Mettler-Toledo International Inc. (MTD) Q2 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2020 Mettler-Toledo International Earnings Conference Call. My name is Demetris, and I will be your audio coordinator for today. At this time, all participants’ lines are in a listen-only mode. After the speaker’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to turn our presentation over to your hostess for today’s call, Ms. Mary Finnegan. Please proceed, ma’am.

Thank you, and good evening, everyone. I’m Mary Finnegan. I’m responsible for Investor Relations at Mettler-Toledo, and happy that you’re joining us this evening. I’m joined on the call today with Olivier Filliol, our CEO; and Shawn Vadala, our Chief Financial Officer. I want to cover just a couple of administrative matters. This call is being webcast and is available for replay on our website. A copy of the press release and the presentation is also available on the website. Let me summarize the safe harbor language, which is outlined on Page 2 of the presentation. Statements in this presentation, which are not historical facts, constitute forward-looking statements within the meanings 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, level of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. For discussions of these risks and uncertainties, please see our recent Form 10-K and other reports filed with the SEC from time to time. All of our forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions "Factors Affecting Our Future Operating Results" and "Business and Management Discussion and Analysis of Financial Conditions and Results of Operations" in 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 measure and the most directly comparable GAAP measure is provided in our Form 8-K. I will now turn the call over to Olivier.

Thank you, Mary, and good evening, everyone. I hope this finds you safe and well. I’m again doing this call from Switzerland, while Shawn and Mary are in Columbus, Ohio. I will start with a summary of the quarter and then Shawn will provide details on our financials. I will then have some additional comments, and we will open the lines for Q&A. The highlights for the quarter are on Page 3 of the presentation. Local currency sales declined 4% in the quarter, which was better than expected. Demand in our end markets continues to be negatively impacted by COVID-19. However, we had good growth in China, and our lab and industrial businesses proved more resilient than initially expected. Contributing to this resiliency is that the majority of our sales are to essential end markets, including life sciences and food manufacturing. Furthermore, we have significant products and end-market diversification and are doing well in redirecting resources to the best growth opportunities. With the continued benefit of our margin initiatives, centered on pricing in Stern Drive as well as the quick actions we took to temporarily reduce our cost structure, we achieved improvement in both gross and operating margins in the quarter. Despite negative currency headwinds, we had positive growth in adjusted EPS. Finally, cash flow generation in the quarter was very strong. Overall, given the very challenging environment, we are pleased with these results. I will have some additional comments shortly, but let me now turn to Shawn for the financials.

Thanks, Olivier. I also want to say that I hope this finds all of you well. Sales were $690.7 million in the quarter, a decline of 4% in local currency. On a U.S. dollar basis, sales decreased 6% as currencies reduced sales growth by approximately 2% in the quarter. On Slide number 4, we show sales growth by region. Local currency sales declined 7% in the Americas, 5% in Europe and increased 1% in Asia Rest of the World. China local currency sales increased 8% in the quarter. The next slide shows sales growth by region for the first half of the year. Local currency sales declined 2% in the Americas, 5% in Europe and 3% in Asia Rest of World. China local currency sales declined 2% in the first half of the year. On Slide number 6, we outlined local currency sales growth by product area. For the quarter, laboratory sales declined 4%, industrial declined 3% with core industrial down 1%, and Product Inspection down 5%. Food Retail declined 11% in the quarter. The next slide shows sales growth by product area for the first half of the year. Laboratory sales declined 2%, industrial declined 4% with core industrial down 2%, and Product Inspection; down 7%. Food Retail declined 14% for the first six months. Let me now move to the rest of the P&L for the quarter, which is summarized on the next slide. Gross margin in the quarter was 57.6%, a 20 basis point increase over the prior year level of 57.4%. Our margin initiatives centered on pricing and Stern Drive contributed to the margin growth. We also benefited from temporary cost actions undertaken earlier in the quarter, offset in part by higher transportation costs. R&D amounted to $31.2 million, which represents a 15% decline in local currency. The decline is principally driven by timing of activity as well as some temporary cost savings measures. I would expect R&D as a percentage of sales to be in the historical range of 5% for the full year. SG&A amounted to $190.1 million, a 7% decrease in local currency over the prior year. Our temporary cost containment measures as well as lower variable compensation were principal contributors to this decline. Adjusted operating profit amounted to $176.6 million in the quarter, which represents a 1% decline over the prior year amount of $177.7 million. We estimate currency reduced operating profit by approximately $4 million in the quarter. Despite the challenges to the top line and the foreign currency headwind, we increased operating margins by 130 basis points to 25.6%. We are pleased with our ability to drive operating margin growth in this very challenging environment. A couple of final comments on the P&L. Amortization amounted to $13.9 million in the quarter, interest expense was $9.6 million in the quarter. Other income amounted to $2.9 million. Our effective tax rate in the quarter was 19.7% before discrete items and adjusting for the timing of stock option exercises. The rate is lower than we expected as compared to the last time we spoke and is being driven by the impact of deductions and some better income mix. For the full year and for the next two quarters, we now expect our tax rate to be 20.5%. This is also likely to be the rate we will have in 2021. Moving to fully diluted shares, which amounted to $24.2 million in the quarter and is a 3.5% decline from the prior year. Adjusted EPS for the quarter was $5.29, a 3% increase over the prior year amount of $5.16. On a reported basis in the quarter, EPS was $5.22 as compared to $5.06 in the prior year. Reported EPS in the quarter includes $0.12 of purchased intangible amortization, $0.03 of restructuring and a $0.08 difference between our quarterly and annual tax rate due to the timing of stock option exercises. The next slide shows our first half results. Local currency sales declined 3% while operating profit declined 2%. Operating margins in the first half increased 60 basis points. Adjusted EPS amounted to $9.28 versus $9.26 in the prior year. That is it for the P&L, and let me now cover cash flow. In the quarter, adjusted free cash flow amounted to $170 million as compared to $113.4 million in the prior year. We are pleased with this level as we made a concerted effort on accounts receivables, collections and cash flow management during this period. DSO in the quarter was at 40 days, while ITO came in at 4.3x. For the first six months, adjusted free cash flow was $218.3 million as compared to $193.5 million in the prior year. On a per share basis, this is a 17% increase. Let me now turn to guidance. Forecasting continues to be challenging, given the significant uncertainty surrounding COVID-19 and the ultimate repercussions for the global economy. We are a short backlog business and the timing and pace of a global recovery is difficult to ascertain at this time. With our Q2 results, we now believe we have better information and insight into our business to provide Q3 and full year sales and earnings guidance. It is important to note that visibility is limited and market dynamics are very fluid, and changes in customer demand can happen quickly. For the third quarter, we would expect local currency sales to decline 1% to 3% and adjusted EPS to be in a range of $5.80 to $6. For the full year 2020, we would expect local currency sales to also decline 1% to 3% and adjusted EPS to be in a range of $22.70 to $23.20. Let me provide some additional insights as you analyze our financial results. We expect to continue to benefit from our Spinnaker sales and marketing initiatives, which we believe are particularly important competitive advantage in the current environment. We will also benefit from our margin initiatives centered on pricing and Stern Drive. We will continue to benefit from the temporary cost containment measures and discretionary cost reduction actions in the third quarter. For Q3, we would expect to reduce operating costs approximately 4% to 5% as compared to the previous year. Interest expense is estimated at $9 million in Q3 and $38 million for the full year. Amortization is estimated at $14 million in Q3 and $56 million for the full year. Other income, which primarily represents pension income, is estimated at $2.5 million in Q3 and approximately $11 million for the full year. As already mentioned, we estimate our full year effective tax rate before discrete items will be 20.5% in 2020. Finally, currency is estimated to increase sales growth by approximately 1% in Q3 and will be neutral for the full year. We are targeting a net debt-to-EBITDA ratio of 1.5x by the end of 2020 and estimate we will repurchase shares of $200 million in Q3 and $700 million for the full year. That is it from my side, and I now want to turn it back to Olivier.

Thank you, Shawn. Let me start with some comments on our Q2 results. Our Lab business proved more resilient than we had anticipated with a 4% decline in local currency in the quarter. Process Analytics did particularly well, while balances were more negatively impacted by COVID. Our Analytical Instruments business was down modestly, contributing to the resiliency of our Lab business is the diversity of our products and end markets and our ability with our sales and marketing techniques to direct resources to the best opportunities. Our Industrial business declined 3% in the quarter. Product Inspection was down mid-single digits with modest growth in our European business, but declines in the Americas as we still face challenges, gaining access to food customer sites, and these customers are currently focused on other priorities. Core Industrial did well in the quarter, declining only 1%. We benefit from an excellent product portfolio, strong sales and marketing initiatives and diversity in our product offering as well as our end markets. I will have some additional comments on Core Industrial shortly. Finally, Food Retail was down 11% in the quarter. Now let me make some additional comments by geography. Sales in Europe declined 5% with both Lab and Industrial in this range. Americas declined 7% in the quarter with retail down 20%. Lab declined slightly more than Industrial, driven in part by strong double-digit growth in Lab in the prior year. Finally, Asia Rest of World grew 1% in the quarter with both Lab and Industrial showing modest growth and retail down double digits. As mentioned, China had 8% growth in the quarter with both Lab and Industrial doing well, while retail declined. One final comment on the second quarter. Service and consumables were flat in the quarter. That concludes my comments on second quarter results. As we look to the second half of the year, the sales decline we are expecting in Q3 is modestly better than what we experienced in Q2. As I mentioned last quarter, as we entered Q2, we had the benefit of our quote order pipeline that we built up in the first quarter. As we enter Q3, we don’t have the same buildup. In terms of geographies, our western markets are in better shape than they were four months ago. While China likely won’t have the same level of pent-up demand that they had in Q2. Taken all together, these dynamics are resulting in low single-digit sales decline in Q3. We will provide more insights into our Q4 expectations on our next call, but our full year guidance assumes there is not a deterioration in operating conditions in the second half of the year. It is worth repeating that our visibility is limited, and we fully acknowledge that market conditions can change quickly, given the unprecedented nature of COVID-19 dynamics. Let me provide some additional insights of how we are managing the business and seeking out growth opportunities. In March, our sales organization quickly adapted our go-to-market approach to telesales and remote sales due to the reduced access to customer sites. We accelerated our planned 2020 adoption of Microsoft Teams, which has proven instrumental in keeping us connected to our customers. Also in March, we launched eDemo lights, which highlights product features in an easy-to-use video format. Since then, we have had more than 12,000 video co-housing sessions with customers. Enhanced training videos and sample conversations and documents available in our digital library are helping our sales force to generate new sales and cross-selling opportunities. We also have found that the current environment can be an ideal time to showcase our technological expertise through webinars, seminars and online training. Using advanced analytics and sales force guidance to prioritize customer segments have proven to be very important, given the very challenging market conditions. Certain end markets and subsegments such as pharma, biotech, testing labs and food manufacturers are showing growth, while other more industrial end markets are showing significant declines. Through an in-depth customer segment analysis, we have identified thousands of customer sites with growth potential even in the current environment. Redirecting resources to the best growth opportunities has always been fundamental to our sales approach, and our ability to quickly adapt to rapidly changing market conditions is helping dampen impact of this very challenging environment. Finally, we are using sales activity monitoring, our new dashboards to obtain real time information on our opportunity pipeline, quotes and bookings so we can quickly react to market conditions. The resiliency of our results is being driven by the diversity of our end markets and our ability to redirect to the best opportunities. We also have an advantage from the diversity of our product offering. Our Core Industrial business is a good example of this. While our core standard industrial business is being negatively impacted, other businesses within core industrial, including Transportation and Logistics, which is focused on freight forwarding companies is holding up. Our technology leadership is also setting us apart in this environment. For example, last year, we launched an innovative dynamic pallet dimensional, which is helping our customers more easily optimize load planning and accurately charging for freight. Until now, pallet has to be placed on the static dimensional, which slows and disrupt operations. Our new dimensionals captures pallet while they are in motion and can be integrated with our floor scale and software. Another example within Core Industrial is our recent launch of a technology platform for the industrial internet of things. As part of the industrial internet of things, conditioned monitoring and production data collected from devices can be used for predictive maintenance and machine learning to improve equipment uptime and product quality. Our new device provides a seamless exchange of long time critical data between our weighing solutions and the customers’ cloud and ERP systems. It can connect both new scales and the existing scales, enabling the upgrade of the installed base to modern technology and is particularly targeted for customers in chemical, food, pharma and logistics. These are just two examples of our technology leadership within Core Industrial. Within our Lab business, we also benefit from diversity in our end markets and our product range. A prime example is our Process Analytics business in which we are a global leader in real time measurement of key process control parameters. Process Analytics is benefiting from strength in bioproduction, where pH and dissolved oxygen are critical parameters to control processes in bioreactors. In pharmaceutical manufacturing, there are three parameters that require monitoring in an ultra-pure water system: conductivity, TOC and bioburden. We are the only supplier that can provide a portfolio of solutions for online measurement for these three parameters. Beyond biopharma, we have also extended our liquid process analytics offering into the gas analytics market with a unique offering of fast and easy-to-use instruments. Raising concerns for safety and environmental compliance in the chemical end market is also driving growth. Although the chemical market is more challenged this year, we are still seeing good demand for our products. Our Process Analytics is just one example of the breadth of our product offering and diversity of our end markets. That concludes our prepared comments. The current environment continues to be the most challenging. We have been able to quickly adapt and adjust our operating model, including changes necessary in our go-to-market approach. The numerous adjustments we made to our supply chain and manufacturing and the temporary actions we took to our cost structure. While much uncertainty still exists in our markets, we remain confident we can continue to gain share during these challenging times and that we will be well positioned for growth as the recovery gets underway. Now I want to ask the operator to open the line for questions.

[Operator Instructions] And our first question comes from Tycho Peterson with JPMorgan. You may proceed.

Olivier, I’m wondering if you could break out how much of the beat this quarter came from, end market resiliency versus a redirection of commercial focus to specific areas. And then I guess going forward, I’m curious about the sustainability of the trends. We’ve seen EU research funding have some negative headlines around some of the cuts there. China has got flooding right now. So I’m curious about the headwinds you could talk to in the back half of the year as well.

On the first question, very difficult to break that out. I think both played well. I think the key part was that very early on in the crisis, we did our heat maps. We did heat maps on all the different industry segments that we are serving. And then we even went on account level. And using this analysis allowed us then to guide our sales force to the most attractive accounts\segments. And in that sense, we are in the good position that being so diversified, there were absolutely enough accounts and the industry segments that are really resilient. And yes, as a fact, Mettler-Toledo is, in particular, exposed to biopharma and packaged food testing labs and chemical, and these have certainly been the most resilient ones. You might wonder about chemical as a overall category challenge. But then within chemical, you still have attractive subsegments and accounts, and that was the benefit of the analysis and then leading the sales force to go to this right opportunity. So even within chemical, we could spot quite a few attractive growth segments. Regarding the second question, sustainability, I think the environment remains challenging. I certainly also see that in – here in Q3, we’re going to experience COVID challenges as well as economic challenges. But I trust that our programs that we put in place will continue to yield good results. I certainly feel that we are gaining share here in a stronger way than usual. And that will also play here in Q3 even that challenges remain. And I’m not particularly concerned about what you just raised like European funding topics or so.

And then on margins, a nice job with the cost controls, and you brought up pricing proactively. Can you maybe just talk a little bit about the pricing impact on gross margins and the pricing strategy in this current environment?

Yes, Tycho, this is Shawn. Yes. So we were very pleased with our execution on pricing. We really spend a lot of time with the organization to stay disciplined in this environment. We talked about that a little bit, I think, on our last call as well. Overall, our price realization for the quarter was about 2%, which was a similar number to what we experienced in Q1, maybe a notch better. The impact on margins was probably about 90 basis points. But maybe if I stay on margins for a second and then go back to pricing, our margins also benefited from – good benefits from our Stern Drive program as well as some of the temporary cost savings initiatives that we’ve been talking about. And those benefits were able to offset the decline in the volume as well as some higher costs that we saw in terms of freight. As we look at pricing for the rest of the year, we feel very good about, again, the execution and the momentum in the program. Hey, the environment, I think, is going to be more challenging as we kind of proceed in the lower inflationary environment. But I would say we still feel very strong about the activities around the program. We still feel like we have a great foundation with pricing, as you know, with lower price points selling directly to end users. And we have a wonderful culture around it in the organization.

And then just one last clarification on Core Industrial. Can you break out how much of that is actually bioprocessing, biopharma at this point? And any notable vaccine therapy tailwinds from any of the COVID work for you guys at this point?

Yes. Actually, that’s basically we want to quantify just isolating bioprocess here for Core Industrial. We have some business in Core Industrial bioprocess, but I don’t want to overstate that. The Lab business certainly is more exposed to bioprocess than core Industrial. And it would be too early to say that we already had some benefit on the production side. Obviously, there are certain companies and are investing in expanding bioprocessing capacity. I would say that has already been a healthy market for quite a while. And we are benefiting, but it’s not big enough here to call out.

Okay. Thank you very much.

And our next question comes from Derik De Bruin with Bank of America. You may proceed.

This is Mike Ryskin on Derik’s line. Thanks for taking the question. I’ve got a couple of quick ones. First, could you comment a little bit more detail on the pace of recovery from 2Q to 3Q? You gave some interesting color on what’s going on in Europe and the U.S. by end market. I’m now just wondering, are there any areas that you see sort of recovering back to prior run rate faster than others versus some that are having some bottlenecks? And I was also curious, in 2Q, some of that China strength, you touched on pent-up demand that you saw building over the course of the first quarter. How much of that plus anything do you think could have been sort of spillover from 1Q versus what you think is sort of underlying China results in the second quarter?

Yes. So let me take the first one and then Shawn, maybe the second one. So on the first one, indeed, there are differences by industry segment and the regional differences exist, they are related to the timing of the lockdowns. And – but when I think about the recovery patterns, it’s more about industry segments. And so what we are seeing, the Lab business that is – has – had a bigger impact because you have a lot of labs that were closed, people working from home and not having the need for new instruments and making decisions on this one. So for this, you – we have a decline. And then when the labs reopened, we see a pent-up demand. When it’s about industrial applications, we have a different dynamic. Our customers typically have not closed down the operations. But they are very careful about not disrupting their production. They don’t want to have upgrades of equipment unless it’s necessary and so on. But business has been ongoing, and we certainly have ongoing projects. And accordingly, for industrial applications, I expect less decline, but also not much of a pent-up. As for lab environment, sharper declines with some pent-up. And where you would see it the most extreme, but I want to cautious, it’s not such a big market for us is academia. Academia activity is very much down. And I see that we have much less visits, actually a significant decline of sales visits to academia. We have less leads generation and less quoting opportunity, but I would expect that this will recover. So – but that’s the most extreme. On the other hand, you have, for example, pharma production, where things were going quite normal and even project activities for the future still look very healthy.

Yes. Mike, so...

Shawn you want to add...

Yes. In terms of the second part of your question, yes, I think it’s a fair comment. It’s hard to obviously always quantify these things. But if we look at China, they had a much more severe decline in the first quarter, given the nature of their lockdown. So in Q1, as a reminder, they were down 13%. And here in Q2, we had 8% growth. We particularly felt like our Industrial business there benefited from some of that pent-up demand in China. If you kind of like looked at the different pieces of the business in China in Q2, our Laboratory business was up high single digit, while our Industrial business was up low double digit.

Okay. Great. And can I ask a quick one on the P&L then? Some of your comments about 3Q, I think you said a 4% to 5% decline in OpEx year-over-year. It was about an 8% in the second quarter. Some of those cost initiatives you’re taking, how temporary are they? And is there – is this cost that sort of permanently cut out and never comes back? Because it’s tied to travel, things like that. How much of it needs to be caught up later either in 4Q or 2021?

Yes. No, as we said before, and it’s consistent to how we see it right now. Most of the actions are temporary in nature. We are continuing to assess the environment and adapt our plans accordingly. I think we’re very proud of the organization and the agility in the organization. Of course, as we proceed throughout the situation, I’m sure we’ll have some learnings and identify savings as we normally would do that we’ll consider as we go into next year. But at this point, kind of too early to kind of comment on anything for next year or for Q4. I think the key is that we stay agile, and we continue to monitor things and adapt accordingly.

Got it. Thanks

And our next question comes from Dan Arias with Stifel. You may proceed.

Great. Thanks for the question. This is Dan Macek on for Dan Arias. Just thinking about coming out of COVID in China, are you seeing share gains? Or do you see the potential for share gains as some of the smaller players could be shaken out there?

So in general, yes, we are convinced that we are winning share. No questions. The one hesitation when you use the word shakeout, we have hardly seen exits in our industry. This – our competitors all benefit also from a certain installed base. And in China, there are a lot of competitors, but there are smaller competitors operating more on a regional level. And they don’t compete in the similar quality and price range. So therefore, when I talk about share gain, I really mean mostly to the bigger global maybe regional players. The small Chinese companies that you are referring to that might be shaked out has not been really key competitors for us and I don’t think will change too much in the future. But I want to reinforce that this environment gives us the opportunity to really win share to better superior execution. I think all this go-to-market change programs that we have in place have been very beneficial. And in that sense, I feel that our numbers that we reported exceed the market growth.

Okay. And then recognizing, it’s obviously a very fluid environment. I believe in the second quarter – sorry, the first quarter commentary, you thought maybe Europe would be a little worse than Americas. It just turned out to kind of be the opposite. But is there anything more you can provide there? Or maybe we should know in terms of what was different from expectations and maybe if that could affect the outlook going forward?

Yes. I think the European situation got for us also better because the lockdowns were released earlier than we expected. In general, the COVID health crisis in Europe developed more favorable than we thought. And then what’s also Product Inspection in Europe did better than expected. And in the U.S., the retail business did a little worse than expected. So we have here maybe the glow – the overall environment that play the role and then business line specific things that impacted us.

Thanks. I appreciate it.

And our next question comes from Vijay Kumar with Evercore ISI. You may proceed.

Thanks for taking my question. Maybe the first one, Olivier, for you. You made some interesting comments about coming out of COVID. You’re really well positioned for share gains. I’m curious, has this changed? How do you go to the customers? How do you reach out to them? And I’m wondering if it has any margin implications when you look at over the medium term. So I’m looking at the guide here, it still suggests that margins are going to be down this year, if I’m doing the maths correct. So maybe just address on coming out of COVID from a margin perspective, if anything’s changed for you guys?

Yes. So I’m going to have Shawn to comment specifically the margin evolution also going forward. But just a quick comment, as go-to-market change that we do has absolutely an operating cost benefit at this stage. Of course, travel and expenses is very significantly down. And we have a certain productivity gain because we can operate here without traveling. However, this is not something that will stay in that way when it comes to operating expenses. We certainly plan to go back in an operating mode where we want to see our customers where traveling will play an important role. But there are going to be a lot of changed management that we implemented here in Q2 that we’re going to keep. And this is not just about remote selling. It’s all about the sales force guidance topics. The whole crisis has helped us to accelerate many Spinnaker practices and innovate new things and introducing new sales tools that we will maintain and will be very powerful for us to drive organic growth and drive share gains. But I would not take them as important driver for margin expansion. I see it much more a driver for share gains. The margin improvements come actually from all the other programs like Stern Drive, pricing, material cost savings and so on. Now maybe back to Shawn to comment quickly about the margin expansions in Europe.

Yes. So Vijay, just to clarify, for the full year, we would expect our operating margin to be up about 20 basis points, and this is the midpoint of our guidance, by the way. But the midpoint of our guidance would be, our operating margin would be up 20 basis points for the full year. And then if we look specifically at Q3, we’d be up about 40 basis points. One thing I think you’re going to see in the second half of the year versus Q2 is that, as I mentioned before, some of these temporary cost reduction initiatives, we’re going to slowly start to pull back on some of those initiatives during the second half of the year.

That’s extremely helpful, Shawn. And just one clarification. Did I hear you guys on the $700 million towards share repurchases? Because I’m looking at the guidance, EPS at the high end. If 3Q comes in at the high end, the implied growth – EPS growth for 3Q versus Q4, I mean, it suggests all of the share repos being done in 3Q. So maybe just clarify the share repo comments.

Yes. No, no. Happy to clarify. So as a reminder – so the $700 million would be for the full year. As a reminder, we did $200 million in Q1. We expect to do about $200 million in Q3 and then the remainder would be in Q4.

Got you. Thanks guys.

And our next question comes from Dan Leonard with Wells Fargo. You may proceed. [Operator Instructions]

Apologies, I’m here now. So for starters, can you please elaborate on trends you’re seeing in the packaged food in Food Retail industries? Olivier, I know you mentioned site access and customer priorities are still an issue. But it seems like your customers’ fortunes have improved, just people are cooking from home. The earnings of your customers have been pretty good this week. Any comments on whether this is showing up in your funnel or future demand forecasts?

Yes. We remain actually very positive about the Product Inspection business. As you highlight, it’s an end-user industry that did well in this COVID crisis. We have really great value propositions, and we really see that as an attractive end-user market. In the short term, it’s going to remain challenging. It is really that all these food companies have different other priorities. Their number one priority is really to keep production up, and they are very reluctant to let any people in their plants. And their engineers are actually working on other topics, mainly really to keep the operations up and running. I see or unsee that less than right, and in particular, true in Americas. I think in Europe, the situation is a little bit better as well as in Asia. But it’s going to take still here a couple of months before the situation will improve. But I’m confident here for the midterm. When it comes to Food Retail, that’s a little bit of a more complex one in the sense that we – in Food Retail, we depend on big projects, sometimes also tenders. We did already know early in the year, even before COVID that we’re going to have here some challenging quarters. And we clearly also talked about that in previous calls. And of course, the COVID situation didn’t help here in the sense that we provide you equipment for stores and stores here, customers, again, don’t want us to – or customers don’t want to make any changes in stores at this current stage and a certain reluctance to make investments because a lot of the retail business is also moving to online. But we do expect that the second part of the year will be better than the first part. And that’s consistent also with what we have guided here early in the year.

Okay. That’s helpful color. And Olivier, as a follow-up, I think you made a comment in your prepared remarks about not having the same quote pipeline entering Q3 as you did entering Q2. Did I hear that correctly? And if so, could you elaborate on the significance of that? Is that a function of challenges to build a quote funnel when folks are working from home, staying at home? Any color you could offer on that?

Yes. So indeed, the home office of our decision makers and customers are relevant enough. But it’s also that fewer new projects are initiated, maybe also fewer new expansions, CapEx investments and so on. So we did anticipate that. And if you can imagine, leads generation, for example, and quote request were certainly challenged here in Q2 and were at a lower level than we would usually have but then all our own activities and tactics here did offset a good part of that. And so that gives us the confidence that the guidance that we have here in Q3 that things will be modestly better here than Q2 is actually well founded, even that we have this challenge that the pipeline is different than when we entered Q2.

Okay. I appreciate thoughts. Thank you.

And our next question comes from Steve Beuchaw with Wolfe Research. You may proceed.

Good afternoon and thanks for the time here. I wanted to ask a couple of maybe bigger picture questions as your customer base has been parsed pretty finely here. The first one I wanted to ask for Olivier is, if I think back historically about what has made Mettler such a good grower really across the board. Your proficiency in terms of identifying opportunities and being really nimble in terms of how to direct the sales force has been such a big part of that. And you’ve referenced that a couple of times you’re on the call that you’re doing that a little bit more acutely and in a more adaptive way, given that the environment has evolved so fast. I wonder if you could maybe put a different lens on it, and say, okay, we may have learned a few things in the last few months, which have been so tough for everyone about how to do that, about how to do what we do. I have a hunch that you have some new ideas and you’re thinking in new ways about how to leverage your phenomenal CRM and data capabilities, not just right now and in this environment, but into the future. I wonder if you could speak to that. And then I have a follow-up.

Yes, yes, yes. I would phrase it that way. We all recognize today even more how powerful it is what we have here. And how powerful our data cubes are that we build based on internal data, CRM data, but very much also based on external data. And these data cubes that we use for data analytics is so powerful that we could do, for example, this Industry segment heat maps. This is the heat maps we did, basically, in Excel with different data points that we took from banks, from statistics, from whatever. And then we did overlay this heat maps over our data cubes and then could really generate some great sales force guidance information. So the technology, the data has been around, but we could apply it in an extremely fast way. And of course, when you are in a crisis mode, the openness of your management team and the sales force around the world is a totally different one. So I would phrase it that way. The crisis allowed us to accelerate change management like we would have never expected it before. It accelerated in that sense the power of the tools that we have. And the beauty was that you certainly have a sales force that has more capacity, not just because you have less customer demand leads but because they didn’t have to travel. And so they are open to test new things. They see the success, and that’s, of course, reinforcing. So yes, we are extremely excited when we look forward in using all these tools. No questions.

Okay. Much appreciated. I love data almost as much as you do, I think. The other thing that I wanted to ask about, it’s actually a reference back to a comment that you made on the 1Q call, which I thought was really interesting. You were one of the early observers to say, look, this is going to be an enormous disruption, but at some point out in the future, there’s going to be a lot of pent-up demand. And let’s think about this as a disruption. Maybe I’ll borrow the Ben Bernanke reference and say, it’s sort of like a hurricane in a way, right? It sweeps through and a lot happens, but you come out the other side. I wonder how your thinking is evolving on the pent-up demand concept, not necessarily for 3Q. This is really not a 2020 question at all. But if you think about whether there might be pent-up demand in 2021 or even beyond, what do you think that’s most likely to emerge? And what have you learned about that over the last few months? And then I’ll jump back in queue.

There were other people that were more aggressive in the sense that they saw a V-shape, and the V-Shape was certainly hinting to a big pent-up. I think we were definitely more cautious on that, even talking about a new shape recovery, but one that will offer pent-up demand in different application, industry sectors and so on. And we have definitely experienced that. I think China is a very good example. In China, we have experienced already good pent-up demand here in Q2. I think for Europe and Americas, it’s not going to happen in the same way as in China, but there are certain applications\industry segments where I think we will have similar effects like, for example, when certain labs will reopen, we will see that they will set up their orders. And there are certainly also areas like we talked about product inspection and so on where things are on hold and then will come back. The good thing about this, I do not expect that it would happen all at the same time in all industry and regions at the same time. And so it’s going to be spread here across the next couple of quarters. And as you hinted into 2021, I do not expect that this thing – this whole pent-up demand will be a Q4 topic at all. So it will be gradual. But let’s also keep in mind, there is an offsetting to this, and this is the global recession. There is a recession out there, and we are not immune to that. And so even that we have easier comparisons maybe next year and we have pent-up demand, we face also a recession. And so it’s very much as it was going to be about us executing very well to tap in the growth opportunities where they are.

I really appreciate. Always help for perspective, Olivier.

And our next question comes from Patrick Donnelly with Citi. You may proceed.

Olivier, maybe just on China, you guys put up pretty strong results there. There’s been a lot of mixed data points across the industry. Your business seems to be performing a little bit better than peers. Can you just dive into what’s leading the recovery there? And then maybe just more specifically in terms of end market trends, how you saw performance across the different industrial customers, academic side and biopharma?

Okay. I want to start, our team in China did just a fantastic job. I really think they executed extremely well. We were one of the first company and factory that was back live. We had, in that sense, an excellent context to serve our customer actually really very, very well. I had also our market organization in China that even throughout the lockout – the lockdown was reaching out to customers not just in a sales mode, but also kind of be in front of them to making sure that we are available, that we are helping. And then when the lockdown was relieved or people could really get back to work, huge efforts to really get our revenue back on track, and our Chinese team did also execute all these go-to-market initiatives that I talked about. This played particularly well into China because you had a situation where there were enough customers that went back to investment mode. The liquidity in the Chinese market is good for state-owned companies and medium to large companies. What my understanding is that the smaller companies, however, still have a difficult time, but these are not our most important customers. So yes, I would say, actually, a good market environment for us with excellent execution. Good market environment because you have, particularly the biopharma, the testing labs, the partially also chemical that are doing well. This is – actually, I would say, throughout Asia, we see quite good dynamics, but then in China, in particular.

Okay. Great. And then maybe just one on the cash flow, nice performance there. It sounds like CapEx came down a little bit. Was that more on the timing side? Or was it a concerted effort to pull back? And then just how should we be thinking about that side heading into the second half of the year?

Yes. So in terms of cash flow, hey, we’re very pleased, of course, with the results in the quarter. In terms of cash flow – I mean, I’m sorry, in terms of CapEx, I mean, some of that was timing. If you look at Q2 of last year, it was a bit of a higher number. We have some facility spend topics going on there a year ago. But otherwise, hey, we’re being disciplined, of course, with how we’re managing the cash flow. But I – but in terms of like the project activity and things that investing in the business, we’re still investing and doing the right things for the long-term health of the franchise.

Okay. Thanks guys.

And our next question comes from Steve Willoughby with Cleveland Research. You may proceed.

Good evening. Thanks for taking my question. Two things for you. One, I guess, first, if you could just comment on your performance and your outlook within your pipette business. And then second, last quarter – I know Olivier just gave some good color as it relates to China. But last quarter, you were talking about how you thought you could potentially see some stimulus in China. I just was wondering if you still think that is the case. There’s also been some talk about maybe some budget cuts in China. So just anything from a monetary standpoint in China in addition to the pipettes?

Yes. Hey, on pipette, there – initially, the pipette business was quite impacted by lab closures and that was a bit of a challenge. But then at the same time, the – of course, there is more research activities also around COVID that has been beneficial. At the beginning of the quarter, there was also some supply chain topics for some of the competitors that we didn’t experience and that we benefited. So an interesting dynamic throughout the quarter, but then certainly happy how they performed in the full quarter. And then just quickly on the stimulus. Yes, stimulus is – we see it in China. There are different subsectors that benefit from that, particularly in the area of public health, pharma, CDC testing labs. There is also somewhat the stimulus money that would go to 5G, energy and power segments where we benefit a bit, but I would say, less so than everything that goes to public health. However, I don’t want to overstate here. The impact, I would say, in Q2 that wasn’t particularly significant, but we should see some benefits here in the second half.

Thanks very much.

And operator, are there any final questions?

And our next question comes from Dan Brennan with UBS. You may proceed.

Thank you very much. Last but not least, hopefully, congrats on the quarter, everyone. So maybe first question would just be, Olivier, as you’ve come off historic lows and then have a steep ascend here. And I’m just wondering, the second half guide no longer implies that you may be a gradual ascend. But I’m just wondering, is there any reason why we shouldn’t see a typical snapback in demand from Mettler come a few quarters after the PMI recovery, say, as we look into early 2021?

I would be very cautious with that assumption. First, PMI is one indicator, but it’s not really the best one. There is not a super good correlation here. And there is definitely so many other effects. Look, I made the statement before. I feel very strong about our execution. I feel strong that we can win market share. But I still believe that there is a recession here that will also impact us. And in that sense, next year will continue to be challenging for us, but there is some positives that will help us. Comparisons will be easier. Pent-up demand, we’ll see some of it. But then offsetting is a recession that will go on, and I – at this stage, I’m reasonably confident about Asia, but Europe and Americas will continue to have a difficult economic environment.

And then maybe just one on lab, which all the businesses did better than we had forecasted, lab down for certainly above our low double-digit decline. Just wondering, like, within lab, could you just speak to some of the different customer groups? Because I know it’s not a – it’s somewhat of a heterogeneous customer. But maybe give us a little color like what happened within your Lab business across your key customers? And maybe how those trended through the quarter and kind of what’s expected in Lab going forward in the back half?

Yes. So maybe not surprising. The customer groups that have labs that were closed was the most challenging ones for us. The more resilient pieces were the quality labs, the testing labs that continued to do well. And then, for example, in biopharma, you can imagine that there is a lot of our lab equipment also used in production areas or in QC labs, that was actually a favorable environment. And then we have businesses in life science that I hinted before, for example, for the pipette business a bit well. And then last but not least, Process Analytics did particularly also well. Process Analytics is more exposed to biopharma, and that has been an attractive segment to be in.

Great. Thanks, Olivier.

This concludes our Q&A portion of today’s conference. And I’d now like to turn the call back over to your host for any closing remarks.

Thank you, and thanks, everyone, for joining us this evening. As always, if you have any questions or follow-up, please don’t hesitate to reach out. Take care, everyone. Bye-bye.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.