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spk15: and welcome to the second quarter 2022 Mettler Toledo International Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Adam Altman. Please go ahead, sir.
spk02: Thank you, and good morning, everyone. I'm Adam Altman. I'm responsible for investor relations at Mettler Toledo, and I'm happy to welcome all of you to this call. I am joined with Patrick Kaltenbach, our Chief Executive Officer, and Shawn Vidala, our Chief Financial Officer, and of course, Mary Finnegan with Investor Relations. 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. Let me summarize the Safe Harbor language that is outlined on page two of the presentation. Statements in this presentation are not historical facts, constitute 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, levels of activity, performance, or achievements to be materially different than those expressed or implied by any forward-looking statements. For discussion of these risks and uncertainties, please see the discussion in our most recent Form 10-K and other reports filed with the SEC from time to time. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions factors affecting our future operating results, and in the business and management's discussion and analysis of financial condition and results of operation sections of our filings. One other item on today's call, we may use non-GAAP financial measures. More detailed information with respect to the use of and differences between the non-GAAP financial measures and the most directly comparable GAAP measure is provided in the 8K. Let me now turn the call over to Patrick.
spk29: Thanks, Adam, and good morning, everyone. We appreciate you joining our call this morning, which we are doing from Switzerland. We reported strong second quarter results as our team executed very well on our growth strategies. Our culture of agility and focused execution have allowed us to capitalize on favorable market demand and navigate challenging supply chain and inflationary conditions. The highlights of our second 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 had very strong growth in our laboratory and core industrial business, and we are particularly pleased with the very good growth in China. Excellent sales growth combined with good margin improvement drove very strong growth in adjusted EPS despite adverse foreign currency. We feel positive about our outlook for Q3 and for the full year, and we recognize our agility and resilience will be pivotal to navigate market conditions. Later, I will have some additional comments on our business, but let me now turn it to Sean to cover the financials and guidance. Sean?
spk34: Thanks, Patrick, and good morning, everyone. Sales in the quarter were $978.4 million, which represented a local currency increase of 10%. On a U.S. dollar basis, sales increased 6% as currency reduced sales growth by 4%. We estimate that the impact of reduced sales in Russia-Ukraine 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 12% in the Americas, 4% in Europe, and 14% in Asia and the rest of the world. Local currency sales increased 14% in China in the quarter. On slide number five, we show sales growth by region for the first half of the year. Local currency sales grew 12% for the first six months, with 14% growth in the Americas, 7% in Europe, and 15% in Asia, rest of the world. Local currency sales increased 15% in China on a year-to-date basis. On slide number six, we summarize local currency sales growth by product area. For the quarter, laboratory sales increased 13 percent, industrial increased 9 percent, with core industrial up 11 percent, and product inspection up 5 percent. Food retail grew 3 percent in the quarter. The next slide shows local currency sales growth by product area for the first half. Laboratory sales increased 15 percent, industrial increased 10 percent, including 12 percent growth in core industrial and product inspection up 7 percent. Food retail declined 6 percent. Let me now move to the rest of the P&L, which is summarized on slide number eight. Gross margin in the quarter was 58.4 percent, an increase of 30 basis points. We benefited from strong pricing and volume growth, which was offset in part by higher material costs. R&D amounted to $44 million in the quarter, which is an 8% increase in local currency over the prior period reflecting increased project activity. SG&A amounted to $242.2 million, a 6% increase in local currency over the prior year, which includes increased investments in sales and marketing. Adjusted operating profit amounted to $285.4 million in the quarter, a 12% increase. The increase reflects strong sales growth combined with good execution. Currency was a 3% headwind to operating profit growth. Adjusted operating margin was 29.2%, which represents an increase of 160 basis points over the prior year. On a currency neutral basis, adjusted operating margins increased 120 basis points. A couple of final comments on the P&L. Amortization amounted to $16.4 million in the quarter. Interest expense was $12.8 million in the quarter. Other income in the quarter amounted to $2.2 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. Fully diluted shares amounted to $22.8 million in the quarter, which is a 3 percent decline from the prior year. Adjusted EPS for the quarter was $9.39, a 16 percent increase over the prior year, or a 20 percent increase excluding unfavorable foreign currency. We're very pleased with this adjusted EPS growth, especially given that adjusted EPS was up more than 50 percent in the second quarter of last year. On a reported basis in the quarter, EPS was $9.29 as compared to $7.85 in the prior year. Reported EPS includes 22 cents of purchase intangible amortization, 6 cents of restructuring, and an 18-cent benefit due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises. The next slide illustrates our year-to-date results. Local currency sales grew 12 percent for the six-month period. Adjusted operating income increased 13 percent, or 16 percent, excluding unfavorable foreign currency. And our operating margin expanded 110 basis points. Adjusted EPS grew 18 percent on a year-to-date basis, or 21 percent, excluding unfavorable currency. That covers the P&L, and let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $208.2 million. We continue to make nice improvements on DSO, which declined two days to 34 days as compared to the prior year. ITO came in at 3.8 times. Year-to-date adjusted free cash flow was $283.7 million. Let me now turn to guidance. Forecasting continues to be challenging given dynamic market conditions. Our forecasts remains on factors we can control, namely successful execution of our growth and margin initiatives. Let me make some general comments on the full year before covering the specifics. While there's more macro noise in the environment today as compared to three months ago, we continue to feel good about our business. Customer demand is solid, and we're executing on our growth initiatives very well. We remain cautious about challenges in the supply chain but to date have been able to navigate them well. Second, we are facing greater foreign exchange headwinds to our earnings growth as compared to three months ago. Specifically, we now estimate that foreign currency will be a headwind to adjusted EPS growth in the quarter of approximately 6% and would expect a similar headwind in the fourth quarter as well. At the time of our last earnings call, the headwind to earnings growth in the second half of the year was in the range of 3 to 4 percent. What this means for the full year is we now expect currency to be a headwind to adjusted EPS of approximately 4.5 percent as compared to 3.5 percent the last time we spoke. At the midpoint of our guidance, we now expect adjusted operating profit margin to increase approximately 140 basis points on a currency neutral basis. reflecting higher volume growth and good execution on our margin initiatives. Including currency, reported operating margin, profit margin will be slightly higher. Finally, as you think through our sales guidance, keep in mind our sales growth will be reduced by approximately 1 percent for the remainder of the year due to sales in Russia. Now, let me cover the specifics. For the full year 2022, we now expect local currency sales growth to be in the range of 9 to 10 percent. This compares to previous guidance of 8 percent. We are increasing our full-year sales guidance for our strong year-to-date results and a better outlook for the second half. We expect full-year adjusted EPS to be in the range of $38.85 to $39.05, which is a growth rate of 14 to 15 percent and a growth rate of approximately 19 percent excluding currency. For the third quarter, based on market conditions today, we expect local currency sales growth of approximately 8 percent and expect adjusted EPS to be in a range of $9.75 to $9.85, a growth rate of 12 to 13 percent, and a growth of 18 to 19 percent excluding currency. Some final details and guidance. With respect to the impact of currency on sales growth, we expect currency to decrease sales growth by approximately 4.5% for the full year and decrease sales about 6% in Q3. In terms of cash flow, we continue to expect full-year cash flow in the $855 million range and expect to repurchase approximately $1.1 billion in shares in 2022. We expect a net debt to EBITDA leverage ratio of approximately one and a half times. That is it from my side, and I'll now turn it back to Patrick.
spk29: Thanks, Sean. Let me start with some comments on our operating businesses, starting with Lab, which had strong sales growth in the quarter with very good growth across all major product categories. We expect our ad markets to remain favorable, and with our excellent product portfolio and effective sales and marketing initiatives, we believe we can continue to gain market share in our laboratory business. Turning to our industrial business, we are very pleased with the continued strength in core industrial. Our outlook for the remainder of the year is favorable, and we believe this business is well positioned to capitalize on our customers' needs for automation, productivity improvement, and efficiency gains as they work to overcome challenges in the labor market and supply chain. Product inspection sales came in a little lower than expected this quarter, but our team is optimistic for the third quarter. We have strong momentum in the Americas, but have started to see some more conservative packaged food customers behavior in Europe. Finally, food retail sales grew 3% as growth in the Americas and Europe offset a significant sales decline in China due to disruptions from pandemic lockdowns. Now let me make some additional comments by geography. Sales in Europe increased 4% in the quarter, about as we had expected and against the 23% growth in the prior year. As a reminder, we stopped shipments to Russia after the invasion of the Ukraine, which is impacting growth in Europe. Sales in the Americas was again excellent with WG growth across all of our major product categories. Finally, Asia and the rest of the world had another quarter of strong growth with robust growth in laboratory and core industrial. China grew 14% with particular strong growth in lab and core industrial. The team continues to do a great job navigating challenges in the markets. Assuming market conditions remain as they are today, we believe we will deliver strong growth in China in 2022. One final comment on the business. Service and consumables continue to show excellent momentum and grew 11% in the quarter. We are very pleased with the growth in this important and profitable part of the business. That concludes my comments on the business. Now I would like to share with you some insights on our sales and marketing initiatives. We have seen in the recent years the agility that Spinnaker provides is invaluable in helping us gain market share, and adapting to various customer demand environments. The effectiveness of this was evident in the initial pandemic downturn and the subsequent recovery. Under both scenarios, Spinnaker provided agility to quickly identify growth opportunities and guide our sales force accordingly. As you are aware, we have an organic sales growth focus that benefits from our highly fragmented markets as well as a very large installed base of instruments, which provides fertile ground to discover growth opportunities, but also requires a great deal of agility and execution focus. Our spinnaker program helps us target the most attractive segments of growth and increase our sales force time with the most strategic accounts. We want to efficiently go up go after the best opportunities with our sales organization of approximately 3,000 sales colleagues around the world. Our field sales force is guided toward opportunities with the most strategic accounts, those with good growth and cross-selling potential, while other opportunities are more efficiently handled by our telesales and inside sales teams. Spinnaker utilizes unique data analytics to leverage external data sources and our substantial internal data, including that of our installed base, to identify the most attractive and profitable growth opportunities. Spinnaker also provides extensive tools to our sales force that improves their effectiveness. Continuous improvement is at the heart of Spinnaker. We continue to build, adapt, and refine our initiatives, which reinforces our already strong foundation for sales and marketing that makes it difficult for competitors to copy. Our Spinnaker program also benefits from our proprietary TopK program. With TopK, we use data analytics to identify customer investment projects and cross-selling opportunities with potential actionable opportunities for our broad product offering. A summary of the opportunity with all relevant information including customer site, contact info, potential for products, other activities with this customer is generated. These summaries are provided to the sales organization throughout the world who then qualify and prioritize these opportunities for our sales teams. The structure of our sales organization allows us to most efficiently follow up and guide the teams to these opportunities. Last year, we generated more than 150,000 of these top K alerts and are continuing to penetrate these potential opportunities at customer sites. While we continue to follow up with last year's alerts, we are also launching additional waves this year. Target industries for this wave include, for example, pharma, food and beverage and chemicals, and we also identified opportunities in the fast-growing markets of lithium-ion battery and semiconductors. Other examples include vaccines, plant-based foods, and advanced materials. We are convinced that our unique ability to quickly identify growth opportunities and related accounts helps us to adapt to shifts in customer demand, who we have all seen can happen quite rapidly. Our sales teams are also very happy to be able to visit customers on-site again. Face-to-face meetings allow us to best assess potential, promote our key value-add solutions, and identify cross-selling opportunities. However, we also saw during the last two years how effective online interactions with customers can be. We have significantly enhanced our remote capabilities, including online sales meetings, webinars, and virtual or e-demos. We recognize the importance of leveraging a smart mix of online and onsite meetings to convert opportunities to orders. Finally, selling service contracts at the point of sale continues to be a high priority focus for us. We saw the value of our service throughout the last two years in terms of very favorable net promoter scores. This has reinforced our sales organization the importance of articulating the value of a service contract when the product is sold. Internally, we have revamped our quoting process to ensure the right focus is on service at the critical point of the selling process. We have also introduced an updated version of our digital sales enablement tool library that allows our sales reps to be more effective in value selling. The update includes new frontend software tied directly into our CRM, providing our sales team dashboards to prepare for upcoming site visits and efficiently handle follow-up requests. Our sales enablement tool also provides our sales teams enhanced application information and selling guides, which also helps us enable cross-selling with new applications in target accounts we have not yet penetrated. This tool greatly improves the effectiveness of the selling process, thereby enhancing the customer experience and improved order conversion rates. These are just a few examples to illustrate our strength in marketing and sales. At the core of our growth strategies is the importance to reallocate resources to the best opportunities, and Spinnaker is a great example how we do this by helping to identify and guide our sales teams to the best growth opportunities in the most favorable end markets. Business conditions today remain solid. I am convinced that our strategic programs such as Spinnaker will provide us agility to adapt to potential changes in the market conditions as we have successfully demonstrated over the last several years. If you look at the mix of our business today, it is stronger than ever. Our laboratory business has grown from 44% of our sales in 2008 to 56% of our sales today as we target secular growth opportunities like pharma and biopharma industries. At the same time, our core industrial business has changed from 31% of our sales to approximately 25% of our sales, and the mix within that has shifted to more favorable end markets. In fact, we estimate that more than 60% of our core industrial sales are now with pharmaceutical, biopharma, food manufacturing, and chemical customers. And I would remind you that our service and consumer business is approximately one-third of our revenues and very profitable. Our end-market breakdown also reinforces the strength of our business. Today, we estimate about 40% of our total sales are to life science customers. 20 percent to food and beverage, and about 10 percent to chemical. And beyond that, we serve many other diverse markets. We are clearly more biased towards higher growth markets, and at the same time, nicely diversified. Well, that concludes our prepared remarks, and we now want to open the call to questions.
spk15: Thank you, speakers. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your phone keypad. If you're using a speakerphone, please make sure your mute function is turned off so your signal can reach us. A voice prompt on the phone line will indicate when your line is open. Please do state your name and company before posing your question. Once again, please press star 1. We will take our first question now. Your line is open. Please go ahead.
spk25: Hey guys, thanks for taking my question.
spk06: And congrats on a really strong print here. Maybe one, you know, you did mention on pricing and inflation. Can you talk about how pricing and inflation assumptions have changed versus the prior guide?
spk34: Yeah, hey Vijay, this is Sean. Yeah, I'm happy to do that. So we were, you know, very pleased with our execution results. in the quarter, both on pricing but also in our supply chain. I think you, Harris, used the word agility a lot, but the organizational agility and execution just continues to be really fantastic across the global organization. If you look at pricing in the second quarter, our estimated price realization was about 4.5%, which was better than what we were expecting kind of when we kind of came into the quarter. On the material side, I would say material costs remain elevated, and they were pretty much as we kind of expected as we came into the quarter, which was a little bit better than Q1, but still remain at an elevated level. But maybe I kind of continue here, and I just kind of like transition into the second half of the year, which I'm sure is also on your mind. So as we kind of think about the second half of the year, right now we're thinking about price realization in the 5% range or so. which would kind of put us at about 4.5% on a full year basis, which is a little bit higher than our guidance last time we spoke for the full year of about 4%. And then if you kind of want to translate that into margins, we're looking at about a 60 basis point improvement in our gross margin for Q3 and about 50 basis points for the full year. And then if you kind of drop it down to operating margins, our operating margin in Q3 right now, we're estimated on a currency neutral basis, about 130 basis points. And actually, if you exclude currency, I mean, if you include currency, the reported number is probably more in the 170 basis point on a reported basis. And then our full year operating margin assumption right now, excluding currency on a currency neutral basis, is about 140 basis points. And on a reported basis, that would be more in 160 basis point kind of a range.
spk06: That's extremely helpful, Sean. And then maybe one for Patrick. On your comments towards the end and how the business makes us change, can you, in a compare and contrast versus... you know, the last cycle, 08, 09, how did it mix the chain? What was it mixed back in 08 and 09? And what's the implication for the business if the economy were to slow down here?
spk22: Yeah. Sean, you go first and then I'll join you.
spk34: Yeah. Okay, Vijay. Maybe I'll take that one. So if you look at our lab business today, it's about 56% of our business. If you go back to 2009, it would have been about 45% of our business. And then if you look at our core industrial business, back in 2009, it would have been, I think, just over 30%. And right now it's about 25%. But what's even more interesting to me is the mix within industrial and our overall end market exposure. So right now we would estimate that more than 60% of our core industrial business, which historically is more susceptible to the economy, more than 60% of that business today is sold into pharma, biopharma, chemical and food manufacturing. So I think we continue to do a good job of redirecting business towards more attractive market segments.
spk29: Yeah, clearly. And of course, let me add also to that, we are seeing strong momentum in both businesses at the moment. We're seeing very healthy demand driven by operational efficiency and automation needs. And they go across both the lab market as well as the industrial end markets. So I think both markets are benefiting very well from these demands, and we have the right products to serve our customers. We are really happy with the outlook for both of the segments. Our lab business, of course, is much bigger, as you know, and we have also launched a lot of exciting products this year and continue to have a lot of good products in the pipeline for both units. So this is why we're also so optimistic on the outlook for Q3 and Q4.
spk25: Understood. Thanks, guys.
spk15: Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing star 2. We will go ahead with our next question. Please state your name and company before you pose your question. Thank you.
spk23: Hey guys, thanks for the questions. This is Catherine Schulte with Baird.
spk31: I guess first, can you talk about the 14% local currency growth in China? I think you were expecting high single digits for the quarter. So what drove the upside there? How do you view the growth for that region for the rest of the year?
spk29: Yeah, thanks, Catherine. I'll take the question first and then let Sean chime in as well. So yes, we are very pleased with the 40% growth in the quarter. And as a reminder, We grew 35 percent in the second quarter of last year, so really accepting strong growth. We saw the growth across our lab business in China with almost 20 percent sales growth, which is remarkable also given about 40 percent sales growth we delivered in the second quarter of last year. And all of our lab product lines really showed very strong growth. We had strong growth also in our core industrial. Here, the team has done a particularly good job of increasing our business mix to more attractive segments, as also Sean mentioned before. We have seen particularly strong demand for solutions and automation driving this efficiency that we talked about. So we are very confident on China if the underlying market conditions don't change. And, you know, in China, they can change quickly with the lockdowns. But so far, we are really optimistic. As I said, we are expecting strong growth in the second half as well.
spk34: Yeah, I don't think I'd add very much. I mean, I know there was a lot of concern about China lockdowns as we kind of entered the quarter, but, you know, from our perspective, we really had minimal impact during the quarter. I think our team did a wonderful job navigating that. We were one of the first companies to reopen in Shanghai, and we were able to really keep a lot of our product flows going throughout the quarter. And, of course, I think many of you know that most of our production is actually outside of Shanghai as well. And then these themes that Patrick talks about too, I mean, automation, digitalization, those are themes that are very prevalent in China that our team has been leaning into with our portfolio and all these hot segments that we talk about, about lithium battery and semiconductor also very prevalent also in China as well. And then, of course, the government's five-year plan, you know, they're leaning into that locally, you know, in terms of how they are stimulating their economy, which I think we're a beneficiary of as well.
spk31: Great. And then you talked a bit about seeing some more conservatism from packaged food customers on the product inspection side in Europe. How do you view that unfolding for the rest of the year? And have you seen any other businesses start to see signs of slowing in Europe?
spk29: Yeah, let me first capture the product inspection piece. And, yes, it's mainly in Europe where we see a little bit more conservative and customers are just a little bit more careful with their investments in packaged food. We don't see that in the U.S. The U.S. is actually still very, very strong for us in product inspection. We have a very good pipeline there. But Europe has become a bit more cautious, and that, of course, has also to do with the overall environment, economic environment in Europe, that some customers get more conservative. On the rest of Europe and the other businesses, I mean, we are really pleased with our growth that we have seen in the second quarter. As you know, we had expected to come in low single digits. We came in better. And this is also against 20% growth in the quarter of last year. We don't see any concerns for our European sales term or any other parts of the businesses right now in Europe. So I would say no signs of a real downturn at this time, but we fully acknowledge that we need to be very agile as market conditions, of course, can change and change quickly given the situation with the energy supply, which we carefully monitor, and have also put the right mitigation plans in place.
spk23: Great. Thank you.
spk15: Thank you.
spk16: We move on to our next question. Please go ahead. Your line is open.
spk10: Hi. It's . Thanks for taking my questions.
spk13: Maybe first, Patrick, you mentioned that consumables and services are now one-third of total revenue. Just giving you a product mix, just wondering where you feel like you can take that potential recurring revenue. over the long term, and what are the plans to do that, given your product mix?
spk29: Yeah, good, absolutely. Let me start with that. So first and foremost, I think we still have ample of opportunity to also grow our service business, which is very, very strong. We have a huge installed base of instruments, and I would say a big part of the installed base is currently not under contract, but is calling more on what we would call break and fix services. So we have opportunities every time we go out there with customers to talk about the value of contracts and being under contract, which means they have faster access to services, they have a faster response time, they have a broader service portfolio if they are under contract. And that also drives some of the growth rates we have heard from us in services. We have a strong focus, of course, also at services at the point of sales, making sure we get right when we sell the instrument, also a better contact rate. The team has a very strong focus on that, and overall, we are increasing our portfolio of services to our customers, adding more high-value services continuously. So I'm very confident that the share of the service revenues continues to increase. I mean, we have to also see that, of course, the last two years, we had very strong instrument growth, and service usually trails that a little bit, but having 11% growth, again, this quality of the growth in service and consumables is a really strong reminder that you're making good progress on broadening our service footprint. If you were to look at it from a regional perspective, the U.S. historic has been very strong as well as Europe. In China, we still have even more potential to grow services. Traditionally, the Chinese market has been not that leaning that much into services. They are more self maintainers and they're also seeing it as a part of the overall sales package being included with instrument. And that takes time to change that mentality. And we are working on that. From that perspective, I'm optimistic and I'm putting a lot of focus also in my internal business meetings with every business I have, how we can increase the share of services. And of course, those are the consumables. The products we have, for example, our pipette business, very strong in consumables. In other areas, for example, in the lab business, the titrators, automation solutions, they all come with a very healthy and increasing share of consumers moving forward. So I'm optimistic that in the long term, we will move that one-third of the business piece further up for service and consumers.
spk13: Great. Thanks for the additional color. And then maybe more of a general question. Just give me your position on automation and some of the strengths you're seeing there. If we are going to a more challenging economic environment, do you see automation from your customer conversations you have as more of a discretionary purchase, meaning they might not have the capabilities and want to do it, but might not want to spend money for that? Or is the trade-off in terms of the productivity enhancements they see from your automation capabilities more than offset that decision to just spend discretionary dollars?
spk29: That's an excellent question. Matt, that's an excellent question. I think your second part of the question is actually leaning in the right direction. What we are hearing is that customers are, for several reasons, really interested in driving more automation in their businesses. It's driving their productivity. With that, of course, driving their profit. And they are very willing to invest and making sure that they continue to drive productivity. Also, you know, getting more... manual labor out of the play as much as possible. When you look at large automation in factories where we play big with our industrial business or even in the lab, it's all about making sure that you can automate processes to make them more robust, more reliable, and also, in the end, cheaper for them. This is why our customers are responding very well to automation right now. It's not the quote automation alone. It's that this productivity gain and also that long-term performance gains that they get from automation solutions.
spk11: Great. Thank you very much for the time. Appreciate it.
spk15: Thank you very much. We move on to our next question. Please do state your name and company before your question. Thank you so much.
spk25: Hey, guys. Thanks. This is Patrick Donnelly from Citi.
spk27: Patrick, maybe just one on, another one on China, just given the amount of focus there. Can you just talk a little bit about the cadence of the recovery, how it trended throughout the quarter, expectations there going forward, maybe just in terms of the guidance, and then similarly, just on the instruments versus consumables, what you saw kind of come back versus what you saw maybe lag a little bit there.
spk29: In China itself, look, we didn't have a really significant slowdown during the quarter. I mean, the quarter held up quite strongly for us. The team was reaching out to customers, even in, let's say, some of the sales folks who had been in provinces or areas where there was a lockdown, they continued to call customers from home. We also referred to earlier in some of the other calls about our digital tools and how we can engage with customers. They leveraged this fully in China as well. So on the auto momentum, I would say we haven't seen a real dip throughout the quarter, and on the manufacturing side, we recovered very, very quickly. There was no difference in terms of instruments versus consumables at all. I don't know, Sean, if you have a different perspective, but I haven't heard anything else in China.
spk34: What was nice to see is just the breadth of growth throughout the product portfolio. We grew strong double-digit both on the laboratory side of the business as well as on the industrial side of the business. Maybe the one soft spot that we did see is in our food retailing business. Food retail is It's less than 5% of our total Chinese business, but that market has been very hard hit by the lockdowns and the nature of the lockdowns, a lot of store closures going on inside the country. But absent that, there was just a lot of strength throughout the rest of the portfolio.
spk27: Okay, definitely encouraging results there. And Sean, maybe a quick one for you there. Just in terms of the guidance for 3Q, Do you mind just breaking it out by segment and then geography as well, if you have it, just in terms of the growth rates?
spk34: Yeah, sure. I'll give you Q3 and then I'll give you the full year as well, Patrick. So let me start with the divisions. So our guidance for the lab division is high single-digit growth for Q3 and low double-digit growth for the full year. For product inspection, our guidance is mid to high single-digit for Q3 and mid to high single-digit for the full year. Core industrial, our guidance is high single digit for Q3 and high single digit for the full year. And then for food retailing, our guidance is low to mid single digit for Q3 and flattish for the full year. And then on a geographic basis, our guidance for Europe is low to mid single digit for Q3 and low to mid single digit for the full year. And I think it's important in Europe to remember that we're going to have a headwind in Russia in the second half of the year. And just given the seasonality of last year's sales, that headwind might be a little bit more in the second half of the year than the first half. It could be in the 4% range or so in terms of Russia headwind. In terms of Americas, we have our guidance as high single digit for Q3 and low double digit for the full year. And then for China, our guidance is approximately 10% for Q3 in low double-digit for the full year.
spk17: Very helpful. Thank you, guys.
spk15: Thank you very much. We move on to our next question. Please go ahead. Your line is open.
spk28: Good morning, guys. Dan Arias from Steeple. Maybe just going back to pricing and the ability to step up what you're able to push through overall. Sean, as the market has evolved and as your own internal capabilities have evolved, are you finding that the pricing power that you have is showing up in areas where maybe you hadn't had it before? Or is it really just a function of pushing a bit harder in the areas where traditionally you've been successful?
spk34: That's a good way to ask the question, Dan. I mean, hey, I think the You know, whenever we do pricing, we try to tailor our approach to the business conditions and the circumstances. And we always talk about how we like to differentiate by product and geography. And if you just look at kind of the cards we're dealt from a pricing perspective at the moment, it really lends itself to higher pricing in most categories. And so what we try to do is we look at the cost pressures in this environment by product category and geography. And then what we can do is we build it up and then we educate the organization about it. And I think that's really important is that with our direct sales force, they can really articulate that to the customer. And then they can also emphasize our value propositions. And it's like Patrick was saying in the previous Q&A that our value proposition in many regards is higher in this environment because people are seeking productivity much more than they were, and they're looking for solutions. And so that plays very well to our overall portfolio and our ability to position the price increases. So I think the market very much understands that. And then if you look at the execution of the organization, it certainly helps when we're able to support customers too. And so what do I mean by that? Just in our supply chain, I think every company has some level of challenge at the moment. But if you compare us relative to competition, I think we look pretty good in terms of our ability to support customers with lead times and things like that. And that also certainly increases the customer's willingness to pay. So it's actually the execution has been really good. And I just think the environment obviously lends itself to better price realization, which we saw in Q3. And with my previous comments, we'll be expected to even be a little bit better in the second half of the year.
spk28: Okay, very helpful. Maybe just as a follow-up, I wanted to ask about Blue Ocean. If I remember correctly, I think that you guys are implemented across 80% or so, 80%, 85% or so of the users at this point. A, is that right? And B, what is the timeline that you would consider for sort of a full global rollout? And then if that number is right, is that last 15% to 20% meaningful at all when it at the end of the day, are those regions that don't really move the needle as much.
spk29: Yeah, I'll get to the first, and then I'll let Sean chime in as well. Okay, yeah, definitely around 85% of the rollout so far. And there's still a number of countries are left to bring on to Blue Oceans, or they are running on their current own ERP systems. Look, I mean, it will continue to help us drive productivity. within the company. We can share a common template for many of the processes that we use across the company. So a lot of it is also an internal gain in terms of efficiency and helping us to drive cost down and just use efficiency across the company. On the pricing side, I know that there is some impact, but I'll let Sean answer that.
spk34: Yeah, on the pricing side, I mean, we'll always benefit from improved analytics, but we'll also To me, the business processes is a big part of it too. Like when you think about price administration, we have a lot of tools around that and global centralized processes. And then there's also a lot of embedded pricing controls in terms of how we can manage discounting and things like that. So there's always some benefit when we go live. I mean, our largest market organization that we have left is in France, which we're expecting to go live next year. And like Patrick said, there's a handful of smaller organizations, and primarily in Europe and the rest of the world. And then maybe just before I hand it back to Patrick, a general comment that we always see with Blue Ocean is just the overall visibility into the business. You know, we very, very much have benefited over the last couple of years by having more transparency end-to-end in our business from Blue Ocean. And for those of you who are or less familiar with Blue Ocean. I mean, it's about global harmonized processes, but we enable that with one single instance of an ERP, fully integrated CRM service, HR program. So then with one single instance, we really have a lot of, you know, very interesting transparency, which we've very much benefited from over the last couple of years.
spk30: Thanks, Sean.
spk15: Thank you. We move on to our next question. Please go ahead. Your line is open.
spk09: Hi. Good morning. It's Derek DeBrown from Bank of America. Hey, Derek. So a couple of questions. Sean, first a little housekeeping question. Full year guide for interest expense and income net. How are the higher rates impacting you? How are you you know, how are you done in fixed versus variable?
spk34: Yeah, no, hey, good question, Derek. So, and thanks for, I know it's early for you today, so we apologize for the early morning. Hey, in terms of interest rates, you know, we're about 75% fixed at the moment, and we don't have any significant maturities in the short term, like this year or next year. I mean, we have a couple of smaller things And then when you look at our variable exposure, actually a lot of that's also in Euro, which probably prices out about 1% or so. So I think we're positioned pretty well here. And if you kind of look at what we've done over the last few years, just even at the end of last year, we've been locking in a lot of 15-year debt over the last few years. So for example, in December of last year, we priced 15 year debt that funded in two tranches. We just funded $150 million at 2.8% for 15 years in March. And then we're gonna fund another $150 million tranche in September at 2.9%. And so we feel like for the short, medium term, we're pretty well positioned. And then to be specific on interest expense, our guidance or estimate for this year is $53 million. Great.
spk09: And, you know, another pricing question, but just more bigger picture with given the pricing and also the currency moves. Have you seen any impact on your customers purchasing power? Basically, some people hesitating because they just didn't have the budgets for things.
spk34: No, I mean, I think it's just the opposite. I think it's very much kind of like how I was answering the question before. I think people just really appreciate the value in this environment, and they appreciate the ability to support them. And of course, we're trying to do things in a balanced way in terms of increasing prices where it's appropriate, and there's very much a cost story, inflation story associated with it. And so I think I think between our approach and then the overall value proposition that we're providing, we're just really not hearing any noise.
spk29: Maybe a little bit in this, as you said, in product inspection into customers become a bit more cautious with investments, but otherwise not really.
spk34: Yeah, I mean, and just to clarify, in the PI, I wouldn't say it's a pricing topic. It's more of a – and as Patrick said earlier, it's very much a European topic for product inspection. There has been – some more conservatism where we, you know, projects, we get the sense that maybe some projects are going to get delayed in packaged foods in Europe.
spk09: And then just one more. Is there any signs of inventory, ex-inventory panels, pipette tips, electrodes, anything that sort of like has long shelf life that people maybe have hoarded or stockpiled? Just sort of like some of the commentary on sort of what you're seeing in your customers.
spk29: Yeah, that's a good question. But look, we don't hear a lot of that customers have stockpiled electrodes or pipette tips. I mean, we had, I would say, more in the beginning of the year. Of course, during the pandemic, customers tried to buy as many pipette tips as possible, and they filled up their stock levels, but it's coming back to, I would say, more normal levels now. And you also have to realize that a lot of the pipette tip sales that we're making today are not going into testing anymore. They're going into, you know, bioresearch, bioparma applications. And these labs usually do not have the same tendency as we have seen, or you probably have heard from other suppliers that supply the broader testing industry that have tried to just get as many in their stocks as possibly in the last year. We have not been that much exposed.
spk21: Thank you very much.
spk25: Thanks, Eric.
spk15: Thank you. Our next question, please go ahead. Your line is open.
spk07: Hey, guys. It's Josh from Cleveland Research. Thanks for taking my questions. Patrick, a follow-up on product inspection. Your growth was a bit lighter than in the quarter, but it sounds like the commercial team remains optimistic. I guess was the softer Q2 a result of like installs pushing out or more a reflection of slower order intake? And just kind of curious how recent trends were reflected in the guide and whether or not H2 assumptions have come down versus prior plans. Yeah.
spk29: Well, thanks, Josh. Very, very good question. But look, I mean, the Q2 results have been a bit softer than we had expected. It's not like off by a huge margin. It's a little bit softer. I think we had projected high single digits and we came in bit more than mid-single digits, so it's not off by far. A lot of that was actually triggered by two factors. We have seen on the customer side, we have seen some project push-outs, not necessarily because they didn't have the money, but because usually we also supply into a larger infrastructure, and then some of the other suppliers were not ready to make the full installation, so our final product inspection piece of the whole flow line, so to speak, They were just not ready to take it this quarter. So there has been some push-outs. What we also suffered from in terms of not being able to deliver everything we could was on the supply chain side, some of the electronic components just didn't come in time. So that led actually to delay in this quarter. As we said, we are quite optimistic for Q3. The team sees a good funnel, especially in the United States. We have to continue to monitor the situation in Europe, but otherwise I think we are okay with the guidance.
spk07: Got it. Okay. And then the lab segment has outperformed expectations here in recent quarters. We'd just love to hear any additional thoughts you have on what you think is driving consistent upside in the segment. I mean, how much of this is price coming in better than expected, maybe share gains or just, you know, kind of strong underlying demand. And I guess whether or not lab benefited from COVID testing in China in the quarter.
spk29: Yeah, look, I mean, again, fast COVID testing in China wasn't a big story at all, but we see broad-based growth across our product portfolio. There's very strong demand from pharma and biopharma, especially biopharma. The chemical segment, again, is showing very strong demand for automation solutions, so we're very happy with that. Also, in our remarks, we had mentioned what we call hot segments, like the battery segment, plant-based foods, et cetera, where we have targeted our sales flows very quickly to these accounts with the right application solutions. They show across the board, I mean across the regions, very strong growth. And I think if we factor all of that together with what we also mentioned earlier about this continuous need for automation solution, that just drove a lot of demand across our portfolio.
spk08: Got it. Appreciate the context.
spk15: Thank you, sir. We move on to our next question.
spk16: Please go ahead. Your line is open.
spk04: Hi, this is Rachel from JPMorgan.
spk05: So sticking with some of the earlier questions on recession resiliency, can you just walk us through how your customers are thinking about the replacement cycle, given the evolving macro dynamic? Do you see any inflation softening some of these capital budgets and softening demand for new products? Or what kind of levers can Mettler really pull the fuel that replacement cycle, even in a recession and inflation? Thanks.
spk34: Yeah. Hey, Rachel, this is Sean. I'll take it. And Patrick wants to jump in. So, you know, when we look at our business, you know, other than this one topic that we talked about with packaged food in Europe, you know, we're not seeing any indicators that people are, you know, have any cautiousness or any indicators that there's any concern about delaying replacement cycles. As we enter into this next phase of the economy, one thing that we try to remind people about, and we've talked about it in the past, is that we typically need the economy to be good enough. We need it to be good enough that people will stick to replacement cycles. We've seen in the past PMIs go into the mid to high 40s like in Europe, but we still had growth. It was because people were sticking with replacement cycles. At the same time, we've seen PMIs in the mid to high 50s in Europe, and we didn't have double digit growth. And so in a geography like Europe, which is arguably the most exposed at the moment, that is very much on our mind is that will the European business just kind of stick to replacement cycles here, and we just need the economy to be good enough. And then part of that is that we are selling, our average selling price of our products are less than $10,000. And so we're not the first instrument that's going to get cut in a budget. And I'd say, I think we estimate that something like more than 70% of our products are actually below that level. And so, you know, and they're personal instruments and we sell them with a direct sales force. We can articulate the value proposition, all that kind of stuff. So I feel like that's a favorable situation for us. And then the other thing is this these comments on mix that we made a lot in the prepared marks and talked about a little bit earlier is I just think that we should be more resilient going into this next phase of the economy compared to where we were in the past.
spk03: Great. And then one quick one from me.
spk05: You flagged some conservatism on supply chain during your prepared remarks, which I think is prudent just given the macro backdrop. But can you walk us through what you're seeing on supply chain? Have things continued to deteriorate? deteriorate here, or have they improved since 1Q? And then, do you have any line of sight on when things could really improve? Thanks.
spk29: Yeah, I'll take it. So, look, on supply chain challenges, I would say they have somewhat stabilized, but we continue to see challenges in certain items, still mainly semiconductors. It seems to get a little better, but I would not give green light on everything, to be honest here. What we have seen on transportation and logistics, that improved quite a bit. We also see, for example, the port in Shanghai less congested as it used to be. So that helps, of course. But in overall supply of material, again, we see some of our businesses have seen slight improvement in semiconductor available. But we have still some others who have not. I mentioned product inspection, for example, where we had some issues getting the right components in time. And we still have constantly calls with the suppliers, making sure that we get enough of the electronic components. I can't tell you really whether this is a trend already, these light improvements. We're hoping all for it. And we stayed very agile and very, very close conversation with all the suppliers to make sure that we have enough safety stock in the areas that we see very critical.
spk02: Okay, operator, I think with that we'll go ahead and wrap up today's call. Thanks, everybody, for joining us on this early morning call. Looking forward to catching up with you later on in the day. Take care.
spk25: Bye. Thank you.
spk26: Thank you. Thank you, everyone. You may now disconnect.
spk12: Bye. me. music music you
spk15: Good day and welcome to the second quarter 2022 Mettler Toledo International Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Adam Altman. Please go ahead, sir.
spk02: Thank you, and good morning, everyone. I'm Adam Altman. I'm responsible for investor relations at Mettler Toledo, and I'm happy to welcome all of you to this call. I am joined with Patrick Kaltenbach, our Chief Executive Officer, and Shawn Vidala, our Chief Financial Officer, and of course, Mary Finnegan with Investor Relations. 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. Let me summarize the Safe Harbor language that is outlined on page two of the presentation. Statements in this presentation are not historical facts, constitute 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, levels of activity, performance, or achievements to be materially different than those expressed or implied by any forward-looking statements. For discussion of these risks and uncertainties, please see the discussion in our most recent Form 10-K and other reports filed with the SEC from time to time. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions factors affecting our future operating results, and in the business and management's discussion and analysis of financial condition and results of operation sections of our filings. One other item on today's call, we may use non-GAAP financial measures. More detailed information with respect to the use of and differences between the non-GAAP financial measures and the most directly comparable GAAP measure is provided in the 8K. Let me now turn the call over to Patrick.
spk29: Thanks, Adam, and good morning, everyone. We appreciate you joining our call this morning, which we are doing from Switzerland. We reported strong second quarter results as our team executed very well on our growth strategies. Our culture of agility and focused execution have allowed us to capitalize on favorable market demand and navigate challenging supply chain and inflationary conditions. The highlights of our second quarter performance are detailed on page three of the presentation. Local currency sales in the quarter increased 10 percent as compared to the prior year. We had very strong growth in our laboratory and core industrial business, and we are particularly pleased with the very good growth in China. Excellent sales growth combined with good margin improvement drove very strong growth in adjusted EPS despite adverse foreign currency. We feel positive about our outlook for Q3 and for the full year, and we recognize our agility and resilience will be pivotal to navigate market conditions. Later, I will have some additional comments on our business, but let me now turn it to Sean to cover the financials and guidance. Sean?
spk34: Thanks, Patrick, and good morning, everyone. Sales in the quarter were $978.4 million, which represented a local currency increase of 10 percent. On a U.S. dollar basis, sales increased 6 percent as currency reduced sales growth by 4 percent. We estimate that the impact of reduced sales in Russia-Ukraine due to the war was a headwind of about 1 percent to sales growth. On slide number four, we show sales growth by region. Local currency sales increased 12 percent in the Americas, 4 percent in Europe, and 14 percent in Asia and the rest of the world. Local currency sales increased 14 percent in China in the quarter. On slide number five, we show sales growth by region for the first half of the year. Local currency sales grew 12 percent for the first six months, with 14 percent growth in the Americas, 7 percent in Europe, and 15 percent in Asia, rest of the world. Local currency sales increased 15 percent in China on a year-to-date basis. On slide number six, we summarize local currency sales growth by product area. For the quarter, laboratory sales increased 13%, industrial increased 9%, with core industrial up 11%, and product inspection up 5%. Food retail grew 3% in the quarter. The next slide shows local currency sales growth by product area for the first half. Laboratory sales increased 15%, industrial increased 10%, including 12 percent growth in core industrial and product inspection up 7 percent. Food retail declined 6 percent. Let me now move to the rest of the P&L, which is summarized on slide number eight. Gross margin in the quarter was 58.4 percent, an increase of 30 basis points. We benefited from strong pricing and volume growth, which was offset in part by higher material costs. R&D amounted to $44 million in the quarter, which is an 8 percent increase in local currency over the prior period reflecting increased project activity. SG&A amounted to $242.2 million, a 6 percent increase in local currency over the prior year, which includes increased investments in sales and marketing. Adjusted operating profit amounted to $285.4 million in the quarter, a 12 percent increase. The increase reflects strong sales growth combined with good execution. Currency was a 3% headwind to operating profit growth. Adjusted operating margin was 29.2%, which represents an increase of 160 basis points over the prior year. On a currency neutral basis, adjusted operating margins increased 120 basis points. A couple of final comments on the P&L. Amortization amounted to $16.4 million in the quarter. Interest expense was $12.8 million in the quarter. Other income in the quarter amounted to $2.2 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. Fully diluted shares amounted to $22.8 million in the quarter, which is a 3 percent decline from the prior year. Adjusted EPS for the quarter was $9.39, a 16 percent increase over the prior year, or a 20 percent increase excluding unfavorable foreign currency. We're very pleased with this adjusted EPS growth, especially given that adjusted EPS was up more than 50 percent in the second quarter of last year. On a reported basis in the quarter, EPS was $9.29 as compared to $7.85 in the prior year. Reported EPS includes 22 cents of purchase intangible amortization, 6 cents of restructuring, and an 18-cent benefit due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises. The next slide illustrates our year-to-date results. Local currency sales grew 12 percent for the six-month period. Adjusted operating income increased 13 percent, or 16 percent, excluding unfavorable foreign currency. And our operating margin expanded 110 basis points. Adjusted EPS grew 18 percent on a year-to-date basis, or 21 percent, excluding unfavorable currency. That covers the P&L, and let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $208.2 million. We continue to make nice improvements on DSO, which declined two days to 34 days as compared to the prior year. ITO came in at 3.8 times. Year-to-date adjusted free cash flow was $283.7 million. Let me now turn to guidance. Forecasting continues to be challenging given dynamic market conditions. Our forecasts remains on factors we can control, namely successful execution of our growth and margin initiatives. Let me make some general comments on the full year before covering the specifics. While there's more macro noise in the environment today as compared to three months ago, we continue to feel good about our business. Customer demand is solid, and we're executing on our growth initiatives very well. We remain cautious about challenges in the supply chain but to date have been able to navigate them well. Second, we are facing greater foreign exchange headwinds to our earnings growth as compared to three months ago. Specifically, we now estimate that foreign currency will be a headwind to adjusted EPS growth in the quarter of approximately 6% and would expect a similar headwind in the fourth quarter as well. At the time of our last earnings call, the headwind to earnings growth in the second half of the year was in the range of 3 to 4 percent. What this means for the full year is we now expect currency to be a headwind to adjusted EPS of approximately 4.5 percent as compared to 3.5 percent the last time we spoke. At the midpoint of our guidance, we now expect adjusted operating profit margin to increase approximately 140 basis points on a currency neutral basis. reflecting higher volume growth and good execution on our margin initiatives. Including currency, reported operating margin, profit margin will be slightly higher. Finally, as you think through our sales guidance, keep in mind our sales growth will be reduced by approximately 1 percent for the remainder of the year due to sales in Russia. Now, let me cover the specifics. For the full year 2022, we now expect local currency sales growth to be in the range of 9 to 10 percent. This compares to previous guidance of 8 percent. We are increasing our full-year sales guidance for our strong year-to-date results and a better outlook for the second half. We expect full-year adjusted EPS to be in the range of $38.85 to $39.05, which is a growth rate of 14 to 15 percent and a growth rate of approximately 19 percent excluding currency. For the third quarter, based on market conditions today, we expect local currency sales growth of approximately 8 percent and expect adjusted EPS to be in a range of $9.75 to $9.85. A growth rate of 12 to 13 percent and a growth of 18 to 19 percent excluding currency. Some final details and guidance. With respect to the impact of currency on sales growth, we expect currency to decrease sales growth by approximately 4.5 percent for the full year and decrease sales about 6 percent in Q3. In terms of cash flow, we expect, we continue to expect full-year cash flow in the $855 million range and expect to repurchase approximately $1.1 billion in shares in 2022. We expect a net debt to EBITDA leverage ratio of approximately one and a half times. That is it from my side, and I'll now turn it back to Patrick.
spk29: Thanks, Sean. Let me start with some comments on our operating businesses, starting with Lab, which had strong sales growth in the quarter with very good growth across all major product categories. We expect our ad markets to remain favorable, and with our excellent product portfolio and effective sales and marketing initiatives, we believe we can continue to gain market share in our laboratory business. Turning to our industrial business, we are very pleased with the continued strength in core industrial. Our outlook for the remainder of the year is favorable, and we believe this business is well positioned to capitalize on our customers' needs for automation, productivity improvement, and efficiency gains as they work to overcome challenges in the labor market and supply chain. Product inspection sales came in a little lower than expected this quarter, but our team is optimistic for the third quarter. We have strong momentum in the Americas, but have started to see some more conservative packaged food customers behavior in Europe. Finally, food retail sales grew 3% as growth in the Americas and Europe offset a significant sales decline in China due to disruptions from pandemic lockdowns. Now let me make some additional comments by geography. Sales in Europe increased 4% in the quarter, about as we had expected and against the 23% growth in the prior year. As a reminder, we stopped shipments to Russia after the invasion of the Ukraine, which is impacting growth in Europe. Sales in the Americas was again excellent with double digit growth across all of our major product categories. Finally, Asia and the rest of the world had another quarter of strong growth with robust growth in laboratory and core industrial. China grew 14% with particular strong growth in lab and core industrial. The team continues to do a great job navigating challenges in the markets. Assuming market conditions remain as they are today, we believe we will deliver strong growth in China in 2022. One final comment on the business. Service and consumables continue to show excellent momentum and grew 11% in the quarter. We are very pleased with the growth in this important and profitable part of the business. That concludes my comments on the business. Now I would like to share with you some insights on our sales and marketing initiatives. We have seen in the recent years the agility that Spinnaker provides is invaluable in helping us gain market share, and adapting to various customer demand environments. The effectiveness of this was evident in the initial pandemic downturn and the subsequent recovery. Under both scenarios, Spinnaker provided agility to quickly identify growth opportunities and guide our sales force accordingly. As you are aware, we have an organic sales growth focus that benefits from our highly fragmented markets as well as a very large installed base of instruments, which provides fertile ground to discover growth opportunities, but also requires a great deal of agility and execution focus. Our Spinnaker program helps us target the most attractive segments of growth and increase our sales force time with the most strategic accounts. We want to efficiently go up go after the best opportunities with our sales organization of approximately 3,000 sales colleagues around the world. Our field sales force is guided toward opportunities with the most strategic accounts, those with good growth and cross-selling potential, while other opportunities are more efficiently handled by our telesales and inside sales teams. Spinnaker utilizes unique data analytics to leverage external data sources and our substantial internal data, including that of our installed base, to identify the most attractive and profitable growth opportunities. Spinnaker also provides extensive tools to our sales force that improves their effectiveness. Continuous improvement is at the heart of Spinnaker. We continue to build, adapt, and refine our initiatives, which reinforces our already strong foundation for sales and marketing that makes it difficult for competitors to copy. Our Spinnaker program also benefits from our proprietary TopK program. With TopK, we use data analytics to identify customer investment projects and cross-selling opportunities with potential actionable opportunities for our broad product offering. A summary of the opportunity with all relevant information including customer site, contact info, potential for products, other activities with this customer is generated. These summaries are provided to the sales organization throughout the world who then qualify and prioritize these opportunities for our sales teams. The structure of our sales organization allows us to most efficiently follow up and guide the teams to these opportunities. Last year, we generated more than 150,000 of these top pay alerts and are continuing to penetrate these potential opportunities at customer sites. While we continue to follow up with last year's alerts, we are also launching additional waves this year. Target industries for this wave include, for example, pharma, food and beverage and chemicals, and we also identified opportunities in the fast-growing markets of lithium ion battery and semiconductors. Other examples include vaccines, plant-based foods, and advanced materials. We are convinced that our unique ability to quickly identify growth opportunities and related accounts helps us to adapt to shifts in customer demand, who we have all seen can happen quite rapidly. Our sales teams are also very happy to be able to visit customers on-site again. Face-to-face meetings allow us to best assess potential, promote our key value add solutions, and identify cross-selling opportunities. However, we also saw during the last two years how effective online interactions with customers can be. We have significantly enhanced our remote capabilities, including online sales meetings, webinars, and virtual or e-demos. We recognize the importance of leveraging a smart mix of online and onsite meetings to convert opportunities to orders. Finally, selling service contracts at the point of sale continues to be a high priority focus for us. We saw the value of our service throughout the last two years in terms of very favorable net promoter scores. This has reinforced our sales organization the importance of articulating the value of a service contract when the product is sold. Internally, we have revamped our coding process to ensure the right focus is on service at the critical point of the selling process. We have also introduced an updated version of our digital sales enablement tool library that allows our sales reps to be more effective in value selling. The update includes new frontend software tied directly into our CRM, providing our sales team dashboards to prepare for upcoming site visits and efficiently handle follow-up requests. Our sales enablement tool also provides our sales teams enhanced application information and selling guides, which also helps us enable cross-selling with new applications in target accounts we have not yet penetrated. This tool greatly improves the effectiveness of the selling process, thereby enhancing the customer experience and improved order conversion rates. These are just a few examples to illustrate our strength in marketing and sales. At the core of our growth strategies is the importance to reallocate resources to the best opportunities, and Spinnaker is a great example how we do this by helping to identify and guide our sales teams to the best growth opportunities in the most favorable end markets. Business conditions today remain solid. I am convinced that our strategic programs such as Spinnaker will provide us agility to adapt to potential changes in the market conditions as we have successfully demonstrated over the last several years. If you look at the mix of our business today, it is stronger than ever. Our laboratory business has grown from 44% of our sales in 2008 to 56% of our sales today as we target secular growth opportunities like pharma and biopharma industries. At the same time, our core industrial business has changed from 31% of our sales to approximately 25% of our sales. And the mix within that has shifted to more favorable end markets. In fact, we estimate that more than 60% of our core industrial sales are now with pharmaceutical, biopharma, food manufacturing, and chemical customers. And I would remind you that our service and consumer business is approximately one-third of our revenues and very profitable. Our end-market breakdown also reinforces the strength of our business. Today, we estimate about 40% of our total sales are to life science customers. 20 percent to food and beverage, and about 10 percent to chemical. And beyond that, we serve many other diverse markets. We are clearly more biased towards higher growth markets, and at the same time, nicely diversified. Well, that concludes our prepared remarks, and we now want to open the call to questions.
spk15: Thank you, speakers. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your phone keypad. If you're using a speakerphone, please make sure your mute function is turned off so your signal can reach us. A voice prompt on the phone line will indicate when your line is open. Please do state your name and company before posing your question. Once again, please press star 1. We will take our first question now. Your line is open. Please go ahead.
spk25: Hey, guys. Thanks for taking my question.
spk06: And congrats on a really strong print here. Maybe one, you know, you did mention on pricing and inflation. Can you talk about how pricing and inflation assumptions have changed versus the prior guide?
spk34: Yeah. Hey, Vijay, this is Sean. Yeah, I'm happy to do that. So we were, you know, very pleased with our execution results. in the quarter, both on pricing but also in our supply chain. I think you, Harris, used the word agility a lot, but the organizational agility and execution just continues to be really fantastic across the global organization. If you look at pricing in the second quarter, our estimated price realization was about 4.5%, which was better than what we were expecting kind of when we kind of came into the quarter. On the material side, I would say material costs remain elevated, and they were pretty much as we kind of expected as we came into the quarter, which was a little bit better than Q1, but still remain at an elevated level. But maybe I kind of continue here, and I just kind of like transition into the second half of the year, which I'm sure is also on your mind. So as we kind of think about the second half of the year, right now we're thinking about price realization in the 5% range or so. which would kind of put us at about 4.5% on a full year basis, which is a little bit higher than our guidance last time we spoke for the full year of about 4%. And then if you kind of want to translate that into margins, we're looking at about a 60 basis point improvement in our gross margin for Q3 and about 50 basis points for the full year. And then if you kind of drop it down to operating margins, our operating margin in Q3 right now, we're estimated on a currency neutral basis, about 130 basis points. And actually, if you exclude currency, I mean, if you include currency, the reported number is probably more in the 170 basis point on a reported basis. And then our full-year operating margin assumption right now, excluding currency on a currency-neutral basis, is about 140 basis points. And on a reported basis, that would be more in a 160 basis point kind of a range.
spk06: That's extremely helpful, Sean. And then maybe one for Patrick. On your comments towards the end and how the business makes us change, can you compare and contrast versus... You know, the last cycle, 08, 09, how did it mix the chain? What was it mixed back in 08 and 09? And what's the implication for the business if the economy were to slow down here?
spk22: Yeah. Sean, you go first and then I'll join you.
spk34: Yeah. Okay, Vijay. Maybe I'll take that one. So if you look at our lab business today, it's about 56% of our business. If you go back to 2009, it would have been about 45% of our business. And then if you look at our core industrial business back in 09, it would have been, I think, just over 30%. And right now it's about 25%. But what's even more interesting to me is the mix within industrial and our overall end market exposure. So right now we would estimate that more than 60% of our core industrial business, which historically is more susceptible to the economy, more than 60% of that business today is sold into pharma, biopharma, chemical and food manufacturing. So I think we continue to do a good job of redirecting business towards more attractive market segments.
spk29: Yeah, clearly. And of course, let me add also to that. We are seeing strong momentum in both businesses at the moment. We're seeing very healthy demand driven by operational efficiency and automation needs. And they go across both the lab market as well as the industrial end markets. So I think both markets are benefiting very well from these demands, and we have the right products to serve our customers. We're really happy with the outlook for both of the segments. Our lab business, of course, is much bigger, as you know, and we have also launched a lot of exciting products this year and continue to have a lot of good products in the pipeline for both units. So this is why we're also so optimistic on the outlook for Q3 and Q4.
spk25: Understood. Thanks, guys.
spk15: Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing star 2. We will go ahead with our next question. Please state your name and company before you pose your question. Thank you.
spk23: Hey guys, thanks for the questions. This is Catherine Schulte with Baird.
spk31: I guess first, can you talk about the 14% local currency growth in China? I think you were expecting high single digits for the quarter. So what drove the upside there? How do you view the growth for that region for the rest of the year?
spk29: Yeah, thanks, Catherine. I'll take the question first and then let Sean chime in as well. So yes, we are very pleased with the 40% growth in the quarter. And as a reminder, We grew 35 percent in the second quarter of last year, so really accepting strong growth. We saw the growth across our lab business in China with almost 20 percent sales growth, which is remarkable also given about 40 percent sales growth we delivered in the second quarter of last year. And all of our lab product lines really showed very strong growth. We had strong growth also in our core industrial. Here, the team has done a particularly good job of increasing our business mix to more attractive segments, as also Sean mentioned before. We have seen particularly strong demand for solutions and automation driving this efficiency that we talked about. So we are very confident on China if the underlying market conditions don't change. And, you know, in China, they can change quickly with the lockdowns. But so far, we are really optimistic. As I said, we are expecting strong growth in the second half as well.
spk34: Yeah, I don't think I'd add very much. I mean, I know there was a lot of concern about China lockdowns as we kind of entered the quarter, but, you know, from our perspective, we really had minimal impact during the quarter. I think our team did a wonderful job navigating that. We were one of the first companies to reopen in Shanghai, and we're able to really keep a lot of our product flows going throughout the quarter. And, of course, I think many of you know that most of our production is actually outside of Shanghai as well. And then these themes that Patrick talks about too, I mean, automation, digitalization, those are themes that are very prevalent in China that our team has been leaning into with our portfolio and all these hot segments that we talk about, about lithium battery and semiconductor are also very prevalent also in China as well. And then, of course, the government's five-year plan, they're leaning into that locally in terms of how they are stimulating their economy, which I think we're a beneficiary of as well.
spk31: Great. And then you talked a bit about seeing some more conservatism from packaged food customers on the product inspection side in Europe. How do you view that unfolding for the rest of the year? And have you seen any other businesses start to see signs of slowing in Europe?
spk29: Yeah, let me first capture the product inspection piece. And, yes, it's mainly in Europe where we see a little bit more conservative and customers are just a little bit more careful with their investments in packaged food. We don't see that in the U.S. The U.S. is actually still very, very strong for us in product inspection. We have a very good pipeline there. But Europe has become a bit more cautious, and that, of course, has also to do with the overall environment, economic environment in Europe, that some customers get more conservative. On the rest of Europe and the other businesses, I mean, we are really pleased with our growth that we have seen in the second quarter. As you know, we had expected to come in low single-digit. We came in better. And this is also against 20 percent growth in the quarter of last year. We don't see any concerns from our European sales term or any other parts of the businesses right now in Europe. So I would say no signs of a real downturn at this time, but we fully acknowledge that we need to be very agile as market conditions, of course, can change and change quickly given the situation with the energy supply, which we carefully monitor, and have also put the right mitigation plans in place.
spk23: Great. Thank you.
spk15: Thank you. We move on to our next question.
spk16: Please go ahead. Your line is open.
spk10: Hi. It's . Thanks for taking my questions.
spk13: Maybe first, Patrick, you mentioned that consumables and services are now one-third of total revenue. Just giving you a product mix, just wondering where you feel like you can take that potential recurring revenue. over the long term, and what are the plans to do that, given your product mix?
spk29: Yeah, good, absolutely. Let me start with that. So first and foremost, I think we still have ample of opportunity to also grow our service business, which is very, very strong. We have a huge installed base of instruments, and I would say a big part of those installed base is currently not under contract, but is calling more on what we would call break and fix services. So we have opportunities every time we go out there with customers to talk about the value of contracts and being under contract, which means they have faster access to services, they have a faster response time, they have a broader service portfolio if they are under contract. And that also drives some of the growth rates we have heard from us in services. We have a strong focus, of course, also at services at the point of sales, making sure we get right when we sell the instrument, also a better contact rate. The team has a very strong focus on that. And overall, we are increasing our portfolio of services to our customers, adding more high-value services continuously. So I'm very confident that the share of the service revenues continues to increase. I mean, we have to also see that, of course, the last two years, we had very strong instrument growth. And service usually trails that a little bit. But having 11% growth, again, this quality of growth in service and consumables, is a really strong reminder that you're making good progress on broadening our service footprint. If you were to look at it from a regional perspective, the U.S. historic has been very strong as well as Europe. In China, we still have even more potential to grow services. Traditionally, the Chinese market has been not that leaning that much into services. They are more self maintainers and they're also seeing it as a part of the overall sales package being included with instrument. And that takes time to change that mentality. And we are working on that. From that perspective, I'm optimistic and I'm putting a lot of focus also in my internal business meetings with every business I have, how we can increase the share of services. And of course, those are the consumables. The products we have, for example, our pipette business, very strong in consumables. In other areas, for example, in the lab business, the titrators, automation solutions, they all come with a very healthy and increasing share of consumers moving forward. So I'm optimistic that in the long term, we will move that one-third of the business piece further up for service and consumers.
spk13: Great. Thanks for the additional color. And then maybe more of a general question. Just give me your position on automation and some of the strengths you're seeing there. If we are going to a more challenging economic environment, do you see automation from your customer conversations you have as more of a discretionary purchase, meaning they might not have the capabilities and want to do it, but might not want to spend money for that? Or is the trade-off in terms of the productivity enhancements they see from your automation capabilities more than offset that decision to just spend discretionary dollars?
spk29: That's an excellent question. Matt, that's an excellent question. I think your second part of the question is actually leaning in the right direction. What we are hearing is that customers are, for several reasons, really interested in driving more automation in their businesses. It's driving their productivity. With that, of course, driving their profit. And they are very willing to invest and making sure that they continue to drive productivity. Also, you know, getting more... manual labor out of the play as much as possible. When you look at large automation in factories where we play big with our industrial business or even in the lab, it's all about making sure that you can automate processes to make them more robust, more reliable, and also, in the end, cheaper for them. This is why our customers are responding very well to automation right now. It's not the quote automation alone. It's that this productivity gain and also that long-term performance gains that they get from automation solutions.
spk11: Great. Thank you very much for the time. Appreciate it.
spk15: Thank you very much. We move on to our next question. Please do state your name and company before your question. Thank you so much.
spk25: Hey, guys. Thanks. This is Patrick Donnelly from Citi.
spk27: Patrick, maybe just one on, another one on China, just given the amount of focus there. Can you just talk a little bit about the cadence of the recovery, how it trended throughout the quarter, expectations there going forward, maybe just in terms of the guidance, and then similarly, just on the instruments versus consumables, what you saw kind of come back versus what you saw maybe lag a little bit there.
spk29: In China itself, look, we didn't have a really significant slowdown during the quarter. I mean, the quarter held up quite strongly for us. The team was reaching out to customers even in, let's say, some of the sales folks who had been in provinces or areas where there was a lockdown, they continued to call customers from home. We also referred in our earlier and some of the other calls about our digital tools and how we can engage with customers. They leveraged this fully in China as well. So on the auto momentum, I would say we haven't seen a real dip throughout the quarter and on the manufacturing side, we recovered very, very quickly. And there was no difference in terms of instruments versus consumables at all. I don't know, Sean, if you have a different perspective, but I haven't heard anything else in China.
spk34: What was nice to see is just the breadth of growth throughout the product portfolio. I mean, we grew strong double-digit both on the laboratory side of the business as well as on the industrial side of the business. And maybe the one soft spot that we did see is in our food retailing business. I mean, food retail is It's less than 5% of our total Chinese business, but that market has been very hard hit by the lockdowns and the nature of the lockdowns, a lot of store closures going on inside the country. But absent that, there was just a lot of strength throughout the rest of the portfolio.
spk27: Okay, definitely encouraging results there. And Sean, maybe a quick one for you there. Just in terms of the guidance for 3Q, Do you mind just breaking it out by segment and then geography as well, if you have it, just in terms of the growth rates?
spk34: Yeah, sure. I'll give you Q3 and then I'll give you the full year as well, Patrick. So, let me start with the divisions. So, our guidance for the lab division is high single-digit growth for Q3 and low double-digit growth for the full year. For product inspection, our guidance is mid to high single-digit for Q3 and mid to high single-digit for the full year. Core industrial, our guidance is high single digit for Q3 and high single digit for the full year. And then for food retailing, our guidance is low to mid single digit for Q3 and flattish for the full year. And then on a geographic basis, our guidance for Europe is low to mid single digit for Q3 and low to mid single digit for the full year. And I think it's important in Europe to remember that we're going to have a headwind in Russia in the second half of the year. And just given the seasonality of last year's sales, that headwind might be a little bit more in the second half of the year than the first half. It could be in the 4% range or so in terms of Russia headwind. In terms of Americas, we have our guidance as high single digit for Q3 and low double digit for the full year. And then for China, our guidance is approximately 10% for Q3 in low double-digit for the full year.
spk17: Very helpful. Thank you, guys.
spk15: Thank you very much. We move on to our next question. Please go ahead. Your line is open.
spk28: Good morning, guys. Dan Arias from Steeple. Maybe just going back to pricing and the ability to step up what you're able to push through overall. Sean, as the market has evolved and as your own internal capabilities have evolved, are you finding that the pricing power that you have is showing up in areas where maybe you hadn't had it before? Or is it really just a function of pushing a bit harder in the areas where traditionally you've been successful?
spk34: That's a good way to ask the question, Dan. I mean, hey, I think the You know, whenever we do pricing, we try to tailor our approach to the business conditions and the circumstances. And we always talk about how we like to differentiate by product and geography. And if you just look at kind of the cards we're dealt from a pricing perspective at the moment, it really lends itself to higher pricing in most categories. And so what we try to do is we look at the cost pressures in this environment by product category and geography. And then what we can do is we build it up and then we educate the organization about it. And I think that's really important is that with our direct sales force, they can really articulate that to the customer. And then they can also emphasize our value propositions. And it's like Patrick was saying in the previous Q&A that our value proposition in many regards is higher in this environment because people are seeking productivity and much more than they were and they're looking for solutions. And so when, you know, so that plays very well to our, our, um, our overall portfolio and our ability to position the price increases. So I think the market very much understands that. And then if you look at the execution of the organization, it certainly helps when we're able to support customers too, you know? And so what do I mean by that? Just in our supply chain? I mean, we, you know, I think every company has some level of challenge at the moment, But if you compare us relative to competition, I think we look pretty good in terms of our ability to support customers with lead times and things like that. And that also certainly increases the customer's willingness to pay. So it's actually the execution has been really good. And I just think the environment obviously lends itself to better price realization, which we saw in Q3. And with my previous comments, we'll be expected to even be a little bit better in the second half of the year.
spk28: Okay, very helpful. Maybe just as a follow-up, I wanted to ask about Blue Ocean. If I remember correctly, I think that you guys are implemented across 80% or so, 80%, 85% or so of the users at this point. A, is that right? And B, what is the timeline that you would consider for sort of a full global rollout? And then if that number is right, is that last 15% to 20% meaningful at all when it comes to pricing, visibility, margins, et cetera, or is... you know, at the end of the day, are those regions that don't really move the needle as much.
spk29: Yeah, I'll get to the first, and then I'll let Sean chime in as well. Okay, yeah, definitely around 85% of the rollout so far. And there's still a number of countries are left to bring on to Blue Oceans, or they are running on their current own ERP systems. Look, I mean, it will continue to help us drive productivity. within the company. We can share a common template for many of the processes that we use across the company. So a lot of it is also an internal gain in terms of efficiency and helping us to drive cost down and just use efficiency across the company. On the pricing side, I know that there is some impact, but I'll let Sean answer that.
spk34: Yeah, on the pricing side, I mean, we'll always benefit from improved analytics, but we'll also To me, the business processes is a big part of it too. Like when you think about price administration, we have a lot of tools around that and global centralized processes. And then there's also a lot of embedded pricing controls in terms of how we can manage discounting and things like that. So there's always some benefit when we go live. I mean, our largest market organization that we have left is in France, which we're expecting to go live next year. And like Patrick said, there's a handful of smaller organizations, and primarily in Europe and the rest of the world. And then maybe just before I hand it back to Patrick, a general comment that we always see with Blue Ocean is just the overall visibility into the business. You know, we very, very much have benefited over the last couple of years by having more transparency end-to-end in our business from Blue Ocean. And for those of you who are or less familiar with Blue Ocean. I mean, it's about global harmonized processes, but we enable that with one single instance of an ERP, fully integrated CRM service, HR program. So then with one single instance, we really have a lot of very interesting transparency, which we've very much benefited from over the last couple of years.
spk30: Thanks, Sean.
spk15: Thank you. We move on to our next question. Please go ahead. Your line is open.
spk09: Hi. Good morning. It's Derek DeBrown from Bank of America. Hey, Derek. So a couple of questions. Sean, first a little housekeeping question. Full year guide for interest expense and income net. How are the higher rates impacting you? How are you You know, how are you done in fixed versus variable?
spk34: Yeah, no, hey, good question, Derek. So, and thanks for, I know it's early for you today, so we apologize for the early morning. Hey, in terms of interest rates, you know, we're about 75% fixed at the moment, and we don't have any significant maturities in the short term, like this year or next year. I mean, we have a couple of smaller things. And then when you look at our variable exposure, actually a lot of that's also in Euro, which probably prices out about 1% or so. So I think we're positioned pretty well here. And if you kind of look at what we've done over the last few years, just even at the end of last year, we've been locking in a lot of 15-year debt over the last few years. So for example, in December of last year, we priced 15 year debt that funded in two tranches. We just funded $150 million at 2.8% for 15 years in March. And then we're gonna fund another $150 million tranche in September at 2.9%. And so we feel like for the short, medium term, we're pretty well positioned. And then to be specific on interest expense, our guidance or estimate for this year is $53 million.
spk09: Great. And, you know, another pricing question, but just more bigger picture with given the pricing and also the currency moves. Have you seen any impact on your customers purchasing power? Basically, some people hesitating because they just didn't have the budgets for things.
spk34: No, I mean, I think it's just the opposite. I think it's very much kind of like how I was answering the question before. I think people just really appreciate the value in this environment, and they appreciate the ability to support them. And of course, we're trying to do things in a balanced way in terms of increasing prices where it's appropriate, and there's very much a cost story, inflation story associated with it. And so I think I think between our approach and then the overall value proposition that we're providing, we're just really not hearing any noise.
spk29: Maybe a little bit in this, as you said, in product inspection, customers become a bit more cautious with investments, but otherwise not really.
spk34: Yeah, I mean, and just to clarify, in the PI, I wouldn't say it's a pricing topic. It's more of a – and as Patrick said earlier, it's very much a European topic for product inspection. There has been – some more conservatism where we, you know, projects, we get the sense that maybe some projects are going to get delayed and packaged foods in Europe.
spk09: And then just one more. Is there any signs of any inventory, excess inventory of animals, pipette tips, electrodes, anything that sort of like has long shelf life that people maybe have hoarded or stockpiled? Just sort of like some of the commentary on sort of what you're seeing in your customers.
spk29: Yeah, that's a good question. But look, we don't hear a lot of that customers have stockpiled electrodes or pipette tips. I mean, we had, I would say, more in the beginning of the year. Of course, during the pandemic, customers tried to buy as many pipette tips as possible, and they filled up their stock levels, but it's coming back to, I would say, more normal levels now. And you also have to realize that a lot of the pipette tip sales that we're making today are not going into testing anymore. They're going into, you know, bioresearch, bioparma applications. And these labs usually do not have the same tendency as we have seen, or you probably have heard from other suppliers that supply the broader testing industry that have tried to just get as many in their stocks as possibly in the last year. We have not been that much exposed.
spk21: Thank you very much.
spk25: Thanks, Eric.
spk15: Thank you. Our next question, please go ahead. Your line is open.
spk07: Hey, guys. It's Josh from Cleveland Research. Thanks for taking my questions. Patrick, a follow-up on product inspection, your growth is a bit lighter than in the quarter, but it sounds like the commercial team remains optimistic. I guess was the softer Q2 a result of installs pushing out or more a reflection of slower order intake? And just kind of curious how recent trends were reflected in the guide and whether or not H2 assumptions have come down versus prior plans.
spk29: Yeah. Well, thanks, Josh. Very, very good question. But look, I mean, The Q2 results have been a bit softer than we had expected. It's not like off by a huge margin. It was a little bit softer. I think we had projected high single digits and we came in a bit more than mid single digits. So it's not off by far. A lot of that was actually triggered by two factors. We have seen on the customer side, we have seen some project pushouts, not necessarily because they didn't have the money, but because usually we also supply into a larger infrastructure, and then some of the other suppliers were not ready to make the full installation, so our final product inspection piece of the whole flow line, so to speak, they were just not ready to take it this quarter. So there has been some push outs, but we also suffered from, in terms of not being able to deliver everything we could, was on the supply chain side, some of the electronic components just didn't come in time, so that led actually to delay in this quarter. As we said, we are quite optimistic for Q3. The team sees a good funnel, especially in the United States. We have to continue to monitor the situation in Europe, but otherwise, I think we are okay with the guidance.
spk07: Got it. Okay. And then the lab segment has outperformed expectations here in recent quarters. We'd just love to hear Any additional thoughts you have on what you think is driving consistent upside in this segment? I mean, how much of this is price coming in better than expected, maybe share gains, or just, you know, kind of strong underlying demand? And I guess whether that lab benefited from COVID testing in China in the quarter.
spk29: Yeah. Look, I mean, again, for us, COVID testing in China wasn't a big story at all. But we see broad-based growth across our product portfolio. There's very strong demand from pharma and biopharma, especially biopharma. The chemical segment, again, is showing very strong demand for automation solutions, so we are very happy with that. We had also, in our remarks, we had mentioned what we call hot segments, like the battery segment, plant-based food, et cetera, where we have targeted our sales flows very quickly to these accounts with the right application solutions. They show across the board, I mean across the regions, very strong growth. And I think if you factor all of that together with what we also mentioned earlier about this continuous need for automation solution, that just drove a lot of demand across our portfolio.
spk08: Got it. Appreciate the contact.
spk15: Thank you, sir. We move on to our next question.
spk16: Please go ahead. Your line is open.
spk04: Hi, this is Rachel from JPMorgan.
spk05: So sticking with some of the earlier questions on recession resiliency, can you just walk us through how your customers are thinking about the replacement cycle, given the evolving macro dynamic? Do you see any inflation softening some of these capital budgets and softening demand for new products? Or what kind of levers can Metler really pull to fuel that replacement cycle, even in a recession and inflation? Thanks.
spk34: Yeah. Hey, Rachel. This is Sean. I'll take it and Patrick wants to jump in. So, you know, when we look at our business, you know, other than this one topic that we talked about with packaged food in Europe, you know, we're not seeing any indicators that people are, you know, have any cautiousness or any indicators that there's any concern about delaying replacement cycles. As we kind of enter into this next phase of the economy, one thing that we try to remind people about, and we've talked about it in the past, is that we typically need the economy to be good enough. We need it to be good enough that people will stick to replacement cycles. And we've seen in the past PMIs go into the mid to high 40s like in Europe, but we still had growth. And it was because people were sticking with replacement cycles. At the same time, we've seen PMIs in the mid to high 50s in Europe, and we didn't have double digit growth. And so in a geography like Europe, which is arguably the most exposed at the moment, that is very much on our mind is that will the European business just kind of stick to replacement cycles here, and we just need the economy to be good enough. And then part of that is that we are selling, our average selling price of our products are less than $10,000. And so we're not the first instrument that's going to get cut in a budget. And I'd say, I think we estimate that something like more than 70% of our products are actually below that level. And so, you know, and they're personal instruments and we sell them with a direct sales force. We can articulate the value proposition, all that kind of stuff. So I feel like that's a favorable situation for us. And then the other thing is this these comments on mix that we made a lot in the prepared marks and talked about a little bit earlier is I just think that we should be more resilient going into this next phase of the economy compared to where we were in the past.
spk03: Great. And then one quick one from me.
spk05: You flagged some conservatism on supply chain during your prepared remarks, which I think is prudent just given the macro backdrop. But can you walk us through what you're seeing on supply chain? Have things continued to deteriorate? deteriorate here, or have they improved since 1Q? And then, do you have any line of sight on when things could really improve? Thanks.
spk29: Yeah, I'll take it. So, look, on supply chain challenges, I would say they have somewhat stabilized, but we continue to see challenges in certain items. It's still mainly semiconductors. It seems to get a little better, but I would not still give green light on everything, to be honest here. What we have seen on transportation and logistics, that improved quite a bit. We also see, for example, the port in Shanghai less congested as it used to be. So that helps, of course. But in overall supply of material, again, we see some of our businesses have seen slight improvement in semiconductor available. But we have still some others who have not. I mentioned product inspection, for example, where we had some issues getting the right components in time. And we still have constantly calls with the suppliers making sure that we get enough of the electronic components. I can't tell you really whether this is a trend already, these slight improvements. We're hoping all for it. And we stayed very agile and very, very close conversation with all the suppliers to make sure that we have enough safety stock in the areas that we see very critical.
spk02: Okay, operator, I think with that we'll go ahead and wrap up today's call. Thanks, everybody, for joining us on this early morning call. Looking forward to catching up with you later on in the day. Take care.
spk25: Bye. Thank you.
spk26: Thank you. Thank you, everyone. You may now disconnect.
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