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.
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 re-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 two 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 Operations sections of our filings. One other item, on today's call, we may use non-GAAP financial measures.
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.
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 three 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're 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?
Thanks, Patrick, and good morning, everyone. Sales in the quarter were $978.4 million, which represented a local currency increase of 10%. On a U.S. dollar basis, sales increased 6% as currency reduced sales growth by 4%. We estimate that the impact of reduced sales in Russia, Ukraine due to the war was a headwind of about 1% to sales growth. On slide number four, we show sales growth by region. Local currency sales increased 12% in the Americas, 4% in Europe, and 14% in Asia, rest of the world. Local currency sales increased 14% in China in the quarter. On slide number five, we show sales growth by region for the first half of the year.
Local currency sales grew 12% for the first six months, with 14% growth in the Americas, 7% in Europe, and 15% in Asia/Rest of the World. Local currency sales increased 15% in China on a year-to-date basis. On slide number six, we summarize local currency sales growth by product area. For the quarter, Laboratory sales increased 13%, Industrial increased 9%, with core industrial up 11% and Product Inspection up 5%. Food Retail grew 3% in the quarter. The next slide shows local currency sales growth by product area for the first half. Laboratory sales increased 15%. Industrial increased 10%, including 12% growth in core industrial and Product Inspection up 7%. Food Retail declined 6%. Let me now move to the rest of the P&L, which is summarized on slide number eight.
Gross margin in the quarter was 58.4%, an increase of 30 basis points. We benefited from strong pricing and volume growth, which was offset in part by higher material costs. R&D amounted to $44 million in the quarter, which is an 8% increase in local currency over the prior period, reflecting increased project activity. SG&A amounted to $ 242.2 million , a 6% increase in local currency over the prior year, which includes increased investments in sales and marketing. Adjusted operating profit amounted to $285.4 million in the quarter, a 12% increase. The increase reflects strong sales growth combined with good execution. Currency was a 3% headwind to operating profit growth.
Adjusted operating margin was 29.2%, which represents an increase of 160 basis points over the prior year. On a currency neutral basis, adjusted operating margins increased 120 basis points. A couple of final comments on the P&L. Amortization amounted to $16.4 million in the quarter. Interest expense was $12.8 million in the quarter. Other income in the quarter amounted to $2.2 million, primarily reflecting non-service related pension income. Our effective tax rate was 19% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter. Fully diluted shares amounted to 22.8 million in the quarter, which is a 3% decline from the prior year.
Adjusted EPS for the quarter was $9.39, a 16% increase over the prior year, or a 20% increase excluding unfavorable foreign currency. We're very pleased with this adjusted EPS growth, especially given that adjusted EPS was up more than 50% in the second quarter of last year. On a reported basis in the quarter, EPS was $9.29, as compared to $7.85 in the prior year. Reported EPS includes $0.22 of purchase intangible amortization, $0.06 of restructuring, and an $0.18 benefit due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises. The next slide illustrates our year-to-date results. Local currency sales grew 12% for the six-month period.
Adjusted operating income increased 13% or 16% excluding unfavorable foreign currency, and our operating margin expanded 110 basis points. Adjusted EPS grew 18% on a year-to-date basis or 21% excluding unfavorable currency. That covers the P&L, and let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $208.2 million. We continue to make nice improvements on DSO, which declined two days to 34 days as compared to the prior year. ITO came in at 3.8 x. Year-to-date adjusted free cash flow was $283.7 million. Let me now turn to guidance. Forecasting continues to be challenging given dynamic market conditions. Our focus remains on factors we can control, namely successful execution of our growth and margin initiatives.
Let me make some general comments on the full year before covering the specifics. While there's more macro noise in the environment today as compared to three months ago, we continue to feel good about our business. Customer demand is solid, and we are executing on our growth initiatives very well. We remain cautious about challenges in the supply chain, but to date have been able to navigate them well. Second, we are facing greater foreign exchange headwinds to our earnings growth as compared to three months ago. Specifically, we now estimate that foreign currency will be a headwind to adjusted EPS growth in the quarter of approximately 6% and would expect a similar headwind in the fourth quarter as well.
At the time of our last earnings call, the headwind to earnings growth in the second half of the year was in the range of 3%-4%. What this means for the full year is we now expect currency to be a headwind to adjusted EPS of approximately 4.5% as compared to 3.5% the last time we spoke. At the midpoint of our guidance, we now expect adjusted operating profit margin to increase approximately 140 basis points on a currency neutral basis, reflecting higher volume growth and good execution on our margin initiatives. Including currency, reported operating profit margin will be slightly higher.
Finally, as you think through our sales guidance, keep in mind our sales growth will be reduced by approximately 1% for the remainder of the year due to sales in Russia. Now, let me cover the specifics. For the full year 2022, we now expect local currency sales growth to be in the range of 9%-10%. This compares to previous guidance of 8%. We are increasing our full year sales guidance for our strong year-to-date results and a better outlook for the second half. We expect full year adjusted EPS to be in the range of $38.85-$39.05, which is a growth rate of 14%-15% and a growth rate of approximately 19% excluding currency.
For the third quarter, based on market conditions today, we expect local currency sales growth of approximately 8% and expect adjusted EPS to be in a range of $9.75-$9.85, a growth rate of 12%-13% and a growth of 18%-19% excluding currency. Some final details and guidance. With respect to the impact of currency on sales growth, we expect currency to decrease sales growth by approximately 4.5% for the full year and decrease sales about 6% in Q3. In terms of cash flow, we continue to expect full-year cash flow in the $855 million range and expect to repurchase approximately $1.1 billion in shares in 2022.
We expect a net debt to EBITDA leverage ratio of approximately 1.5 x. That is 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 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 for 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 the Ukraine, which is impacting growth in Europe. Sales in Americas was again excellent, with double-digit growth across all of our major product categories. Finally, Asia and the rest of the world had another quarter of strong growth with robust growth in Laboratory and core industrial.
China grew 14%, with particular strong growth in Lab and core industrial. The team continues to do a great job navigating challenges in the markets. 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 that makes it difficult for competitors to copy. Our Spinnaker program also benefits from our proprietary topK program. With topK, 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 valid 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 topK 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 waves 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 eDemos. 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 to 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 target accounts we have not yet penetrated.
This tool greatly improves the effectiveness of the selling process, thereby enhancing the customer experience and improve order conversion rates. These are just a few examples to illustrate our strength in marketing and sales. At the core of our growth strategies is the importance to reallocate resources to the best opportunities, and Spinnaker is a great example how we do this by helping to identify and guide our sales teams to the best growth opportunities in the most favorable end markets. Business conditions today remain solid. I am convinced that our strategic programs, such as Spinnaker, will provide us agility to adapt to potential changes in the market conditions as we have successfully demonstrated over the last several years. If you look at the mix of our business today, it is stronger than ever.
Our Laboratory business has grown from 44% of our sales in 2008 to 56% of our sales today as we target secular growth opportunities like pharma and biopharma industries. At the same time, our core industrial business has changed from 31% of our sales to approximately 25% of our sales. 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. I would remind you that our service and consumer 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. 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.
Thank you, speakers. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your phone keypad. If you're using speakerphone, please make sure your mute function is turned off so your signal can reach us. A voice prompt on the phone line will indicate when your line is open. Please do state your name and company before posing your question. Once again, please press star one. We will take our first question now. Your line is open. Please go ahead.
Hey, guys. Thanks for taking my question. Congrats on a really strong print here. You did mention on pricing and inflation. Can you talk about how pricing and inflation assumptions have changed versus the prior guide?
Yeah. Hey, Vijay, this is Shawn. Yeah, I'm happy to do that. We were, you know, 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 is just continues to be really fantastic across the global organization. If you look at pricing in the second quarter, our estimated price realization was about 4.5%, which was better than what we were expecting kind of when we kind of came into the quarter.
On the material side, I would say, material costs remain elevated, and they were pretty much as we kind of expected as we came into the quarter, which was a little bit better than Q1, but still remain at an elevated level. You know, but maybe I kind of continue here, and I just kind of like transition into the second half of the year, which I'm sure is also on your mind. As we kind of think about the second half of the year, right now we're thinking about price realization in the 5% range or so, which would kind of put us at about 4.5% on a full year basis, which is a little bit higher than our guidance last time we spoke for the full year of about 4%.
Yeah, then if you kind of like want to translate that into margins, you know, 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. If you kind of drop it down to operating margins, you know, our operating margin in Q3 right now we're estimated on a currency neutral basis about 130 basis points. Actually, if you exclude currency, I mean, if you include currency, the reported number is probably more in the 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.
On a reported basis, that would be more like a 160 basis points kind of a range.
Yeah, that's extremely helpful, Shawn. Then maybe one for Patrick. On your comments towards the end and how the business mix has changed. Can you you know compare and contrast versus you know the last cycle, 2008, 2009, how that mix has changed? What was that mix back in 2008 and 2009, and what's the implication for the business if the economy were to slow down here?
Shawn, you go first and then I join.
Yeah. Okay, Vijay. Maybe I'll take that one. 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. Then if you look at our core industrial business back in 2009, it would have been, I think, just over 30%, and right now it's about 25%. What's even more interesting to me is the mix within industrial and our overall end- market exposure. 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.
I think we've continued to do a good job of redirecting business toward more attractive end- market segments.
Yeah. Clearly, 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. I think both markets are benefiting very well from these demands, and we have the right products to serve our customers. We are really happy with the 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 are also so optimistic on the outlook for Q3 and Q4.
Understood. Thanks, guys.
Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing star two. We will go ahead with our next question. Please state your name and company before you pose your question. Thank you.
Hey, guys. Thanks for the questions. 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. What drove the upside there, and how do you view the growth opportunity for that region for the rest of the year?
Yeah. Thanks, Catherine. I'll take the question first and then let Shawn chime in as well. Yes, we are excited. We are very pleased with the 14% growth in the quarter. As a reminder, we grew 35% in the second quarter of last year, so really exceptional, 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. All of our Lab product lines really showed very strong growth. We had strong growth also in our core industrial. Here the 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. We are very confident on China if the underlying market conditions don't change. You know, in China, they can change quickly with the lockdowns. We are really optimistic. As I said, we are expecting strong growth in the second half as well.
Yeah. 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 you know, 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. Of course, I think many of you know that most of our production is actually outside of Shanghai as well.
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 lithium battery and semiconductor are also very prevalent also in China as well. Then, of course, the government's Five-Year Plan, you know, they're leaning into that locally, you know, in terms of how they are stimulating their economy, which I think we're a beneficiary of as well.
Okay, great. Then you talked a bit about seeing some more conservatism from packaged food customers on the Product Inspection side in Europe. You know, how do you view that unfolding for the rest of the year? Have you seen any other businesses start to see signs of slowing in Europe?
Yeah, let me first capture the Product Inspection piece. Yes, it's mainly in Europe where we see a little bit more conservative, and customers are just a little bit more 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. Europe has become a bit more cautious, and that, of course, has also to do with the overall environment, economic environment in Europe, that some customers get more conservative. On the rest of Europe and the other businesses, I mean, we are really pleased with our growth that we have seen in the second quarter. As you know, we had expected to come in low single- digit. We came in better.
This is also against 20% growth in the quarter of last year. We don't see any concerns from our European sales team or any other parts of the businesses right now in Europe. 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.
Great. Thank you.
Thank you. We move on to our next question. Please go ahead. Your line is open.
Hi, it's Matt Sykes from Goldman Sachs. Thanks for taking my questions. 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?
Mm-hmm.
What are the plans to do that given your product mix?
Yeah. Good, absolutely. Let me start with that. First and foremost, I think we still have ample opportunity to also grow our service business, which is very strong. We have a huge install base of instruments, and I would say a big part of the install base is currently not under contract but is calling more on what we would call break-and-fix services. We have opportunities every time we are 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 faster response time, they have a broader service portfolio if they are under contract. That also drives some of the growth rate we have heard from us in services.
We have a strong focus, of course, also at services at the point of sales, making sure we get right when we sell the instrument, also a better connect rate. The team has a very strong focus on that. Overall, we are increasing our portfolio of services to our customers, adding more high-value services continuously. I'm very confident that the share of the service revenues continues to increase. I mean, we have to also see that, of course, the last two years we had very strong instrument growth, and then service usually trails at a rate a little bit. Having 11% growth, again, this quarter double-digit growth in service and consumables is a really strong reminder that we are making good progress on broadening our service footprint.
If you would look at it from a regional perspective, the U.S. historically 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 that leaning that much into services. They are more self-maintainers, and they're also seeing it as a part of the overall sales package being included with the instrument. That takes time to change that mentality, and we are working on that. From that perspective, I'm optimistic, and I'm putting a lot of focus also in my internal business meetings with every business I have, how we can increase the share of services and, of course, also with the consumables.
The products we have, you know, for example, our pipette business, very strong in consumables. In other areas, for example, in the Lab business, the titrators, automation solutions, they all come with a very healthy and increasing share of consumables moving forward. I'm optimistic that in the long term, that we will move that 1/3 of the business piece further up, for service and consumables.
Great. Thanks for the additional color. Maybe more of a general question. Just given your position in automation, and some of the strengths you're seeing there, if we are going to a more challenging economic environment, do you see automation from your customer conversations you have as more of a discretionary purchase, meaning they might not have the capabilities and want to do it, but might not wanna spend money for that? Or is the trade-off in terms of the productivity enhancements they see from your automation capabilities more than offset.
Yes.
That decision to just spend discretionary dollars on that?
Matt, that's an excellent question, and I think your second part of the question is actually leading up in the right direction. What we are hearing is that customers are, for several reasons, really interested in driving more automation in their businesses. It's driving their productivity. It's, with that, of course, driving their profit. They are very willing to invest and making sure that they continue to drive productivity also. End up getting manual labor out of the play as much as possible. When you look at large automation in factories where we play a big role in the industrial business or even in the lab, it's all about making sure that you can automate processes to make them more robust, more reliable, and also in the end, cheaper for them.
This is why our customers are responding very well to automation right now. It's not the quote automation alone. It's this productivity gain and also the long-term performance gains that they get from automation solutions.
Great. Thank you very much for the time. Appreciate it.
Thank you very much. We move on to our next question. Please do state your name and company before your question. Thank you so much.
Hey, guys. Thanks. This is Patrick Donnelly from Citi. Patrick, maybe just one on China, just given the amount of focus there. Can you just talk a little bit about the cadence of the recovery? You know, how it trended throughout the quarter, expectations there going forward, maybe just in terms of the guidance. Then, you know-
Mm-hmm.
Similarly, just on the instruments versus consumables, you know, what you saw kinda come back versus what you saw maybe lag a little bit there.
In China itself, look, we didn't have a really significant slowdown during the quarter. I mean, the quarter held up quite strongly for us. The team was reaching out to customers even in, let's say some of the sales folks who had been in provinces or areas where there was a lockdown. They continued to call customers from home. We also referred in some of the earlier calls about our digital tools and how we can engage with customers. They leveraged this fully in China as well. On the auto 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.
Yeah.
I haven't heard anything else from China.
No. I mean, what was nice to see is just the breadth of growth throughout the product portfolio. I mean, we grew strong double-digit both on the Laboratory side of the business as well as on the Industrial side of the business. You know, maybe the one soft spot that we did see is in our Food Retail 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. 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.
Okay. No, definitely encouraging results there. Shawn, maybe a quick one for you there. Just in terms of the guidance for 3Q, do you mind just breaking it out by segment and then geography as well, if you have it, just in terms of the growth rates?
Yeah, sure. I'll give you Q3, and then I'll give you the full year as well, Patrick. Let me start with the divisions. Our guidance for the L ab division is high single- digit growth for Q3 and low double- digit growth for the full year. For Product Inspection, our guidance is mid- to- high single- digit for Q3 and mid- to- high single- digit for the full year. For core industrial, our guidance is high single-digit for Q3 and high single-digit for the full year. For Food Retail, our guidance is low to mid single-digit for Q3 and flattish for the full year. On a geographic basis, our guidance for Europe is low to mid single-digit for Q3 and low to mid single-digit for the full year.
I think it's important in Europe to remember that we're gonna have a headwind in Russia in the second half of the year. Just given the seasonality of last year's sales, that headwind might be a little bit more in the second half of the year than the first half. It could be in the 4% range or so in terms of Russia headwind. In terms of Americas, we have our guidance is high single-digit for Q3 and low double-digit for the full year. Then for China, our guidance is approximately 10% for Q3 and low double-digit for the full year.
Very helpful. Thank you, guys.
Thank you very much. We move on to our next question. Please go ahead. Your line is open.
Yeah, good morning, guys. 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 as your own internal capabilities have 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?
That's a good way to ask the question, Dan. I mean, hey, I think, you know, whenever we do pricing, we try to tailor our approach to the business conditions and the circumstances, and we always talk about how we like to differentiate by product and geography. If you just look at kind of the cards we're dealt from a pricing perspective at the moment, it really lends itself to higher pricing in most categories. So what we try to do is we look at the cost pressures in this environment by category, product category and geography. Then what we can do is we, you know, we build it up, and then we educate the organization about it, you know.
I think that's really important that with our direct sales force, they can really articulate that to the customer, and then they can also emphasize our value propositions. It's like Patrick was saying in the previous Q&A that, you know, our value proposition in many regards is higher in this environment because people are seeking productivity much more than they were, and they're looking for solutions. That plays very well to our overall portfolio and our ability to position the price increases. I think the market very much understands that. Then if you look at the execution of the organization, it certainly helps when we're able to support customers too, you know. What do I mean by that?
Just in our supply chain, I mean, we, you know, I think every company has some level of challenge at the moment. If you compare us relative to competition, I think we look pretty good in terms of our ability to support customers with lead times and things like that. That also certainly increases the customer's willingness to pay. You know, it's actually the execution's been really good, and I just think the environment obviously lends itself to better price realization, which we saw in Q3. You know, with my previous comments, we'll be expected to even be a little bit better in the second half of the year.
Yep. Okay. Very helpful. Maybe just as a follow-up, I wanted to ask about Blue Ocean. If I remember correctly, I think that you guys are implemented across 80% or so, 80%-85% or so of the users at this point. A, is that right? And B, what is the timeline that you would consider for sort of a full global rollout? And then if that number is right, is that last 15%-20% meaningful at all when it comes to pricing, visibility, margins, et c.? Or, you know, at the end of the day, are those regions that don't really move the needle as much?
Yeah, I'll get to the first, and then I'll let Shawn chime in as well. Look, we are definitely around 85% of the rollout so far. There's still a number of countries are left to bring on to Blue Ocean, so they are running on their current own ERP systems. Look, I mean, it will continue to help us drive productivity within the company. We can share a common template for many of the processes that we use across the company. It's a lot of it is also an internal gain in terms of efficiency and helping us to drive, you know, costs down and just use efficiency across the company. On the pricing side, I don't. There is some impact, but I'll let Shawn offer that.
Yes. On the pricing side, I mean, we'll always benefit from improved analytics, but we'll also, to me, the business processes is a big part of it too. Like, when you think about price administration, we have a lot of tools around that and global centralized processes. And then there's also a lot of embedded pricing controls, you know, in terms of how we can manage discounting and things like that. There's always some benefit when we go live. I mean, our largest market organization that we have left is in France, which we're expecting to go live next year. Like Patrick said, there's a handful of smaller organizations and primarily in Europe and the rest of the world.
Maybe just before I hand it back to Patrick, a general comment that we always see with Blue Ocean is just the overall visibility into the business. You know, we very, very much have benefited over the last couple of years by having more transparency end-to-end in our business from Blue Ocean. For those of you who are less familiar with Blue Ocean, I mean, it's about global harmonized processes, but we enable that with one single instance of an ERP system and fully integrated CRM, service, HR program. Then with one single instance, we really have a lot of, you know, very interesting transparency, which we've very much benefited from over the last couple of years.
Good. Thanks, Shawn.
Thank you. We move on to our next question. Please go ahead. Your line is open.
Hi. Good morning. It's Derik De Bruin from Bank of America.
Hey, Derik.
Hope everything's well. A couple of questions. Shawn, first a little housekeeping question. Full- year guide for interest expense and income net of, you know, how are the higher rates impacting you? You know, how are you done in fixed versus variable?
Yeah, no. Hey, good question, Derik. I know it's early for you today, so we apologize for the early morning. Hey, in terms of interest rates, you know, we're about 75% fixed at the moment, and we don't have any significant maturities in the short term like this year or next year. I mean, we have a couple of smaller things. When you look at like our variable exposure, actually a lot of that's also in euro, which probably prices out about 1% or so. I think we're positioned pretty well here.
If you kinda like look at, you know, what we've done over the last few years, just even at the end of last year, you know, we've been locking in a lot of 15-year debt over the last few years. For example, in December of last year, we priced 15-year debt that funded in two tranches. We just funded $150 million at 2.8% for 15 years in March, and then we're gonna fund another $150 million tranche in September at 2.9%. We feel like, you know, for the short medium term, we're pretty well- positioned. Then, to be specific on interest expense, our guidance or estimate for this year is $53 million.
Great. You know, another pricing question, but just more bigger picture. With given the pricing and also the currency moves, have you seen any impact on your customers' purchasing power? Basically, some people hesitating because they just didn't have the budgets for things?
No, I mean, I think it's just the opposite. I think it's very much kinda like how I was answering the question before. It's like, I think people just really appreciate the value in this environment, and they appreciate the ability to support them. Of course, we're trying to do things in a balanced way, you know, in terms of like increasing prices where it's appropriate and, you know, there's very much a cost story, inflation story associated with it. I think between our approach and then the overall value proposition that we're providing, we're just really not hearing any noise.
No. Maybe a little bit in this. We said in Product Inspection, too, customers become a bit more cautious with investments, but.
Yeah.
Otherwise, not really.
Yeah. I mean, just to clarify on the PI, I wouldn't say it's a pricing topic.
It's more of a, as Patrick said earlier, it's very much a European topic for Product Inspection. There has been some more conservatism where we, you know, get the sense that maybe some projects are gonna get delayed in packaged foods in Europe.
Just one more. Is there any signs of inventory, excess inventory sales, pipette tips, electrodes, anything that sort of like has long shelf life that people maybe have hoarded or stockpiled? Just sort of feel like some of the commentary on sort of what you're seeing in your customers.
Yeah, that's a good question. Look, we don't hear a lot of that customers have stockpiled electrodes or pipette tips. I mean, I would say more in the beginning of the year, we of course, 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 that we make today are not going into testing anymore. They're going into, you know, bio research, 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 tried to just get as many in their stocks as possible in the last year. We have not been that much exposed.
Great. Thank you very much.
Thanks, Derik.
Thank you. Our next question, please go ahead. Your line is open.
Hey, guys, it's Josh from Cleveland Research. Thanks for taking my questions. 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
Mm-hmm.
Was the softer Q2 a result of, like, installs pushing out or more a reflection of slower order intake? Just kinda curious how recent trends were reflected in the guide and whether or not H2 assumptions have come down versus prior plans?
Yeah. Well, thanks, Josh. Very, very good question. Look, I mean, the Q2 results have been a bit softer than we had expected. It's not like off by a huge, right, margin.
Mm-hmm.
It was a little bit softer. I think we had projected high single-digits%, and we came in a bit more than mid-single-digits%. It's not way off by far. A lot of that was actually triggered by two factors. We have seen on the customer side some project push outs, not necessarily because they didn't have the money but because usually we also supply into a larger infrastructure. Some of the other suppliers were not ready to make the full installation. Our final Product Inspection piece of the whole flow line, so to speak, what they want are just not ready to take it this quarter. There has been some push outs.
We also suffered from, in terms of not being able to deliver everything we could, was on the supply chain side, some of the, like, electronic components just didn't come in time. That did lead actually to delay in this quarter. As we said, we are quite optimistic for Q3. The team sees a good funnel, especially in the United States. We have to continue to monitor the situation in Europe. Otherwise, I think we are okay with the guides.
Got it. Okay. 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, you know, kind of strong underlying demand? I guess whether or not...
Yeah.
Lab benefited from COVID testing in China in the quarter.
Yeah. Look, I mean, again, for us, COVID testing in China wasn't a big story at all. We see broad-based growth across our product portfolio. There's still very strong demand from pharma and biopharma, especially biopharma. The Chemical segment, again, is showing very strong demand for automation solutions, so we are very happy with that. Should we add also in our remarks, we had mentioned what we call hot segments like the Battery segment, plant-based food, et c, 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.
I think if you factor all of that together with what we also mentioned beginning about, you know, this continuous need for automation solution, that just drove a lot of demand across our portfolio.
Got it. Appreciate the context.
Thank you, sir. We move on to our next question. Please go ahead. Your line is open.
Hi, this is Rachel Vatnsdal from JP Morgan. 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, you know, softening some of these capital budgets and softening demand for new products? Or what kind of levers can Mettler really pull to fuel that replacement cycle, even in a recession and inflation? Thanks.
Yeah. Hey, Rachel, this is Shawn. I'll take it and if Patrick wants to jump in. You know, when we look at our business, you know, other than this one topic that we talked about with packaged food in Europe, you know, we're not seeing any indicators that people are, you know, have any cautiousness or any indicators that there's any concern about delaying replacement cycles. As we kind of enter into this next phase of the economy, you know, one thing that we try to remind people about, and we've talked about it in the past, is that, you know, we typically need the economy to be good enough. You know, we need it to be good enough that people will stick to replacement cycles.
You know, we've seen in the past PMIs go into the mid- to high 40s like in Europe, but we still had growth, and it was because people were sticking with replacement cycles. At the same time, we've seen PMIs in the mid- to high 50s in Europe, and we didn't have double-digit growth. In a geography like Europe, which is, you know, arguably the most exposed at the moment, you know, that is very much on our mind is that will the European business just kind of stick to replacement cycles here, and we just need the economy to be good enough. Part of that is that we are, you know, selling.
Our average selling price of our products are less than $10,000, and so we're not, you know, the first instrument that's gonna get cut in a budget. I'd say, I think we estimate that something like more than 70% of our products are actually below that level. You know, they're personal instruments, and we sell them with a direct sales force. We can articulate the value proposition, all that kind of stuff. I feel like that's a favorable situation for us.
The other thing is this, these comments on mix that we made a lot in the prepared remarks and talked about a little bit earlier is I just think that we, you know, we should be more resilient, you know, going into this next phase of the economy compared to where we were in the past.
Great. One quick one from me. You flagged some conservatism on supply chain during your prepared remarks, which I think is prudent, just given, you know, the macro backdrop. Can you walk us through what you're seeing on supply chain? Have things continued to deteriorate here, or they improved since 1Q? Do you have any line of sight on when things could really improve? Thanks.
Yeah. I'll take that. Look, on supply chain challenges, I would say they have somewhat stabilized, but we continue to see challenges in certain items. It's still mainly semiconductors. It seems to get a little better, but I would not still give green light on everything, to be honest here. What we have seen on transportation and logistics, that improved quite a bit. We also see, for example, the port in Shanghai less congested as it used to be. That helps of course. In overall supply of material, again, we see some of our businesses have seen slight improvement in semiconductor availability, but we have still some others who have not. I mentioned Product Inspection, for example, where we had some issues getting the right components in time.
We still have constant calls with the suppliers, making sure that we get enough of the electronic components. I can't tell you really whether this is a trend already, these slight improvements. We're hoping all for it, and we stay very agile and very, very close conversations with our suppliers to make sure that we have enough safety stock holding in the areas that we see very critical.
Operator, I think with that, we'll go ahead and wrap up today's call. Thanks everybody for joining us in this early morning call. Looking forward to catching up with you later on in the day. Take care.
Bye. Thank you.
Bye. Thank you.