Mettler Toledo International Inc/ Q2 FY2023 Earnings Call

Good afternoon, and welcome to the Mettler-Toledo Second Quarter 2023 Earnings Conference Call. My name is Briana, and I will be your conference operator today. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the call over to Adam Uhlman, Head of Investor Relations. Please go ahead.

Thanks Briana, and good evening, everyone. Thanks for joining us. On the call with me today is Patrick Kaltenbach, our Chief Executive Officer; and Shawn Vadala, our Chief Financial Officer. Let me cover some administrative matters. This call is being webcast and is available for replay on our website. A copy of the press release and the presentation that we will refer to today is available on our website. This call will also include forward-looking statements within the meaning of the US Securities Act of 1933 and the US 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 statements, except as required by law. On today's call, we will 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 also available on our website. Let me now turn the call over to Patrick.

Thanks Adam, and good evening, everyone. We appreciate you joining our call today. Tonight, we reported our second quarter financial results, the details of which are outlined for you on page three of our presentation. Our sales growth in the second quarter included strong growth in our service business as well as solid performance across our industrial product categories, which was offset in part by softer market conditions in Laboratory and China. Focused execution of our margin expansion and cost control initiatives resulted in good growth in adjusted EPS despite currency being a much greater-than-expected headwind this quarter. As we look to the remainder of 2023, there is increased uncertainty in the global economy and our end markets. In addition, market demand in China has deteriorated. While we have reduced our growth expectations for 2023 due to weaker market conditions, we remain confident in the factors we can control, including execution on our best-in-class sales and marketing programs and our margin expansion and cost-saving initiatives. Our team remains very agile in adapting to changing market conditions, and I'm confident that our efforts will deliver solid results this year. Let me now turn the call over to Shawn to cover the financial results and our guidance, and I will then come back with some additional commentary on the business and our outlook.

Thanks Patrick, and good evening, everyone. Sales in the quarter were $982.1 million, representing a 2% increase in local currency. In U.S. dollars, sales were flat due to a 2% decrease caused by currency effects. Sales growth by region showed a 4% increase in local currency for Asia and the rest of the world, 1% for the Americas, and flat growth in Europe. In China, local currency sales rose by 3%. Looking at the first half of the year, local currency sales increased by 4%, with a 3% rise in both the Americas and Europe, and a 6% increase in Asia. Year-to-date, sales in China grew by 6%. In terms of product categories, for the quarter, Laboratory sales fell by 3%, while Industrial sales increased by 6%, with core industrial up by 6% and product inspection up by 5%. Food Retail surged by 17% due to significant project activity. For the first half, Laboratory sales grew by 1%, and Industrial sales increased by 6%, benefiting from growth in both core industrial and product inspection. Food Retail experienced a substantial 25% increase. Moving to the rest of the profit and loss statement, gross margin stood at 59.4%, an improvement of 100 basis points, though pricing was tempered by higher costs, business mix changes, and currency impacts. Research and Development expenses were $47.2 million for the quarter, marking a 6% rise in local currency compared to the prior period, indicating increased project activity. Selling, General and Administrative expenses came in at $228.6 million, a 6% decrease in local currency from the previous year, attributed to lower variable compensation and the benefits of our cost-saving measures. Adjusted operating profit reached $307.7 million, an 8% increase, with currency negatively impacting operating profit growth by roughly 4%. The adjusted operating margin improved to 31.3%, a gain of 210 basis points year-on-year. In summary of the P&L, amortization stood at $18 million for the quarter, interest expense was $19.3 million, and other income totaled $1 million. Our effective tax rate was 19% this quarter, higher than our previously guided range of 18.5% for the year, not accounting for discrete items and the timing of stock option exercises. We now anticipate our tax rate will be 19% for the full year. Fully diluted shares were 22.1 million, a drop of about 3% from the prior year. Adjusted earnings per share for the quarter were $10.19, a 9% increase year-over-year or a 13% rise excluding unfavorable foreign currency effects. On a reported basis, EPS was $9.69 compared to $9.29 in the prior year, which included $0.23 of purchased intangible amortization and $0.29 of restructuring costs. We also recorded a $0.02 benefit from tax items. Looking at our year-to-date results, local currency sales increased by 4% for the first six months. Adjusted operating income saw a 9% rise, or 14% when excluding the negative impact of foreign currency, with an operating margin expanding by 190 basis points. Adjusted EPS grew 9% year-to-date or 15% when excluding currency impacts. Regarding cash flow, adjusted free cash flow for the quarter was $260.5 million, an increase of $52 million driven by favorable working capital. Year-to-date, cash flow per share rose by 44%. Days Sales Outstanding averaged 35 days, while Inventory Turnover was 3.7 times. Now, looking ahead, we see increased caution among our customer base, particularly in pharma, biopharma, chemical, and food manufacturing sectors, coupled with greater uncertainty regarding global economic conditions. Particularly in China, conditions have worsened, leading to uncertainty about economic growth and limited government support, which affects our pharma and biopharma customers who are postponing investment decisions, also noticed in the Americas and Europe. In Europe, the outlook remains uncertain due to the ongoing conflict in Ukraine and weak overall economic growth. Global manufacturing PMIs have trend lower and have remained below the growth threshold for several months. Concerning our guidance, we expect local currency sales to decrease by 3% to 4% in the third quarter, reflecting a mid-single-digit decline in Laboratory sales due to the adverse conditions in China and softness in demand from pharma and biopharma customers. We also anticipate modest sales declines in our industrial sectors. We are taking actions to reduce costs in light of the softer sales environment while still maintaining key growth investments. We estimate our operating margin will improve by 70 to 100 basis points for 2023 due to our disciplined efforts in margin expansion and cost-saving initiatives. For the third quarter, we project adjusted EPS to be between $9.55 and $9.85, indicating a drop of 3% to 6%, which includes approximately a 3% foreign exchange headwind. For the full year 2023, our local currency sales growth estimate has been revised to 0% to 1%, down from our previous estimate of around 5%. We now forecast full-year adjusted EPS to range from $40.30 to $41.20, suggesting a growth rate of about 2% to 4%, or roughly 5% to 7% excluding unfavorable currency impacts, compared to our earlier guidance of $43.65 to $43.95. There are three main factors behind our adjusted EPS outlook: first, the lower local currency sales growth expectations partly offset by cost reductions; second, a greater than expected foreign exchange impact on EPS; and third, a higher anticipated tax rate of 19% for 2023 compared to 18.5% prior guidance. To finalize the guidance details for your models, total amortization is estimated to be $72 million. Purchased intangible amortization is excluded from adjusted EPS and is expected to be $26 million pre-tax or $0.93 per share. Interest expense is projected at $78 million for the year. We now anticipate free cash flow of about $850 million, revised down from approximately $900 million, and we will also reduce our share repurchase program by a similar amount. That concludes my remarks, and I will now hand it back to Patrick.

Thanks Shawn. Let me start with some comments on our operating businesses, starting with Lab, where sales were softer than we had expected for the quarter. While we continue to see robust demand in hot segments like lithium-ion batteries, our pharma and biopharma customers have become increasingly cautious with their spending and have delayed investment decisions, particularly in China. As expected, our pipette sales were again weak in the second quarter as customers reduced inventories of chips and instrument sales declined. The impact of the lower pipette sales was in line with our previous expectations, and we continue to expect this headwind to ease in the second half of the year as comparisons become easier. As mentioned, we also see customers, especially in our key market segments such as pharma and biopharma delaying purchases. However, our pipeline and customer quoting activity has remained strong, and we were pleased to see continued strong service growth across our Lab business in the second quarter. We are hopeful conditions normalize soon, but we have not built this into our 2023 guidance. Turning now to our Industrial business. We again saw strong demand for our automation solutions from our core industrial portfolio this quarter. While we expect to continue to benefit from customer investments in automation and localization of supply chains globally, we are not immune to the increased uncertainty around the global economic outlook. Regarding product inspection, it also had good performance this quarter, but our packaged food customers have also become more cautious about making investments in new equipment due to inflation and uncertain economic conditions, and we would expect softer results for the remainder of the year. Finally, Food Retail delivered strong growth this quarter due to robust project activity in the Americas. Our Food Retail sales can be lumpy, and we would expect strong growth again in the third quarter. One final comment on the business. Service sales remained very strong overall and grew 13% in the quarter. We continue to be very pleased with the growth in this important and profitable part of our business. Now let me make some additional comments by geography. Sales in Europe were flat in the quarter with growth in core industrial and product inspection, offset by declines in laboratory products. In the Americas, we saw good growth across our industrial and retail businesses offset by declines in our laboratory product offering, especially pipettes. Finally, Asia and the rest of the world had another quarter of good growth. China grew 3% with good growth in Industrial, but sentiment, particularly in Laboratory has become much more cautious as activity has slowed following the COVID reopening, and there has been limited economic stimulus as mentioned before. As of today, we expect a significant decline in sales in China in the second half of the year, but our team in China will remain agile to capitalize on growth opportunities however market conditions unfold. Now, I would like to share with you some updated thoughts about our strategic priorities and how we are investing to drive growth over the long term. While market conditions have become increasingly challenged over the past year, we have remained at a very high level of incremental investment to support the long-term growth of the organization and market share gains. The hallmark of our culture is agility and focused execution, and our team continues to respond very well to unexpected changes in the environment to gain market share, expand profitability, and make additional important growth investments for the future. Starting with our sales and marketing programs, we have developed increasingly sophisticated digital approaches with our Spinnaker program that more efficiently feeds our pipeline with new leads, alerts with a special focus on customers that we do not conduct business with currently. Webinars have been an important area of investment to nurture new customer leads as we look to increase potential customer interactions in a very efficient format. We can directly show how other solutions address common customer pain points in very specific end-use applications. We have had strong participation in our webinars, which positions us as trusted subject matter experts in specific applications but also provides a good sales pipeline as customers seek unique solutions to challenging or new applications. This is particularly evident in hot segments like lithium-ion batteries, sustainable materials, and the semiconductor industry. Our data-centric approach in nurturing and qualifying these leads allows field sales teams to prioritize their efforts on high-potential business opportunities and increase our win rates. We have also continued to invest very strongly in research and development over the past year to maintain and improve our technology leadership and support our growth potential. I am very excited about our pipeline of new and recently released products that enhance our customers' productivity while also ensuring compliance with regulatory requirements. This has been a topic of increasing importance for our customers as of late, and our innovative solutions like LabX enhance productivity through workflow automation while ensuring full data integrity and traceability across customers' entire workloads. Earlier this year, we launched a new thermal analysis instrument that allows customers to increase sample analysis throughput through new automation and software features. This is especially important in hot segments like advanced materials and the battery segment. Additionally, our Process Analytics business recently released a new conductivity sensor that is unmatched in the industry for measuring ultra-pure water in the microelectronics industry, helping to increase yields for our semiconductor customers while reducing the amount of very expensive ultra-pure water required for their operations. Lastly, our Industrial business had great success with our new line of hygienic scales that help customers clean their scales up to 40% faster and also help eliminate contamination risks in regulated environments like food and pharma. While individual new product launches are not material on their own, given the diversity of our portfolio, they provide a very important compounding element to our growth algorithm, expanding our technology leadership, enhancing our value propositions, and helping drive market share gains. Going forward, we have a very exciting pipeline of innovative products that we plan to launch over the coming year that will further extend our leadership position. Turning now to our margin initiatives. Our pricing and SternDrive initiatives have been very effective in supporting our margin expansion this year. As a reminder, SternDrive is focused on improving productivity and driving operational excellence across our manufacturing and back-office operations, with our team executing several hundred projects to reduce material costs and improve productivity. We have excellent opportunities ahead of us with enhanced advanced data-driven approaches around value engineering, smart manufacturing, and common platform architectures that we expect to launch in the near future. I hope this provides some context to our updated guidance for the year but also shows the confidence we have in our ability to continue to execute on our long-term growth initiatives, expand our margins, and deliver solid earnings growth this year and beyond. Now that concludes our prepared remarks. Operator, I'd like to open the line now for questions.

Your first question comes from Dan Arias with Stifel. Your line is open.

Afternoon, guys. Thanks for the questions. Patrick or Shawn, maybe just to start on China. Growth there was actually a couple of points above the U.S. and Europe in the quarter. Is the deterioration that you're pointing to for the second half showing up in the order book here in early 3Q? Or is it more just sort of reading the writing on the wall when it comes to the big picture direction that things are headed in over there?

Yes, this is Shawn. I'll begin and then Patrick can provide more details. As we conclude the quarter and start the third quarter, we've noticed a significant decline in conditions that emerged towards the end of Q2. We don't usually have a lot of backlog, but at the start of Q3, we observed a notable drop, particularly in our Lab segment. Our forecast for Lab in China shows a potential decrease exceeding 20%. While we've experienced strong growth over the past few years, including 20% growth last year in Lab in China and nearly 40% in Q3 the previous year, we're also noticing a slowdown in the Industrial sector. Overall, customers seem hesitant to place orders. We're uncertain how much this hesitancy is linked to unclear stimulus policies in the country. Although there has been recent discussion of additional stimulus, we haven't factored that into our guidance for Q3 or the rest of the year. Given the rapid and significant downturn we're witnessing, we don't feel it's prudent to make any optimistic projections for Q4, and we are preparing for a negative outlook for that quarter.

Okay. Okay. Just to finish that thought. Did you give a forecast for the year for China? If you did, I missed it.

Yeah. So, we expect a decline in the mid-single digits for the full year, and for Q3, a decline in the mid-teens. If you take a step back and consider that full year guidance of a mid-single digit decline, it's a significant change from last quarter when we projected high single digits for the full year. A quick calculation shows that more than half of our guidance reduction is specifically due to China.

Sure. Moving to the Lab and the destocking activity in the pipette business, how much are you attributing to that? Is it aligned with your expectations from last quarter? Do you believe normalization can occur in the second half of the year, or should we consider it will take the rest of the year to fully resolve?

That situation is unfolding as we anticipated. We experienced about a 2.5% headwind in the first quarter, and we had projected a 2% headwind for the second quarter, which turned out to be accurate. Consequently, our growth rate of 2% would have been 4% without the decline in pipettes. Similarly, our Lab business would have shown a 1% growth instead of a 3% decline without the impact of pipette sales. Overall, this is aligning closely with our expectations. For the second half of the year, we don't foresee significant headwinds, perhaps only minor ones in the third quarter. Pipette sales may still be down by low to mid-single digits, particularly in China, where the decline will be more pronounced due to previous testing comparisons. In general, things are proceeding much as we had thought.

Got it. Okay. Thanks Shawn.

Yeah. Thanks Dan.

Thank you. Good afternoon. I had one more follow-up on China. I was just curious like what feedback you've heard from the region about what might have driven this kind of rapid deterioration? Is it your sense this is just demand-related? Or is there any sense maybe there's been an uptick in local competition at all?

Yeah. Jack, this is Patrick speaking. Let me take this. And since Shawn already commented the first part of the question about China. Look, the change is, I think, mainly driven really by the lack of stimulus when after COVID reopening, beginning of the year, there was really strong momentum in China, a lot of expectation on growth, and the government would drive it with additional stimulus. That really didn't happen. And I think it also now led to the fact that a lot of customers really become much more reluctant and waiting for the government to make a decision about the stimulus, so they are clear on how much they can spend and where they can spend the money. We have not seen any significant change in competition locally in China. That's one what we are hearing from the team. The team is really confident in our product portfolio. We have a very experienced sales team and a great product portfolio that helps us to compete efficiently in China. So, it's really about the missing momentum. And I would say the missing confidence in the economy that leads to the fact that a lot of customers are holding back investments and waiting for the certainty about what's to come. And that's the major slowdown that we are facing now. And it's also the fast drop-off that we have seen that we also didn't expect and our sales team definitely didn't expect as we're going into Q2, but towards the end of Q2, that really became a big momentum and now early in Q3. We don't see that changing, and that's why we're also careful with the outlook Shawn mentioned. We see China minus double-digit in the third quarter, and we don't really count on that improving in Q4 as well.

Got it. And then just in terms of some of the actions that you're taking to mitigate this pressure. Is it possible to quantify just the magnitude of cost-savings that are going to hit in the second half of the year and just where that's going to show up kind of across the income statement.

Sure. The best way to think about it, Jack, is that we expect our overall cost structure to remain relatively stable for the full year. In the second half, we anticipate a decrease in low single digits. Considering our profit and loss statement, selling, general and administrative expenses will decrease compared to other expense categories. Some of our costs are also above gross profit, which isn't detailed separately. As we evaluate our programs, we are concentrating on productivity and managing discretionary spending. However, it's important to highlight that we continue to grow and invest in the business. For instance, our research and development budget is up 7% year-to-date, and we expect to see growth in R&D for the second half as well. Overall, we believe we have the right balance to maintain significant operating margin expansion for the full year, projected between 70 to 100 basis points, despite facing some unfavorable currency impacts.

Great. Thank you.

Hey, good afternoon. Thanks for taking my question. So, a couple of ones. So, I was surprised to hear your pharma biotech comments on things being down so much. And the reason why I say that is, I mean, we certainly have heard that purchases over $100,000 are getting held up. So, your items are often well below that. What's going on there? I mean, is it just a complete freeze? Or are you just getting a lot of pushback on pricing? I'll ask the pricing question, what are your expectations now for the price in your guide?

I'll begin addressing your question, Derik, and then Shawn can add to it. We're not experiencing a complete standstill in our business. While there has been a decline and some delays in orders, it's not as severe as it might seem. Our products are usually part of lower or below CapEx spending. We are observing a slowdown in the pharma-biopharma sector, which is quite widespread, but it isn’t a drastic drop-off. However, we are witnessing a notable decrease in orders and a slowdown. The pressing question many are asking is how long this situation will last and what is causing it. Our sales team reports substantial quoting activity, and I’m pleased to see that engagement with customers is strong. There are many discussions regarding their plans, and leads have actually increased year-to-date. However, these leads are not converting into orders as swiftly as they used to. The duration of this situation will depend significantly on when more certainty returns to the economy, according to our sales team's feedback. I am satisfied with the quoting activity and I monitor it daily. I can see how frequently our sales team engages with customers about projects and investments. Unfortunately, the time it takes to convert these opportunities into actual orders has definitely lengthened, which contributes to the slowdown we are noticing in orders.

In terms of the other part your question, Derik, pricing actually was very good in the quarter. For the total group, it was actually up 6%, which was a little bit better than what we had expected. And as we kind of like look at the second half of the year that's for the total company. And as we kind of look for the second half of the year, it's probably going to be a little bit better than what we were initially expecting as well to probably up by about 4%, which would kind of put us in the 5% kind of a range on a full-year basis. And what we've kind of continued to observe is that we feel like our value proposition has really resonated and increased over the last few years. As the market looks for opportunities in terms of productivity and digitalization, it really plays to the strength of our portfolio. And I think teams do an excellent job in terms of articulating that value proposition to the customer base. And as you kind of mentioned or implied with your question, our price points also tend to be pretty low as you know too. And so that value proposition really resonates, and it's easy to justify from a customer perspective. So, we feel good about the pricing program and how we think about it for the second half of the year.

Got it. Just as a follow-up. You're taking guidance down by about 4.5%. It looks like about 2.5% of that is China. So, can you quantify what else is that? And just like what's pharma, what's industrial, you're just not having good feelings about that you just want to be conservative on.

We are observing a slowdown in the Americas and Europe. In the Americas, we now anticipate flat growth for the full year, adjusting from our previous expectations of low to mid-single digit growth. This is largely due to concerns in our key end markets, particularly in pharma, biopharma, food manufacturing, and chemicals. In the U.S., while we've seen strength in food manufacturing earlier, we anticipate challenges in the second half as these customers face significant pressures. In Europe, our outlook has slightly declined, now projecting low single-digit growth for the full year, down from the previously expected low to mid-single digits. While we have been impressed with how the European numbers have performed so far this year, we recognize the decline in PMIs and the ongoing uncertainties in the region, which are also affecting our end markets. For instance, the chemical industry in Europe is under considerable stress, with many chemical companies recently downgrading their forecasts significantly. This illustrates the challenges faced by that customer base in particular. When we break down the business areas, we expect the Lab segment to decline mid-single digits in the third quarter and low single digits for the full year. Core industrial is forecasted to decrease low single digits but see low single-digit growth for the year. Product inspection is expected to drop low single digits in Q3 but grow low single digits for the full year. Conversely, our retail business is performing robustly, with strong project activity anticipated to grow by high teens in Q3 and for the full year.

Great. Thanks Shawn. That was really detailed. Appreciate it.

Hey, guys. Thanks for taking the questions. Patrick, I guess, when you kind of look at these various headwinds you've called out and you kind of assessed them, you talked a little bit, I think, in the prior question about trying to figure out what could linger into 2024. I guess, when you kind of step back, which do you see being more temporary or transitory versus issues where you look and you're kind of doing these cost controls that you look out and say, maybe this could linger into 2024. If you can just kind of bracket it up for us and try to help frame that view would be helpful.

Sure. It's too early to make a forecast for 2024. We will address this in our next earnings call when we report Q3 and evaluate Q4. Currently, we have observed a normalization in the destocking of pipettes, and we expect consumption to return to pre-COVID levels in the second half of the year. We see this uptick happening slowly but steadily. However, predicting the broader industry trends is challenging, especially regarding how the economy will evolve and the ongoing pressures in the pharma, biopharma, and chemical sectors. The continued pressure on PMIs indicates a significant downturn, but it’s uncertain when it will improve, whether in early or mid-2024. On a positive note, we do see some strong momentum in specific areas, such as the battery segment, which is performing exceptionally well across our businesses, including analytical lab sectors and industrial automation. There's also increasing interest in semiconductors and our ultra-pure water and sensors business. We are focusing on these growth areas and driving our sales team accordingly. However, we cannot accurately predict how long the broader economy will remain under pressure. We are looking at the second half for forecasting purposes, and we will provide guidance for 2024 once we reach Q4. At this moment, it's too early to provide a definitive outlook.

Yeah. No, understood. And then, Shawn, I guess, maybe a follow-up on that. Just around the margins, you touched on them a little bit. But I guess when you think about the pricing lever, that seems like it's still quite strong for you guys in terms of the boost for margins. Again, some of these cost reduction activities. Can you just talk about the moving pieces as we work our way through the second half? And then, I guess, how nimble you want to be on the cost side going into next year and then pricing, I assume, is still going to be positive as we move forward. You guys always protect the margins pretty well. So, just curious how you think about it, the moving pieces there would be helpful.

Sure. I believe we still have an excellent margin outlook. For the full year, we expect to achieve an operating margin expansion of 70 to 100 basis points. I wouldn't be surprised if we end up closer to the higher end of that range, even with some unfavorable currency impacts. The operating margin may see a slight decline in Q3 but could improve in Q4. Overall, we're confident in our ability to expand margins for the full year. Looking ahead to next year, it's a bit early to make specific projections. We anticipate some savings from our initiatives this year, but some benefits will diminish as well. Regarding pricing, we remain optimistic about our value propositions, although it will also depend on the inflationary landscape. We will share more details and guidance during our next call in November.

Hey, guys. Thanks for taking my question. I guess, my first one on the third quarter guidance, low single-digit declines. You just did 2% in Q2. That's a 500 basis point change. And I think about 300 basis points of the 500 is coming from China. Are you seeing China down mid-teens in July? And if the assumption, it's down mid-teens for the rest of the quarter? And where is the remaining 200 basis points softness coming from, perhaps from an end market perspective?

Sure, I can take that. We typically avoid going into too much detail on individual months, but I can say that July had a significant impact on our outlook for China for the quarter and the rest of the year. We anticipate a mid-teens decline, particularly affecting our Laboratory business. This segment is facing strong comparisons from last year, and we expect an even sharper decline there. Looking at our overall portfolio, similar to my response to Derik regarding full-year results, we anticipate low single-digit growth in the Americas. This reflects the same challenges in core end markets, particularly delays in the pharma and biopharma sectors. We also mentioned pipettes and have some smaller exposure to single-use bioprocessing, like PendoTECH, which we discussed last quarter. Additionally, we expect a decline in product inspection in the Americas during the third quarter due to pressures from food manufacturing companies. For Europe, we expect low single-digit growth in the third quarter, but we recognize various uncertainties as mentioned earlier. Overall, for the third quarter, our Laboratory business is projected to decline more significantly than other areas.

Understood. Can you provide more details about the stimulus you mentioned? Specifically, what have you learned from Lynx regarding a potential stimulus? If there is one, how long does it typically take for it to impact customer orders and purchasing? Additionally, what is the current pace of your cost actions? What benefits do you anticipate from them? It appears that EPS has decreased more than revenue, suggesting that the benefits in the third quarter may not be significant. What is the expected impact of the cost actions you've implemented for the fourth quarter?

There are a lot of points to address. First, regarding the stimulus, we don't have more insight than anyone else. Recently, there have been comments from the government about an intention to stimulate the economy, but no specific details have been released yet, making it difficult to comment further. We will need to observe how this develops and how it influences our end markets, as well as the time it takes to filter into the economy. Currently, we have not accounted for any potential stimulus in our forecast for the second half of the year, so we will monitor the situation. As for earnings per share, we are experiencing unfavorable impacts from foreign currency, which has been a challenge throughout this year. This situation has been more significant than what we anticipated in our last guidance. Initially, we expected a 2% headwind, but now it's looking closer to a 3% to 4% range. Looking back at our original guidance, we didn't foresee significant headwinds due to foreign currency, which is clearly affecting us. If we examine the third quarter, excluding foreign currency impacts, we would be projected to land anywhere from the high end of our guidance at flat to the lower end, which is minus 3%. For the full year, we anticipate growth of 5% to 7%, despite modest sales expectations of 0% to 1%. We are confident in our ability to expand margins this year while continuing to invest in the business, which is crucial for our medium and long-term strategy. Other than that, I don't have any further specific comments to add.

Understood. Thanks guys.

Hi. Good afternoon. Thanks for taking my questions. Maybe for my first one, Patrick, you spent a lot of time and focus on the services portion of the business and you called out some pretty strong growth this quarter for that segment. Could you maybe talk about what your assumptions are for the full year for services growth? And just maybe help us understand a little bit better about the customer dynamic and caution as it relates to services, assuming it's a little more defensive. Just maybe talk about how you expect that business to perform in this type of environment.

I appreciate the question. I am extremely pleased with our service business performance. As you may remember, we saw a 14% growth in the first quarter, which has continued with a 13% increase in the second quarter. Our service team is performing exceptionally well. We are still in a phase of hiring, adding more service technicians because we recognize strong business momentum and demand from our customers. Over the past year or two, we have also expanded our service offerings. We've intensified our focus on service sales at the point of sale, ensuring we promote more service contracts. Additionally, we've restructured the quoting process to include services and have trained our service team more effectively in selling these services. All these efforts are paying off with the growth we're experiencing in services. Looking ahead, we maintain a strong outlook for the full year, forecasting high single-digit growth in services. Shawn, am I aligned with this?

Yeah. Might even be high single digits, might even be low double digits, maybe close to 10%, but yeah, high single to 10%, yeah.

Good. And again, that's driven by the ongoing momentum. Currently, we are experiencing stronger demand in the product category, and there hasn't been significant resistance to pricing. I expect this momentum to continue. However, we will face tougher comparisons in the next couple of quarters since Q3 and Q4 last year also showed considerable service growth. Nonetheless, the underlying momentum is strong. We have a very robust service team and continue to invest in services to further develop that team and ensure we provide the best possible support to our customers, delivering an exceptional customer experience. This commitment distinguishes us as a leader from many of our direct competitors, thanks to the strength of our service organization.

Great. And then just thinking of some other potential offsets, just given some of the challenges in the Lab business. You talked about sustainable materials, batteries, and semis. Can you maybe help us understand sort of the sizing of that business and what kind of you're seeing in terms of growth sort of globally, but maybe also by region. Just so we can kind of better understand what some of the offsets could be over the course of the year?

Let Shawn explain the size of the business. Currently, the hot segments are being driven primarily by lithium-ion battery markets. We're observing significant momentum in the semiconductor sector, particularly with the reshoring and homeshoring of semiconductor plants, which is gaining traction alongside the importance of sustainable materials. While these growth pockets may not be large in size, their momentum is crucial for us to offset some of the challenges we are facing in other areas.

In terms of size, I don't have a specific number for you, but these markets are still relatively small for us, generally in the low single-digit range. However, from a growth standpoint, they contribute significantly due to their higher growth compared to the rest of our portfolio and the long-term opportunities they present. What's interesting about these high-demand segments is that we can offer comprehensive solutions. The process begins in research and development and extends through to manufacturing. We benefit from this, particularly in our analytical instrument business, but we also see advantages across a large portion of our portfolio.

Hey, guys. Thanks for the questions. I guess, first in China, is the weakness concentrated in any product categories within your Lab business? Or is it more broad-based? And are you seeing the consumables and services side of the business holding up better there?

Look, Catherine. I take this, it's really broad-based in the market segment. I can't point to any specific product category. It's pretty broad-based and focused on pharma and biopharma. But for the single product category, I would point you that there is more effective.

And specific to consumables, Catherine, consumables are actually down more so because of all the testing that was still going on in China with COVID last year.

Yeah. Okay. Got it. And maybe on the packaged food side, you've been talking about caution in that category for several quarters now. At what point do you start lapping some easier comps there? And is there anything to point to in prior inflationary environment as to when you might start seeing improvements there?

I think we will not face any easier comparison because we have performed pretty well last year in this business, and we are almost confident, but we are confident that we have taken market share as well. Yeah. In the Americas, especially, we have been quite strong. And this is also why we see probably in the second half of this year comparison with a bit of a slowdown in growth. We had pointed more reluctance of investment in Europe in the beginning of the year or end of last year. And we continue to see that going on. And Europe is just not the same investment environment right now in the packaged food industry. A lot of the customers are actually under pressure when it comes to their margins, so they're trying to push out their investments as well. That said, we had just recently had a big trade show in Europe, the Interpac, and we have seen great interest in our product portfolio. We also launched a set of new products, also midrange products in the x-ray category and others. And that helps us, of course, to also really effectively compete in that segment and drive our future growth. We are quite sure that we're taking market share in the segment right now, although the growth is not outstanding. I think we are outcompeting our competitors. And it's a business that we, again, invested in over the last two years in expanding the portfolio, especially pushing more into the midrange to be there more effectively, but also now launching pretty soon some new higher-end solutions.

Good evening. Thanks for taking my questions. Maybe, Patrick, just to follow-up on product inspection. I mean, it sounded like it held in the quarter, but seeing signs of softening from CPG, food and pharma seems like it's pulling back. Just curious what level of orders you've seen kind of entering the third quarter and maybe how the guide reflects those maybe softer end markets. It seems like the guide, I mean, only moved down modestly, if I'm correct.

Yes. That's right. The guidance is down modestly. Again, it's mainly in the U.S. where we see also tougher compares, but also the environment for customers that are becoming a bit more difficult. And it looks like they are slowing down their investments. Shawn, anything else if we could say in terms of the guidance for PI.

No, I believe that if we examine the second quarter, we actually performed better than expected. While the second quarter was stronger, the outlook for the second half appears less favorable. As Patrick mentioned, based on the feedback from our customers and the organization, particularly in the U.S. and Europe, we are encountering a more challenging situation compared to what we saw in the second quarter.

Hey, guys. Thanks for taking my question. I guess, my first one on the third quarter guidance, low single-digit declines. You just did 2% in Q2. That's a 500 basis point change. And I think about 300 basis points of the 500 is coming from China. Are you seeing China down mid-teens in July? And if the assumption, it's down mid-teens for the rest of the quarter? And where is the remaining 200 basis points softness coming from, perhaps from an end market perspective?

Hi. Good afternoon. Thanks for taking my questions. Maybe for my first one, Patrick, you spent a lot of time and focus on the services portion of the business and you called out some pretty strong growth this quarter for that segment. Could you maybe talk about what your assumptions are for the full year for services growth? And just maybe help us understand a little bit better about the customer dynamic and caution as it relates to services, assuming it's a little more defensive. Just maybe talk about how you expect that business to perform in this type of environment.

There are no further questions at this time. With that, we will end the conference call. Thank you for joining us today. You may now disconnect.