection sales grew stronger than expected this quarter with very strong sales in the Americas.

Europe had modest growth as a result, better customer activity compared to the last quarter.

Overall, we expect to have a positive start in 2020 and product inspection with good growth in the Americas. However, we remain cautious in Europe with <unk>.

Softer conditions in packaged foods.

Finally, food retail delivered very strong growth with project activities in the Americas, and Europe offset in part by a significant sales decline in China due to the disruptions from the pandemic.

Now, let me make some additional comments by geography.

Sales in Europe increased 9% in the quarter better than we had expected and inclusive.

4% headwind from stoping ore shipments to Russia.

We saw good growth across most product categories in Europe , particularly in process analytics and retail.

So potential energy prices and related impact on customer demand is also being better than expected.

But we of course still need to get through the rest of the winter.

Sales in the Americas was again strong with especially good growth across product inspection and food retail.

And finally Asia and the rest of the World had another quarter of good growth led by will lap business, China grew 11% with particularly strong growth in lab.

Switching now double service business, we continue to see excellent momentum.

And service sales grew 11% in the quarter and 12% for the year.

Service remains an important contributor to our profits and a key advantage versus our competition.

Also customers that use our services are more likely to buy instruments from us again in the future.

Given the importance of whole service business I'd like to share with you more details on our strategy and initiatives.

To start off as a reminder, service represents 20% of our revenues and is a key part of our solution offerings.

Your service offering is comprehensive and includes installation qualification calibration preventative maintenance spare parts and repair services.

Over 50% of our service revenues represent service contracts that support our customers' ability to maintain uptime improved productivity and comply with regulatory requirements.

An important piece of all businesses calibration services, and our comprehensive auto proof electronic integration certificates or fully traceable and available on demand performance acute database.

This makes it very easy for our customers to comply with regulatory requirements.

Yes, very strong competitive advantages for public service business and excellent opportunities to accelerate our growth.

We believe we have the largest installed base of instruments in the world and the largest service network across our direct competitors with over 3000 service technicians around the world.

We have a standard global service offering with dedicated service sales excellence.

This global coverage is increasingly important as customers look for consistent service around the world.

Our ability to serve customers during the pandemic has proven to be a strong competitive advantage and double service offering versus specialty important customers in regulated regulated environments.

The introduction of new service levels 24, seven support and remote diagnostics helped has been helpful in supporting customers.

You have seen continued improvements in our net promoter scores in recent years and throughout 2022.

<unk>, which measures customer satisfaction after service event.

We are focused on accelerating our service growth given these competitive advantages and strong customer satisfaction and over the medium term, we'd expect our service sales to outpace of our product sales.

To achieve this.

There are two important elements of our growth strategy, besides continuously upgrading of offering.

Penetrating our large installed base of instruments and selling service contracts at the point of product sales.

Starting first with penetrating our installed base.

We have a large installed base of instruments.

We have sold over many years, the majority of which is not serviced by us today.

To further penetrate this install base we use the same concept.

And similar approaches with advanced Big data analytics that we use when selling products.

But with more specific data about history meets.

Current penetration potential of a customer.

Our service Telesales teams can leverage this data to run marketing campaigns based on the H warranty services to re and projected service intervals of our instruments to generate service lead when an instrument is most likely to require service.

Additionally, we use sophisticated data analytics for sales force guidance to identify carefully selected high potential accounts for our field service sales team.

Selling services contracts at the point of sales is another high priority focus for us.

Over the past year, we revamped our sales trainings and product quoting process to automatically provide a quote for service contract at the point of sale.

Prototyping service has also been beneficial providing in communicating the value of the service contract true customer in an easy way.

Providing service on the service contract is a win win for us and the customer.

It ensures high reliability and accuracy of measurement for our customers.

And also helps prevent costly failed experiments co production quality or unplanned downtime from devices that are not properly maintained or calibrated.

Our technicians are able to build deeper relationships relationships with customers and become trusted advisors.

Service contracts are also a benefit for our service team is saying.

We are able to more efficiently scheduled service calls.

<unk> and advance leveraging of our territory and route planning and analytics to optimize the productivity of the team.

Additionally, customer satisfaction is higher for customers with service contracts and as I said those customers are more likely to purchase our instruments again.

Overall, I feel very good with service growth strategies.

It will position us well to grow this very important and very profitable portion of our business over the coming years.

As we look ahead through 2023.

We expect to face continued uncertainty in the global economy, and challenging multiyear sales growth comparisons our ability to demonstrate resilience and agility during difficult times is an important signal drove our cultural I am confident we will all be we'll be able to react quickly to the new challenges and opportunities.

That arise.

And so we can continue to gain share and deliver deliver solid results.

Now that concludes our prepared remarks, and I now want to open the call for questions.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

We will take our first question from Josh Waldman at Cleveland Research.

Thanks for taking my questions I have one for Patrick and one for Sean If I may.

Patrick Europe came in solidly above the low to mid single target for the fourth quarter. Just curious any other color you can provide on what drove the upside how durable do you think do you think it was pumping mettler is doing different or just the stronger market outlook.

Yeah look I mean.

Very proud of our fourth quarter result of course, I mean, the team performed extremely well across the regions and across the product portfolio.

I would say what you have seen is again Midland action, we have demonstrated that we can go after the more market opportunities as they arise.

There has been I would say not much bigger market momentum than we predicted but it'd be really capable to to act on the opportunities out there Europe has performed stronger has shown already indicated in his remarks.

<unk> seen good opportunities. Despite the headwind we have seen from not shipping products to Russia, Europe grew excluding Russia, 13%.

The first compare.

Against the prior quarter and again that is also driven by the fact that would be really really capable tool to capture opportunities out there.

There is not I would say the market conditions have not changed compared to what we have seen last year. We have seen some reluctance in Europe for example in the Pi business.

Customers are more cautious spending.

Right now the extent time of some of the projects, but vivo able really to get everything that goes out there and tuning all the orders and sales via <unk> hour.

Our supply chain team executed very well.

Getting over some of the remaining issues, we had seen in the supply chain.

We had really shorter treatment times and it all helped us to really perform extremely well in Q4.

Got it got it good to hear.

And then Sean was wondering if you could walk us through the thought process on the 6% local currency guidance for the quarter, but reiterating the five for the full year. When you set up obviously implies a bit of a T cell in the latter three quarters, despite an easier comp, but just curious if it's something in the order book was there any push outs from the fourth quarter that hit in the first.

Or is it just mettler being prudent.

No I mean, I think if you look at it.

Of course, there is an element of caution just given that we have these difficult multi year comparisons that we that we referred to and there is uncertainty, but but I think there's a couple of dynamics that's important to reflect on two so the first is that.

When we look at our pricing in terms of the cadence of pricing, we're going to we're going to have a better higher pricing in the first half of the year than the second half.

But we'll probably have better volume growth in the second half of the year versus the first half. So that's that's one topic and then another is.

We'll probably do a little bit better on the on the retail business in the first quarter.

Maybe maybe this is a good time ill just kind of walk through the different pieces of the business and you kind of see that at retail will have a little bit of a benefit here in Q1. So as we're thinking about the first quarter, we're thinking about mid single digit growth in lab, and we're thinking mid to high single digit growth for the full year.

For core industrial we're thinking mid single digit growth for Q1, and we're also thinking we're thinking low to mid single digit growth for the full year.

We're thinking product inspection mid single digit growth for Q1, and low to mid single digit growth for the full year.

And then here, we get to the retail we're looking at high teens. So we are going to benefit from some strong project activity in Q1 now keep in mind retail is still only about 5% of our business, but you're going to get a sense for it but then for the full year, we're still thinking.

And the like mid to high single digit range for for retail and then from a geographic perspective, we're looking at mid single digit for Q1 and for the full year for Americas.

For Europe , we're looking at mid single digit for Q1, and low single digit for the full year. So that's us being maybe a little bit cautious on Europe , and also acknowledging multiyear comparisons, especially if you exclude.

Russia, I think we grew 13% in the fourth quarter.

Of this past year.

And then for China, we're looking at mid single digit growth for Q1 and high single digit growth for the full year.

Got it really helpful. Appreciate all the detail.

Yes. Thank you.

Yes.

Well move next to Dan areas at Stifel.

Good morning, guys. Thanks for the question John maybe just on your last point there on China can you just talk a little bit about the transition from.

First half of the year headwinds from Covid to something that looks like presumably a step up in the back half of the year I'd be particularly interested in your thoughts around.

Stimulus dollars in China. Some of our companies have just been more emphatic about the impact there that you might be than others. So just wanted to get your two cents.

Yeah, Hey, Thanks, Dan So maybe a few comments. So one we're very pleased with the quarter, we're coming off a 11% growth in China and then when we look at.

China for 2023, we feel very good about where we're coming off two very strong years, we grew 14% in 2022, but we grew 25% in 2021, so thats kind of always on our mind and I'd like to remind everybody that but as we look at the cadence for this year.

Very pleased with how the team was able to manage through different dynamics with Covid. We've always said that things can change quickly in China and this is another example, with the reopening.

We had quite a bit of the organization.

<unk> with Covid around the holidays.

But we've been backup in terms of full.

Capacity now for a few weeks I would say and things are back to normal of course. They just also came off the Chinese.

New year as well so we're actually looking at it quite favorably in terms of the reopening there could be some short term uncertainty in terms of what it could mean to certain customer segments, but as we kind of look to the second half of the year certainly there could be.

We're looking at higher growth in the second half of the year. Then we're looking at for the first half and then in terms of stimulus.

Think we're all looking forward to what comes out here over the next month.

In terms of the magnitude of stimulus, but our expectation certainly our that stimulus dollars will be most likely directed towards a lot of the programs.

Under the five year plan and then.

Sure. Some of these strategic industries within the country will also benefit as well too and we continue to see really good.

Mentum in a lot of these hot segments like lithium batteries like semiconductor.

And then just these overall arching trends towards automation and digitalization.

Continue to play out well so we continue to feel like where we are.

Well positioned for China for the medium to long term of course in the short term always a little bit more more difficult to call, but but yes, I'd say that said Patrick any other comments from your side or no I think he covered really well.

Strong team in China, obviously in China <unk>.

That anybody using the same go to market strategies and tools that can be used in the rest of the world very efficiently.

You said I am very confident about the mid and long term performance in China.

Who knows what kind of what's coming out of any stimulus might be bit more biased towards the real estate market. We don't know yet, but I think it will it will also cover a good part of the flagship plan.

Investing into health investing into important technologies revenue will play out.

Okay. Thank you for that and then just maybe on pricing. So did I don't know if I missed it but did you give the refreshed price realization assumptions that youre, making for the year and then as Youre dialing in your pricing expectations for 'twenty three I am just curious if there are business segments or geographies that maybe we should think of us.

Being more or less than the company average when it comes to realization or do you think that everyone being kind of just moves up in sort of the same range.

Yes, I mean, our guidance for the full year.

Is unchanged at 4%.

I'd say, we actually finished the year a little bit better than what we were expecting we had a very strong finish in Q4 with something in more unlike the 7% kind of range and so we'll probably get off to <unk>.

I expect to get off to a good start here in Q1 was something more in the maybe the 6% kind of range, but then we will kind of moderate into the second half of the year as we kind of start lapping a lot of these pricing actions that we did to combat.

Inflation during the course of 2022.

In terms of differentiation I'd say.

This does.

Nothing significant to point out, but I would say lab tends to do a little bit better than the rest of the portfolio and then we tend to do maybe a little bit better in the developed countries than we do on in the emerging countries.

Okay very good thank you guys.

Okay.

Our next question comes from Jack Meehan Edney from research.

Okay.

Mr. <unk>. Your line is open you may be muted.

Sorry.

Sorry, I was muted.

Good morning wanted to ask about the product inspection business, so 9% core.

Nice beat versus the guide and I think the CAGR accelerate into year end too.

The service piece is usually pretty steady I was just curious if you could talk about the trends there what youre seeing in service versus the product side was there any acceleration.

Yes, okay.

Good morning, Jack.

As you said, we are really really happy with the performance of product infection in the fourth quarter. We gained momentum can be a little bit more cautious kind of getting into the quarter, but we saw especially good momentum in the U S and a bit better performance unexpected in Europe , but they are still causes as I said before about Europe .

Increasing our installed base on products will continue to drive towards a more service business services is a really important part of that and our service coverage, especially in U S is exceptional compared to many of our competitors and gives us a clear advantage in product inspection. So if we continue to build out our service offering in terms of another level of services to come.

Providers will put us product portfolio.

And again as we also launched new products, including now also more mid range products.

Tracing multi mid market needs of products.

We are also growing off a small market you have instrumentation mutual afterwards continue to drive more services.

Yes.

The region, whether you had probably more still more happened was also in China given.

<unk> 19, <unk> not a lot of momentum in Pi in the fourth quarter, while we saw some good adoption of the new.

<unk> products have been launched from mid range overall, the market was still suffering from the pandemic.

But also there I would say moving forward, we see opportunity of course, we're building more market momentum and that domain as well, but the U S is by far the biggest and most important market and very well covered by social services business day of course.

Europe is the second biggest part and then continuing to build out also China and Asia Pacific.

And then in terms of trends, we saw improvement in both in service in the product business, Jack kind of going from Q3 to Q4, but service has been growing faster than products. This year.

Got it.

And then just one.

Only minor point on the 2023 outlook by segment in lab I think previously you were talking about mid to high single digit growth now mid single digit.

Was there anything that softened a little bit or just anything you would call out there.

For lab, we're talking if I said it incorrectly I apologize, we expect to grow mid to high single digit for the full year in which they are consistent with what we said before.

For Q1.

We're at mid single digit in Q1 is going to be a little bit impacted by.

Some of the topics with like pipette tips and customer stocking so.

Sorry, I may have misheard. Thank.

Thank you.

Yes.

We will go next to Vijay Kumar at Evercore ISI.

Yes.

Hey, guys. Congrats on a strong finish here and thanks for taking my question.

I guess my first question is on the <unk>.

Q1 guidance.

Did I hear you correctly, Shaun pricing of six points in Q1, and the guidance of six 6% that implies zero volume.

Teems seems a little conservative maybe talk about the Q1 assumptions.

Yes, I mean I think we.

If you look at it we've always been concerned a bit by multi year comparisons and uncertainty in the macro and I don't think its really that different than what we've been saying about the full year results.

And I think right now it's.

It's a new year and we're very early in the year I think we need to see how the next couple of months play out and then we'll be able to have a lot more.

Insight in terms of not only the first quarter went but like how the year starts to have what kind of momentum we have kind of going into Q2 into the rest of the year.

Understood and then one.

On the free cash flows here.

It looks like free cash flows came in below your guidance for fiscal 'twenty. Two I'm curious was that just.

A timing element.

I am looking at your guidance here for <unk>.

Fiscal 'twenty two.

900 million is that benefiting from some timing elements here any cadence on free cash flows.

Yes. So good question, so our free cash flow and so you might not remember, but we updated our guidance for that last quarter. So we actually came in line with our revised guidance from last quarter, and we revised down 2022, primarily because of we.

We were carrying more we're carrying more inventory in 'twenty or we carried more inventory in 2022.

Giving more safety stocks just to kind of mitigate some of the challenges in the global supply chain as we kind of look towards 2023.

We expect to.

Benefit and reduce a lot of those inventory levels and so youll see from us.

One year growth perspective, youll see pretty significant growth, but a lot of it has to do with timing of working capital.

Okay. Thanks, guys.

Yes.

Our next question comes from Tim Daley at Wells Fargo.

Okay.

Great. Thanks.

So I appreciate the detail on the service side, but just wanted to dig a bit in consumables.

What was the consumable growth in the quarter and the year and then can you help quantify the size and the timing of the two major one off headwinds mettler spacing in 'twenty three around the pipette.

Hi, Pat tip business, particularly the rollout Dod contract and then that inventory stocking dynamics.

Yes, so so our consumables business.

In terms of total mix on the business is about it was about 10% in the quarter for the full year is about 12% of our business.

Consumables as a reminder for everybody about half of that is probably pipette tips and then the other half is a combination of process analytics sensors as well as other.

Consumables for other categories.

Total group.

Consumables were down about 5% in the quarter.

And for the full year they were up 5%.

But if you kind of dug into the details of course, the one area, where we saw a decline was with pipette tips, which would have been down.

Over 20% in the quarter.

And Thats the top near that's a topic related to.

Customer stocking that you've heard about from other companies Fortunately for us it's not a it's not and it's not a significant impact to our overall results and we will probably continue to see that trend.

Trend play out here in the first quarter and maybe even into Q2.

Alright, I appreciate that and then my second one on margins.

So I think the guidance implies about.

100, twentyish basis points from operating margin expansion can you help us understand how.

How we should think about the pieces of growth versus SG&A.

R&D.

I'll help here would be great.

Yes sure. So so if we look at our.

Maybe.

Rather than going through each line, maybe I'll give you a little bit of flavor in terms of gross profit and then.

And then and then of course, there's a lot of other ingredients in terms of like R&D and SG&A, but like in terms of the first quarter. We're looking at gross margin expansion of about 140 basis points.

And for the full year, we're looking at about 100 basis points. So that number is a little bit lower than the last time, we spoke and the reason is it purely almost entirely related to just currency translation. So on a currency neutral basis, it's pretty consistent with our with our previous guidance.

And then for the full year, our operating margins up.

190 basis points, and then for the full year.

We're estimating about 130 basis points.

Great. Thank you.

Yep you're welcome.

Okay.

Yes.

We will go next to Matt cyclic Goldman Sachs.

Hi, Good morning, Thanks, taking my questions Patrick maybe just on the services.

The business that you talked about on the call just reflecting back from the Investor Day, you talked about that.

That services mix being about $50 50 contract versus value added services can you just maybe talk about the importance of that mix shift as you move forward and where you see that mix over sort of the medium term developing into.

Yeah, Thanks, Mark really good question and.

As I pointed out added vessels. It is important for us to continue to drive that mix more towards services on the contract and the team is working on that in the telesales team into the end of sales team of course working on continuously.

Also bringing new.

Our new service to only 12 of customers, including the new service offerings that we have and showing that our sales team and our customers understand the benefits of being on the contract what it means to them in terms of preventative maintenance of uptime response to mobile service was 24 seven available to you et cetera. So.

I see actually a good momentum I think we have made good progress over the last two years or three years in moving more of our.

Services under contracts and installed is always at the point of sales, making sure that when we sell a product that's kind of almost a salesperson can have an educated discussion with the customer the benefits of being on a contract at the same time, we have increased our portfolio of services.

<unk> offer as I mentioned before from basic to comprehensive services.

And that makes it and also easier and more attractive to all customers to select a service contract.

Ceded shift ongoing and we are working on that because India indicated.

Win for both the customer and ourselves as I said, we have the data analytics behind and beyond be noted customers on the service contract are more likely to buy from US again, because they have seen the full benefit of offering.

For us. It also helps us of course to drive more efficiency in services that helps us be more effective in scheduling service is making sure we optimize the coverage of our service and the timing when we can do services.

And picture the service technicians that we have are working most efficiently. So expect to continue to increase there in terms of service coverage.

It's again beneficial both for us as a company, but also a strong win for the customer.

Got it and then just maybe a follow up just staying on services. Patrick you mentioned that the majority of instruments are not serve service by Mettler, maybe if you could give us a little bit more color on what that percentage is and where you think you can go to and then Sean just.

Given that services and you commented that it's going to be growing faster than group and I'm, assuming it's higher margin could you talk about the medium term impact on margins from from a larger services business over the next few years.

Yes, sure Hey, maybe I'll go first and I'll, let Patrick go second, but I'd say I don't have it quantified in terms of precision but.

You are right, our we expect our service business.

To grow faster than our product business over the medium to long term and our service business has operating margins that are higher than our corporate average.

And back to your question regarding the service opportunity overall of course, we have.

Billions of instruments, and I want to hit a base and that is a very competitive advantage for us to have that visibility our served market.

So it's a soft market for services over $3 billion. So we have significant opportunity to expand our market share in Venezuela. If you look at the total share of instruments.

Installed base of course, you never know.

Could extend.

<unk> <unk> instruments are still on the operation and then make them based on electronic sections for.

The database, we have for instruments and make some assumptions in terms of how many instruments otherwise would be some operational but we think thats probably more than 60% of the instruments out there not yet on the full service coverage from us.

Great. Thank you very much.

Our next question comes from Brandon Couillard at Jefferies.

Okay.

Hey, Thanks, good morning.

Just a couple for you Sean could you just split out lab versus industrial in China in the quarter.

And then those two sub segments.

Just maybe for the year the bifurcation between those two markets.

Yes, sure sure Brendan so for.

Q4.

Lab was up over.

I'm, sorry, I'm looking at the wrong year here.

But still good results lab was up about 20% in the fourth quarter and industrial was up low single digit and as we kind of like look for towards 2023.

We're expecting double digit growth in lab for the first quarter and the full year and we're expecting industrial to be more flattish you can imagine more impacted by.

Some of the disruptions over the last few months.

And then for the full year were a little bit more conservative there with low to mid single digit growth. So obviously expecting more growth in the second half of the year.

Got it and then on the lab business globally.

Are you able to quantify that.

The impact of the pipette declines on that segment in the quarter I imagine most of it.

And then.

Patrick you mentioned lithium batteries, just help us understand what areas of the portfolio.

So we're in that market.

Yes, so for the quarter Brandon can you kind of like play out the math.

The data points that I kind of mentioned earlier, that's probably.

And the 1% or so to the group so it probably would've been in the 2% or more two to the lab division and probably looking at similar type trends here in the first quarter.

And then at some point it will we expect it to stabilize it and that during the second quarter.

Tom and Sean on the Pipette business itself, we have seen good growth on the pipette instruments.

So in Q3 and throughout 2022 and also we see continued good growth in service pack business. So it's really too bad.

Tip business that have been suffering.

And as of course also Q2 ramp down of testing et cetera out there. So with the increased number of instruments that we sell single use my pants et cetera, and the increased service business I think we are quite confident that.

As we see the demand for <unk>, but also the demand for pipette tips will continue to grow up.

Excellent.

Okay.

We will go next to Catharine salty at Baird.

Hey, guys. Thanks for the question I guess first I wanted to go back to the services business you talked on the penetration side question, but on the other area of opportunity. You mentioned is Brian contracts at the point of sale can you just elaborate on what your attach rate is today and where are you.

We'd like to see that power in the next few years and longer term.

So what we are working on Catherine what we are working on is again continued increase of after your attach rates I mean, what we changed last year, the entire quoting process before meaning.

Our salespeople basically actively quote services and have to look up in the catalog of services. We could also look to dedicated products now it's an automatic part of the quoting process and if consumers.

Santa Cruz and wouldn't be able to sell services deals I have to give us some justification wider.

And it also helps us to improve again.

The marketing collateral behind service and making sure that would be make a better job of selling.

The value of services, so if you're going to continue to move really to make sure that we pull levers to make sure all of our customers almost stand to benefit off of service contracts.

Overall attach rate I think is in the range of.

Actually I'll just have to look up the number and get back to your problem on one of our next calls.

But for.

For me the most important measures really that'd be.

<unk> continues to see an increase.

Alright, Great and then on Europe , you mentioned, there's maybe some conservatism in your low single digit guide for the year.

Factors there is that mostly on the packaged food side.

Or are there other areas, where you're trying to be at that my predecessor.

Thank you Carl.

Yes, I think it's I think it's multiple factors damning packaged food is definitely one of it clearly I mean again, because this is high capex investment and.

It's one of the few product categories, it's really more of a high Capex site. Maybe you also have seen.

Some of our customers being more reluctance and we have seen is in Q4 and we see this continuing into Q1.

All are looking at.

At the market situation right now and they all want to see how it plays out Fortunately as at the <unk>.

Impact of <unk>.

Angela energy shortage in Europe has not yet played out and.

Hopefully, we will get through it I mean there'll be some.

Major issues in that building.

Hopefully also increase the overall market confidence in.

I would say otherwise in the European market.

For Us. It's also look at <unk> had been very successful over the last couple of few sales will be quite successful in Q4, so in the second half.

We will also be a tougher compare for us.

That's why we are thinking currently about.

For Europe more in the low single digit for 2023.

Okay, great. Thank you.

We'll move next to Michael Rice at Bank of America.

Great. Thanks for taking the question. This is Mike on for Derik the Brown.

Sorry, if I missed this earlier, but I want to drill a little bit into core industrial.

I know you kind of anticipated a little bit of a step down in the fourth quarter.

But it still seems like a sequential decline from the first three quarters of the year, we had really strong 10% growth and then looking at your guide for mid single for 2023.

Anything in particular, you want to call out how thats trending.

Mostly a reflection of macro or how much conservatism is built into that are you seeing any change in order patterns with those customers.

Or if there's anything by Geo or you can call out there. Thanks.

Yes, I'd say, we're coming off a period of a lot of growth in that business Mike.

We still feel really good though the businesses well positioned it's a better mix of business than it used to be.

Like we've talked a lot about over the past year.

Not more than what we would call the more attractive.

Segments of the market like more anchored towards pharma food manufacturing and chemical which is primarily specialty chemical for us.

This business also benefits from some of these hot segments that we talk about like lithium battery.

And then just these trends in automation and digitalization, which we continue to see really holding up during.

<unk>.

Deteriorating macro environment over the last.

A few months.

Historically it is the business that's most susceptible to the macro so we we still keep an eye on it.

We were really pleased in the fourth quarter that we saw good growth in each region, which I think is good it's important to see.

Each region of the world growing.

We're certainly a little bit more cautious as we kind of look to 2023, it's early in the year.

China is a big part of part of this business. So I think will be important for us to kind of get through the first quarter.

See how things look and then we'll have maybe some better visibility into the rest of the year.

Okay, That's fair and maybe just a follow up time off of Lucerne.

Modeling the 18 five tax rate is that a one year dynamic for 2023 years.

To assume that going forward beyond.

Yes.

At least a two year dynamic we took it down for 2022, we feel comfortable we can hold effort 2023, as we look to 2024 I think there could be some upward pressure on the rate, it's still a little early for us to kind of communicate anything but it could be something in the 1% to 2% kind of range, but will allow.

<unk> know a lot more towards the end of this year and when we provide guidance for next year.

Great. Thanks, so much congrats on the quarter again, yes. Thank you. Thank you.

We'll go next to Liza Garcia at UBS.

Hey, good morning, guys. Thanks for squeezing me in.

No.

The Opex question and kind of how to think about maybe just diving in there a little bit so R&D up.

In local currency and the corporate or obviously, you offset that with SG&A declined as we think about kind of broader.

Your investment strategy, how should we think about the R&D line and kind of.

Out.

Okay.

I'll get started on that.

Actually I'm very proud that we really have a lot of opportunities in our business to drive more products to the market and the success of our of our business really also relies on driving innovation to market would be this year, we brought a lot of great products to the market, helping our customers and the amount of automation and digitalization.

Clients et cetera, both on the hardware and software portfolio that would be launched.

We actually launched internally.

<unk> accelerated programs, where we looked at our pipeline of R&D projects that we that we have across the company and selected a number of really high potential projects that the accelerated with additional funding and Thats part of the increase that you also see there on the R&D line.

Again for us it's.

On the on the leadership team he made a very conscious decision, saying you're using the success for the company to accelerate products and bringing even more horsepower to the street and making sure that would be.

Get stuffed total customers of which we know it will help them to drive more productivity helped them.

To drive better insights.

Research they are doing.

And.

I'm actually really excited and im really proud that we could do that.

Great.

And I know obviously, the macro started have been predominantly organic but you've definitely made some notable tuck ins tend attack biotech can you just provide maybe an update on kind of M&A environment and what youre seeing in the market maybe in terms of the incremental opportunities.

Portfolio.

Yes, very good question so.

On M&A I mean, we didnt change our strategy at all yields to looking at tuck in acquisitions bolt on acquisitions that complement both eyeball on the <unk>.

Technology Science technology that we do not own today, but think are important for us complement our portfolio all giving us market access in areas, where we don't plan to undertake was an example of that as we said we want to go more into downstream bio processing and have the right solutions for our customers. He also made last year's strategic acquisition of <unk>.

Area.

Software complementing of auto business with scale ups systems, which is a very.

Very important software capability for us to help customers scaling up from R&D to manufacturing.

Those videos a unique value proposition there and then.

End of the year, we acquired.

Also a small business called Houma, and Germany $10 million revenues, but also with products that we think really Bruce would have in the portfolio and thats. The way I envisioned to continued as we really look for the right opportunities given the strength, we have as a business we can be very selective in what.

Companies, we want to acquire I think metal Toledo is an outstanding platform for these companies who look for.

Global access to market, which we have.

And also the strength that we have in terms of supply chain.

To help them to really accelerate the go to market, but it needs to be really something that is missing in our portfolio and we don't have to.

Bank M&A to grow we have a strong organic engine.

But I am very interested in the close in opportunities to get us into the fast growing market segments like the.

For example, and it's also one of the reasons why we acquired <unk>.

Great. Thanks, so much.

Okay.

We'll move next to Rachel that install at J P. Morgan.

Okay. Thanks for taking my questions guys and congrats on the quarter and so I wanted to follow up about some of the earlier questions around the consumable dynamic in some of this type had inventory stocking as well to flag that consumables were down 5% during <unk> due to that Paypal dynamic. So can you just walk us through your expectations for consumables growth in the <unk>.

First quarter, and then for the full year, and then kind of within that what's embedded for that consumables growth between pricing versus volume.

Yeah, Hey, Rachel.

I don't have the specific breakout for the full year I would say I would probably expect to see a similar.

The result in Q1 as we saw here in Q4 overall for consumables.

And then I would certainly expect to see some growth in the second half of the year, but I don't have anything specific in mind in terms of exactly what that would be but definitely would expect us to return to growth in the second half of the year.

Absolutely. Thanks, Shaun I think again as I said before some good indicators for us is to demand for bypass itself footings dramatically.

Should grow.

Give us continue to grow with Walter I mean, we are playing very well into Biopharma research space with all of our product portfolio. So Colby tailwind I think will hopefully not be any any topic for us.

To the second half of the year and the rest of our portfolio that we have in consumables. The sensors that go into you know into Biopharma is one of the approved sensors or even some of our lab products have consumable sales still doing quite well.

Great and then maybe a quick one here just on Onshoring you guys had talked about the onshoring and near shoring dynamic being a tailwind from Butler.

You just talk about your latest expectations on where you can see that impact the portfolio. Obviously, there is some debate going on around the U S market here locally so how are you.

Embedding that into expectations in the near and medium term as well. Thank you.

And we still see that as a really good opportunity for the company in the medium to long term.

But in terms of 2023, we didn't really build anything specific into our guidance.

And we'll take our final question from Patrick Donnelly at Citi.

Hey, guys. Thanks for fitting me in maybe just one obviously a lot of ground covered here Shawn maybe on the supply chain in general you talked about inventory, obviously ran a little high in 'twenty two with some of the stocking impacts can you just talk about expectations kind of wind that down are you seeing normalization in the supply chains.

Some thoughts on kind of how you're thinking about that please.

Yes, maybe ill yeah, thanks, Patrick I'll start and I'll, let Patrick maybe add a few comments as well too here, but but yes, we definitely have seen a lot of improvement in the supply chain in particular on the transportation side like this the time to go from.

One country to another.

As the lead times are I think pretty close to back to normal at this point in time. So that's been great and then in terms of like availability of components. They are still there is still.

A topic here or there, but I'd say the noise level is significantly lower than what we were seeing six months ago, yes, absolutely I can confirm that.

Semiconductor issues that we talked about last year are mostly behind us.

Very few exceptions. The team has been also very agile agile to change somewhat scientific instruments that we are not so dependent on some of the exotic components, but clearly novel supply chain as I would say, it's almost back to normal in terms of transportation times availability of materials and that should not be getting taller.

Way too.

To make successful business.

2023.

Okay.

Yes, and maybe just one final comment on that one is.

We're really proud of our team the supply chain I think really it's been a competitive advantage for us over the last few years and just the collaboration around the global organization and the culture has been really amazing to observe from the inside and I think frankly helped us gain some share along the way and enhance our brand.

Absolutely.

That does conclude the question and answer session and today's conference call. Thank you for your participation you may now disconnect.

Okay.

Yes.

Okay.