Good morning, and thank you for joining us. My name is Carly, and I will be your conference operator today. I want to welcome everyone to the Mettler-Toledo Quarter 2025 Conference Call. I will now hand the call over to Adam Uhlman, Head of Investor Relations. Please continue.

Thanks, Carly, and good morning, everyone. I appreciate you joining us this morning. On the call with me today is Patrick Kaltenbach, our Chief Executive Officer; and Shawn Vadala, our Chief Financial Officer. Let me cover some administrative matters. This call is being webcast and is available for replay on our website at mt.com. A copy of the press release and the presentation that we will refer to on today's call 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, see our recent annual report on Form 10-K and quarterly and current reports filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement, except as required by law. On today's call, we may use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in the 8-K and is available on our website. Let me now turn the call over to Patrick.

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. We are pleased with our second quarter and experienced growth throughout most of our businesses despite challenging market conditions. Our team performed extremely well, and we continue to benefit from our innovative product portfolio and strategic programs. I am proud of our team's agility, as we continue to navigate uncertain market conditions and our ability to implement mitigation actions to counter the impact of tariffs. We delivered solid adjusted EPS growth in the quarter and continue to compete very effectively in this environment. However, global trade disputes and tariffs are still highly dynamic. And as you may have seen last night, after our press release, the U.S. administration announced a significant increase in U.S. tariffs on imports from Switzerland. If the tariffs stay at 39% on Switzerland, this would negatively impact yesterday's EPS guidance for this year by approximately $0.40. We will continue to implement mitigating actions to fully offset tariffs next year. Looking further out, while we anticipate that many customers will remain cautious with their investments in the near term, due to the global trade disputes and various governmental policy uncertainties, we are also very well positioned to benefit from increased investments in the future. We are confident that our unique global go-to-market approach and innovative portfolio will enable us to seize these opportunities for growth. Let me now turn the call over to Shawn to cover the financial results and our guidance, and then I will come back with some additional commentary on the business and our outlook.

Thanks, Patrick, and good morning, everyone. Sales in the quarter were $983 million, which represented an increase in local currency of 2%. On a U.S. dollar reported basis, sales increased 4%. On Slide #4, we show sales growth by region. Local currency sales increased 3% in the Americas, were flat in Europe, and increased 3% in Asia/Rest of the World. Local currency sales in China declined 2% during the quarter. Slide #5 shows local currency sales growth by region on a year-to-date basis. On Slide #6, we summarize local currency sales growth by product area. For the quarter, Laboratory sales increased 1% and Industrial increased 4% with core industrial up 2% and product inspection up 8%. Food retail was flat in the quarter. Slide #7 summarizes our local currency sales growth by product area on a year-to-date basis. Let me now move to the rest of the P&L, which is summarized on Slide #8. Gross margin was 59.0% in the quarter, a decrease of 70 basis points on positive price realization, and benefits from our SternDrive program were offset by incremental tariff costs and lower volume. R&D amounted to $49.3 million in the quarter, which is a 3% increase in local currency over the prior year. SG&A amounted to $247.3 million, a 2% increase in local currency over the prior year. Adjusted operating profit amounted to $283.3 million in the quarter and was flat versus the prior year. Adjusted operating margin was 28.8%, a decrease of 120 basis points versus the prior year. We estimate the gross impact of tariffs reduced our operating margin by approximately 130 basis points. A couple of final comments on the P&L. Amortization amounted to $17.6 million in the quarter. Interest expense was $16.8 million, and other income amounted to $3.3 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. Fully diluted shares amounted to 20.7 million, which is approximately a 3% decline from the prior year. Adjusted EPS for the quarter was $10.09, a 5% increase over the prior year. Incremental tariff costs were a gross headwind of 5% and a net headwind of about 1.5% in the quarter. On a reported basis in the quarter, EPS was $9.76 as compared to $10.37 in the prior year, which included a discrete tax benefit of $1.07. Reported EPS in the quarter included $0.24 of purchased intangible amortization, $0.14 of restructuring costs, and a $0.05 tax benefit related to the timing of stock option exercises. Slide #9 summarizes our year-to-date P&L. Local currency sales were flat for the 6-month period. Adjusted operating profit declined 6%, and our operating margin contracted 150 basis points. Adjusted EPS declined 1%. Excluding the impact of 2023 shipping delays that benefited 2024 results, we estimate local currency sales grew 3% on a year-to-date basis, operating margin declined 30 basis points, and adjusted EPS grew 7%. That covers the P&L, and let me now comment on adjusted free cash flow, which amounted to $409 million for the first 6 months, a 3% decrease on a per share basis due to lower earnings and higher bonus payments related to last year's performance. DSO was 35 days, while ITO was 4.2x. Let me now turn to our guidance for the third quarter and for the full year. As Patrick mentioned earlier, the tariff environment remains dynamic and may continue to change. As you review our guidance, please keep in mind the following factors: First, yesterday's guidance assumed U.S. import tariffs as well as the impact of retaliatory tariffs from other countries will remain in effect at recently announced levels prior to last night's U.S. presidential executive order and assumed a 15% U.S. tariff rate on Swiss imports. As of today, including the increase in Switzerland tariffs to 39% first mentioned in last night's U.S. presidential executive order, we estimate our incremental global tariff costs at approximately $95 million on an annualized basis, down from our May 2025 estimate of $115 million due to lower rates for China-U.S. tariffs, offset in part by the increase in Swiss tariff rates. We continue to make excellent progress with our mitigation actions and expect to fully offset these costs next year. Geopolitical tensions are elevated and include the potential for new tariffs or retaliatory tariffs that we have not factored into our guidance. Second, while our second quarter results were better than expected, market conditions remain challenging with uncertainty related to trade disputes and governmental policies. We are not assuming market conditions improve during the second half of the year, although we will benefit from higher pricing compared to the first half of the year. Third, we assume foreign currency at current rates, which is a slight headwind to adjusted EPS in 2025, but is about a 1% benefit to reported sales growth in the third quarter and a 1% benefit for the year. Finally, please keep in mind that our third-party logistics provider delays negatively impacted our Q4 2023 results by $58 million, nearly all of which was recovered in our Q1 2024 results. For the full year 2025, this will reduce our sales growth by 1.5% and is a headwind to operating margin expansion of approximately 60 basis points and a headwind to adjusted EPS growth of approximately 4%. Now turning to our guidance. For the third quarter of 2025, we expect local currency sales to grow approximately 3% to 4%. Operating margin is expected to decrease approximately 130 basis points at the midpoint of our range. We expect adjusted EPS to be in the range of $10.55 to $10.75, a growth rate of 3% to 5%. Included within the EPS guidance is a gross headwind of approximately 5% from higher tariff costs that we expect to offset with our mitigation actions. For the full year 2025, our local currency sales growth forecast is 1% to 2% or up 2.5% to 3.5%, excluding the shipping delays. Operating margin is expected to be down modestly, excluding the net impacts of tariffs and prior year shipping delays. As mentioned earlier, the tariffs on U.S. imports from Switzerland at 39% were announced shortly after we provided yesterday's 2025 adjusted EPS guidance of $42.10 to $42.60. If the Swiss rate remains at 39%, this will negatively impact our full year 2025 adjusted EPS by approximately $0.40 per share and reduce our EPS range to $41.70 to $42.20 compared to our May 2025 guidance of $41.25 to $42, which reflects EPS growth of 1% to 3% or 5% to 7%, excluding the shipping delays. The EPS guidance after adjusting for the higher Swiss tariff rates includes 5% from incremental tariff costs versus the prior year that we expect to fully offset with mitigating actions for 2026. We will post an updated slide to our website after the call, reflecting this information. Lastly, I would like to share a few other details on our 2025 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 $25 million on a pretax basis or $0.95 per share. Interest expense is forecast at $68 million for the year. Other income is estimated at approximately $11 million. We expect our tax rate before discrete items will remain at 19% in 2025. Free cash flow is expected to be approximately $860 million in 2025, and share repurchases are expected to be approximately $875 million. 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 slightly in the quarter. We saw good growth from pharma and biopharma customers, which was offset in part by softer demand from academia, biotech, and chemical sectors. Our bioprocessing-related sales remain strong, and the outlook for the year is healthy for this piece of our business. We have a unique solutions offering for bioproduction, and we can help customers across their entire workflow with our laboratory, process analytics, and industrial products. Our Process Analytics business has also introduced many new innovations like digital analytical sensors that have a strong and consistent digital signal that resist interference and can store critical data for audit-proof recordkeeping. We've also expanded our portfolio of single-use sensors that covers a wide range of measurement parameters. Turning to our Industrial business, we had growth in our core industrial business in the quarter despite challenging market conditions. While most end markets have generally remained soft, we have been active in capitalizing on our customers' demand for our automation and productivity solutions. Our portfolio is well positioned to benefit from onshoring investments over the coming years, and our team is focused on identifying potential new project opportunities as they emerge. Turning to product inspection, we again had stronger-than-expected performance this quarter amid challenging market conditions in the food manufacturing industry. Our recent innovations are providing customers a strong incentive to upgrade aging equipment given the significant reduction in total cost of ownership that our new solutions provide. We expect to deliver solid growth for the remainder of the year as our market share gains offset soft industry demand. Lastly, Food Retail sales were flat for the quarter. Now let me make some additional comments by geography, starting in the Americas, where growth was stronger than expected due to strength in our core industrial and product inspection business. We remain pleased that our refreshed portfolio of industrial solutions has supported solid market share gains during soft economic conditions. Market conditions for lab remain mixed as academia and biotech sectors have been soft, offset in part by strength in bioprocessing. Turning to Europe, sales were flat for the quarter against solid growth in the year-ago period, especially for lab, and we also had modest growth in industrial. Finally, our Asia and Rest of the World results were better than expected in the second quarter. Our teams executed very well and delivered strong growth in Southeast Asia. In China, underlying market conditions remain soft, and we do not expect much improvement in the second half of the year. We are pursuing growth opportunities in hot segments like e-mobility and renewable energy and GLP-1s and also looking to help customers meet more stringent quality control requirements in the 2025 Chinese pharmacopeia starting in October. We are also monitoring any potential stimulus in China this year and have not assumed anything in our forecast. Finally, I'd like to provide an update on our service business, which grew 4% in the quarter and 5% on a year-to-date basis. Our second quarter results were impacted a bit by timing issues, and we remain optimistic for good growth in the second half of the year. We are making good progress with our service growth initiative. In summary, I'm extremely satisfied with our team's performance and the strong results we have achieved despite challenging and uncertain market conditions. Our proactive tariff mitigation efforts will allow us to meaningfully offset incremental costs this year while also increasing the resiliency in our global supply chain. We will continue to leverage and evolve our global manufacturing footprint to increase our in-region production capabilities that will ensure continued resilience and agility. I'm also very pleased with how Spinnaker is enabling us to proactively support our customers as they adapt their operations. The demand for more resilient supply chains has intensified since the pandemic, representing significant growth opportunities for us across nearly all regions. Onshoring and the development of regional supply chains in the coming years will serve as critical growth drivers, especially as many companies have announced significant investment plans in the United States. Our strong and diverse portfolio enables us to support customers across the entire value chain, and we are uniquely positioned to benefit from the many new instrument plans that have been announced by the biopharma and other industries in recent months. As companies establish new production facilities, we are uniquely positioned to benefit as life sciences overall represents about 40% of our revenue, and we estimate around two-thirds of that supports customers' production and QA/QC operations. In addition, approximately half of our global sales support our customers' production processes with solutions in process analytics, core industrial applications, and product inspection, which will also benefit from onshoring opportunities and investments in other industries. Our market organizations are well equipped to identify and capitalize on these opportunities, empowered by an expanded toolkit of our recent wave of Spinnaker. I recently spent several days with global leaders from around the world to discuss these opportunities and how we will leverage these new initiatives to reallocate resources to ensure we fully capitalize on our customers' resiliency investments. Another key growth opportunity we are actively pursuing is the increasing need to replace aging equipment after many years of deferred investments. During the latter half of 2024 and early into this year, we started to observe a return to normal replacement cycles for lab equipment among many customers. However, trade and policy uncertainties appear to have again delayed many replacements. We believe there's pent-up replacement demand across our business following several years of soft market conditions. As the business environment stabilizes with reduced uncertainty, we anticipate an increase in replacement spending over the coming years. Overall, we are confident in our ability to execute and deliver solid earnings in 2025. We are also well positioned to uniquely benefit from the emerging growth opportunities associated with onshoring part segments and equipment replacement. We will also maintain a well-balanced approach that emphasizes growth, innovation, and operational excellence. The focused execution of these initiatives will drive above-market growth and sustained margin expansion well into the future. Now this concludes our prepared remarks. Operator, I'd now like to open the line to questions.

Your first question comes from Dan Arias with Stifel.

Sean, so maybe just on the EPS guide, that sounds like it's now functionally $0.40 lower. Does that include some offset activities? Or is that the gross impact, and that's just sort of the way that you think things will end up by the end of the year? I know you've had about 12 hours to think about it. So just what you think you do from here.

Yes, thank you, Dan, I appreciate your comment. Currently, we are facing a significant challenge. With limited time left in the year, we are actively reviewing additional measures to address this issue. We have developed a solid preliminary plan for our approach. We are confident in our ability to make effective adjustments for next year. In terms of Q3, we do not anticipate any noticeable impact due to our current inventory levels over the next few months. However, as we look towards Q4, we recognize that time is limited for making changes. While we have some ideas for action, we believe it is more prudent to operate under the assumption of a gross impact for now.

Okay. And then maybe just on China, if you put the tariff stuff aside to the extent that that's possible, does visibility into demand look like it's changing at all or at least stabilizing in some way, such that a forecast one way or another has more confidence behind it? I mean last quarter, we were talking about the environment getting more uncertain. I'm just curious whether things have changed since then.

Yes. I believe that prior to last night, there were elements that introduced more uncertainty in the markets regarding how our customers might react. However, as we approached this release, we felt increasingly positive. We delivered a solid quarter despite the challenging market conditions, and we experienced strong execution across the organization. There was modest growth, with a few notable highlights in our portfolio during the second quarter. At the start of this year, we were somewhat cautious about our industrial business, which turned out to be a highlight of the quarter, especially on the core industrial side, and product inspection had a very good quarter as well. As we look towards the second half of the year, we did not expect conditions to worsen. We approached our guidance for the latter half of the year with caution, thinking it would be similar to the first half in terms of volume. However, we were encouraged by some stabilizing trends, particularly in the industrial sector. The laboratory side of the business presents a more mixed picture, but I’ll pause here and welcome any follow-up questions.

Yes, I would like to add a bit regarding the question about China. In Q2, our performance exceeded guidance. However, we expect the second half of the year to remain flat, with no significant changes anticipated in underlying market conditions. Our team and portfolio are competitive there. As I mentioned earlier, we have not included any potential stimulus in our projections for the second half of this year or the beginning of next year. For now, I would describe the situation as stable, albeit with low volume, and no significant changes are evident.

Your next question comes from Dan Leonard with UBS.

Can you elaborate further on where the strength is coming from in product inspection and comment whether your full year forecast for that business has changed at all?

I will start by discussing our product portfolio. Over the last three years, we have focused on expanding our strategy to capture a larger share of the mid-range market. We have invested significant effort into launching innovative products at both the midrange and high-end levels. Currently, we are gaining market share in this area due to the new products we've introduced. I am pleased with how our strategy has unfolded, and we are well positioned globally with this portfolio. We now offer new solutions for x-ray detection, metal detection, and checkweighing, which encourages our customers to upgrade their existing systems and purchase from us. With our new midrange offerings, we can now attract customers who previously viewed us as predominantly a high-end supplier. This expanded portfolio allows us to reach new accounts and continue winning market share. Looking ahead to the second half of the year, we are optimistic about continued growth. I believe we are still targeting mid-single digit growth, but please correct me if I'm mistaken.

In the third quarter, I believe we could perform even better than our guidance of mid- to high-single digits. Looking at the year overall, we're aiming for mid- to high-single digits for that business, which is an improvement from our previous expectations of just mid-single digits. I'm really pleased with our team's hard work and execution, and these new products are being well received by the market. While food manufacturing is a challenging end market, we are doing very well and are happy with our momentum.

Appreciate that color. And then as a follow-up, what was the process analytics growth rate in the quarter? And can you comment on the full year outlook for that business given your positive commentary on bioprocessing more broadly?

Yes. We usually don't provide detailed breakdowns for that business, but I can offer some insights. In the bioprocessing sector, we performed well in process analytics and maintained good momentum. If you look closer at single-use technologies, we had an exceptional quarter there as well. However, process analytics also caters to other end markets like chemicals, which somewhat balanced out that growth when considered as a specific product line. Overall, we are optimistic about the trends in our bioprocessing business, and we believe those trends will carry into the second half of the year.

Your next question comes from Patrick Donnelly with Citi.

Could you provide some insight on the guidance for the third quarter? It's encouraging to see your forecast exceed analysts' expectations. I can't remember the last time that occurred; it's been a while. Can you share the confidence that led to this decision? Additionally, it would be helpful to hear your thoughts on each segment for the quarter. Did conditions improve to give you more assurance in setting a number above the consensus, especially considering the usual conservative approach from Mettler?

Yes, I can start by explaining the guidance for each business area and then share a few additional comments. In our lab business, we are expecting low-single digit growth for the third quarter. For our core industrial and product inspection businesses, we are projecting mid- to high-single digit growth this quarter. Retail is expected to decline by low single digit. Geographically, we anticipate the Americas will see mid-single digit growth, Europe low single digit growth, and China will remain flat. Overall, I believe we are more optimistic about our industrial businesses today compared to three months ago. This shift is influenced by better performance in the core industrial business and positive trends in automation and digitalization from our customers. This area is a notable strength in our portfolio, and we feel well positioned to take advantage of these opportunities. Additionally, we see promising activity in our project pipeline for the third quarter, which also boosts our confidence.

Okay. That sounds good. And then maybe just on the pricing side, always a nice lever for you guys to pull. Obviously, with everything going on, on the tariff side, it's probably even been more pertinent. Can you just talk about the conversations there? Again, it sounds like the Switzerland piece is a gross impact. To your point, Shawn, probably a little late in the year to do too much on that. But can you just talk about pricing as a potential lever, what the expectations are, what's built into guide here, and just the moving pieces, as we think about pricing, margins, that area?

Yes, pricing always begins with our value proposition. We put significant effort into continuously investing in innovation to maintain and enhance that value. During times when we need to raise prices slightly, we carefully assess that value proposition. The positive aspect from my perspective is that we observe favorable reactions in the marketplace; people understand our reasoning. Our sales team effectively communicates this value proposition. In the second quarter, our pricing increases were about 3%, which aligned with our expectations. For the second half of the year, we anticipate pricing around 3.5%. This could fluctuate slightly due to past surcharges that were adjusted based on recent rate changes. Reflecting on the full year, we previously anticipated a 3% growth for price realization, and we still expect to remain in that range, although possibly lower than previously indicated. As we look ahead to next year and consider factors like Swiss tariff rates, we will take that into account while maintaining strong value propositions for those products. We'll aim to approach this thoughtfully for our customers and remain attentive to how the situation evolves in the coming months.

Your next question comes from Vijay Kumar with Evercore ISI.

Congratulations on the solid execution. Shawn, my first question is about the EPS assumptions as we look towards the second half of 2026. The Swiss update annualizes to a rate of $1.60, and I assume you will be able to offset that rate for next year. While it's early to discuss Q4, can we expect Mettler to fully offset that for next year? Also, regarding fiscal 2026, I have noticed that some of your peers have commented on tax rates due to R&D capitalization. What is your perspective on the tax rate for next year?

Thank you, Vijay. I believe you suggested that the $1.60 would represent an annual figure. To clarify, we estimate the gross impact on our results this year to be $0.40. As we look ahead to next year, we are confident in our ability to manage the additional impact for 2026. Although it's still early to provide detailed guidance for 2026, we will share updates during our next call. We are pleased with our overall progress in mitigation activities and have some promising strategies in mind if the situation persists. Regarding taxes, we don’t anticipate any significant benefit to our tax rate for next year at this time, so I would maintain the assumption of 19%. We will provide further updates as we gather more information and refine our outlook for next year, but one potential advantage could be on the cash tax side, which we are currently analyzing. We expect to see some benefits in cash flow from this.

That's helpful, Shawn. And Patrick, maybe one for you. You did bring up services, some timing issues. Are those coming back in the back half? Maybe just talk about what happened in 2Q and expectations on a go-forward basis?

Yes, Vijay, let me chime in here a little bit and explain. About Q2, again, most of it was really a timing issue on some of the larger projects that we sometimes have in services. We are very confident about our second half growth that we will get back to the growth we have seen before. We have a strong growth program in place for our service organization. We actually started already last year putting more service engineers into the organization, strengthening the marketing organization as well, getting deeper penetration in the installed base because we see a really good growth opportunity there, connecting stronger with the installed base of instruments. So yes, for the second half, we are optimistic that we are getting back to growth. We have no indications that this is a major thing that we have seen in Q2. We see really good second half optimism.

Your next question comes from Jack Meehan with Nephron Research.

Feel for you guys providing guidance as the tariff rates change in real time. I appreciate the incremental color you shared on that. One of the big topics we've been focused on with earnings is like pull-forward dynamics. I was curious, as you look at the results in the quarter, whether you saw that in any of your businesses, how you went about assessing that?

Yes. Thanks, Jack, for the question. Look, I mean, when we talk to our sales leaders out there, we have no indications at the moment that there was any pull forward happening in Q2. The market uncertainty was out there. The reason I think why we saw good growth in Q2 is entirely based on the fact that we have an outstanding product portfolio and compete extremely well in this dynamic and challenging market conditions, but nothing that I could point to say I heard in any of the regions or any other product categories that it would be a stocking or pull forward. Yes. As I said in my comment before to Vijay, again, you sometimes have this transition of the quarters. It's mainly project related with some of the larger service projects we had. Some of it was spare parts that we had a stronger spare parts consumption in the quarter last year in the same quarter. But again, we have no indication that it is an underlying trend for the second half. We are optimistic in terms of the service demand that we're seeing the adoption of new services that we have outlined and our second half outlook remains stable.

Your next question comes from Rachel Vatnsdal with JPMorgan.

This is Casey on for Rachel. Maybe the first one is just can you walk us through performance in Europe in the quarter relative to expectations? The flat growth there, I think, is a little bit below the low single-digit growth you pointed us to in the guide. So maybe just parse out drivers by segment and the outlook in that region for the back half of the year. I think you said you expect Europe to grow low singles in 3Q.

Yes, I'll address that. Europe was flat for the quarter, which is slightly down from our previous guidance. The lab business was relatively stable, while the industrial business saw a slight increase. In the second quarter, we observed significant market uncertainty, influenced by some tariff announcements in the U.S. at the start of the quarter. These factors impacted how people approached project timing in different regions, including Europe, which was reflected in our results. Looking ahead for Europe for the remainder of the year, we anticipate low single-digit growth in the third quarter. For the full year, our guidance suggests flat growth in Europe, but if we exclude the impact of shipping delays, the European figures would likely reflect low single-digit growth on an annual basis.

Okay. Got it. That's helpful. And then maybe just one on the onshoring piece, you talked a lot about it today and some of the recent pharma manufacturing build-out announcements. You've talked previously about how Mettler is not necessarily involved in the initial build-out of those facilities given your portfolio. So just curious on timing of when you would expect some of these CapEx announcements to eventually flow through into orders and revenue for you guys. Is it a 2026 upside driver or perhaps further out?

I believe we are still in the early stages. There have been many significant announcements made. Our strong relationships and connections with customers globally, along with our discussions about their reshoring or onshoring strategies, highlight our portfolio's strength and how we can assist them in these plans. However, it is still very early in this process. We anticipate seeing progress by 2026, and expect to gain even more momentum in the subsequent years, but we are still in the initial phase.

Your next question comes from Luke Sergott with Barclays.

I wanted to get some clarity on the replacement cycle that you mentioned regarding pent-up demand. Can you provide insight into how outdated the active installed base is, considering that uncertainty has caused some delays? Where do you stand in the upgrade cycle? Based on your past experiences, could this lead to a rebound, or do you think that once customers gain clarity, they will simply engage in the upgrade cycle without just experiencing a pause and delay? Will we see a more typical recovery similar to what we've seen before?

Luke, this is Shawn. I'll begin, and Patrick can add his thoughts if he wishes. Looking back, before COVID, around 80% to 90% of our business in Western markets like the U.S. and Europe was driven by replacement. Recently, we've noticed that customers have not been actively replacing their existing equipment. This may have been partly due to some changes that occurred during COVID. As we move further away from the pandemic, we believe this trend continues. Last year, we saw some early signs of replacement cycles, especially with the numbers from analytical instruments in the second half of the year, and while we didn't label it as a trend, we noted it. However, this year’s uncertainty seems to have caused customers to hesitate again. Analyzing the data is challenging since our teams generally work on a more detailed level with the installed base. Still, some of our observations suggest that the installed base is aging. The precise timing and scale of replacements remain unclear, and some decisions might be postponed, but ultimately, customers can't delay indefinitely. We anticipate that this will eventually lead to a rebound. We believe as market conditions stabilize, that will drive activity, and the return to normalcy will begin. Whether this recovery happens all at once or gradually is still uncertain.

I think that's an important point, Shawn, yes. Look, you should look at this as not a total stop of replacement that we have been seeing. It was a slowdown of the replacement cycle over the last several years. And once the certainty comes back, there will be an acceleration again of the replacement cycle, but it's not a snapback. It's not like you will see all of a sudden, you will see one big spike in replacements. It will be, then again, customers get more confidence, and then we will see an acceleration of the replacement cycle.

Right. What excites us is that while we have this dynamic, it's important to note that in the past, around 80% to 90% of the West was focused on replacements. Moving forward, we anticipate a significant increase in new developments, especially with the current trends of onshoring and the shift towards more automated and digital solutions. These factors will positively impact our portfolio as well.

Great. That's helpful. And then last year, I guess, Shawn, talked a little bit about the 4Q margin step-up from 3Q. Just help understand the underlying drivers there, especially in context with the tariffs and your mitigation aspects there, especially on the low to mid-single implied growth.

So just to clarify your question, Luke, are you referring to the fourth quarter and which specific period?

For this year, the margin in Q4 is an improvement from Q3.

We usually don’t provide too much detail on the fourth quarter, but you can start to get a sense of it this time of year. The overall gross margin will likely look somewhat similar to the third quarter. However, there are two key factors to consider. First, we expect significantly more volume in the fourth quarter compared to the third quarter. Second, there are also more tariffs in the fourth quarter, assuming the Swiss tariff rates stay at 39%. On a year-over-year basis, the fourth quarter margin is expected to decrease notably, potentially by 170 to 180 basis points compared to the previous year.

Your next question comes from Tycho Peterson with Jefferies.

I want to ask about biopharma. I know you said no pull forward to Jack's question and too early to kind of benefit from onshoring as you also noted. But you talked about kind of modest recovery last quarter. I'm just curious how you're thinking about R&D spending in the next couple of quarters. You've got tariffs, MFN noise, obviously, some negative headlines in cell and gene therapy. How do you feel about kind of baseline R&D spending for pharma in the near term?

Yes, Tycho, this is Patrick. As you probably know, most of our involvement in biopharma is primarily in bioproduction, focusing on process analytics and our platform solutions. We are not heavily involved in R&D in this area. However, we see potential for biopharma, especially with the recent trends toward reshoring and home-shoring in the United States. This is appealing for us because customers are likely to establish manufacturing sites here for existing products. They will also continue to maintain QA/QC operations that we can support with our lab and industrial solutions. Despite the possibility of research slowing down due to current news, the development of manufacturing sites and QA/QC operations will actually benefit us and serve as a strong tailwind moving forward.

Yes. And just to make sure to kind of help everyone understand what is our exposure here. I think we might have said it in the prepared remarks. But if you think about it, about 40% of our global business is sold into life sciences, broadly like traditional pharma, biopharma, et cetera. We estimate about two-thirds of that comprises manufacturing and QA/QC labs with the other one-third being more R&D and scale-up. But even within that one-third, we're probably a little bit more weighted towards the late-stage R&D. If you kind of like peel back the portfolio a little further on the early stage, that's clearly where we have seen some softness like in the pipetting business. But I think we're relatively less exposed there. And I think it's always one of our strengths, right? It's like we serve all the way through the value chain, and we've always been pretty good at being able to pivot where and towards the growth opportunities that they present themselves.

Okay. That's really helpful. And then I guess, similarly, I know U.S. academic...

Give me one moment. Let me get his line back live.

A follow-up, I want to ask on U.S. academic and government. I know it's a low single-digit percentage of revenues, but there are green shoots here. NIH grants are starting to flow. As we think about the lab business in the back half of the year, could that be a source of upside, any kind of budget catch-up spend?

It's not a significant exposure for us. Our U.S. academic and government business combined accounts for only about 2% of our global sales. Therefore, any fluctuations in that area won't have a substantial impact on our overall numbers. Any positive outcomes are welcome, but they won't significantly affect our results. In terms of our business with the NIH, it represents a very small percentage, nearly negligible, so it's insignificant.

Your next question comes from Michael Ryskin with Bank of America.

Shawn, I want to clarify my understanding of the tariff situation, especially given the recent changes. You mentioned before, and reiterated earlier, that you plan to mitigate most of the impacts by 2026. I want to confirm if the mitigation actions you're implementing are proactive. My concern is that we are still seeing tariff news daily, as you know. Is there a delay in your ability to fully mitigate if we encounter more tariff news in the next couple of months? Could that affect 2026? Or should we expect no tariff impact next year regardless?

I can't provide an official guarantee at this moment, but we feel very optimistic about our current initiatives. We have numerous workstreams in progress, some of which are short-term. For instance, we can implement pricing adjustments quickly, but we are also focused on various aspects of our supply chain. Some of these initiatives were already underway at the beginning of this year, and we have accelerated many projects recently. Just earlier this week, Patrick and I visited our Tijuana facility and observed the excellent work being done there. It highlights the strength of our global culture and teamwork. This is just one example of the various areas in our global supply chain that we can improve. Additionally, we have some new ideas stemming from our latest announcement. Overall, one of the key attributes of our company culture has been our agility. We understand that changes will occur, but we concentrate on what we can manage and utilize our agility when necessary. I feel very positive about our organization and its culture, which gives me great confidence for the future. Regarding what we know today, we believe we are well-positioned to manage potential challenges for next year.

Okay. And then for my follow-up, I'll kind of ask along the same lines. Given the high Switzerland exposure for you, can you just sort of remind us what steps specifically you're going to be taking to mitigate that, like where the exposure hits? And yes, I'll just look at that.

Yes. I don't want to go into too many details right now, as it may be a bit early for that discussion. We also need to have some internal discussions about our next steps. It's important to note that there will be various factors at play, and it's not going to just be one solution. We'll go through this process, and if the situation persists, we can share more information on our next call.

Your next question comes from Josh Waldman with Cleveland Research.

One for Shawn and then one for Patrick. Shawn, first, a quick follow-up on Mike's tariff questions. What were the variables that drove the gross impact stepping down to the $60 million or the, I guess, $95 million with the Switzerland change last night? And then on the offsets, where do you find you're leaning in most to drive offsets to date? Has it been more price? Or has it been more supply chain and cost reduction focused?

Yes. We certainly benefited from the decrease in Chinese rates. To put it in perspective, our Chinese exports to the U.S. make up about 50%. So you can estimate the impact of the rate dropping from 145% to 30%. However, this was somewhat countered recently by an increase in Swiss rates. The other rate changes were minor and can be considered relative noise overall. Regarding our short-term mitigation strategies, we anticipated certain changes in the supply chain prior to the announcement on April 2. We had already initiated good work on that front and made progress on cost management as well. Additionally, we have implemented some pricing measures. Initially, we projected price realization in the 2% range for the year, but we are now expecting it to be around 3%. This gives you an idea of the scale of change. Moving forward, the situation will continue to evolve, and as we optimize our supply chain, we will start to see more benefits as we enter next year.

Got it. Okay. And then Patrick, on the demand side, does it seem like visibility going into the second half is any better or worse than the visibility you felt you had either coming into the year or into the second quarter? Have order patterns become any more predictable as you progressed into the year and into July?

Yes. Look, I mean, the visibility we have is really good with the systems we have in place. I would not say there has been a dramatic change in terms of the visibility in terms of anything that would indicate a slowdown or acceleration of the business momentum. We are confident in our Q3 growth numbers based on what we see in our funnels and our leads and opportunities out there that gives us confidence for Q3 and also for the second half. But you also have to appreciate that we have a pretty fast turnover with our products. And usually, our deal cycles are very fast.

There are no further questions at this time. I'll now turn the call back over to Adam Uhlman for closing remarks.

Thanks, Carly, and thanks, everybody, for joining us today. If you have any follow-up questions, please feel free to reach out. And I hope everybody has a great weekend, and we'll talk to you soon.

This concludes today's conference. You may now disconnect.