Mettler-Toledo International Inc

NYSE:MTD

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome to the Second Quarter 2022 Mettler-Toledo International Inc. Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Adam Uhlman. Please go ahead, sir.

[Adam Uhlman, Investor Relations]

Thank you, and good morning, everyone. I'm Adam Uhlman. I'm responsible for Investor Relations at Mettler-Toledo, and I'm happy to welcome all of you to this call. I am joined with Patrick Kaltenbach, our Chief Executive Officer; and Shawn Vadala, our Chief Financial Officer; and of course, Mary Finnegan with Investor Relations.

Let me cover some administrative matters. This call is being webcast and is available for replay on our website at mt.com. A copy of the press release and the presentation that we will refer to on today's call is also available on our website.

Let me summarize the safe harbor language that is outlined on Page 2 of the presentation. Statements in this presentation are not historical facts, constitute forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different than those expressed or implied by any forward-looking statements.

For a discussion of these risks and uncertainties, please see the discussion in our most recent Form 10-K and other reports filed with the SEC from time to time. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions, factors affecting our future operating results and in the Business and Management's Discussion and Analysis of Financial Condition and Results of Operation sections of our filings.

One other item on today's call, we may use non-GAAP financial measures. A more detailed information with respect to the use of and differences between the non-GAAP financial measures and the most directly comparable GAAP measure is provided in the 8-K. Let me now turn the call over to Patrick.

[Patrick Kaltenbach, Chief Executive Officer]

Thanks, Adam, and good morning, everyone. We appreciate you joining our call this morning, which we are doing from Switzerland. We reported strong second quarter results as our team executed very well on our growth strategies. Our culture of agility and focused execution have allowed us to capitalize on favorable market demand and navigate challenging supply chain and inflationary conditions.

The highlights of our second quarter performance are detailed on Page 3 of the presentation. Local currency sales in the quarter increased 10% as compared to the prior year. We had very strong growth in our laboratory and Core Industrial business, and we are particularly pleased with the very good growth in China. Excellent sales growth combined with good margin improvement drove very strong growth in adjusted EPS despite adverse foreign currency.

We feel positive about our outlook for Q3 and for the full year, and we recognize our agility and resilience will be pivotal to navigate market conditions. Later, I will have some additional comments on our business, but let me now turn it to Shawn to cover the financials and guidance. Shawn?

[Shawn Vadala, Chief Financial Officer]

Thanks, Patrick, and good morning, everyone. Sales in the quarter were $978.4 million, which represented a local currency increase of 10%. On a U.S. dollar basis, sales increased 6% as currency reduced sales growth by 4%. We estimate that the impact of reduced sales in Russia-Ukraine due to the war was a headwind of about 1% to sales growth.

On Slide #4, we show sales growth by region. Local currency sales increased 12% in the Americas, 4% in Europe and 14% in Asia/Rest of World. Local currency sales increased 14% in China in the quarter.

On Slide #5, we show sales growth by region for the first half of the year. Local currency sales grew 12% for the first 6 months, with 14% growth in the Americas, 7% in Europe and 15% in Asia/Rest of World. Local currency sales increased 15% in China on a year-to-date basis.

On Slide #6, we summarize local currency sales growth by product area. For the quarter, Laboratory sales increased 13%, Industrial increased 9% with Core Industrial up 11% and product inspection up 5%. Food retail grew 3% in the quarter.

The next slide shows local currency sales growth by product area for the first half. Laboratory sales increased 15%, Industrial increased 10%, including 12% growth in Core Industrial and product inspection up 7%. Food Retail declined 6%.

Let me now move to the rest of the P&L which is summarized on Slide #8. Gross margin in the quarter was 58.4%, an increase of 30 basis points. We benefited from strong pricing and volume growth, which was offset in part by higher material costs. R&D amounted to $44 million in the quarter, which is an 8% increase in local currency over the prior period, reflecting increased project activity.

SG&A amounted to $242.2 million, a 6% increase in local currency over the prior year, which includes increased investments in sales and marketing. Adjusted operating profit amounted to $285.4 million in the quarter, a 12% increase. The increase reflects strong sales growth combined with good execution. Currency was a 3% headwind to operating profit growth. Adjusted operating margin was 29.2%, which represents an increase of 160 basis points over the prior year.

On a currency-neutral basis, adjusted operating margins increased 120 basis points.

A couple of final comments on the P&L. Amortization amounted to $16.4 million in the quarter, interest expense was $12.8 million in the quarter. Other income in the quarter amounted to $2.2 million, primarily reflecting nonservice-related pension income.

Our effective tax rate was 19% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter. Fully diluted shares amounted to 22.8 million in the quarter, which is a 3% decline from the prior year. Adjusted EPS for the quarter was $9.39, a 16% increase over the prior year or a 20% increase, excluding unfavorable foreign currency. We're very pleased with this adjusted EPS growth, especially given that adjusted EPS was up more than 50% in the second quarter of last year.

On a reported basis in the quarter, EPS was $9.29 as compared to $7.85 in the prior year. Reported EPS includes $0.22 of purchased intangible amortization, $0.06 of restructuring and an $0.18 benefit due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises.

The next slide illustrates our year-to-date results. Local currency sales grew 12% for the 6-month period. Adjusted operating income increased 13% or 16% excluding unfavorable foreign currency, and our operating margin expanded 110 basis points. Adjusted EPS grew 18% on a year-to-date basis or 21% excluding unfavorable currency. That covers the P&L and let me now comment on cash flow.

In the quarter, adjusted free cash flow amounted to $208.2 million. We continue to make nice improvements on DSO, which declined 2 days to 34 days as compared to the prior year. ITO came in at 3.8x. Year-to-date adjusted free cash flow was $283.7 million.

Let me now turn to guidance. Forecasting continues to be challenging, given dynamic market conditions. Our forecast remains on -- our focus remains on factors we can control, namely successful execution of our growth and margin initiatives. Let me make some general comments on the full year before covering the specifics.

While there is more macro noise in the environment today as compared to 3 months ago, we continue to feel good about our business. Customer demand is solid and we are executing on our growth initiatives very well. We remain cautious about challenges in the supply chain, but to date, have been able to navigate them well.

Second, we are facing greater foreign exchange headwinds to our earnings growth as compared to 3 months ago. Specifically, we now estimate that foreign currency will be a headwind to adjusted EPS growth in the quarter of approximately 6% and would expect a similar headwind in the fourth quarter as well. At the time of our last earnings call, the headwind to earnings growth in the second half of the year was in the range of 3% to 4%.

What this means for the full year is we now expect currency to be a headwind to adjusted EPS of approximately 4.5% as compared to 3.5% the last time we spoke. At the midpoint of our guidance, we now expect adjusted operating profit margin to increase approximately 140 basis points on a currency-neutral basis, reflecting higher volume growth and good execution on our margin initiatives.

Including currency, reported operating margin -- profit margin will be slightly higher. Finally, as you think through our sales guidance, keep in mind, our sales growth will be reduced by approximately 1% for the remainder of the year due to sales in Russia.

Now let me cover the specifics. For the full year 2022, we now expect local currency sales

growth to be in the range of 9% to 10%. This compares to previous guidance of 8%. We are increasing our full year sales guidance for our strong year-to-date results and a better outlook for the second half. We expect full year adjusted EPS to be in the range of $38.85 to $39.05, which is a growth rate of 14% to 15% and a growth rate of approximately 19%, excluding currency.

For the third quarter, based on market conditions today, we expect local currency sales growth of approximately 8% and expect adjusted EPS to be in a range of $9.75 to $9.85, a growth rate of 12% to 13% and a growth of 18% to 19%, excluding currency.

Some final details on guidance. With respect to the impact of currency on sales growth, we expect currency to decrease sales growth by approximately 4.5% for the full year and decreased sales about 6% in Q3. In terms of cash flow, we expect -- we continue to expect full year cash flow in the $855 million range and expect to repurchase approximately $1.1 billion in shares in 2022. We expect a net debt-to-EBITDA leverage ratio of approximately 1.5x. That is it from my side and I'll now turn it back to Patrick.

[Patrick Kaltenbach, Chief Executive Officer]

Thanks, Shawn. Let me start with some comments on our operating businesses, starting with Lab, which had strong sales growth in the quarter with very good growth across all major product categories. We expect our end markets to remain favorable. And with our excellent product portfolio and effective sales and marketing initiatives, we believe we can continue to gain market share in our Laboratory business.

Turning to our Industrial business. We are very pleased with the continued strength in Core Industrial. Our outlook for the remainder of the year is favorable, and we believe this business is well positioned to capitalize on our customers' needs, automation, productivity improvement and efficiency gains as they work to overcome challenges in the labor market and supply chain.

Product inspection sales came in a little lower than expected this quarter but our team is optimistic for the third quarter. We have strong momentum in Americas but have started to see some more conservative packaged food customers' behavior in Europe. Finally, Food Retail sales grew 3% as growth in the Americas and Europe offset a significant sales decline in China due to disruptions from pandemic lockdowns.

Now let me make some additional comments by geography. Sales in Europe increased 4% in the quarter, about as we had expected and against the 23% growth in the prior year. As a reminder, we stopped shipments to Russia after the invasion of Ukraine, which is impacting growth in Europe.

Sales in the Americas was, again, excellent with double-digit growth across all of our major product categories. And finally, Asia/Rest of the World had another quarter of strong growth with robust growth in Laboratory and Core Industrial. China grew 40%, with particular strong growth in Lab and Core Industrial. The team continues to do a great job navigating challenges in the market. Assuming market conditions remain as they are today, we believe we will deliver strong growth in China in 2022.

One final comment on the business. Service and consumables continue to show excellent momentum and grew 11% in the quarter. We are very pleased with the growth in this important and profitable part of the business. That concludes my comments on the business.

Now I would like to share with you some insights on our sales and marketing initiatives. We have seen in the recent years the agility that Spinnaker provides is invaluable in helping us gain market share and adapting to various customer demand environments. The effectiveness of this was evident in the initial pandemic downturn and the subsequent recovery.

Under both scenarios, Spinnaker provided agility to quickly identify growth opportunities and guide our sales force accordingly. As you are aware, we have an organic sales growth focus that benefits from our highly fragmented markets as well as a very large installed base of instruments, which provides fertile ground to discover growth opportunities but also requires a great deal of agility and execution focus.

Our Spinnaker program helps us target the most attractive segments of growth and increase our sales force time with the most strategic accounts. We want to efficiently go after the best opportunities with our sales organization of approximately 3,000 sales colleagues around the world. Our field sales force is guided toward opportunities with the most strategic accounts, those with good growth and cross-selling potential, while other opportunities are more efficiently handled by our telesales and inside sales teams.

Spinnaker utilizes unique data analytics to leverage external data sources and our substantial internal data, including that of our installed base, to identify the most attractive and profitable growth opportunities. Spinnaker also provides extensive tools to our sales force that improves their effectiveness. Continuous improvement is at the heart of Spinnaker. We continue to build, adapt and refine our initiatives, which reinforces our already strong foundation for sales and marketing and makes it difficult for competitors to copy. Our Spinnaker program also benefits from our proprietary Top K program.

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

A summary of the opportunity with all relevant information, including customer site, contact info, potential for products, other activities with this customer is generated. These summaries are provided to the sales organization throughout the world who then qualify and prioritize these opportunities for our sales teams. The structure of our sales organization allows us to most efficiently follow up and guide the teams to these opportunities.

Last year, we generated more than 150,000 of these Top K alerts and are continuing to penetrate these potential opportunities at customer sites. While we continue to follow up with last year's alerts, we are also launching additional wins this year. Target industries for this wave include, for example, pharma, food and beverage and chemicals. And we also identified opportunities in the fast-growing markets of lithium-ion battery and semiconductors.

Other examples include vaccines, plant-based foods and advanced materials. We are convinced that our unique ability to quickly identify growth opportunities and related accounts helps us to adapt to shifts in customer demand, who we have all seen can happen quite rapidly.

Our sales teams are also very happy to be able to visit customers on-site again. Face-to-face meetings allow us to best assess potential, promote our key value-add solutions and identify cross-selling opportunities. However, we also saw, during the last 2 years, how effective online interactions with customers can be. We have significantly enhanced our remote capabilities, including online sales meetings, webinars and virtual or e-demos. We recognize the importance of leveraging a smart mix of online and on-site meetings to convert opportunities to orders.

Finally, selling service contracts at the point of sale continues to be a high-priority focus for us. We saw the value of our service throughout the last 2 years in terms of very favorable Net Promoter Scores. This has reinforced our sales organization the importance of articulating the value of a service contract when the product is sold.

Internally, we have revamped our quoting process to ensure the right focus is on service at the critical point of the selling process. We have also introduced an updated version of our digital sales enablement tool library that allows our sales reps to be more effective in value selling. The update includes new front-end software tied directly into our CRM, providing our sales team dashboards to prepare for upcoming site visits and efficiently handle follow-up requests. Our sales enablement tool also provides our sales teams enhanced application information and selling guides, which also helps us enable cross-selling with new applications in targeted accounts we have not yet penetrated. This tool greatly improves the effectiveness of the selling process, thereby enhancing the customer experience and improve order conversion rates.

These are just a few examples to illustrate our strength in marketing and sales. At the core of our growth strategies is the importance to reallocate resources to the best opportunities. And Spinnaker is a great example how we do this by helping to identify and guide our sales teams to the best growth opportunities in the most favorable end markets. Business conditions today remain solid. I am convinced that our strategic programs, such as Spinnaker, will provide us agility to adapt to potential changes in the market conditions as we have successfully demonstrated over the last several years.

If you look at the mix of our business today, it is stronger than ever. Our Laboratory business has grown from 44% of our sales in 2008 to 56% of our sales today as we target secular growth opportunities like pharma and biopharma industries.

At the same time, our Core Industrial business has changed from 31% of our sales to approximately 25% of our sales, and the mix within that has shifted to more favorable end markets. In fact, we estimate that more than 60% of our Core Industrial sales are now with pharmaceutical, biopharma, food manufacturing and chemical customers. And I would remind you that our service and consumable business is approximately 1/3 of our revenues and very profitable.

Our end market breakdown also reinforces the strength of our business. Today, we estimate about 40% of our total sales are to life science customers, 20% to food and beverage and about 10% to chemical. And beyond that, we serve many other diverse markets. We are clearly more biased towards higher-growth markets and, at the same time, nicely diversified. Well, that concludes our prepared remarks, and we now want to open the call to questions.

[Operator]

[Operator Instructions] We will take our first question now. Your line is open. Please go ahead.

[Vijay Kumar, Evercore ISI]

And congrats on a really strong print here. Maybe one, you did mention on pricing and inflation. Can you talk about how pricing and inflation assumptions have changed versus the prior guide?

[Shawn Vadala, Chief Financial Officer]

Vijay, this is Shawn. Yes, I'm happy to do that. So we were very pleased with our execution in the quarter, both on pricing but also in our supply chain. I think you hear us use the word agility a lot, but the the organizational agility and execution just continues to be really fantastic across the global organization. If you look at pricing in the second quarter, our estimated price realization was about 4.5%, which was better than what we were expecting kind of when we kind of came into the quarter.

On the material side, I would say material costs remain elevated and they were pretty much as we kind of expected as we came into the quarter, which was a little bit better than Q1 but still remain at an elevated level. Maybe I kind of continue here and I just kind of like transition into the second half of the year, which I'm sure is also in your mind.

So as we kind of think about the second half of the year, right now, we're thinking about price realization in the 5% range or so, which would kind of put us at about 4.5% on a full year basis, which is a little bit higher than our guidance. Last time we spoke for the full year of about 4%.

And then if you kind of like want to translate that into margins, we're looking at about a 60 basis point improvement in our gross margin for Q3 and about 50 basis points for the full year. And then if you kind of drop it down to operating margins, our operating margin in Q3 right now were estimated on a currency-neutral basis, about 130 basis points. And actually, if you exclude currency -- I mean, if you include currency, the reported number is probably more than the 170 basis point on a reported basis.

And then our full year operating margin assumption right now, excluding currency on a currency-neutral basis, is about 140 basis points and on a reported basis, that would be more in a 160 basis point kind of a range.

[Vijay Kumar, Evercore ISI]

That's extremely helpful, Shawn. And then maybe one for Patrick on your comments towards the end on how the business mix has changed. Can you compare and contrast versus the last cycle, '08, '09, how that mix has changed? What was that mix back in '08 and '09? And what's the implication for the business if the economy were to slow down here?

[Patrick Kaltenbach, Chief Executive Officer]

Yes. Shawn, you go first and then I'll chime in.

[Shawn Vadala, Chief Financial Officer]

Yes. Okay, Vijay, maybe I'll take that one. So if you look at our Lab business today, it's about 56% of our business. If you go back to 2009, it would have been about 45% of our business. And then if you look at our Core Industrial business back in '09, it would have been, I think, just over 30%, and right now, it's about 25%.

But what's even more interesting to me is the mix within Industrial and our overall end market exposure. So right now, we would estimate that more than 60% of our Core Industrial business, which historically is more susceptible to the economy, more than 60% of that business today is sold into pharma, biopharma, chemical and food manufacturing. So I think we continue to do a good job of redirecting business towards more attractive end market segments.

[Patrick Kaltenbach, Chief Executive Officer]

Yes. Clearly, and of course, let me add also to that. We are seeing strong momentum in both businesses at the moment. We're seeing very healthy demand driven by operational efficiency and automation needs. And they go across both the Lab market as well as the Industrial end markets.

So I think both markets are benefiting very well from the [indiscernible] of the right products to serve our customers.

We are really happy with [indiscernible] for both of the segments. Our Lab business, of course, is much bigger as you know. And we have also launched a lot of exciting products this year and continue to have a lot of good products in the pipeline for both units. So this is why we're also so optimistic on the outlook for Q3 and Q4.

[Operator]

[Operator Instructions] We will go ahead with our next question. Please state your name and company before you pose your question.

[Catherine Schulte, Baird]

This is Catherine Schulte with Baird. I guess first, can you talk about the 14% local currency growth in China? I think you were expecting high single digits for the quarter so what drove the upside there? How do we view the growth for that region for the rest of the year?

[Patrick Kaltenbach, Chief Executive Officer]

Yes. Thanks, Catherine. I'll take the question first and then let Shawn chime in as well. So yes, we are exactly -- we are very pleased with the 14% growth in the quarter. And as a reminder, we grew 35% in the second quarter of last year, so really exceptionally strong growth.

We saw the growth across our Lab business in China with almost 20% sales growth, which is remarkable also given about 40% sales growth we delivered in the second quarter of last year. And all of our Lab product lines really showed very strong growth. We had strong growth also in our Core Industrial. Shield team has done a particularly good job of increasing our business mix to more attractive segments, as also Shawn mentioned before.

We have seen particularly strong demand for solutions in automation driving this efficiency that we talked about. So we are very confident on China if the underlying market conditions don't change. And in China, they can change quickly for lockdowns. But so far, we are really optimistic. As I said, we are expecting strong growth in the second half as well.

[Shawn Vadala, Chief Financial Officer]

Yes. I don't think I'd add very much. I mean, I know there was a lot of concern about China lockdowns as we kind of entered the quarter, but from our perspective, we really had minimal impact during the quarter. I think our team did a wonderful job navigating that. We were one of the first companies to reopen in Shanghai, and we're able to really keep a lot of our product flows going throughout the quarter.

And of course, I think many of you know that most of our production is actually outside of Shanghai as well. And then these themes that Patrick talks about too, I mean, they're automation, digitalization. Those are themes that are very prevalent in China that our team has been leaning into with our portfolio.

And all these hot segments that we talk about, about lithium battery and semiconductor are also very prevalent also in China as well. And then, of course, the government's 5-year plan, they're leaning into that locally in terms of how they are stimulating their economy, which I think we're a beneficiary of as well.

[Catherine Schulte, Baird]

Okay. And then you talked a bit about seeing some more conservatism from packaged food customers on the product inspection side in Europe. How do you view that unfolding for the rest of the year? And have you seen any other businesses start to see signs of slowing in Europe?

[Patrick Kaltenbach, Chief Executive Officer]

Yes. Let me first capture the product inspection piece. And yes, it's mainly in Europe where we see some -- a little bit more conservatism. Customers are just a little bit careful with their investments in packaged food. We don't see that in the U.S.

The U.S. is actually still very, very strong for us in product inspection. We have a very good pipeline there.

But Europe has become a bit more cautious and that, of course, has also to do with the overall environment -- economic environment in Europe that some customers get more conservative.

On the rest of Europe and the other businesses, I mean, we are really pleased with our growth that we have seen in the second quarter. As you know, we have had expected to come in low single digit. It came in better, and this is also against 20% growth in the quarter of last year.

We don't see any concerns for our European sales team or any other parts of the businesses right now in Europe. So no, I would say no signs of a real downturn at this time. But we fully acknowledge that we need to be very agile as market conditions, of course, can change and change quickly, given the situation with the energy supply, which we carefully monitor and have also put the right mitigation plans in place.

[Operator]

We move on to our next question. Please go ahead.

[Matt Sykes, Goldman Sachs]

It's Matt Sykes, Goldman Sachs. Maybe first, Patrick, you mentioned that consumables and services are now 1/3 of total revenue. Just given your product mix, just wondering where you feel like you can take that potential recurring revenue over the long term. And what are the plans to do that, given your product mix?

[Patrick Kaltenbach, Chief Executive Officer]

Yes. Good. Absolutely. Let me start with that. So first and foremost, I think we still have ample of opportunity to also grow our service business, which is very, very strong.

We have a huge installed base of instruments. And I would say a big part of the installed base is currently not under contract but it's calling more on what we would call break and fixed services.

So we have opportunities every time we go there with customers to talk about the value of contracts and being under contract, which means they have faster access to services. They have a fast response time. They have a broader service portfolio if they are on a contract and then also drives some of the growth rate we have proved from our services.

We have a strong focus, of course, also at services at point of sales, making sure we get right for we sell the instrument also better connect rate. The team has a very strong focus on that.

And overall, we are increasing our portfolio of services to our customers, adding more high-value services continuously. So I'm very confident that the share of the service revenues continue to increase.

I mean, we have to also see that, of course, for the last 2 years, we had very strong instrument growth. And the service usually trails that a little bit, but having 11% growth, again, this forward double-digit growth in Services and Consumer is a really strong reminder that we're making good progress on broadening our service footprint.

If you were to look at it from a regional perspective, the U.S. history has been very strong as well as Europe. In China, we still have even more potential to grow services. Traditionally, the Chinese market has been not leaning that much into service. They are more self-maintainers and they're also seeing it as a part of the overall sales package being included with the instrument, that it takes time to change that mentality, and we are working on that.

From that perspective, I'm optimistic and I'm putting a lot of focus also in my internal business meetings with every business I have, how we can increase the share of services and, of course, other consumables. The products we have, for example, our pet business, very strong in consumables. In other areas, for example, in the Lab business, the titrators, automation solutions, they all come with a very healthy and increasing share of consumers moving forward. So I'm optimistic that in the long term, we will move that 1/3 of the business piece further for service and consumables.

[Matt Sykes, Goldman Sachs]

Great. And then maybe more of a general question. Just given your position in automation and some of the strength you're seeing there, if we are going to a more challenging economic environment, do you see automation from your customer conversations you have as more of a discretionary purchase, meaning you might not have the capabilities and want to do it but might not want to spend money for that? Or is the trade-off in terms of the productivity enhancements they see from your automation capabilities more than offset that decision to just spend discretionary?

[Patrick Kaltenbach, Chief Executive Officer]

That's an excellent question. I think your second part of the question is actually leaning in the right direction. What we are hearing is that customers are, for several reasons, really interested in driving more automation in their businesses. It's driving their productivity. It's -- with that, of course, driving their profit.

And they are very willing to invest and making sure that they continue to drive productivity also. Getting manual labor out of the play as much as possible when you look at large automation in factories where we play big [indiscernible] in the Industrial business or even in the Lab. It's all about making sure that you can automate processes to make them more robust, more reliable and also, in the end, cheaper for them.

This is why our customers are responding very well to automation right now. It's not the "automation" alone. It's that this productivity gain and although that long-term performance gains that they get from automation solutions.

[Operator]

We move on to our next question. Please do state your name and company before your question.

[Patrick Donnelly, Citi]

This is Patrick Donnelly from Citi. Patrick, maybe just 1 on -- another 1 on China, just given the amount of focus there. Can you just talk a little bit about the cadence of the recovery? How it trended throughout the quarter? Expectations there going forward, maybe just in terms of the guidance?

And then similarly, just on the instruments versus consumables, what you saw going to come back versus what you saw maybe lag a little bit there?

[Patrick Kaltenbach, Chief Executive Officer]

In China itself, look, we didn't have a really significant slowdown during the quarter. I mean, the quarter held up quite strongly for us. The team was reaching out to customers even in, let's say, some of the sales folks who have been in provinces or areas where they're also locked down, they continue to call customers from home.

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

I don't know, Shawn, if you have a different perspective, but I haven't heard anything else in China.

[Shawn Vadala, Chief Financial Officer]

No. What was -- I mean, what was nice to see is just the breadth of growth throughout the product portfolio. I mean, we grew strong double digit, both on the Laboratory side of the business as well as on the Industrial side of the business. And maybe the one soft spot that we did see is in our food retailing business. I mean, food retail is it's less than 5% of our total Chinese business, but that market has been very hard hit by the lockdowns and the nature of the lockdowns, a lot of store closures going on inside the country.

But absent that, there was just a lot of strength throughout the rest of the portfolio.

[Patrick Donnelly, Citi]

Okay. No, definitely encouraging results there. And Shawn, maybe a quick one for you there. Just in terms of the guidance for 3Q, do you mind just breaking it out by segment and then geography as well if you have it just in terms of the growth rates?

[Shawn Vadala, Chief Financial Officer]

Sure. I'll give you Q3 and then I'll give you the full year result as well, Patrick. So let me start with the divisions. So our guidance for the Lab division is high single-digit growth for Q3 and low double-digit growth for the full year. For product inspection, our guidance is mid- to high single digit for Q3 and mid- to high single digit for the full year.

Core Industrial, our guidance is high single digit for Q3 and high single digit for the full year.

And then for food retailing, our guidance is low to mid-single digit for Q3 and flattish for the full year.

And then on a geographic basis, our guidance for Europe is low to mid-single digit for Q3 and low to mid-single digit for the full year. And I think it's important in Europe to remember that we're going to have a headwind in Russia in the second half of the year. And just given the seasonality of last year's sales, that headwind might be a little bit more in the second half of the year than the first half. It could be in the 4% range or so in terms of Russia headwind.

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

[Operator]

We move on to our next question. Please go ahead. Your line is open.

[Dan Arias, Stifel]

Dan Arias from Stifel. Maybe just going back to pricing and the ability to step up what you're able to push through overall. Shawn, as the market has evolved and in your own internal capabilities that evolved, are you finding that the pricing power that you have is showing up in areas where maybe you hadn't had it before? Or is it really just a function of pushing a bit harder in the areas where traditionally you've been successful?

[Shawn Vadala, Chief Financial Officer]

Yes, that's a good way to ask the question, Dan. I mean -- hey, I think the whenever we do pricing, we try to tailor our approach to the business conditions and the circumstances, and we always talk about how we like to differentiate by product and geography.

And if you just look at kind of the cards we're dealt from a pricing perspective at the moment, it really lends itself to higher pricing in most categories. And so what we try to do is we look at the cost pressures in this environment by category -- product category and geography. And then what we can do is we build it up and then we educate the organization about it. And I think that's really important is that with our direct sales force, they can really articulate that to the customer.

And then they can also emphasize our value propositions. And as like Patrick was saying in the previous Q&A that our value proposition, in many regards, is higher in this environment because people are seeking productivity much more than they were and they're looking for solutions. And so that plays very well to our overall portfolio and our ability to position the price increases. So I think the market very much understands that.

And then if you look at the execution of the organization, it certainly helps when we're able to support customers, too. And so what do I mean by that? Just in our supply chain. I mean, we -- I think every company has some level of challenge at the moment. But if you compare us relative to competition, I think we look pretty good in terms of our ability to support customers with lead times and things like that, and that also certainly increases the customers' willingness to pay.

So it's actually the execution has been really good, and I just think the environment, obviously, lends itself to better price realization, which we saw in Q3. And with my previous comments, we expect it to even be a little bit better in the second half of the year.

[Dan Arias, Stifel]

Okay. Very helpful. Maybe just as a follow-up, I wanted to ask about Blue Ocean. If I remember correctly, I think that you guys are implemented across 80% or so -- 80%, 85% or so of the users at this point. A, is that right?

And B, what is the time line that you would consider for sort of a full global rollout? And then if that number is right, is that last 15% to 20% meaningful at all when it comes to pricing, visibility, margins, et cetera? Or is -- at the end of the day, are those regions that don't really move the needle as much?

[Patrick Kaltenbach, Chief Executive Officer]

Yes. I'll get this first and then I'll let Shawn chime in as well. Look, we are definitely around 85% of the rollout so far. And there are still a number of countries left to bring on to Blue Ocean or they are running on their current own ERP systems. Look, I mean, it will continue to help us drive productivity within the company.

We can use -- shared a common template for many of the process that we use across the company.

So a lot of it is also an internal gain in terms of efficiency and helping us to drive cost down and just use efficiency across the company. On the pricing side, I don't -- there is some impact, but I'll let Shawn take that.

[Shawn Vadala, Chief Financial Officer]

Yes. On the pricing side, I mean, we'll always benefit from improved analytics, but we'll also -- to me, the business processes are a big part of it, too. Like when you think about price administration, we have a lot of tools around that and global centralized processes. And then there's also a lot of embedded pricing controls in terms of how we can manage discounting and things like that. So there's always some benefit when we go live.

I mean, our largest market organization that we have left is in France, which we're expecting to go live next year. And like Patrick said, there's a handful of smaller organizations and primarily in Europe and the Rest of World.

And then maybe just before I hand it back to Patrick, a general comment that we always see with Blue Ocean is just the overall visibility into the business. We very, very much have benefited over the last couple of years by having more transparency end-to-end in our business from Blue Ocean.

And for those of you who are less familiar with Blue Ocean, I mean, it's about global harmonized processes, but we enable that with 1 single instance of an ERP and fully integrated CRM service, HR program. So then with 1 single instance, we really have a lot of very interesting transparency, which we've very much benefited from over the last couple of years.

[Operator]

We move on to next question. Please go ahead.

[Derik De Bruin, Bank of America]

It's Derik De Bruin from Bank of America. So a couple of questions. Shawn, first, a little housekeeping question. Full year guide for interest expense and income net, how are the higher rates impacting you and how are you done in fixed versus variable?

[Shawn Vadala, Chief Financial Officer]

Yes. No, good question, Derik. So -- and thanks for -- I know it's early for you today so we apologize for the early morning. In terms of interest rates, we're about 75% fixed at the moment and we don't have any significant maturities in the short term, like this year or next year. I mean, with a couple of smaller things.

And then when you look at like our variable exposure, actually, a lot of that is also in euro, which probably prices out about 1% or so. So I think we're positioned pretty well here. And if you kind of like look at what we've done over the last few years, just even at the end of last year, we've been locking in a lot of 15-year debt over the last few years.

So for example, in December of last year, we priced 15-year debt that funded in 2 tranches. We just funded $150 million of 2.8% for 15 years in March, and then we're going to fund another $150 million tranche in September at 2.9%. And so we feel like, for the short and medium term, we're pretty well positioned. And then to be specific on interest expense, our guidance or estimate for this year is $53 million.

[Derik De Bruin, Bank of America]

Great. And another pricing question but just more bigger picture. With -- given the pricing and also the currency moves, have you seen any impact on your customers' purchasing power, basically some people hesitating because they just didn't have the budgets for things?

[Shawn Vadala, Chief Financial Officer]

No. I mean, I think it's just the opposite. I think it's very much kind of like how I was answering the question, like I think people just really appreciate the value in this environment and they appreciate the ability to support them.

And of course, we're doing -- we're trying to do things in a balanced way in terms of like increasing prices where it's appropriate and there's very much a cost story, inflation story associated with it. And so I think between our approach and then the overall value proposition that we're providing, we're just really not hearing any noise.

[Patrick Kaltenbach, Chief Executive Officer]

And maybe a little bit as we said, in product inspection [indiscernible] customers become a bit more cautious with investments. Otherwise, not really, no.

[Shawn Vadala, Chief Financial Officer]

Yes. I mean -- and just to clarify on the PI, I wouldn't say it's a pricing topic. It's more of a -- and as Patrick said earlier, it's very much a European topic for product inspection. There has been some more conservatism where we -- projects -- we get the sense that maybe some projects are going to get delayed in packaged foods in Europe.

[Derik De Bruin, Bank of America]

And then just 1 more. Is there any signs of inventory, [indiscernible] pipette tips, electrodes, anything that's sort of like has long shelf life that people maybe have hoarded or stockpiled? Just sort of like some of the commentary on sort of what you're seeing in your customers.

[Patrick Kaltenbach, Chief Executive Officer]

Yes. That's a good question, but we don't hear a lot of the customers have stockpiled electrodes or pipette tips. I mean, we had, I would say, more at the beginning of the year, we, of course, during the pandemic, customers try to buy as many pipette tips as possible, and they filled up their stock levels, but is coming back to, I would say, more normal levels now.

And you also have to realize that a lot of the pipette tip sales that we make a day are not going into testing in going into bio research, biopharma applications. And these labs usually do not have the same tendency as we have seen, or you probably have heard from other suppliers that supply, the broader testing industry that have tried to just get as many in their stocks as possibly even last year, we have not been that much exposed.

[Operator]

Our next question, your line is open.

[Josh Waldman, Cleveland Research]

It's Josh from Cleveland Research. Patrick, a follow-up on product inspection. Your growth was a bit lighter than in the quarter but it sounds like the commercial team remains optimistic. I guess, was the softer Q2 a result of like installs pushing out or more a reflection of slower order intake? And just kind of curious how recent trends were reflected in the guide, and whether or not H2 assumptions have come down versus prior plan?

[Patrick Kaltenbach, Chief Executive Officer]

Yes. Well, thanks, Josh. Very good question. But look, I mean, the Q2 results have been a bit softer than we had expected. It's not like off by a huge factor.

Margins is not a little bit softer. I think we had projected high single digits. We came in a bit more to mid-single digits, so it's not off by far.

A lot of that was actually triggered by 2 factors. We have seen -- on the customer side, we have seen some project pushouts not necessarily because they didn't have the money, but because usually, we also supply into a larger infrastructure. And then some of the upper suppliers were not ready to make the full installations of our final product inspection piece of the whole flow line, so to speak, but they were just not ready to take it this quarter. So there has been some pushouts.

What we also suffered from in terms of not being able to deliver everything we could was, on the supply chain side, some of the electronic components just didn't come in time, so that led actually to delay in this quarter. As we said, we are quite optimistic for Q3. The team sees a good pharma especially in the United States. We have to continue to monitor the situation in Europe. But otherwise, I think we are okay with the guidance.

[Josh Waldman, Cleveland Research]

Got it, okay. And then the Lab segment has outperformed expectations here in recent quarters. Would just love to hear any additional thoughts you have on what you think is driving consistent upside in the segment. I mean, how much of this is price coming in better than expected, maybe share gains or just kind of strong underlying demand? And I guess whether the lab benefited from COVID testing in China in the quarter?

[Patrick Kaltenbach, Chief Executive Officer]

Yes. Look, I mean, again, for COVID testing in China wasn't a big storm at all, but we see broad-based growth across our product portfolio. There is very strong demand from pharma and biopharma, especially biopharma. The Chemical segment, again, is showing very strong demand for automation solutions so we are very happy with that.

Should we add also in our remarks, we have mentioned what we call hot segments like the battery segment, plant-based food, et cetera, where we have targeted our sales force very quickly to these accounts with the right application solutions.

They show across the board, I mean, across the regions very strong growth. And I think if you factor all of that together with what we also mentioned being about this continuous need for automation solution, that just drove a lot of demand across our portfolio.

[Operator]

We move on to next question, please go ahead.

[Rachel Vatnsdal, JPMorgan]

This is Rachel Vatnsdal from JPMorgan. So sticking with some of the earlier questions on recession resiliency, can you just walk us through how your customers are thinking about the replacement cycle, given the evolving macro dynamic? Do you see any inflation softening some of these capital budgets and softening demand for new products? Or what kind of levers can Mettler really pull the field that replacement cycle even in a recession and inflation?

[Shawn Vadala, Chief Financial Officer]

Rachel, this is Shawn. I'll take it, and Patrick wants to jump in. So when we look at our business, other than this 1 topic that we talked about with packaged food in Europe, we're not seeing any indicators that people are -- have any cautiousness or any indicators that there's any concern about delaying replacement cycles.

As we kind of enter into this next phase of the economy, one thing that we try to remind people about and we've talked about it in the past is that we typically need the economy to be good enough. We need it to be good enough that people will stick to replacement cycles. And we've seen in the past, PMIs go into the mid- to high 40s, like in Europe, but we still had growth, and it was because people were sticking with replacement cycles.

At the same time, we've seen PMIs in the mid- to high 50s in Europe, and we didn't have double-digit growth. And so in a geography like Europe, which is arguably the most exposed at the moment, that is very much on our mind is that well the European business just kind of stick to replacement cycles here.

And we just need the economy to be good enough. And then part of that is that we are selling -- our average selling price of our products are less than $10,000. And so we're not the first instrument that's going to get cut in a budget. And I'd say, I think we estimate that something like more than 70% of our products are actually below that level. And so -- and they're personal instruments and we sell them with the direct sales for us.

We can articulate the value proposition, all that kind of stuff. So I feel like that's a favorable situation for us.

And then the other thing is these comments on mix that we made a lot in the prepared remarks and talked about a little bit earlier. I just think that we should be more resilient going into this next phase of the economy compared to where we were in the past.

[Rachel Vatnsdal, JPMorgan]

Great. And then one quick one for me. You flagged some conservatism on supply chain during your prepared remarks, which I think is prudent. Just given the macro backdrop, but can you walk us through what you're seeing on supply chain? Have things continued to deteriorate here or they improved since 1Q?

And then do you have any line of sight on when things can really improve?

[Patrick Kaltenbach, Chief Executive Officer]

Yes. I'll take that. So look, on supply chain challenges, I would say they have somewhat stabilized but we continue to see challenges in certain items. It's still mainly semiconductors. It seems to get a little bit of that.

I would not give green light on everything to be honest here.

What we have seen on transportation and logistics have improved quite a bit. We also see, for example, the port in Shanghai, less congested as it used to be, so that helps, of course, but an overall supply of material. Again, we see some of our businesses have seen slight improvement in semiconductor available.

But we have still some others who have not. I mentioned the product aspect, for example, where we had some issues getting right components in time. And we still have constantly calls with the suppliers, making sure that we get enough of the electronic components.

I can't tell you really whether it's -- this is a trend already, these line improvements. We are hoping all for it and we stay very agile and in very, very close conversation with our suppliers to make sure that we have enough safety stock holds in the areas that we see very critical.

[Adam Uhlman, Investor Relations]

Okay. Operator, I think with that, we'll go ahead and wrap up today's call. Thanks, everybody, for joining us on this early morning call. Looking forward to catching up with you later on in the day. Take care.

[Shawn Vadala, Chief Financial Officer]

Bye.

[Adam Uhlman, Investor Relations]

Thank you.

[Patrick Kaltenbach, Chief Executive Officer]

Bye. Thank you.

[Operator]

Thank you, everyone. You may now disconnect.