Mettler-Toledo International - Q2 2024

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Mettler-Toledo second quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. For operator assistance throughout the call, please press star zero. Finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Adam Uhlman, Head of Investor Relations, to begin the conference. Adam, over to you.

Adam Uhlman (Head of Investor Relations)

Hey, thanks, Paul, and good morning, everyone. Thanks for joining us. On the call with me today is Patrick Kaltenbach, our Chief Executive Officer, and Shawn Vadala, our Chief Financial Officer. Let me cover some administrative matters. This call is being webcast and is available for replay on our website at mt.com. A copy of the press release and the presentation that we will refer to today is also available on our website. This call will include forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties, and other factors that may cause our actual results, financial condition, performance, and achievements to be materially different from those expressed or implied by any forward-looking statements.

For a discussion of these risks and uncertainties, please see our recent annual report on Form 10-K and quarterly and current reports filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking 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 to Patrick.

Patrick Kaltenbach (CEO)

Thanks, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our second quarter financial results, the details of which are outlined for you on page three of our presentation. Our team continued to execute well and deliver better-than-expected results in the second quarter, including good growth in laboratory sales in Europe and the Americas. As expected, market conditions in China remained weak in both our laboratory and Industrial businesses. We continue to benefit from our productivity and margin initiatives, which help mitigate the impact of foreign exchange headwinds and protect our earnings. Looking to the remainder of 2024, market conditions are soft, particularly in China.

However, we expect our local currency sales to return to growth in the second half of the year, primarily due to easier comparisons, as well as execution of our Spinnaker sales and marketing program and leveraging our innovative product portfolio. We remain focused on continuing to strengthen our company for the future and believe we are in an excellent position to continue to gain market share and deliver future growth. Let me now turn the call over to Shawn to cover the financial results and our guidance, and then I will be back with some additional commentary on the business and our outlook. Shawn?

Shawn Vadala (CFO)

Thanks, Patrick, and good morning, everyone. Sales in the quarter were at $943.8 million, which represented a decrease in local currency of 2%. On a U.S. dollar basis, sales declined 4% as currency reduced sales growth by 2%. On slide 4, we show sales growth by region. Local currency sales grew 6% in Europe, 2% in the Americas, and declined 13% in Asia, rest of the world. Local currency sales decreased 23% in China in the quarter. On slide 5, we show sales growth by region for the first half of the year. Local currency sales declined 1% for the first six months, with 6% growth in Europe, 2% growth in the Americas, and an 11% decline in Asia, rest of the world.

Local currency sales decreased 21% in China on a year-to-date basis. As a reminder, our first quarter sales benefited by 6% from recovering delayed product shipments, which is a 3% benefit to our year-to-date results. Excluding this, our local currency sales declined 4% on a year-to-date basis. On slide 6, we summarize local currency sales growth by product area. For the quarter, Laboratory sales increased 1% and Industrial decreased 5%, with Core Industrial down 9% and Product Inspection up 3%. Food Retail declined 12% in the quarter against significant project activity last year. The next slide shows local currency sales growth by product area for the first half. Laboratory sales increased 1% and Industrial decreased 3%, with Core Industrial down 5% and Product Inspection up 1%. Food Retail decreased 10%.

Let me now move to the rest of the P&L, which is summarized on slide 8. Gross margin was 59.7%, an increase of 30 basis points on positive price realization, as positive price realization was partially offset by lower volume. R&D amounted to $45.8 million in the quarter, which is a 2% decrease in local currency over the prior period. SG&A amounted to $235.8 million, a 4% increase in local currency over the prior year and includes higher variable compensation. Adjusted operating profit amounted to $284.1 million in the quarter, an 8% decrease.... unfavorable foreign currency was a headwind to adjusted operating profit of approximately 2%. Adjusted operating margin was 30%, which represents a decrease of 130 basis points over the prior year.

A couple of final comments on the P&L. Amortization amounted to $18.2 million in the quarter. Interest expense was $19 million, and other income amounted to $1.5 million. Our effective tax rate was 19% in the quarter. This rate is before discrete items and is adjusted for the timing of stock option exercises. This also excludes a $23 million one-time non-cash discrete tax benefit relating to the favorable settlement of a tax audit. Fully diluted shares amounted to 21.4 million, which is approximately a 3% decline from the prior year. Adjusted EPS for the quarter was $9.65, a 5% decrease over the prior year, or a 3% decrease, excluding unfavorable foreign currency.

On a reported basis in the quarter, EPS was $10.37, as compared to $9.69 in the prior year. Reported EPS in the quarter included $0.24 of purchase accounting and intangible amortization, $0.20 of restructuring costs, a $0.09 tax benefit from the timing of option exercises that is trued up in Q4, and the one-time non-cash discrete tax benefit of $1.07. The next slide illustrates our year-to-date results. Local currency sales declined 1% for the six-month period. Adjusted operating income decreased 4% or 1%, excluding unfavorable foreign currency, and our operating margin contracted 60 basis points. Adjusted EPS declined 2% on a year-to-date basis or grew 1%, excluding unfavorable currency. That covers the P&L, and let me now comment on cash flow.

Adjusted free cash flow amounted to $433.4 million on a year-to-date basis, a 13% increase on a per-share basis from prior year levels due to favorable working capital. DSO, DSO was 37 days, while ITO was 4 times. Let me now turn to our guidance for the third quarter and the full year. As you review our guidance, please keep in mind the following factors. Market conditions are soft, especially in China. While we are not seeing a negative change in market conditions, we're also not seeing a significant improvement. We believe we are well-positioned to capture growth opportunities through our Spinnaker sales and marketing program, as well as our innovation, which includes several product launches, which we discussed last quarter. We continue to execute very well on our margin expansion, productivity, and cost savings initiatives.

As previously mentioned, we will start to benefit from easier prior year comparisons during the second half of the year. Lastly, as you update your models, keep in mind our 2025 results will face a sales headwind of approximately 1.5% as we recapture delayed shipments in 2024 from 2023. Now, turning to our guidance. For the third quarter of 2024, we expect local currency sales to grow by approximately 1%. We expect adjusted EPS to be in the range of $9.90-$10.05. Currency for the quarter at recent spot rates would be an approximate 1% headwind to the third quarter sales and adjusted EPS.

For the full year of 2024, we expect local currency sales to grow approximately 2%, unchanged from our previous guidance. We expect full-year adjusted EPS to be in the range of $40.20-$40.50, which compares to our prior guidance of $39.90-$40.40. This includes an expected headwind to sales of 1% and adjusted EPS growth of approximately 2% from unfavorable foreign exchange. Lastly, I'd like to share a few other details on our 2024 guidance to help you as you update your models. We expect total amortization, including purchased intangible amortization, to be approximately $73 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $26 million on a pre-tax basis or $0.95 per share.

Interest expense is forecast at $78 million for the year, and other income is estimated at approximately $4 million. We expect our tax rate before discrete items will remain at 19% in 2024. We expect adjusted free cash flow of approximately $850 million, representing a conversion of approximately 100% of adjusted net income. We continue to expect share repurchases of approximately $850 million in 2024. That's it for my side, and I'll turn it back to Patrick.

Patrick Kaltenbach (CEO)

Thanks, Shawn. Let me start with some comments on our operating businesses, starting with Lab, which grew approximately 1% compared to last year. We had good growth across most of the portfolio, especially in Europe, and we also had good growth in the Americas. We continue to benefit from our refreshed portfolio of innovative solutions and our Spinnaker sales and marketing program, as well as our diversity across end markets and applications. Our Industrial sales for the quarter were in line with our expectations and were down 5%, with sales growth in Europe offset by a significant sales decline in China. Product Inspection sales were up 3% on good results in both Europe and the Americas, although market conditions with food manufacturing customers are still challenging. We have also seen very good demand for our X-ray inspection technologies, which has benefited from recent innovations.

Lastly, Food Retail sales declined in line with our expectations against significant project-driven sales growth in the second quarter last year. Now, let me make some additional comments by geography. Starting in the Americas, our sales grew 2% in the quarter, with good growth across Lab and Product Inspection, while retail declined, declined against significant growth in, in the prior year. Our results were a bit better than expected, and while we observe long- longer customer purchasing cycles, we see good customer engagement and feel that our team is competing very well. Sales in Europe were better than expected and grew about 6% in the quarter. Our results included very good growth from both laboratory and Industrial. Our teams continue to compete extremely well, considering challenging economic conditions, and are doing an excellent job leveraging our updated portfolio of innovative, innovative products.

Additionally, in Europe, we have the highest proportion of sales through our own direct sales force, and they have shown excellent execution in leveraging our Spinnaker sales and marketing program to achieve these results. Lastly, our Asia and rest of the world results were in line with our expectations and included the significant sales decline in China as expected. We continue to see soft demand from most end markets in China, but we still expect to return to sales growth in the second half due to much easier year-ago comparisons. Our China team remains agile and has implemented advanced customer mapping and database enrichment to identify potential sales opportunities as they arise. As we have mentioned in the past, trends in China can change quickly, and our team remains ready to take advantages of growth opportunities.

One final comment on our quarterly results: We continue to see very good growth with service across most business areas and regions. Our service business grew 6% this quarter, which was on top of double-digit growth in the previous year. Those are all my comments on the business for the quarter, and now I would like to share with you additional insights on how we are strengthening our business to continue to gain market share and emerge from the market downturn in an even stronger position. Earlier this year, we shared with you how we are rolling out the next wave of various corporate programs, such as our sales and marketing excellence program, Spinnaker 6, and the sophisticated data analytics being implemented to support our enhanced program.

An important enabler of this initiative is our Blue Ocean program, which is our global process harmonization initiative, all built on a single instance of SAP. We have invested in this initiative for over 15 years, harmonizing and centralizing processes that touch all elements of our business, from sales and marketing to service, our supply chain, product development, and our finance, HR, and other administration functions. With Blue Ocean, we have been able to harness the significant diversity and complexity of our business and turn it into a very powerful competitive advantage that many smaller private companies in our industry cannot match. Blue Ocean provides us with valuable real-time business intelligence insights, allowing us to react quickly to changes in the business and operating environment.

We have implemented advanced dashboards to ensure real-time reporting of KPIs across our business and are leveraging advanced software solutions to make better decisions faster. Our digitalization efforts have been a source of productivity improvements with much more ahead of us that will allow us to automate many manual activities, creating seamless end-to-end processes with meaningful productivity benefits. Blue Ocean has also enabled global shared service centers that drive process excellence, quality, and productivity. In recent years, we have improved our Blue Ocean template to add new features and functionality, including adding eShops, advanced procurement solutions, and sophisticated service pricing analytics. A great example of this enhanced functionality is service technician scheduling, which can be a very complicated manual task.

There are several factors to be taken into consideration when scheduling the assignments, such as customer location, number of devices, age of the devices, and the type of service. By using advanced analytics and machine learning models to predict durations, we have been able to automate or semi-automate this process and then also apply enhanced real-time traffic imaging to outline the best routes. Now that we have rolled out Blue Ocean to nearly all of our entire organization, we have a strong foundation to push new capabilities out into the entire organization at a rapid pace... Blue Ocean is the backbone supporting the next wave of several corporate programs, including our new Spinnaker 6 sales and marketing initiative.

This includes the rollout of advanced version of our Top-K program, which are targeted investment alerts we create by using sophisticated data analytics to scan our internal CRM and external databases to identify new growth opportunities. In the past, these alerts were manually qualified, and static reports were generated by our sales team in one or two releases per year. Today, our team is integrating advanced software solutions to automatically qualify and feed these leads real time into our CRM for much quicker response by our sales teams. This also enables faster generation of cross-lead opportunities across our business units. Additionally, customers utilizing our customer portal today are offered standardized purchase recommendations based on items in their cart. In the near future, these recommendations will be tailored to an individual customer's current install base and application requirements, enabling more personalized suggestions.

We are also expanding our capability for self-service, which today includes the ability to access calibration certificates or request service or remote diagnostics and remote service. In the future, our platform will support new business models around consumables re-reordering and preventative maintenance, and supports the rollout of our advanced cloud-based software solutions. Overall, Blue Ocean has been a long journey, starting from a goal to consolidate roughly 70 different ERP systems into one standardized global business system. From there, we have expanded the project to support new features, business models, and advanced productivity initiatives around automation across the company. As we look to the future, Blue Ocean is at the core of enabling new sales growth and margin expansion opportunities we have today.

It makes us more agile and supports fast digital innovation, as our central implementation allows new ideas and digital business models to be scaled globally at a rapid pace. It provides real-time visibility across the entire value chain and our business units globally to support data-driven decision making and reallocation of resources. Significant productivity gains are enabled with bots and the AI-supported automation, and it allows for optimization of our global IT footprint with scaled cybersecurity, global applications, and lifecycle management. Finally, it is a platform to provide value to our customers, which includes connecting to our digital products and service offering while enhancing their MT experience. As I mentioned earlier, these capabilities are a powerful competitive advantage that many in our industry do not have the ability to or resources available to replicate. Now, this concludes our prepared remarks.

Operator, I'd now like to open the line for questions.

Operator (participant)

Thank you for the presentation. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad to raise your hand and join the queue. To please ensure you unmute your device when called upon to ask your questions. Your first question comes from the line of Dan Arias from Stifel. Please go ahead.

Daniel Arias (Managing Director)

Hi, good morning, guys. Thanks for the questions here. Tell me, Patrick, Europe seems to be doing pretty nicely right now, especially given some of the macro conditions that exist in some of those countries. What do you think is driving that, and what do you think is making the biggest difference between that region and the Americas when it comes to revenue, performance, and growth?

Patrick Kaltenbach (CEO)

Yeah, that's perfect. Thanks, and good morning, Dan. Yes, we are very happy with our position in Europe and how well our team competes there. I mean, a lot of the success is based, as we ultimately said in our early remarks, that a lot of our sales team in Europe is through our direct sales channel. And we are competing very effectively with our Spinnaker sales and marketing tools and how we direct our sales force. On top of that, we have launched a lot of new products over the last two years, and with these platforms, we compete very effectively in Europe. I would say the customers in Europe really appreciate the innovation.

We see that also in comparison to many other players in the market, and we are really happy with where we are with these results. As you know, in the beginning of the year, we were more concerned about Europe, given the impact of the Ukraine war, et cetera. But we are now seeing that we are competing well, especially with our Lab portfolio. And as we highlight also in the last quarter with the release of our new Lab automation portfolio, that is really resonating extremely well with our customers.

Daniel Arias (Managing Director)

Okay, helpful. And then maybe on China, the message here sounds pretty similar to last quarter. Demand is still weak, hope for growth in the back half, but mostly just because of the year-over-year compares and how those change. Can you just expand on the extent to which business conditions have changed at all? And if they have, what do you think that might mean for the year? I assume the outlook is still for a high singles decline, but curious if the potential for something slightly different one way or another has increased.

...And then it would just be great to get your updated thoughts on stimulus from here, just given how topical that is.

Patrick Kaltenbach (CEO)

Yeah, correct.

Daniel Arias (Managing Director)

Thanks.

Patrick Kaltenbach (CEO)

Yeah, yeah. Thanks, Dan. Yeah, and yeah, I mean, China, as you said, unfolded as we expected in Q2. That said, you also have to, I want to remind you that we still had positive growth in the second quarter last year. When we look at the end markets, it has been soft across all of our end markets. There's not a single market I would point out here at this point in time. And, given that softness, we also think we want to maintain our guidance for the rest of the year. As you rightfully said, we expect high single digits decline for the full year. That said, it means also that we will see positive growth in the second half, and that's based on easier compares.

I would say, when you asked about the stimulus program, we have not yet seen the impact of the stimulus. I mean, what we see here is that the stimulus this time is different from the stimulus that have been launched probably last year or the years before. This one seems to be much more focused. I think, the Chinese government called it focused on high-quality segments, aiming at, segments of AI, new energy, biopharma, and new materials. And, our teams are working very closely with our customers to also help them prepare for the applications. We have prepared, bundles that they can basically also, apply to these applications. We have not built in any effect of the stimulus in our guidance for Q3 and Q4.

We think that will be mainly a 2025 topic.

Daniel Arias (Managing Director)

Got it. Okay, thanks, Patrick.

Patrick Kaltenbach (CEO)

You're welcome.

Operator (participant)

Your next question comes from the line of Rachel Vatnsdal from JPMorgan. Please go ahead.

Rachel Vatnsdal (Executive Director and Equity Research)

Perfect. Thanks. I just wanted to dig first in Core Industrial. That was down 9% in the quarter. I think you guys had pointed us towards high single-digit declines. So can you just unpack that for us a little bit? How did that trend? Were exit rates into June and July any better than kind of what you started off in the quarter? And then also, can you just walk us through segment expectations for Core Industrial for the rest of the year? How should we think about 3Q and then the full year as well?

Shawn Vadala (CFO)

Yeah. Hey, Rachel, this is Shawn. I'll, I'll take that one. So, so like you said, I think the, you know, the, the division kinda came in pretty much similar to how we expected, being down 9%. I think a key thing to remember in Industrial is that it's very disproportionately weighted by China versus our other product categories. So we did see the Industrial business down very significantly in the quarter. Kinda similar to the Lab business. As Patrick mentioned, we saw the downturn in China in the quarter, pretty similar across both product categories. When we kinda look outside of China, you know, we did see, you know, of course, better activity. We see, you know, sometimes differentiated performance, depending on, like you said, the, the segments of the market.

You know, certainly, where we see companies that focus on automation and digitalization, and process control, we clearly are seeing better opportunities in those segments. You know, there are other aspects of the economy that I think are a little softer at the moment. But I think our teams have been very resilient here. I think our portfolio is very strong and robust, and I think our go-to-market strategy with our Spinnaker program continues to be really a differentiator in the Industrial areas. We've been able to target, you know, specific opportunities in the market. And as we kinda like step back from the business, one of the things I think is most exciting is, I think a lot of the discussions around reshoring and nearshoring opportunities are still yet to come.

And so I think, you know, as we kinda look to the future, we're a little bit more optimistic here.

Rachel Vatnsdal (Executive Director and Equity Research)

Perfect. And then just my follow-up, can you just walk us through segment level and geography expectations for 3Q in the full year as well?

Shawn Vadala (CFO)

Yeah, sure. So, hey, maybe I'll kinda run it down from the top here with the products. So our Laboratory business, our guidance for Q3 is up low single digit, and for the full year it would be up low single digit to up mid-single digit. Our Product Inspection business would be up mid-single digit for the third quarter, and for the full year, up low single digit. Our Core Industrial business would be up low single digit for Q3 and flat for the full year. And our retail business would be down in the mid-twenties for Q3 and down double digit, which is a little bit of a decline from what we were thinking last quarter for the full year.

By geography, we expect the Americas to be flat in Q3 and up low single-digit for the full year. We expect Europe to be down slightly in Q3 and up mid-single-digit for the full year. We expect China to be up low single-digit in Q3, and as we said before, down high single-digit for the full year.

Operator (participant)

Your next question is from the line of Vijay Kumar from Evercore. Please go ahead.

Vijay Kumar (Senior Managing Director)

Hey, guys. Congrats on this execution here. I had two guidance-related questions. One on that third quarter, maybe, Shawn, for you. Your comps get 700 basis points easier, right? The 1% seems a little light. Curious on the thought process for 3Q.

Shawn Vadala (CFO)

Yeah. Hey, Vijay. You know, hey, we, we felt very good about our performance in the second quarter. You know, we did, we did do better than expected, and, you know, we're not necess-- we're not seeing any negative changes in the business. But I acknowledge we continue to be a little cautious here. There still are a lot of uncertainties in the macro. You know, we all just saw the PMI numbers the other day. You know, and, and our end markets, you know, we still see longer cycle, sales cycles. But, you know, the other side of that is we do feel like we're competing really well. You know, and, I think, you know, we are continuing to take a little bit of market share each quarter.

These new products have been very well received in the market from what we can see from some initial results. But, you know, nonetheless, there's still some uncertainty and, you know, as you know, we typically only have about one and a half months of backlog. So, you know, we'd like to just kinda get through another quarter here, and then have a little bit more visibility as we kinda get into the end of the year.

Vijay Kumar (Senior Managing Director)

Understood. And Patrick, maybe one for you on, if you look at the second quarter performance, you know, pretty impressive on the operational side, you know, beat EPS by $0.60. I think guide raise was at the midpoint, maybe $0.20. So, was the guide, you know, back half assumptions, did it temper down a little bit? I know Sean mentioned PMI, but, you know, your business mix has changed quite a bit, no? Your exposure to PMI is far lesser. So, maybe just comment on, your back half, how you're looking at it, any change versus, you know, three months ago?

Patrick Kaltenbach (CEO)

Well, look, it's a very good question, and then I think we tried to say it also in the prepared remarks. We don't see a change from what we have told you in Q2, to be honest. I mean, the markets, the performance of the end markets, foremost rolled out as we expected it, and we also see it for the remainder of the year. Yes, we are very proud of the fact that we beat Q2, both top and even more on bottom line. You're right, I mean, our exposure on the PMI end markets is probably a little less, but we also need to see, again, more momentum in pharma and biopharma moving forward to really benefit even stronger from our strong portfolio.

As Shawn said, we're taking, of course, a bit of cautious stance here to make sure that we that we also can live up to what we told you for the full year. We maintain the outlook for the full year. We are pretty confident in 2% growth for the full year, but we need a little bit more visibility moving forward, to be honest. Our sales team and the engagement we are seeing of our sales team with customers is excellent. We have a lot of good leads, but sales cycles still take longer, and customers are still also living through an uncertain market environment. Especially in China, the customers are really cautiously spending until they have better guidance also from the government, on the path forward.

But also in the rest of the world, in some of the areas where we see with, for example, larger pharma accounts, a bit better momentum. We see that, you know, smaller pharmaceutical accounts and biotech accounts are still under pressure given the high interest rates. So if you sum all of that up, I think we are... We're still where we have been throughout the quarter or so ago in terms of market dynamics. We think it didn't get worse, but we also we still are looking forward to see better momentum, to be honest, to change our guidance. And at the moment, I think we are really well positioned with the 2% guidance for the full year.

Vijay Kumar (Senior Managing Director)

Understood. Thank you, guys.

Operator (participant)

Your next question is from the line of Jack Meehan from Nephron. Please go ahead.

Jack Meehan (Equity Research Analyst)

Thank you, and good morning. Wanted to start, ask about China again. I was wondering if you could provide color about what you're seeing across customer classes like pharma, biotech, academic versus Industrial, and whether any of the regional dynamics are different across those?

Patrick Kaltenbach (CEO)

Yeah. Well, I mean, especially on Q2, again, we have seen not a huge difference between the different market segments or end customers. They all have been pretty much down the same level, with few % up and down. I want to remind you that, again, our end markets or end customers in China, about 60% or more than 60% are local companies, about 15% are multinationals, and about 25% is government state-owned companies. But within that, within end segments and also the underlying end markets, whether it's Industrial or pharma, not a big difference. As I said in my earlier remark here, there is, again, a lot of cautiousness in the end market.

The customers really want to see how, you know, the government stimulus plays out, and they need to have more confidence before they invest more. I think we're competing very effectively with our own portfolio in China. Our local China team is very well connected to our customers. As I said, they are preparing, you know, or helping our customers to prepare for the application for the stimulus, et cetera. We've set up specific bundles. We have a lot of localized solutions for China. So, we are not concerned about the local competition when you look at the end market. It's really the, I would say, the overall mood in the market and the readiness to increase investment.

Jack Meehan (Equity Research Analyst)

Great. Two follow-ups on China. On stimulus, just want to understand the dynamic in the quarter. Is it possible that the discussion around stimulus actually led to some pause from some customers, kind of to wait for when the funding shows up? And then second is, on the pharma and biotech side, have you seen any impact from the BioSecure Act? Thanks.

Shawn Vadala (CFO)

Yeah. Hey, Jack, maybe I'll take that one. So hey, in terms of, like, this air pocket, you know, topic, we're, we're not hearing that from our teams. You know, not to say that maybe there's some psychology out there, but, but we're, we're not hearing that at the moment. And then in terms of BioSecure, we're not, we're not necessarily hearing any impacts of that. You know, maybe a little small. But of course, when you, when you look at the bigger topic, you know, ultimately, we, we would expect to see opportunities in other parts of the world with other customers as well, too.

Jack Meehan (Equity Research Analyst)

That makes sense. Thanks, Shawn.

Shawn Vadala (CFO)

Yep.

Operator (participant)

Your next question comes from the line of Matt Sykes from Goldman Sachs. Please go ahead.

Matthew Sykes (Research Analyst)

Hi, good morning. Thanks for taking my questions. Patrick, I just want to touch on something you mentioned when you were discussing the strengths you've seen in Europe, which is a higher exposure from your direct sales force in that region. I'm not entirely clear about direct sales force exposure across, you know, regions outside of Europe, but I'm just wondering, given the success that that team has had in executing Spinnaker and in the quarter, does that make you want to reinvest in a direct sales force where you might have gaps versus indirect? Or, do you feel pretty good about where you are in terms of direct sales force exposure globally?

Patrick Kaltenbach (CEO)

It's a very good question. Thank you for that. Look, I mean, we're constantly evaluating of where we stand in terms of go-to-market strategies and channels that we have in the end markets and what are the best fit for the end markets. That's true, by the way, for both. That's true, of course, for our sales and where, as I said, in Europe, we have a lot of direct sales force to our end customers. They are using the Spinnaker sales toolsets very well. We also have a strong direct sales team in the U.S. In other parts of the world, we're using sometimes indirect sales channel, but we are constantly evaluating that. When it comes to investment in sales channel, we are looking at it from a coverage perspective.

Do we really cover all the important end markets around the world? Do we also cover the, what we call the hot segments, well enough, either direct or indirect? So it's, it's a very differentiated approach we take worldwide of how we look at this. And, if we are thinking about investment, it's, it's first and foremost dependent, is there underlying market momentum there to increase our sales force? But we also look at the same way, for, for example, services. And services, we see very healthy growth. I would say in the last quarters, we have, continued to invest in services, building out our service capabilities and also strengthening our, our services team, and that's also a good opportunity for us to move, moving forward.

Matthew Sykes (Research Analyst)

Thank you. If I could just follow up on that services growth. You mentioned, I think, up 6% in the quarter. You've consistently driven sort of mid- to high-single-digit growth in services or sometimes higher. Could you just give a mark-to-market? I remember at the Investor Day you had a few years ago, that was a key initiative of yours. Could you maybe just talk about how that exposure to services has grown and where you think, you know, there still is room to continue to drive that services growth higher as a proportion of overall sales?

Patrick Kaltenbach (CEO)

Yeah, absolutely. Look, I mean, services, again, is a really strong hold of Mettler-Toledo. It's also one of the key differentiations, differentiators we have against many other companies out there. We have probably the strongest, services organization out there compared to other competitors of our size. We continue to invest, not only into the in the size of the service team, but also in the portfolio of the services we are offering, to make sure that we have unique and differentiated offerings for our customers. We have a large installed base of instrument out there, and a good part of that is still untouched with our services.

So what we're also investing in at the moment is to go after the installed base with a stronger inside sales and telesales force to make sure that we get in touch with these customers, tell them about our updated service opportunities, and then moving forward, hopefully also increase the amount of products that we have on the service contracts. So I think it's an excellent opportunity. Again, it's definitely something we keep a strong eye on and also invest in. Even through the downturn that we have seen last year, we continued to invest in services, and I think it's paying back now. As I said, we had double-digit growth last year, and even this year, based on the tough compares, we're still seeing very good growth with 6% we see.

As a final reminder, you know that services is the most profitable part of our business.

Matthew Sykes (Research Analyst)

Thank you.

Operator (participant)

Next question is from Dan Leonard of UBS. Your line is open.

Dan Leonard (Managing Director)

Thank you. My first question, Patrick, you zoomed in on share gain in your prepared remarks. Is it your view that share gain for Mettler is accelerating, or are you highlighting these efforts as supportive of that historical one point of share gain?

Patrick Kaltenbach (CEO)

That's a good question, but it's really hard to say about how much share you gain per quarter. I wouldn't look at as a quarter-over-quarter topic. Of course, we compare our results to what we're hearing from our competitors, and we are very pleased with how we perform even in this difficult environment. But as we also make clear, for example, on the Investor Day, on average, we own probably about 25% market share, so there's ample room for us to gain additional share. And that's why we're also investing into innovation and driving more innovation to market, because that's what customers are looking for. They're looking for products that help them to become more productive, to help them with data integrity, on the automation side.

And that will be, that will be a path for us to continue the market share gains. And we don't make big market share gains per year, but we do make small chunks every year. At whether it's currently accelerating or not, hard to tell. I would say, given the, the performance of the products, compared to many competitors, we are happy with the performance, and we're seeing market share gains.

Dan Leonard (Managing Director)

Appreciate that. And then as a follow-up, you know, this earnings season, a few of your diversified peers have announced upsized share repurchase programs and specifically flagging that the M&A target environment is still incredibly richly valued. I'm curious your thoughts on that environment.

Shawn Vadala (CFO)

This is Shawn. Maybe I'll take that one. I mean, as you know, we're, you know, very, you know, we think we're a great platform for acquisitions. When something's strategic and makes sense, you know, we usually can move pretty quickly, but we're also very selective. And, you know, but absent share repurchases, we use our free cash flow to buy back shares. We feel good about how that program has worked over the years, and I think part of the success is our consistency in how we execute it. And so we continue to look at it the same as we've looked at it in the past, and I think you'll see us be consistent with our share repurchase program.

As a reminder, this year, I think our estimate is about $850 million, which approximates our free cash flow estimate for the year, and, you know, absent if we did identify an acquisition opportunity.

Dan Leonard (Managing Director)

Thank you.

Operator (participant)

Your next question comes from the line of Michael Ryskin from Bank of America. Please go ahead.

Michael Ryskin (Managing Director)

Great. Thanks for taking the question, guys. Shawn, maybe one for you. Just looking at the EPS guide through the rest of the year and the quarterly progression, seems like you're implying, you know, a little bit of a step up in margins in the third quarter and a bigger jump in four Q. That's pretty consistent with what you've done historically. There's a lot of volume leverage in the fourth quarter. Just wondering if you could dive into the nuances of that margin expansion, though. You know, how much are we seeing on the gross margin line versus SG&A? And just any additional color you can give us on quarterly pacing, just confirming that. Thanks.

Shawn Vadala (CFO)

Yeah. Thanks, Mike. Yeah, no, I think you got it spot on. It's gonna be very much about the leverage on volume. You know, if we look at our gross margin estimates for the second half of the year, I'd say they're probably on a full year basis, we're probably up a little bit from what we were thinking last quarter. As you could see, we did pretty well in the third quarter versus our expectations, and of course, a part of that was also doing a little bit better on the volume. For Q3, we're kind of estimating gross margin expansion in, like, the 60 basis points kind of a range, and for the full year... And that would be maybe 50 basis points, excluding currency.

So currencies are a little bit inverse of what we would have seen in terms of how they affect the margins, at least the moving pieces versus Q2. And then for the full year, our gross margin estimate is about 70 basis points, which again is up a little bit from what we were thinking last quarter. And then in terms of the operating margin, the operating margin for the third quarter estimate is down about 50 basis points, and then for the full year, it would be up about 40 basis points. And again, these numbers are also at the midpoint of our guidance, too, so things could be a little bit better or worse, depending on how we do. But otherwise, I'd say that the teams are executing really well.

You know, the pricing program continues to be very effective. Pricing came in at 2% in the quarter, which is, you know, in line with our expectations. We continue to expect 2% for the full year, and then our teams are doing a really fantastic job working on our various productivity and cost savings initiatives. And then, you know, maybe also to comment on our SternDrive program is driving some nice efficiencies and cost savings in the margin line, so.

Michael Ryskin (Managing Director)

Okay. That's all really helpful. Thanks, Shawn. And then one more to the guide. A number of other peers talked about expecting a return to more traditional seasonality as the year goes on. And then, you know, referring both to a little bit of a lull in Q3 in Europe, and then maybe a little bit of an end-of-year bounce. That's implied in your guide as well, but you've also got the weird comps last year from the shipping delay. So if you could just walk us through, like, what are you expecting from a seasonality perspective? Is there any view on budget flush at this point? I know it's not a huge driver for you, but still, just what are you thinking about there? Thanks.

Shawn Vadala (CFO)

Yeah, yeah, probably the best, yeah, we are expecting things to start looking a little bit more like seasonal typical seasonality if you adjust for the shipping delay topic. Probably the best way. But, you know, maybe not 100% back, you know. But if you kinda, I think the best way to look at that is to kinda take our sales guidance and look at the sequentials. And, and then you can see the sequentials are, I think, pretty reasonable versus, you know, historical results, depending on how far back you go, adjusting for the shipping delay topic. So that gives us some confidence for the back half of the year. In terms of budget flush, as you say, we're, we're typically not a budget flush story.

But nonetheless, I think we all did feel this, you know, feel Q4 last year. I'd say it's still a bit early to judge. As Patrick mentioned, we still see longer sales cycles with the customers, but at the same time, we're only typically sitting on 1.5 months' worth of backlog. And, you know, otherwise, I think we feel like there probably should be something this year versus, you know, relative to last year, but the magnitude is obviously difficult to judge, but we do feel good about how we're positioned here for the second half of the year from a sequential basis.

Michael Ryskin (Managing Director)

Awesome. Thanks so much. Appreciate it.

Shawn Vadala (CFO)

Yep. Welcome.

Operator (participant)

Your next question is from the line of Josh Waldman from Cleveland Research. Please go ahead.

Joshua Waldman (Senior Equity Research Analyst)

Hey, good morning, guys. Thanks for taking my questions. Two for Patrick, I think. First-

... Patrick, I wondered if you could talk a bit more about how Product Inspection performed versus your expectations. I'm curious what you're seeing in the business across kind of the major geographies and end markets, and how orders have tracked over the last couple of months.

Patrick Kaltenbach (CEO)

Yeah. Good morning, Josh. Yeah. Product Inspection, actually, we are quite pleased with the result. I mean, we know that the end markets are still under pressure. Customers are cautious with their investments. We know that deal cycles are longer still, but we have launched a lot of new products over last year, mainly in the X-ray business demand, and we also broadened our product offering from the high end into the mid-range portfolio. That opens also a lot of doors for us now. So I think we have a really good, healthy engagement of our sales teams around the globe with our portfolio.

So we have a healthy funnel there, but I would say the caveat is still that sales cycles are longer, and customers in some areas are cautious with investments until they also see the underlying market picking up. The upside for us is the new portfolio. We are competing very effectively, and again, with the broader portfolio, also seeing probably more customers than we have seen before.

Joshua Waldman (Senior Equity Research Analyst)

Got it. Okay, and then maybe a question and a half or so on lab. Any sense on if the upside in the quarter was from better funnel conversion, or did you also see new opportunities coming into the book at a higher rate than you anticipated? And then, maybe a follow-up question, I think, do you get the sense that there's a change in customer buying such that accounts are more willing to work with you directly, as opposed to exclusively through the distribution channels?

Patrick Kaltenbach (CEO)

Well, let's say, I mean, this is a pretty broad question. Let's focus on the Lab products right now. I mean, we see again that with our portfolio, we are competing very well. We have launched a new platform there as well. We saw also some bigger projects, and especially in Europe, converting in the first half and the second quarter of the year. So there is again. I think we are in a good position when it comes to our portfolio and competing effectively in the market. But on a broad view, I would say on a grand scale of things, it's not like there is a significant change in customer buying behavior right now.

The end markets, as we laid out and the behavior as we laid it out, it's still rather soft, especially in China. But in Europe, we have seen good momentum. We also have seen the last quarter, the Lab business in the U.S., picking up. So I think we're in a good position, and the faster the market recovers, I mean, the more momentum we can capture into this portfolio, to be honest.

Joshua Waldman (Senior Equity Research Analyst)

Sure. Okay. Thanks, guys.

Operator (participant)

The next question is from the line of Patrick Donnelly from Citi. Please go ahead.

Patrick Donnelly (Managing Director)

Hey, guys. Thanks for taking the questions. Shawn, this might be one for you. You sounded a little more, I guess, optimistic on the Core Industrial outside of China. So maybe you can focus on that piece just for a second. You know, the Industrial complex been a little softer in terms of commentary this earnings season. Just curious what you're hearing from customers, how you're thinking about that piece again, you know, acknowledging China is pretty soft, but just in the developed world here, how are you thinking about that Core Industrial piece, what you're hearing from customers, and is a little bit of optimism the right way to read it?

Shawn Vadala (CFO)

Yeah, no. Thanks, Patrick, and good question. I mean, you know, it-- I think it depends a lot on what segment of the market we're talking about. And, you know, probably what you picked up on in my voice was just that, you know, we have... You know, this is the business historically, right? When people would say, "Hey, can you talk about, you know, your cyclicality?" You know, we would say, "This is historically the part that's been exposed to the economy more than our other businesses." And then, you know, if I look at Europe, I mean, yes, Lab did a lot better than Industrial in the quarter, but we still had growth in Industrial, you know, and that's against a backdrop of a relatively weak economy there.

So that's something that we do feel good about is the resiliency there. You know, part of our Industrial business, of course, is supporting, you know, the same end markets as Lab, like pharmaceutical. But I think it really gets into what we started to see in the quarter and some of the discussions I've had with colleagues. You hear comments around, "Hey, if we're talking about customers that are in the business of, like, automation and end-to-end process control and digitalization, those customers are actually doing pretty well.

If you're talking about customers that are in the business of discrete manufacturing and those types of segments, you know, much more challenging conditions." And I understand what you're saying because I had a similar question to our team as well, too, because, you know, we certainly see a lot of the headlines from a lot of the Industrial companies this past quarter having more challenging results. So, I guess it's a little bit of both. You know, I think we're really well positioned on some of these more favorable trends, but it doesn't mean that we're necessarily immune to the economy.

But in the meantime, I think, you know, we always try to focus on what we can control, and I think the teams are executing very well, both on the sales and marketing side, but also on the product development side. And we feel very good about some of the R&D investments that we've accelerated over the last few years in that business to lean into some of these market trends. And, you know, certainly, we have a great pipeline of opportunities going forward as well.

Patrick Donnelly (Managing Director)

Okay. Got you. That's a really helpful run through. And then just on the two-stage guide, obviously, we've gotten a few questions here. You know, I think, I think someone mentioned kind of the implied, you know, raise was a little bit less than the beat. I mean, has anything-

... changed in your view, in terms of the 2H view? Obviously, you guys, you have the standard normal conservatism a lot of times, and I think people are used to it. But just how you think about 2H relative to a few months ago, again, just given that the guide change, and, and Shawn, even in one of your answers, kind of said, we're not quite back to 100% seasonality just yet. So just how you're thinking about the market, you know, relative to a few months ago would be helpful.

Shawn Vadala (CFO)

Yeah, I mean, I think we're. You know, we always sit on one and a half months of backlog, so I think that always makes it a little challenging for us when we start going out beyond the current quarter. I think we tried to acknowledge, like, we're executing well, we did better than expected in the second quarter, but, you know, we're not just assuming that we should add that to the second half. We do see soft market conditions out there. But we do benefit also from easier comparisons. We feel good about the sequentials. There is an element of us being a little bit cautious going into the second half, but I think it's prudent to be cautious, too.

Like, I think there really are a lot of different aspects to this uncertainty in the environment. I think we're all looking forward to seeing, you know, more robust signs of things turning, and you know, but no one really can say exactly when that's gonna happen. And of course, you know, we're a pretty diverse business by product, by end market, and by region of the world. And so, but I think when we kinda step back and look at how we're guiding, we actually feel good about our guidance to everybody, and of course, we're always gonna, you know, look to do better, you know, but right now we feel like this is an appropriate way to position the forecast.

Patrick Donnelly (Managing Director)

Great. Thanks, Shawn.

Operator (participant)

Your next question is from the line of Catherine Schulte from Baird. Your line is open.

Catherine Schulte (Senior Research Analyst)

Hey, guys. Thanks for the questions. Maybe first for Shawn, just going back to your margin commentary. I think you said gross margin up 70 basis points for the full year versus the 40 you were talking about last quarter, but then op margins up 40 versus the 50 you talked about last quarter. So I guess, what's being absorbed on the OpEx side, where you're, where you aren't passing through that gross margin benefit, and op margins are actually, you know, down a little bit versus your prior guide?

Shawn Vadala (CFO)

Yeah, no, good question, Catherine. I mean, I think some of this is also noise with how some of the currencies have changed over the last quarter. But certainly we are doing a little bit better on the gross margin side that I talked about earlier. And then, you know, in terms of, like, the OpEx side, you know, we're still investing in the business, too, you know. And, you know, we have such a great pipeline of investment opportunities and, you know, we're just trying to find the right balance and the right mix between, you know, realizing productivity gains, but also reinvesting in the business at the same time.

Catherine Schulte (Senior Research Analyst)

Okay. And then maybe on the Lab business, you know, adjusted for the shipping delays recaptured in the first quarter, it looks like revenue increased high single digits sequentially, which seems very encouraging. Can you just talk through any differences you're seeing between pharma and academia? And, you know, on pharma, are you seeing easing in terms of the customer spend caution that we've been seeing? Thanks.

Shawn Vadala (CFO)

We're still seeing caution in pharma, but maybe the one pocket that stood out a little bit more was in Europe. We—Patrick mentioned it in his, one of his previous responses. When we talk to the team, you do hear that there has been some projects on the sidelines for a bit, and we started to hear some of those projects converting, so that was a positive sign. But I would say that, hey, we're not out of the woods. We do hear comments about big pharma performing better than, you know, smaller companies or even, you know, getting into small biotech, where I think there's still some challenges there.

But when you look at it from a product perspective, what was maybe encouraging to us is we saw pretty good growth throughout the portfolio with, with the only exception, being Product Inspection, which was still, you know, kind of down a little bit from some—I mean, not Product Inspection, Process Analytics. With Process Analytics being down a little bit because of our exposure to bioprocessing. But when we look at the second half of the year, we, we feel, a little bit better about that one.

Operator (participant)

And your next question comes from the line of Tycho Peterson of Jefferies. Your line is open.

Tycho Peterson (Managing Director)

Hey, thanks. Actually, Shawn, I'm gonna pick up right where you left off on bioprocess. I know it's a smaller part of the mix, but can you maybe just give us a little sense on kind of, you know, upstream versus downstream, what you're seeing there? Your equipment's obviously kind of lower price points than maybe some of your peers, but just curious, as we've kind of gone through a long period of, you know, destock and just thinking about restock, where are we in kind of that cycle for you guys?

Shawn Vadala (CFO)

I think we feel pretty good. Maybe I'll start, and if Patrick wants to chime in. But, like, I'd say we're – I don't know if you'd say eighth inning, Patrick, or so – but we're getting pretty close there. I mean, we definitely feel very encouraged as we kinda go in the second half of the year. If you think upstream and downstream, you know, we were seeing a lot of particular headwinds in our downstream business. You know, for us also, that was where we're more exposed on the single-use side, so that could have been part of it as well, too.

But when we kinda look to the second half of the year, you know, all the data and even just the qualitative discussions we're having with the team, and more importantly, customers, points to a much more favorable, you know, situation for the second half.

Patrick Donnelly (Managing Director)

Yes, absolutely. I can, I can confirm that. I mean, again, if you want to differentiate a little bit about the regions in the U.S. and Europe, you asked about the destocking issues. I would say in Europe and the U.S., we have the destocking issue behind us. There's some residual, stocking issue that we're still facing in China, but what we are hearing from customers there, it also should be over in a quarter or so.

Tycho Peterson (Managing Director)

Great. And then, Shawn, question about pricing. First, I mean, I assume the assumption for this year is still about 200 basis points, but then, more importantly, going forward, as inflation starts to pull back, you know, should we think about you guys getting to pre-COVID levels around 250 basis points per year?

Shawn Vadala (CFO)

Yeah. Hey, Tycho, I understand the question, but I think it's probably a little bit earlier for us to kinda think about how we would guide for next year on pricing. And, you know, hey, just to also maybe remind of, like, how we historically guided, we typically were... You know, I don't think we've ever necessarily, except for the last few years, during this inflationary environment, we're never typically guiding more than 200 basis points, even in the more historical inflationary environment. So, hey, if we can do better than that, of course, we will. But I kinda look at 200 basis points as a mid to long-term guide, as probably a reasonable assumption.

Tycho Peterson (Managing Director)

Okay. Thank you.

Shawn Vadala (CFO)

Yep, thanks.

Operator (participant)

This concludes our Q&A session for today. I would like to hand the call back over to Adam for closing remarks.

Adam Uhlman (Head of Investor Relations)

Hey, thanks, Paul, and thanks, everybody, for joining our call this morning. Please feel free to reach out to me if you have any further questions, and I hope you all have a great weekend. Take care. Bye.

Operator (participant)

This concludes today's conference call. Enjoy your weekend. You may now disconnect.