Good afternoon. My name is Audra, and I will be your conference operator today. At this time I would like to welcome everyone to the Mettler-Toledo Third Quarter 2022 Earnings Call. Today’s conference is being recorded. All lines have been placed on-mute to prevent any background noise.

After the speakers’ 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 at Investor Relations. Please go ahead..

Thanks, Audra, and good evening, everyone. I am Adam Uhlman. I am responsible for Investor Relations at Mettler-Toledo and I am happy to welcome you all to this call. I am joined with Patrick Kaltenbach, our CEO; and Shawn Vadala, our CFO; and Mary Finnegan. 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 on today’s call is also available on our website. This call will include forward-looking statements within the meaning of the U.S. Securities Act of 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 conditions, performance and achievements to be materially different from those expressed or implied by any forward-looking statements.

For a discussion of these risks and uncertainties, see our recent annual report on Form 10-K and quarterly and current reports filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement except as required by law. On today’s call we may use non-GAAP financial measures.

A reconciliation to these non-GAAP financial measures to the most directly comparable GAAP measures is provided in the 8-K and about -- and available on our website. Let me now turn the call over to Patrick..

Thanks, Adam, and good evening, everyone. We appreciate you joining our call. I am pleased to report another quarter of strong results as our sophisticated sales and marketing programs, our innovative product portfolio and that supply chain agility continues to be strong competitive advantages.

The highlights of our third-quarter performance are detailed on page three of the presentation. Local currency sales in the quarter increased 10% as compared to the prior year. We have particular strong results in the Americas and in China. Yet, it’s very good growth in our Laboratory and Core Industrial businesses.

Our robust sales growth and effective execution of our margin initiatives resulted in very good growth in adjusted operating profit and adjusted earnings growth despite significant foreign exchange headwinds.

As we look towards the remainder of the year and on to 2023, forecasting remains challenging and we acknowledge there is greater uncertainty in the macroeconomic environment.

These uncertainties will require us to remain agile and focused on factors we can control, namely, leveraging our strong strategic programs to identify and target profitable growth opportunities.

We continue to strengthen our market position and benefit from the strong execution of our growth initiatives, as well as favorable market trends such as automation and digitalization. Based on market conditions today, we believe we will generate good sales growth for the remainder of the year and in 2023.

Continued execution of our margin and productivity initiatives will support strong financial results. Later I will have some additional comments on our business. But let me now turn it to Shawn to cover the financials and guidance.

Shawn?.

Thanks, Patrick, and good evening, everyone. Sales in the quarter were $985.08 million, which represented a local currency increase of 10%. On a U.S. dollar basis sales increased 4% as currency reduced sales growth by 6%. We estimate that the impact of reduced sales in Russia due to the war was a headwind of about 1% to sales growth.

On slide number four, we show sales growth by region. Local currency sales increased 11% in the Americas, 1% in Europe and 15% in Asia/Rest of World. Local currency sales increased 15% in China in the quarter. Excluding Russia our sales in Europe grew 5%. On slide number five, we show sales growth by region on a year-to-date basis.

Local currency sales grew 11% for the first nine months with 13% growth in the Americas, 5% growth in Europe and 15% growth in Asia/Rest of the World. Local currency sales increased 15% in China on a year-to-date basis. Excluding Russia, our sales in Europe grew 7% on a year-to-date basis.

On slide number six, we summarized local currency sales growth by product area. For the quarter, Laboratory sales increased 10%, Industrial increased 10%, with Core Industrial up 13% and Product Inspection up 6%. Food Retail grew 7% in the quarter. The next slide shows local currency sales growth by product area on a year-to-date basis.

Laboratory sales increased 13%, Industrial increased 10%, including 12% growth in Core Industrial and Product Inspection up 7%. Food Retail declined 2% on a year-to-date basis. Let me now move to the rest of the P&L which is summarized on slide number eight.

For the third quarter, gross margin was better than expected at 59.3%, an increase of 90 basis points. We benefited from favorable pricing and volume growth, which was offset in part by higher material costs.

R&D amounted to $44.1 million in the quarter, which is a 10% increase in local currency over the prior year—prior period reflecting increased project activity. SG&A amounted to $233.4 million, a 3% increase in local currency over the prior year and includes increased sales and marketing investments.

Adjusted operating profit amounted to $307.2 million in the quarter, a 13% increase. Currency reduced operating profit growth by approximately 6%. Adjusted operating margin was 31.2%, which represents an increase of 250 basis points over the prior year. A couple of final comments on the P&L.

Amortization amounted to $16.7 million in the quarter, interest expense was $14.5 million in the quarter. Other income in the quarter amounted to $1.9 million, primarily reflecting non-service related pension income. Our effective tax-rate was 19% in the quarter.

This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter. We expect to maintain this rate in Q4 and in 2023. Fully diluted shares amounted to 22.6 million in the quarter, which is a 3% decline from the prior year.

Adjusted EPS for the quarter was $10.18, a 17% increase over the prior year or a 24% increase excluding unfavorable foreign currency. On a reported basis in the quarter, EPS was $9.76, as compared to $8.71 in the prior year.

Reported EPS includes $0.22 of purchased intangible amortization, $0.07 of restructuring and the $0.13 headwind due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises. We are very happy with our year-to-date results, which are summarized on the next slide.

Local currency sales grew 11% for the nine-month period, adjusted operating income increased 13% or 17% excluding unfavorable foreign currency and our operating margin expanded 150 basis points. Adjusted EPS grew 17% on a year-to-date basis or 22% excluding unfavorable currency. That covers the P&L. Now let me cover cash flow.

In the quarter adjusted free cash flow amounted to $224.7 million. DSO was flat compared to prior year levels at 35 days, while ITO was 3.7 times. Let me now turn to guidance and begin with some overall considerations for our guidance for the remainder of this year and next year. First, forecasting remains very challenging.

There is greater uncertainty in the macro environment, including the impacts of the global economy from higher interest rates, the war in Ukraine and China’s zero COVID policies. We recognize the importance of being agile and able to react quickly if market conditions change.

We are basing our guidance for Q4 in 2023 assuming market conditions remain as they are today. Second, we feel very good about our business. In particular, we believe we have strategies in place to identify and pursue growth opportunities and we have an innovative product portfolio that supports these growth initiatives.

We also continue to benefit from a more favorable business mix, as well as global market trends in automation, digitalization and investments in on and nearshoring. We also believe we will continue to execute well on our margin initiatives. Third, supply chain challenges remain but are improving.

Our team has done an outstanding job of overcoming the various dynamics of the supply chain over the last three years. We believe our ability to continue to meet customer demands is a competitive advantage, but acknowledge risks remain in the global supply chain.

Finally, we have a significantly greater headwinds with respect to currency as compared to the last-time we spoke. In particular, as I know you are all aware currency has moved dramatically since early September creating significant headwind for Q4 and for 2023. To a lesser degree, higher interest rates are also a bit of a headwind.

Fortunately, we have limited floating rate debt. However, the significant movement in rates has increased our expense. I thought it would be helpful to provide this guidance overview and now let me comment on -- cover the specifics. For the full year 2022, we now expect local currency sales growth to be approximately 10%.

This compares to our previous guidance of 9% to 10%. We expect full year adjusted EPS to be in the range of $38.95 to $39.05, which represents a growth rate of about 15%.

The midpoint of our adjusted EPS guidance is slightly higher than our previous guidance as stronger than expected Q3 performance has been largely offset by greater currency headwinds in the fourth quarter. Specifically, we expect currency to be a headwind to adjusted EPS growth in the fourth quarter of approximately 10% and 6% for the full year.

At the time of our last earnings call, we had expected earnings -- we had expected currency to be a headwind to fourth quarter adjusted EPS growth of approximately 6% and 4.5% for the full year.

With respect to the fourth quarter, we would expect local currency sales growth to be approximately 7% and adjusted EPS to be in the range of $11.55 to $11.65. This represents a growth rate of 10% to 11%, and as I just mentioned, includes a currency headwind of approximately 10%.

For the full year 2023, based on our assessment of market conditions today, we would expect local currency sales growth to be approximately 5% and adjusted EPS to be in a range of $42 to $42.40, which represents a growth rate of 8% to 9%. This includes an estimated currency headwind of approximately 4.5%. Some further comments on our 2023 guidance.

We expect interest expense to be approximately $73 million, total amortization, including purchased intangible amortization to be $71 million, purchased intangible amortization is excluded from adjusted EPS and is estimated at $24 million on a pre-tax basis or $0.83 per share.

Other income, which is below operating profit and reflects non-service pension income is forecast to be approximately $12 million. We expect our tax rate before discrete items will be 19% for both 2022 and 2023. Now, let’s turn to cash flow.

For 2022, we now expect full year free cash flow in the range of $780 million which is below our previous guidance. While our supply chain team has done an exemplary job in overcoming challenges in meeting customer demand, it has required us to hold higher -- a higher a higher inventory level than we had expected.

We believe it has been necessary given the challenges in the global supply chain and expect we will return to more normal levels in 2023. I also want to remind you that our free cash flow in both 2020 and 2021 was excellent, exceeding 25% growth on a per share basis in each year.

For 2023, we expect free cash flow in the range of $900 million, which represents a growth rate of 19% on a per share basis and a conversion rate of 97% on -- of net income. We would expect to repurchase approximately $1 billion of shares in 2023, which would allow us to maintain a net-debt to EBITDA ratio of approximately 1.5 times.

As we have done in the past, we will aim to repurchase our shares evenly throughout the year.

We have also announced today that our Board has authorized an additional $2.5 billion to the share repurchase program to be utilized over the next few years, which is an addition to the $1.2 million -- $2 billion remaining on our previous year repurchase authorization.

Lastly, with respect to the impact of currency on sales growth, we expect currency to reduce our sales growth by 5.5% in 2022, including an 8.5% sales growth headwind in Q4. At today’s foreign exchange rates, currency would reduce our sales growth by an additional 4% for the full year 2023.

That is it from my side and now I will turn it back to Patrick..

Thanks, Shawn. Shawn and I recently completed our annual global budget tour, meeting with our colleagues around the world for in-depth reviews of strategic frameworks and key initiatives of our operating units.

Those of you that have followed us closely know, this is an important element of our annual planning process as it allows us to spend considerable time with our colleagues to discuss and analyze the opportunities across our diverse business.

Although, uncertainty exists in the outlook for the global economy over the next year, I feel very good about the underlying strategies we have in place and believe we are well-positioned to enhance our market position going forward. We are quite confident that we can continue to gain share and generate good earnings in 2022 and 2023.

Let me share with you some comments on our operating results, as well as more details on our outlook for 2023. Starting with Lab business. I am very pleased with the strong sales growth we have delivered this quarter and year-to-date, and we saw good results across most of our portfolio.

We expect good sales performance continuing in the fourth quarter and next year. As we think about our Lab business over the medium-term, we expect investments by pharma and biopharma into new drug modalities will provide great opportunities for us to support them with our solutions.

The trend of digitalization in Labs has also accelerated and our solutions helps customers realized productivity gains and address growing compliance and data validation requirements.

We also will look to talk the significant growth occurring in hot segments like lithium-ion batteries, semiconductors, green hydrogen and sustainable polymers to name a few.

We leverage a highly agile approach to capture growth in these segments, applying a systematic voice of the customer approach on a segment and application level to identify attractive opportunities and ensure we have the correct strategies, product roadmaps and marketing efforts in place to take advantage of them.

Switching now to the Industrial business. Core Industrial had very strong results in the third quarter and year-to-date. There is good demand particularly for our automation solutions as our customers look to improve productivity and increased yields.

We have also seen good interest from pharma and biopharma customers as they utilize our solutions to efficiently bring new drugs to production.

Like our Laboratory business, hot segments are important for our Core Industrial business as well and we have seen very strong activity from customers serving lithium-ion battery industry in China, Europe and the Americas.

While we are seeing good demand to date in Core Industrial and our business has shifted over the years to more resilient industries, our business is not immune to changes in the economy. High energy cost and softer economic activity may weigh on our customers in Europe and particularly in the chemical customers.

Nevertheless, we expect to deliver solid growth in our Core Industrial business in the fourth quarter and next year. Over the long-term, labor shortages and the trend of nearshoring and reshoring to establish more resilient supply chains is expected to benefit our Core Industrial business over the coming years.

Additionally, new product development has been critical to our success in meeting customer needs for automation solutions and we provide equipment that is very easy to integrate into customer’s control systems and also meets the most stringent data integrity and cyber security requirements.

We are also optimistic about our product portfolio and exciting innovations we have brought to-market and new products to come. For example, in addition to a strong growth we have seen before contact automation offering, our new line of hygienic bench and floor scales positions us well to win the pharma and food customers in the coming years.

Turning now to Product Inspection business, we had good growth with strong demand in the Americas, which was offset in part by more cautious investment activity in Europe.

Some of our packaged fruit manufacturing customers face more challenging operating environment and are focused on mitigating margin pressures from inflation and supply chain disruptions. However, we would still expect overall growth in the fourth quarter and into 2023.

While the pandemic, high input costs and the war in Ukraine have resulted in lower relative sales growth for Product Inspection in the recent years, we remain convinced that the long-term growth dynamics remain strong.

We are not standing still and continue to seek out pockets of growth including check weighing in with industry, pharma and confectionery customers, and we have expanded our mid-range or our mid-market coverage with new product offerings in X-ray and metal detection.

I’d also want to remind you that service is very important to our Product Inspection customers and we have new initiatives underway to support our customer’s uptime, while at the same time improving our service technician productivity.

These include augmented reality for remote customers support and advanced remote diagnostics to identify and recommend quick repairs to keep our food manufacturing customers up and running.

Lastly, our Food Retail business delivered strong results in the third quarter, with strength in the Americas offset by weakness in China due to the pandemic related lockdowns. Our team has built good momentum recently and has an attractive product pipeline for 2023 and we are optimistic that we can generate profitable growth over the next year.

Let me make some comments by geography. We had very good performance in the Americas, again strong growth in last year’s third quarter with strong growth across Product Inspection, Core Industrial and Retail. We have a favorable outlook for the remainder of the year and in 2023.

Switching to Europe, our sales grew about 5% excluding the impact of Russia. The war in Ukraine has led to sharply higher energy costs across the region and as weighed on some of our customer’s investments appetite, particularly packaged food manufacturers and some chemical customers.

We still see good investment level from other customer segments, including biopharma and firms involved in the development and production of electric vehicles. We expect moderate growth in Q4 and next year.

Finally, for Asia and the Rest of the World, they had very strong growth in the third quarter as our team successfully navigated challenging operating conditions with the pandemic and COVID 19 lockdowns and also executed very well on our strategic initiatives.

Going forward, we look to continue to optimize our sales force guidance activities in China to pursue attractive opportunities and we will also increase our focus on leveraging digital approaches to generate customer leads.

Our Lab and Industrial business have performed very well this year, which we expect to persist for the rest of the year and in 2023. We remain optimistic about several key long-term market drivers in China, including the continued development of pharmaceutical, biotechnology, electrical vehicles, micro electronics and new material industries.

We are very well-positioned to take advantage of these growth opportunities and have continued to invest in our sales and marketing efforts to support our growth in China.

While we remain optimistic about the long-term, we acknowledge days and uncertainty in the short-term, and we know from the past that economic conditions can change very quickly in China requiring us to remain agile. So that is a summary of our outlook for the fourth quarter and next year.

As you think about our longer term -- as you think about the longer term years, we very strongly believe that favorable market dynamics, our growth initiatives and our improved business mix is supportive of our long-term growth algorithm of 6% plus local currency sales growth and mid-teens earnings growth.

This will be accomplished by gaining additional market share through strong execution of Spinnaker, which includes optimizing our sales force guidance and cross-selling initiatives, increasing customer engagement with digital tools and selling services at the point-of-sale.

Our team will continue to pursue the most attractive, fast growing and resilient market segments.

We will also continue to invest in new product innovations and will be -- that will be the foundation of future growth and I would note that our portfolio and go-to-market approach is uniquely positioned to deliver on customer requirements for automation and digitalization.

Our strategies and initiatives are well-developed and well ingrained throughout the organization, and we will continue to be critical in gaining market share and driving sales and operating margin growth. That concludes our prepared remarks and I now want to open the call for questions..

Thank you. [Operator Instructions] We will take our first question from Derik De Bruin of Bank of America..

Hi. Thank you. This is Peter [ph] on for Derik. Just real quick.

Could you guys just maybe walk through your assumptions by segment for the fourth quarter and next year as well, and also by geography, too?.

Yeah. Hey, Peter. This is Shawn. I will take that one. So, let me start with our Lab business. So for the fourth quarter, we estimate high single-digit growth in Q4, which would be low double-digit growth for the full year and mid-to-high single-digit growth for 2023.

For our Core Industrial business, we estimate mid single-digit growth for Q4, which would be approximately 10% growth for the full year and low-to-mid single-digit growth for 2023.

For Product Inspection, we estimate low single-digit growth for Q4, which would approximate mid single-digit growth for the full year and low-to-mid single-digit growth for 2023. And for Food Retailing, we estimate approximately 10% growth in Q4, which would be about low single-digit growth for the full year and mid single-digit growth for 2023.

And then, if I kind of go through that by region, in the Americas we estimate high single-digit growth in Q4, which would be low double-digit growth for the full year and mid single-digit growth for next year.

For Europe, we are estimating low-to-mid single-digit growth in Q4, which would be mid single-digit growth for the full year and low single-digit growth for 2023 and then for China we are estimating approximately 10% growth in Q4, which would translate to double-digit growth for the full year and we estimate high single-digit growth in 2023..

Okay. Thank you.

And could you guys give us an update on pricing? I guess, maybe comment on what you did on the third quarter and updated expectations for 2022 and what’s embedded for 2023?.

Yeah. Yeah. So we were very pleased with our execution of the organization in the quarter and we also continue to see how our value proposition is really are valued in this environment, especially as customers seek more solutions towards automation and digitalization.

At the beginning of the quarter we were estimating about 5% price realization for Q3 and we actually came in at in the 6% kind of a range. As we kind of look forward, so we did better than expected. As we kind of look at Q4 we are kind of expecting a similar price realization again in the 6% kind of a range.

And then as we looked at 2023, we are estimating about something in the 4% kind of a range. But I would say it’s important to think that we will do a little bit better in the first half of the year because we will get some benefits from some of our pricing actions that happened during 2022 then the second half of the year..

Super helpful. Thank you so much..

Thank you..

Welcome..

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

Hey. Thanks for taking my questions. Shawn, I appreciate your talking through the segment and geo assumptions. I guess though at a high level, I am assuming the 5% is more of a base, just given where we are to start the year, how much variance do you think there is to that 5% number.

I mean, given you expect 4% price next year, I guess, only a point of volume, it seems like that’s fairly conservative?.

Yeah. I mean, hey, I feel like we are doing very well. We feel -- continue to feel good about the things we can control. The teams are executing well. We feel like we are gaining market share. We think that there’s a lot of good trends in the world that we talk about like automation and digitalization and on nearshoring.

But of course, yeah, there is uncertainty in the world as well. And I think, more importantly, we are coming off a period of really strong multiyear comparisons.

I mean, if you look at like our three year CAGR over the last three years, I think, it’s about 9% organically and so that’s something I think we also need to kind of keep in mind as well, too. So, overall, we feel like this is a good guide at this point in time.

Of course, we will see how things play-out as we kind of get into the year and update as we kind of go along. But otherwise there has been no change to our planning process and how we approach things from the past..

Got it. And then, Patrick, for the first time in a while, I didn’t hear you talk about LabX. I wonder if you could provide an update there.

We hear it come up in the research quite often but, wondered if you could talk through maybe the opportunities you see forthcoming and maybe talk around metrics that you kind of gauge against internally?.

Very good. Thanks for the question Josh. Yeah. So, look, LabX, we are really happy how LabX is being rolled out to more customers around the world.

It has a very strong reputation in the market for those who are not aware, not -- who don’t know the background of LabX, it’s our instrument control software for our Lab products, for most of our Lab products actually Baloney controls instrument. It also reflects the entire workflows.

So it’s a very strong software solution that helps our customers also on the compliance and data integrity side.

And it’s definitely one of the strong selling points for us for pharma customers and Lab customers who are on the even more strict compliance restrictions and as we increasingly connect more whole Lab instruments through LabX, it’s becoming a strong differentiator for us as well positioning our products in the broader lab space.

Again, we continue to roll out -- to roll this out, but only if key accounts who had several accounts, using our LabX software on a broader base, but we see very strong success around -- in this indoor Lab space, we expect that we continued to connect more instruments moving forward, our goal is to have for most of our instruments connected to LabX and helping our customers are said to reflect the entire workflow with our instruments and having the software backbone to not only stored data but also reflective workflows, et cetera.

Really strong selling proposition for us and also against our competitors who don’t have a similar solution. So I am really happy with where we are and we continue to add features and again connect more instruments moving forward..

All right. Appreciate it guys..

Yeah. Thanks..

We will go next to Vijay Kumar at Evercore ISI..

Hey. This is Jordan on for Vijay. Thanks for taking my question. I was wondering if you could talk about your margin assumptions for the remainder of the year and kind of what you are assuming as we go into fiscal year 2023..

Yeah. Hey. I will take that, Jordan. So, like, I said before we -- we were very pleased with our performance with pricing, Q3 and I have already provided guidance for Q4 and for next year. I think that’s certainly a key lever in our margin assumption. If you kind of look at Q3, we expanded our gross margin by 90 basis points.

As we kind of look to Q4, we are looking at about 150 basis points of gross margin expansion.

We are looking at a similar amount in 2023 of about 150 basis points and then if you kind of dropped down to operating margin, we expanded our margin by about 250 basis points in Q3, as we kind of look to Q4 we are going to be just under 300 basis points, probably, about 290 basis points.

As we look at next year, we are looking at about 160 basis points. And a key ingredient will be our price realization as we go forward as we kind of look towards Q4, we still will see some elevated headwinds in terms of up inflation on material costs, but maybe to a slightly lesser degree than what we saw in Q3..

Great. And time for one quick follow-up. I was wondering if you could talk about what you are seeing across geographies and I know you touched upon it in your opening remarks.

But maybe can you talk about what you are seeing from an order perspective in Europe, kind of some factors that you have seen in the quarter and your expectations moving forward?.

Yeah. So in terms of orders, as you are probably familiar, we don’t -- we only typically have about a month and a half or so of backlog, so we typically don’t comment on orders or backlog. But of course, we consider that in our guidance for the fourth quarter and for next year.

In terms of Europe, I don’t know if I’d add too much to what Patrick said in our opening remarks.

I mean one area that we have seen some slowdown to a certain degree is in packaged foods, in particularly the impact on our Product Inspection businesses, companies are delaying investments in CapEx in that area and Product Inspection would fit into CapEx, which is not the typical part of our portfolio, a lot of our -- most of our sales are and below $10,000, but Product Inspection is above that.

And then as we kind of look at the energy crisis, I mean, we still hear good things from our organization, but we are also mindful of the overall situation and the potential impact on industries like the chemical industry..

Great. Thank you..

We will go next to Tim Daley at Wells Fargo..

Great. Thanks. First question, I wanted to touch on China here. So, previously you were expecting about 10% in the quarter delivered 15%. And I think previously you were talking about low double-digit for the year and I think today you said double digits.

So just curious is -- what’s been going on there, what drove the upside in the quarter and how exactly has your outlook for the year changed, I guess?.

Yeah. Look, this as Patrick. We are very pleased with our results in China. As you said, we are 15% in the quarter and we also have forecast double-digit growth for the fourth-quarter. So we are really happy how China is supporting for us. We have a very strong organization there and it’s really performing extremely well.

We have not been affected big time by the corporate lock towns, our manufacturing sites continue to manufacture restrictions, but they have been operational.

We see our sales team, as we said in the remarks, also really fully leveraging the Spinnaker tools to really reach out to customers and capture the fast growing segments in China, as well as a lot of momentum behind for some electrical vehicles, battery segment, the lithium-ion segment, but we are also seeing still very good growth in pharma and biopharma in China.

So we are -- actually we have continued to be very pleasantly surprised by the performance, again, we have been optimistic for Q3. It totally came in as expected or even better and our outlook for China is still positive long-term, of course, so anyway positive.

Short-term, there always risk in China, of course, as we all acknowledge that can be short-term lockdown impacts or others, but I think, you should look at China from a long-term growth perspective. It’s very promising. I think we will continue to see growth.

We have organization there that is very strong both on the sales and marketing side, but also don’t forget we have manufacturing and R&D Day as well. And from that perspective, I think, we have a really good understanding about what drives market momentum in China and can also quickly adopt to fast growing segments and capture those..

All right. That’s very helpful. And a bit of a two-parter here on margins. First, on kind of price cost and inflation, and then the second is going to be on the FX impact.

So on the price cost just thank you for the outlook on that kind of four points of pricing next year, but should inflation come in higher or lower then we currently forecast that are currently embedded in the outlook.

How should we be thinking about that impact to the margin? Is it pretty much expected to be consistent, if inflation comes in higher upside lower downside or general thoughts? And then on the FX side of things. FX impact the topline and the operating income line seem to be similar in the quarter and on the outlook, I think, that’s consistent as well.

So is that the best rule of thumb we can use kind of like-for-like impact on FX to the topline and to the bottomline?.

Yeah. Hey. Good questions, Tim. Hey. So the first one -- let me start with this -- I will kind of end with the second one -- I will start with the second one first. So, I think, the best way, I mean, I recognize what you are saying the relationship between sales and EPS.

But I would say, probably, the best way to think about it is our -- to look at our major exposures, so our largest exposure would be the U.S. dollar to the renminbi. And so for about every 1% change in the renminbi to the U.S. dollar that would affect our operating profit of about $3.5 million to $4 million.

And then if you -- the second largest exposure would be our Swiss franc to the euro. So, if you think about it we are long in euro, but we are short in franc and that kind of creates inherent natural hedge within the company and so we look at the cross rate.

And so as the Swiss franc changes are the or the -- as that cross rate changes every 1% has an effect of about $2 million on our operating profit.

And so I think that’s how I would probably look at it and then I don’t have a really good proxy for the dollar against the rest of the basket of currencies, but those are the two major impacts on our earnings. In terms of -- what was the first price costs, okay, yeah..

Yeah..

If the certainly in terms of price cost, I mean, I think, you saw that we were able to respond very well to inflationary headwinds in 2022. Of course, it can take a quarter or two for us to be able to actually get the actions into the market.

But if we were confronted with a similar situation next year, I think, we would react exactly the same way and I think that the market understands inflation, our organization was able to do a great job articulating and explaining that to the market.

And then, I think, most importantly, we are providing really strong value propositions to the market that they appreciate and the ability to support them and provide these value propositions is highly appreciated and also supports our price realization going-forward..

Great. Thank you so much..

Yeah. Thank you..

Our next question comes from Alonso Garcia at UBS..

Evening, guys. Thanks so much. So, I guess, to start-off with. I just wanted to actually dig into a little bit with kind of, you have obviously talked a little bit about kind of supply chain and kind of the challenges that you have been able to kind of manage and how to think about the cadence.

But if you could kind of help us understand kind of you have talked about electrical components and -- previously and how that’s improving the kind of how to think about through the balance of 2023 kind of how to think about kind of maybe the impact to margins and the improvement there and what you are kind of expecting into the guidance?.

Yeah. Hey, Alonso. So, you can imagine there’s a lot of moving parts in terms of our gross margin assumption in our different material categories.

There are going to be some benefits next year where we have seen things like electronic components, we have seen or expect to see some benefits next year, but of course, there’s other categories like where we have had a do broker buys this year going out several months where we are going to have to carry additional cost into next year is two like simple examples.

I think the best way to think about the impact on margin next year is that, overall we were expecting 150-basis-point improvement in our gross margin, about 170 basis points of that will come from our pricing assumptions and then it will be offset by a wide range of other categories in this inflation basket.

And as you kind of think about material cost assumptions for next year, I think we are going to -- right now we are planning on something more modest probably in the low single-digit kind of arrange..

Okay. Great. And I know PendoTECH is at this point part of the organic number, but it would be great to kind of just trying to get a contextual update on performance in the quarter and how the company is maybe performing relative to kind of….

Yeah..

… your expectations?.

Yeah. Absolutely. I will take that, look, we are very happy with how PendoTECH is performing. It has been probably one of the best acquisitions in terms of overall growth, may not in total volume, but overall growth. It’s really exceeding our expectations. We are very happy we are still seeing strong demand from our end customers.

And we continue to build out the organization. We started, as you know, mainly as pressure sensors, in the future we look into additional single-use sensors as well. It’s now in the meantime really well-connected and engrained in the overall product process business. So we are very optimistic on the outlook for the business moving forward..

Great. Thanks so much..

Thanks..

We will move next to Patrick Donnelly at Citi..

Hi. This is Lucy [ph] on for Patrick. Thanks for taking my question. I was wondering if you could delve a little bit into what you are seeing in Europe, you said that maybe there sort of weakness on Product Inspection. Was that a particular countries, is that the entire region just, any more color there would be helpful? Thank you and I have one more..

Yeah. Thank you. I will take the question. Look, in Europe and Product Inspection, a lot of them are large international, multinational companies and what we are seeing is that, they are not canceling projects, but they are delaying projects.

I think, overall, they have become a bit more cautious with the projects and how they are spending their money at least in this quarter, and probably, also in Q4, so they are postponing projects and they have, I would say, better line-of-sight of how things develop in Europe. It’s not specific to any particular country in Europe.

So, I would say, you can see just from most are from several customers but it’s not linked to one country overall..

Great. Thank you. And then, in terms of the Investor Day coming up, anything around the share what we can expect for that, I am not that gloomy? Thanks..

Yeah. I think you will see an update on our business and our different initiatives. We will walk you through that and then we will kind of also talk about some of our exciting opportunities to continue to expand our margins through supply chain and pricing.

And then it’s going to be -- the Investor Day is going to be based, actually we are here right now in Massachusetts at our Process Analytics business and so we are going to feature that business and so show you -- showcase that business in a lot more detail and then kind of also show you kind of how we serve the value stream of a typical biopharma customer..

Great. Thank you..

We will go next to Matt Sykes at Goldman Sachs..

Hey. Thanks for taking my questions. Maybe the first question Patrick or Shawn, just as you look into 2023, there’s obviously risks out there whether it’s inflation or supply chain or Europe weakness and I am sure you have baked them into the guidance you have presented.

If one of those were to improve, meaning not become a risk, is there a certain one of those three or others that could really change kind of the dynamic of, one, how you think about the progression of the year, but also the dynamics of the business and the growth in certain areas?.

Let’s see..

I can take this. Look, I mean….

We are flipping a coin. Okay.

As it is -- as we did, of course, there are still ongoing multiple risks and it’s not only Europe and in China, we are talking potentially about continued lockdowns related to COVID-19, but it is not yet clarity of how that will evolve further, talk maybe for -- I mean, it’s about Europe, I mean, again the war in Europe, it related to energy crisis, et cetera, just shows quite some uncertainty in the outlook of 2023.

Of course if that would be resolved we would see upside to our current projection. But who knows? I mean, it’s -- there is no short-term resolution in sight and that’s actually also not really clear about how big those impacts will be, right? How many of the chemical customers will be affected, will there be like program….

Yeah..

Energy outages, what does this mean for the entire strategy, we -- it took of course that all into consideration and try to make it very reasonable forecast for 2023. But we can’t know -- we cannot neglect these risks right and they are now in our forecast.

If those would go away, and of course, there would be upside, right?.

Yeah. Exactly. And….

But how much is really hard to quantify..

Yeah..

It also how -- again how customers will respond to these crisis..

And I think the key is like you kind of go back, Josh kind of asked about an upside-downside at the beginning and in the end it is going to be a lot to do with the macro..

Yeah..

Like, there are a lot of big topics out there in the world and if they go away, any one of them would -- could be an up -- could be a good upside for us and if they worsen, I mean, it could be a downside and those are things out of our control and as an organization we just to stay agile and we continue to try to monitor….

Yeah..

… these situations very closely and make sure we can have and react quickly..

I mean, what I want to say is, also looking back just the last crisis, we went into COVID-19 and in our organization really demonstrated incredible agility to adjust the market conditions and we will apply similar same measures as moving forward if any new crisis comes up.

I think we are very well-trained and very agile and have demonstrated actually how we can react to changing market conditions and the flexibility of organizations and the tools we have in place, as I have said, also in my remarks at the beginning, we have the tools in place where we can very quickly identify pockets of growth in the market and send our sales team to those and capture those opportunities as they come up..

Got it. Thanks for indulging me in that question, I appreciate the color. And just a second question a quick follow-up. As you look at Food Retail, it’s obviously a smaller part of your business. It’s been fairly volatile and I think comps are obviously impacting that.

As you look that mid single-digit growth for next year, should we expect a decrease maybe in the volatility of revenue for that business, are there things that you have done there to better manage that or help to manage that or is that mid-single digits sort of an average of the volatility that we might see continue into 2023?.

Well, look as you rightfully said, it’s a smaller part of our business, it’s about 5% of the total business. We are -- we have seen really good projects over the last couple of months, where we have been really successful. We are also looking at rollout often upgrade portfolio of products and we are optimistic of the product we have.

But in terms of the overall volatility in the market, we don’t see any short-term changes. Again, I mentioned also in the markets that we have in China we are currently facing an issue with the lockdown, which affects a lot of the retail customers there and we don’t know exactly how long that will continue.

If that eases up there is probably some upside. But volatility I don’t expect a total significant change in 2023. What we do, I want to say is, that we have, again, with the strong portfolio and also the number of projects we have won over the last couple of months, it also gives us confidence in the portfolio..

Great. Thank you very much..

And our next question comes from Rachel Vatnsdal at JPMorgan..

Hi. This is Neil [ph] on for Rachel and thanks for taking the question. First, could you give us some color and/or some additional color on inventory, last quarter you had updated us on customer inventory levels, knowing it had come down a bit on pipette tips after customers have stockpiled during the heights of the pandemic.

You talk today a bit about how your inventory levels in relation to free cash flow had changed, so could you provide us some more color here on both customer inventories like how are they looking at it was the same by product and then kind of some of the key products there like and have you noticed any material change here in your inventory levels?.

Hey. Maybe I will take it and if Patrick wants to add something from the customer perspective. Let me start with our internal. So, the first comment I would say is, we are extremely happy with our global supply chain organization.

Really tremendous, just really great job in terms of supporting customers for the last few years during the pandemic and it’s been a competitive advantage that really has.

We -- Patrick and I were just traveling around the world, visiting our different businesses and we just heard several antedotes from around the world about how we are able -- our delivery times, they might be a little longer than they were in the past, but they are significantly better than competition.

And that’s allowed us to gain share in different cases and so we feel really good about that. Now, of course, the other side of that is, we have carried higher inventory levels, higher safety stocks in different categories to be able to make sure that we could do that.

As we -- I mean, I don’t think it’s necessary to get into any particular detail with one category or another, there’s different types of components and the different that are key to a wide range of our portfolio. We have about 130,000 SKUs.

So you can imagine it’s pretty complex and I think Blue Ocean has allowed us to have the visibility through the supply chain to manage that complexity and know where we had to increase safety stocks. But now as we kind of look to 2023 and with shipping times., especially coming from China into the U.S. dramatically shortening just recently.

We feel like we are in a position also to reduce those levels in 2023, which was included of course in our outlook and our guidance for 2023. From a customer perspective, probably, the one area that we have heard some noise in the area of pipette tips.

Difficult to quantify exactly how much that is to kind of in our business, I mean, our -- but overall we are very pleased with our overall pipette tips business. The instrument sales are actually continuing to grow very well with really good demand in biopharma research. But as you say on the consumable side we were down in the third quarter.

And then it’s hard to have visibility through our customers in that, but it’s also not a significant impact to our overall business..

Yeah. I would say, not significant also, because we didn’t service or serve the majority after COVID testing labs, right now a majority -- Shawn as you said, have been biopharma research labs, et-cetera, which didn’t overstock to the same extent as a lot of testing customers did..

Awesome. That’s super helpful. And then just one more on -- you noticed previously that there had been some rumblings of potential government stimulus in different regions, particularly in China and that could probably benefit the region. Have you noticed any sort of updates on that, have you heard any updates on that and that’s it. Thank you so much..

Do you want to take..

Yeah. I can take. No. We are -- actually good question, but no, we have not heard any significant impact or changes driven by any government initiatives at the moment..

Yeah..

Awesome. Thanks..

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