Q3 2023 Mettler Toledo International Inc Earnings Call
Thank you for standing by and walk you through the Mettler Toledo third quarter 2023 earnings Conference call.
I would now like to welcome Adam <unk> head of Investor Relations to begin the call Adam over to you.
Thank you and good morning, everyone. Thanks for joining us on the call with me today is Patrick Kaltenbach, Our Chief Executive Officer, and Shawn Vadala, Our Chief Financial Officer, Let me cover some administrative matters. This call is being webcast and is available for replay on our website at <unk> Dot com a copy of the press release and the presentation that we.
We'll refer to today is available on our website. This call will include forward looking statements within the meaning of the U S Securities and Exchange Act of $19 33, $19 34. These statements involve risks uncertainties and other factors that may cause our actual results financial condition performance and achievements.
To be materially different from those expressed or implied by any forward looking statements for a discussion of these risks and uncertainties see our recent annual report on Form 10-K, and quarterly and current reports as filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions.
Any forward looking statements, except as required by law on today's call. We may use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in the 8-K and is also available on our website. Let me now turn the call over to Patrick.
Thanks, Adam and good morning, everyone. We appreciate you joining our call today.
Last night, we reported our third quarter financial results. The details of which are outlined for you on page three of our presentation.
Market conditions were weaker than expected in the third quarter, especially in China, where market demand significantly deteriorated relative to our expectations.
Our team has reacted quickly to address the market challenges and adjust our cost structure and we delivered good margin and cash flow performance. Despite these headwinds.
As we look to the remainder of 2023, we expect market conditions to remain weak, especially in China.
And based on market conditions as of today, we would expect these headwinds to persist into next year.
However, we remain confident in the fact that we can control, including strong execution of our proven corporate programs like spinnaker to drive growth and capture market share and stern drive to manage our costs effectively.
I will go to market strategy.
<unk> portfolio and unique culture has been important differentiators during challenging conditions and I am convinced that our efforts have driven market share gains and will help us to emerge stronger in a market recovery.
Let me now turn the call over to Sean to cover the financial results and our guidance and then I will come back with some additional commentary on the business and outlook Shawn Thanks, Patrick and good morning, everyone sales in the quarter were $942 $5 million, which.
<unk> a decrease in local currency of 5%.
On the U S dollar basis sales declined 4% as currency increased sales growth by 1%.
On slide number four we show sales growth by region local currency sales grew 4% and Europe declined 3% in the Americas and declined 14% and Asia rest of the world local currency sales in China were significantly lower than expected and declined 25% in the quarter.
On slide number five we show sales growth by region on a year to date basis local currency sales grew 1% for the first nine months with 4% growth in Europe, and 1% growth in the Americas, and a 1% decline in Asia rest of the world local currency sales decreased 6% in China on a year to date basis.
<unk>.
On slide number six we summarized local currency sales growth by product area for the quarter Laboratory sales decreased 9% and industrial decreased 6% with core industrial down, 9% and product inspection up 1%.
Food retail grew 49% in the quarter and benefited from significant project activity.
Service sales grew 6% in the quarter.
The next slide shows local currency sales growth by product area on a year to date basis laboratory sales decreased 3% and industrial increased 2%, including 1% growth in core industrial and 4% growth in product inspection.
Food retail increased 33% <unk>.
Service sales grew 11% on a year to date basis.
Let me now move to the rest of the P&L, which is summarized on slide number eight gross margin was 59, 4% an increase of 10 basis points as pricing was partially offset by our volume decline higher costs business mix and currency.
R&D amounted to $46 $1 million in the quarter, which is a 1% increase in local currency over the prior year period, including increased project activity.
SG&A amounted to $217 4, million% to 9% decrease in local currency compared to the prior year and includes lower variable compensation and benefits from our cost savings initiatives.
Adjusted operating profit amounted to two amounted to $296 million in the quarter, a 4% decrease.
Currency reduced operating profit growth by approximately 3% <unk>.
Adjusted operating margin was 31, 4%, which represents an increase of 20 basis points over the prior year.
A couple of final comments on the P&L.
Amortization amounted to $18 3 million in the quarter interest expense was $23 million and other income amounted to $1 $2 million.
Our effective tax rate was 19% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter. We continue to expect our tax rate to be 19% for the full year and again in the fourth quarter.
Fully diluted shares amounted to $21 9 million, which is approximately a 3% decline from the prior year.
Adjusted EPS for the quarter was $9 80.
A 4% decrease over the prior year or a 1% decrease excluding unfavorable foreign currency.
On a reported basis in the quarter EPS was $9 21.
As compared to $9 76 in the prior year.
Reported EPS in the quarter includes 24 <unk> of purchased intangible amortization 27 of restructuring cost and <unk> from the difference between our quarterly and annual tax rate due to the timing of stock option exercises.
The next slide illustrates our year to date results.
Local currency sales grew 1% for the nine month period, adjusted operating income increased 4% or 8%, excluding unfavorable foreign currency and our operating margin expanded 140 basis points.
Adjusted EPS grew 4% on a year to date basis or 9%, excluding unfavorable foreign currency.
That covers the P&L and let me now comment on cash flow in the quarter adjusted free cash flow amounted to $251 $7 million.
Up $27 million.
Helped by favorable working capital.
Year to date cash flow per share grew 32%.
DSO was 37 days, while <unk> was three eight times.
Let me now turn to our guidance for the remainder of this year and our initial thoughts on next year.
First forecasting remains very challenging, particularly for our business in China.
Our team in China has reacted to changing market conditions very quickly and we feel very good about our market position in the country.
However, economic conditions remain challenged and there is low visibility.
Outside of China. There is also greater uncertainty today with weakness in our core end markets such as life Sciences, and continued soft economic conditions in Europe and the Americas.
We expect lower than normal customer year end spending.
The recent middle East conflict also creates additional uncertainty.
Secondly, our.
Our organization is not standing still during this period of reduced market demand a defining attribute of our culture. The team has executed exceptionally well to adjust our cost structure to current market conditions, while at the same time reallocating resources to support important investments in our long term growth.
Now turning to our guidance for the full year 2023, we expect local currency sales to decline approximately 1%. This compares to our previous guidance of zero to 1% growth.
We expect full year adjusted EPS to be in the range of $39 <unk> to.
To $39 30.
This includes an annex this includes an expected headwind to adjusted.
<unk> EPS growth of approximately 3% to 4%.
Free cash flow for the year is now expected to be approximately $875 million above our prior guidance as our reduced profit forecast is more than offset by the favorable timing of tax payments and working capital share.
Share repurchases will now be $900 million.
2023.
With respect to the fourth quarter, we would expect local currency sales to decline 7% to 8%.
We expect fourth quarter adjusted EPS to be in the range of $10 50.
To $10 70.
Currency is expected to increase sales by approximately 1%, but decreased EPS by approximately 1%.
We have also provided our initial guidance for 2024 and based on our assessment of market conditions. Today, we would expect local currency sales to be approximately flattish and adjusted EPS to be in the range of $39 10.
To $39 80.
Which represents a growth rate of zero to 2% or two 2% to 4% growth excluding adverse currency.
Relative to sales currency is expected to be a headwind to sales growth of approximately 1% in 2024.
Underpinning our 2024 guidance are the following assumptions.
First we expect our customers to remain cautious with spending in the first half of the year, reflecting the increased uncertainty in the economy.
Our sales in China are also expected to decline in the first half of the year as economic trends are expected to remain weak and we faced challenging multi year growth comparisons.
We expect our local currency sales to improve in the second half of the year as comparisons become easier and market conditions improve.
Secondly, we expect our year over year margin performance to be dampened due to lower sales volume and a reset in our variable compensation programs offset in part by our cost savings initiatives.
Lastly, I will share a few final comments on our 2024 guidance, we expect total amortization, including purchased intangible amortization to be approximately $73 million.
Purchased intangible amortization is excluded from adjusted EPS and is estimated at $25 $8 million on a pretax basis or <unk> 96 per share.
Interest expense is forecast at $86 million for the year and other income is estimated at approximately $5 million we.
We expect our tax rate before discrete items will remain at 19% in 2024.
We expect free cash flow of approximately $850 million, representing a conversion of approximately 100% of adjusted net income. We also expect share repurchases will be approximately $850 million.
That's it from my side and I'll now turn it back to Patrick.
Thanks Shawn.
Let me start with some comments on level operating businesses stalling the flap Rainbow sales teams continuing to see good engagement and activity levels with customers, but budget constraints and cautious spending patterns have led to declines in demand across our key market segments of life Sciences, food and beverage and chemicals.
This is especially true in China available pharma and Biopharma customers have significantly reduced our investments and also significant spending during the pandemic.
In the Americas, while customer Destocking of Pipettes has unfolded as we had expected we still see weaker market demand.
We also saw lower than expected demand.
From our automated chemistry business and really instruments.
Process analytics was again challenged by weak demand from our <unk> processing customers.
As we look out through 2024, the market fundamentals for the lab business as a group.
While the pharma Biopharma market has slowed this year, we expect a normalization in activity in 2024, and the long term outlook remains strong as innovation pipelines remain full of novel drugs and therapies to.
To be brought to the market.
We anticipate to benefit from trends in automation and digitalization, leveraging our <unk> software.
Additionally, our team remains focused on capturing the significant growth procuring and hot segments like lithium ion batteries semiconductors and sustainable materials.
We will also gain from our investments in innovation and software in 2024 will feature many exciting product launches that I look forward to share with you a few over the coming year.
Turning now to our industrial business.
Overall industrial sales declined 6% in the quarter against very strong growth in the previous year.
Our core industrial product sales were weaker than anticipated due to a sharp decline in sales in China.
<unk> had lower sales in the Americas due to very tough growth comparisons and weaker market demand.
Product inspection sales grew in Europe. However, this growth was largely offset by weaker sales in the Americas as our fruit manufacturing customers have remained cautious with their investments in new equipment.
As we look out to 2020 for one of our core industrial business likely faces headwinds from the slowing global economy, particularly in China.
We should benefit from global trends in automation, digitalization and reassuring investments around the world.
We also continued to upgrade our portfolio with new solutions to address our customers' challenges on the production floor point.
For example dose increased customer focus the devices used some hesitance areas.
To be certified explosion proof.
And to be a simple to use as opposed in safe areas.
Earlier this year, we released a new model of Hubbell flagship industry 500 waiting terminal.
For use in hazardous areas that provides powerful process control for pharma and chemical customers.
Our new terminals are intrinsically safe and also features seamless integration into our customers' automation systems and deliver state of the art cycles acuity features.
Yeah.
Now regarding our product inspection business crude manufacturing customers face more difficult operating environment today, which we expect will lead to limited growth for product inspection business in 2024.
We will also continue to focus on innovation in this area as our customers increasingly seek solutions to protect their packaged foods from physical contaminants and increase productivity as they continue to be challenged by labor shortages.
We have had great initial success with our new X two line.
X Ray products that have launched over the past year to address demand in both the mid and premium end of the market.
This new line provides a wide range of package integrity checks. In addition to traditional contamination detection and positions us very available to gain market share.
Lastly, food retail had another quarter of very strong growth due to a robust project activity in the Americas.
Our team has delivered remarkable growth this past year, if successful penetration of major grocery and club stores.
While we have cultivated an attractive portfolio opportunity pipeline.
The strong growth, we expect to deliver this year means we face very challenging growth comparisons in 2024 and fail for we would expect modest revenue declines.
Now, let me make some additional commenced by geography.
Sales in Europe grew 4% in the quarter with growth across our product portfolio and across most major end markets against very modest growth in the prior year.
While we are pleased to have.
To have generated good growth in Europe. So far this year, we are more cautious on the outlook for Europe due to soft PMI readings in the region.
During more into Ukraine, and potential for disruption and for the economy from the conflict in the Middle East.
Turning now to the Americas.
Very strong growth in food retailing customers was offset by a decline in both laboratory products and industrial.
Customer feedback in the Americas continues to point to optimism over the coming years from various government stimulus programs like the chipset and the infrastructure Bill.
Willis re shoring activities.
Our pharma and Biopharma customers are expected to gradually increase the spend in 2024 is to return to more normal replacement cycles and continue to advance their drug pipelines.
Finally.
Asia and the rest of the World sales declined 14% our sales in China declined 25% driven by a very soft laboratory in core industrial product sales.
Pharma Biopharma demand in China has declined significantly after several years of very strong growth and we have also seen very weak demand across other end markets in China as the economy has abruptly slowed.
The economy in China was expected to rebound following the end of the Covid lockdowns almost a year ago as the central government has shifted their focus towards growing its economy. However, the lack of stimulus has.
Vince from the real estate sector and declines in direct foreign investments are weighing on business and consumer confidence.
While the outlook for China is uncertain in EU.
Near term.
The long term growth opportunity remains significant through the country's commitment to expanding R&D investment and supporting the development of advanced pharma Biopharma, new energy and new material industries.
We also continue to see the laboratory market shift towards more advanced automated solutions in China supported by a desire for highly accurate and reproducible results.
Okay.
Our industrial solutions are increasingly in demand as customers in China look to increase quality and reduce cost and prepare for labor shortages in the years ahead.
Our business is very well positioned to capitalize from these growth opportunities and we expect solid growth over the long term.
Now as we look forward to the remainder of 2023 and 2024, we expect market conditions to remain challenging.
Nevertheless, we remain focused on the things we can control through the diligent execution of our initiatives.
Our competitive position has grown stronger as we continue to expand our technology leadership with new product innovation, and our spinnaker sales and marketing programs will be further enhanced.
Over the coming year.
With more sophisticated digital tools to ensure our sales teams on guided efficiently to the best opportunities.
You're also stepping up on various strategic pillars, and enhancing the metal to lead her experience with customers and employees.
Which will be enabled critical launches of new programs over the coming year.
I couldnt be more excited about what the future holds and fully believe that the best is yet to come.
So that is the conclusion of our prepared remarks, operator, I'd like now I'd like to open declined four questions.
Okay.
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.
I ask that you limit yourself to one question and one follow up question. Please we'll pause for just a moment to compile any questions.
Again, the <unk> like to ask a question. Please press star one on your telephone keypad now.
Yes.
Our first question comes from the line of Dan areas with Stifel. Please go ahead.
Hey, good morning, guys. Thanks for the questions.
Sean maybe just to start on China, what's the implied performance that youre baking in for 24, and I know it's hard to.
Sort of predict cadence, thus far out but can you just talk about what's assumed first half versus second half just knowing that obviously the comps will be easier here in the second half.
It sounds like you think China can be will be down in the first half, but Tim maybe grow in the second half are you able to sort of compare how those two pieces might look next year and then just on what Youre baking in.
Yes, hey, thanks, Dan.
Yes. So for next year, we're kind of expecting China to be down high single digit, but we're expecting more significant decline in the first half of the year.
And frankly also expecting significant declining in the fourth quarter, probably down in the mid mid <unk> in Q4 kind of similar to what we saw in Q3, but we do we are very optimistic about growth in the second half of the year next year like you said, we'll be facing some easier comparisons, but I think a lot.
Different topics in the local market should also be flushed out I think we also appreciate that there was an element of maybe some stocking at customers that were happening with supply.
With supply chain constraints during COVID-19.
Some of that inventory is also going to be flushed out by the time, we get to the second half of next year.
Okay, and then maybe just on op margins had a thing look there for you just sort of in the context of the expansion that you're delivering this year on more or less similar organic growth. I mean, obviously FX is a headwind I would imagine theres a pricing headwind too can you just talk about that and then also the <unk>.
Dry powder or the.
The gas in the tank whatever term is appropriate there just when it comes to efficiency and productivity that comes out of things like Stern drive Blue Ocean et cetera.
Yes, sure. So yes, so when we look at our margin for this year of course, we're very pleased with our margin expansion.
On a year to date basis, I think were up like 140 basis points for the full year will probably be up excluding currency. It would probably be up over 100 basis points, but on a reported basis, probably in the 50 basis point kind of a range as we look to next year, our operating margin will be more flattish.
If you exclude currency, it's probably up by about 20 basis points, probably one of the.
I think you've kind of like highlighted some of the things in terms of like puts and takes for next year.
In terms of.
Maybe I'll start with pricing pricing continues to do very well this year it came in.
Four 5% or so for the third quarter will probably be down a little bit from that level in the fourth quarter, probably in the 4% kind of range, but then when we kind of like to think about next year, we're probably more in the 2% range probably more in a more normalized environment.
Environment for next year, so that has an impact what do you kind of compare 'twenty three versus 24.
From a.
From a volume perspective, you're right, it's probably kind of kind of similar year on year in terms of the overall volume.
But we also.
Have initiated different cost savings measures, we're very pleased with the progress on that a lot of that is targeted towards productivity in the organization. So we will have some benefits from that into next year, but we also one of the things we have going on next year. As we also have so if you kind of like to think about our overall cost structure.
Sure.
Excluding bonus and incentives might be down slightly but we do have to bring back bonus levels to a more normalized level next year. So that's going to be a little bit of a headwind as we go into next year and then I think maybe the final thing is like when you go through times like this I think on one hand, we're very proactive.
On the other hand, we're also very mindful, we want to be very mindful of coming out of this situation stronger than when we entered it I think that's something we've always been good at in the past and we're very we're very thoughtful about how we're trying to balance our.
Our costs and our investments in this environment and we have a lot of things that we're still investing in that we're actually very excited about we'll drive some innovation that we'll see next year, but also.
Beyond next year or two and it's not just innovation that will continue to invest in our service organization as well. So I think we have a good balance in the company and I think when we kind of step back I think.
I think we have the right mix going into next year, and maybe I forgot almost forgot theres one other thing is foreign currency.
I think you mentioned in the question our currency will be about a 2% headwind.
So our EPS kind of next year.
Sean if I might add very good most of that and also as I asked about the stern drive OIS seems to have debt on stern drive this year and I've talked about stepping up on our strategic pillars. We've just launched <unk> drive phase III with a strong focus on automation on the shop floor Smart automation and we expect that also due to <unk>.
<unk> significantly contribute to our performance next year and drive savings both on the automation side, but also.
Back office efficiencies et cetera. So the program is.
What are you running and the team is very committed to drive additional savings next year.
Okay. Thank you guys.
Yeah.
Our next question comes from the line of Josh Waldman with Cleveland Research. Please go ahead.
Hey, good morning, Thanks for taking my questions guys.
Maybe one for Sean and one for Patrick Sean I Wonder can you talk a bit more on the assumptions that went into the guide, particularly as it relates to the sequential progression from Q4 into 'twenty four I mean, it seems like the guide implies a bit more of a step up been normal on an absolute basis and to 24.
Any anything youre seeing in the markets that you're trying to capture within the guide, suggesting that maybe like fourth quarter is trough and things start to get better.
I think more yes, I think the one topic, we have in Q4, Josh is that kind of like if you look at how do we think about market demand in the fourth quarter. I don't think we're going to get I think market demand is going to be less than it normally is towards the end of the year each year, there tends to be a pickup in market demand.
Especially in the lab business and right now, we're we're not anticipating much of that pickup if any in our fourth quarter guidance. So that's maybe one one topic to think about this year versus versus next year.
But then as we kind of like enter the year.
We're very much thinking and not to get too specific this early but we're definitely thinking the first half of the year is going to probably look more similar to the second half of this year.
In other words I think.
You can fully expect to be down in the first half of the year, but but but we do see ourselves returning to growth in the second half of the year.
Especially as we face easier comps I think this Q4 dynamic should be better next year as well.
And then.
If you kind of like get into parts of the portfolio, there's been different destocking issues at different points in time, whether it's pipette tips or whether it was.
Consumables and bio processing, especially on the single use side and then I kind of mentioned in the first question.
Some of the stuff that we're seeing in China as well.
Got it okay.
And then Patrick can you comment on how the service business is holding in.
It's been a bright spot here recently, but I guess any risk that that business starts to slow in the back of software hardware and maybe you know.
Pressures growth and profitability as we move out 24.
Yeah. Thanks, Thanks, Josh for the question I mean, I'm extremely proud of our service organization.
Definitely also an area, where we continue to invest this year as well.
Head count in services to make sure that we can deliver on the demand level customers ethanol services as I mentioned enrolment and solved.
Earlier earnings calls.
<unk> increased our portfolio and improve our portfolio of service offerings.
That helps us of course to also drive not only more to drive more services at the point of sales.
Getting a higher connectivity, but also good people of our installed base.
Yes.
Potential products that are currently noted almost service contract and stuff, there's no Santa marketing campaigns et cetera.
Really performing well.
Q3, I think our growth rate John correct me, if I'm wrong was 6%.
And thats for the full year still holds up into high single digits low double digit growth for the full year on services. It has been very strong in the first half now of course, we're also facing tougher compares because we also had strong growth in the second half of last year.
Now looking forward again, we still have I think envelope opportunity to grow with to go after.
Our installed base products.
Products that are currently not on the contract.
Making sure that with the customers.
Understand the benefits of being on a contract with US we know that customers, who all of the service contract are much more likely by again from us because they have seen the benefits of.
Opposite of being under service contract with metal Toledo, we continue to look into the offerings, we have more sophisticated.
Services for more complex solutions out there and that will also continue to drive momentum for us in service I'm again, I'm very upbeat about hotel opportunity and so there was that we would expect it to come to continue to grow mid single digits at least next year.
Got it I appreciate all the detail guys.
Okay.
Our next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead.
Hey, guys. Good morning, and thanks for taking my question.
Patrick maybe one on.
When you look at the Q4 guidance.
Since stepping down from <unk> shouldn't be a surprise given your peer commentary.
What is changing from a metrics perspective can you comment on end market and our farmer versus industrial like what are you seeing in China versus non China trying to figure out. If this is all China or or ex China Youre seeing softening.
Yeah. Good question Jay.
Biggest part of it is as <unk> I would like absolutely China because.
Initially we have planned for.
Double digit to mid double digit declines in.
In China will be facing will become 25% decline in Q4 Thats, what we are planning for.
That's definitely one important piece of it the other piece is.
<unk>.
The overall budget flush.
Factoring the mainly the lab business.
Which we basically don't account for this year have you seen very limited.
Accident, there from customers and we should see by now to be honest.
So we didn't factor that into the Q4 growth as well so in that regard, it's kind of in a bit unusual in Q4.
For the mortgage servicing some of oil.
<unk> mentioned that Youll seeing similar.
Lack of demand.
Oxford flush demand at the end of the year. This year customers are just more cautious with their spending and then ultimately using.
As I had contact with several.
Key customers out there and they said look we have to hold our budget together this year.
We will continue to look into opportunities next year, but don't expect a big box of trust from us.
In Q4 this year I think that's probably the biggest things with China together with the lack of a budget flush in terms of the auto industry I would say no significant changes.
X U S.
For Europe.
Maybe a little bit into chemical market in the U S, where we saw a slowdown in Q3 npls are factored into Q4.
But we have to see how that plays out long term are less.
Between major disruption in the market I would expect it to be.
I would say normal momentum going into 2020, the chemical market.
Understood that's helpful and Sean maybe one for you Dave did I hear you right about pricing being normalized.
Coupons next year.
Just given patricks comments on end markets being.
Copper.
Pricing like what gives you the visibility on pricing for next year contribute assume gross margins being consistent flattish year on year.
Yeah. So I mean, yes, I think I feel very confident with the 2% for next year.
I think.
There's a lot of factors that go into it of course, we have a pretty robust processes I'm sure you are familiar with that.
Literally start in the summer and we go through the.
Whole portfolio with the organization and we look at different metrics.
But I think when you step back from it all our value proposition remains very strong.
And I think that's always the key and that's why we're always of course investing in innovation to make sure. We maintain that leadership in terms of the value proposition, but what we've seen is over the last couple of years as the market actually also move towards our portfolio in a way as customers seek more automated solutions more.
Digitalization. These are strengths of our portfolio relative to competition and I think we're very well differentiated in many respects and so I think that certainly helps us kind of maintain or our pricing position versus competition in terms of the operating margin I mentioned flattish, but if you look at.
The gross margin I think it will actually be up a little bit next year.
Okay interesting thanks, guys.
Yes. Thanks.
Our next question comes from the line of Derik de Bruin with Bank of America. Please go ahead.
Hi, Good morning. Thank you for taking my question. So I guess the first one is.
No.
Last November when you had your analyst day, you raised the long term guide.
The 6% to 5% for revenue growth.
Look I agree with you that China is not going to be down for a long time are not going to be down forever and it will pick up at some point, but.
What do you think what do you think it looks like one.
The market sort of rebounds, I mean, we're in a different world today.
Politics as different things are different you know how much of that 6% top line.
<unk> that it was just going to be.
Business as usual as it had been for prior years.
What did you what do you do with bed in that guide for.
Sort of like that China assumption with it.
So I think it's a broad broad question I know the crystal ball, but I do think it's important.
It is important let me start and then I'll let.
Sean chime in Israel.
We think what the curve when we talk about a 6% growth.
Long term growth model for my thought leader I think that the number is still very relevant in the mid and long term.
Several reasons for that is the number one behalf.
Effectively in China in that equation to be high single digits to long term. So it's not like most of the growth rates that we have seen over the last two years.
But still I would say.
High single digit is probably not not unlikely that we would see it is in the midterm again in China the other bit.
An important piece for us.
Remember that we also shifted our portfolio.
Sequentially into faster growing segments over time and that continues into the lab business in the life science market in industrial automation. These are all markets that are.
Still we see you'll see strong demand just given the underlying demand in different industries, whether it's related to <unk>.
<unk> work in populations like a flavor out there driving automation the whole story around digitalization.
Very very strong.
Our portfolio both on the lab side, but also on the industrial side and even if you look at public expect clinical products software products software you have a very unique positioning.
Well that is something that I think we will continue to differentiate us and also gives us the opportunity to capture market share and if you account for the underlying market growth.
Both the mid and long term in the range of 4%, 4%, maybe four 5% we should get to.
5% to 6% by taking the market share that youre going after.
I think we have we have the right portfolio increasing.
Our investments and we have increased our investments that will allow us to use significantly to also drive new solutions with the modeling. If you will see a lot of exciting solutions coming also next year, because I'm a strong believer that deferral.
Differentiation.
Will help us to drive growth, but also profitability mhm and as a global company of course, there is theres opportunities for us as there is changes in the landscape as well too. So we can pick up as companies start to reinvest more and maybe countries outside of China.
Already seen opportunities for our business and those kind of areas as well too. So that so I think the key for US is to always keep an eye on where the opportunities are and make sure. We're there leverage R. R.
Our programs to identify and pursue those opportunities.
Got it and is it.
A follow up.
Your business is relatively short cycle, you don't build tons of backlog.
I'm just sort of curious on.
Where youre getting your visibility from particularly into that back half ramp, which looks a little aggressive.
Frankly, and also regarding the same questions like you talked about.
Pharma and Biopharma.
Returning to our normal relatively normal replacement cycle. It seems like do you know.
I'm just surprised to hear you say that given what.
Given what have you, but my understanding of how the business is in sort of like how your visibility is for the next couple of quarters can you just a little bit more confidence on what sort of going into this other than sort of like tougher or easier comps in the back half of next year.
Well, maybe I'll start and I'll, let Patrick can add some color I mean, I think I understand the point, we were typically only sitting on about a month and a half worth of backlog. So I get that part, but I think if you take a step back to like if you look at our multiyear CAGR is kind of like.
Four year type CAGR I mean, we are starting to see ourselves moderating here.
<unk>.
When you kind of look at the back half of next year versus even like a 2019, you start to see more consistency from what we see here in the second half of this year and so I think at a high level.
We think that that is reasonable we also think that.
We are going to have easier comps. We know there are topics in China that will that will flush out with some excess inventory maybe in the system from coming out of out of Covid and then I think as we kind of particularly look at the fourth quarter. I think this year's fourth quarter is setting up to be a more unusual.
Fourth quarter for the group.
In terms of like lack of.
That that end of the year uptick that we normally see in terms of market demand and.
We can't predict what Q4 of next year is going to be like but I wouldn't expect it to be the same environment that we're we're faced right now.
And I would say probably maybe one other comment is just talking.
Talking to the sales organization throughout the world and what we hear from customers is that there's still a tremendous amount of interest out there.
There's a lot of activity out there is just a question of when.
We will start to reinvest in and have the funds available.
Definitely.
May adhere.
The topping around Destocking is something that we had seen in pipettes up we have seen and what percentage of those can all appropriate et cetera.
We think it would be good for more customers most of its behind US I mean, you are back to normal order pattern.
These consumables intangibles that are used for example in manufacturing.
Customers doing buildup of excess inventory anymore. It's also clearly what we're hearing from them, but we see in terms of the Otto cycle Cynthia that they are back to a normal use models.
50 centers.
Our next question comes from the line of Mac Sykes with Goldman Sachs. Please go ahead.
Hi, Good morning, Thanks for taking my question, maybe just first on.
In Europe, where there was some relative strength there, but just on the core industrial side and particularly on the chemical side.
Just the data points, we're getting things seem to be hearing, but Darren you've talked about the PMI could you maybe talk about that.
And sort of the context for 'twenty four.
Europe on the core industrial side.
I'll start with <unk>.
On Europe, yes, perhaps an XD good performance you see on the margin, but admittedly. It's it also had some easier comparisons versus China U S compared to last year.
We're gonna have February has seen more growth last year in the market that said on the chemical market, we referred to one of our concerns going into the year was that the higher energy prices in <unk>.
Impacted market much more than we have seen actually held up.
Quite well also over Q3 for us.
And I think it's it's two factors.
One is our capability to continue to drive market share and remember we have a very strong sales team in Europe. It goes mainly direct that is leverage.
<unk> also our.
Spending on sales to our sales capabilities to direct our sales team to opportunities very quickly.
And also address hot segments, like lithium ion batteries et cetera, which help us to compensate some shortfalls in other areas.
We are of course, a bit more cautious on Q4 and expect also a much more moderate 2024.
Youre right. The PMI is also pointing downwards as why we are more cautious.
Next year.
The investment sentiment across Europe, I would say, it's if you go to southern Europe, Spain, <unk>, Portugal, which are quite significant amongst falls.
Quite healthy so the.
The other hand, Europe within Europe, Germany has been slower than we thought it would be.
But you also see a lot of excitement for example in France, France is put to France 2030 plan in place where they plan to invest in some of these core technologies in pharma Biopharma in semiconductors, but also into India.
Lithium lithium ion battery and energy market, which I think will continue to drive growth moving forward.
So again overall for Europe next year.
Very moderate but long term I think.
It is still holds on a model that we expect.
Low to mid single digit growth from Europe.
Yeah, and just to maybe and then just one go ahead go ahead Sean.
I'm going to say just to answer your question specifically for next year, we're a little bit more cautious on Europe.
In our core industrial specifically.
Probably expecting it to be more flattish next year and Thats again after coming on top of some.
Some really solid numbers this year and clearly frankly exceeded our expectations for for the year and then for Europe in total.
For next year since I'm hitting it with we're probably looking at growth.
Up slightly for the year overall.
Got it thank you for that color and then.
Maybe just following up on <unk> question on second half next year assumptions.
If we were to kind of look at.
The comp impact and then inventory destocking, where there might be some level of visibility of that going away could you kind of isolate what your assumptions are for just underlying demand growth in the back half in the context of the second half recovery.
It's possible.
I'm, sorry, Matt I don't have that level of granularity.
Model N and <unk>.
<unk> of course, it's very early to start trying to give specifics for any quarter for next year I think we always try to share what we know at this time of the year recognizing it's early but we feel like it helps everybody to know at least what's on our mind and it helps you to think about.
Organize your models, but of course as we get into the year.
Refine things as we've as we've learned more about trends as we enter the year.
Got it I appreciate that thanks, Shawn Thanks, Patrick welcome Yes.
Okay.
Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead.
Hey, guys. Thanks for taking the questions.
Sean maybe maybe one for you just in terms of next year do you mind, just breaking out kind of the segment forecast. It's usually pretty helpful. Just to hear a kind of a sub segment detail and maybe geographies too I know you mentioned Europe and China.
Yes, sure. So hey, maybe I'll some of this might repeat what I've already said, but I will just kind of go top to bottom is to make sure everybody gets it so so.
So I think the overall sales growth for the for the full year next year as is flattish.
And so if we start with with lab, we expect lab to be be up slightly.
We expect.
Core industrial to be down slightly.
We expect product inspection to be up slightly.
And then we expect food retail to be down probably mid single digits might be a little bit more than that.
From a geographical perspective, we expect as I mentioned before China to be down high single digit with a bigger decrease in the second in the first half of the year and growth in the second half of the year and then we expect the Americas and Europe to be to be up slightly.
Okay. That's helpful at least low single digit go ahead.
Yeah, I got you.
And then maybe one on the earnings side, Sean I mean, just looking at <unk> you know in typical years, that's about a third of the year in terms of earnings.
We're a little bit below 11 bucks here for <unk>.
That is the run rate right. It kind of suggests something like 33 Bucks.
The guidance for next year is more 39.
I guess is there something holding <unk> down that goes away next year I'm, just trying to think about that as a jumping off point and just bridging the gap to get to that guidance for next year on the earnings side relative to what <unk> seems to imply.
Yeah, I mean, I feel like you are trying to take a low quarter and try to extrapolate.
The fourth quarter as this dynamic that we talked about with <unk>.
Not having your typical year end.
Market demand and.
So it'd be a little bit cautious to try to do any correlations off of that of course the way. We're building. It up is a lot more granular.
Looking at the different levers and trying to pull it altogether.
And so we we.
We feel good about the guide that we've provided.
Of course, Theres, a lot of moving parts things are dynamic but.
But I think we still stay very committed to operational excellence inside the company I mean culture is just amazing the amount of agility and the amount of resilience is really impressive.
And the organization is doing very well in that regard and like I mentioned before.
We do try to find the right balance for the medium and long term here too and I think we were striking that with this guidance.
Okay. So <unk> seems to maybe like a little more of a depressed number then yes.
Next year I guess, yeah okay.
I appreciate it guys.
Yes. Thanks.
Our next question comes from the line of Jack Meehan.
With Nephron research. Please go ahead.
Thank you good morning.
Hi, Joe.
So one of your peers called out lab closures impacting demand as it as they went through the third quarter and into the fourth quarter, you obviously have really.
Good visibility into this probably amongst the best in the peer group was just curious what youre seeing in that regard if that's kind of a factor that's playing into.
The outlook.
Yeah, maybe I'll start Jack So I mean, the only thing I've really heard about is like there's certainly a lot of small start up biotech that have gone out of business.
Some articles on that kind of recently.
But as you know thats not a big part of our business.
As a smaller effect on it maybe are our pipe heading business, but a lot of our portfolio really isn't geared towards early research. So.
Less of an impact for us, but other than that we're not we're not doing anything.
Absolutely not.
Okay.
And then on food retail so I just look back over the last decade. This is Ben.
Give or take a $200 million business here or there.
This year, you're obviously trending well.
Well above that.
Do you view this as pull forward from future years as they are.
Some risk that this could swing below the trend line before we can get to equilibrium.
It's always a lumpy business you know like we've had some years, where it's been down recently, it's nice to see retail have a great year.
But beyond just being lumpy, we've actually won some some new accounts in the U S and in Europe. So the teams actually done a really great job with that.
You have like the cyclicality of investment cycles, but then I think we have won a couple of nice.
A couple of really nice projects here and then we've also have come out with some new innovation in the last couple of years, some new things.
Added onto our portfolio a refresh of the portfolio I should say that it has been really well received in the marketplace as well too but.
I would never extrapolate anything from retail because it's always lumpy.
Our visibility into next year is that we see that we should have another really good year of project activity, but given the comparison is still going to be down a little bit.
But going forward I think it's always better to have a long term view on retail we still view it as like a long term a lower single digit kind of growth business, but but pleased to see how well its doing this year.
Okay. Thank you Sean.
Youre welcome.
Yeah.
Our next question comes from the line of Rachel <unk> with Jpmorgan. Please go ahead.
Thanks, Good morning, and thanks for taking my question. So first up I guess on that if you could spend a few minutes talking about your exit rates of how the segments performed in the month of September and then so far into October and early November Yes, and then you mentioned during derek's question or your CAGR on the volume pilot fulfill stabilization there.
Your confidence into the back half ramp next year, but can you just talk about are those categories that you were referring.
I'm, referring to really about the overall through a huge CAGR oriented looking at.
Some of the exit rates here and given it sounds like July and August, but likely a bit stronger.
Sure.
Yeah, Hey, Rachel So maybe I'll start with the second part of your question. So from a kg perspective, we're kind of looking at what we saw in Q3 and and how we're guiding Q4, and then just kind of taken a step back and applying our own judgment as to like that looks reasonable to us.
Just kind of.
Kind of a moderation of our normalization rate as we kind of think about next year.
And then in terms of like exiting and entering we usually don't try to comment too much on individual months.
But I would say that we certainly understood.
Both of those numbers as we were providing guidance on the fourth quarter here.
And if it helps at all maybe I haven't really touched upon guidance for the fourth quarter, but I can maybe just run through that by segment to provide.
Provide a little bit more color in terms of how we're thinking about the different parts of the business. So we were looking at for the fourth quarter lab being down in the 10% kind of a range.
We're looking at core industrial being down mid single digit.
Product inspection being down high single digit.
And but with retail growing and the 20% kind of a range.
And then from a geographic perspective, I've already mentioned, China being down like mid mid twenties.
And then from a geographic perspective, the Americas being down mid single digit with Europe being down low single digits.
Okay.
Alright, that's helpful. And then I just wanted to perhaps a little bit more on that first half second half thing Annick next year, we'll talk about China.
Pretty pressured in the first half and then starting to get optimistic about growth in the back half of the year, but I wanted to press on those types of assumptions around the lab and industrial business.
How much of a meaningful step up in growth rate.
And the second next year, and then again, how much of that is really driven off their content.
<unk> underlying demand accelerating.
Yeah.
Yeah, I mean like I said before I mean, I think we expect lab for the full year to be.
To be up slightly and then we expect.
On the industrial side or overall, it's going to be.
Flattish with with core industrial down slightly and product inspection up slightly I think China of course is going to be a big part of like the seasonality next year and so I would expect things to be relatively down in the first half of the year and then up in the second half of the year.
But like I said earlier, we don't have.
Specifics to share regarding some.
Some of the other granularity of how we would arrive at that and as we like I said before as we entered the year, we will have more visibility and can provide help you refine models and provide more color.
Uh huh.
Our next question comes from the line of Catherine Schulte with Baird. Please go ahead.
Hey, guys. Thanks for the question.
My name is Greg you mentioned in manufacturing customers in America remained cautious.
No.
I know you talked about product inspection being slightly next year, but maybe talk about outlook for that customer group and 24.
I'm going to start being a little more constructive around.
Okay.
Yeah, maybe I'll start Catherine and then I'll, let Patrick pick it up so you know.
So the hate we've talked a lot about food manufacturing.
Over the last couple of years I'd say overall, it's probably exceeded our expectations to a certain degree this year, but we do see.
A lot of pressure on that segment kind of going into the fourth quarter and by this time, we have enough visibility to say that.
So for the fourth quarter of this year, we're seeing.
Negative negative results are declines I should say both in the Americas, but frankly also in Europe.
That market segment has been under a lot of pressure in terms of their own cost structure.
Their own challenges with inflation you've seen.
Some of the food companies.
Closing plans executing restructuring plans.
A lot of antidotes from our team saved like like a lot of other things like Hey, there's a lot of interest there, but they're just not getting approved things are getting.
<unk> off to a certain degree.
But outside of the Americas and Europe were also seeing actually good growth at the moment and as we kind of enter into 2024.
This is a really good example, where we have a lot of nice innovation in the portfolio coming out we have a lot of good products in different areas of <unk>.
Product inspection like in the X Ray business I think we talked about it in our prepared remarks, we have good stuff also coming out in metal detection as well and.
And the innovation and the new products are being very very well received by the marketplace.
We just started some updates yesterday about some anti <unk> from a trade show that the guys were recently at an end.
And a really good market reception of some of the new products. So we feel good about what we're doing what we can control and how we're positioning it's just a much more difficult.
Market environment.
But it's frankly been like that for a little while it's been a little bit up and down.
But the the.
The value proposition is still there right like the need to help these companies with productivity.
We can really help them and I think they recognize that so I think that's still there and then and then just the focus on <unk>.
Food safety and brand protection.
See things in the news in that regard and of course.
We certainly can help companies as they seek to address those needs as well too.
Okay got it and then any update on how tenders have been performing and your thoughts on hiring.
I can take just yes, so pencil tank again for US has been performing really very well over the last year or so I mean, the integration went really well with Panther Tech of course strongly dependent on the underlying biopharma.
Market <unk> seen a slowdown compared to be used before.
But shouldn't be surprised but what we have done with <unk> as we expanded the whole duty offering there.
New parts of the portfolio. So it's not only pressure sensors also have now you'll be monitoring monitors et.
And the portfolio so while while of course, we see lower demand compared to last year.
We think the portfolio is really really strong and of course by expanding it also different application wages quite.
Quite optimistic on <unk> future, although we are seeing negative growth this year.
Yeah.
I would now like to turn the call over to Adam Uhlman for closing remarks.
Great. Thanks, Hey, thanks for joining us today, a replay of the call will be available on our website and if you have any follow up questions. Please feel free to reach out to me and we look forward to seeing you at future events and conferences.
Thank you.
I would like to thank our speakers for today's presentation and thank you all for joining US. This now concludes today's call and you may now disconnect.
Yeah.
Yeah.
Hum.
Yeah.