Good day, ladies and gentlemen, and welcome to the First Quarter 2020 Mettler-Toledo International Earnings Conference Call. My name is George, and I will be your audio operator for today. I would now like to hand the conference over to your hostess for today, Ms. Mary Finnegan.

Thank you, and good evening, everyone. I'm Mary Finnegan, responsible for Investor Relations at Mettler-Toledo and happy that you're joining us this evening. I am on the call today with Olivier Filliol, our CEO; and Shawn Vadala, our Chief Financial Officer. I want to cover just a couple of administrative matters. The call is being webcast and is available on our website. A copy of the press release and the presentation that we refer to is also on the website.

Thank you, Mary. Good evening, everyone. I want to start by saying that I hope this finds all of you safe and well. We face unprecedented times, and I hope that you are adjusting. I'm doing this call from Switzerland, while Shawn and Mary are in Columbus, Ohio. I will start with a summary of the quarter, and then Shawn will provide details on our financials. I will then have some additional comments, and we will open the lines for Q&A. The highlights for the quarter on Page 3 of the presentation. Local currency sales declined 3% in the quarter. The negative impact of COVID-19 to our sales in China was greater than we originally estimated. Local currency sales in other countries, particularly in Asia and Europe, were also negatively impacted by COVID-19. Despite the challenges to sales, with the benefit of our marginal productivity initiatives as well as some immediate cost containment measures, we increased gross margins and maintained adjusted operating margins consistent with the prior year at 21.8%. Adjusted EPS in the quarter was slightly below the prior year. The global spread of COVID-19 has impacted our businesses throughout the world. Our primary concern is protecting the health of employees and customers. We have diligently instituted safety protocols throughout the world, which is allowing us to continue to provide instruments and services to our customers, a majority of which are in the essential industry including pharma, food manufacturing, chemical, transportation and logistics and grocery stores.

Thanks, Olivier. I also want to say that I hope this finds all of you well and adjusting to this new environment. Sales were at $649.2 million in the quarter, a decline of 3% in local currency. On a U.S. dollar basis, sales decreased 4% as currencies reduced sales growth by approximately 1% in the quarter. On Slide number 4, we show sales growth by region. Local currency sales grew 3% in the Americas and declined 5% in Europe and declined 8% in Asia/Rest of World. China local currency sales declined 13% in the quarter. While sales in the quarter were negatively impacted by COVID, I want to also highlight that we had strong local currency growth in the prior year. In particular, Europe had 9% sales growth and China had 13% growth in Q1 of 2019. On Slide number 5, we outline local currency growth by product area. For the quarter, Laboratory sales grew 1%. Industrial declined 5%, with Core Industrial down 3% and Product Inspection decreased 8%. Food Retail declined 16% in the quarter. Food Retail reduced our sales growth by 1% in the quarter. Let me now move to the rest of the P&L, which is summarized on the next slide. Gross margin in the quarter was 57.7%, a 50 basis point increase over the prior year level of 57.2%. Pricing in Stern Drive contributed to the margin growth. R&D amounted to $34.4 million, which represents a 5% decline in local currency. This decline was impacted by the timing of activity and the 9% local currency growth in R&D in the prior year. SG&A amounted to $198.7 million, a 2% decrease in local currency over the prior year. We continue to make investments in our field force but this was more than offset by some immediate cost containment measures and lower variable compensation. Adjusted operating profit amounted to $141.3 million in the quarter, which represents a 4% decline over the prior year amount of $147.8 million. We estimate currency reduced operating profit by approximately $3.5 million. Despite these headwinds and challenges to the top line, operating margins were 21.8% in the quarter, consistent with the prior year.

Thank you, Shawn. Let me start with a few comments on health and safety. I'm very pleased we were able to quickly adopt important safety protocols throughout the world regarding social distancing, hygiene, health monitoring, split shifts and remote work. The organization has adapted quite well, reflecting not only our execution but also our agility.

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

Olivier, I thought it was interesting in your comments, you called out the lab reactors as potentially having a vaccine tie-in. I'm just curious as we start to think about potential tailwinds, are there other areas you think you could disproportionately benefit? And any preliminary views on labs opening up, academic labs opening up in the fall in the U.S. at this point?

Yes. So the AutoChem business, as highlighted, will benefit. We will continue also to benefit with the pipette business. And then I do expect that more investment will go into bioproduction and that will benefit again our AutoChem business, will also benefit our process analytics business, in particular with this Ingold products, and then industrial will also get some benefits. And in general, I do expect that there will be industries, end user industries that will suffer for quite a while in this environment and the other industries that will be more attractive on one hand short term. And we are working on this already when I talked about shifting the priorities for our sales force. But then there also medium-term segments that I do view as more attractive going forward. I certainly expect that there is a desire from western governments to bring back certain active substance production. And that, for example, would also benefit us. And when we think about big data analytics, and when we think about driving our sales force to these opportunities, we look at industry segments, we look at specific accounts and we certainly also look at announcements that companies are doing in terms of investments.

And then one of the initiatives you've had is to get more of your clients on annualized service contracts. In the context of your comments earlier on service, can you maybe just remind us where you are in that effort? What percentage of your service is annualized? And how much cushion that might give you in the near term?

So about half of our service revenue is contract-based. And that business at this stage, we see no reason why it shouldn't recover. We didn't, or we have good renewal rates and we didn't have cancellations. In that sense for that piece, I expect a V-shaped recovery. When it comes to break, fix and auto preemptive maintenance work, we certainly see that this is heavily impacted, but typically this would be rather delayed than canceled. In general, I would view our service business as being resilient. But I do recognize, particular in the industrial world that capacity utilization and the wear down of our products has also a certain impact on service. Service will be severely impacted here in Q2 but I do expect that we have good recovery in the remainder of the year.

And then just one last one on China, you said up mid-single digit in the second quarter. Can you just comment on the April order book? And what gives you the confidence in mid-single digit for the second quarter? Thanks.

Yes. Hey, Tycho, this is Shawn. Maybe I'll take that one. So for China, yes, we're thinking mid-single digit for Q2. If you kind of think about it in terms of the different businesses, we're probably thinking the Lab business will be more like low to mid-single digit. We're expecting more on the Industrial side, maybe more like mid- to high single digit. But part of that maybe gives you a little bit of a flavor for how things are playing out. Like on the Industrial side, we had a much more significant decline in the first quarter. It was down in the mid-teens but it also shows you that the recovery isn't necessarily a V-shaped recovery. While on the Lab side, in the first quarter, we were down low single digit. And then that kind of just shows you that it's maybe a more moderate situation there. And then in terms of April, nothing in particular I'd really want to comment on there. But of course, we understood the month of April as we were kind of providing guidance for the second quarter.

Great. I appreciate the color.

Thank you. Your next question comes from the line of Derik De Bruin. Your line is open.

Hi. Can you hear me?

Yes.

This is Mike Ryskin on for Derik. I want to follow up on that last one there on the China comment and then also loop that into your general thoughts on the recovery. You made a couple of comments in the prepared remarks that you expect a little bit more of a U-shaped recovery, and so 3Q should be not that different than the 2Q range. Is that just some of the differences in terms of how quickly you expect the Labs and Industrial to bounce back in Americas and the U.S.? Is there some conservatism built in there? Or is there something else you're seeing in terms of ordering patterns and how these countries -- how these other geographies beyond APAC region have gone through the lockdown so far? Just thinking about labs reopening and sort of the pace of ordering as we go through the summer and fall.

Yes. I think we're going to see big differences in the different geographies but also in the different business lines when we think about recovery. We talked about Service that should have kind of a V-shaped recovery before. I do expect that certain industry segments, for example, R&D labs and so on, they have a sharp drop here in the lockdowns but then we should certainly see a recovery. This is particularly true for more the lower-cost instruments that we have. But then to contrast that, we definitely have a business that is more project-oriented. We have businesses like thermal analysis, automated chemistry, high-end balances, titrators. And then on the Industrial side for example, checkweighers and x ray. These are not instruments that customers buy within weeks. These are projects that typically take long renew cycles and evaluations until they commit and then we ship. So early in Q2, we are still benefiting from a pipeline that existed before COVID. And then we have a situation in the lockdown now where very few new projects are initiated at customers for multiple reasons, but one is certainly also that people are operating out-of-home offices. Other reasons are that companies are slowing down their CapEx. And then sometimes it can be also that sites are not easily accessible. People don't want to bring additional disruptions by bringing new instruments and so on. So there are different reasons. Now if I bring you all these businesses together, and if I think about the different geographies, I, it starts to sum up more to a U-shaped recovery. And this is actually also the context why we are working with an operating model that Q3 will not be better than Q2. And only Q4 will start to see improvements because we do expect by then that our project pipeline will be filled again and that we have customers that are again initiating larger projects.

And then right along those lines, if you could go down the P&L on the OpEx side. I appreciate all the color on the 2Q cost-cutting steps. Should we anticipate sort of a similar cadence to that for 3Q, and then again flexing that back up later in the year and then 2021 as demand recovers? And could you also touch on decremental margins to their gross margin line?

Yes, sure. Yes. Thanks, Mike. Yes. So hey, of course, we're working on and planning cost reductions at the moment. But I wouldn't want to quantify the magnitude of what we're going to do for Q3 at this point. I think it's important that we get closer to the quarter, and then we can differentiate our ultimate execution as we enter the third quarter. In terms of decremental margins, I mean, I think there's a lot of variability at the moment with our guidance. I think probably the, what I would focus on a little bit is maybe just on the gross margin line, maybe this is what you were referring to. But if we look at the first quarter gross margin, very pleased with the results. We're continuing to benefit from pricing. Pricing realization was just under 2% in the quarter, so towards the higher end of our guidance there. We'd expect something similar here in the second quarter as well. We also had some good benefit from our Stern Drive initiatives around material cost savings. But of course, offsetting that is the volume impact. And so as that plays out in the second quarter, we're going to see a bigger impact from volume. We'll mitigate some of that with some of our cost savings initiatives but most of our cost savings initiatives are below the gross margin line. So when we look at gross margin for Q2, if I kind of like look at the midpoint of our guidance, we'd probably be looking at minus 80 basis points for the second quarter. But I caution that there could be a larger range of expectations here than normal just given the impact of volume. So for example, if we were at the better side of the sales guidance in terms of minus 8%, gross margins might be down 50 basis points. But if we were at the worst side in terms of minus 12%, gross margins could be down like more like 120 basis points. So it gives you a little bit of a flavor for how the outcomes can be quite different with volume.

Your next question comes from the line of Vijay Kumar.

One, I guess just on the macro side here, Olivier, coming out of lockdowns, right, when you think about recession, recessionary impacts in the back half. Maybe just give us a big picture sense on how is the portfolio structured to weather recession? And what kind of growth rate should we look at? Is 2008, '09 relevant to look at the company now, a decade later? Or is that a good analogy on how we should be thinking about top line?

Yes, hey, interesting that you make this analogy, and it has certainly also been one thing that we studied. Very early on when the crisis started, we started to do revenue scenarios and we used different data points for us. I think one, in particular one that we care most is to look at the different industry segments and how they will be impacted or how we expect them to be impacted. And then we look those at sensitivities around what we have experienced 10 years ago. Unfortunately, I am now already in my second crisis as a CEO, and so I still remember well that crisis. Now a couple of things to consider when you compare it. And first, we are today much better positioned than we were in 2009 in terms of the exposure. If you think, Lab is now more than 50% of our sales, significantly higher share than in, at the time. Service and consumable is now 33%, also much higher. Core Industrial is smaller percentage of sales, while emerging market is a larger percentage. So all in all, we are not immune to the economy but we do believe we are less reliant on it than in the past downturn. And the second point is we have today much stronger Spinnaker tools, data analytics and change management capabilities that we did not have in 2009. These are very important practices, and really I have seen the power of these tools and approaches in the last few weeks. I was referring in the prepared remarks about a fundamental change in our go-to-market approaches. We have countries where customer visits went down by 90% in the last few days, weeks. And we have to compensate this customer access through other means with other tools. And really Spinnaker and all these other technologies that we have already implemented in the recent past but also new digital technologies that we have piloted and now can scale up our big bets. So the environment today is very different. But in terms of recession impact, there are certainly learnings out of 2009, and we use these learnings also when we build our operational models. You have seen us being here very action-oriented, very far in terms of cost measures. I think that has also been the learning from last time. We know how to do these things, and our organization knows how to respond to these things.

That's helpful, and…

Yes. So I think that's kind of the way I would look at this 2009 comparison.

That's helpful. And Shawn, one on the cost actions and margins side. I think I heard you say OpEx will be down 9%. And if revenues are down 10% at the midpoint, are we looking at OpEx being down in line with revenues? And the implication would be if 3Q revenues are down, then we're looking at OpEx down but margins could still end up being down. In the context of if that's the right way to be thinking about margins being down for '20, should 2021 be a hyper-normal margin year for you guys? As given the cost actions you've taken and volumes come back, the margin benefit should be above your typical 75 bps of annual expansion? Thank you.

Yes. No, hey, thanks for the question, Vijay. Hey, I think of course it's a little early to try to look out to 2021. But I think it's good that you asked the question because it highlights on these cost actions. I think it's important to understand that these are temporary -- largely temporary actions. So these -- a lot of these topics will come back next year. So we won't see the next -- necessarily we won't see the same level of pickup that maybe you might be implying otherwise.

Your next question comes from the line of Patrick Donnelly.

This is Jesse Klink on for Patrick. Could you just remind us of what percent of your sales generally come within the last few weeks of the quarter, and just kind of your visibility into the second quarter as you're preparing guidance there?

Yes, sure. So I'll take this, Jesse, it's Shawn. So we're not a hockey stick kind of business. I mean the third month of a quarter typically is higher from a seasonal perspective than the first month of a quarter, but it's not so back-ended in terms of a hockey stick in the last 2 weeks. But as we kind of like provided guidance for Q2, there's a lot of ingredients that kind of go into that. I mean of course, we have the benefit of seeing that the trends develop throughout the quarter. We see how the month of April came together. But as Olivier kind of mentioned in his, in our prepared remarks, there's a lot of other KPIs that we've been monitoring literally on a daily basis in our virtual war room. And so we've been doing that for quite a while now and to keep kind of a close pulse on the different businesses. So at a high level, those are a lot of the different factors that we had as we kind of provided guidance for the second quarter.

Okay. Now...

As the question I feel that one really change in an interesting way that we, what Shawn refers to the war room, we really from the first week on installed a whole new set of metrics that allows us to really monitor country, business and end-user industry-specific, all the key metrics like lead generation, the number of customer visits, the number of phone calls that we're facing, the number of opportunities, quote levels and so on. And we are using all these metrics on one hand to manage the sales force to manage and guide them, but then at the same time also to get additional visibility for our forecast. And I stress that point because it's obvious that we cannot just extrapolate from the past metrics that we have. In the past, we didn't look at on a daily basis on all our metrics, as today we do.

Okay. Yes, that's really helpful. And then just one more on the capital deployment front. You guys, I think, bought back 200 million of shares in the quarter and talked about suspending that. But what are you kind of looking for to maybe get back and take advantage of lower share prices or look for other areas of deployment, whether it'd be paying down debt? Or just kind of how you're thinking about that throughout the quarter?

Yes, sure. So hey, I mean we strongly believe in the share repurchase program, very strongly believe in it. Our philosophy has not changed at all. For us, it's not, it's never been about trying to time the market. So share price will not be a factor in terms of when we try to reenter. We'd expect that we'd restart hopefully in the second half of the year here. In terms of capital deployment, I think this is still going to be our strategy going forward. I mean of course, we still like bolt-on M&A as well if there's some opportunities that are available. But we, in the end, it just came down to caution, just given the significant uncertainty in terms of forecasting as we talked about. And we recognize that it's a cautious view. We have a very, very strong balance sheet. We have very strong liquidity. And I think you'll see us get back into share repurchases in due course and kind of continue to work towards this leverage ratio of 1.5x that we've talked about in the past.

Your next question comes from the line of Steve Willoughby.

Just one follow-up question first on that last question regarding buybacks, Shawn. When you do look to potentially reenter and restart the buyback in the back half of the year, would you expect to restart at a similar rate as what you had been doing?

Yes, it's a good question. I mean, I think we need to kind of see what the situation is, Steve, in terms of like what the future looks like at that point in time. Probably yes, I think, yes, it could go in different directions. It really will depend on how the world looks when we restart. And, but I would expect us to get at this, kind of keep at this 1.5x net debt-to-EBITDA ratio. And I wouldn't expect that we'd want to wait too long to kind of march towards that ratio.

Okay. And then secondly, I was just wondering maybe if Olivier or Shawn could provide a little bit more color as it relates to your pipette business. You highlighted it, I believe you said strong or very strong in the first quarter. Just was wondering if you could help either quantify that at all? Maybe talk about what you're expecting that business could look like during the second quarter or over the back half of the year, if you're taking out manufacturing capacity off of that business? Just any more color on the pipette business.

No, it's not that we're going to have to expand capacity specifically. On the short term here in Q1, we had a very strong demand. But partially it was also because customers wanted to secure supply, and then they would also stock up a bit. And that certainly required also some capacity expansion short term for us. For the full year, we're going to have good growth. But I don't think that it's going to impact the group results in a material way. So don't want to overstate the growth coming out of this.

Okay. And then, Olivier, if I could just add in one more real quick. Last quarter, you talked about the potential for some government stimulus in China. I was just wondering if you had any updated thoughts on that potential enough I guess.

Yes, so that's an interesting one. Because of COVID, the Chinese government councils were postponed on that. This is happening right now, and we just got also updates on the topic in the last few days. We do expect stimulus money, the stimulus money will however be very different to what we had 10 years ago. It's going to go to different end markets. Last time, it was very much also infrastructure related. This time, what's -- what the rumors are, it's not less being infrastructure. And there are partially big sectors that would not benefit, but us, there are orders that we like. We do think that CDC hospitals will benefit from it. We do think that pharma production will benefit from it. And so we're going to see some benefits to us but certainly not in the same magnitude as we have seen it 10 years ago.

Next question comes from the line of Brandon Couillard. Your line is now open.

Brandon?

Brandon?

Operator, could you check the line, please?

Hello, Brandon, your line is now open. You may ask your question.

Why don't we go to the next question then?

I think his line is open now. Brandon?

Can you hear me, guys?

Yes.

Yes, now we can.

Okay. All right. Great. So just one more time. Olivier, I'm curious to get your thoughts as to why or why not China would be a relevant proxy to think of in terms of the pathway that the U.S. and Europe might take as restrictions are lifted.

Can you just repeat the question? I'm not sure I fully got it, sorry.

Sorry. Just curious what your thoughts are in terms of looking at China as a relevant proxy for European and U.S. recovery as restrictions are lifted.

Okay. Yes, good, good, sorry. Actually good question. China was an ideal learning case for us as a company to learn how to prepare for when the COVID pandemic was coming to different regions. And we were well prepared in terms of lockdown and all these things. When it comes to the recovery, it's actually more challenging in the west than in China. I do not expect that the demand will come back that quickly. The lockdown in the west seems to have a more fundamental impact on the economy than it has in China. And in that sense, I'm very happy to see how our Chinese revenue has recovered here in April and the rest of Q2 as we expect today but I do not expect the same in the west. So to summarize again, China was a good learning case for us in the downturn but I'm not so sure it will be a downturn.

We have another question from Dan Brennan.

Hi. This is John Sourbeer on for Dan. Olivier, I just have a question around customer behavior. Any thoughts around instrument replacement cycles over the next year, and how long that these can be deferred on replacements?

You asked an interesting question. So when I answer that, I need to differentiate between lab and industrial applications or industrial environment. In a lab environment in west where it's mostly replacement business, customers will delay the replacement because the driver for replacement is often that new product has better functionality, better accuracy and precision. You have software features that's on. But if CapEx budgets are cut or people are not in the office and are not focusing on getting the latest instruments, they will delay these things. And in the industrial world, the driver for replacement is actually the wear down and the drive to productivity. And in that sense, capacity utilization is one of the key drivers for the industrial business. Accordingly, the two businesses behave differently across the economic cycles. Both businesses will ultimately have a pent-up demand but the timing of the pent-up demand will be different. What I just said applies to the replacement business, in particular, the west. Of course in industries or countries where you have capacity expansion in terms of investments in new production plants, there you have another driver for pent-up demand.

And just to ask a follow-up, can you unpack the Core Industrial a little bit? In the past, management has discussed how this segment is less cyclical with more exposure to pharma, food, chemical. I'm just wondering if you can provide some color on demand trends you've seen within the Core Industrial. And how do you think this drags into 3Q and what a recovery could look like?

Yes, hey, good question. So we're definitely benefiting lot from the more favorable mix in our Industrial business. If you kind of go back to the question on how do we look in terms of 2009 and now, to me that's part of the, that's part of it too. It's like even though our Industrial business is a smaller part of the business, it's also in a lot more attractive businesses like, and in the segments that you kind of mentioned. I think that when I kind of look at Q2 and I look at how the business has kind of held up in Q1, certainly I think that is going to be a differentiator for us. I think also as we look at the different segments, when you think about something like chemical, just to be clarifying chemicals, a lot of, we don't have a significant exposure on the oil side of chemical. We'll be more so unlike the specialty chemical side of it. So there's pockets of chemical that are actually doing better than others. And so we're having a little bit of a mixed experience there at the moment. The other thing is that if you look at a lot of our Industrial customers in general, we are serving a lot of essential businesses. And I think that's been a real, that's been very favorable for us. And again, I don't want to overplay this that we're not immune to the economy. I just want to play that we're better positioned than we were in the past. And I think if you even look at some of the things that we've done from an innovation perspective in the last couple of years, like, for example, in our Transportation and Logistics business, there's definitely some good stories there as well.

There are no further questions at this time. You may continue.

Thank you. Thank you, and thanks, everyone, for joining us this evening. Take care. And of course as always, if you have any questions, please don't hesitate to reach out. Take care and good night.

That concludes today's conference call. Thank you all for participating. You may now disconnect.