Earnings Call Transcript - MTD Q2 2022

Operator, Operator

Good day, and welcome to the Second Quarter 2022 Mettler-Toledo International Inc. Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Adam Uhlman. Please go ahead, sir.

Adam Uhlman, Investor Relations

Thank you, and good morning, everyone. I'm Adam Uhlman. I'm responsible for Investor Relations at Mettler-Toledo, and I'm happy to welcome all of you to this call. I am joined with Patrick Kaltenbach, our Chief Executive Officer; and Shawn Vadala, our Chief Financial Officer; and of course, Mary Finnegan with Investor Relations. Let me cover some administrative matters. This call is being webcast and is available for replay on our website at mt.com. A copy of the press release and the presentation that we will refer to on today's call is also available on our website. Let me summarize the safe harbor language that is outlined on Page 2 of the presentation. Statements in this presentation are not historical facts, constitute forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different than those expressed or implied by any forward-looking statements. For a discussion of these risks and uncertainties, please see the discussion in our most recent Form 10-K and other reports filed with the SEC from time to time. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions, factors affecting our future operating results and in the Business and Management's Discussion and Analysis of Financial Condition and Results of Operation sections of our filings. One other item on today's call, we may use non-GAAP financial measures. A more detailed information with respect to the use of and differences between the non-GAAP financial measures and the most directly comparable GAAP measure is provided in the 8-K. Let me now turn the call over to Patrick.

Patrick Kaltenbach, CEO

Thanks, Adam, and good morning, everyone. We appreciate you joining our call this morning, which we are doing from Switzerland. We reported strong second quarter results as our team executed very well on our growth strategies. Our culture of agility and focused execution have allowed us to capitalize on favorable market demand and navigate challenging supply chain and inflationary conditions. The highlights of our second quarter performance are detailed on Page 3 of the presentation. Local currency sales in the quarter increased 10% as compared to the prior year. We had very strong growth in our laboratory and Core Industrial business, and we are particularly pleased with the very good growth in China. Excellent sales growth combined with good margin improvement drove very strong growth in adjusted EPS despite adverse foreign currency. We feel positive about our outlook for Q3 and for the full year, and we recognize our agility and resilience will be pivotal to navigate market conditions. Later, I will have some additional comments on our business, but let me now turn it to Shawn to cover the financials and guidance. Shawn?

Shawn Vadala, CFO

Thanks, Patrick, and good morning, everyone. Sales in the quarter were $978.4 million, reflecting a local currency increase of 10%. On a U.S. dollar basis, sales rose 6% as currency impacts reduced sales growth by 4%. We estimate that the ongoing conflict in Russia-Ukraine had about a 1% negative effect on sales growth. We show sales growth by region with local currency sales up 12% in the Americas, 4% in Europe, and 14% in Asia/Rest of World. Sales in China grew 14% in local currency this quarter. In the first half of the year, local currency sales rose 12%, with 14% growth in the Americas, 7% in Europe, and 15% in Asia/Rest of World. Year-to-date sales in China increased 15%. Local currency sales growth by product area shows Laboratory sales up 13%, Industrial up 9% (with Core Industrial up 11% and product inspection up 5%), and Food retail grew 3%. For the first half, Laboratory sales increased 15%, Industrial was up 10%, including 12% growth in Core Industrial and product inspection saw a 7% rise, while Food retail declined 6%. Moving on to the rest of the P&L, gross margin for the quarter was 58.4%, an increase of 30 basis points. We benefited from strong pricing and volume growth, which were partially offset by higher material costs. R&D expenses were $44 million in the quarter, representing an 8% increase in local currency, tied to heightened project activity. SG&A costs totaled $242.2 million, a 6% increase in local currency, reflecting boosted investments in sales and marketing. Adjusted operating profit was $285.4 million for the quarter, marking a 12% increase due to strong sales growth and effective execution, though currency posed a 3% headwind to operating profit growth. The adjusted operating margin stood at 29.2%, an increase of 160 basis points compared to the prior year, with a 120 basis point rise on a currency-neutral basis. Amortization for the quarter was $16.4 million, and interest expense was $12.8 million. Other income amounted to $2.2 million, largely representing non-service-related pension income. Our effective tax rate for the quarter was 19%, prior to discrete items and adjustments for timing in stock option exercises. Fully diluted shares were at 22.8 million, a 3% decrease from the previous year. Adjusted EPS for the quarter was $9.39, a 16% increase from last year, or a 20% rise excluding adverse foreign currency impacts. We are pleased with this adjusted EPS growth particularly since it follows more than a 50% increase in the second quarter of the previous year. Reported EPS for the quarter was $9.29, up from $7.85 the year before and included adjustments for amortization and restructuring. For year-to-date results, local currency sales rose 12% over the six-month period, with adjusted operating income growing 13% or 16% when excluding adverse currency effects, and our operating margin expanding by 110 basis points. Adjusted EPS year-to-date increased by 18% or 21% excluding unfavorable currency. Regarding cash flow, adjusted free cash flow for the quarter was $208.2 million, with a notable improvement in DSO, declining by 2 days to 34 days over last year. ITO was at 3.8x, and year-to-date adjusted free cash flow reached $283.7 million. Now, turning to guidance. Forecasting remains challenging due to changing market conditions. We focus on controllable factors, especially our execution of growth and margin initiatives. Despite increased macro uncertainties, we feel confident about our business, with solid customer demand and effective execution on our growth initiatives. However, we do face increased foreign exchange headwinds compared to three months ago, estimating a 6% adverse effect on adjusted EPS growth for the upcoming quarter, mirroring similar challenges in the fourth quarter. What this means for the full year is we now expect foreign currency impacts to adjust EPS growth by approximately 4.5%, up from the previously estimated 3.5%. At the midpoint of our guidance, we anticipate adjusted operating profit margins to increase roughly 140 basis points on a currency-neutral basis, driven by higher volume growth and effective margin initiatives. Including currency effects, reported operating profit margins will be slightly higher. For full year 2022, we project local currency sales growth between 9% and 10%, up from previous guidance of 8%, reflecting our strong year-to-date performance and a more optimistic outlook for the latter half of the year. We expect full year adjusted EPS of $38.85 to $39.05, translating to a growth rate of 14% to 15% and approximately 19% excluding currency. For the third quarter, based on current market conditions, we forecast local currency sales growth around 8%, with adjusted EPS in the range of $9.75 to $9.85, reflecting a growth rate of 12% to 13% or 18% to 19% after excluding currency impacts. Finally, regarding cash flow, we maintain our expectation for full year cash flow in the $855 million range and anticipate repurchasing approximately $1.1 billion in shares in 2022, with an expected net debt-to-EBITDA leverage ratio of about 1.5x. That concludes my remarks, and I'll now turn it back to Patrick.

Patrick Kaltenbach, CEO

Thanks, Shawn. Let me start with some comments on our operating businesses, starting with Lab, which had strong sales growth in the quarter with very good growth across all major product categories. We expect our end markets to remain favorable. And with our excellent product portfolio and effective sales and marketing initiatives, we believe we can continue to gain market share in our Laboratory business. Turning to our Industrial business. We are very pleased with the continued strength in Core Industrial. Our outlook for the remainder of the year is favorable, and we believe this business is well positioned to capitalize on our customers' needs, automation, productivity improvement and efficiency gains as they work to overcome challenges in the labor market and supply chain. Product inspection sales came in a little lower than expected this quarter but our team is optimistic for the third quarter. We have strong momentum in Americas but have started to see some more conservative packaged food customers' behavior in Europe. Finally, Food Retail sales grew 3% as growth in the Americas and Europe offset a significant sales decline in China due to disruptions from pandemic lockdowns. Now let me make some additional comments by geography. Sales in Europe increased 4% in the quarter, about as we had expected and against the 23% growth in the prior year. As a reminder, we stopped shipments to Russia after the invasion of Ukraine, which is impacting growth in Europe. Sales in the Americas was, again, excellent with double-digit growth across all of our major product categories. And finally, Asia/Rest of the World had another quarter of strong growth with robust growth in Laboratory and Core Industrial. China grew 40%, with particular strong growth in Lab and Core Industrial. The team continues to do a great job navigating challenges in the market. Assuming market conditions remain as they are today, we believe we will deliver strong growth in China in 2022. One final comment on the business. Service and consumables continue to show excellent momentum and grew 11% in the quarter. We are very pleased with the growth in this important and profitable part of the business. That concludes my comments on the business. Now I would like to share with you some insights on our sales and marketing initiatives. We have seen in the recent years the agility that Spinnaker provides is invaluable in helping us gain market share and adapting to various customer demand environments. The effectiveness of this was evident in the initial pandemic downturn and the subsequent recovery. Under both scenarios, Spinnaker provided agility to quickly identify growth opportunities and guide our sales force accordingly. As you are aware, we have an organic sales growth focus that benefits from our highly fragmented markets as well as a very large installed base of instruments, which provides fertile ground to discover growth opportunities but also requires a great deal of agility and execution focus. Our Spinnaker program helps us target the most attractive segments of growth and increase our sales force time with the most strategic accounts. We want to efficiently go after the best opportunities with our sales organization of approximately 3,000 sales colleagues around the world. Our field sales force is guided toward opportunities with the most strategic accounts, those with good growth and cross-selling potential, while other opportunities are more efficiently handled by our telesales and inside sales teams. Spinnaker utilizes unique data analytics to leverage external data sources and our substantial internal data, including that of our installed base, to identify the most attractive and profitable growth opportunities. Spinnaker also provides extensive tools to our sales force that improves their effectiveness. Continuous improvement is at the heart of Spinnaker. We continue to build, adapt and refine our initiatives, which reinforces our already strong foundation for sales and marketing and makes it difficult for competitors to copy. Our Spinnaker program also benefits from our proprietary Top K program. With Top K, we use data analytics to identify customer investment projects and cross-selling opportunities with potential actionable opportunities for our broad product offering. A summary of the opportunity with all relevant information, including customer site, contact info, potential for products, other activities with this customer is generated. These summaries are provided to the sales organization throughout the world who then qualify and prioritize these opportunities for our sales teams. The structure of our sales organization allows us to most efficiently follow up and guide the teams to these opportunities. Last year, we generated more than 150,000 of these Top K alerts and are continuing to penetrate these potential opportunities at customer sites. While we continue to follow up with last year's alerts, we are also launching additional wins this year. Target industries for this wave include, for example, pharma, food and beverage and chemicals. And we also identified opportunities in the fast-growing markets of lithium-ion battery and semiconductors. Other examples include vaccines, plant-based foods and advanced materials. We are convinced that our unique ability to quickly identify growth opportunities and related accounts helps us to adapt to shifts in customer demand, who we have all seen can happen quite rapidly. Our sales teams are also very happy to be able to visit customers on-site again. Face-to-face meetings allow us to best assess potential, promote our key value-add solutions and identify cross-selling opportunities. However, we also saw, during the last two years, how effective online interactions with customers can be. We have significantly enhanced our remote capabilities, including online sales meetings, webinars and virtual or e-demos. We recognize the importance of leveraging a smart mix of online and on-site meetings to convert opportunities to orders. Finally, selling service contracts at the point of sale continues to be a high-priority focus for us. We saw the value of our service throughout the last two years in terms of very favorable Net Promoter Scores. This has reinforced our sales organization the importance of articulating the value of a service contract when the product is sold. Internally, we have revamped our quoting process to ensure the right focus is on service at the critical point of the selling process. We have also introduced an updated version of our digital sales enablement tool library that allows our sales reps to be more effective in value selling. The update includes new front-end software tied directly into our CRM, providing our sales team dashboards to prepare for upcoming site visits and efficiently handle follow-up requests. Our sales enablement tool also provides our sales teams enhanced application information and selling guides, which also helps us enable cross-selling with new applications in targeted accounts we have not yet penetrated. This tool greatly improves the effectiveness of the selling process, thereby enhancing the customer experience and improving order conversion rates. These are just a few examples to illustrate our strength in marketing and sales. At the core of our growth strategies is the importance to reallocate resources to the best opportunities. And Spinnaker is a great example of how we do this by helping to identify and guide our sales teams to the best growth opportunities in the most favorable end markets. Business conditions today remain solid. I am convinced that our strategic programs, such as Spinnaker, will provide us agility to adapt to potential changes in the market conditions as we have successfully demonstrated over the last several years. If you look at the mix of our business today, it is stronger than ever. Our Laboratory business has grown from 44% of our sales in 2008 to 56% of our sales today as we target secular growth opportunities like pharma and biopharma industries. At the same time, our Core Industrial business has changed from 31% of our sales to approximately 25% of our sales, and the mix within that has shifted to more favorable end markets. In fact, we estimate that more than 60% of our Core Industrial sales are now with pharmaceutical, biopharma, food manufacturing and chemical customers. And I would remind you that our service and consumable business is approximately 1/3 of our revenues and very profitable. Our end market breakdown also reinforces the strength of our business. Today, we estimate about 40% of our total sales are to life science customers, 20% to food and beverage and about 10% to chemical. And beyond that, we serve many other diverse markets. We are clearly more biased towards higher-growth markets and, at the same time, nicely diversified. Well, that concludes our prepared remarks, and we now want to open the call to questions.

Operator, Operator

We will take our first question now. Your line is open. Please go ahead.

Vijay Kumar, Analyst

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

Shawn Vadala, CFO

Vijay, this is Shawn. Yes, I'm happy to do that. So we were very pleased with our execution in the quarter, both on pricing but also in our supply chain. I think you hear us use the word agility a lot, but the organizational agility and execution just continues to be really fantastic across the global organization. If you look at pricing in the second quarter, our estimated price realization was about 4.5%, which was better than what we were expecting coming into the quarter. On the material side, I would say material costs remain elevated and they were pretty much as we expected as we came into the quarter, which was a little bit better than Q1 but still remain at an elevated level. Maybe I continue here and I just transition into the second half of the year. Right now, we're thinking about price realization in the 5% range or so, which would put us at about 4.5% on a full-year basis, which is a little bit higher than our guidance last time we spoke for the full year of about 4%. And then if you kind of like want to translate that into margins, we're looking at about a 60 basis point improvement in our gross margin for Q3 and about 50 basis points for the full year. And then if you kind of drop it down to operating margins, our operating margin in Q3 right now is estimated on a currency-neutral basis, about 130 basis points. Actually, if you include currency, the reported number is probably more than 170 basis points on a reported basis. Our full-year operating margin assumption right now, excluding currency on a currency-neutral basis, is about 140 basis points and on a reported basis, that would be more in the range of 160 basis points.

Vijay Kumar, Analyst

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

Patrick Kaltenbach, CEO

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

Shawn Vadala, CFO

Okay, Vijay, maybe I'll take that one. So if you look at our Lab business today, it's about 56% of our business. If you go back to 2009, it would have been about 45% of our business. And then if you look at our Core Industrial business back in '09, it would have been, I think, just over 30%, and right now, it's about 25%. But what's even more interesting to me is the mix within Industrial and our overall end market exposure. So right now, we would estimate that more than 60% of our Core Industrial business, which historically is more susceptible to the economy, more than 60% of that business today is sold into pharma, biopharma, chemical and food manufacturing. So I think we continue to do a good job of redirecting business towards more attractive end market segments.

Patrick Kaltenbach, CEO

Yes. Clearly, and of course, let me add also to that. We are seeing strong momentum in both businesses at the moment. We're seeing very healthy demand driven by operational efficiency and automation needs. They go across both the Lab market as well as the Industrial end markets. Both markets are benefiting very well from the right products to serve our customers. We are really happy with our outlook for both of the segments. Our Lab business, of course, is much bigger as you know. And we have also launched a lot of exciting products this year and continue to have a lot of good products in the pipeline for both units. This is why we're also so optimistic on the outlook for Q3 and Q4.

Operator, Operator

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

Catherine Schulte, Analyst

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

Patrick Kaltenbach, CEO

Yes. Thanks, Catherine. I'll take the question first and then let Shawn chime in as well. So yes, we are very pleased with the 14% growth in the quarter. And as a reminder, we grew 35% in the second quarter of last year, so really exceptionally strong growth. We saw the growth across our Lab business in China with almost 20% sales growth, which is remarkable also given about 40% sales growth we delivered in the second quarter of last year. And all of our Lab product lines really showed very strong growth. We had strong growth also in our Core Industrial. Our Shield team has done a particularly good job of increasing our business mix to more attractive segments, as also Shawn mentioned before. We have seen particularly strong demand for solutions in automation driving this efficiency that we talked about. So we are very confident on China if the underlying market conditions don't change. And in China, they can change quickly for lockdowns. But so far, we are really optimistic. As I said, we are expecting strong growth in the second half as well.

Shawn Vadala, CFO

Yes. I don't think I'd add very much. I mean, I know there was a lot of concern about China lockdowns as we kind of entered the quarter, but from our perspective, we really had minimal impact during the quarter. I think our team did a wonderful job navigating that. We were one of the first companies to reopen in Shanghai, and we're able to really keep a lot of our product flows going throughout the quarter. And of course, I think many of you know that most of our production is actually outside of Shanghai as well. And then these themes that Patrick talks about too, I mean, they're automation, digitalization. Those are themes that are very prevalent in China that our team has been leaning into with our portfolio. And all these hot segments that we talk about, about lithium battery and semiconductor are also very prevalent in China as well. And then, of course, the government's 5-year plan, they're leaning into that locally in terms of how they are stimulating their economy, which I think we're a beneficiary of as well.

Catherine Schulte, Analyst

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

Patrick Kaltenbach, CEO

Yes. Let me first capture the product inspection piece. And yes, it's mainly in Europe where we see a little bit more conservatism. Customers are just a little bit careful with their investments in packaged food. We don't see that in the U.S. The U.S. is actually still very, very strong for us in product inspection. We have a very good pipeline there. But Europe has become a bit more cautious and that, of course, has also to do with the overall economic environment in Europe that some customers get more conservative. On the rest of Europe and the other businesses, I mean, we are really pleased with our growth that we have seen in the second quarter. As you know, we had expected to come in low single digits. It came in better, and this is also against 20% growth in the quarter of last year. We don't see any concerns for our European sales team or any other parts of the businesses right now in Europe. So no, I would say no signs of a real downturn at this time. But we fully acknowledge that we need to be very agile as market conditions, of course, can change and change quickly, given the situation with the energy supply, which we carefully monitor and have also put the right mitigation plans in place.

Operator, Operator

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

Matt Sykes, Analyst

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

Patrick Kaltenbach, CEO

Yes. Good. Absolutely. Let me start with that. So first and foremost, I think we still have ample opportunity to also grow our service business, which is very, very strong. We have a huge installed base of instruments. A big part of the installed base is currently not under contract but is calling more on what we would call break and fix services. So we have opportunities every time we go there with customers to talk about the value of contracts and being under contract, which means they have faster access to services. They have a fast response time. They have a broader service portfolio if they are on a contract, which also drives some of the growth rate we have from our services. We have a strong focus on services at point of sale, making sure we connect the right focus when we sell the instrument, and then also drive the connect rate. The team has a very strong focus on that. And overall, we are increasing our portfolio of services to our customers, adding more high-value services continuously. So I'm very confident that the share of service revenues continues to increase. I mean, we have to also see that, of course, for the last two years, we had very strong instrument growth. The service usually trails that a little bit, but having 11% growth again, this forward double-digit growth in services and consumables is a really strong reminder that we're making good progress on broadening our service footprint. If you were to look at it from a regional perspective, the U.S. history has been very strong as well as Europe. In China, we still have even more potential to grow services. Traditionally, the Chinese market has been not leaning that much into service. They are more self-maintainers and they also see it as a part of the overall sales package being included with the instrument, which takes time to change that mentality, and we are working on that. From that perspective, I'm optimistic and I'm putting a lot of focus on increasing the share of services and, of course, other consumables. The products we have, for example, our pet business, are very strong in consumables. In other areas, for example, in the Lab business, the titrators and automation solutions, they all come with a very healthy and increasing share of consumables moving forward. So I'm optimistic that in the long term, we will move that 1/3 of the business piece further for service and consumables.

Matt Sykes, Analyst

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

Patrick Kaltenbach, CEO

That's an excellent question. I think your second part of the question is leaning in the right direction. What we are hearing is that customers are, for several reasons, really interested in driving more automation in their businesses. It's driving their productivity. It's driving their profit. They are very willing to invest and making sure that they continue to drive productivity. Getting manual labor out of the play as much as possible is key when you look at large automation in factories where we play big in the Industrial business or even in the Lab. It's all about making sure that you can automate processes to make them more robust, more reliable, and also, in the end, cheaper for them. This is why our customers are responding very well to automation right now. It's not about automation alone; it's that this productivity gain and that long-term performance gains that they get from automation solutions.

Operator, Operator

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

Patrick Donnelly, Analyst

This is Patrick Donnelly from Citi. Could you elaborate on the recovery in China, particularly how it progressed throughout the quarter and what your expectations are moving forward regarding guidance? Also, could you discuss the differences you observed between the recovery of instruments and consumables, particularly what returned sooner and what lagged behind?

Patrick Kaltenbach, CEO

In China itself, look, we didn't have a significant slowdown during the quarter. I mean, the quarter held up quite strongly for us. The team was reaching out to customers even in areas where they were locked down; they continue to call customers from home. We also referred in our earlier calls about our digital tools and how we engage with customers. They leveraged this fully in China as well. So on the order momentum, I would say we haven't seen a real dip throughout the quarter. And on the manufacturing side, we recovered very, very quickly. There was no difference in terms of instruments versus consumables at all. I don't know, Shawn, if you have a different perspective, but I haven't heard anything else in China.

Shawn Vadala, CFO

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

Patrick Donnelly, Analyst

Okay. No, definitely encouraging results there. And Shawn, maybe a quick one for you there. Just in terms of the guidance for Q3, do you mind just breaking it out by segment and then geography as well if you have it just in terms of the growth rates?

Shawn Vadala, CFO

Sure. I'll provide the Q3 results first and then the full-year results. Starting with the divisions, we expect high single-digit growth for the Lab division in Q3 and low double-digit growth for the full year. For product inspection, we anticipate mid- to high single-digit growth in Q3 and for the full year as well. In Core Industrial, we project high single-digit growth for both Q3 and the full year. For food retailing, our guidance is low to mid-single digit for Q3 and flat for the full year. Regionally, in Europe, we forecast low to mid-single digit growth for Q3 and for the full year. It's essential to note that we expect a headwind in Russia during the second half of the year, which could be around 4% due to last year's seasonality in sales. In the Americas, we expect high single-digit growth for Q3 and low double-digit growth for the full year. For China, our guidance is approximately 10% for Q3 and low double-digit growth for the full year.

Operator, Operator

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

Dan Arias, Analyst

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

Shawn Vadala, CFO

Yes, that's a good way to frame the question, Dan. When we approach pricing, we adapt to the business conditions and circumstances, and we focus on differentiating by product and geography. Currently, the pricing situation allows for higher pricing across most categories. We assess the cost pressures by product category and geography and communicate this to our team. It's crucial for our sales force to convey this to customers and highlight our value propositions. As Patrick mentioned earlier, our value propositions are stronger in this environment since customers are more focused on productivity and are seeking solutions. This aligns well with our portfolio and supports our price increases. The market understands this. Additionally, our execution plays a significant role, as we can support customers through our supply chain. While every company faces challenges, we have a competitive edge in our ability to meet customer needs with lead times, which enhances their willingness to pay. Overall, our execution has been strong, and the environment is conducive to better price realization, as seen in Q3. Based on my earlier comments, we anticipate even better results in the second half of the year.

Dan Arias, Analyst

Okay, very helpful. Maybe just as a follow-up, I wanted to ask about Blue Ocean. If I remember correctly, I think you are implemented across about 80% to 85% of the users at this point. Is that correct? Also, what is the timeline you would consider for a complete global rollout? If that number is accurate, is that remaining 15% to 20% significant in terms of pricing, visibility, margins, etc.? Or do those regions not have much impact overall?

Patrick Kaltenbach, CEO

Yes. I will address this first and then allow Shawn to add his thoughts. We are currently about 85% through the rollout. There are still several countries that need to be integrated into Blue Ocean, or they are managing their own ERP systems. Much of this also translates into internal gains in efficiency, which helps us reduce costs and enhance overall effectiveness across the company. Regarding pricing, there is some impact, but I will let Shawn elaborate on that.

Shawn Vadala, CFO

Yes. On the pricing side, we'll always benefit from improved analytics, but also, to me, the business processes are a big part of it too. When you think about price administration, we have a lot of tools around that and global centralized processes. There's a lot of embedded pricing controls in terms of how we can manage discounting and things like that. So there's always some benefit when we go live. Our largest market organization that we have left is in France, which we're expecting to go live next year. Like Patrick said, there's a handful of smaller organizations and primarily in Europe and the Rest of World. Before I hand it back to Patrick, a general comment that we always see with Blue Ocean is just the overall visibility into the business. We've benefited over the last couple of years by having more transparency end-to-end in our business from Blue Ocean. For those who are less familiar with Blue Ocean, it's about global harmonized processes, but we enable that with one single instance of an ERP and fully integrated CRM service, HR program. With one single instance, we really have a lot of transparency, which we've benefited from over the last couple of years.

Operator, Operator

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

Derik De Bruin, Analyst

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

Shawn Vadala, CFO

Yes, that's a good question, Derik. I appreciate you being on the call early today, and I apologize for the early morning hour. Currently, about 75% of our interest rates are fixed, and we don't have any major maturities coming up in the near term, apart from a few smaller items. A significant portion of our variable exposure is in euros, which adds about 1% or so. Overall, I think we are in a solid position. Over the past few years, we've been securing a lot of 15-year debt. For instance, in December last year, we priced 15-year debt in two tranches. In March, we funded $150 million at 2.8% for 15 years, and we plan to fund another $150 million tranche in September at 2.9%. We believe that we're well positioned for the short and medium term. Specifically regarding interest expense, our guidance for this year is $53 million.

Derik De Bruin, Analyst

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

Shawn Vadala, CFO

No. I think it's just the opposite. People appreciate the value in this environment and they appreciate the ability to support them. We try to do things in a balanced way in terms of like increasing prices where it's appropriate and there's a very much a cost story, inflation story associated with it. I think between our approach and the overall value proposition we provide, we're just not hearing any noise.

Patrick Kaltenbach, CEO

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

Shawn Vadala, CFO

Yes. Just to clarify on the product inspection, I wouldn't say it's a pricing topic. It's more of a European topic for product inspection. There has been some more conservatism where we get the sense that maybe some projects are going to get delayed in packaged foods in Europe.

Derik De Bruin, Analyst

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

Patrick Kaltenbach, CEO

Yes. That's a good question, but we don't hear a lot of the customers stockpiling electrodes or pipette tips. We had, I would say, more at the beginning of the year during the pandemic, customers tried to buy as many pipette tips as possible, and they filled up their stock levels, but it's coming back to, I would say, more normal levels now. You also have to realize that a lot of the pipette tip sales we make daily are not going into testing but into bio research and biopharma applications. These labs usually do not have the same tendency as we have seen or you probably have heard from other suppliers that supply the broader testing industry that have just tried to get as many in their stocks as possible even last year; we have not been that much exposed.

Operator, Operator

Our next question, your line is open.

Josh Waldman, Analyst

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

Patrick Kaltenbach, CEO

Yes. Well, thanks, Josh. Very good question. The Q2 results have been a bit softer than we had expected. It's not like off by a huge factor. Margins are not a little bit softer. I think we had projected high single digits, and we came in a bit more to mid-single digits, so it's not off by far. A lot of that was actually triggered by two factors. We have seen on the customer side, we have seen some project pushouts not necessarily because they didn't have the money, but because usually we also supply into a larger infrastructure. Some of the upper suppliers were not ready to make the full installations of our final product inspection piece of the whole flow line, so to speak, but they were just not ready to take it this quarter. There has been some pushouts. What we also suffered from in terms of not being able to deliver everything we could was, on the supply chain side, some electronic components just didn't come in time, so that led to delays in this quarter. As we said, we are quite optimistic for Q3. The team sees a good pharma especially in the United States. We need to continue to monitor the situation in Europe, but otherwise, I think we are okay with the guidance.

Josh Waldman, Analyst

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

Patrick Kaltenbach, CEO

Yes. Look, I mean, COVID testing in China wasn't a big storm at all, but we see broad-based growth across our product portfolio. There is very strong demand from pharma and biopharma, especially biopharma. The Chemical segment is again showing very strong demand for automation solutions, so we are very happy with that. Should we add also in our remarks, we have mentioned what we call hot segments like the battery segment, plant-based food, etc., where we have targeted our sales force very quickly to these accounts with the right application solutions. They show across the board, I mean, across the regions very strong growth. If you factor all of that together with what we also mentioned about the continuous need for automation solutions, that just drove a lot of demand across our portfolio.

Operator, Operator

We move on to our next question, please go ahead.

Rachel Vatnsdal, Analyst

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

Shawn Vadala, CFO

Rachel, this is Shawn. I'll take it, and Patrick wants to jump in. When we assess our business, aside from the issue we mentioned regarding packaged food in Europe, we are not detecting any signs of caution or concern about delaying replacement cycles. As we transition into this next phase of the economy, we emphasize that we typically need the economy to be in a sufficiently positive state for people to maintain their replacement cycles. Historically, we've witnessed PMIs dropping into the mid- to high 40s in Europe, yet we still experienced growth because people continued with replacement cycles. Conversely, there have been instances where PMIs were in the mid- to high 50s in Europe, and we did not see double-digit growth. In Europe, a region currently highly impacted, we are very much focused on whether the European business will continue to adhere to these replacement cycles. We just require the economy to remain adequately stable. One of the aspects supporting this is that our average selling price is under $10,000, making our products less likely to be among the first cuts in budgets. We estimate that over 70% of our products fall below that price point. These are personal instruments that we sell through a direct sales force, allowing us to clearly communicate the value proposition. I believe this positions us favorably. Additionally, the comments on our product mix mentioned in our prepared remarks suggest we should be more resilient entering this next economic phase compared to past experiences.

Rachel Vatnsdal, Analyst

Great. And then one quick one for me. You flagged some conservatism on supply chain during your prepared remarks, which I think is prudent. Given the macro backdrop, can you walk us through what you're seeing on supply chain? Have things continued to deteriorate here or have they improved since Q1? Do you have any line of sight on when things can really improve?

Patrick Kaltenbach, CEO

On supply chain challenges, I would say they have somewhat stabilized, but we continue to face difficulties with certain items, particularly semiconductors. While there has been some improvement in transportation and logistics, for example, the port in Shanghai is less congested now, which helps overall material supply. Some of our businesses are seeing slight improvements in semiconductor availability, while others still face challenges. We have had issues with obtaining the right components on time, and we maintain constant communication with suppliers to ensure we have enough electronic components. I can't confirm if these improvements are part of a trend yet, but we remain hopeful and are keeping in very close contact with our suppliers to ensure we have sufficient safety stock in critical areas.

Adam Uhlman, Investor Relations

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

Shawn Vadala, CFO

Bye.

Patrick Kaltenbach, CEO

Bye. Thank you.

Operator, Operator

Thank you, everyone. You may now disconnect.