Good morning. My name is Audra and I'll be your conference operator today. At this time, I would like to welcome everyone to the Mettler-Toledo Fourth Quarter 2023 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator instructions] At this time, I would like to turn the conference over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Thanks, Audra and good morning, everyone. Good afternoon from Switzerland. Thanks for joining our call today. On the line with me is Patrick Kaltenbach, our Chief Executive Officer, and Shawn Vadala, our Chief Financial Officer. Let me cover some administrative matters. This call is being webcast and is available for replay on our website at mt.com. A copy of the press release and the presentation that we will refer to today on the call is available on the website as well. This call will include forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties and other factors that may cause our actual results, financial condition, performance and achievements to be materially different from those expressed or implied by any forward-looking statements. For discussion of these risks and uncertainties, please see our annual report on Form 10-K and our quarterly and current reports filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement except as required by law. On today's call, we might 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 fourth quarter financial results, the details of which are outlined for you on Page 3 of our presentation. As previously announced, to transition to a new external European logistic service provider, significantly impacted our fourth quarter results, which we expect to largely recapture in the first quarter. Excluding the impact of these delayed shipments, our results were in line with our previous expectations. Market demand has remained weak in China and across our core end markets of pharma and biopharma, food manufacturing and chemicals, but also does not appear to have deteriorated further. Looking forward, we expect market conditions to remain soft in the first half of the year, and we would then expect our sales return to growth in the second half of the year as we begin to let easier comparisons. We are focused on the things we can control, including increasing our competitive advantages through innovation and continuous improvement of corporate programs and nurturing our unique global culture. I'm confident these actions will drive market share gains and help us emerge stronger in market recovery. Let me now turn the call over to Shawn to cover the financial results for the quarter and our guidance for the year, and then I will come back with some additional commentary on the business. Shawn?

Thanks, Patrick, and good morning, everyone. Sales in the quarter were $935 million, which represented a decrease in local currency of 13%. On a U.S. dollar basis, sales declined 12% as currency increased sales growth by 1%. On Slide number four, we show sales growth by region. Local currency sales declined 7% in the Americas, 16% in Europe, and 18% in Asia, rest of the world. Local currency sales in China declined 23% in the quarter. Excluding the impact of the previously disclosed shipping delays related to a new logistics provider in Europe, we estimate our sales in Q4 declined about 7%, with the Americas down approximately 3%, Europe down approximately 6% and Asia down approximately 14%. On Slide number five, we show sales growth by region for the full year 2023. Local currency sales declined 3% in 2023, with sales in the Americas down 1%, Europe down 2%, and Asia, rest of the world, down 5%. Local currency sales decreased 10% in China for 2023. Excluding the logistics headwind in Q4, we estimate our full year sales decline approximately 1%, with the Americas flat, Europe up 1%, and Asia down 5%. On Slide number six, we summarize local currency sales growth by product area. For the quarter, laboratory sales decreased 18% and industrial decreased 8% with core industrial down 6% and product inspection down 10%. Food retail grew 9%. Service sales grew 6% in the quarter. Excluding the logistics delays, we estimate laboratory product sales decline approximately 11%, industrial declined 5% with core industrial down 2% and product inspection down 10% and food retail grew 17%. The next slide shows local currency sales growth by product area for the full year 2023. Laboratory sales decreased 7% and industrial sales declined 1% with core industrial down 1% and product inspection…

Thanks Shawn. Let me start with some comments on our operating businesses, starting with Lab. As we had expected, demand trends across most of our Lab customers remained weak in the fourth quarter, especially pharma and biopharma. Sales declined across most product categories, and we continue to see soft demand across all geographies, especially in China. While market conditions have been weaker, we continue to focus on the things we can control, which includes bringing new innovations to market, enhancing our sales and marketing programs and expanding our service offering and capacity. This past year saw the launch of many exciting new and upgraded products. We are excited about our innovation pipeline, and we believe organizations that maintain their growth investments during market downturns will emerge even stronger during recovery periods. Our investments have had a particular emphasis on supporting our customers' needs for laboratory automation and data integrity requirements, which we are confident will be a significant driver of continued market share gains going forward, and we are excited to share with you additional developments over the coming months. Switching to our industrial business, sales for the quarter were in line with our previous guidance, despite the headwind from delays from our European logistics hub. Core industrial demand in the Americas and in Europe has been relatively resilient this past year, despite declines in purchasing manager indexes. We continue to see solid interest from customers looking for advanced automation solutions, and we expect to benefit from customer investments in on-shoring and near-shoring over the coming year. Regarding our product inspection business, we have seen weak food manufacturing customer demand in Europe and soft demand in the Americas. We continue to target faster-growing segments and have a focus on engaging new customers with a refreshed portfolio of innovative solutions. Lastly,…

[Operator instructions] We'll go first to Jack Meehan at Nephron Research.

Thank you. Good morning. Shawn, just wanted to start. It would be great to get your forecast by segment for the first quarter and for the year.

Yeah, sure. So, let me start with the lab business. So, we expect lab in Q4, I'm sorry, in Q1 2024 to be down low to mid-single digit, and for the full year, we expect it to be up low single digit. For core industrial, we expect Q1 to be down mid-single digit, and for the full year to be flattish. Product inspection, we expect to be down mid-single digit for Q1, and for the full year, flattish and then retail, we expect to be down about 10% in Q1, and for the full year, down mid-to-high single digit. And then if we look at the geographies, we expect the Americas to be down low single digit in Q1, and then for the full year, up low single digit. We expect Europe to be up low single digit in Q1, but in up low to mid-single digit for the full year. We expect China to be down low to mid-20s in Q1, and down high single digit for the full year.

Excellent. And then just as a follow-up, what does your first quarter guidance assume for EBIT margins, and can you just walk us through the pacing throughout the year, what kind of bridges to the full year forecast?

Yeah, sure. So in the first quarter, of course, the first quarter, we're going to have a significant volume decline in the first half of the year. So for the first quarter, we're going to be down over 200 basis points, probably in the 230, 240 kind of basis point range. Now, it's important to understand, too, like currency has a pretty big effect on the first quarter. So it's probably like 100% negative headwind to our margin in the first quarter, and I think we called out in the press release a 4% headwind to earnings per share. But that's going to change quite a bit as we get into the second half of the year, especially the fourth quarter and so for the full year, we're looking at the operating margin to be up in the kind of like 30 bps kind of a range, and if you exclude currency, it's probably in like the 70 bps, 70 bps plus kind of bps kind of a range.

We'll move to our next question from Daniel Arias at Stifel.

Hi, guys. Thanks for the questions. Shawn, maybe just going back to the guide, if you take out the $58 million and you add it to 2024, it does get you to that upper point or two that you're guiding to, but in order to have the dollars be the same, it seems like the outlook would need to be for three points or so of growth. So is there something else that's amounting to a partial offset? How do you see the outlook now versus last quarter when you exclude the logistics issue?

Yeah. Hey, Dan, it's a fair point. Like as you mentioned, we built the -- we expect the shipping delays to largely benefit the first quarter of this year and so we acknowledge there's upside to the full year guidance because in addition to that benefit, there's also like a growth rate benefit as we get to the end of the year in the fourth quarter, given the base that we're kind of growing off of, but when we kind of step back from all that, we just kind of felt like it's still very early in the year and while we're not seeing anything new in the business, Patrick talked about in the prepared marks that yes, there's still challenges in the market, but just want to confirm we're not seeing anything new at this point, but it's still early in the year. We just prefer to be a little bit cautious given various uncertainties and the back waiting of the year, but when we look at the second half of the year, we still feel good. We feel like we're really well positioned for the second half. We talked about some of these new product launches in the prepared remarks. We have a lot of really exciting programs that we're launching. We spent a little bit of time talking about Spinnaker 6 in the prepared remarks, but there's other corporate programs that we're working on as well. So we feel like we are well positioned for the second half and just acknowledge I think there's a little bit of upside. Yeah, we're being a little bit cautious as we start the year, but we just want to see how things play out a little bit.

Okay. So just to be clear here, you're not passing along the full amount of the logistics offset, but you also don't see anything in the end market makeup that has you feeling less confident than before or that has you looking for less growth than before. Is that a fair summation?

Yeah, I think that's fair.

Okay. And then just as a follow up, maybe from an end market standpoint, it would be great if you could just give any color you could on the degree to which sentiment on China has changed in the quarter versus last quarter. Maybe it hasn't at all, but it would be good to get sort of an updated view on the word on the street when it comes to ground level conversations, thoughts on rebound, etcetera.

Yeah, I'll take that. Look, Shawn and I have been in China in December and of course we're in continued conversations with the local team there, sales management team to see if there are any changes. I would say China at the moment is still quite weak, especially in pharma, biopharma, but from our perspective, the situation has not deteriorated from what we reported on at the JPMorgan conference. Clearly they have seen still facing many headwinds. There has been very significant spending and growth during the COVID period, but right now we are facing a situation where there's a lack of stimulus from the government. There's a lot of uncertainty still there. There is some reduced foreign investment as well. So all of the economy that is focused on stabilizing the real estate market and I think that in itself leads to just also softer demand at the moment, but overall it hasn't changed. As I said in my comments, core industrial has been actually a bit better than expected in Q4, but we remain a bit cautious on our outlook, still in the first half of '24 and the second half will be easier for us because we have much easier compares. As a reminder, we had been down 25% in Q3 last year, 23% in Q4. This year, we told you that the first half will be down. So the second half will be now for us in '24, there'll be an easier compare. I think we have a lot of good strategic drivers there. We have a very strong team and we are confident that we will be able to continue getting market share with our programs, our products that we have there and there's also long-term that the market in China has, as we told you before, has high single entry growth opportunities.

Okay. Thank you guys.

We'll go next to Derik de Bruin at Bank of America.

Hi, good morning. Thanks for taking my question. So can you talk a little bit about more about what you had to do to sort of like fix the logistical issues and what your third party is, and I guess just are you confident that these are not going to be at Red debt? And you made some sort of allusion to or comment about the Middle East. Are you seeing, what do you think is really sort of the risk there? I don't think you ship much through the Red Sea, but can you just sort of talk about sort of like what you've done to sort of ameliorate and fix some of the issues around that? Thanks.

Yeah. Hey, Derek, maybe I'll start off. So maybe I'll start off with the latter part of the question with the Red Sea and the Middle East. Of course we do have things coming from Asia that are on boats or ships going through the Red Sea. So we will have higher freight costs a little bit as we kind of go this year, but I think the bigger thing is really what does that mean to our customers? It's not really directly related to us, as you say. It's really about what does it mean to our customers? So I think there's still an unknown there. I know, especially in Europe, there's been a lot of sensitivity around various inflationary topics over the last couple of years, whether it's all the geopolitics that have put pressure on energy costs or whether it's just inflation in general. This is just another thing kind of in the mix. In terms of our business, just to be clear, you're right. We don't sell very much at all into that region. So it's not a direct impact at all. In terms of what are we doing to improve the logistical situation, Patrick, did you want to take that?

Sure, I can take that. We are making actually quite pleased with the ongoing progress that we're making and we are also expecting really to work down the backlog during Q1. We have a lot of our own experts there on site as well to help the local management team of our service partner there to get all the processes in place and stabilized, which have been the issue during Q4 when we transferred the full 100% of the volume from our former logistics provider to this new logistics provider. There are a lot more comprehensive processes involved on site there, like mini finish processes, etcetera and that can be brought our experts there to help them understand these processes, build enough capacity and making sure that everything from product into the logistics center to product out of the logistics center, that process flow is stable and really matching the volumes that we are expecting. As I said, we're making good progress there. We expect the backlog to go down and having a more stable operation clearly at the end of Q1 and while it still might maintain some more oversight from us during the next couple of quarters, we are confident that this is a very good logistics provider moving forward and that they can deliver the performance that we expect from them.

Got it. And then just one follow-up. Where are we on the stocking issues and pipette tips and sensors and all that? Can you just sort of like give us an update? Is there still waiting for customers to burn down inventory?

Yeah, I'll start with it and Shawn, feel free to chime in. When you mentioned pipette tips, I think we're done with the pipette tip stocking issue and the reason why I'm saying that is that we see now more normal order patterns, meaning customers are ordering more frequently, not at very high volumes, but the order pattern is back to normal. So while the volume is still a bit lower than during -- or still lower than during the pandemic, the frequency of orders has normalized and that for me is an indication that the overstocking of pipette tips is behind us. We still are working down or our customers are still working down some inventory more on the process analytics business with the sensors they have ordered, mainly also in the biopharma area and we expect that to remain through Q1 and Q2 and then by the end of Q2 or towards the second half of the year, that's at least what we're hearing right now from the channels. They should also have worked off that inventory as well.

We'll go next to Joshua Waldman at Cleveland Research.

Patrick, I'm wondering if you could -- hey, guys. I'm wondering if you could give Patrick -- hey, Patrick. Hey, Patrick, I'll start with you. I'm wondering if you could give an update on just how you perceive visibility in the business. Has visibility improved or deteriorated over the last 90 days? I guess like you commented that market conditions seem to have stabilized or are not getting worse, but maybe also mentioned seeing a softer start to the year. Can you just kind of unpack what you're seeing there?

Sure, absolutely. And again, I'll probably give you some insights into the different regions, but also the different end markets. So, what we're seeing is a lot of very good activity out there, meaning customers are really interested, especially in the new products that we have launched over the last year and that's why we are so excited also about the future. There is good customer engagement. We have a lot of discussions. Still, it takes longer than normal to close the opportunities to orders, and that's also a sign that our customers are still reluctant to really spend the budgets that they have now at hand, or maybe they have some reduced budgets, but there's really very good activity, and if I look into the leads and the funnel that we have, the opportunities, I think we are quite positive about the momentum we are seeing there and we don't see any further deterioration from what we had seen last year. So, that's why we positioned in saying, hey, the underlying market visions haven't deteriorated further, whether it's in the biopharma market, where it's still soft, whether it's in the industrial space, where we see actually a very good demand for industrial automation and digitalization efforts, and we have a great portfolio as well. We saw a bit softening, especially in Europe, on product inspection towards the -- or throughout Q4, and also now starting into Q1 and that's largely in Europe, and its big customers in the food area that are still holding back budgets. They have projects, but they are not ready to spend the money yet and I think that's also based on the fact that they are under pressure. If you read the news, you hear a lot of news about these packaged food customers that are also under pressure with reduced profits and bigger demand as well. But otherwise, I would say markets are stable. The regions have developed as we expected it, and China, I outlined already, the US, good demand, and Shawn has outlined the growth for the year for the different regions as well. The EU is a bit softer at the moment. It was very resilient last year. At the moment, it's a bit softer than we have seen it last year, especially in Germany.

Okay. Thanks for that. And then, Shawn, for the follow-up, I wondered if you could walk through the moving pieces on the '24 EPS raise. How much of the raise was from the shipping-related revenue push-out versus other inputs like FX and maybe margin? I guess the impetus of the question is you missed the Q4 guide by calling it $1.20. Shouldn't that have been added to the '24 guide, or were there other moving pieces that were missing?

Yeah, it's very much related to how we position sales. Like, and I think I go back to Dan's question towards the beginning, it's very much how we position our sales guidance. In terms of margins and costs, there's, of course, some moving pieces within there. There's a couple of nits and gnats, but I'd say in the end, I feel like the margin is actually, I feel good about our margin guidance for the year. I think we'd already mentioned it earlier, but for the operating margin, it should go up about 30 basis points on a full-year basis and if you exclude currency, it's probably about 70 basis points. So, Josh, I kind of go back. It's very much to how we were thinking of a reflection of how we guided on the top line.

Okay. Thanks, guys.

Next, we'll go to Vijay Kumar with Evercore ISI.

Hey, guys. Thanks for taking my question. A couple of guidance questions. Your Q1 minus 6% to minus 7% guidance, like, if I go back to Q4, pre-logistics, I think the guide was minus high single and if you assume the first half of '24 to be similar to last year, one would have assumed Q1 to be down high singles, but now given the timing of these logistic push-out, the revenues push-out, shouldn't Q1 have been a little bit better than the minus 6% to minus 7%? I'm just trying to think about the year-on-year versus the sequential cadence and how you're looking at Q1 guidance.

Yeah, sure, Vijay. I'm happy to answer that one. So, hey, just to clarify, our Q1 guidance and constant currencies is minus 4% to minus 6%. So, it's minus 4% to minus 6% and as we mentioned, there is about a 5% benefit here from the shipping delays, which I can understand asking a question about that. But I think there's also a few things that are very important to our first quarter. The first one is that comps really do matter. Yes, Q1 was our strongest quarter last year. We grew 7%, but I think it's important to kind of go back to the couple of years before that, like what we're growing on top of and we're really cycling a very difficult multi-year comparison. If you kind of go back, we grew 14% in Q1 of 2022, and that was on top of 18% growth in Q1 of 2021. So, I think it's hard for us to ignore that as we're looking at the first quarter here. China, of course, we were happy that it came in a little bit better than what we expected if you excluded the effect of the shipping delay, but nonetheless, it's still down over 20% and as we kind of look here at the first quarter, we have 20% of our business kind of down, low to mid-20s in the first quarter. So, that's another thing that's a bit on our mind and again, that's a bit of a comparison topic as well as kind of like this resetting that's going on in the country. But just to be clear, we're not seeing anything new in our end markets, but we do assume that customers here are going to likely start the year a bit more cautious with a more normalized budget flush at the end of the year, but of course, we acknowledge it's early. It's difficult for us to tell at this point in time. March is a very important month in the first quarter, but that's kind of how at least we were thinking about Q1 at this point in time.

Understood. And then one on what's being assumed for share count, share repurchases, and is free cash conversion expected to be similar to fiscal '23?

Yeah. So, our share buyback assumption is $850 million, which I think is the same or similar number as we're thinking free cash flow for this year and that's also assuming plus or minus right around 100% free cash flow conversion. So, we're really happy with the focus around the company on cash flow. It's something we always like to focus on and very pleased with the teams around the world, all the efforts on working capital and all the other things that go into efficient end-to-end processes that can drive an order to cash cycle. So, it's something we're going to continue to focus on this year.

Understood. Thanks, guys.

We'll take our next question from Dan Leonard at UBS.

Thank you. Two questions. First off, what was the pricing benefit in Q4 and what is your outlook for 2024?

Yeah. So, for Q4, we came in pretty much as we expected. It was about 4%. That put us on a full year basis in 2023 at about 5% and as we kind of mentioned in previous quarters, we were benefiting a bit in the first half of the year from some pricing actions that we did in the second half of 2022, but we're very pleased with how things came together this year. I think it really shows the value proposition that we have to customers. I feel I've said it many times, but I do feel like our value proposition has very much increased over the last few years, especially as the markets have moved towards topics like automation and digitalization. It really plays to a lot of the strengths of our portfolio that can provide tangible paybacks to customers. All the things that we're doing from an innovation perspective also will really help fuel that going forward, too. So, that's something that we feel good about and then in terms of 2024, we're consistent with how we were thinking about pricing with our earlier guidance for the year, and we're expecting price realization to be around 2%.

Appreciate that. And my follow-up, I'm curious on your outlook for pipette tips and really any other part of your business that suffered from destocking. Does growth normalize back to trend, or is there an above-trend growth period since your comping and inventory burned down?

No, I'll start and let Patrick jump in if he wants to. I think the challenge with pipettes right now is that there is just weak market demand in general. We don't have at Mettler-Toledo a significant exposure to early research or to biotech R&D, but we certainly do in Pipette Tips, and so we're not immune to those trends right now at the moment. So, there are softer market conditions there, but I think we're more optimistic as we get into the second half of the year. As Patrick mentioned, ordering patterns are looking a little bit better as well and just similar to my comments on innovation, we have a couple things there as well, too, that we were actually out at our facility recently, last month, and it was really fun to spend some time with the team there and look at some of the things they're working on. Some of them are more medium-term, but some of them are things that we have in the market this year.

We'll move next to Matt Sykes at Goldman Sachs.

Hi, good morning. Thanks for taking my questions. Maybe just the first one, just going back to the logistics issue, you outlined the revenue impact, and that seems isolated to Q1. Could you maybe talk about any cost implications that could bleed into Q2? My understanding is there had to be some temporary changes in how things were being shipped out of Europe, and I'm just wondering if there's any lingering costs that could impact margins in Q2 or beyond.

Yeah, of course, there's some incremental costs associated with it. A lot of the costs are really opportunity costs because we're reallocating resources to support the transition. The incremental travel costs, those things are less of an issue. Yes, there's some higher transportation costs, but when you step back from it, I'd say it's not overall significant to our overall financial statements and certainly something we kind of considered as we provided guidance here for the first quarter.

Got it. Thanks for that. And then just on Europe, you've talked pretty cautiously about it, but I still think, unless I misheard, that you're expecting positive growth this year. Could you maybe just talk about sort of your cautious comments versus sort of the growth you're expecting this year in Europe and what's driving that?

Yeah, hey, that's a good question. Europe, of course, is going to benefit the most from the shipping delays. So I think if you exclude that, you get to a different answer, and it's probably -- if you take the fact of the Q1 and if you also look at maybe the easier comp in Q4, Europe's probably more flattish on the year if you exclude those two things. So it's marginally a bit softer than what we were originally expecting. But we'll caution again. It's early in the year. It was softer in the fourth quarter than we expected. A lot of it had to do with product inspection, as Patrick mentioned, but we did see just generally weaker market conditions. We've been very pleased with how resilient Europe was in 2023. If you would have asked us a year ago out of the major regions of the world, we would have probably expected things to be a little bit softer there just given all the concerns with the energy crisis and what that impact might be to our customers. So we're very pleased with how the business performed in 2023, but just sitting here today, we're just a little bit more cautious on it.

We'll go next to Catherine Schulte at Baird.

Hey, guys. Thanks for the questions. Maybe first just on the revenue guide, I get that you want to leave a little bit of a cushion given where we are in the year, but if we looked at your outlook by segment excluding the shipping delays, I guess, which segments are you baking in some extra conservatism into?

Yeah, good question. I'd say PI, and I guess you can see that one because it doesn't have as much of an impact, if any, from the shipping delays. So I think we were saying that was up slightly the last time we guided for the full year, and this time we're saying it's about flattish. And then this comment on Europe, Europe is a little bit lighter than what we would have guided before, and then when you kind of break it into divisions, it kind of trinkles into Lab a little bit and so Lab might be excluding the shipping delays more. Instead of saying up slightly, it's probably more flattish.

Okay, got it. And then maybe on the margin guide, what should we be expecting for gross margins for the first quarter and the full year?

Yeah, for the first quarter, we should be down about 40 basis points, and there's a lot of currency in the margin in Q1. So if you excluded the currency, it would probably be up about 20 bps and then if you look at the full year for gross margin, we'll be up, our estimate is we'll be up around 50 basis points and again, currency has an impact on that. So if you excluded that, it would be up probably more like 90 bps.

We'll go next to Rachel Vatnsdal at JPMorgan.

Perfect. Thanks for taking the questions, and good morning. So you mentioned that you're expecting customers to be more cautious with investments starting off the year. We've heard that from some of your peers as well. So can you just dig into what you've specifically been hearing from customers in January and now into the first week of February here, and then which markets, geographies, have you been seeing more of that cautious spending to kick off the year as well?

Yeah, thanks, Rachel. And I'll start, and then Shawn, if you have some additional comments, feel free to chime in. So I think the majority of cautiousness we have for it was in Europe, and also down in what we told you in the PI business, in the food segments, where we see customers not releasing purchases as fast as we had expected. Again, there's good engagement for sales teams. We have launched a great fleet of new products, also mid-range products that help us to get to access to new market segments. But the whole conversion from opportunity to final sale still takes longer than we expected and that's part of what we're hearing in the European market. Otherwise, I think that, as we said, it's not a big change. Do you want to do anything else? No? Okay.

Great. And then just my follow-up, given that you're expecting most of this logistics issue to really benefit 1Q, can you just walk us through the sequentials on how should we be thinking about 2Q and the step up there, and then kind of leading into the back half on top line as well?

Yeah. Hey, I think it's a little early for us to provide too much color on Q2, but we kind of stick to what we said before, is that we expect the first half of the year to be down. I expect Q2 to still be down. A big part of that is going to be China. We still have to lap I think a full cycle in China for Q2. So that's something that's very much on our minds, but I think when we get to the second half, we do have, with a company that only typically sits on 1.5 months of backlog, it's hard to have too much confidence when you're starting to go out several months. But I do think we feel encouraged by lapping these comps as we get into the second half of the year, as we just field maybe the organization, looking at the initiatives, looking at how we're trying to position things. A lot of our focus has always been on coming out of this stronger and I think we try to focus on the things we can control and when we talk about all these product launches, all these launching of corporate programs, Spinnaker 6 [ph], things we're doing with the customer experience, there's a lot of good things that I think should help us out for the second half of the year. And we'll get through the first quarter, and then we'll provide a little bit more color as to how we're seeing things at that point in time.

We'll go next to Brandon Couillard at Jefferies.

Hey, thanks. Good morning. Patrick, the service business remains pretty healthy. You grew 10% last year against the double-digit comp. Where are you having the most success, driving attach rates, and what's your outlook for that business in 2024?

Yeah, very good question, Brandon, thanks for that. Service, again, I'm super excited about our service opportunity. And by the way, it's also an organization that we continue to invest in throughout 2023 while we had to make some adjustments in other areas. We continue to invest in service because we see a big opportunity out there. Broadening our service portfolio, there's good demand from our customers. We have a large install base. Last year, if you said it, we grew 10%, and we expected to grow in a mid-single-digit range this year again. So another year where you will see services growing ahead of products. We continue to work with our sales teams to make sure that they can sell services at a point of sales, train them about the value of services, that they make sure they have value proposition when they talk to customers, increasing the connect rates and of course, these are different from product category to better product category, but we continue to make improvements there and I still see a lot of opportunity for us moving forward to increase our share of services.

Thanks. And then just one more, Shawn on China, about Beijing, the first quarter being down, we caught low to mid-20s, does this imply that China is back to kind of double-digit growth in the second half of the year? How should we think about cadence, first half versus second half?

Yeah. Again, I don't want to get too specific, but I think if you do the math, you probably kind of get into that neighborhood for the second half of this year, but we'll provide more guidance on our next call depending on how we're thinking about the pacing with Q2 and everything. Right now we do see, for the full year, Lab being down more than the industrial business. So, kind of looking at Lab being down more like low teens, while industrial would be down like more mid-single digits. So, the industrial business was a pleasant surprise in the fourth quarter. We're a little bit more cautious on it for Q1, but we'll see how things play out here. Yeah. And just to read correctly, Brandon, that doesn't mean that the algorithm going forward we're expecting double-digit growth in China. We just know that not only they have an easier comp. We know that they're lapping a lot of things in the market. I think, one of the topics, there's a few topics there, right? One of them was all the spending during COVID, potentially an acceleration of replacement cycles. But then the other thing is I think there's just a lot of inventory, throughout the customers and I think just given the nature of the lockdowns during COVID and all the logistical challenges, there's just more people purchasing a lot more inventory than in other regions and I think that's one of the things that is kind of on our mind as well for the second half of the year. So, as we kind of go forward, just to reiterate what we said in the past, we kind of view China as more of a high single-digit growth opportunity more longer term.

Next, we'll move to Patrick Donnelly at Citi.

Hey, guys. Thanks for taking the questions. Shawn, I wanted to pick up on that kind of the ramp question. I think Rachel and Brandon both hit on a little bit there. If we just back out the comps, because that's pretty formulaic, just in terms of the consequential dollar improvement as you work your way through the year into the second half, China being obviously one example. You mentioned the month, month and a half of backlog. Can you just talk about, I guess, the visibility into it? Is it just the confidence level that, there was a lot of inventory in the channel in areas like China, and that just you guys are confident it normalizes as you get to the second half and dollars come back? Maybe just talk about, again, the confidence, comps excluded on that dollar ramp as we work our way through the year, China and otherwise.

Yeah, of course, there's also a lot of noise and sequentials right now, right? Like, you have a lack of a budget flush in Q4 of 2023 and now we add more complexity with these shipping delays and then we probably throw another one at you saying, like, we just expect customers to potentially start a little bit slower in Q4, Q1 of this year with a more normalized seasonality in the back half. But I think if you kind of cut through all that and you look at maybe longer term sequentials for us, I think we're actually very consistent, and so that's one thing, I think when we look at, like, multi-year comps and multi-year CAGRs and just kind of like cut through the whole COVID period, and you look at that by quarter, I think that gives us a lot of more confidence as well, too and then you kind of layer in some of these things that we know, like the one-year comps and some of these de-stocking topics, the comments I just made on China and then the final thing is, I think we are, you know, we are doing a lot inside the company to drive growth, too. And so I think, nothing drives growth like new products, and we have some really cool things that we're launching right now. We're going to probably spend more time talking about that on our next call next quarter and I think those are types of things that will help and of course, Spinnaker 6, right, there's a reason why we're talking about it in the call. It's, kind of like, I think, a preface to, like, a lot of things we're doing to focus on growth in the company and the combination of all these digitalization things that are just continue to improve, plus all the things that we're doing to further enhance that relationship with a customer. It's a very powerful combination, and we think those things will gain momentum as we kind of get into the second half of the year as well.

Okay, that's helpful. And then maybe just on the cost structure, I think you mentioned a few times, you guys want to come out of this stronger. Can you just talk about, I guess, the level of investments you're making currently with the softer backdrop versus, trying to be mindful of protecting the margins? How nimble can you be on the cost side and how are you guys approaching that? Thank you.

Yeah, hey, this has been a very important balancing act for us, something that we've been spending a lot of time as an executive team, really thinking about and reviewing over the last year. I feel like we have a really good balance. On one hand, we're really looking at parts of the organization where we've lost productivity over the last year, and so we're working on those areas. On the other hand, there are growth opportunities that we're trying to make sure that we're continuing to invest for those. Patrick mentioned service as an example, on a full-year basis. So we continue to invest in service throughout the year and that's something that we'll continue to do in 2024, but it's not just service. There's different regions of the world, there's different -- and there's also things, like innovation that we talked about a few times already today, as well as other things that I think will help make us a stronger organization going forward. So, when you kind of step back from that, I feel very good. Of course, we do have a headwind next year, too, with variable coming back to more normalized levels. So, there's a lot of moving parts, but when you look through it all, I feel like good that we can still expand margins, even though it's maybe a little bit lower than what we normally do. We can still expand margins next year with a low-growth year, and then if you look at 2023, we were able to hold our margins flat for the full year, despite a lot of the challenges that we had as well, too. So, I feel like, in the end, we have a good balance.

And there are no further questions at this time. I would like to turn the conference over to Adam Uhlman for closing remarks.

Hey, thanks, Audra, and thank you, everybody, for joining our call today. If you have any questions, feel free to reach out to me. Hope you have a great rest of your day, and we'll talk to you soon. Thank you.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.