Q2 2023 Mettler Toledo International Inc Earnings Call
Good afternoon, and welcome to the Mettler Toledo second quarter 2023 earnings Conference call.
My name is brianna and I will be your conference operator today.
Please note that this call is being recorded.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time. Please press star followed by the number one on your telephone keypad.
I will now turn the call over to Adam Uhlman head of Investor Relations. Please go ahead.
Hey, Thanks, Brandon and good evening, everyone. Thanks for joining us on the call with me today is Patrick Kaltenbach, Our Chief Executive Officer, and Shawn Vadala, Our Chief Financial Officer, Let me cover some administrative matters. This call is being webcast and available for replay on our website at <unk> Dot com a copy of the press release and the presence.
Patients that we will refer to today is available on our website. This call will also include forward looking statements within the meaning of the U S. Securities Act is $19 33 in the U S Securities Exchange Act of 1934. These statements involve risks uncertainties and other factors that may cause our actual result.
Financial condition performance and achievements to be materially different from those expressed or implied by any forward looking statements for a discussion of these risks and uncertainties. Please see our recent annual report on Form 10-K, and quarterly and current reports filed with the SEC The company disclaims any obligation.
We are undertaking to provide any updates or revisions to any forward looking statement, except as required by law on today's call. We may use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in the 8-K and is available on our website. Let me now turn the call over.
Patrick.
Thanks, Adam and good evening, everyone. We appreciate you joining our call today.
Tonight, We reported our second quarter financial results the details of which are outlined for you on page three a whole presentation.
Our sales growth in the second quarter included strong growth in our service business the service business as well as solid performance across our industrial product categories.
Which was offset in part by softer market conditions and laboratory in China.
Focused execution of our margin expansion and cost control initiatives resulted in good growth in adjusted EPS.
Slight currency being much greater than expected headwind this quarter.
As we look to the remainder of 2023, there is increased uncertainty in the global economy, and our end markets.
In addition market demand in China has deteriorated.
While we have reduced our growth expectations for 2023 due to weaker market conditions.
Remain confident in the factors, we can control, including execution on our best in class sales and marketing programs and our margin expansion and cost saving initiatives.
Our team remains very agile in adapting to changing market conditions and I am confident that our efforts will deliver solid results.
This year.
Yes.
Let me now turn the call over to Sean to cover the financial results and our guidance and I will then come back with some additional commentary on the business and our outlook.
Sure.
Thanks, Patrick and good evening everyone.
Sales in the quarter were $982 $1 million, which represented an increase in local currency of 2%.
On a U S dollar basis sales were flat as currency reduced sales growth by 2%.
On slide number four we show sales growth by region.
Local currency sales increased 4% and Asia rest of the world, 1% in the Americas and were flat in Europe .
Local currency sales increased 3% in China in the quarter.
On slide number five we show sales growth by region for the first half of the year.
Local currency sales grew 4% for the first six months with 3% growth in both the Americas, and Europe , and 6% growth in Asia rest of the world.
Local currency sales increased 6% in China on a year to date basis.
On slide number six we summarized local currency sales growth by product area.
For the quarter laboratory sales decreased 3% and industrial increased 6% with core industrial up 6% and product inspection up 5%.
Food food retail grew 17% in the quarter as we benefited from significant project activity.
The next slide shows local currency sales growth by product area for the first half lab.
Laboratory sales increased 1% and industrial increased 6%, including 6% growth across both core industrial and product inspection food.
Food retail increased 25%.
Let me now move to the rest of the P&L, which is summarized on slide number eight.
Gross margin was 59, 4% an increase of 100 basis points as pricing was partially offset by higher costs.
<unk> mix and currency.
R&D amounted to $47 $2 million in the quarter, which is a 6% increase in local currency over the prior period, reflecting increased project activity.
SG&A amounted to $228 6 million, a 6% decrease in local currency over the prior year and includes lower variable compensation and benefits from our cost savings initiatives.
Adjusted operating profit amounted to $307 $7 million in the quarter and 8% increase.
Currency reduced operating profit growth by approximately 4%.
Adjusted operating margin was 31, 3%, which represents an increase of 210 basis points over the prior year.
A couple of final comments on the P&L.
Amortization amounted to $18 million in the quarter.
Interest expense was $19 $3 million and other income amounted to $1 million.
Our effective tax rate was 19% in the quarter above our previously guided range of 18, 5% for the full year.
This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter.
We now expect our tax rate to be 19% for the full year.
Fully diluted shares amounted to $22 1 million, which is approximately a 3% decline from the prior year.
Adjusted EPS for the quarter was $10 19.
A 9% increase over the prior year or a 13% increase excluding unfavorable foreign currency.
On a reported basis in the quarter.
<unk> was $9 69.
As compared to $9 29 in the prior year.
Reported EPS in the quarter includes 23 <unk> of purchased intangible amortization and 29 are restructuring costs were.
We also had a <unk> <unk> benefit from tax items.
The next slide illustrates our year to date results.
Local currency sales grew 4% for the six month period, adjusted operating income increased 9% or 14%, excluding unfavorable foreign currency and our operating margin expanded 190 basis points.
Adjusted EPS grew 9% on a year to date basis or 15% excluding unfavorable currency.
That covers the P&L, let me comment on cash flow.
In the quarter adjusted free cash flow amounted to $265 million up $52 million helped by favorable working capital.
Year to date cash flow per share grew 44%.
DSO was 35 days, while <unk> was three seven times.
Let me now turn to guidance.
As we look to the remainder of the year. There is increased caution across our customer base, such as pharma and Biopharma chemical companies and food manufacturing.
And there is also greater uncertainty regarding the global economic conditions and.
In particular conditions in China have deteriorated sharply as there is growing uncertainty around the pace of economic growth and limited government stimulus.
This is particularly true with our pharma and Biopharma customers, who are delaying investment decisions in China, but also in the Americas and Europe .
In Europe , the outlook remains uncertain in light of the ongoing war in Ukraine, and soft general economic growth.
Global manufacturing PMI have also continued to trend lower and have been below the 50 growth no growth index level for many months.
Now turning to our guidance.
We expect local currency sales to be down 3% to 4% in the third quarter with a mid single digit decline in laboratory.
This reflects deteriorating conditions in China as mentioned earlier, with particularly soft demand from pharma and Biopharma customers.
We also expect modest sales declines across our industrial businesses in the third quarter.
We are implementing actions to reduce our costs in response to the softer sales environment and manage productivity, while maintaining various growth investments that are important for the future.
We estimate our operating margin will increase in the 70 to 100 basis point range for 2023 based upon our disciplined approach to margin expansion productivity and cost savings initiatives.
We expect third quarter adjusted EPS to be in the range of $9 55.
The $9 85 reps.
Representing a decline of 3% to 6%.
This includes foreign exchange headwind to EPS of approximately 3%.
Now turning to the full year 2023 or.
Our local currency sales growth guide is now zero to 1%, reflecting the factors mentioned earlier. This is down from our previous guidance of approximately 5% local currency sales growth.
We now expect full year adjusted EPS to be in the range of $40 30.
The $41 20.
Representing a growth rate of about 2% to 4% or approximately 5% to 7% excluding unfavorable foreign currency.
This compares to our previous guidance of adjusted EPS in the range of $43 65.
The $43 95.
There are three factors to our revised adjusted earnings per share outlook.
First the reduced local currency sales growth forecast for the year compared to our previous guidance, partially offset by our cost reduction efforts.
Our reduced outlook largely reflects a lower laboratory sales forecast of a decline of low single digits down from our previous mid single digit outlook.
Additionally, we now see pronounced weakness in our business in China, where we now expect our total business to to decline mid single digits for the year compared to our prior forecast of high single digit growth.
Secondly, foreign exchange as mentioned earlier is now expected to be a 3% to 4% headwind to EPS growth this year compared to 2%. The last time, we spoke.
Largely due to the weakening of the Chinese renminbi and the strengthening of the Swiss franc versus the euro.
Relative to the impact on sales currency is expected to be a 1% headwind to sales growth for the full year and roughly neutral in the third quarter.
And third we would now expect a higher tax rate of 19% in 2023 compared to our prior guidance of 18, 5%.
Some final details on guidance as you update your models.
Total amortization, including purchased intangible amortization is forecast to be $72 million.
Purchased intangible amortization is excluded from adjusted EPS and is estimated at $26 million on a pretax basis or <unk> 93 per share.
Interest expense is forecast at $78 million for the year, we now expect free cash flow of approximately $850 million compared to our previous estimate of approximately $900 million and will also reduce our share repurchase program by a similar amount.
That's it from my side and I'll now turn it back to Patrick.
Thanks, Sean.
Let me start with some comments on our operating businesses starting with lap.
Where sales were softer than we had expected for the quarter.
While we continue to see robust demand from hot segments like lithium ion batteries, our pharma and biopharma customers have become increasingly cautious with their spending and have delayed investment decisions, particularly in China.
As expected our pipette sales were again weak in the second quarter as customers reduced inventories of chips and instrument sales to clients.
The impact of lower sales was in line with previous expectations and we continue to expect this headwind east in the second half of the year as comparisons become easier.
As mentioned, we also see customers, especially in our key market segments, such as pharma biopharma delaying purchases.
However, our pipeline and customer quoting activity has remained strong.
We were pleased to see continued strong service growth across our lab business in the second quarter.
You hope for conditions normalize soon but we have not built this into our post 2023 guidance.
Turning now to our industrial business began saw strong demand for automation solutions for mobile core industrial portfolio of this quarter.
While we expect to continue to benefit from customer investments in automation and localization of supply chains globally.
And you under the increased uncertainty around the global economic outlook.
Regarding product inspection.
It also had good performance this quarter, but.
Our packaged food customers have also become more cautious about making investments in new equipment due to inflation and uncertain economic conditions, and we would expect softer results for the remainder of the year.
Finally, food retail delivered strong growth this quarter due to robust project activity in the Americas.
Our food retail sales can be lumpy and we would expect strong growth again in the first quarter.
One final comment on the business service sales remained very strong overall and grew 13% in the quarter.
We continue to be very pleased with the growth in this important and profitable part of our business.
Now, let me make some additional comments by geography.
Sales in Europe were flat in the quarter with growth in core industrial and product inspection offset by declines in laboratory products.
In the Americas, we saw good growth across our industrial and retail businesses.
Offset by declines in our <unk> product offering, especially buybacks.
Finally Asia the rest of the world had another quarter of good growth.
China grew 3% with good growth in industrial but sentiment, particularly in laboratory has become much more cautious as activity has slowed following the colbert to reopening.
And there has been limited economy, just similar stimulus as mentioned before.
As of today, we expect a significant decline in sales in China in the second half of the year, but our team in China, we remain agile to capitalize on growth opportunities however market conditions unfold.
That would not all will be too sure, but few some updated thoughts about our strategic priorities and how we are investing to drive growth over the long term.
While market conditions have become increasingly challenged over the past year.
We have remained a very high level of incremental investment to support the long term growth of the organization and market share gains.
A hallmark of <unk> culture.
Is the agility and focused execution and our team continues to respond very well to unexpected changes in the environment to gain market share expand profitability make additional important growth investments for the future.
Starting with our sales and marketing programs, we have developed increasingly sophisticated digital approaches with our spinnaker program.
Yes.
More efficiently feeds our pipette, our pipeline with new leads.
Clothing hypertension top Cape alerts with a special focus on customers that we do not do business with today.
Maybe not have been in important areas of investment and source of new customer leads as they look to increase potential customer interactions in a very efficient format.
The agenda Records show, how our solutions address common customer pain points in various.
Specific end user applications.
<unk> had strong participation in our webinars, which positions us as trusted subject matter experts in specific applications.
But also provides a good sales pipeline as customers seek unique solutions to challenging or new applications.
This is particularly true in hot segments like lithium ion batteries to.
Sustainable materials and the semiconductor industry.
Our data centric approach in nurturing and qualifying these leads allows our field.
<unk> sales team to prioritize their efforts on high potential business opportunities and increase our win rates.
We have also continued to invest very strongly in research and development over the past year to maintain and improve our technology leadership and support our growth potential.
Im very excited about our pipeline of new and recently released products that enhance our customers' productivity, but also ensure compliance with regulatory requirements.
It has been a topic of increasing importance for our customers as of late.
Innovative solutions like Webex.
Enhanced productivity through workflow automation, while ensuring full data integrity and traceability across customer entire workflow.
Earlier this year, we launched a new thermal analysis instrument that allows customers to increase sample analysis throughput through new automation and software features this.
This is especially important in hot segments like advanced materials and the battery segment.
Additionally, our process analytics business reasonably released a new productivity sensor that is unmatched in the industry, while Michelin ultra pure water in the microelectronics industry, helping increase in yields for semiconductor customers wireless using the amount of very expensive ultra pure water required for their operations.
<unk>.
Lastly, our industrial business had great success with our new line of hygienic scales that help customers clean the scales up to 40% faster, but also help eliminate contamination risk in regulated environments like food and pharma.
While individual new product launches are not material on their own given the diversity of our portfolio. They provide a very important compounding element to our growth algorithm, expanding our technology leadership, enhancing our value propositions and helping drive market share gains.
Going forward.
We have a very exciting pipeline of innovative products that we plan to launch over the coming year that will further extend our leadership position.
Turning now to our margin initiatives, our pricing and stern drive initiatives have been very effective in supporting our margin expansion this year.
As a reminder, stern drive is focused on improving productivity and driving operational excellence across our manufacturing and back office operations.
With our team executing several hundred projects that reduce material cost and improved productivity.
We have excellent opportunities ahead of us with enhanced with advanced data driven approaches around value engineering, smart manufacturing and common platform architectures that we expect to launch into a new future.
In the near future.
I Hope this provides some con text, Joe will updated guidance for the year, but also shows the confidence we have in our ability to continue to execute on our long term growth initiatives expand our margins and to deliver solid earnings growth this year and beyond.
Now that concludes that is the conclusion to all repaired remarks, operator I'd like to open the line now for questions.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from Dan Arias with Stifel. Your line is open.
Afternoon, guys. Thanks for the questions Patrick are as Sean maybe just to start on China.
Growth there was actually a couple of points above the U S and Europe in the quarter is the deterioration that you are pointing to for the second half showing up in the order book here in early <unk> or.
It more just sort of reading the writing on the wall when it comes to the Big picture direction that things are headed over there.
Yeah, Hey, Dan This is Shawn maybe I'll start and I'll, let Patrick add some color, but basically as we were kind of X is largely related to how we're exiting the quarter, but probably even more importantly, how we were starting the third quarter and as you know we don't typically carry a lot of backlog in our business.
But certainly as we kind of started the third quarter, we started to really see a significant deterioration in conditions that we also started to see towards the end of.
Q2.
And as we mentioned before it's largely in the area of lab.
Lab.
Forecast for China is down very significantly.
In the third quarter.
We're kind of like looking at like literally something that could be in excess of 20%.
Kris now of course as you know we've had some <unk>.
Streams strong growth over the last couple of years. If you kind of look at we grew 20% last year and lab in China, and almost 40% in Q3 and the year before that.
But we're also seeing a little bit of slowdown in industrial as well.
And <unk>.
So overall, we're just kind of seeing.
A lot of hesitancy in terms of customers, placing orders.
Sure how much of it is related to <unk>.
A lack of clarity in terms of like stimulus in the country. I mean, there is some some very recent talk of additional.
Additional stimulus.
But that's something that we have not built into our guidance for Q3 or for the rest of the year and kind of just sitting here looking at this very sudden decrease and as we've said many times in the past things in China can change very quickly.
We feel like we're absorbing observing.
Something thats, a very negative quick.
Is it going in the wrong direction and with the fact that it's kind of just starting to happen. So significantly we don't feel like we're in a position to necessarily try to.
Build anything in necessarily for the fourth quarter at this time, so we're kind of building and also a negative outlook for Q4.
Okay. Okay, just to finish that thought did you give a forecast for the year for China. If you did I missed it.
Oh, yeah, so that so so down down mid single digits for the full year.
And then for Q3 down mid teens.
And then so if you kind of step back and you look at that full year guidance of down mid single digits, I mean, thats, a very significant difference than what we're looking at.
Last quarter, when we provided guidance we were looking at high single digit for the full year and if you just kind of like do the quick math on that that's that's.
I think more than half of our decrease in our guidance is related.
Specifically to China.
Okay. Okay, and then just maybe just moving to lab and the Destocking activity that you have going on in the pipette business how much of what Youre looking at are you attributing to that does it feel like that's tracking relative to your expectations last quarter.
I mean do you still think you can kind of normalize in the second half of the year or is the better way to think about it just that it takes the remainder of the year to sort of washed out of the system.
That one is playing out pretty similar to what we expected.
It was.
It was about a two 5% headwind in Q1, I think we're saying that we expected something to be about a two 2% headwind in the second quarter that that's exactly what it was so our 2% growth would've stayed in other words, our 2% growth would've been 4% if it wasn't for the decrease in Pipettes and then our lab business.
I would have been plus 1% growth instead of a minus 3% decline if it wasn't for the decrease in pipe that so thats playing out very similar to what we thought for the second half of the year, we're not expecting much of a headwind.
Maybe a very little and and in Q3 type that could still be down low to mid single digit.
Especially in China is going to be down significantly because of what they are lapping with testing, but I'd say overall, it's playing out pretty similar to what we.
How we thought it would.
Got it okay. Thanks, Sean.
Yes, Thanks, Tim.
Your next question comes from Jack Meehan with Nephron Research Your line is open.
Yeah.
Thank you good afternoon.
I had one more follow up on China I was just curious like what feedback you've heard from the region about what might have driven this.
Kind of rapid deterioration is it your sense. This is just demand related or is there any sense, maybe theres been an uptick in local competition at all.
Yes, Hello. This is Patrick speaking, let me take this instance shown already commented.
As part of the question about China.
Look the.
With change.
Mainly driven really by the lack of stimulus win.
After COVID-19.
Covid reopening beginning of the year that was a really strong momentum in China, a lot of expectation on.
On growth and the government would drive an additional stimulus that really didn't happen.
I think that also now led to the fact that a lot of customers.
It became much more reluctance and waiting for the government to make a decision about the stimulus.
For the year of how much they can spend and where they can spend the money.
<unk> not seen any significant change in competition locally in China. That's helpful are you hearing from the team. The team is really confident in our product portfolio.
Our experienced sales team and a great product portfolio that helps us to compete efficiently in China.
So it's really about the missing momentum in I would say the missing confidence in the economy that relief.
Please refer to the lowest customers holding back investments and are waiting for the certainty about what's to come.
And that's that's the major slowdown that you're facing right now and it's over with the fast drop off that we have seen that we also didn't expect the whole sales team definitely didn't expect as we're going into Q2, but towards the end of the Q2, it really became a big momentum and now during Q3, we don't see that changing in display we able to cap lift out Sean mentioned.
MPC China minus.
Double digits.
And in the <unk>.
Third quarter, and we don't really count on that improving in Q4 as well.
Got it and then just in terms of some of the actions that you're taking to mitigate this pressure.
Is it possible to quantify just.
The magnitude of the cost savings that are going to hit in the second half of the year and just where that's going to show up.
Kind of across the income statement.
Yes, sure. So hey, maybe the best way to look at it Jack is that we're kind of looking at our overall cost structure to be flattish for the full year.
<unk>.
So if you kind of like think about that.
Terms of.
The second half of the year probably.
Probably down down low single digit in the second half of the year and if we if you try to think about that how it looks on the P&L.
SG&A will be will be lower than the other lines of course part of our costs are also above gross profit, which you don't necessarily have broken out separately.
But I think as we look at the at.
At our program, we are focused on productivity and other discretionary.
Spending, but I think it's also important to emphasize too where we're still continuing very much too to grow and invest in the <unk>.
Invest in the business for growth.
If you look at our R&D as an example, it's still up 7% year to date, we still expect to see growth in R&D for the second half of the year.
But but then kind of just stepping back from everything too I think we feel pretty like it's the right balance where we can still provide really good operating margin expansion on a full year basis.
70 to 100 basis point kind of a range and that's despite some unfavorable currency.
Great. Thank you.
Yes.
Okay.
Your next question comes from Derik de Bruin with Bank of America. Your line is open.
Hey, good afternoon.
Thanks for taking my question so.
A couple of ones.
So I was surprised to hear.
Now your pharma biotech comments on on things being down so much and the reason why I say that is I mean, we certainly have heard that purchases over $100000 Youre getting held up so your items are often.
Well below that.
What's going on there I mean, because it's just a complete freeze or are you just getting a lot of pushback on pricing. The pricing question what are your expectations now.
For the price in your guide.
Yeah, I'll start with it to Eric and then I'll, let John chime in Israel, we are not.
Seeing a complete freeze the sunlight total pharma business.
It is frozen for us of course, we see decline and as we said.
See delays.
And orders.
It's not and you are right.
Our our products.
The lower Capex is below capex spending.
But we.
We see a slowdown in orders and Thats in pharma Biopharma and that's pretty broad.
Base, but it's not a complete going off a cliff so to speak.
But it's a significant.
The decline that you're seeing in slowdown that we are seeing.
And for US of course, the question is as many of US ask is how long will this take and.
Why is that happening.
<unk>.
What we hear from our sales team as well we have a lot of quoting activity actually what we're seeing but I'm really happy to see is that we have a strong sales team engagement via mobile sales team is out there with customers. They are talking about no.
Their plans.
We get good leaves leaves I actually up year to date. So we see good momentum on police generation side, but they're not turning into orders as quickly as they used to do.
How long this will continue.
It also depends on when more certainties coming back to the economy I mean this.
That's what we're hearing from our sales team.
I am pleased with the quoting activity and monitoring that on a daily basis I see them all all the sales teams interact with customers and how often they are out there with customers.
Discussing projects and investments, but the time to turn these opportunities into orders has definitely increased.
That's part of the slowdown we're seeing in orders.
Okay.
In terms of the other part of your question Derrick.
Yeah.
Pricing actually was very good in the quarter for the total group it was actually up 6%, which was a little bit better than what we had expected and as we kind of like look at the second half of the year and Thats for the total company and as we kind of look for the second half of the year.
It's probably going to be a little bit better than what we were initially.
<unk> as well to probably up by about 4%, which would kind of put us in the 5% kind of range on a full year basis than what we've kind of continue to observe is that we feel like our value proposition has really resonated and increased over the last few years.
The market like looks for opportunities in terms of productivity and digitalization.
Really plays to the strengths of our portfolio and I think our teams to excellent job in terms of articulating that.
That value proposition to the customer base and is as you kind of mentioned are or imply with your question. You know our our price points also tend to be pretty low as you know two and so that value proposition really resonates and it's easy to justify from a customer perspective. So so we feel good about the pricing program.
And how we think about it for the second half of the year.
Got it just as a follow up.
So you're taking guidance down by about four 5% it looks like about two 5% of that is.
China. So can you quantify what else is that and just like whats pharma, what's industrial whats Youre just not having good feelings about that you just want to be conservative on.
And when you say when you ask that question are you asking to break down the <unk> piece or the rest of it okay. The rest of the piece, yes, we know the China piece, it's the rest of the piece that I disagree with what else is baked into that remainder remainder of it is not the China cut.
Yeah, Yeah, Yeah, So hey, I think we do see moderating.
In the Americas as well as Europe so for.
So for the for the Americas, We're now looking at more flattish growth.
For the full year, our prior guide was like more like low to mid single digit.
What were kind of seeing there is just its more concern with our core end markets. One of the things that is happening at the moment is we have a <unk>.
Three largest core end markets are under pressure.
<unk> Biopharma food manufacturing and chemical and in the U S food manufacturers and other we talked a little bit about pharma food manufacturing is also an area, especially in our product inspection business, where we see we came off a good quarter, but we also see.
Some pressure for the second half of the year as these customers are under a lot of pressure.
If you look at.
Europe , we're probably modestly a little bit lower than what we were before at least at the lower end of what we're guiding we're thinking more like low single digit for the full year previously we were.
In the low to mid single digit the one thing we've actually been very impressed at how well the European numbers have held up this year.
But we also acknowledge that PMI have been down very low there.
Decreased recently and it's been a prolonged period and of course, there's a lot of uncertainty in the region and of course, our end markets. There are also under pressure and as we think about Europe like a. Good example is in addition, again to give you. An example, other than pharma biopharma as the chemical industries under a lot of pressure I mean, if you just look.
At the number of chemical companies that have reduced their their forecast for the year just recently double digits.
There's a lot of concern there in terms of that that customer base, particularly.
When it comes to Europe .
So that maybe gives you a more of a geographic.
Overview, if if we kind of break it down by.
Bye Bye business area, maybe I'll, just kind of do the walk through so everybody kind of has that too and of course. There is some overlap here because China is influencing some of these numbers, but I'm just going to kind of go through it. So we have we're looking at lab down mid single digit in the third quarter.
And down low single digit for.
For the full year, we're looking at core industrial down low single digits and up and up low single digit for the full year and similarly products inspection down low single digit for Q3 up low single digit for the full year and then our retail business is actually doing quite well very good project activity, we continue to see that.
Expect that in the second half.
That to be up high teens in the quarter for Q3 and also for the full year.
Yeah.
Great. Thanks, Sean It was really detailed appreciate it yeah, yeah. Thanks, Eric.
Okay.
Okay.
Your next question comes from Patrick Donnelly with Citigroup. Your line is open.
Hey, guys. Thanks for taking the questions.
Patrick I guess can you kind of look at these various headwinds you've called out in your kind of assessment you talked a little bit I think in the prior question about.
I'm trying to figure out what could linger into 'twenty four I guess when you when you kind of step back which do you see.
Being more temporary or transitory versus.
Issues, where you look and you just kind of doing these cost controls that you look out and say hey, maybe this could linger into 'twenty for you. If you can just kind of bracket it up for us and try to help frame that view would be helpful. Sure.
Sure absolutely look I mean of course, it's too early to make a forecast for 2024 and I will do this in an hour.
It makes the earning call and report.
We report our Q3 and look at Q4.
Can you say what is trends what is transitory for right now.
I would say the easiest thing to capture for US is what we have seen on the pet side. The destocking, perhaps will be anticipated is normalizing again, the consumption of our competitors probably to pre COVID-19 levels in the second half, we see you see that uptick happening slowly but steadily.
Normalizing when it comes to the rest of the industry is of course very hard to predict to say how is the economy continuing to evolve how long real no.
Pharma and Biopharma on the pressure and also will the rest of the economy. The journals the outlet of the chemical industry self perform these.
Economic downturn that we are seeing.
Have a great time to PMI is on the personnel.
It just leads us to note right now if we look at the second half and say.
This is Bob.
Good forecast for us, giving the information that you have itself for the significant downturn, but really when it will turn will it be early 2024 mid twenties 24, I think that's too early to call to make a call that frankly, I mean, we have been.
Pockets may be see really still very good momentum in the tree count on that to continue to grow if we take what we call. The hot segments like the battery segment like somebody's performing extremely well driving good growth almost across all of our businesses with emphasize on from some of the lab businesses life and annuity business performing well.
We still see pockets of good momentum in industrial automation.
And we also see increasing interest as I highlighted at the beginning of the earnings call also in the semiconductor business will be successful with some of our phone business. When it comes to ultra pure water Los Angeles.
Pockets of.
Still good growth that we capture really going hard. After this we have the right tool set we see these pockets of growth in dry hole same store team doses direction, but how long do you brought a columbia who are under pressure.
None of us can be telling you how long that will take when youre looking at the second half and forecast the second half and then once we get through Q4 will give you a full guidance on 2024 right now it's too early Josh.
Yes understood.
And then Shawn I guess, maybe a follow up on that just around the margins he touched on them a little bit, but I guess when you think about the pricing lever that seems like it's still quite strong for you guys in terms of the boost for margins.
Again some of these cost reduction activity can you just talk about the moving pieces as we work our way through the second half and then I guess, how nimble you want to be on the cost side going into next year, and then pricing I assume is still going to be a positive as we move forward you guys always protect the margins pretty well. So just just curious how you think about the moving pieces there.
It'd be helpful.
Yeah sure. So I mean, hey, I think we still have a really great margin story, I mean, I think as I.
I kind of mentioned before for the full year.
We're still expecting to deliver an operating margin expansion in the 70 to 100 basis point range and frankly wouldn't be surprised if we ended up closer to the higher end of that range and that's despite some unfavorable currency.
That probably puts us the operating margin by quarter, it might be down a little bit in Q3 might be up a little bit in Q4, but overall.
We feel very good about the ability to continue to expand for the full year and then I think as we kind of go into next year like Patrick said, it's a little bit early to look at that.
Of course, we will probably have some savings from some of the trends.
From some of the actions that we did this year there'll be some stuff that goes away as well.
And as we think about pricing.
Yes, we still feel great about our value propositions and but it will also depend a little bit on the inflationary environment and.
Well as you know we will provide more.
Provide more.
<unk> guidance and insights on all of that on our next call in November .
Okay. That's helpful. Thank you guys.
Yes. Thanks.
Your next question comes from Vijay Kumar with Evercore. Your line is open.
Hey, guys. Thanks for taking my question.
My first one on.
The third quarter guidance.
Low single digit declines.
Two 2% in Q2, that's a 500 basis points change.
Think about 300 basis points.
The 500 is coming from China.
<unk> seen China down mid teens in July if the assumption, it's down mid teens for the rest of the quarter and the remaining 200 basis points softness coming from perhaps from an end market perspective.
Yeah, Hey, maybe I'll take that one Vijay so I mean, if we.
We don't typically as you know, we typically don't go into too much detail on.
Individual months, but absolutely we are.
Kind of alluded to it before we what we experienced and as we've seen in July kind of Stark certainly heavily influenced how we're looking at the quarter.
The rest of the year for China, and so so yes, very much we're looking at down mid teens and.
And then especially.
Weighted in our laboratory business, if you look at our laboratory business.
As I mentioned before we're lapping some pretty big comparisons there.
But but we're expecting the lab business to be down even more significantly there.
Kind of like look at.
The rest of the portfolio, it's kind of similar to how I answered Derek I'd say on the on the full year results I mean, we're we're looking at.
Low single digit growth in the Americas.
There, it's very much the same topic about core end markets.
Does this delay in pharma.
Biopharma that Patrick talked about.
Of course, we also within within that we talked about type tests, but of course, we also have.
Smaller exposure.
On.
Within single use bio processing that we talked about last quarter like with <unk> Tec.
As well and then <unk>.
<unk> the prior answer I mean, we're also looking at a.
The decline in product inspection in the Americas in the third quarter as well with the pressure that we're seeing from food food food manufacturing companies.
And then Europe , we're still expecting Europe to be more low single digit in the third quarter, but acknowledging that we have.
Different uncertainties that we've talked about before if we kind of like look at the business in terms of overall by by business for the third quarter.
We're looking at well actually I already mentioned it so I don't need to mention it again, but in terms of the.
The different areas, I mean lab being down more so than the other areas.
In terms of.
The guidance for Q3.
Understood and then one maybe on the stimulus that you mentioned.
<unk>.
What specifically have you heard about from links up I would assume listen if there is a stimulus.
How long.
Along does it carefully.
For it to flow through.
<unk>.
Two customers, placing orders.
In purchasing.
And on the cost actions here.
What is the.
The pacing of cost actions.
What kind of benefits are you expecting it looks like the EPS is down more than revenue as maybe perhaps not much benefit you in CQ, but what's the magnitude of.
The cost actions to benefit from cost actions taken in Q4.
Yeah, Hey.
So a lot there so.
The first thing you were talking about was the stimulus so.
In terms of the stimulus like we don't have any probably more insights anybody else I mean, there were some comments coming out of the government I think in the last week with.
With an intention to stimulate.
Don't think any specific details have been provided so it's hard to kind of comment on that at this point in time.
And so I think it will we'll have to see.
How that plays out and how long that takes to really how directly that affects our end markets and how long it takes to get into the economy, but like I said right now we haven't built anything in for.
For our forecast for the second half of the year. So we'll kind of see how how it plays out in terms of.
In terms of EPS I mean, we do have.
Unfavorable.
In <unk> and <unk>.
I mean, I'm, sorry, foreign currency, we do have unfavorable foreign currency, that's been hurting us throughout this year and as we kind of mentioned in the opening remarks, it's also kind of.
Impacted us.
Much more significantly than our last time, we provided guidance. So I think we were initially looking at a 2% headwind last quarter.
And.
Now we're looking at something in more in the 3% to 4% range and I think if we go back to our original guidance for the year I don't think we were expecting very much headwind at all from from foreign currency. So thats, certainly something thats affecting us. So I think it's important to kind of also consider that as you kind of look at the EPS.
Yeah.
Growth for.
For the second half of the year. So if you kind of like look at Q3, if you exclude foreign currency.
We will be anywhere from at the high end of our guidance flattish and into the lower end of our guidance minus 3% and then for the full year, we would be growing 5% to 7% in a year, where sales are are much more modest than the zero to 1%. So we feel like.
We still feel good about that in terms of the ability to still expand margins during the course of.
Of this year and then at the same time being able to continue to invest in the business, which we've talked about which is important to us to protect the medium and longer term as well too.
But otherwise no other specific comments I would say in terms of details yes.
Thanks, guys.
<unk>.
Your next question comes from Matt <unk> with Goldman Sachs. Your line is open.
Hi, good afternoon. Thanks for taking my questions. Maybe first one how should you spent a lot of time and focus on the services portion of the business and you called out some pretty strong growth this quarter for that for that segment could you maybe talk about what your assumptions are for the full year for services growth and just maybe help us understand a little bit better about the customer.
Mick and caution.
Really just the services, assuming it's a little more defensive.
Maybe talk about how you expect that business perform in this type of environment.
Yeah, very good question and I couldn't be more pleased with the performance level service business as you probably recall, we grew 14% in the first quarter it.
Grew 13% now in the second quarter, So outstanding performance off the service team actually got it's also a business just a reminder to everybody on the coldest wherever you still also hiring people.
Hum.
More service.
Technicians to all the team because we see good business momentum that we see good demand for all our customers to use the opportunity of over the last year or two was also you know.
Extend level service offering a whole portfolio of the increased emphasis on service sales at the point of sales.
You sure did we sell more service contracts with the restructure to quoting process that services. All always included in the quoting we trained our service team more efficiently on setting the.
The sales team more on selling services. So I think that all really now pays out in India growth was seen in <unk>.
Services.
If youre looking at the full year.
Also.
Both strong outlook here I think for the full year, we're forecasting high single digits at least in terms of service growth, Sean I am I correct on this one.
Yes, it might even high single digit for Q3, and yes, it might even.
Probably might even be high single digit might even be low double digit maybe close to 10, but yes hi.
High single to the tenure.
Good and again, that's driven by the ongoing momentum.
And we see at the moment, we see.
Stronger demand and.
The product category, and we don't see a lot of push pushback on pricing.
And so what I would really see continue to see there.
Our momentum continue of course, we are also having tougher compares us into a tougher compares as we move in between the next couple of quarters as Q3 and Q4 last year also had been already quite strong on service growth, but the underlying momentum is strong we have an extremely strong services team and we continue to invest in services because we'll continue to do.
To build out the team and make sure that we can serve our customers in the best possible way and deliver outstanding customer experience that is really what is differentiating else's metrics leader for many of our competitors that compete directly with us and the field is the strength of all the service organization.
Sure.
Great and then just thinking of some other potential offsets just given some of the challenges in the lab business you talked about sustainable materials batteries and <unk> can maybe help us understand sort of the sizing of that business and what kind of you're seeing in terms of growth.
Sort of globally, but maybe also by region just to so we can kind of better understand what some of the offsets could be over the course of the year.
Yeah, I'll, let Sean break it down in terms of the size, but I mean this is what we call the haul segments right and it's really the mone strongly driven by lithium iron battery segments, we see strong.
We had good momentum building up in the semiconductor business.
With the re shoring and home shoring assault semiconductor plants, gaining momentum in sustainable materials.
Gaining importance and.
That is again, because these pockets of growth in itself.
Of course.
Not super significant in terms of size, but the growth momentum is important for us.
To compensate and offset some of the weaknesses that we see in other areas.
Yeah and in terms of the size, Matt I don't have to.
<unk> number for you, but I mean these are still relatively smaller end markets for us in the kind of low single digit kind of a range, but but from a growth perspective. They certainly help a lot in terms of growth given the higher growth relative to the rest of the portfolio and the longer term.
Opportunities here.
What's kind of neat about these hot segments is that.
We can we can provide solutions very end to end a lot of them. It starts in R&D. It goes all the way through development and manufacturing and so we benefit.
Some cases more so in our analytical instruments business, but we also see benefits through a large portion of our portfolio.
Great. Thank you.
Yeah.
Your next question comes from Catherine Schulte with Baird. Your line is open.
Hey, guys. Thanks for the questions I guess first in China is the weakness concentrated any product categories like in your lab business or is it more broad based and are you seeing the consumables and services side of the business holding up better there.
So look at uptake. This is really broad based and then mark thickness I Couldnt can point to any specific product category.
It's pretty broad based again focus on pharma and Biopharma.
But sort of single product category I would point you to say that there's more effect.
Okay, and then maybe on the specific to consumables Catherine consumables are actually down more so because of all the testing that was still going on in China with Covid last year.
Yes, Okay got it and maybe on the packaged food side, you have been talking about caution in that category for several quarters now.
Do you start lapping some easier comps there and is there anything to point caring prior inflationary environment, that's kind of when you might start seeing improvements there.
Okay.
I think we will not face any easier comparison, because we had performed really really last year in this business.
Most confidence of your confidence that you have taken market share.
Yeah.
In the Americas, especially we have been have been quite strong and this is also why receive probably in the second half this year tougher compares or.
A slowdown in growth.
We have points.
More reluctance of investment in Europe .
Beginning of the yields or end of last year, and we continue to see that going on in Europe . It's just not the same investment environment right now in the packaged food industry a lot of the customers actually on the on the pressure.
When it comes to debt margins that what they're trying to push out.
Their investments as well.
But February interest reason to have a big tradeshow in European the pack and.
Great interest in our product portfolio, we also launched <unk>.
Net of new products also mid range products.
Ray category than others.
And that helps us of course, we're also really effectively compete in that segment in <unk>.
<unk> our future growth.
We are quite sure that we are taking market share in that segment right now although the growth is not outstanding.
Figure out competing all competitors.
It's a business that would be again invested in over the last two years in expanding the portfolio, especially pushing more into the into the midrange to compete more effectively but also now launching pretty soon some new higher end solutions.
Great. Thank you.
Yeah.
Your next question comes from Joshua <unk> with Cleveland Research. Your line is open.
Good evening, Thanks for taking my questions.
Maybe patrik just to follow up on product inspection it sounded like it held in the quarter, but seeing signs of softening from CPG food.
Pharma it seems like it's pulling back just curious.
Level of orders, you've seen kind of entering the third quarter and maybe how the gas.
The guide.
Reflects those maybe softer end market it seems like it seems like the guide.
<unk> moved down modestly if I'm correct.
Yes, that's right the guidance is down modestly again, it's mainly in the U S where we see the tougher compares but also.
Environmental to put our customers are becoming a bit more difficult.
And it looks like they are.
Slowing down the investments.
Sean any anything else.
You could say in terms of the guidance for <unk>.
I think the I think also.
We look at Q2, we actually did better than we expected. So maybe Q2 was better but the second half is a little bit worse.
It's kind of like what Patrick says if you just kind of like look at.
If we kind of just look at how.
What we're hearing from customers and from the organization, especially in the U S. But also in Europe going into the quarter.
Just seeing a more negative six situation than what we experienced in the second quarter.
Got it and then I guess, a follow up or a question on process analytics.
I Wonder what you saw in Q2 from a demand perspective or growth perspective, and in your assumptions on the second half I mean, we've seen some of the bioprocess.
<unk> peers.
Chemical accounts talk on incremental softness is there something youre seeing show up in the business or do you think that business will hold and more resilient.
Yeah, I'll start and I'll, let Patrick add some color additional color if you'd like but in terms of process analytics, we had very very modest growth.
In the quarter.
But there were definitely different storylines kind of under the covers on one hand, we we did have a very significant headwind in terms of bio processing specific more so to the single use technologies.
In downstream bio processing.
We also see softness in pharma and biopharma or more Biopharma I should say.
Coming off some very strong comparisons in previous years, but then kind of offsetting some of that is also have been good growth in some of these hot segments like semiconductors as an important segment for us.
For the process analytics business, but but nonetheless, we we have a more modest expectation here.
For the second half as well too.
Just just given.
More pressure that we talked about in general with pharma Biopharma.
Yeah, John if I might.
<unk>.
Of course, we are seeing some headwind there in biopharma mainly.
And you mentioned also the.
The single use sends a topic that we have with <unk>.
Just wanted to put a market segment, but on the other.
Ingalls reusable sensors, you are not having the same stocking dynamics that you have seen with Penn to take but it actually is still good ongoing with your business.
They also want draft here, Rick and I know, we'll talk a lot about innovation, but he also launched last year, new unbreakable sensor that is no linear great success story for us in the battery business.
Business and we continue to launch into new market segments with reduced.
Hating us from our competitors, though.
I am very positive about the product portfolio into how it will help us Joel to gain market share even in difficult market environments.
I appreciate the detail guys.
Yeah.
Your next question comes from Rachel <unk> with J P. Morgan Your line is open.
Great. Thank you for taking the question. So I wanted to follow up on some of those comments around pharma and Biopharma customers can you just walk us through what are you seeing any difference in buying trend between your large pharma customers and some of those smaller biotechs and then can you detail how are those conversations about decision, making on spending difference between the two and then that's it.
A follow up just can you remind us how small is there emerging biotech exposure.
So overall, our small biotech exposure is very small I mean, that's part of that.
Georgia for our customer base.
Customer base for us in pharma and Biopharma larger customers.
Sure.
To your second part of the question about decision slowdown I guess, there's nothing specific.
<unk> particular.
We could point to readjust thing what Youre seeing is the delay in decision making.
The Korean root causes of that might be different for different businesses, but I think overall pharma just has become more cautious with spending and that affects us across the board with our product portfolio.
Great and then maybe just a follow up here on pricing.
Around 5% pricing next year, you also had above average pricing contribution last year as well. So how should we think about that pricing translating into 2024. When you guys go back to your normalized range connected to allow what really expectations. There. Thank you.
Yes, Rachel I mean of course, it's early to still to provide too many insights in terms of how we're thinking about 2024, but maybe but I would say is that we still feel very good about our value propositions, we still feel very good about our our program. We continue to invest heavily in R&D to continue to enhance those.
<unk> propositions and depending on the inflationary environment I.
I would expect us to be probably more of a normalized situation.
Kind of going into next year, but I think we'll kind of have to see how the inflationary environment plays out.
Your next question comes from Liza Garcia with UBS. Your line is open.
Good evening guys. Thanks, so much for squeezing me in.
It sounds great and keep it brief.
Circling back since we were talking about China, I think you called out good growth actually on the industrial side of the China business I know the focus has been on the Biopharma and pharma piece, obviously detailed quite a bit there can we just talk about your expectations on the other businesses in China for the balance of the year and kind of what you're seeing there and how to think about.
That.
And then I'll have a follow up really quick.
Yeah, Okay. Thanks, Lisa yes, so I'll take that one so the growth in the second quarter I mean was more mid single digits for.
For industrial so we're pleased on that as you know we've been kind of lapping some some big comparisons in that part of the business as well.
We kind of like look to the second half of the year, though.
We're looking at the.
The industrial business to be down.
Probably mid single digit we are seeing some.
Some decline in that part of the business as well.
And I think it's important to remember like some of these customers. These customers are also exposed to a lot of the same end market exposures that we're exposed to and laboratory as well too. So when we say pharma and Biopharma is down that's also affecting our industrial business also and so and so maybe not.
Down as much as what we are seeing pronounced in the lab business, but still down in the second half of the year and probably more more flattish on a full year basis.
Right, Yeah, and you know you guys were talking about.
Obviously you mentioned.
Stern drive and that initiative, but I believe there is another way that the knocker, that's supposed to be under way are kind of coming under.
That should be launched I believe in right now I guess kind of how to think about that in kind of the library that you have.
I mean, its been accurate, obviously isn't great in terms of market share and how to think about.
Sure.
But Matt can deliver over the next couple of quarters.
The next wave.
Yes so.
So in terms of spinnaker, we continue to innovate and spinnaker.
Patrick can you hear.
Okay.
We continue to work as a question so if something's wrong.
Okay.
Your lives, though your life, yes.
So in terms of Liza can you still hear me.
I hear you great.
Yes.
So hey, I think Patrick just lost.
Lost the ability to hear the question.
So I'll just kind of answer it so in terms of spinnaker, we continue to innovate in terms of spinnaker.
And we are in the process of launching a new wave we were going to share some of the details on that until we kind of roll it out a little bit further, but that's something that we're just at the very beginning of doing an in kind of very excited about it and I think there's some really interesting opportunities for us kind of going forward to continue the journey that we have in <unk>.
<unk>.
Great. Thanks, so much.
Yeah.
Your next question is from Tim Daly with Wells Fargo. Your line is open.
Great. Thanks so.
Sean Patrick's whoever can answer here, but.
But it's pretty clear the guide discounts any year end budget flush in pharma biotech.
But again, Patrick given your experience.
You brought the mettler from your prior lives across the life science industry and or Sean yourself given the.
Historical experience you have at Mettler can you guys game theory for US if you will Central America. Those are factors that would influence the outcome for a potential year end budget flush.
Yeah.
Macro conditions stabilize.
Considerably fall off by the end of the year and Thats for the potential outcome.
Yes, Hey, Tim This is Shawn I'll I'll take that one so hey of course, we didn't it's always difficult to be able to judge exactly what his budget flush and quantify it from year to year, especially in our business. We did not build in anything specific or budget flush and I think just like you said just kind of implicitly.
Looking at our guidance, we have a much more cautious view in terms of pharma and Biopharma.
We kind of exit exit the year and if you could just kind of like look at how we're thinking about Q4 in general.
It's not quite the same but it's pretty similar to how we're thinking about the.
The third quarter so.
Certainly if pharma Biopharma had a more robust end of year spend that certainly could be an upside to how we're looking at things.
Alright got it.
Again, sorry.
Did that horseshoe on China, but just note given that is a pretty critical piece of the investment.
The long term thesis for growth within lab.
The standardization of Western facilities, just just curious is there a pullback from western companies because of geopolitical.
Potential risk there because there have been any change at Empress.
But that whole standardization.
Global facility format, which utilize <unk> products within it.
Or is that still you know.
This is just temporary stuff weighing on us.
Thank you I hope you can hear me.
Just disconnect so Jeff Okay, well I'll take that question. Okay. If it go through multinationals pulling out of China, and what you're seeing here right now I think we don't see significant impact yet but.
The way I want you to think about this as if multinationals pull out of China into some re shoring homeshore ring Middle Deco from China to India, whether they go back to Europe .
Yes.
You also see this of course moving forward as.
Potential opportunity for us to.
To capture these investments those investments are happening happening then and we have definitely the right market sensing towards market sensing solutions in place to capture these opportunities and guide our sales team and all <unk> companies as they're growing excel going to reinvest either in the U S and Europe or somewhere else.
They are putting business out of China, but as of now I wouldn't say that there's not the major driver for the slowdown in China that is not what's driving it for us for us it's really the overall sentiment of the lack of confidence in the market and the weight and the wait mode for stimulus into the companies to really decide on how much budget they have and how much they can invest moving forward.
Yeah.
Got it. Thank you appreciate it.
Thanks.
There are no further questions at this time with that we will end the conference call. Thank you for joining US today you may now disconnect.
I appreciate it.
Thanks.
There are no further questions at this.