Q2 2022 Mettler-Toledo International Inc Earnings Call

July 29, 2022

[music].

Okay.

Good day and welcome to the second quarter of 2022 Mettler Toledo International Inc. Earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Adam Osman. Please go ahead Sir.

Thank you and good morning, everyone.

At the moment I am 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 Sean <unk>, Our Chief Financial Officer and of course, Mary Finnegan with Investor Relations. So let me cover some administrative matters. This call is being webcast.

There's available appropriate replay on our website at <unk> Dot 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.

<unk> in this presentation are not historical facts constitute forward looking statements within the meaning of the U S. Securities Act of $19 33 in the U S Securities Exchange Act of $19 34. These statements involve risks uncertainties and other factors that may cause our actual results levels of <unk>.

Activity performance or achievements to be materially different than those expressed or implied by any forward looking statements for a 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 qualify.

In their entirety by reference to the factors discussed under the captions factors affecting our future operating results and in the business and managements discussion and analysis of financial condition and results of operation sections of our final items. One other item on today's call we may use non-GAAP .

<unk> 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 8-K, let me now turn the call over to Patrick.

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.

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 recognized our agility and resilience will be pivotal to navigate market conditions.

Later, we will have some additional comments on our business, but let me now turn it to Shawn to cover the financials and guidance chalk. Thanks, Patrick and good morning, everyone sales in the quarter were $978 4 million, which represented a local currency's increase of 10%.

On a us 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 rest of the world local currency sales increased 14% and 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.

<unk>.

On slide number six we summarized local currency sales growth by product area for.

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% growth in core industrial and product inspection up 7% food retail declined 6%.

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% 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.

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% decline from the prior year.

Adjusted EPS for the quarter was $9 39.

A 16% increase over the prior year or a 20% increase excluding unfavorable foreign currency.

We're very pleased with this adjusted EPS growth, especially given that adjusted EPS was up more than 50% 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 <unk> <unk> of purchased intangible amortization.

<unk> <unk> of restructuring and an <unk> 18 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% for the six month period, adjusted operating income increased 13% or 16%, excluding unfavorable foreign currency and our operating margin expanded 110 basis points.

Adjusted EPS grew 18% on a year to date basis or 21% 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.

Came in at three eight times.

Year to date adjusted free cash flow was $283 $7 million.

Let me now turn to guidance.

Forecasting continues to be challenging given the dynamic market conditions.

Our forecast remains on fact, our focus 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 is 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 are 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% in wood 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%.

What this means for the full year as we now expect currency to be a headwind to adjusted EPS of approximately four 5% as compared to three 5%. The last time, we spoke at.

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 will be slightly higher.

Finally, as you think through our sales guidance keep in mind, our sales growth will be reduced by approximately 1% for the remainder of the year due to the 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%. This compares to previous guidance of 8%.

We're 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.

$39, <unk>, which is a growth rate of 14% to 15% and a growth rate of approximately 19% excluding currency.

For the third quarter based on market conditions today, we expect local currency sales growth of approximately 8% and expect adjusted EPS to be in a range of $9 75 to.

To $9 85.

Our growth rate of 12%, 13% and a growth of 18% to 19% excluding currency.

Some final details on guidance with respect to the impact of currency on sales growth, we expect currency to decrease sales growth by approximately four 5% for the full year and decreased sales about 6% in Q3.

In terms of cash flow, we expect we continue to expect full year cash flow and the $855 million range and expect to repurchase approximately $1 1 billion.

And shares in 2022, we expect our net debt to EBITDA leverage ratio of approximately one five times that is it from my side and I'll now turn it back to Patrick.

Thanks, Shawn let.

Let me start with some comments on our operating businesses, starting with lap, which had strong sales growth in the quarter very good growth across all major product categories.

Do you expect the 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 as favorable and we believe this business is better positioned to capitalize on our customers' needs for automation and productivity improvement and efficiency gains as they work to overcome challenges in the labor market and the supply chain.

Product inspection sales came in a little lower than expected this quarter.

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 the 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.

As we had expected and against a 23% growth in the prior year.

As a reminder, we stopped shipments to Russia after the invention 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 the rest of the World had another quarter of strong growth with robust growth in laboratory and core industrial.

China grew 14%.

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 2020.

One final comment on the business service and consumables continue to excellent momentum and grew 11% in the quarter.

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.

I have seen in the recent years the agility that's been like a 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 and.

Turning to find growth opportunities and guide our sales force accordingly.

Yeah.

As you're all aware, we have an organic sales grew focus to benefit from our highly fragmented markets as.

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 <unk>.

Most attractive segments of growth and increase our sales force time here is the move strategic accounts.

You want to efficiently grow.

So after the best opportunities with our sales organization of approximately 3000 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 also opportunities are more efficiently handled by our tele sales and inside sales teams.

<unk> 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.

<unk> also provides extensive tools tahoe salesforce that improves the 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 it makes it difficult for competitors to coffee.

Our spinnaker program also benefits from our proprietary top key program.

Rooftop K, we use data analytics to identify customer investment projects and cross selling opportunities with potential actionable opportunities for our broad product offering.

In summary of the opportunity built all relevant information, including customer site contacting pool potential products all the activities with this customer is generated.

These summaries up 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 $150000 each top payloads and are continuing to penetrate these potential opportunities at customer sites.

Why do we continue to follow up with last year's alerts.

So launching additional layoffs 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.

Samples include vaccines plant based foods and advanced materials.

We're convinced that our unique ability to quickly identify growth opportunities and related accounts helps us to adapt to shifts in customer demand.

<unk> 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.

You 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 and the importance of articulating the value of the service contract and 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 to library that allows our sales reps to be more effective in value selling.

The update includes new product software ties directly into our CRM, providing our sales team dashboards to prepare for upcoming site visits and efficiently handled follow up requests.

Our sales enablement tool also provides our sales teams enhanced application information and selling guidance.

Which also helps us enabled cross selling with new applications in targeted accounts you have not yet penetrated.

This tool greatly improves the effectiveness of the selling process, thereby enhancing the customer experience and improve order conversion rates.

This is not just a few examples to illustrate our strength in marketing and sales.

At the core of our growth strategy 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 anchor and guide our sales teams to the best growth opportunities is the most favorable end markets.

Business conditions conditions today remains solids I am convinced that our strategic programs such as spin it 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 whole 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 want to remind you that all service and consumable 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 two life science customers, 20% to food and beverage and about 10% to chemical.

And beyond that we serve many of these diverse markets.

Clearly more biased towards higher growth markets and at the same time nicely diversified.

Well that concludes our prepared remarks, I mean, I want to open the call to questions.

Yeah.

Thank you speakers.

Ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your phone keypad, if you're using a speaker phone. Please make sure your mute function is turned off.

Yes.

A voice from the phone line will indicate when your line is open. Please state your name and company before posing your question. Once again. Please press star one we will take our first question now your line is open. Please go ahead.

Hey, guys. Thanks for taking my question.

And congrats on the really strong break here.

Maybe one.

You did mention on pricing in <unk>.

<unk>.

Can you talk about how pricing and inflation assumptions have changed versus the prior guide.

Okay.

Yeah, Hey, Vijay this is Sean I'm happy to do that so we were.

Pleased with our execution in the quarter, both on pricing, but also in our in our supply chain I think you hear us use the word agility a lot but.

The organizational agility and execution continues to be really fantastic across the global organization.

You look at pricing in the second quarter and we are estimated price realization was about four 5%, which is which was better than what we were expecting kind of when we kind of came into the quarter on the materials 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.

It 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 a 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 four 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 yes, and then if you kind of like want to translate that into to margins.

We're looking at about a 60 basis point improvement in our gross margin for Q3 and about 50 basis points.

The full year and then if you kind of drop it down to operating margins. Our operating margin in Q3 right. Now we are estimated on a currency neutral basis about 130 basis points and actually if you exclude currency.

If you. 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 than 160 basis point kind of a range.

Is that fixed when we help with Sean and then maybe one for Rob.

Patrick.

On your comment.

Comments towards the end and how the business mix has changed.

Can you.

Compare and contrast versus.

The last cycle.

And how that mix of <unk>, what was that mix backing away from the <unk> and what's the implication for the business.

The economy were to slow down here.

Yes, Sean personal loans, yes, 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 <unk>. It would have been I think just over 30% and right.

Now it's about 25%.

What's even more interesting to me is the mix within industrial and our overall end market exposure. So right now we would 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've continued to do a good job of redirecting business towards more attractive end market segments.

Clearly of course, let me add also to that you are seeing strong momentum in both businesses at the moment, we're seeing very healthy demand driven by operational efficiency and automation needs across both the margin as well as the industrial end markets. So I think both markets are benefiting very well from DC manage on behalf of right products to serve our customers.

We're really happy to file <unk> for both.

All segments and all of that business of course is much bigger as you know and vehicles.

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 here and so this is why we also so optimistic on the outlook for Q3 and Q4.

Understood. Thanks, guys.

Okay.

Yes.

Thank you if you find that your question has been answered you may remove yourself from the queue by pressing star two.

Go ahead, Peter next question please.

State your name and company before.

Before you posed the question. Thank you.

Okay.

Hey, guys. Thanks for the question. This is Catherine Schulte with Baird.

Can you talk about that's 14% local currency growth in China, I think you were expecting high single digit for the quarter. So what drove the upside there.

Without speaking for the rest of the year.

Yeah. Thanks Catherine.

Thank you a question first on that.

Sean joining as well so yes, we.

We are very pleased with the 40% growth in the quarter and as a reminder, we grew 35% in the second quarter of last year, So really accepted strong comp growth.

We saw growth across all of our lab business in China with Paul.

Most 20% sales growth, which is remarkable also given about 40% sales growth we delivered in the second quarter of last year and all of our overlap.

Product lines really showed very strong growth.

We had strong growth also in our core industrial <unk> has done a particularly good job of increasing our business mix to more attractive segments is also Sean mentioned before you have seen particularly strong demand for solutions and automation driving these efficiencies can be talked about.

We are very confident.

On China, if the underlying market conditions don't change in China. They can change very beautiful lockdowns, but so far we're really optimistic as I said, we are expecting strong growth in the second half as well.

Yes, I don't think I would add very much I mean, I know there was a lot of concern about China lockdowns as we kind of entered the quarter, but 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 <unk>.

Product flows going throughout the quarter and of course I think most many of you know that most of our production is actually outside of Shanghai as well and then these themes that Patrick talks about to.

Automation digitalization those are themes that are very prevalent in China that our team has been leaning into with our portfolio and all of 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 the governments.

Five year plan.

There they are leaning into that locally in terms of how they are stimulating their economy, which I think we're a beneficiary of as well.

Thanks, Sean.

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.

D scientists.

And in Europe .

Yeah, Let me first capture the <unk>.

<unk> inspection piece and yes, it's mainly in Europe , where we see some a little bit more conservative from customers such as lithium el capsule with debt investments in packaged food.

Don't see that in the U S. The rest is actually still very very strong for us and public inspection you have a very good pipeline there, but Europe has become a bit more cautious on that of course has also to do with <unk>.

Wall 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 have had expected to come in low to mid single digit who came in better and this is also against 20% growth in the quarter of last year.

We don't see any concerns from our European sales.

Part of the of the business is right now in Europe .

So no 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 between capital and monitor and have also put.

Derived mitigation plans in place.

Great. Thank you.

Thank you we move on to our next question. Please go ahead. Your line is open.

Yes.

Hi, it's Matt Thanks for Goldman Sachs. Thanks for taking my questions.

Maybe first.

Patrick you mentioned the consumables and services are now one third of total revenue.

Just given your 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.

Yes, good absolutely, let me start with that.

First and foremost I think we still have ample opportunity for you all to grow our services business, which is very very strong.

We have a huge installed base of instruments.

I would say a big part of those installed base is currently not under contract, but is calling more than what we would call break fix services. So we have opportunities every time, we dialed in with customers, who talk about the value of contracts and being under contract, which means they have faster access to services to have a fast response time type of broader service portfolio.

Year to fill in the contract and then also drive some of the growth rate improved from Austin services.

We have a strong focus of course those in it services and point of sale at the point of sales, making sure we get right from the sale of the instrumental to better connect grade team has a very strong.

Our focus on debt and overall.

Increasing our portfolio of services global customers, adding more high value services.

Continuously so I'm very confident that the chair of the service revenues continues to increase I think we have to also see that of course last two years, we had very strong instrument growth.

And then sort of as usually trails.

A little bit, but having 11% growth again this quarter double digit growth in servicing consumers.

It's a really strong reminder, that youre, making good progress on broadening our.

Service footprint, if you would look at it from us from a regional perspective, the U S. Historically has been very strong as well as Europe and China, we still have even more potential to grow services.

Really at the Chinese market has been not that.

Not leaning that much into services.

They are more self maintainor enel, so seeing it as a part of the overall sales package being included within instruments and <unk>.

Next time to changed at <unk>.

Mentality and we are working on that.

That perspective, I'm optimistic and I'm, putting a lot of focus also in my internal business meetings with every business how.

How we can increase the share of services and of course, those with the consumables.

Because we have our <unk>.

For example, a multi pet business very strong in consumables.

Other areas for example in the lab business the Thai traders automation solutions, they all come with a very healthy and increasing share of consumers moving forward. So.

<unk> good in the long term the email move that one third of the business piece through the App.

For service and consumables.

Great. Thanks for the additional color and then maybe more of a general question just given your position automation.

Some of the strength Youre seeing there.

If we are going to a more challenging economic environment do you see automation from your customer conversations you have is more of a discretionary purchase meaning we might not have the capabilities and we want to do it but might not want to spend money for that or is the trade off in terms of the productivity enhancements.

See from your automation capabilities more than offset that decision to spend discretionary.

Now that is an excellent meta is an excellent question and I think your second part of the question is actually leaning into right direction. What we are hearing is that customers are for several reasons really interested in driving more automation in that business as it's driving our productivity.

Instead of course, driving the profit and.

They are very willing to invest in and making sure that they continue to drive productivity also.

<unk>.

Manual labor out of out of to play as much as possible. When you look at lots of automation in factories.

<unk> bakery, Pall industrial business or even in the lap it's all about making sure that you can automate the.

Processes to make them more robust more reliable and also India and cheaper for them. This is why our customers are responding very well to automation right now it's.

It's not the quote automation alone. It's took this productivity gain and also that is longer term performance gains that they get from automation solutions.

Great. Thank you very much for the time.

I appreciate it.

Okay.

Thank you very much we'll move onto the next question. Please state your name and company before your question. Thank you so much.

Hey, guys. Thanks, This is Patrick Donnelly with Citi.

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.

You saw it going to come back versus what you saw maybe lag a little bit there.

In China itself.

You didn't have really significant slowdown during the quarter.

The quarter held up.

Quite strongly for us the key months, reaching out to customers even in let's say some of the sales folks who have been in provinces or areas been able to lock down day continued to call customers from home.

<unk> referred to earlier and some of the other calls about our digital tools, how we can gauge with customers de leveraged as fully in China as well. So on the order momentum I would say, we haven't seen a real did throughout the quarter and on the manufacturing side be 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 for the Ida I haven't heard anything else in China.

I mean, what was nice to see is just the breadth of 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 retailers, it's less than 5% of our total <unk>.

<unk> business, but but that market has been very hard hit by by the Lockdowns and the nature of the Lockdowns 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.

Okay definitely encouraging results there.

And Sean maybe a quick one for you there just.

Just in terms of the guidance for <unk>.

Do you mind, just breaking it out by segment and geography as well if you have interest in terms of the growth rate Yeah sure I'll give you a Q3 and then I'll give you the full year as well Patrick So let me start with the divisions. So so our guidance for for the Lab Division is high single digit growth for Q3, and low double digit growth for the full year.

For product inspection are 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 <unk>.

One 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.

Russia headwind.

In terms of Americas, we have our guidance is high single digit for Q3 and low double digit for the full year and then for China. Our guidance is approximately 10% for Q3 and low double digit for the full year.

Very helpful. Thank you guys.

Okay.

Thank you very much we move on to our next question. Please go ahead. Your line is open.

Hey, good morning, guys, Dan areas from Stifel, maybe just going.

Going back to pricing and the ability to step up what youre able to push through overall, Sean as the market has evolved and on your own.

Internal capability that will evolve 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 <unk> been successful.

Yes, that's a good way to ask the question Dan.

Thanks.

Whenever we do pricing, we try to tailor our approach to the.

Business conditions in the circumstances, and we always talk about how we'd like to differentiate by product and geography, and if you just look at kind of the cards were 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 category 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 as 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 are looking for solutions and so so that plays very well to our our 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 that our supply chain.

I think every company has some level of challenge at the moment, but if you if you compare it 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 customers' willingness to pay so so it's actually the execution has been really good and I just think the environment obviously.

Lends itself to to better price realization, which which we saw in Q3 and with my previous comments will be expected to even be a little bit better in the second half of the year.

Yes, Okay very helpful. Maybe.

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% to 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.

At the end of the day of those regions that don't really move the needle as much.

Yes.

And then I'll, let you.

Sean chime in as well, okay, yes, definitely around 85% of the rollout so far.

And there's still a number of countries.

Left.

Bring it on to promotions with Mayo on ammonia.

Current ERP.

<unk> systems.

Look I mean, it will continue to help us drive productivity.

Within the company, we can use shared common template for many of the process that we use across the company. So it's a lot of it is also an internal gain in terms of efficiency and helping us to drive.

Drive cost down and just use efficiencies across the company on the pricing side.

There is some impact, but I'll, let sean answer that.

Yes on the pricing side, I mean, we will always benefit from.

Improved analytics, but will also to me is the business processes is a big part of it too like when you think about price.

<unk> administration, we have a lot of tools around that.

Mobile centralized processes and then Theres also a lot of embedded pricing controls.

Terms of how we can manage discounting and things like that so there's always there's always some benefit when we go live I mean are our largest market organization that we have left is is in France, which were expected to go live next year.

Patrick said Theres, a theres a handful of smaller organizations, primarily in Europe , and the rest of the World and then maybe just a bit.

Dror I hand, it back to Patrick a general comment that we always see with Blue Ocean is just the overall visibility into the business. We're very very much benefited over the last couple of years by having more transparency and to end in our business from Blue Ocean and for those of you who are less familiar with <unk> I mean, it's about global <unk>.

<unk> processes, but we enable that with one single instance of an ERP.

Fully integrated CRM service HR programs so.

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. Okay. Thanks, Sean.

Thank you we move onto next question. Please go ahead your line is open.

Hi, Good morning, it's Derrick Brown from Bank of America.

And everything as well.

A couple of questions Sean first of all housekeeping question full year guide for interest expense.

Income net.

How are the higher rates impacting you and how are you.

How are you done fixed versus variable.

Yes, no hey, good question Derek.

And thanks for I know, it's early for you today, So we apologize for the early morning.

Hey in terms of interest rates were about 75% fixed at the moment and we don't have any <unk>.

Significant maturities in the short term like this year or next year.

A smaller things and then when you look at like our variable exposure actually a lot of that is also in euro, which which probably prices out about 1% or so so I think we're positioned pretty well here and if you kind of like 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 a $150 million at two 8% for 15 years in March and then we're going to fund another $150 million tranche in September at two nine.

1%, 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.

Another pricing question, but just more bigger picture.

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.

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 is like I think people just really appreciate the value in this environment and they appreciate the ability to support them and of course, we're doing we're trying to do things.

Balanced way in terms of like increasing prices, where it's appropriate.

There is a very much a cost story inflation story associated with it so.

And so I think I think between our approach and the overall value proposition that we're providing.

Really not hearing any noise, maybe a little bit in the S&P said in product inspection in June .

Customers get more cautious with investments.

Yes, I mean, and just to clarify on 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.

Projects, we get the sense that maybe some projects are going to get delayed in packaged foods and in Europe .

And then just one more.

Is there any.

Lines of <unk>.

Inventory.

Pipette tips electrodes anything thats long shelf life that people may be reported or stockpiled.

Just sort of feel like some of the commentary on sort of what youre seeing in the at your customers.

Yes, that's a good question, but look we don't hear a lot of customers have stockpiled electrodes all pipette tips. I mean, we had I would say more in the beginning of two years of course during the pandemic customers dry trying to buy as many pipette tips as possible and they filled up their stock levels, but it is coming back to where I would say more normal levels now.

And you also have to realize that a lot of the pipette tips hands have been making day I'm not going into.

Testing anymore I going into bio research.

Biopolymer applications of these labs, you do not have the same tendency as we have seen on you probably have heard from other suppliers that supply the product testing industry.

Trying to just get as many in their stocks as possibly even last year being that much expose.

Great. Thank you very much.

Thanks, Eric.

Okay.

Yeah.

Thank you. Our next question. Please go ahead your line is open.

Hey, guys, it's Joshua and Cleveland research, Thanks for taking my questions.

A follow up on product inspection.

The growth was a bit lighter than.

In the quarter, but it sounds like the commercial team remains optimistic I guess with softer with the softer Q2 result of installs pushing out or more a reflection of slower order intake.

Curious how.

Recent trends were reflected in the guide and whether or not <unk>.

<unk> assumptions have come down versus prior plan, yes.

Thanks, Jos to very very good question, but look I mean, the Q2 results have been a bit softer than you would expect it's not like off by a shoe tracker margins is probably a little bit.

Software I think we had projected high single digits and we came in.

A bit more of a mid single digit so it's not we're 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 because but because we usually you also supply into a larger infrastructure than some of the Apple suppliers, we're not ready to make the full installations of our final product.

Spectrum piece of the whole flow lines so to speak.

What they've done I'm, 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 the cut was on the supply chain side some of the.

Electronic components, just didnt come in time, so that the Atlantic city to delay this quarter as we said we are quite optimistic for Q3. The team sees a good formula, especially in the United States. We have to continue to monitor the situation in Europe or otherwise.

Okay for the guidance.

Got it Okay and then the lab segment has outperformed expectations here in recent quarters, we're just lumpy here.

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.

Strong underlying demand and I guess, whether that lab benefited from prototypes being in China in the quarter.

Yes look I mean again post COVID-19 testing in China.

Big story at all but we see broad based growth across our product portfolio is very strong demand from pharma and biopharma, especially biopharma.

The chemical segment.

Ken is showing very strong demand for automation solutions. So we're very happy with that.

Should we had also in our remarks, we had mentioned.

Let me call hearth segments like the battery segment plant based food et cetera, where we have target our sales force very quickly to these accounts with the right application solutions based will show across the board across the regions.

Very strong growth and I think if you factor all of that together with what we also mentioned anything about this continuous need for automation solutions.

Touches drove a lot of demand across our portfolio.

Scott I appreciate the context.

Thank you Sir you move onto the next question. Please go ahead. Your line is open.

Hi, This is Rachel Levine from J P. Morgan.

Thank you for the earlier questions on refreshing 1 billion can you just walk us through how your customers are thinking about the replacement cycle given the volatile macro dynamics and do you see any inflation softening from the capital projects and softening demand for new products or what kind of levers can that level.

Can you hold that replacement cycle, even in a recession and inflation. Thanks.

Yeah, Hey, Rachel this is Shawn I'll take it and Patrick wants to jump in so when we look at our business.

Other than this one topic that we talked about with packaged food in Europe .

We're not seeing any indicators that people are.

Have any cautiousness or any indicators that there is 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 needed to be good enough that people will stick to replacement cycles and we've seen in the past.

<unk> go into the mid to high 40% 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.

<unk> in the mid to high Fifty's in Europe , and we didn't have double digit growth in so so in a geography like Europe , which is arguably the most exposed at the moment that is very much on our mind is that we will weather European business, just kind of stick to replacement cycles here and we just need the economy to be good enough in and part of that is that we are selling are.

Average selling price of our products are less than $10000 and so we're not the first instrument that's going to get cut in our budget and I would say I think we estimate that there's something like more than 70% of our.

Products are actually below that level and so.

So and their personal instruments, and we sell them with a direct sales force, we can articulate the value proposition all that kind of stuff. So so I feel like that is that.

A favorable situation for us and then the other thing is that these comments on mix that we made a lot in the prepared remarks and talked about a little bit earlier 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.

Great and then one quick one for me and you flagged some conservatism on supply chain during your prepared remarks, which I think is prudent.

Macro backdrop.

Can you walk us through what Youre seeing on supply chain.

Continuing to deteriorate.

Right here or are they improve since <unk>.

Have any line of sight on when things really improved.

Yes, I'll take that.

So look on supply chain challenges I would say they have somewhat stabilized, but we continue to see challenges in suicide still mainly semiconductors.

It seems to get a little bit of that I wouldn't ultimately green light on everything to be honest here.

What we have seen them on transportation and logistics have improved quite a bit. We also see for example, the port in Shanghai and less congested as it used to be so that helps of course, but.

All supply of material.

Again, we see some of our businesses have seen slight improvement in semiconductor available, but we have still some others, we have not I mentioned.

<unk> for example, where we had some issues getting getting derived components in time, and we still have constantly calls with the suppliers, making sure that the <unk>.

Getting off of electronic components I can tell you really relates to.

China already the slight improvements youre, hoping offered NBA stayed very agile and very very close conversation with our suppliers to make sure that we have enough safety stock holds in areas that we see very critical.

Okay.

Okay, operator, I think with that we will 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.

Thank you. Thank you.

Thank you everyone you may now disconnect.

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Good day and welcome to the second quarter 2020 to Mettler Toledo International Inc. Earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Adam Hoffman. Please go ahead Sir.

Thank you and good morning, everyone.

In a moment I am 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 Sean <unk>, Our Chief Financial Officer and of course, Mary Finnegan with Investor Relations. Let me cover some administrative matters. This call is being webcast.

As available appropriate replay on our website at <unk> Dot 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.

In this presentation are not historical facts constitute forward looking statements within the meaning of the U S. Securities Act of $19 33 in the U S Securities Exchange Act of $19 34. These statements involve risks uncertainties and other factors that may cause our actual results levels of <unk>.

One other item on today's call, we may use non-GAAP financial measures.

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 8-K, let me now turn the call over to Patrick.

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 <unk>.

<unk> 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, we will have some additional comments on our business, but let me now turn it to Shawn to cover the financials and guidance, Sean Thanks, Patrick and good morning, everyone sales in the quarter were $978 4 million, which represented a local currency increase of 10%.

On a us dollar basis sales increased 6% as currency reduced sales growth by 4% we.

We estimate that the impact of reduced sales in Russia, Ukraine due to the war was a headwind of about 1% to sales growth.

<unk>.

On slide number six we summarized 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.

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% 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.

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% decline from the prior year adjusted.

Adjusted EPS for the quarter was $9 39.

16% increase over the prior year or a 20% increase excluding unfavorable foreign currency.

We're very pleased with this adjusted EPS growth, especially given that adjusted EPS was up more than 50% 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 <unk> of purchased intangible amortization <unk>.

<unk> <unk> of restructuring and an <unk> 18 benefit due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises.

Adjusted EPS grew 18% on a year to date basis or 21% excluding unfavorable currency.

Came in at three eight times.

Year to date adjusted free cash flow was $283 $7 million.

Let me now turn to guidance.

Forecasting continues to be challenging given the dynamic market conditions.

Our forecast remains on fact, our focus remains on factors, we can control, namely successful execution of our growth and margin initiatives.

Customer demand is solid and we are 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 wood 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%.

What this means for the full year as we now expect currency to be a headwind to adjusted EPS of approximately four 5% as compared to three 5%. The last time, we spoke at.

<unk> currency reported operating margin profit margin will be will be slightly higher.

Finally, as you think through our sales guidance keep in mind, our sales growth will be reduced by approximately 1% for the remainder of the year due to the 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%. This compares to previous guidance of 8%. 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 <unk>.

Which is a growth rate of 14% to 15% and a growth rate of approximately 19% excluding currency.

For the third quarter based on market conditions today, we expect local currency sales growth of approximately 8% and expect adjusted EPS to be in a range of $9 75.

To $9 85.

Our growth rate of 12%, 13% and a growth of 18% to 19% excluding currency.

In terms of cash flow, we expect we continue to expect full year cash flow and the $855 million range and expect to repurchase approximately $1 1 billion.

And shares in 2022, we expect our net debt to EBITDA leverage ratio of approximately one five times that is it from my side and I'll now turn it back to Patrick.

Thanks, Shawn let.

Let me start with some comments on our operating businesses, starting with lap, which had strong sales growth in the quarter very good growth across all major product categories.

Do you expect the markets to remain favorable and believe 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 as favorable and we believe this business is better 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 the supply chain.

Product inspection sales came in a little lower than expected this quarter, but our team is optimistic for the third quarter.

You 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.

As we had expected and against the 23% growth in the prior year.

As a reminder, we stopped shipments to Russia after the invention 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%.

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.

A leaf we will deliver strong growth in China in 2022.

One final comment on the business service and consumables continued 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.

You have seen in the recent years the agility that's been I can provide 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 subsequent recovery.

Under both scenarios spinnaker provided agility.

To quickly identify and identify growth opportunities and guide our sales force accordingly.

As you're all aware, we have an organic sales grew focused benefits from our highly fragmented markets as.

As well as a very large installed base of instruments, which provides fertile ground to discuss 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 theres the most strategic accounts.

You want to efficiently go.

Go after the best opportunities with our post sales organization of approximately 3000 sales colleagues around the world.

<unk> 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.

<unk> also provides extensive tools tahoe salesforce that improves the 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 it makes it difficult for competitors to coffee.

Our spinnaker program also benefits from our proprietary top key program.

We have top K b use data analytics to identify customer investment projects and cross selling opportunities with potential external opportunities for our broad product offering.

A summary of the opportunity built all relevant information, including customer site contact info potential products all the activities with this customer is generated.

These summaries up provided to the sales organization throughout the World. We 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 to teams to these opportunities.

Last year, we generated more than $150000 each top payloads and are continuing to penetrate these potential opportunities at customer sites.

While we continue to follow up with last year's alerts.

So launching additional layoffs this year.

Target industries for this wave include for example, pharma food and beverage and chemicals and we also identified opportunities to fast growing markets of lithium ion battery and semiconductors.

I'll take samples 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.

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 demos.

Demos.

We recognize the importance of leveraging a smart mix of online and onsite meetings to convert opportunities to autos.

Finally, selling service contracts at the point of sale continues to be a high priority focus for us.

You saw the value of our service throughout the last two years in terms of very favorable net promoter scores.

This has reinforced our post sales organization the importance of articulating the value of the service contract and 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 to library that allows our sales reps to be more effective in value selling.

The update includes new product software tie directly into our CRM, providing our sales team dashboards to prepare for upcoming site visits and efficiently handled follow up requests.

Our sales enablement tool also provides our sales teams enhanced application information and selling guidance.

Which also helps us enabled 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 improve order conversion rates.

This is not just a few examples to illustrate our strength in marketing and sales.

At the core of our growth strategies is to importance to reallocate resources to the best opportunities and spinnaker is a great example, how we do this by helping to identify and Micah and guide our sales teams to the best growth opportunities in the most favorable end markets.

Business conditions conditions today remains solids I am convinced that our strategic programs such as spin off 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 whole 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 chemicals customers.

And I would remind you that our service and consumable 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 two life science customers, 20% to food and beverage and about 10% to chemical.

And beyond that we serve many of these diverse markets.

Clearly a more biased towards higher growth markets and at the same time nicely diversified.

That concludes our prepared remarks, I mean, I want to open the call to questions.

Okay.

Yes.

Thank you speakers.

Ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your phone keypad, if you're using a speaker phone. Please make sure your mute function is turned off.

Yes.

A voice prompts on the phone line will indicate when your line is open. Please state your name and company default posing your question. Once again. Please press star one we will take our first question now your line is open. Please go ahead.

Hey, guys. Thanks for taking my question.

And congrats on the really strong <unk> here.

Maybe one.

You had mentioned on pricing and inflation can.

Can you talk about how pricing and inflation assumptions have changed versus the prior guide.

Okay.

Yes, Hey, Vijay this is Sean I'm happy to do that so we were.

We're pleased with our execution in the quarter, both on pricing, but also in our in our supply chain I think you harriss used the word agility a lot but.

The organizational agility and execution is just continues to be really fantastic across the global organization.

If you look at pricing in the second quarter. We are estimated price realization was about four 5%, which is which was better than what we were expecting kind of when we kind of came into the quarter on the materials side I would say material costs remain elevated and they were pretty much as we kind of expected as we came into the <unk>.

Which was a little bit better than Q1, but still remain at an elevated level.

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 minds. 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 four 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 yes, and then if you kind of like translate that into to margins.

We're looking at about a 60 basis point improvement in our gross margin for Q3 and about 50 basis points.

If you. If you include currency the reported number is probably more in the 170 basis point on a reported basis.

Okay. That's extremely helpful. Sean and then maybe one for Rob.

Patrick.

On your comment.

Comments towards the end and how the business mix has changed.

Can you.

Compare and contrast versus.

The last cycle.

And how that mix is today and what was that mix backing away from the <unk> and what's the implication for the business.

The economy were to slow down here.

Yeah sure Nicole first one on China, Yes, 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 <unk>. 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 we would estimate that more than 60% of our core industrial business, which historically is more.

Clearly of course, let me add.

The answer 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 of <unk> across both marketing as well as the industrial end markets. So I think both markets are benefiting very well from DC Madam you have the right products to serve our customers. They are really happy with <unk>.

Both of them.

Segments of that business of course is much bigger as you know.

We have also launched a lot of exciting products. This year and continue to have a lot of good products in the pipeline for <unk>. So this is why we also so optimistic on the outlook for Q3 and Q4.

Understood. Thanks, guys.

Hi.

Thank you if you find that your question has been answered you may remove yourself from the queue by pressing star two we will go ahead with our next question. Please.

State your name and company before.

Before you posed the question. Thank you.

Okay.

Hey, guys. Thanks for the question with Catherine Schulte with Baird.

Can you talk about that's 14% local currency growth in China, I think you were expecting high single digit for the quarter. So what drove the upside there.

Because without reaching for the rest of the year.

Yeah. Thanks Catherine.

A question first on that.

Sean joining as well so yes.

We are very pleased with the 40% growth in the quarter and as a reminder, we grew 35% in the second quarter of last year, So really accepted strong comp growth.

We saw growth across all of our lab business in China with Paul.

Almost 20% sales growth, which is remarkable also given by 40% sales growth we delivered in the second quarter of last year and all have overlapped.

Product lines really showed very strong growth.

You had strong growth also in our core industrial shale team has done a particularly good shop of increasing our business mix to more attractive segments is also Sean mentioned before we have seen particularly strong demand for solutions and automation driving this efficiency can be talked about.

We are very confident.

On China, if the underlying market conditions don't change in in China that can change very beautiful lockdowns, but so far we are really optimistic as I said, we are expecting strong growth in the second half as well.

Yes, 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 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 <unk>.

Product flows going throughout the quarter and of course I think most many of you know that most of our production is actually outside of Shanghai as well and then these themes as Patrick talks about to.

Five year plan.

There they are leaning into that locally in terms of how they are stimulating their economy, which I think we're a beneficiary of as well.

Thanks, Sean.

This filing in Europe .

Yeah, Let me first captured.

Product inspection piece and yes, it's mainly in Europe , where we see some a little bit more conservative from customers I, just listed and our careful with investments in packaged food.

You don't see that in the U S. The rest is actually still very very strong for us and public inspection you have a very good pipeline there, but Europe has become a bit more cautious on that of course has also to do.

Overall environment economic environment in Europe , but 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 have had expected to come in low single digit who came in better.

This is also against 20% growth in the quarter of last year.

We don't see any concerns from our European sales team or any other part of the of the businesses right now in Europe .

The right mitigation plans in place.

Great. Thank you.

Yes.

Thank you we move on to our next question. Please go ahead. Your line is open.

Hi, it's Matt Thanks for Goldman Sachs. Thanks for taking my questions.

Maybe first.

Patrick you mentioned the consumables and services are now one third of total revenue.

Just given your 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.

Yes, good absolutely, let me start with that.

First and foremost I think we still have ample opportunity to also grow our services 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 than what we would call breaking fixed services. So we have opportunities every time, we do our beverage customers to talk about the value of contracts and being under contract, which means to have faster access to <unk>.

Services to have a fast response time type of broader service portfolio development contract and then also drive some of the growth rate improved from Austin services.

We have a strong focus of course those in it services and point of sale at the point of sales, making sure we get right from the sale of the instrumental to better connect grid team has a very strong.

Focus on debt and overall.

Increasing our portfolio of services to our customers, adding more high value services.

Continuously so I'm very confident that the chair of the service revenues continues to increase I mean do you have to also see that of course last two years, we had very strong instrument growth.

And then service usually trails that I think it's a little bit, but having 11% growth again this quarter double digit growth in servicing consumers is.

Really strong reminder, that youre, making good progress on broadening our.

Certainly the Chinese market has been not debt.

Not leaning that much into services.

They are more self maintainor enel, so seeing it as a part of your overall sales package being included with instrument and it 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 on wholesale in my internal business meetings with every business I know how.

How we can increase the share of services and of course those are the consumables.

Alex We have for example of our pipette business very strong in consumables.

The areas for example in the lab business the Thai traders automation solutions, they all come with a very healthy and increasing share of consumers moving forward. So.

<unk> good in the long term the PVA move that one third of the business piece grew up.

For services and consumables.

Great. Thanks for the additional color and then maybe more of a general question just given your position automation.

And some of the strength youre seeing there.

We are going to a more challenging economic environment do you see automation premier customer conversations you have is more of a discretionary purchase meaning they may 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.

See from your automation capabilities more than offset that decision to spend discretionary.

So that is an excellent meta is an excellent question I think your second part of the question is actually leaning into right direction.

Hearing is that customers are for several reasons really interested in driving more automation in that business as it's driving our productivity.

That of course, driving the profit and.

They are very willing to invest in Q and making sure that they continue to drive productivity also.

<unk>.

Manual labor out of out of the play as much as possible. When you look at lots of automation in factories, maybe play bakery Pall industrial business or even in the lap. It's all about making sure that you can automate processes to make them more robust reliable and also India and cheaper for them. This is why our cost.

Responding very well to automation right now it's.

It is not the quote automation alone it stick this productivity gain and although that is long term.

<unk> gains that they get from automation solutions.

Great. Thank you very much for the time.

I appreciate it.

Okay.

Thank you very much we'll move onto the next question. Please state your name and company before your question. Thank you so much.

Hey, guys. Thanks, This is Patrick Donnelly with Citi.

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.

You saw it going to come back versus what you saw maybe lag a little bit there.

In China itself.

You didn't have really a significant slowdown during the quarter.

The quarter held up.

Quite strongly for us and the team was reaching out to customers even in let's say some of the sales folks who have been in provinces or areas have been able to lock down day continue to call customer from home.

Referred to earlier and some of the other calls about our digital tools, how we can engage with customers de leveraged as fully in China as well. So on the order momentum I would say, we haven't seen a real dip throughout the quarter and on the manufacturing side be recovered very very quickly and there was no difference in terms of instruments versus consumables at all.

I don't know if you have a different perspective for the Ida I haven't heard anything else in China.

I mean, what was nice to see is just the breadth of our 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 retailers, it's less than 5% of our total <unk>.

<unk> business, but but that market has been very hard hit by by the Lockdowns and the nature of the Lockdowns 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.

Okay definitely encouraging results there.

And Sean maybe a quick one for you there just.

Just in terms of the guidance for <unk>.

Do you mind, just breaking it out by segment and geography as well if you have interest in terms of the growth rate Yeah sure I'll give you a Q3 and then I'll give you the full year as well Patrick So let me start with the divisions. So 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 are 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.

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.

Very helpful. Thank you guys.

Yes.

Thank you very much we'll move onto our next question. Please go ahead. Your line is open.

Hey, good morning, guys, Dan areas from Stifel, maybe just going.

Going back to pricing and the ability to step up what youre able to push through overall, Sean as the market has evolved in your own.

Internal capabilities that are involved 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 <unk> been successful.

Yes, that's a good way to ask the question Dan.

Thanks.

Whenever we do pricing, we try to tailor our approach to the business conditions and the circumstances and we always talk about how we'd like to differentiate by product and geography, and if you just look at kind of the cards. We are dealt from a pricing perspective at the moment it really lends itself to higher pricing in most categories.

So what we try to do is we look at the cost pressures in this environment by category 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.

<unk>, 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 are looking for solutions and so so that plays very well to R. R.

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 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 our customers' willingness to pay so so it's actually the execution has been really good and I just think the environment obviously.

Lends itself to to better price realization, which which we saw on Q3 and with my previous comments will be expected to even be a little bit better in the second half of the year.

Okay, Okay very helpful. Maybe.

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% to 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% beat.

Meaningful at all when it comes to pricing visibility margins et cetera or is.

At the end of the day are those regions that don't really move the needle as much.

Yes.

And then I'll, let Sean chime in as well okay.

Around 85% of the rollout so far.

And there's still a number of countries left.

Bring it on to promotions on Aon wanting on here.

Current ERP systems.

Look I mean, it will continue to help us drive productivity.

Within the company we can use.

Shared common template for many of the process that we use across the company. So it's a lot of it is also an internal gain in terms of efficiency and helping us to drive.

Drive costs down and just to use efficiencies across the company on the pricing side.

Im impact, but I'll, let Sean answer that.

Yes on the pricing side, I mean, we will always benefit from.

Improved analytics, but will also to me is the business processes is a big part of it too like when you think about pricing.

<unk> administration, we have a lot of tools around that.

Global centralized processes, and then Theres also a lot of embedded pricing controls.

In terms of how we can manage discounting and things like that so there's always there's always some benefit when we go live I mean are our largest market organization that we have left is <unk>.

As in France, which we're expecting to go live next year.

Patrick said Theres, a theres a handful of smaller organizations, 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.

We're very very much benefited over the last couple of years by having more transparency and to end in our business from Blue Ocean and for those of you who are less familiar with <unk> I mean, it's about global harmonized processes, but we enable that with one single instance of an ERP see it 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. Okay. Thanks, Sean.

Thank you we move onto next question. Please go ahead your line is open.

Hi, Good morning, it's Derrick Brown from Bank of America.

Is there anything as well.

So a couple of questions Sean first of all housekeeping question full year guide for interest expense.

And income net.

How are the higher rates impacting you how are you.

How are you done fixed versus variable.

Yes, no hey, good question Derek.

And thanks for I know, it's early for you today, So we apologize for the early morning.

Hey in terms of interest rates were about 75% fixed at the moment and we don't have any <unk>.

Significant maturities in the short term like this year or next year I mean, a couple of smaller things and then when you look at like our variable exposure actually a lot of that is also in euro, which which probably prices out about 1% or so so I think we're positioned pretty well here and if you kind of like look at what we've done over the last few years.

Even at the end of last year.

10% 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.

Another pricing question, but just more bigger picture.

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.

Balanced way in terms of like increasing prices, where it's appropriate and there is a very much a cost story inflation story associated with it so.

And so I think I think between our approach and then the overall value proposition that we're providing we're.

Really not hearing any noise and maybe a little bit in the S&P said in product inspection.

Customers get more cautious with investments.

Yes, I mean, and just to clarify on 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 to where we.

<unk>, we get the sense that maybe some projects are going to get delayed in packaged foods in Europe .

And then just one more.

Is there any.

Signs of it.

Inventory.

Thank you.

Pipette tips.

<unk> anything that's like as long shelf life that people may be reported or stockpiled.

Just sort of like some of the commentary on sort of what youre seeing in the at your customers.

Yes, that's a good question, but look we don't hear a lot of customers have stockpile electrodes all pipette tips.

I would say more of the beginning of two years of course during the pandemic customers dry trying to buy as many pipette tips as possible and they filled up their stock levels, but it is coming back to where I would say more normal levels now and you also have to realize that.

Lot of the.

IPad tip sales have been making a day on not growing into.

Testing anymore going into bio research.

Oklahoma applications and these labs, usually do not have the same tendency as we have seen on your proppant and fluid from other suppliers to supply the product testing industry.

Trying to just get as many in their stocks as possibly when you last year being that much exposed.

Great. Thank you very much.

Thanks, Eric.

Okay.

Thank you. Our next question. Please go ahead your line is open.

Hey, guys, it's Joshua and Cleveland research, Thanks for taking my questions.

Patrick.

I'll work on product inspection.

<unk> growth was a bit lighter than in.

In the quarter, but it sounds like the commercial team remains optimistic I guess with softer with the softer Q2 result of installs pushing out or more a reflection of slower order intake.

Curious how.

Recent trends were withdrawn.

The guide and whether or not <unk> assumptions have come down versus prior plan yes.

Well, thanks, Josh to very very good question, but look I mean, the Q2 results had been a bit softer than we would expect it sounds like off by a huge margin, it's probably a little bit.

Software I think we had projected high single digits, we came in.

Didn't want to mid single digits. So it's not we're 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 because but because we usually you also supply into a larger infrastructure and then some of the Apple suppliers, we're not ready to make the full installations of our final product inspection piece of the whole flow lines so to speak.

Hey, Ron I'm, just not ready to take it this quarter.

So there has been some push outs.

We also suffered from in terms of not being able to live where everything because it was on the supply chain side some of the.

Electronic components, just didnt come in times of that Atlantic City to delayed this quarter. As we said we are quite optimistic for Q3, the team and see good funnel, especially in the United States. We have to continue to monitor the situation in Europe and otherwise.

Okay for the guidance.

Got it Okay and then the lab segment has outperformed expectations here in recent quarters, we're just lumpy here.

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.

You kind of strong underlying demand.

And I guess, whether or not lab benefited from prototypes being in China in the quarter.

Yes look I mean again post COVID-19 testing in China a.

Big story at all but we see broad based growth across our product portfolio tends to very strong demand from pharma and biopharma, especially biopharma.

The chemical segment.

<unk> is showing very strong demand for automation solutions. So we're very happy with that.

Should we had also in our remarks, we had mentioned.

Let me call half segments like the battery segment plant based food et cetera, where we have targeted our sales force very quickly to these accounts with the right application solutions based real sugar across the board I mean across the regions.

Very strong growth and I think if you factor all of that together, what we also mentioned anything about this continuous need for automation solutions.

Is that just drove a lot of demand across our portfolio.

Got it appreciate the context.

Thank you Sir you move on to the next question. Please go ahead. Your line is open.

Hi, This is Rachel Levine from Jpmorgan sticker.

From the earlier questions on refreshing resilient can you just walk us through how your customers are thinking about the replacement cycle, given the evolving macro dynamics and do you see any inflation in a softening from the capital projects and softening demand for new products or what kind of levers.

Really fueled that replacement cycle, even in a recession and inflation. Thanks.

Yeah, Hey, Rich this is Sean I'll take it and Patrick wants to jump in so when we look at our business.

Other than this one topic that we talked about with packaged food in Europe .

We're not seeing any indicators that people are.

Have any cautiousness or any indicators that there is 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 needed to be good enough that people will stick to replacement cycles and we've seen in the past PMI as go into the mid to high <unk> 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.

<unk> in the mid to high <unk> in Europe , and we didn't have double digit growth in so so geography like Europe , which is arguably the most exposed at the moment that is very much on our mind is that we will weather 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 app.

Products are actually below that level and so.

So and their personal instruments, and we sell them with a direct sales force, we can articulate the value proposition all that kind of stuff. So so I feel like that's a 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 remarks talked about a little bit earlier I, just think that we should be.

More resilient.

<unk> into this next phase of the economy compared to where we were in the past.

Great and then one quick one for me and you flagged some conservatism on supply chain. During your prepared remarks, which I think it's prudent just given the macro backdrop.

Can you walk us through what Youre seeing on supply chain.

To deteriorate.

Right here or are they improve since <unk>.

Have any line of sight on when things will improve.

Yes, I'll take that.

So look on supply chain challenges I would say they have somewhat stabilized, but we continue to see challenges in certain items still mainly semiconductor it.

It seems to get a little bit of that I wouldn't ultimately get green light on everything to be honest here.

What we have seen in transportation and logistics have improved quite a bit. We also see for example, the port in Shanghai and less congested as it used to be so that helps of course, but and overall supply of material.

Again, we see some of our businesses have seen slight improvement in semiconductor available, but we have still some others. We have not I mentioned product inspection for example, where we had some issues getting getting derived components in time, and we still have constantly calls with the suppliers, making sure that would be good enough.

Tony components I can tell you really whether it's 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 our suppliers to make sure that we have enough safety stock holds in areas that we see very critical.

Okay.

Okay. Operator, I think that will 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.

And good day take care.

Thank you. Thank you.

Thank you everyone you may now disconnect.

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