Good day, ladies and gentlemen, and welcome to our Third Quarter 2019 Mettler-Toledo International Earnings Conference Call. My name is Mike, and I will be your audio coordinator for today. . I would now like to turn our presentation over to your hostess for today's call, Ms. Mary Finnegan. Please proceed, ma'am.

Okay. Thanks, Mike. And good evening, everyone. I'm Mary Finnegan, I'm Treasurer and responsible for Investor Relations and happy to have you joining us this evening. I'm joined here today with Olivier Filliol, our CEO; and Shawn Vadala, our Chief Financial Officer.

Thank you, Mary, and good evening, everyone. I will start with a summary of the quarter and then Shawn will provide details on our financial results and guidance for the remainder of this year and for 2020. I will then have some additional comments and we will open the lines for Q&A. The highlights for the quarter are on Page 3 of the presentation. Sales growth in the quarter was very good in our laboratory and industrial product lines. Food Retail declined 15%, worse than we expected the last time we spoke. Total local currency sales growth in the quarter was approximately 4.5%. And excluding Food Retail, sales growth was 6%, which is in line with our expectation at the beginning of the quarter. Excluding Food Retail, growth in the Americas was excellent while growth in Europe and Asia/Rest of World was solid. We achieved very strong growth in operating margins and earnings per share despite meaningful headwinds due to adverse currency and tariff costs. Overall, we are very pleased with the strong results for the third quarter. As we look to the remainder of 2019 and our initial thoughts for 2020, we face somewhat of a balancing act. On the one hand, we remain confident in our growth initiatives and our ability to continue to execute and gain market share. These initiatives have strong momentum and are well ingrained in the organization and surface well in an environment in which it is more important than ever to focus on the best growth opportunities within our markets.

Okay. Thanks, Olivier. Sales were $753.9 million in the quarter, an increase of approximately 4.5% in local currency. On a U.S. dollar basis, total sales increased 3% as currencies reduced sales growth by approximately 1.5% in the quarter. On Slide 4, we show sales growth by region. Local currency sales grew 7% in the Americas, 2% in Europe and 4% in Asia/Rest of World. Sales growth in Europe was particularly impacted by the decline in Food Retail. Absent Food Retail, Europe had sales growth of 4% in the quarter. Food Retail reduced sales growth in the Americas by 2% and 1% in Asia/Rest of World in the quarter. China had growth of 5%, pretty much in line with what we expected and was impacted by strong multiyear comparisons. The next slide shows year-to-date results. Local currency sales growth increased 5% in the Americas year-to-date, 3% in Europe and 7% in Asia/Rest of World. On Slide 6, we outline local currency sales growth by product area. In the quarter, laboratory sales grew 7%, industrial increased 5% with core industrial up 7% while product inspection increased 3%. Food Retail declined 15% in the quarter. And excluding Food Retail, our overall growth in the quarter was 6%. The next slide shows year-to-date sales growth. Laboratory sales grew 8% in local currency, industrial grew 5% with core industrial up 7% and product inspection up 2%. Food Retailing declined 10% on a year-to-date basis. Overall, total sales were up 5% in local currency and 6% if we exclude Food Retailing on a year-to-date basis.

Thanks, Shawn. Let me start by providing some additional comments on our operating results. Our lab business continues to perform very well with 7% local currency sales growth in the quarter, which was against very strong growth in the prior year. Most product lines did well, particularly if you look at it on a 2-year basis. Sales growth in the Americas and China was particularly strong. Our laboratory business is well positioned to continue to gain share. We spent a disproportionate amount in lab on investments in field resources, Spinnaker sales and marketing initiatives and R&D investments. We expect market demands to remain favorable and expect solid growth in the fourth quarter and in 2020, although we face more challenging comparisons after several years of very strong growth.

. Your first question comes from the line of Tycho Peterson from JP Morgan.

This is Julia on for Tycho. So maybe to start off, regarding your commentary on Europe, I think I heard you saying that industrial was particularly strong in that region. We're just comparing to some of the other commentary we've heard from your peers. So could just give us a little more color on that?

Yes. Indeed, we were very happy about the performance. I think it's a reflection of an economy that is good enough for us, but then a very strong execution by the team in terms of the Spinnaker initiatives, in terms of focusing on the right end-user segments. And we had also some good product launches that helped us. So indeed, really a good performance. What I, however, would also add here, the part of the economy that is particularly weak in Europe is not necessarily one that we have a focus on, so thinking of machinery, automobile industry and so on. These are not the most important industry segments for us.

Got it. And -- sorry, go ahead.

Yes. It's fine, Julia.

Okay. And then regarding Food and Retail, I'm just wondering what drove the negative surprise in the quarter. And how has your visibility into that business line has changed? Because I think you previously said that you typically have pretty good visibility a quarter ahead. So just wondering, are there any changing dynamics there that you'd like to call out? And then as we look at your 2020 guidance, obviously, for lab and industrial, you're still having pretty strong momentum there. So with the 4% constant currency growth, is that all sort of due to food weakness that you're expecting for next year? And what would be the guidance excluding food?

So I will take the first part and then Shawn covers the second part of the question. So back to retail and visibility, indeed, we have a reasonable visibility within the quarter. But our visibility is supported by good diversification across regions and across businesses. And so I think in retail, we certainly have a reasonable visibility to very large projects, but then there is an underlying business that we can't properly predict the whole quarter. What plays also in the weakness of retail is that the big projects did not come in as expected. And so we experienced that weakness in particular also from that end. We expect, as we did talk on the prepared remarks, retail to continue to be a challenge here for another 1, 2 quarters. It's also because we are managing this business too with profitability and not top line. And yes, I -- it's not a fundamental shift, but we do recognize that this market in food retailing is a challenging market right now. We expect that the latter part of next year will look better for us.

Yes. In terms of the second part of your question, Julia, if I look at 2020 for retail, for the full year, we probably imagine modest growth of low single digit. But during the first half of the year, we wouldn't be surprised if we see it down slightly during Q1 and Q2, but down in kind of like low-single-digit kind of a range. If we look at the full year, excluding Food Retail, not as much of an impact as we would have seen in 2019, but modestly better than the 4%. And if I just kind of like walk down the divisions or the business areas, lab, we're probably looking at lab in the mid-single-digit range next year. I mean keeping in mind, we have very good momentum in that business, feeling very good about the execution, but just acknowledging we're coming off of several years of very strong growth there. On the core industrial side, probably looking at more low single digit next year. We've been growing very fast in that business since the fourth quarter of last year. As a reminder, the core industrial business grew 13% in Q4 of last year, and we've been at very strong growth levels in the high-single-digit range for most of this year. And then if we look at product inspection, probably more in the low- to mid-single-digit range next year. This is acknowledged below our longer-term expectations. We still feel very good about the business from a long-term perspective, given our many competitive advantages, but just acknowledging some softness in the packaged food segment.

Got it. That's very helpful. And then lastly from me regarding China. I think last quarter, you had double-digit lab growth in China and a high-single-digit for industrial. It seems like it has moderated a little bit. So just wondering if there are any comp dynamics that you'd like to call out and how should we think about your outlook for China in the near term? Have there been any changes?

So indeed, there is a comp topic. We had here in China many quarters of very good results, and that starts now to play in. Absent of that, we feel still very good about our business in China. We have an excellent leadership position there. We have, in average, probably a 25% market share, which is about similar to what we have in the group. We have the Spinnaker programs that are executed really particularly also well in China. And we are benefiting from a good diversification of the end-user markets that we serve. So these are all very strong assets that we bring here, and I feel that our end-user industries that we are focused on are actually still going well in China. So all in all, good, but then we have these comparison topics and, of course, we also see that there are parts of the Chinese markets that are weaker. We are just less exposed, but I'm not pretending that we are totally immune to that one.

Your next action comes from the line of Jack Meehan from Barclays.

Just back on the core industrial business, that's kind -- despite some of the macro commentary, seemed to continue to do well. I was wondering if -- you did mention some discrete projects, which may help the quarter, what would the growth have been like otherwise? And then, Shawn, as we're thinking about 2020, is there any phasing within that low-single-digit outlook you talked about for 2020 as you look at the year for core industrial?

Yes. Jack, I mean, we called out a little bit some project activity in our T&L business. We actually see excellent momentum in that business kind of continuing for the medium term. There are some very interesting things going on in that business for us. So I wouldn't view it as necessarily a onetime topic for next year. But if we exclude that, I don't have that number, but it -- I don't think the number is also that significant on the overall division. What's been really interesting to us is that the growth in industrial has been extremely broad-based geographically and in a lot of our product categories as well. And I just feel like the -- this focus on the more attractive segments of the market really has gained momentum over the last year. And as I mentioned in my previous comments with Julia, I mean, we grew 13% in core industrial in Q4 of last year and we've really seen strong execution throughout this year. As I look to 2020, I haven't thought too much about pacing, but I can imagine Q1 might be a little bit lower than the other quarters, could be flat, more flattish to modest growth just given that we have a very difficult comparison in the previous year, but frankly, haven't put a lot of thought into that one and we don't have very good visibility going out that far at this moment in time but, of course, we'll give you an update the next time we talk.

Yes. That's fair. And then on the gross margin, so up 60 basis points year-over-year. I think that's the best progression you've had in a while. Can you walk us through some of the moving parts with FX, tariffs and pricing, just what the drivers of that were?

Yes. Sure. Again, no, very pleased with the margin expansion in the quarter, also came in line with what we had expected at least. Price realization did well. It was about 2.5%. Again, that was probably a little bit better than what I was thinking when -- the last time we would have spoken. That would have had a benefit of about 100, 110 basis points on the margin. Kind of offsetting that was the gross impact of the tariffs of 50 basis points. And so I think those are really the 2 items that -- to call out. There was certainly a lot of things offsetting each other that were smaller in nature going either way, but nothing worth really mentioning.

Your next question comes from the line of Dan Brennan from UBS.

Olivier, just back to geographies or, Shawn, just for a moment. Just I don't think you mentioned this, but just how do we think about China and Europe, specifically, as you look at the fourth quarter in 2020? I think it may have been asked earlier, but I'm just kind of -- think about, yes, the comps are a little bit easier for 2020, but just trying to get a flavor for how you're kind of modeling it.

Yes. Right now, -- yes. Thanks, Dan. So right now, for Q4, we're looking at probably more mid- to high-single-digit growth. But as we look to 2020, right now, we're assuming mid-single-digit growth. I would imagine the lab business will do better, maybe high single digit but probably a more cautious view on the industrial business, not that we're particularly seeing anything in our business, but just given the overall environment there that's kind of how we're thinking about it right now. Like every year with China, there's always upsides and downsides and things can change quickly.

Got it. And then I'm sorry, for Europe, Shawn, I don't know if you gave those numbers for 2020, just wondering how you think about it.

For Europe, right now, we're thinking probably low single digit in Europe, and then just to be clear, for Americas, mid-single digit.

Got it. And then, Olivier, I know you talked about the global economy and kind of where we're at. You guys are kind of powering through with the exception of Food Retail. But just kind of your sense for 2020, I mean the guide of 4%. Is it there anything you see? Are there -- I mean like what indicators do you watch because you've been kind of highlighting the risks for about 4 or 5 quarters and yet, with exception of Food Retail, the business has held in well. So I'm just wondering about -- it seems like you're warning that something may come, but maybe it won't come. So just can you give us a flavor for what are some of the indicators you're watching?

All the indicators that we have internal still look favorable. I think we commented before, we have in retail and in the packaged food area some end markets that are more challenging. But absent of that, all our KPIs that we have internally, leads growth, all that stuff looks favorable. We are very pleased about the team being focused on execution. We see good results of our sales and marketing programs. So that's unchanged. And we feel good. I think the overall economy, we look at PMI metrics, we look at economics, and we want to take that in our consideration. And in that sense, we continue to talk about also clouds, economic clouds. I think that was one word that I used a year ago. And I would still apply it here. But it's not that we see something particularly worrying or that the clouds get really dark here. Yes, in that sense, not anything that is so different to what we experienced the last few quarters. And we always said, the economy needs to be good enough for us to grow, and we feel the economy is good enough.

And then maybe one final just on Food Retail. I know it's a small part of the business, but is it -- so in 2020, it gets better from a comp basis. And then as you look out, are there fundamental issues or kind of benefits that will improve do you feel like with the supermarket industry or the other parts of the industry you're serving just given the pressure from the Internet?

I think the challenges will remain, but we will have adjusted to that. The comparisons will become easier, of course. But we have been also proactive in restructuring parts of this business, and we will have the benefit of that behind us. That's also one of the reasons why we feel like the second part of next year will be better. And that should position us well also for the future.

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

Olivier, just maybe one on the 20 comments you're making. If I understand it correctly, what you're saying is we want to be cautious but you haven't seen any deceleration in either industrial or food versus what you're seeing right now. This is more of a cautious tone you're just taking, but from an actual trend that you're seeing so far, you haven't seen any deceleration. Is that a fair comment?

Yes. That's a fair comment. And in contrary, I would say, what we are seeing year-to-date in the business, absent of product inspection and food retailing, we are very pleased that we have not seen a slowdown in the momentum from -- so it's yes. And this is true for all the relevant KPIs. So not just kind of the reported sales we -- growth activity, leads generation and all that stuff.

That's helpful. And then maybe one on the assumptions around '20. It looks like just based on at the EPS, maybe there's some moderation in margin expansion for next year, not sure if this is FX or what kind of FX you're assuming. Maybe any comments on incremental margins next year?

No. I mean, I think when I look at our guidance for margins, I feel actually pretty good. From an operating profit margin perspective, there might be a little bit of currency noise there. But excluding currency, we're looking at operating margin expansion of about 90 basis points, which is closer to the higher end of our typical guidance of 70 to 100 basis points. When I look at the incremental margins, I mean, we're looking at 40 -- north of 40%. And when I look at the gross profit margin level, it probably is in the 40% to 50% kind of a range. So overall, yes, we feel pretty good about our margin expansion story.

Your next question comes from the line of Steve Beuchaw from Wolfe Research.

I wanted to ask just one housekeeping question for Shawn, and then a couple on customer dynamics for either Shawn or Olivier. Shawn, I wonder if you could just speak to the tariffs impact that you have embedded in the guidance for 2020. Just operationally, how and where is that manifesting? And then I have a couple on customer dynamics.

Yes. Sure. Thanks, Steve. So for tariffs right now, the direct impact of the tariff is about a 0.5% headwind to EPS next year. And just to maybe proactively address the currency it's probably -- well, close to a 1% headwind next year as well, too.

Sorry, but the question was with tariffs, is it -- what is it about the tariffs? Is it about redomiciling something operationally? Or is it a direct -- more direct impact?

No. No. It's a direct impact. It's the costs that we incur because we import products out of China. To recall, a significant part of our production is based in China and then we export. And when they arrive in U.S., we have tariffs that apply to that. And the -- always the assumptions that we use on these calls is what has been communicated, and we are not taking any speculation of what might change or not.

Yes. Just to be clear, we're assuming the 25% rate on the enacted tariff stays in place.

Okay. Perfect. So then two on customer dynamics, and then I'll jump back in queue. One is on pharma. You guys have pretty substantial exposure to pharma as a customer base. Can you talk about what you've seen in terms of demand trends there and what the assumption is for 2020? And then on China, I appreciate the comments about the operating environment. Certainly, they're making a lot of sense. I just want to make sure that in your narrative when you are not calling out any more challenging tender dynamics or local competition or local preference, any of those items, just to make sure you're indicating that you're not seeing any of that.

Yes, thanks. Let's start with life science or pharma. Actually, why I say life science, that's the way we look at our business. We don't particular narrow it down just to be pharma. Also, our life science business has big pharma, CROs. We include also biotech companies. So it's relatively broad-based. This is about 30% of our revenue. And it has been a market that is doing well for us. We have very good competitive positions. We have -- this is an end use these competitive differentiations that we have, and there are also additional beneficial things happening like data integrity, which is becoming more important also. So it is a very good end-user industry, going well for us globally. And what's important to us, at the end of the day, it's a market that is still nicely diversified because we have not just big pharma; it's small and big and it's across geographies. And historically, what we have seen is there were times when big pharma was restructuring in the West, but then you saw a lot of CROs coming up in the East. And we have benefit from that and I -- looking forward, I see that underlying diversification, that is also beneficial for us, but we certainly count strongly on life science industry. We continue to invest in it. And it's certainly one of the markets that we expect us to continue to win market share. The second question, Shawn, do you want to take that one or...

Yes. I think the second question was in China, any local preference. I think the short answer is we're not experiencing that like some of the other peer-group companies are. In China, we're very much viewed as a local company. We've been there for over 30 years. We employ a lot of people. We make a lot of products there, very strong reputation in the market. If anything, we would be probably secondly viewed as a Swiss company in China as opposed to an American company.

And so bottom line, we don't have any disadvantage here or we don't see any problems coming up or so. I think contrary, I would say we have a trend in the Chinese market where quality really matters and people are, in that sense, willing to pay premiums also for Western brands, so we feel good about that.

Your next question comes from the line of Derik De Bruin from Bank of America Merrill Lynch.

So just a question, just sort of thinking about some of the past brands when we saw you give relatively conservative balance and then sort of like beat that. Is -- when we look for next year and you look into it, was there any sort of like pockets of where people didn't buy in lab and industrial because they were worried about tariffs or worried about trade? I'm just basically saying is like do you think there's some catch-up spending to be done in 2020? Is there -- thinking about what happened back in the 2016, '17 time frame when you had the catch-up trading, what the -- when your China industrial business was down so much, just wondering if that dynamic will repeat for next year.

No. I don't -- I think we referred that in the past as pent-up demand. I don't see that. And I see it -- and I say so because I don't see that we are experiencing a particular declining here or -- we are expecting that the economy remains about the same as it is now. And I used the term also before "good enough." So the good enough actually implies that there isn't customers holding back and then we would expect a pent-up the following year. And in terms of our guidance being conservative or so, I would say we did it in the same -- similar way as last year. Of course, to our guidance there are upsides and downsides, but I don't feel that we are more conservative or more bullish than last year.

Great. That's helpful. And then just -- I mean, I realize that you're guiding based upon what the current political situation looks like. But if the tariff situation between the U.S. and China goes away, does that -- or normalizes, does that impact your ability in any way at all to sort of like how you would get pricing for next year, i.e., would you not get as much pricing because you took some this year?

So if tariffs would go away, I would see an upside in our EPS and our margins. I feel like we kind of keep the current pricing power that we have. There are a few things that would -- we would reverse. But in general, there is a significant upside to EPS if the tariffs would really go away and particularly, because I would think that currencies might also change everyone there. But what I would not automatically assume is that the top line would improve because of that. Again, I don't feel we lost business because of the trade war. Yes.

Your next question comes from the line of Steve Willoughby from Cleveland Research.

A couple for you. First, I guess, Shawn, just a few housekeeping items. I apologize if you did mention it, but have you -- did you provide specific operating margin, tax rate and share count guidance for next year?

I think so. But I don't mind going over it again. In terms of operating margin, we're looking at margin expansion excluding currency of 90 basis points. In terms of tax rate, we're assuming we maintain our rate of 20%. And in terms of weighted average shares, we're estimating just over $24 million -- I mean 24 million shares.

Yes. And then just a follow-up question maybe for Olivier. The product inspection business, if we take a little bit longer-term view, going back a few years, it was a business that consistently grew in the double-digit range. And it's been closer to flattish or low-single-digit growth over the last 2 years. I understand that some of these customers are under financial pressures, but just wondering what your view is on kind of the longer-term potential growth in this business as I wasn't sure how much of the sales from customers are discretionary versus more kind of driven by regulation.

Just to clarify, we might have had quarters with double-digit growth, but we are more high single digit. And the high single digit, sometimes in quarters, we can have a very big project and therefore, it can be the double digit. But medium term, long term, I expect us to have this mid- to high-single-digit growth in product inspection. It is driven because we have really an exceptional strong market position. We are the only one that will -- or have a lead in all the core technologies. So including check weighing methods, x-ray and vision inspection. We have a fantastic service network that customers really value. And we are really a partner to global accounts to -- for global rollouts. And these global rollouts are driven by requirements to protect the brand. It is regulation-driven but indirectly. In a sense, the regulation specifies how recalls need to take place. And that incurs a lot of cost and, again, also damages to brands when you need to do recalls. But it's up the different accounts to decide how they protect themselves. And we certainly feel that installing our instruments at the end of a packaging line is the best insurance and allows to really protect the interests of the company and provide the best quality to customers.

Your next question comes from the line of Paul Knight from Janney.

Olivier, could you talk about the particular products that you are driving this accelerating growth in lab products as 2020 rolls out?

I wouldn't narrow it down to any particular product. We talked about this on past calls, that we have the most modern product portfolio in lab that we have ever had, but this across all the product lines. So this is true for pipette, this is true for analytical chemistry, this is true for our automated chemistry, it's also true for our lab balances. So it's the whole portfolio. It's not things that I would say only benefits us in the last 2 quarters. This is an ongoing thing. We benefited last year and we're certainly going to benefit next year. In our business, as an individual, new product doesn't really move the needle. It's the sum of things and having this technology leadership that allows us to win new customers and also allows us to raise prices, gives us this pricing power.

And then what is pricing power a year? Is it 100 bps, 200 bps, low single digits?

Yes. Going forward -- I mean, Paul, of course, this year, we did very well. We're 2.5% year-to-date. We've been north of 2% in the last couple of years. As we kind of guide, we typically think about 150 bps. As I look at next year, 150 to 200 basis points is probably a reasonable range.

Okay. And then lastly, you had mentioned earlier that consumables were 10%. How much is the software content now and service content of Mettler-Toledo?

So service is 23%. And then we have -- it's 10% from consumables, that's why we say we have about a 1/3, which is really recurring. And both have been growing very nicely this year, about the 7% range.

Okay. Congratulations.

Thanks.

Thanks.

. Your next question comes from the line of Brandon Couillard from Jefferies.

Olivier, just curious if you could share an update on Stern Drive with us and perhaps quantify the net savings from that program in '19 and the incremental opportunities you see in '20.

Yes. So it has really good momentum. Happy to -- that you raise the question because yes, it's one of the contributors to our margin expansion. We have really all the producing organizations across the world engaged in this. We really see benefits in terms of productivity on the shop floor. We see benefits in material costs. We have very good new additional initiatives of sub-projects also for next year. You might recall at an earlier call, we mentioned that we have about 300 sub-projects on the Stern Drive, and we have a similar number of projects also going into next year. In terms of results this year, we're very happy about this and so, in that sense, achieving our target. And I expect about the same benefit over next year from the program. And to highlight, we look at Stern Drive in a similar way as to Spinnaker. It's a journey, i.e., I expect this to be incremental every year, and I wouldn't be surprised if in 10 years, we are still going to talk about Stern Drive on this call.

Very good. And then, Shawn, could you give us the CapEx number for '20?

The CapEx number for '20, just 1 second, Brandon. Just under $110 million.

That was our last question. At this time, I will now turn the call back over to the presenters.

Thanks, Mike, and thanks, everyone, for joining us this evening. As always, if you have any questions, please don't hesitate to reach out. Have a good evening, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.