Thank you for standing by. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mettler-Toledo First Quarter 2021 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Adam Uhlman, Head of Investor Relations. You may begin. .

Thank you, Sarah, and good morning, everyone. Thanks for joining us. On the call with me today is Patrick Kaltenbach, our Chief Executive Officer; and Shawn Vadala, our Chief Financial Officer. Let me cover some administrative matters.

This call is being webcast and is available for replay on our website at mt.com A copy of the press release and the presentation that we will refer to on today's call is also available on the 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 condition, performance and achievements to be materially different from those expressed or implied by any forward-looking statements. .

For a discussion of these risks and uncertainties, please see our recent 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 statements, except as required by law. .

On the call, we may use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in the 8-K and is 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 first quarter financial results, the details of which are outlined for you on Page 3 of our presentation. Overall, our results in the first quarter were much better than anticipated across most product categories and geographies.

As discussed last quarter, we also had a benefit this quarter from recovering delayed product shipments from the fourth quarter. .

However, we recovered more than expected and shipped nearly all of our delayed orders and are glad to have this disruption behind us. While our team executed well this quarter, underlying market demand is still soft, especially in China, and there remains considerable uncertainty in the global economic and geopolitical environment.

We continue to maintain a cautious outlook, and we will -- and we still expect to return to sales growth in the second half of the year, largely due to easier comparisons. .

Otherwise, we remain focused on executing on our growth and productivity initiatives, so we will emerge stronger as our markets improve. Let me now turn the call over to Shawn to cover the financial results for the quarter and our guidance for this 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 $926 million, largely unchanged from prior year levels, both on a U.S. dollar basis and in local currencies.

Our sales in the quarter benefited by approximately 6% from recovering nearly all of our previously disclosed delayed product shipments from the fourth quarter of 2023 above our guidance of an approximate benefit of 5%. .

On Slide #4, we show sales growth by region. Local currency sales grew 6% in Europe and 3% in the Americas and declined 8% in Asia Rest of the World. Local currency sales in China declined 19% in the quarter. .

Excluding the benefit from recovering our fourth quarter shipping delays, we estimate our sales in Q1 declined about 6% with the Americas down approximately 1%, Europe down approximately 5%, and Asia, Rest of the World, down approximately 12%, including a 21% sales decline in China. .

On Slide #5, we summarize local currency sales growth by product area. For the quarter, laboratory sales increased 2% and Industrial sales were flat with both core Industrial and product inspection flattish. .

Food Retail declined 9%. Service sales grew 6% in the quarter. Excluding the Q4 shipping delay benefit, we estimate laboratory product sales declined approximately 6%, Industrial declined 3% with core Industrial down 4% and product inspection flattish, and Food Retail declined 15%. .

Let me now move to the rest of the P&L, which is summarized on Slide #6. Gross margin was 59.2%, an increase of 30 basis points due to improved productivity, positive pricing and favorable mix, partially offset by lower volume and currency headwinds. .

R&D amounted to $46.4 million in the quarter, unchanged in local currency over the prior period. SG&A amounted to $234.4 million, a 1% decrease in local currency compared to the prior year and includes benefits from our cost savings initiatives. .

Adjusted operating profit amounted to $267.3 million in the quarter, approximately flat with the prior year amount. Unfavorable foreign currency was a headwind to adjusted operating profit of approximately 4%. Adjusted operating margin was 28.9% which represents an increase of 20 basis points from the prior year. .

A couple of final comments on the P&L. Amortization amounted to $18.2 million in the quarter. Interest expense was $19.2 million and other income amounted to $0.3 million. Our effective tax rate was 19% in the quarter. This rate is before discrete items and adjusted for the timing of stock option exercises. .

Fully diluted shares amounted to $21.5 million, which is approximately a 3% decline from the prior year. Adjusted EPS for the quarter was $8.89, a 2% increase over the prior year or plus 7%, excluding unfavorable foreign currency. .

On a reported basis, EPS was $8.24 as compared to $8.47 in the prior year. Reported EPS in the quarter included $0.24 of purchased intangible amortization, $0.36 of restructuring costs and a $0.05 tax headwind from the timing of stock option exercises. That covers the P&L, and let me now comment on cash flow. .

In the quarter, adjusted free cash flow amounted to $182.3 million, a 39% increase on a per share basis from the prior year levels due to favorable working capital, including lower cash incentive payments related to last year's performance. .

Let me now turn to our guidance for the second quarter and the full year. As you review our guidance, please keep in mind the following factors.

First, while we do not see any negative change in business conditions today, we continue to take a cautious approach with our forecast and expect our customers will be conservative with their investments in the second quarter. .

We also expect our sales in China to decline over 20% again in the second quarter before returning to growth in the second half, again, significantly easier year-ago comparisons. Additionally, there is uncertainty in the economy and geopolitical risks, which also has created volatility in foreign exchange rates. .

Lastly, as mentioned last year, we will face higher variable compensation this year relative to prior year levels. Now turning to our guidance. For the second quarter of 2024, we expect local currency sales to decline approximately 4%. We expect adjusted EPS to be in the range of $8.90 to $9.05.

Currency for the quarter at recent spot rates would be an approximate 2% headwind to second quarter sales and adjusted EPS. .

For the full year 2024, we expect local currency sales to grow approximately 2%, which is up from our previous guidance of approximately 1% to 2% growth. We expect full year adjusted EPS to be in the range of $39.90 to $40.40 which compares to our prior guidance of $39.60 to $40.30.

This includes an expected headwind to sales of 1% and adjusted EPS growth of approximately 2% from unfavorable foreign exchange. .

Lastly, I would like to share a few other details on our 2024 guidance to help you as you update your models. We expect total amortization, including purchased intangible amortization to be approximately $73 million. Purchase intangible amortization is excluded from adjusted EPS and is estimated at $26 million on a pretax basis or $0.95 per share. .

Interest expense is forecast at $82 million for the year and other income is estimated at approximately $2 million. We expect our tax rate before discrete items will remain at 19% in 2024. We expect adjusted free cash flow of approximately $850 million, representing a conversion of approximately 100% of adjusted net income.

We continue to expect share repurchases of approximately $850 million in 2024. That's it from my side, and I'll now turn it back to Patrick. .

Thanks, Shawn. Let me start with some comments on our operating businesses, starting with Lab. As Shawn mentioned earlier, excluding the Q4 shipping delay benefits this quarter, local currency sales in our Laboratory business declined approximately 6% compared to last year.

This was better than we anticipated, but we saw cautious spending patterns from our pharma and biopharma customers, especially in China. .

We have a very strong product portfolio and pipeline of new innovations that directly address our customer needs for solutions that enhance their productivity and ensure regulatory compliance.

Combined with the enhancements we have made in our Spinnaker sales and marketing program, our go-to-market approach is a significant competitive differentiator during this period of reduced end market demand. .

Our Industrial sales for the quarter were also better than we had expected and declined about 3%, excluding the benefit of shipping delays.

Our sales of core Industrial products have performed better than we would have expected in a soft economic environment, benefiting from our upgraded portfolio of products that enable automation and digitalization in our customers' production and logistics facilities. .

We also continue to be optimistic about growth opportunities related to home shoring and near shoring as customers aim to increase resiliency in their supply chains. Our product inspection business also had better-than-expected performance in a soft market environment with benefits from recent product introductions and strong service growth. .

Lastly, Food Retail sales declined in line with our expectations against significant project-driven sales growth in the first quarter of last year. .

Now let me make some additional comments by geography. Starting in the Americas, our sales declined slightly in the quarter, excluding the benefit from recovering our shipping delays. We benefited from strong project-related growth in Industrial which was offset by a decline in Lab and Retail.

As expected, our customers have been somewhat cautious starting the year, especially in pharma and biopharma which we expect to improve as we face easier comparisons in the second half of the year. .

Retail also faced very difficult comparisons related to very strong growth in the prior year. Sales in Europe, excluding the estimated benefit from recovering our European logistics hub delays declined about 5% and were largely in line with our expectations across each of our businesses.

We continue to see soft economic indicators across most of Europe and acknowledge the potential risk to the European economy and energy prices from the conflict in the Middle East. However, we have a very strong team and go-to-market approach that positions us very well to capture growth opportunities. .

Lastly, Asia, Rest of the World results were also slightly better than expected, although demand in China remains very weak relative to very strong growth over the past few years.

We continue to target pockets of growth opportunities, including semiconductor and new energy industries and our approach to the market has remained a significant competitive advantage against the competition. .

Those are all my comments on the businesses for the quarter, and I'd now like to share with you why we are so optimistic on the long-term growth opportunity for our company. .

First, I have been in the life science and analytical tools industry for a long time and believe the exciting advancements our customers are bringing to the market will continue to support healthy market growth in our industry over the long term. .

We also see many new opportunities in fast-growing segments such as sustainable materials, semiconductors and alternative energy. Our customers also continue to look to us to help them achieve their goals, including improving productivity and quality while supporting their efforts in automation and digitalization. .

Our very broad and diverse portfolio of solutions is an important differentiator, and we lead the industry with new innovations for our target markets. Innovation is at the heart of our culture and is essential to our continued success.

We are constantly coming out to market with new products and have accelerated our rate of innovation over the past few years. .

New products help stimulate replacement cycles, support market share gains and enhance our value proposition that support our pricing. We are uniquely positioned to serve customers throughout the value chain from R&D through production and logistics.

This also creates a tremendous opportunity for us to add automation and digitalization features to our products and drive productivity and provide insights throughout the value chain. .

Over the past 3 years, we have invested over $0.5 billion in research and development into 3 key areas. First, technology advancements to support new products and features that increase the value of our products. .

Second, application and software development to complement our products. And third, design enhancements to simplify manufacturing and serviceability of our products. The significant investments we are making have been an important contributor to expanding our innovation leadership and market share gains. .

I'd like to share with you a few examples of innovations we have recently brought to market and why we are so excited about our future. I'll start with our biggest launch of the year, our entirely new and redesigned portfolio of standard and advanced level laboratory balances, which you may have seen featured in our annual report.

We are the global market leader in laboratory weighing, but also have ample room to gain further market share that includes expanding our access to growth segments. .

Our new range of balances address this opportunity with the best products for entry-level applications all the way up to advanced weighing requirements. [ Featuring ] increased robustness, seamless data management, a harmonized user interface and up to 30% better measurement in performance.

Our design approach also improves sustainability and using improved packaging and reducing their power consumption.

Weighing is a critical step in the sample preparation process and our LabX software connects our higher-end balances to our broad portfolio of analytical instruments to help automate workflows and ensure secure and compliant data capture. .

This is a very important competitive advantage, considering we provide about 40% of the instruments that are found in a typical quality control app, and we recently introduced several new analytical instruments with new automation and digitalization features. .

For example, we are the global number two player in titration. And last month, we launched 2 completely new Karl Fischer titrators models. Our new EVA titrators are ideal for efficiently determining the water content of challenging samples and our new control algorithm speeds up reaction rates and allows for faster analysis and cycle times. .

It also has an automated solvent exchange system that ensures safety by minimizing exposure to potentially hazardous chemicals. Importantly, our new titrators have full compatibility with our LabX software to enable automated seamless workflows with secure data management, all while complying with data integrity regulations. .

Hot segments have been an important driver of growth for analytical instruments and water determination to titration is an important part of lithium battery production. Our voice of customer program [ Jetstream ] uncovered a specific customer need in the market to be able to analyze multiple samples with only 1 titration instrument. .

To address this, our team developed a new automated sample prep solution the InMotion Karl Fischer Six that is used with our titrator. With our InMotion 6, customers can process up to 6 samples fully automatically and unattended with only 1 titrator addressing our customers' need for a cost-effective solution on a very small footprint. .

Automation has also been an important differentiator for our thermal analysis customers in fast-growing markets such as development of new materials, and we recently introduced a new thermal analysis instrument called the DSC 5+ with a fully automated sample changer. .

This instrument also increases the efficiency of the entire workflow from sample handling to result assessment, generating reproducible results with less resources.

Our artificial intelligence Wizard software automatically detects and evaluates many types of thermal effects saving valuable time in providing consistent and reliable measurement results regardless of the user's level of experience. .

Our software also has different neural networks that are trained on dedicated data so customers can download the most appropriate package for their experiment.

Our core Industrial business has been very successful in integrating advanced automation and connectivity features into its products and has focused its new product development on terminals and digital load cells that provide seamless integration into factory automation systems. .

A great example of this is our Industry 360 Terminal, which is an ultrafast weight indicator for automated filling, dosing and tank weighting applications across a variety of industries from biopharma to food manufacturing.

The terminal connects our scales and weighing sensors and seamlessly integrates our preprogrammed, ready-to-use weighing applications into a customer's Programmable Logic Controllers for process control automation. .

It also seamlessly feeds data to customer IT system. And because of our unique ability to combine IT and operations technology communication on a single network, it saves customers' integration and programming cost and time and eliminates the need for an additional gateway to the server or cloud.

This product line has been very successful and new derivatives like our Industry 700 and Industry 400 have been very recently launched to further expand our portfolio. .

We have also expanded our capabilities in pharma manufacturing IT systems, helping customers by having a simplified and standardized integration of our weighing solutions. .

These advanced terminals also connect to our new pHT low-profile hygienic floor scale family that offers unmatched hygiene and safety features. Our new scales are very well suited for industries like pharma where cleanliness is paramount.

These scales offer a unique, fully seal design that reduces contamination risks and simplified cleaning procedures and also has a state-of-the-art digital load cell. .

We have had great success with the 2023 launch of this product, and we believe this and other new core Industrial products have been very important contributors to the relative resilience of this business over the past year.

We have also recently launched several new products across our product inspection business over the past year that are highly differentiated and bring considerable value to the customers. We expect these innovations, including our new series of X-ray inspection technology to help drive market share gains, especially in the mid-market segment. .

We have an excellent pipeline of innovations of product inspection that will further build on our market leadership. .

Lastly, we are also pleased with our success of Food Retail business that has seen with the new product introductions like our FreshBase scales, which was an important contributor to the market share gains and strong sales growth last year. .

Additionally, our new FreshBase plus AI scale with advanced image recognition technology is an exciting innovation we are looking forward to bringing to additional markets outside of China. .

So that is a brief overview of a few new products we have launched over the past year, and we have many more to come this year as we have accelerated certain innovation investments to capture growth opportunities.

These investments continue to provide a portfolio that is stronger than ever and continues to increase our value proposition and most importantly, help our customers gain new insights, increase their productivity and ensure regulatory compliance throughout their value chain. .

That is the conclusion of our prepared remarks. Operator, I'd like to open the line now to questions. .

[Operator Instructions] Your first question comes from the line of Dan Arias with Stifel. .

Shawn, the 50 bps-or-so that you're raising on the organic guide and then $0.20, I believe, on the bottom line, is that just feeling better about the logistics issue given that last quarter you sort of held back a bit given that it was early in the year or is that reflective of better results that you saw in 1Q and maybe the way that the year might unfold on demand?.

Yes. Thanks, Dan. Thanks for the question. I think it's pretty much as you interpreted. It's largely related to doing a little bit better on the shipping delays that we had in Q4. Of course, we did a little bit better than that in terms of Q4 results in general. But even though we're not seeing any negative changes in the business.

We also prefer to be a little bit cautious here until we get closer to the second half and have a little bit more visibility. .

And then maybe on the outlook for China. You pointed to continued challenges there in Q2. That's not exactly a surprise just given the way that things have unfolded this quarter. But it does sound like you expect some deceleration on what is an easier comp. I think the China comp gets 6 points easier next quarter.

Is there something to that? And are you seeing any of the green shoots that have been discussed a little bit across the earnings cycle this quarter?.

I can take this, Dan. Look, we have been definitely pleased that we have seen a somewhat better result in Q1 than we had expected. That said, we still expect it to be quite weak.

I mean, as Shawn said, we'll have more than 20% decline in China second quarter based on the very tough compares we see against Q2 last year and the years before where there has been quite heavy investment in China. There was significant spending during COVID and also some, of course, inventory buildup, et cetera. .

For the second half of the year, the comps will become much easier for us. So we expect positive growth. And regarding -- your questions regarding the stimulus that was announced. I think this is definitely a positive sign for the market.

We have not yet seen any impact yet, and we have to see whether it will move the needle, but I think it helps to reestablish also the confidence in the market. So the stimulus will help. .

But I think most importantly, you need to understand that we think we are really well positioned with our product portfolio there with our local team that is executing really well with also developing local products for the Chinese market.

I think we are in a great position to compete in this market and as the market recovers to gain even more momentum. .

Yes. And just to maybe specifically address the comment about potential deceleration.

I think it's important to also just look at maybe the multiyear comparisons here and if you just like look at the trends in terms of like dollar terms or renminbi terms, we're kind of hitting a high watermark a year ago in Q2 in terms of what we're lapping in terms of comps.

So actually, the comp level that we have in Q2 is a more difficult comp than we had in the first quarter. .

Your next question comes from the line of Jack Meehan with Nephron Research. .

I was wondering if you could just reflect on the first quarter a little bit. You posted flat local currency growth, you were guiding to down 4% to 6%, about a point came from better capture of logistics.

Where did the rest of the upside come from? Can you just walk us through that?.

Yes. Thanks, Jack. Hey, the rest of it, we -- despite being down 6%, excluding the shipping benefit, we're pleased we did better than expected. We kind of expected customers to start a little more cautiously this year.

I think they did start cautiously, but we're glad that they didn't -- they weren't as cautious as maybe we were thinking at the beginning of the quarter. .

If you look at kind of the where, like where did it come from, it was actually pretty broad-based, whether it be by region or by product area. And I think if we look internally, Patrick and I just came out of some executive meetings earlier this week, we just really walk away feeling very good about the things that we're controlling. .

The execution in the organization, I would say, is very high. We talked about a lot of different corporate programs that we're rolling out on our last call, whether it be Spinnaker 6 or other programs.

Today, we talk a lot about innovation and all the things we're doing in terms of launching new products and so I have to also believe that the teams are just executing well, and we're seeing some benefit from all that good work. .

Great.

And then do you mind just walking us through in terms of the guide for 2Q and the full year just by segment, what the expectations are?.

Yes, sure. So let me start by business area. So our Q2 guide for Lab is to be down low single digit and for the full year to be up low- to mid-single digit. Product inspection, I don't know if I could also maybe add, if you exclude the shipping delay for the full year, that would be flattish. .

If we look at core Industrial, it would be up low single digit in Q2 -- I'm sorry, that was product inspection. Product inspection would be up low single digit in Q2 and up low single digit for the full year and that would be the same if you exclude the shipping delays for the full year. .

Core Industrial would be down high single digit for Q2 and flattish for the full year and would be down slightly, excluding the benefits of the shipping delays for the full year.

And then Food Retail would be down about 10% for Q2 and down mid- to high-single digit for the full year and similarly, down mid- to high-single digit for the full year, excluding the shipping delay benefit. .

And then in terms of the Americas, we would be flat for Q2, we would be up low-single digit for the full year, and then we would be up slightly for -- excluding the shipping delay benefit. Europe would be up low-single digit for Q2, up mid-single digit for the full year, but flattish, excluding the shipping delay benefit. .

And then China would be down mid-20s in Q2, down high-single digit for the full year and similarly down high-single digit, excluding the shipping delay benefit. .

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

Congrats on a good Q1 execution. Maybe Shawn, for you, you beat Q1 by 500 basis points, right, at the minimum relative to your expectations.

So that's annualized 125 basis points which you've raised guidance by 50 basis points, so did anything changed around the back half assumptions that makes you perhaps want to be a little bit more cautious?.

No. Vijay, thanks for the question. No, I mean, we're not seeing -- I want to be clear, we're not seeing anything negative or new negative changes in the business. We just feel like it's still a little bit early in the year. We only have 1.5 months' worth of backlog, and we're just a little bit cautious here kind of going into the second quarter. .

And we'd just like to have a little bit more visibility to the second half of the year. And I think after the end of the Q2, we'll be in a better position to reassess the second half.

But I think we're still optimistic about growing in the second half and -- but we just like to have a little bit more visibility here before we kind of get out over our skis. .

Understood. And maybe Patrick, for you as a follow-up.

Shawn mentioned visibility for back half and backlog, right? What is typical backlog for Mettler? When you say visibility, is that sort of being driven by funnel activity, customer conversations or are you hoping -- or do you have any expectations for China stimulus to play out in the back half?.

Thanks for the question, Vijay. Look, as Shawn just said, we have about 1.5 months of backlog. So we have a pretty fast turnover in most of our businesses. When we look at the second half, again, the comps will get much easier for us based on what we have seen last year. So that, of course, implies a positive growth for the second half. .

We see very good customer engagement out there also during Q1 and what our teams are in great discussions with customers. I think there's great interest in our new products that we just launched and we are confident that we are really well positioned. What we're seeing, however, is that the sales cycle times are still somewhat longer at the moment. .

But as Shawn also mentioned, given where we are with the portfolio, given what we see in terms of customer engagement, we don't see any negative trends or changes to what we have said in the first quarter. We think we are well positioned to achieve the goals we have for the second half, to be honest. .

Your next question comes from the line of Michael Ryskin with Bank of America. .

I'm going to ask another one about market conditions as you go through the year because I think that's where there's the most interest. Just following up on your comments just there.

Is there anything in particular you're looking for as you go through the year? I mean is it really just a matter of time of you don't want to call for an improvement until you're only about 3 or 6 months out?.

Or are there any specific indicators whether it's PMI, whether it's funding levels, whether it's just some budgets being unlocked, whether it's a recovery in China? Just walk us through sort of like what are the indicators you're looking for as you go through the year to gain a little bit more confidence in that reopening of the markets in that acceleration.

.

Yes. Mike, this is Shawn. Maybe not to entirely repeat what we just said, but probably we'll echo it to a large degree. I think it comes back to this sitting on pretty much 1.5 months' worth of backlog. We do see good activity in our pipeline.

As Patrick, I think, mentioned before, we are seeing order cycles being elongated a little bit in the first quarter. .

Certainly, it would be nice to see those -- the conversions actually starting to happen here in the second quarter. But the activity is good. But I think it comes back to we only sit on about 1.5 months' worth of backlog. We have still some difficult comparisons on a multiyear basis here in the second quarter. .

It would be nice just to see -- to gain a few more months here and just kind of get a little bit closer to that second half.

And then I think we've generally been -- our second half growth story has also largely been about easier comparisons and so it would be nice to see how the market kind of develops here in the second quarter in addition to those easier comparisons. .

And of course, there's plenty of uncertainty and risks in the world that are out there, nothing specific to our business, but whether it's economic risks or geopolitical risks, and we'll just kind of see how the world plays out here for a few more months. .

Okay. And I want to ask one on the P&L. I mean, 1Q earnings beat pretty handily, obviously, shipping, recovery and the underlying business being better, probably played a decent role in that. But could you sort of parse that out? I mean you gave a lot of color on what revenues would have been if it wasn't for the shipping recovery.

Any color you can give on the P&L in terms of how much benefit was the EPS?.

And what I'm getting at is your 2Q EPS guide of roughly $9 is essentially flat versus 1Q. You normally see a pretty nice sequential step-up. So again, I appreciate that the shipping recovery had some noise to that.

But just trying to get a better sense of like the margin cadence 1Q to 2Q?.

Yes. So in terms of the first quarter, as we kind of said, we benefited about 6% in terms of sales from the shipping delay benefit. Our expectation was that we were going to benefit about 5%. So we had a 1% benefit. So you can kind of maybe draw your own conclusions of what that would have meant or not.

But maybe more importantly, if you just take that reported number of sales in Q1 and you look at our guidance for Q2, regardless of shipping delay benefit. With that benefit, the reported number is actually a very similar dollar number sequentially to what we see in the second quarter. .

And if you look at the EPS for Q2, it's actually our guidance is higher than Q1, which I think points a little bit to some of the good execution we're doing on our side in terms of cost savings and productivity measures. .

Now if you look at the second quarter versus prior year, of course, there's different moving parts. You have a 2% headwind when it comes to foreign currency.

If we look at our gross margins, we expect the gross margin to be down probably about 20 basis points versus the prior year and a lot of that has to do with volume being down in the second quarter versus the prior year. .

There's a little bit of noise as well with maybe a little bit of higher transportation costs with some of the Red Sea topics, some investments we're making in our service business. And then our pricing, of course, offsets that a little bit.

Our pricing came in about 2%, which was in line with our expectation for the first quarter, and we kind of expect that to continue here into the second quarter and for the full year.

And then maybe one other comment on the P&L kind of going below the gross margin in addition to the volume and the things that I just said in terms of headwinds, we also will have higher variable comp Q2 this year relative to last year. .

But if you kind of then step back from all that, and you maybe pivot to the full year, we're actually pleased that our full year operating margin is now probably going to be up about 50 basis points. And if you exclude currency, it's probably up about 70 basis points.

So in a year where there's a pretty modest top line growth, we feel good about our ability to continue to drive operating margin improvement. .

Your next question comes from the line of Rachel Vatnsdal with JPMorgan. .

So I want to dig into the Industrial performance in the quarter. You mentioned some strength in Americas and 1Q on some project level activity, but then you also said that you expect core industrial to be down high singles in 2Q.

So can you just kind of walk us through the drivers of that core Industrial business in the first half of the year? Were there any one-timers that we need to be aware of in 1Q, for example?.

Thank you, Rachel, and I'll start and maybe let Shawn chime in as well. Looking at it, we are very proud of the performance of our Industrial business. I think it comes down to really the outstanding portfolio enhancements we have made over the last year.

I mentioned the Industry 360 terminal and other things we launched driving productivity for our customers, and they really pick it up nicely. .

When you look at Q2, I mean, the major driver for the decline that we outlined is a very tough compare against a very strong business we have seen in Q2 last year in Industrial. .

So we are not concerned about the, I would say, the attractiveness of our products or the engagement we see of our customers simply based a decline on a very tough compare versus last year.

In the quarter, we definitely look forward to keeping the momentum or gaining even more momentum with the new products that I indicated like the Industry 400 and 700 and the new industry scales that we are launching. So overall, I would say, not a concern, the decline is purely because we had a very big quarter last year in the industry. .

Yes. Maybe just to get to the other part of your question, Rachel. The first quarter in the U.S., certainly, that project activity is lumpy. And so we certainly will not see that in the second quarter. So there's an element of that.

And then maybe the other point I make here is that in core Industrial, it has a larger mix of business weighted towards China versus our other businesses. .

And then if you kind of look at maybe the multiyear comparisons of that China business, we do have a very difficult comparison, as Patrick mentioned. So it will be a little bit -- and it will be a little bit bigger of a headwind there that we saw versus Q1. .

And then just for my follow-up, I want to dig into some of the biopharma commentary that you gave. So you mentioned some of slower spending to start of the year, we've been hearing that across the sector this earnings season.

But can you just unpack for us what does guidance assume in terms of those biopharma customer budget starting to open up? And then have you seen any activity level from biopharma customers pick up in April and then early May here from that group as well?.

Well, look, when we talk about biopharma, I think the business we really focus on here is our Process Analytics business. Biopharma definitely still has been soft in the first quarter, and we also expected given the year, biopharma customers to be soft in the second quarter as well. .

I mean, when we talk about growth in the second half for biopharma, same thing is true for many other businesses we just expect also easier compares. When you look at the underlying engagement and the momentum we are seeing right now, especially in China, we are still facing some inventory issues with our Pro sensors.

They're still sitting on some inventory there that they're working down. .

On the single-use sensors that you use in biopharma, we're actually also encouraged by, in fact, more recent interest again into single-use sensors that come from our PendoTECH business for biopharma customers. .

And the other part of biopharma, of course, pipettes and we certainly have seen improvement in pipettes relative to some of the destocking issues that we were dealing with last year. .

Your next question comes from the line of Matt Sykes with Goldman Sachs. .

Patrick, maybe -- and sorry if I've missed it, but maybe just some commentary around the services business.

I think you mentioned it was strong in Q1, but just any expectations and progress that you've made on your services initiative over the course of this quarter and your expectations for the full year?.

Yes. Very good. Thanks. Matt, I mean, again, we are very proud about the performance of our service business. We had 6% growth in the first quarter against a very strong growth in the first quarter last year. We see strong demand for our services. We continue to build out the service portfolio that we can deliver to our customers.

We compete extremely well. We still have a lot of opportunity with the installed base that we have out there, connecting more of our services to the installed base, and we have dedicated marketing programs in place to connect more of the business. .

I think that will drive a lot of profitable growth for us moving forward. I'd like to remind you also that our operating profit on services is actually higher than the average of the -- of our portfolio. So that's such a big benefit. .

And broadening the portfolio and increasing the reach to our customers with dedicated campaigns and all the go-to-market strategies will help us to continue that momentum that we see behind services. Services is one of the areas that we continue to invest also through the down cycle last year.

We have a very strong service team, and we see moving forward still more opportunity out there for services. .

Our services are very well recognized in the market by our customers. We have very unique solutions that many of our competitors cannot offer, like, for example, the RapidCal solutions when it comes to tank calibration, et cetera. So it is, again, a big opportunity for us, and we are seeing strong demand, and we'll continue to invest in this business.

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And then just maybe a little more color on Europe. I know you're guiding to low-single digits for Q2 and mid-single digits for the full year, but you've been cautious on Europe for some time. You kind of reiterated that caution again. .

I'm sure comps are helping in the succeeding quarters.

But just any additional color on what you're seeing from an end-market demand standpoint from Europe? And any reasons for continued caution over the course of the year?.

Yes. Matt, this is Shawn, maybe I'll take that one. So we're very pleased with the execution from our team in Europe. We have our most direct sales organization there in terms of direct channel to the customer. And I tend to think we always feel the best benefit of our Spinnaker sales and marketing programs in Europe.

So I think that's one of the things that we feel very good about. .

Now the other side of that is the economies have been soft. You look at some of the PIs, especially some of the larger countries like Germany, you see elevated cost of energy in the region affecting some of our end markets. So there's certainly uncertainty there. .

At the same time, as we look to the second quarter, I think there's going to be some benefit here from the timing of Easter. But otherwise, it's kind of like a yin and a yang. I think on one hand, we see a lot of market uncertainty, but on the other hand, I feel like we're fighting a great fight and the team is doing really well. .

And as we always kind of say the economy tends to just need to be good enough there for people to stick to replacement cycles, but at the same time, there are opportunities with reshoring and some of these hot segments like semiconductor or lithium battery in Europe, and I think our teams do a really great job of identifying those opportunities when they're available and capturing them.

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Your next question comes from the line of Catherine Schulte with Baird. .

First, great to see the recapture of the shipping delays coming in above your expectations and recapturing pretty much all of that lost revenue.

Just when it comes to the new logistics provider, would you say that situation is fully resolved? You got the protocols and processes in place to move smoothly going forward?.

Yes. Thanks, Catherine. I'm really happy how the team performed in Q1 and how we could resolve that issue that we had in Q4. Actually, I'm looking at all the major KPIs that we have bought I would say, today, we are in a very, very good situation.

We can, of course, keep a very close eye on it because a couple of months of great performance is not enough for us to say, everything is locked down. But happy with the performance right now. Our team, our own team has been really deeply engaged with fixing the situation. .

I have seen very strong collaboration between our own logistics teams and this external logistics provider to get these issues resolved. And again, we have all monitoring KPIs implies that if we see any deterioration, we will have these teams come back into action. By now, everything is running smooth, which I'm very happy with. .

But as everything we do at Mettler-Toledo, there is continued performance improvement plans in place. I mean even here, even though it's now today, we are not satisfied where we are today.

We think we can still do better and make this -- really make sure that this is not an issue moving forward, but also continue to deliver outstanding customer experience when it comes to delivery times and quality of deliveries, et cetera, is definitely front and center, with this logistics partner. .

We made great progress, and I'm confident that we don't see any issues in the near term, but again, we keep it, we have monitoring KPIs in place to make sure that we don't miss any potential deviation. .

And then maybe on the second quarter guide, it's implying a slower sequential increase than what you've typically seen historically.

So can you just talk through any areas of conservatism that you feel are in the second quarter guide? It looks like maybe on the Industrial side is where that's a slower uptick sequentially than historically, but curious if you could just give some more color there. .

Yes, sure, Catherine, maybe I take that one. So of course, there was the shipping delay benefit in Q1, but I -- but if you exclude that, I think like the multiyear CAGRs still look pretty similar between Q2 and Q1. .

Sometimes we're looking at pre-COVID CAGRs when we say that, but if you do look at like the Industrial business, like one of the things that kind of stands out there is this kind of ties to the comments we're making about China earlier or Industrial before where I said China is a higher percentage of that business.

And on a multiyear basis, we have just higher comps. So if you start looking at it on a multiyear basis instead of a 1-year basis, I think that's maybe affecting a little bit some of the sequentials on a more disaggregated basis. .

Your next question comes from the line of Patrick Donnelly with Citi. .

I want to follow up on, I think, as Rachel asking about kind of the underlying improvement as we work our way through the year, I think that was biopharma, can you talk about China, just the assumptions there. Obviously, the comps get easier, it sounds like 2Q will be down 20%-plus. .

But can you talk about the underlying improvement you're assuming as we work away in -- not like maybe core Industrial is still a little bit soft, but would love to just talk through the expectations there. I get the comps are easier, but just the underlying expectation... .

Yes. I mean I think if you like look at our -- like if you look at our full year guide for China, we're still expecting to be down high-single digit. I think if you try to break it out between the businesses, maybe on a full year basis, Industrial might be a little bit better than that, than Lab. But I think that's largely because of what we saw in Q1.

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I think as we kind of like look at Q2, they're probably down similarly, maybe a little bit more on the Industrial side because of some of these longer-term comp issues that we talked about. .

I think we have a good setup in terms of comparisons certainly going into the second half of the year. And if you look at -- if you think about last year, the Lab business was down disproportionately versus the Industrial business. So I think the Lab will benefit from that more than the Industrial in the second half of the year. .

In terms of the market, we always say things in China can change very quickly either way. So I think this is a good example of just wanting to get another quarter under our belt before we talk too much about the second half of the year. And I think right now, we don't have any particular new insights.

I mean, I think everyone is seeing the same headlines, hearing about potentials for stimulus and these types of things, but nothing like that's necessarily influencing how we're thinking about guiding for the second half of the year. .

I think we're -- I think probably the bigger theme is the more that can happen from a governmental perspective to instill confidence in the economy in terms of people starting to reinvest, I think there's been a lot of outreach in the country to companies, including to multinationals to really reinstill that confidence level.

And I think as that confidence builds, we'll start to see probably more investment happening in the country. .

But mid- to long term, we're still really, really optimistic here. There's still a lot of growth opportunity in China for China. And I think we're just very well positioned for that growth.

When you look at how well we align with the government's priorities and then even getting into some of the trends that we talk a lot about with automation and digitalization. .

Yes. And we see a very good engagement with customers in China as well. The sales team has really good engagement. We monitor very closely. So there's a lot of customer interest out there that I think will help us also to get back to that growth in the second half. .

Yes. And then to kind of feed off that, our team there has just always been such an agile team to pivot to where the growth opportunities are.

And certainly, that was a topic we were talking about throughout this week with our -- at the executive level as just some of the programs that they're doing locally to identify those pockets of growth and go after them. So we feel like we're well positioned as things improve. .

Okay. That's helpful. And then, Shawn, maybe just on the margin build.

Can you just talk about the pricing piece in the quarter and as you work your way through the year? And then similarly, just how you're thinking about the cost base given, again, if you are still a little bit of a softer macro, how nimble you're being on the cost side would be helpful?.

Yes. So I kind of mentioned earlier in one of the other questions. Pricing came in pretty much as expected in the quarter at 2%. We're still kind of holding our guide for the full year on pricing at 2%. Of course, we're going to try to do better than that.

I think all the things we're doing on innovation certainly continues to enhance our value proposition. And so that always helps. I see good execution on this topic as well, too. So we'll see how it plays out for the rest of the year. .

In terms of margins on a quarterly basis, it can be kind of lumpy as we saw with the second quarter with volumes. But I think the team continues to do a good job in terms of material costs. I think there's some modest benefits we saw in Q1 there that we'll kind of continue to see through the rest of the year.

And then in terms of like just our overall cost structure, we have -- it's like a balancing act, right? We've done a lot of, I think, very good things in terms of driving productivity in the organization and cost savings that were kind of necessary to adjust to our current volumes. .

But of course, that also creates the -- it creates the ability for us to continue to reinvest in the business to ensure long-term success, which is something that we've always been very focused on. And so I think we have a very good balance and mix in the business. .

Of course, Patrick and I are going to spend a lot of time with our teams here starting next month, we start to go into our normal planning cycles and that kind of continues until the fall where we really kind of look at the different growth opportunities, investment opportunities and then at the same time, driving productivity throughout the organization.

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Your next question comes from the line of Joshua Waldman with Cleveland Research. .

First, Patrick or Shawn, just to follow up on a previous theme.

Any more color you can provide on what types of accounts started to open up in the latter part of Q1 or any customers that you'd point to that were sitting on the sidelines in '23 and maybe January that then started to improve?.

Yes. Look, I mean I think we saw very good interest in our products and performance, as we said, better than expected throughout the end markets and product portfolio.

If I would point to maybe one segment, it could be Food, actually, the food market, we saw really good interest for our product inspection business that also drove a little bit of the better performance there. .

That market definitely -- while there is still same topic about elongated sales cycles, we see that as well. There's strong engagement and a lot of that is driven by our new product portfolio. I mentioned the new X-ray products, new metal detector products, so that drives a lot of customer interest, to be honest. .

And also us getting more into what we call the midrange market. We have historically been more focused on the high end of that market. We have a broader portfolio now for mid-range customers, meaning more cost-conscious customers that don't need the highest amount of performance there.

But -- and that probably is one of the market segments where I would say that opened up maybe a bit more than expected. But overall, we saw really good engagement across all end markets and geographies. .

And then, Shawn, maybe a related question on price. I guess I forget if you commented whether or not price is tracking kind of in line or how it is tracking versus expectations.

But just curious if you could comment on price-risk expectations? And then in the recent past, you talked about using tough times to support share gains, any recent success stories or examples you could point to that you think are driving share gain, maybe supporting upside versus the guide year-to-date?.

Yes, I think Patrick mentioned benefits from go-to-market strategy, I guess, any changes on the go-to-market strategy, for example, anything like that kind of driving upside versus maybe what you expected here year-to-date?.

Joshua, maybe I'll take that one. So we'll start with price. So as I mentioned, price came in as expected in the quarter, it came in at 2%. So we were happy with that. We expect price to be 2% again in Q2 and for the full year, which is kind of consistent with our previous guidance.

And as I kind of mentioned, we do feel very good about our value proposition, all the stuff we talked about earlier about innovation really strengthens that value proposition, so that helps to always support our pricing in the market. .

And so -- but at the same time, we will, of course, look to see if we can do better than that as we kind of go through the year. In terms of market share gains, I do think we're executing really well. It's always hard to tell how much share we're taking. But if I look at some of our results by region, Europe, I think, was a good example. .

I mean even the comments on food, right? Some of that is we're executing well. We have new products that are being very well received in the market. It's not like there's no softness in some of these end markets, particularly in the U.S., but the teams are doing quite well there.

So in terms of go-to-market approach, I mean, I think we continue to just do very well within the umbrella of Spinnaker. .

That program really has allowed us to be -- use a lot of analytics to really identify growth opportunities and pursue those opportunities. We have a lot of great tools to help prepare the team, to help with conversion and value selling, cross-selling. And so I think a lot of the programs we have are very effective. .

If you go back to the beginning of the year, we talked about rolling out and introducing the next generation of Spinnaker to the organization, Spinnaker 6.

I think it's still a little early to say that Spinnaker 6 is driving share gains, but certainly, it creates momentum in the organization and focus on the program in general because it's not like a different Spinnaker they all kind of build on all the other waves and generations. .

This concludes the question-and-answer session. I'll turn the call to Adam Uhlman for closing remarks. .

Great. Thank you, everybody, for joining us this morning. If you have any follow-up questions, please feel free to reach out to me. And I hope you all have a great weekend. We'll talk to you soon. Thank you. .

This concludes today's conference call. Thank you for joining. You may now disconnect..