Mettler Toledo International Inc/ Q2 FY2024 Earnings Call

Thank you for standing by, and welcome to the Mettler-Toledo Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background. After the speakers’ remarks there will be a question-and-answer session. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Adam Uhlman, Head of Investor Relations to begin the conference. Adam, over to you.

Thanks, Paul, and good morning, everyone. Thanks for joining us. On the call with me today is Patrick Kaltenbach, our Chief Executive Officer; and Shawn Vadala, our Chief Financial Officer. Let me cover some administrative matters. This call is being webcast and is available for replay on our website at mt.com. A copy of the press release and the presentation that we will be referring to today is also available on our website. This call will include forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties, and other factors that may cause our actual results, financial condition, performance, and achievements to be materially different from those expressed or implied by any forward-looking statements. For a discussion of these risks and uncertainties, please see our recent Annual Report on Form 10-K and Quarterly and Current Reports filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statements, except as required by law. On today's call, we may use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in the 8-K and is available on our website. Let me now turn the call over to Patrick.

Thanks, Adam, and good morning, everyone. We appreciate you joining our call today. Last night, we reported our second quarter financial results, the details of which are outlined for you on Page 3 of our presentation. Our team continued to execute well and deliver better-than-expected results in the second quarter, including good growth in Laboratory sales in Europe and the Americas. As expected, market conditions in China remained weak in both our Laboratory and industrial businesses. We continue to benefit from our productivity and margin initiatives, which helped mitigate the impact of foreign exchange headwinds and protect our earnings. Looking to the remainder of 2024, market conditions are soft, particularly in China. However, we expect our local currency sales to return to growth in the second half of the year, primarily due to easier comparisons as well as execution of our Spinnaker sales and marketing program and leveraging our innovative product portfolio. We remain focused on continuing to strengthen our company for the future and believe we are in an excellent position to continue to gain market share and deliver future growth. Let me now turn the call over to Shawn to cover the financial results and our guidance, and then I will be back with some additional commentary on the business and our outlook.

Thanks, Patrick, and good morning, everyone. Sales in the quarter were at $943.8 million, which represented a decrease in local currency of 2%. On a U.S. dollar basis, sales declined 4% as currency reduced sales growth by 2%. On Slide number 4, we show sales growth by region. Local currency sales grew 6% in Europe; 2% in the Americas; and declined 13% in Asia Rest of the World. Local currency sales decreased 23% in China in the quarter. On Slide number 5, we show sales growth by region for the first half of the year. Local currency sales declined 1% for the first six months with 6% growth in Europe; 2% growth in the Americas; and an 11% decline in Asia Rest of the World. Local currency sales decreased by 21% in China on a year-to-date basis. As a reminder, our first quarter sales benefited by 6% from recovering delayed product shipments, which is a 3% benefit to our year-to-date results. Excluding this, our local currency sales declined 4% on a year-to-date basis. On Slide number 6, we summarize local currency sales growth by product area. For the quarter, Laboratory sales increased 1% and Industrial decreased 5% with core industrial down 9% and Product Inspection up 3%. Food Retail declined 12% in the quarter against significant project activity last year. The next slide shows local currency sales growth by product area for the first half. Laboratory sales increased 1% and Industrial decreased 3% with Core Industrial down 5% and Product Inspection up 1%, Food Retail decreased 10%. Let me now move to the rest of the P&L, which is summarized on Slide number 8. Gross margin was 59.7%, an increase of 30 basis points on positive price realization as positive price realization was partially offset by lower volume. R&D amounted to $45.8 million in the quarter, which is a 2% decrease in local currency over the prior period. SG&A amounted to $235.8 million, a 4% increase in local currency over the prior year and includes higher variable compensation. Adjusted operating profit amounted to $284.1 million in the quarter, an 8% decrease. Unfavorable foreign currency was a headwind to adjusted operating profit of approximately 2%. Adjusted operating margin was 30%, which represents a decrease of 130 basis points over the prior year. A couple of final comments on the P&L. Amortization amounted to $18.2 million in the quarter. Interest expense was $19 million and other income amounted to $1.5 million. Our effective tax rate was 19% in the quarter. This rate is before discrete items and is adjusted for the timing of stock option exercises. This also excludes a $23 million one-time non-cash discrete tax benefit relating to the favorable settlement of a tax audit. Fully diluted shares amounted to 21.4 million, which is approximately a 3% decline from the prior year. Adjusted EPS for the quarter was $9.65, a 5% decrease over the prior year or a 3% decrease excluding unfavorable foreign currency. On a reported basis in the quarter, EPS was $10.37 as compared to $9.69 in the prior year. Reported EPS in the quarter included $0.24 of purchased intangible amortization; $0.20 of restructuring costs; a $0.09 tax benefit from the timing of option exercises that is trued up in Q4; and the one-time noncash discrete tax benefit of $1.07. The next slide illustrates our year-to-date results. Local currency sales declined 1% for the six-month period. Adjusted operating income decreased 4% or 1%, excluding unfavorable foreign currency, and our operating margin contracted 60 basis points. Adjusted EPS declined 2% on a year-to-date basis or grew 1%, excluding unfavorable currency. That covers the P&L, and let me now comment on cash flow. Adjusted free cash flow amounted to $433.4 million on a year-to-date basis, a 13% increase on a per share basis from prior year levels due to favorable working capital. DSO was 37 days, while ITO was 4x. Let me now turn to our guidance for the third quarter and the full year. As you review our guidance, please keep in mind the following factors. Market conditions are soft, especially in China. While we are not seeing a negative change in market conditions, we're also not seeing a significant improvement. We believe we are well-positioned to capture growth opportunities through our Spinnaker sales and marketing program as well as our innovation, which includes several product launches, which we discussed last quarter. We continue to execute very well on our margin expansion, productivity and cost savings initiatives. And as previously mentioned, we will start to benefit from easier prior-year comparisons during the second half of the year. Lastly, as you update your models, keep in mind, our 2025 results will face a sales headwind of approximately 1.5% as we recapture delayed shipments in 2024 from 2023. Now turning to our guidance. For the third quarter of 2024, we expect local currency sales to grow by approximately 1%. We expect adjusted EPS to be in the range of $9.90 to $10.05. Currency for the quarter at recent spot rates would be an approximate 1% headwind to the third quarter sales and adjusted EPS. For the full year of 2024, we expect local currency sales to grow approximately 2%, unchanged from our previous guidance. We expect full year adjusted EPS to be in the range of $40.20 to $40.50, which compares to our prior guidance of $39.90 to $40.40. This includes an expected headwind of sales of 1% and adjusted EPS growth of approximately 2% from unfavorable foreign exchange. Lastly, I'd like to share a few other details on our 2024 guidance to help you as you update your models. We expect total amortization, including purchased intangible amortization to be approximately $73 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $26 million on a pretax basis or $0.95 per share. Interest expense is forecast at $78 million for the year and other income is estimated at approximately $4 million. We expect our tax rate before discrete items will remain at 19% in 2024. We expect adjusted free cash flow of approximately $850 million, representing a conversion of approximately 100% of adjusted net income. We continue to expect share repurchases of approximately $850 million in 2024. That's it from my side, and I'll now turn it back to Patrick.

Thanks, Shawn. Let me start with some comments on our operating businesses, starting with Lab, which grew approximately 1% compared to last year. We had good growth across most of the portfolio, especially in Europe, and we also had good growth in the Americas. We continue to benefit from our refreshed portfolio of innovative solutions and our Spinnaker sales and marketing program as well as our diversity across end margins and applications. Our industrial sales for the quarter were in line with our expectations and were down 5% with sales growth in Europe offset by a significant sales decline in China. Product Inspection sales were up 3% on good results in both Europe and the Americas, although market conditions with food manufacturing customers are still challenging. We have also seen very good demand for our X-ray inspection technologies, which has benefited from recent innovations. Lastly, Food Retail sales declined in line with our expectations against significant project-driven sales growth in the second quarter of last year. Now let me make some additional comments by geography. Starting in the Americas. Our sales grew 2% in the quarter with good growth across Lab and Product Inspection, while retail declined against significant growth in the prior year. Our results were a bit better than expected and while we observed longer customer purchasing cycles, we see good customer engagement and feel that our team is competing very well. Sales in Europe were better than expected and grew about 6% in the quarter. Our results included very good growth from both Laboratory and Industrial. Our teams continue to compete extremely well considering challenging economic conditions and are doing an excellent job leveraging our updated portfolio of innovative products. Additionally, in Europe, we have the highest proportion of sales through our own direct sales force, and they have shown excellent execution in leveraging our Spinnaker sales and marketing program to achieve these results. Lastly, our Asia and Rest of the World results were in line with our expectations and included the significant sales decline in China as expected. We continue to see soft demand from most end markets in China, but we still expect to return to sales growth in the second half due to much easier year-ago comparisons. Our China team remains agile and has implemented advanced customer mapping and database enrichment to identify potential sales opportunities as they arise. As we have mentioned in the past, strength in China can change quickly and our team remains ready to take advantage of growth opportunities. One final comment on our quarterly results. We continue to see very good growth with service across most business areas and regions. Our service business grew 6% this quarter, which was on top of double-digit growth in the previous year. Now I would like to share with you additional insights on how we are strengthening our business to continue to gain market share and emerge from the market downturn in an even stronger position. Earlier this year, we shared with you how we are rolling out the next wave of various corporate programs, such as our sales and marketing excellence programs, Spinnaker 6, and the sophisticated data analytics being implemented to support our enhanced program. An important enabler of this initiative is our Blue Ocean program, which is our global process harmonization initiative, all built on a single instance of SAP. We have invested in this initiative for over 15 years, harmonizing and centralizing processes that touch all elements of our business. From sales and marketing to service our supply chain, product development, and our finance, HR, and other administrative functions. With Blue Ocean, we have been able to harness the significant diversity and complexity of our business and turn it into a very powerful competitive advantage that many smaller private companies in our industry cannot match. Blue Ocean also provides us with valuable real-time business intelligence insights, allowing us to react quickly to changes in the business and operating environment. We have implemented advanced dashboards to ensure real-time reporting of KPIs across our business and are leveraging advanced software solutions to make better decisions faster. Our digitalization efforts have been a source of productivity improvements with much more ahead of us that will allow us to automate many renewal activities creating seamless end-to-end processes with meaningful productivity benefits. Blue Ocean has also enabled global shared service centers that drive process excellence, quality and productivity. In recent years, we have improved our Blue Ocean template to add new features and functionalities, including adding e-shops, advanced procurement solutions and sophisticated service pricing analytics. A great example of this enhanced functionality is service technician scheduling, which can be a very complicated manual task. There are several factors to be taken into consideration when scheduling the assignments such as customer location, number of devices, age of the devices durations. We have been able to automate or semi-automate this process and then also apply enhanced real-time traffic imaging to outline the best routes. Now that we have rolled out Blue Ocean to nearly all of our entire organization, we have a strong foundation to push for new capabilities out into the entire organization at a rapid pace. Blue Ocean is the backbone supporting the next wave of several corporate programs including our new Spinnaker 6 sales and marketing initiative. This includes the rollout of an advanced version of our Top K program, which are targeted investment alerts we create by using sophisticated data analytics to scan our internal CRM and external databases to identify new growth opportunities. In the past, these alerts were manually qualified and static reports were generated by our sales team in one or two releases per year. Today, our team is integrating advanced software solutions to automatically qualify and feed these leads real-time into our CRM for much quicker response by our sales teams. This also enables faster generation of cross-lead opportunities across our business units. Additionally, customers utilizing our customer portal today offer standardized purchase recommendations based on items in their cart. In the near future, these recommendations will be tailored to an individual customer's current installed base and application requirements, enabling more personalized suggestions. We are also expanding our capability for self-service, which, today, includes the ability to access calibration certificates or request service or remote diagnostics and remote service. And in the future, our platform will support new business models around consumables reordering and preventative maintenance and supports the rollout of our advanced cloud-based software solutions. Overall, Blue Ocean has been a long journey, starting from a goal to consolidate roughly 70 different ERP systems into one standardized global business system. From there, we have expanded the project to support new features, business models, and advanced productivity initiatives around automation across the company. As we look to the future, Blue Ocean is at the core of enabling new sales growth and margin expansion opportunities we have today. It makes us more agile and supports fast digital innovation as our central implementation allows new ideas and digital business models to be scaled globally at a rapid pace. It provides real-time visibility across the entire value chain and our business units globally to support data-driven decision-making and reallocation of resources. Significant productivity gains are enabled with bots in the AI-supported automation, and it allows for optimization of our global IT footprint with scale cybersecurity, global applications, and life cycle management. Finally, it is a platform to provide value to our customers, which includes connecting to our digital products and service offering while enhancing their experience. And as I mentioned earlier, these capabilities are a powerful competitive advantage that many in our industry do not have the ability to or resources available to replicate. Now this concludes our prepared remarks. Operator, I'd now like to open the line for questions.

Thank you for the presentation. And your first question comes from the line of Dan Arias from Stifel. Please go ahead.

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

We are very pleased with our position in Europe and the performance of our team there. Much of our success is due to our direct sales channel, which has been effective in conjunction with our Spinnaker sales and marketing tools. Additionally, we have introduced many new products over the past two years, allowing us to compete well in Europe. Customers in the region value our innovation, which sets us apart from many competitors. Although we had concerns earlier this year due to the impact of the Ukraine war, we are now seeing positive results, particularly with our Lab portfolio. Our new LabX portfolio is also resonating very well with our customers, as highlighted in our previous quarter.

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

Yes, that's correct. China progressed as we anticipated in Q2. However, I want to remind you that we still experienced positive growth in Q2 of the previous year. When analyzing the end markets, they have been soft across the board, without any particular market standing out at this moment. Given this softness, we intend to maintain our guidance for the remainder of the year. As mentioned, we expect a high single-digit decline for the full year, but we also anticipate positive growth in the second half due to easier year-over-year comparisons. Regarding the stimulus program, we have yet to see its impact. This current stimulus differs significantly from those launched in previous years; it appears to be much more targeted. The Chinese government refers to it as being focused on high-quality sectors, particularly in AI, new energy, biopharma, and new materials. Our teams are actively collaborating with our customers to assist them in preparing for these applications, providing prepared bundles for use. We have not factored in any effects from the stimulus in our Q3 and Q4 guidance, as we believe its impact will primarily be felt in 2025.

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

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

Hey, Rachel, this is Shawn. I'll take that one. So like you said, I think the division kind of came in pretty much similar to how we expect it to be down 9%. I think a key thing to remember in industrial is that it's very disproportionately weighted by China versus our other product categories. So we did see Industrial business down very significantly in the quarter, kind of similar to the lab business. As Patrick mentioned, we saw the downturn in China in the quarter, pretty similar across both product categories. When we kind of look outside of China, we did see, of course, better activity. We see sometimes differentiated performance depending on, like you said, the segments of the market. Certainly, where we see companies that focus on automation and digitalization and process control, we clearly are seeing better opportunities in those segments. There are other aspects of the economy that I think are a little softer at the moment, but I think our teams have been very resilient here. I think our portfolio is very strong and robust and I think our go-to-market strategy with our Spinnaker program continues to be really a differentiator in the industrial areas. We've been able to target specific opportunities in the market. And as we kind of like step back from the business, one of the things I think is most exciting is I think a lot of the discussions around reshoring and near-shoring opportunities are still yet to come. And so I think as we kind of look to the future, we're a little bit more optimistic here.

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

Yes, sure. So, hey, maybe I'll kind of run it down from the top here with the products. So our Laboratory business, our guidance for Q3 is up low single digits and for the full year, it would be up low single digits to up mid-single digits. Our Product Inspection business would be up mid-single digits for the third quarter and for the full year, up low single digits. Our Core Industrial business would be up low single digits for Q3 and flat for the full year and our retail business would be down in the mid-20s for Q3, and down double-digit, which is a little bit of a decline from how we were thinking last quarter for the full year. By geography, we expect the Americas to be flat in Q3 and up low single digit for the full year. We expect Europe to be down slightly in Q3 and up mid-single digit for the full year, and we expect China to be up low single digit in Q3, and as we said before, down high single digit for the full year.

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

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

Yes, Vijay. We are pleased with our second quarter performance, which exceeded our expectations. We're not experiencing any negative changes in the business, but we remain somewhat cautious due to uncertainties in the macro environment. Recently, we observed the PMI numbers, and in our markets, we still notice longer sales cycles. On the positive side, we believe we're competing effectively and gradually gaining market share each quarter. Our new products have received positive feedback based on initial results, but some uncertainty persists. Typically, we have about 1.5 months of backlog, so we wish to navigate through another quarter for better visibility as we approach the end of the year.

Understood. Patrick, regarding the second quarter performance, it was quite impressive operationally, with EPS increasing by $0.60. The guidance raise at the midpoint was around $0.20. Did the assumptions for the second half of the year moderate a bit? I know Shawn mentioned PMI, but your business mix has shifted significantly with less exposure to PMI. Could you comment on your outlook for the second half and any changes compared to three months ago?

Thank you for the question. We've been trying to convey in our prepared remarks that we haven't seen any changes from what we communicated in Q2. The performance in the end markets has unfolded as we anticipated, and we have set our expectations for the rest of the year accordingly. We're pleased to have surpassed our Q2 results in both revenue and net income. While our exposure to the PMI end markets may be slightly lower, we need to gain more momentum in the pharmaceutical and biopharmaceutical sectors to further leverage our strong portfolio. As Shawn mentioned, we're approaching this with some caution to ensure we can meet our full-year projections. We're maintaining our outlook for the year with a strong confidence in achieving 2% growth, although we do require a bit more visibility moving forward. Our sales team is performing excellently and engaging well with customers, leading to many promising prospects. However, sales cycles are extending, and customers remain cautious amid the uncertain market conditions, particularly in China, where spending is conservative until we receive clearer guidance from the government. In other regions, larger pharmaceutical accounts are showing better momentum, but smaller pharmaceutical and biotech accounts continue to face challenges due to high interest rates. Overall, we remain in the same position regarding market dynamics as we were a quarter ago. While the situation hasn't worsened, we are eager to see improved momentum that could prompt us to adjust our guidance. For now, we feel well positioned with our 2% growth forecast for the full year.

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

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

Yes. I mean especially on Q2, again, we have seen not a huge difference between the different market segments or end customers. They're all being pretty much down the same level with a few percent up and down. I want to remind you that again, our end markets or our end customers in China are about 60% or more than 60% are local companies, about 15% are multinationals and about 25% is government state-owned companies. But within that, we want in that segment and also the underlying end markets, whether it's industrial or pharma. Not a big difference. As I said in my earlier remark here is, there is, again, a lot of cautiousness in the end market. The customers really want to see how the government stimulus plays out and they need to have more confidence before they invest more. I think we are competing very effectively with a portfolio in China. Our local China team is very well connected to our customers. As I said, they are preparing or helping our customers to pay for the application for the stimulus, et cetera. We set up specific bundles. We have a lot of localized solutions for China. So we are not concerned about the local competition when you look at the end market is really the, I would say, the overall mood in the market and the readiness to increase investment.

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

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

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

Patrick, I want to revisit a point you made about the strength in Europe, specifically regarding the higher involvement of your direct sales team in that area. I'm not completely clear on how the direct sales team operates in regions outside of Europe. Given the success that team has experienced with Spinnaker in the recent quarter, are you considering reinvesting in a direct sales force in places where it may be lacking compared to indirect channels, or are you satisfied with your global direct sales exposure?

Thank you for the question. We are always assessing our go-to-market strategies and the channels we use in different markets to determine the best fit. This applies not just to our sales efforts. In Europe, for example, we rely significantly on our direct sales force to engage with end customers, and they have been effectively utilizing the Spinnaker sales tools. We also have a strong direct sales team in the U.S. In other regions, we sometimes employ indirect sales channels, but we continuously evaluate our approach. When considering investments in sales channels, we analyze our coverage to ensure we adequately address all key markets globally and focus on important segments, whether through direct or indirect means. Our approach varies globally, and any decisions regarding investments will primarily depend on the underlying market momentum to enhance our sales force.

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

Yes, absolutely. Look, I mean, services, again, is a really strong hold of Mettler-Toledo. It's also one of the key differentiators we have against many other companies out there. We have probably the strongest services organization compared to other competitors of our size. We continue to invest not only in the size of the service team, but also in the portfolio of the services we are offering to make sure that we have unique and differentiated offerings for our customers. It has a large installed base of instruments there and a good part of that is still in touch with our services. So what we're also investing in at the moment to go after the installed base with a stronger inside sales and telesales force to make sure that we get in touch with these customers, tell them about our updated service opportunities and then moving forward, hopefully, also increase the amount of products that we have on the service contracts. So I think it's an excellent opportunity. Again, it's definitely something we keep a strong eye on and also invest in even through the downturn that we have seen last year, we continue to invest in service and I think it's paying back now.

Next question is from Dan Leonard of UBS.

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

That's a good question, but it's really hard to determine how much market share we gain each quarter. I wouldn't view it as a quarter-over-quarter issue. We compare our results with what we hear from our competitors, and we are quite pleased with our performance even in this challenging environment. As we indicated on Investor Day, we typically hold about 25% market share, which provides us with significant opportunities to gain additional share. That's why we are investing in innovation and actively bringing our innovations to market, as this aligns with what our customers want—products that enhance their productivity, ensure data integrity, and support automation. This approach will facilitate our continued market share growth. While we don't capture large market share increases each year, we do achieve incremental gains annually. It's difficult to say if this is currently accelerating, but based on our product performance relative to many competitors, we are satisfied and are witnessing market share growth.

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

Hey Dan, this is Shawn. I'll take that one. We believe we're a strong platform for acquisitions. When we find a strategic opportunity, we can act quickly, but we are also very selective. In the absence of share repurchases, we utilize our free cash flow to buy back shares. We're pleased with how that program has performed over the years, and I think part of the success comes from our consistent execution. We approach it the same way we have in the past, and you can expect consistency in our share repurchase program. As a reminder, our estimate for this year is about $850 million, which aligns with our free cash flow estimate for the year unless we identify an acquisition opportunity.

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

Shawn, maybe one for you. Just looking at the EPS guide through the rest of the year and the quarterly progression, it seems like you're a little bit of a step-up in margins in the third quarter and a bigger jump in 4Q. That's pretty consistent with what you've done historically. There's a lot of volume leverage in the fourth quarter. Just wondering if you could dive into the nuances of that margin expansion now. How much are we seeing on the gross margin line versus SG&A? Just any additional color you can give us on a quarterly basis, just confirming that.

No, I think you understood correctly. It will primarily depend on the leverage from volume. Looking at our gross margin estimates for the second half of the year, I would say that we are likely a bit higher than our previous thoughts from last quarter. We performed quite well in the third quarter compared to our expectations, partly due to an increase in volume. For Q3, we are estimating gross margin expansion in the range of about 60 basis points, and for the full year, it would be around 50 basis points if we exclude currency effects. Currencies have had an opposite effect on margins compared to Q2. For the full year, we estimate our gross margin to be about 70 basis points, which is an increase from what we anticipated last quarter. Regarding the operating margin, our estimate for Q3 is a decrease of about 50 basis points, while for the full year, it will likely increase by about 40 basis points. These figures reflect the midpoint of our guidance, and there could be some variation based on our performance. Overall, I would say our teams are executing exceptionally well. The pricing program remains highly effective, with pricing growth of 2% in the quarter, aligning with our expectations. We continue to anticipate a 2% increase for the full year. Additionally, our teams are making great progress on various productivity and cost-saving initiatives. I would also like to mention that our SternDrive program is delivering significant efficiencies and cost savings in terms of margins.

Okay. That's all really helpful. Thanks, Shawn. And then one more to the guide. A number of other tools, peers talked about, expecting a return to more traditional seasonality as the year goes on and I mean, referring both to a little bit in 3Q in Europe and then maybe a little bit of an end of year bounce. That's implied in your guide as well. But you've also got the weird comps last year from the shipping delay. So if you could just walk us through like what are you expecting from the seasonality perspective? Is there any view on budget flush at this point? I know it's not a huge driver for you, but still just what are you thinking about there?

Yes, we anticipate things will begin to resemble typical seasonality, especially if we account for the shipping delays. While we might not be completely back to normal, the best way to assess this is by reviewing our sales guidance and looking at the sequential numbers, which appear reasonable compared to historical performance depending on the timeframe considered, once we factor in the shipping delays. This gives us some confidence for the latter half of the year. Regarding budget flush, we generally don't experience significant budget flush scenarios. However, we all recognized that Q4 last year was an exception. At this stage, it may still be too early to draw conclusions. As Patrick pointed out, we are witnessing longer sales cycles with our customers, and we typically only maintain about 1.5 months' worth of backlog. Nevertheless, we feel optimistic that there will be some improvement this year compared to last. Although it's challenging to gauge the extent of this change, we are confident about our position for the second half of the year from a sequential perspective.

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

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

Product Inspection actually we are quite pleased with the result. I mean we know that the end markets are still under pressure, customers are cautious with their investments. We know that deal cycles are longer still, but we have launched a lot of new products over the last year, mainly in the X-ray business demand and we also broadened our product offering from the high end into the midrange portfolio that opens also a lot of stores for us now. So, I think we have a really good healthy engagement of our sales teams around the globe with our portfolio. So we have a healthy funnel there but I would say the caveat is still that sales cycles are longer and customers in some areas are cautious with investments until they also see the underlying market picking up. The upside for us is the new portfolio. We're competing very effectively. And again, with the broader portfolio also seeing probably more customers than we have seen before.

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

This is a broad question, so let’s concentrate on the Lab products for now. We believe we are competing effectively with our portfolio. We've also introduced a new platform and observed larger projects, particularly in Europe, coming to fruition in the first half and second quarter of the year. Overall, we feel confident about our position in the market. However, on a larger scale, there hasn’t been a significant shift in customer purchasing behavior at this time. The end markets, as we have discussed, remain somewhat soft, especially in China, whereas in Europe we’ve noticed positive momentum. Additionally, in the last quarter, our Lab business in the U.S. showed improvement. Therefore, as the market recovers, we anticipate being able to capture more momentum with our portfolio.

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

Shawn, this is one for you. You sounded a little more, I guess, optimistic on the Core Industrial outside of China, so maybe we can focus on that piece just for a second. The industrial complex is a little softer in terms of commentary of this earnings season. Just curious what you're hearing in the developed world here, how you're thinking about that core industrial piece, what you're hearing from customers and there's a little bit of optimism, the right way to lead it?

Thank you, Patrick, that's a good question. It really depends on which segment of the market we're discussing. Historically, when asked about our cyclicality, we would highlight that this part of the business has been more exposed to economic fluctuations than our other divisions. In Europe, for instance, while our Lab segment performed better than Industrial this quarter, we still saw growth in Industrial despite a relatively weak economy, which we view positively as a sign of resilience. Our industrial business does support similar end markets as Lab, such as pharmaceuticals. What we noticed this quarter, based on discussions with colleagues, is that customers involved in automation, process control, and digitalization are performing quite well. However, those engaged in discrete manufacturing face much tougher conditions. I can understand your perspective since many industrial companies reported challenging results this past quarter. So, it's a bit of a mixed picture. We feel well-positioned for favorable trends, but we’re not completely immune to economic pressures. In the meantime, we're focusing on what we can control, and our teams are executing effectively on sales, marketing, and product development. We are confident in the R&D investments we've made recently to align with market trends and have a strong pipeline of opportunities ahead.

Okay. That’s really helpful run through. And then just on the 2H guide, obviously, I’ve gotten a few questions here. I think someone mentioned kind of the implied raise is a little bit less than B. I mean has anything changed in your view in terms of 2H view? Obviously, you guys have the standard network conservatism a lot of times, I think people are used to it, but just how you think about 2H relative to a few months ago, again, just given that the guide change, and Shawn, even one of your answers, because we're not quite back to 100% seasonality just yet. So just how you're thinking about the market relative to a few months ago would be helpful.

I believe we typically maintain about one and a half months of backlog, which can make it challenging when we look beyond the current quarter. While we performed better than expected in the second quarter, we are not simply assuming that will carry into the second half. We notice softer market conditions, although we do have the advantage of easier comparisons. We're optimistic about sequential growth, but we are proceeding with caution as we enter the second half due to various uncertainties in the environment. Everyone is eager for clearer signs of improvement, but no one can predict exactly when that will occur. Our business is diverse across products, end markets, and regions. Overall, when assessing our guidance, we feel confident in our outlook. We always strive to do better, but for now, we believe this forecast is positioned appropriately.

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

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

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

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

We're still seeing caution in the pharmaceutical sector, but one area that stood out was Europe. Patrick mentioned this in one of his earlier responses. When we speak with the team, we hear that some projects have been sitting on the sidelines for a while, but now we're beginning to see those projects moving forward, which is a positive sign. However, I want to emphasize that we are not fully out of the woods yet. There are remarks about larger pharmaceutical companies performing better than smaller ones or even small biotech firms, which still face various challenges. From a product perspective, we found it encouraging that we saw substantial growth across the portfolio, with the only exception being Process Analytics, which continued to decline slightly due to our involvement in bioprocessing. Looking ahead to the second half of the year, we feel more optimistic about that area.

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

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

I think we feel pretty good. Maybe I'll start and Patrick wants to chime in. But like I'd say we're, I don't know if you'd say 8th inning, Patrick or so, but we're getting pretty close there. I mean, we definitely feel very encouraged as we kind of go in the second half of the year. If you think upstream and downstream we were seeing a lot of particular headwinds in our downstream business. For us also, that was where we're more exposed on the single-use side. So that could have been part of it as well, too. But when we kind of look to the second half of the year, all the data and even just the qualitative discussions we're having with the team and more importantly, customers, point to a much more favorable situation for the second half.

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

Great. And then, Shawn, regarding pricing, I assume the expectation for this year is still around 200 basis points. More importantly, looking ahead, as inflation begins to decrease, should we expect you to return to pre-COVID levels of about 250 basis points per year?

Yes, Tycho. I understand your question, but I believe it's a bit too early for us to consider how we would provide guidance on pricing for next year. Just to remind you of our historical approach, we typically have not guided beyond 200 basis points, even during previous periods of inflation. If we can exceed that, we certainly will, but I see 200 basis points as a reasonable assumption for mid-to-long-term guidance.

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

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

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