Mettler-Toledo International Inc (MTD) Q2 2021 Earnings Call Transcript

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Mettler-Toledo International Inc (NYSE:MTD)
Q2 2021 Earnings Call
Jul 29, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Mettler-Toledo Quarterly Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ms. Mary Finnegan. Please go ahead.

Mary T. Finnegan — Head of Internal Relations and Treasurer

Thank you, and good evening, everyone. I’m Mary Finnegan. I’m responsible for Investor Relations at Mettler-Toledo and happy to welcome you to the call. I’m joined on the call today with Patrick Kaltenbach, our CEO; and Shawn Vadala, our Chief Financial Officer. Let me 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 that we will refer to on today’s call is also available on the website.

Let me summarize the safe harbor language, which is outlined on Page two of the presentation. Statements in this presentation, which 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 from those expressed or implied by any forward-looking statements. For discussions of these risks and uncertainties, please see the discussion in our 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 Discussion and Analysis of Financial Condition and Results of Operations sections of our filings.

Just 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 non-GAAP financial measures, and the most directly comparable GAAP measure is provided in the Form 8-K. I will now turn the call over to Patrick.

Patrick Kaltenbach — President and Chief Executive Officer

Thanks, Mary, and good evening, everyone. I am pleased to host the call tonight, which we are doing from Switzerland as Shawn and Mary are here with me, too. I’m excited to report another quarter of excellent results. Several factors contributed to these results. First, demand in our markets was very strong and broad-based. Second, we were able to capture these growth opportunities as a key priority since the onset of the pandemic was to stay close — in close contact with our customers and be strongly positioned once customer demand recovered. And finally, the teams around the world have done an excellent job in execution and customer support.

Our supply chain team has had more than the share of challenges due to part availability and logistics complications while our market organizations have executed well to meet increasing customer demands. Our teams have shown resiliency and agility in an environment where conditions change rapidly.

Now let me turn to our financial results. The highlights are on Page three of the presentation and you can see we had a great quarter. Local currency sales growth was 27%, and we had very strong broad-based growth in all regions and most product lines. With the exception with this exceptional sales growth and combined with focused execution of our margin initiatives, we achieved a 45% growth in adjusted operating income and 53% increase in adjusted EPS.

Cash flow generation was excellent in the quarter. Demand in our end markets remains positive, although our growth for the remainder of the year will reflect more challenging comparisons than we had in the first half of the year. We are making incremental investments, which will position us very well for future growth. We remain confident that we can continue to gain market share and deliver strong results in 2021 and beyond.

Let me now turn it to Shawn to cover the financials and guidance details, and then I will come back with some additional commentary on the business. Shawn?

Shawn Vadala — Chief Financial Officer

Thanks, Patrick, and good evening, everybody. Sales were $924.4 million in the quarter, an increase of 27% in local currency. On a U.S. dollar basis, sales increased 34% as currency benefited sales growth by 7% in the quarter. The PendoTECH acquisition contributed approximately 1% to sales growth in the quarter.

On Slide number four, we show sales growth by region. Local currency sales increased 29% in the Americas, 23% in Europe, and 28% in Asia/Rest of World. Local currency sales increased 35% in China in the quarter. The next slide shows sales growth by region for the first half of the year. Local currency sales grew 23% for the first six months with a 22% increase in the Americas, 18% in Europe, and 28% growth in Asia/Rest of World.

On Slide number six, we summarized local currency sales growth by product area. For the second quarter, laboratory sales increased 35%, industrial increased 20%, with core industrial up 27% and product inspection up 9%. Food retail increased 9% in the quarter.

The next slide shows local currency sales growth by product area for the first half. Laboratory sales increased 27% and industrial increased 19% with core industrial up 27% and product inspection up 7%. Food Retail increased 11% for the first six months.

Let me now move to the rest of the P&L, which is summarized on Slide number eight. Gross margin in the quarter was 58.1%, a 50 basis point increase over the prior-year level of 57.6%. We benefited from volume and pricing, which was offset in part by challenges in the global supply chain, namely higher transportation, logistics, and raw material costs. These items are even more challenging than we had expected the last time we spoke.

One additional factor, as you compare to the prior year, we now have in our cost structure, the impact of the temporary cost actions we undertook in 2020. R&D amounted to $42.6 million in the quarter, which is a 28% increase in local currency over the prior period. The impact of the temporary cost reductions undertaken last year as well as the timing of project activity contributed to this increase. SG&A amounted to $239 million, a 20% increase in local currency over the prior year. The impact of the temporary cost savings that we undertook last year, higher variable compensation, and increased investments in sales and marketing were the principal factors driving the increase.

Adjusted operating profit amounted to $255.3 million in the quarter, a 45% increase over the prior-year amount of $176.6 million. Adjusted operating margins increased 200 basis points in the quarter to 27.6%. We are pleased with this margin growth, which reflects excellent sales growth, combined with focused execution on our margin initiatives. Currency benefited operating profit growth by approximately 7% but had little impact on operating margins.

A couple of final comments on the P&L. Operating — I’m sorry, amortization amounted to $16.2 million in the quarter. Interest expense was $10.4 million in the quarter and other income in the quarter amounted to $2.7 million primarily reflecting non-service-related pension income. Our effective tax rate before discrete items and adjusted for the timing of stock option deductions was 19.5%. Fully diluted shares amounted to $23.5 million in the quarter, which is a 3% decline from the prior year.

Adjusted EPS for the quarter was $8.10, a 53% increase over the prior-year amount of $5.29. Currency benefited adjusted EPS growth by approximately 7% in the quarter. On a reported basis in the quarter, EPS was $7.85 as compared to $5.22 in the prior year. Reported EPS in the quarter includes $0.19 of purchased intangible amortization, $0.03 of restructuring, and $0.03 due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises.

The next slide shows our P&L for the first half. Local currency sales grew 23% for the six months. Adjusted operating income increased 47% with margins up 330 basis points. Adjusted EPS grew 58% on a year-to-date basis. That covers the P&L, and let me now comment on cash flow.

In the quarter, adjusted free cash flow amounted to $233.3 million, which is an increase of 41% on a per-share basis as compared to the prior year. We are very happy with our cash flow generation. DSO was 36 days, which is four days less than the prior year. ITO came in at 4.6 times, which is slightly better than last year. For the first half, adjusted free cash flow amounted to $372.2 million, an increase of 75% on a per-share basis as compared to the prior year.

Let me now turn to guidance. Forecasting continues to be challenging. Market conditions are very dynamic and changes to the business environment can happen quickly. Uncertainty remains surrounding COVID-19, in particular, the impact of the latest variance, the worldwide pace of vaccinations, and related potential shutdowns and/or restrictions. The ultimate impact on the global economy is also still uncertain. In addition, we are monitoring our supply chain very closely and recognize we must remain very agile in order to adapt to unexpected material shortages, inflationary pressures, and unforeseen logistic challenges, which can create unexpected volatility.

As we enter the second half of the year, demand in our end markets is positive, although we face more challenging comparisons for the remainder of the year as compared to the first half of this year. The organization continues to execute well and has demonstrated a high level of resilience and agility and adapting to rapidly changing market conditions. We are making incremental investments for future growth and continue to feel confident in our ability to gain market share and drive earnings growth in 2021 and beyond.

Now let me cover the specifics. For the full year 2021, with the benefit of our strong Q2 results and improved outlook for the remainder of the year, we now expect local currency sales growth for the full year to be approximately 15%. This compares to our previous guidance range of 10% to 12%. We expect full-year adjusted EPS to be in the range of $32.60 to $32.90, which is a growth rate of 27% to 28%. This compares to previous guidance of adjusted EPS in the range of $31.45 to $31.90. With respect to the third quarter, we would expect local currency sales growth to be in the range of 11% to 13% and expect adjusted EPS to be in a range of $8.12 to $8.27, a growth rate of 16% to 18%.

In terms of free cash flow for the year, we now expect it to be in the range of $770 million. We expect to repurchase in total one billion in shares in 2021, which should put us in the range of a net debt-to-EBITDA leverage ratio of approximately 1.5 times at the end of the year. Some final details on guidance. With respect to the impact of currency on sales growth, we expect currency to increase sales growth by approximately 3% in 2021 and 2% in the third quarter. In terms of adjusted EPS, currency will benefit growth by approximately 3% in the quarter and approximately 3.5% for the full year 2021.

That is it from my side, and I’ll now turn it back to Patrick.

Patrick Kaltenbach — President and Chief Executive Officer

Thanks, Shawn. Let me make some comments on our operating businesses, starting with Lab, which had an outstanding growth of 35% in the quarter. Pipettes had excellent growth. all other major product categories also had robust sales growth and growth in all regions was very strong. Biopharma continues to be very favorable and continuing the trend we saw in the first quarter, we see strong customer demand in other segments such as chemical. We expect demand for our laboratory products to continue to be positive due to favorable biopharma trends, vaccine research, and bioproduction scale-up and production.

While we faced tougher comparisons in the second half of the year, we remain confident we can continue to capture share, given the strength of our product portfolio and continued execution of our Spinnaker sales and marketing initiatives. In terms of our industrial business, core industrial did very well in the quarter with a 27% increase in sales. All three regions of the world had robust core industrial growth. Improving market conditions, including some benefit from pent-up demand, combined with the strength and diversity of our product portfolio and our focus on attractive market segments contributed to the strong results. Similar to my comments on laboratory, we will face tougher comparisons for the second half of the year, but our outlook and our confidence in gaining market share remains positive for this business.

Product Inspection had increased momentum and solid sales growth of 9% in the quarter. We saw good growth in all regions. We expect good growth in product inspection for the remainder of the year as we are gaining better access to our customer facilities and believe we will benefit from some pent-up demand in the business. Food retailing grew 9% in the quarter. Let me make some additional comments by geography. Sales in Europe increased 23% in the quarter with excellent growth in lab, core industrial, and food retail. Americas increased 29% in the quarter with excellent growth in lab and core industrial. Product Inspection did well in the Americas, while food retail declined.

Finally, Asia and the rest of the world grew 28% in the quarter with outstanding growth in Laboratory and Industrial. As you hear from Shawn, China had another quarter of stellar growth. We would expect another good quarter of growth in Q3 in China, although not at the same level of the first half as China faces more challenging comparisons. We are strongly positioned in China, and the team is executing very well.

One final comment on the business. Service and consumables performed very well and were up 23% in the quarter. We are very happy with the growth in this important and profitable part of the business. That concludes my comments on the business.

With our better-than-expected sales growth in the first half, we are making incremental investments for future growth. These investments are centered on innovation and operational excellence. In product development, in our manufacturing facilities, and in our corporate programs such as Spinnaker sales and marketing.

Let me give you some recent examples, starting with product development, where we have a proven track record of launching market-leading technologies. It all stems from our deep knowledge of customer processes and what our solutions can do to enhance or improve these processes. We think of innovation in product development as customer-centric rather than technology-centric. We are focused on the specific value of our solutions can provide to customers, for example, in terms of productivity, compliance-related matters, safety, or data integrity.

On the website, we have recently launched our newest version of our LabX instrument control and data management software. This latest vision fully supports the lab digitalization, and with the strong adoption of our customer base, we have doubled the number of instruments that can be networked. LabX increases our customers’ productivity by speeding up daily work through the management of data and development of workflows. It enhances security and compliance, ensuring data quality and full data traceability. Finally, LabX helps reduce complexity in asset managers data, assets and workflow centrally and seamlessly integrates into laboratory data management systems such as LIMS. Software is progressively becoming a deciding factor for customers in choosing a supplier for Benchtop lab solutions.

With the increasing importance of software, LabX is helping to position us as a trusted advisor for certain global pharma customers as we meet their demands for instruments, service, and software. While lab receives the greater share of R&D investments, we also have some great examples of new products on the industrial side, including a best-in-class industrial terminal, which provides fully integrated weighing applications for — with the industry’s fastest processing speed.

Similarly, we launched new load cell technology in our product inspection business, which provides industry-leading check weighing throughputs with maximum precision. Both of these products provide value by increasing customers’ productivity. New products highlight our deep and great knowledge of our customers’ processes and pain points and allow us to lead the market with technology to provide specific value to customers. We are also investing in our manufacturing facilities to boost productivity. Last quarter, we rolled out significant automation in our pipette and tip harvesting process, resulting in a meaningful increase in yield per molding machine.

This quarter, we are unveiling a new expanded clean room for our pipette manufacturing as well as inaugurating a new facility for our secondary brand, Biotix, that will expand our pipette and tip manufacturing capacity and efficiency. We are also launching a project for our Process Analytics business in the U.S. to optimize production and its warehouse layout, which will yield improvements in material flow, in productivity, and production capacity. We also continue to invest in innovation in our corporate programs. You have seen over many years for tremendous innovation in our Spinnaker sales and marketing programs.

A current priority area for us is maximizing our cross-selling capabilities. Because we utilize a specialized sales force, cross-selling techniques are different than what you might hear from companies that have — that use a more generalist sales force approach. Our goal is to use data analytics to identify customer sites in which we have low cross-selling penetration. We then use contacts and references to develop warm and hot leads to other product categories. It involves data and qualification analytics, and these leads have proven to be very effective in converting to sales.

Another innovative techniques we are using to stay fully engaged with customer is greater use of webinars. In the past, we would conduct a few hundred webinars annually. While our goal this year is to launch 2,000 webinars in local languages, which helps to overcome the limitations we face with customer interactions due to the pandemic. We have professionalized the delivery of the webinars and have expanded our topics to include items such as compliance, productivity, Industry 4.0, and data integrity. From a customer’s perspective, webinars are very cost and time-efficient while still allowing for interactions with experts from various businesses.

Our supply chain team and pricing team are also demonstrating a high level of innovation. For our supply chain team, agility continues to be a necessity in overcoming the many challenges of the current environment. At the same time, they also continue to make excellent progress on Stern Drive, our corporate initiative to continuously improve and drive world-class operations and supply chain. Stern Drive comprises several hundred projects throughout manufacturing and back-office operations focused on material cost reductions, shop floor productivity, and back-office productivity.

Finally, the pricing team also shown great resilience and agility in reacting to inflationary pressures. They moved quickly earlier this year to implement certain midyear price changes and at the same time, they continue to work strategically on some pricing initiatives to help improve the efficiency and effectiveness of life quotes to customers. Incorporating data analytics into upfront processes will make quoting more effective and easier and more efficient for our salespeople. These are just a few of many examples we have internally in which we continue to move our initiatives to another level.

We recently held a virtual leadership meeting with senior leaders from around the world with the theme of doubling down to drive growth. What we emphasize to our senior leaders and to you today is we have a great strategy in place, and we’ll execute on it in an even more determined way than before. We will continue to invest in innovation to double down on enhancing our initiatives that are the foundation of our future growth. We remain confident that our strategies are effective in capturing market share and driving sales and operating profit. That concludes our prepared remarks, and I want to ask the operator to open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question will come from the line of Dan Arias with Stifel. Please proceed.

Dan Arias — Stifel — Analyst

Good afternoon, guys. Thanks for the questions. Patrick or Shawn, pretty major growth you’re seeing in China right now. What are you guys thinking about for the back half of the year? And I know we’re a quarter away from the ’22 guide, but is there anything you can sort of offer when it comes to just thinking about sort of the multiyear growth rate that makes the most sense as a forecast for China when you think about the strength of life sciences, the moving parts in industrial and just pent-up demand versus sustainable demand?

Shawn Vadala — Chief Financial Officer

Yes. Dan, I’ll take that one. This is Shawn. So why don’t I — I’ll talk about maybe Q3 specifically, and then I’ll talk about the full year and then you can kind of like back into what that implies for maybe Q4. But for Q3 right now, we’re looking at high teens growth for Q3, and then for the full year, we’re looking at mid-20s. But we fully agree. We enter the second half of the year with extremely strong momentum in China. Also very strong execution from our team there. There’s very — there’s many favorable dynamics in China at the moment, whether it’s life sciences, whether it’s investments in industrial, whether it’s trends toward automation and digitalization, many strategic investments in different subsegments like microelectronics or lithium batteries. And I feel like our team continues to do an excellent job of capturing these opportunities.

One of the challenges we start to have in the second half, though, of course, is that we start to lap some pretty significant comparisons to the previous year. And as you said, too, like there is a topic of pent-up demand and when the recovery started in Q3 of last year, that was very much a local recovery. And then as kind of we started to progress through 2021, it became — China was benefiting much more from the global recovery. And what’s always hard to tell is how much are we benefiting from pent-up. And there also is an element of stimulus in China. We talked a lot about this last quarter as well. But clearly, the government is investing very heavily in many different sectors, whether it’s programs related to the five-year plan, or whether it’s investments in the industrial sector further developing the economic zone going out to the western part of the country. And it’s always difficult to tell how much we’re benefiting from these trends as well.

Dan Arias — Stifel — Analyst

Yes, OK. That’s helpful. And then maybe just on product inspection. It seems like things are picking up there as well. I mean you have favorable comps in the back half of the year, I think, like the average over the two quarters is something like down 7%. So I’m just curious, when we think about regional dynamics, are there any things in the key geographies that make you think that the different regions are going to sort of move at different paces, or there’s a trajectory for one that might be different together. I guess I’m just sort of asking for a little bit of detail on how we should chart the course for PI over the next, call it, couple of quarters?

Shawn Vadala — Chief Financial Officer

Yes. I mean right now, we were — we’re definitely encouraged with some increased momentum. I think we started to talk about some improvement in the pipeline last quarter. We were pleased with how we landed on we ended Q2. And if we kind of like look at guidance for Q3, we’re looking at low double-digit in Q3 and high single-digit for the year. So we’re starting to see definitely some improvement there.

If we start to think about it more geographically, I think we’re going to see higher growth in the Americas right now. But I think there’s still this pent-up opportunity for all geographies as we go forward. I think there will be an element, and I think we’re well-positioned for it. I mean — but there’s also going to be an element of the COVID variants, and how that could potentially impact access to plans and timing of projects and that creates a little bit of uncertainty. But we definitely enter Q3 feeling encouraged by increased momentum from what we were seeing last quarter.

Patrick Kaltenbach — President and Chief Executive Officer

Shawn, if I might add. Sorry there, actually wanted to add to Shawn’s comments here about the regions. I think we have definitely good opportunities across — around the world. But we also just recently launched a new mid-range version for the X-ray detection in China, which was actually specifically initially developed for the Chinese market to be very competitive in the midrange market. So we are looking also with quite some optimism on that development in China as well.

Dan Arias — Stifel — Analyst

Okay. Shawn, just to finish the thought on the comment you made on the Delta variant or any other variant for that matter. Are you starting to see any skittishness on the part of customers that are maybe, I don’t want to say closing their doors, but just getting a little bit more nervous about access? Or is that just sort of the natural fear that you might have before we head in the direction that it feels like we’re heading in?

Shawn Vadala — Chief Financial Officer

No, we’re not. I mean I’d say that we continue to see really — I mean the variant, of course, impacts social activities, I think, around the world. There’s still lockdowns in certain countries, but that’s more of a social perspective. From a business perspective, we don’t see really any impact on our business at the moment. The reason why I mentioned it with product inspection, though, is if you just think back from the beginning of the pandemic, product inspection has been the one business that’s arguably been the most impacted just from some of the dynamics in the food manufacturing sector.

We’re not — we’ve seen improvement in those dynamics over the course of this quarter, things are starting to, I’d say, reopen more so. We have more access to plants and facilities to work on projects than we did a quarter ago. But I just mentioned it because those things — dynamics can also change quickly if the variant start to create a situation where packaged food companies start to prohibit access to their facilities.

Dan Arias — Stifel — Analyst

Yes, for sure. Thank you, guys.

Operator

Your next question will come from Vijay Kumar with Evercore. Please proceed.

Paul — Evercore — Analyst

Hi. This is Paul on for Vijay. Just a quick two-parter. So the 15% annual guide sort of implies mid-single-digit growth in the fourth quarter. Given the 3Q guide of 11% to 13%, somewhat similar comps, what’s causing the 4Q step-down? And then I guess what is the new guide contemplating for segment growth? What changed from the prior? I know you already talked about product inspection, but what about lab and industrial? Thanks.

Shawn Vadala — Chief Financial Officer

Yes, sure. So we’re, of course, very pleased with our year-to-date results. We’re also pleased with our outlook. As I kind of mentioned on the China comment, it’s always difficult to assess how much we’ve been benefiting from topics like pent-up demand stimulus. And as we kind of look toward Q4, there’s always the topic of budget flush as well. And as you all know, it’s — we never have a significant number of months of backlog. We’re typically at 1.5 or a little bit more than 1.5 months of backlog. So it’s always a little bit more difficult for us to forecast beyond the current quarter that we’re in. So right now, kind of our planning assumption is to look at more normalized growth rates for Q4 but acknowledge there’s always going to be upsides or downsides to our guidance.

Maybe I can answer the second part of your question and just kind of like walk down the different businesses and geographies just to kind of get that out there as well, too. So if we kind of start with the lab business, we’re looking at mid-teens growth in Q3. And then we’re looking at high teens for the full year. If we look at product inspection, I think I already said this, low double-digit in Q3 and high single-digit for the full year. If we look at core industrial, we’re looking at low double-digit for Q3 and mid-teens for the full year.

And then if we look at food retailing, we’re looking to be down low to mid-teens in Q3 and flattish for the full year. And then by geography, we’re looking to be high single-digit for Q3 and low double-digit for the full year. For the Americas, we’re looking to be low to mid-teens in Q3 and mid-teens for the full year. And then for China, we already mentioned high teens for Q3 and mid-20s for the full year.

Paul — Evercore — Analyst

Okay.

Operator

Your next question will come from Jack Meehan with Nephron Research. Please proceed.

Jack Meehan — Nephron Research — Analyst

Thank you. Good evening. I wanted to dig a little bit more into the lab acceleration in the quarter. Even if you look at it on a compounded basis, I think it went from something like 10%, 13% or so in the second quarter. How much of this do you think is funding versus mix shift in the portfolio and due to first-half pretty much COVID may have added in the quarter?

Patrick Kaltenbach — President and Chief Executive Officer

Well, I’ll start, and I’ll let Shawn also chime in here. So again, we’re very pleased, of course, with the momentum in lab. I think a lot of it is based on our outstanding portfolio that we have that we continue to improve. And you hear in my comments as well about the new products we just recently launched. There is very strong demand across all regions in the lab business.

As you know, over time, we have increased our share in lab as a total part of the business significantly over the last years, and that will most likely continue as the underlying momentum in the end markets is also very strong. I mean a lot of it is driven by the life sciences market where we see a lot of adoption of our products.

Our AutoChem business is doing extremely well and is adopted also in new segments like battery manufacturing and better development for e-mobility. So we are very confident in our lab growth, and that will probably moving forward, given also the strong link to biopharma, be the one segment that will continue to lead the growth for all of the businesses.

Shawn, anything you want to add?

Shawn Vadala — Chief Financial Officer

Yes. Maybe a couple of additional comments, Jack. I think our results were just very broad-based across most product categories and regions. But lab really does stand out a little bit above some of the other divisions this quarter. And what was kind of interesting is that the results were very strong in each region of the world. And as Patrick mentioned that the trends in biopharma just continue to be very, very favorable. And then we started to — we continue to also see strong growth in end markets outside of biopharma. And we don’t have a significant exposure to academia, but that was certainly an end market that we saw improved as well during the quarter.

Jack Meehan — Nephron Research — Analyst

Great. And then as a follow-up, I was wondering if you could parse out how much pricing might have contributed in the quarter? I know you talked about the agility of the team there. Do you think — just curious how you see the landscape? Is it changing? Do you think there could be even more pricing opportunities in the back half?

Shawn Vadala — Chief Financial Officer

Can you — Jack, can you repeat the first part of the question? I didn’t hear the word you used.

Jack Meehan — Nephron Research — Analyst

How much pricing added in the COVID during and whether you think there could be more opportunity in the back half?

Shawn Vadala — Chief Financial Officer

Okay. Yes, yes. No, thank you. Yes, so we were very pleased with our pricing results in the quarter. And we — if you think about at last quarter, we were kind of guiding 2% to 2.5% in Q2, and then we were looking at more like 2.5% in the back half of the year. We ended up finishing Q2 at 2.5%. And at this point, we expect to do between 2.5% and 3% for the back half of the year, and I would expect to be at the high end of that range by the time we get into Q4.

The team and the global organization continue to execute really well on our various midyear price increase topics. It’s also, as Patrick mentioned in the prepared remarks, we’re also very agile in this area. The cost inputs are also dynamic as well, and we’re constantly looking for ways to optimize the situation and differentiate our approach to the market.

Jack Meehan — Nephron Research — Analyst

Thanks, Shawn.

Shawn Vadala — Chief Financial Officer

Great. Welcome.

Operator

Your next question will come from Tycho Peterson with JPMorgan. Please proceed.

Tycho Peterson — JPMorgan — Analyst

Hey. Good evening. I want to start with maybe earnings on the quarter. You’d be consensus 5%, 6%, that’s a lot less than the typical 20% to 30% B. Can you maybe just talk to some of the dynamics there? Was that inflation? Was it the supply chain challenges you talked about? Can you maybe touch on those?

Shawn Vadala — Chief Financial Officer

In terms of the Q2B, Tycho?

Tycho Peterson — JPMorgan — Analyst

Correct, correct. Yes, and it was less of an earnings peak than we’ve seen in prior quarters. And I’m just curious whether there are inflationary pressures or that was supply chain pressures?

Shawn Vadala — Chief Financial Officer

Yes, absolutely. That’s what it was. I mean we, of course, had the benefit from higher sales volume. The primary — there was maybe two things that was offsetting that a little bit. But the primary thing was higher costs associated with transportation and material costs. And if you kind of like look at our gross margin for the quarter, it was down a little bit from what we were guiding initially at the beginning of the quarter, and it was very much related to higher transportation costs and material costs.

Tycho Peterson — JPMorgan — Analyst

And there was a lot more commentary in the prepared comments around supply chain. If I go back to last quarter, you had a question, and I think you talked about building some safety stock, but it seems like things have maybe intensified on the supply chain side. Can you maybe talk to some of the steps you’ve taken there to alleviate some of the pressures?

Patrick Kaltenbach — President and Chief Executive Officer

Yes. Let me talk to that, Tycho. So on the supply chain, supply chain side is just — I would say the supplier situation is particularly challenging with respect to electronics. That’s probably the most concerning part for us right now, and you hear it also from a different part of industries. In that regard, we are also facing longer lead times.

We are starting to battle obsolescence issues. We have short-term notices from our suppliers which then will require also R&D teams to jump in and to redesign some of the products. On top of that, transportation and logistics, as Shawn said, are also challenging for our team. We do see bottlenecks and delays there. However, we are really diligently working on these topics to help offset.

In terms of mitigation strategies, again, on material shortages, what we do for electronic components, some of it is redesigning short term our products to make sure that we can deliver. We have been very successful so far. I would say we have been very successful fulfilling our customer demand this quarter. But it’s definitely locking in more resources than we initially thought.

And we also, of course, as Shawn said, we are facing some price increases on components — electronic components, for example, which go now through prorate situations, where you just have to pay much higher prices than you used to. And that impacts us a little bit on the gross margin side as well. Moving forward, we are closely monitoring the situation.

Again, we have team prepared with mitigation strategies in case situations get more tricky, but it’s hard to predict where it might hit you next. Again, we are most exposed currently on some of the electronic parts. Some of it will more impact retail for Q3 as well as retailers leveraging also components that are used in consumer electronics and those are under most pressure right now.

So again, there are several areas where we have to tackle these issues. We have the right teams in place. And of course, we are also trying different ways to supply material for Q3. I think it will not be so far, but we see not be a major one, but we are on our toes to make sure that we can react as quickly as possible if the situation gets more intense.

Tycho Peterson — JPMorgan — Analyst

Okay. That’s helpful. And maybe one last one. I know it’s a little bit early, you’re not going to guide until next quarter, but any kind of higher-level thoughts as we think ahead to next year. The Street has had about 5% revenues, 9% EPS. Obviously, a lot of variables around the pandemic, but I’m just curious if you have any high-level thoughts for next year at this point?

Shawn Vadala — Chief Financial Officer

Yes. No, it’s still a bit early, Tycho. I mean there’s a lot of moving parts. And Patrick and I are actually about to kick off our annual budget tour here in a few weeks, and then we’ll be doing that for about a month and like we do with our normal cadence every single year, and I think we’ll have a much better perspective in feeling once we wrap up that tour, and we’ll definitely provide an update during our next call.

Tycho Peterson — JPMorgan — Analyst

Thanks.

Operator

Your next question will come from Derik De Bruin with Bank of America.

Derik De Bruin — Bank of America — Analyst

Hi. Good afternoon.

Patrick Kaltenbach — President and Chief Executive Officer

Hi, Derik.

Derik De Bruin — Bank of America — Analyst

So a couple of questions. I guess the first one is talk a little bit about gross margin progression in the back half?

Shawn Vadala — Chief Financial Officer

Yes. So you wanted me to start there? Did you want to ask a second part for this?

Derik De Bruin — Bank of America — Analyst

I’ll start there as opposed to bombarding you with the whole (expletive) loads of stuff.

Shawn Vadala — Chief Financial Officer

Okay. All right. So our gross margin was up 50 basis points in Q2, as you saw, we’re going to be flattish for the second half of the year. So as I kind of mentioned in the pricing question, we expect the benefits from pricing to slightly increase in the second half. But of course, going the other side of that is these increased material costs that Patrick was just speaking to.

The other thing that we see in the back half is that we will not have the same level of benefit that we’ve had in the first half of the year regarding volume. And so that’s probably the other thing that kind of stands out in terms of comparing the first half versus the second half. So if you kind of like put that together, the full year is probably up in the whatever, 20 to 30 basis point kind of a range.

Derik De Bruin — Bank of America — Analyst

Got it. So the implied local currency growth in the fourth quarter looks to be in the mid-single-digit range, and yet you’re talking about potentially getting 3% pricing tailwind. So that’s complying like 2% volume growth. That seems a little draconian of the drop-off like that. I mean what’s sort of embedded in that?

Shawn Vadala — Chief Financial Officer

Yes. I mean I don’t know if I’d consider it draconian. I mean I think we’re just kind of like looking at the limited visibility that we had and not to repeat all the things that I mentioned before about how much have we been benefiting from pent-up and stimulus and things like that. But yes, I recognize that there’s an upside to it if conditions continue to be favorable.

Derik De Bruin — Bank of America — Analyst

Got it. And just a little bit of a — just going back, I mean, the last time Mettler guided to 15%, or something in the mid-teens local currency growth was actually back in 2010 coming off of the financial crisis. And I think you did 14% in 2010 local currency growth, and that was off of a negative 10% comp, and now you’re doing 15% off of a positive 1.8% comp. I’m just sort of curious on market dynamics than now? And — because then in 2011, you did 12% local currency growth the following year off of that. So it sort of follows on to Tycho’s question of why is 5%? Or why wouldn’t we see sort of like a similar levels there? And what’s sort of like different about the market?

Shawn Vadala — Chief Financial Officer

Yes. I mean, hey, I think we’re very pleased with our two-year growth this year, very different situation, as you can appreciate, versus 2010. And fully acknowledge that our end markets are coming out of this. At least we expect them to come out stronger. We feel like we’re coming out of this stronger. We feel like there’s market trends toward automation and digitalization that benefit us. So when we think over the medium term, we feel very positive. To be specific about what it all means for 2022. Like I said, there’s — we kind of need to go through our normal process here to have a better view on that more specifically.

Derik De Bruin — Bank of America — Analyst

Alright. Thank you.

Shawn Vadala — Chief Financial Officer

Yes. Welcome.

Operator

Your next question will come from Patrick Donnelly with Citi. Please proceed.

Patrick Donnelly — Citi — Analyst

Thanks. Maybe just one on the industrial strength. It’s far more durable than maybe I expected among others. It sounds like the guidance is calling for a continuation in the back half a little bit softer. But can you just talk through, I guess, what you’re seeing in that market? Obviously, China is an area of strength, but maybe on a geographical basis as well? Just trying to get a better feel for the industrial piece.

Patrick Kaltenbach — President and Chief Executive Officer

Sure. Thanks, Patrick. I’ll take that. We are extremely pleased with another quarter of very strong growth for industrial. China has a big impact on core industrial, but we also have seen very strong growth in Europe, in Americas as well. I think Shawn mentioned the fact already that we are not only benefiting from a strong recovery in our end markets, including some pent-up demand here. But we are also capitalizing on the growth with our specific sales and marketing tools around Spinnaker.

And we also benefit from our diversity of our product portfolio in our end markets. We see also in China, I would say, particularly in China, some investments, benefits from government investments, and our customers, as Shawn said, demand for automation, for connectivity, for digitalization, which plays really well in our product portfolio that we have. So I think this also has clearly lagged.

So I think the advantage of our product portfolio is the underlying momentum and the focus on automation and productivity gains will continue — will help us to continue to drive this momentum. We are extremely pleased with core industrial, especially. And we see some slowdown, of course, in Q4 based on the difficult compares, but we are also looking clearly account are still for us as a continued opportunity to take market share.

Patrick Donnelly — Citi — Analyst

That’s helpful. And then maybe just one on kind of the emerging markets outside of China. It seemed to be coming back a little slower with low vaccination rates. And just — can you just give us a feel for what you’re seeing in terms of trends there as we work through the year?

Patrick Kaltenbach — President and Chief Executive Officer

Outside of China, look, if you look at Asia Pacific on a broader range, I think we are still in the 20% range in the quarter. So if you would point to some specific countries, we have, for example, Thailand and Malaysia were weaker this quarter. And — but the rest of it is in a broader base also had pretty healthy growth.

Patrick Donnelly — Citi — Analyst

Okay. Appreciate it.

Operator

Your next question will come from Matt Sykes with Goldman Sachs. Please proceed.

Matt Sykes — Goldman Sachs — Analyst

Thanks and congrats on the quarter. Thanks for taking the questions. Just one for me, and it’s more focused on costs, and you guys have invested a lot in digital engagement, both in the sales and the service side. And COVID was a unique period of time where your customers are forced to engage with you digitally.

I’m just wondering, as you’ve had conversations in the last month or two, and maybe these will fade away if due to the variants. But as you’ve had conversations with customers and getting back engaging in person, have you seen that customers are more — have a greater desire to actually continue that digital engagement, and therefore, on the SG&A side, there might actually be some cost savings that are more durable than you might have thought? Or do you feel that customers just want to get back to the way it was before?

Patrick Kaltenbach — President and Chief Executive Officer

I’ll take that. And look, what we’re hearing from our customers, they actually love the new ways of — that we have engaging with them. I mentioned in my remarks upfront, webinars, where we really scaled up significantly. Last year, we did a couple of hundreds of webinars, and we are now digitally going to 2,000 because we see such a strong resonance from our customers on having that information and interaction channel. That on top with a really specialized sales force, which is also fully back in action. It gives us an opportunity to, again, to use our direct sales force to really go also after competitive accounts and new accounts, approaching these with our solutions and their deep knowledge about our product portfolio, but use the broader digital channel also for existing customers and again, broadcasting solutions in a much better way than we could in the past.

Our customers, I think, at the moment, if you look at the amount of trade shows that are, for example, available still limited. So they’re really looking also to us to say, give us different ways of how you can demonstrate your products in — if you’re not at trade shows, if you cannot attend trade shows so we use digital demos. We have studios and every major site to do virtual product demos, and that has been very well received by our customers. And I trust that it will continue that way.

We will have a very complementary setup where our direct sales force will be in terms of consultative selling and product solutions will be on customer sites, but we will use the broader channel and e-commerce channel, also to digitally interface with customers. It will be — it will drive efficiency gains. Is it cost saving, I would say, it’s an efficiency gain for us moving forward. We do not think about this that it’s necessarily an opportunity to scale back our sales force. It’s again an additional channel and a competitive advantage for us to engage with customers on many different levels, face-to-face interaction as well as digital interaction.

By the way, we also scaled up telesales over the last several years, significantly to back up our direct sales force and that has been proven to be very effective as well.

Matt Sykes — Goldman Sachs — Analyst

Great. Thanks for the detail. I appreciate all the help. I will be going back to the queue.

Operator

Your next question will come from Josh Waldman with Cleveland Research. Please proceed.

Josh Waldman — Cleveland Research — Analyst

Hey, guys. Maybe following up on Matt’s question. A couple of questions on op expenses. Wonder if you could provide additional color on the magnitude and timing of the incremental investments you spoke of. I guess, what level of step-up should we pencil in for the second half? And any additional color on what these incremental investments are being targeted toward would be helpful as well.

And then second, as we look to 2022 and potentially revenue growth maybe starts to normalize from a higher level this year. Any concern in your ability to pull in cost commensurate to any slowing revenue? Or is there maybe some pull forward going on here in 2021 that derisk 2022?

Shawn Vadala — Chief Financial Officer

Okay. Hey, Josh, I’ll take this one. This is Shawn. So of course, there’s a lot of different moving pieces with our expense growth. I think one of the big piece to not lose sight of is that we had prior-year cost savings. And of course, that optically affects this year’s number as we kind of bring back the workforce and things like that where we had some workforce savings from last year.

We still have an element — And we also had some discretionary topics last year as well where we had savings. The one area where we have not brought things back 100% would be in the area of travel, and I think that one will play out over time. And then — but then kind of another factor, of course, is variable compensation. And so if you think about like last year, we had much lower variable compensation. This year, we’re going to have much higher variable compensation.

And then the third piece I would say is kind of this element of the investments. And the investments are very much a sign of the strength of the organization in terms of our end markets and trying to pursue growth opportunities for the future and really take advantage of the situation. So I’d say these are certainly incremental investments. There are a wide range of different types of investments. We talked about field turbo resources during our last call. That program is going to be a little bit more disproportionately invested toward China versus the rest of the world, but it is a very global program.

We’re doing other things that are more sales and marketing in nature that we do on an ongoing basis, but we’re going to do a little bit more than we normally do during the second half of the year. And then we’re investing in other things in terms of — from a product perspective. But I wouldn’t say we’re necessarily accelerating things, but we certainly are working on our priority list. And so I think every company has a priority list, and we’re able to work down that list at a more accelerated rate, just given the strong results that we see in the business.

Josh Waldman — Cleveland Research — Analyst

Got it. And then how should we think about the magnitude of the capacity investments you’re making? And are those expected to hit more in 2022, or could it be partially seen in 2021 as well?

Shawn Vadala — Chief Financial Officer

In terms of manufacturing capacity, you’re speaking specifically to? I wouldn’t say — I’d say there’s different investments in different parts of the business. I mean I think it’s going to be nothing that will be coming all at once. I think you’ll see gradual improvements, nothing significant or material to any one quarter, but certainly things that will benefit each quarter kind of going forward, and then some stuff will kind of kick in a little bit next year. So…

Josh Waldman — Cleveland Research — Analyst

Got it. Thanks, guys.

Operator

Your final question will come from Brandon Couillard with Jefferies. Please proceed.

Brandon Couillard — Jefferies — Analyst

Hey, guys, Good afternoon.

Patrick Kaltenbach — President and Chief Executive Officer

Hey, Brandon.

Brandon Couillard — Jefferies — Analyst

Patrick, you talked about sort of using Spinnaker in terms of cross-selling initiatives that could be wrong. I don’t recall Mettler talking much about that historically. Is that a new aspect of Spinnaker that you’re looking to capitalize on? And what segments or what areas of the business would be most impacted by that?

Patrick Kaltenbach — President and Chief Executive Officer

Yes. Thanks, Brandon. That’s an excellent question, yes. And it’s not totally new, but we’re definitely emphasizing it more because look, our product portfolio is broad, it goes across a broader part of the value chain of our customers, all the way from R&D, QC into production scale-up and manufacturing. And with Spinnaker, historically, we have been more focused on a very dedicated and prioritized sales force along the different product lines.

We are now looking at — more intensely at cross-selling opportunities in the — on the customer side and also starting from one existing sales contact on, let’s say, a specific R&D contact to make sure that we understand better the customer side in terms of what other opportunities are for us to penetrate in other parts of the customer organization, maybe QC, maybe — it may be manufacturing, maybe in production scale-up. And we’re using then these leads to send basically other dedicated sales team members with the right background and know-how to these other accounts within a customer account.

Again, we don’t use channel list. We have specialized workforces. And this is where it’s now, I would say, different or enhanced from what we have done before. We are — we have more dedicated initiatives. And actually, as part of the recent leadership team meeting we have, we had this one of the topic across all of the divisional leaders and all of the business and market organization leaders of how we can do this more effectively moving forward to make sure that we capture all of the opportunities that we have at any given customer site.

Brandon Couillard — Jefferies — Analyst

Thank you. That is all for me. Thanks.

Operator

I would now like to turn the call back over to Mary Finnegan for any closing remarks at this time.

Mary T. Finnegan — Head of Internal Relations and Treasurer

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

Operator

[Operating Closing Remarks]

Duration: 61 minutes

Call participants:

Mary T. Finnegan — Head of Internal Relations and Treasurer

Patrick Kaltenbach — President and Chief Executive Officer

Shawn Vadala — Chief Financial Officer

Dan Arias — Stifel — Analyst

Paul — Evercore — Analyst

Jack Meehan — Nephron Research — Analyst

Tycho Peterson — JPMorgan — Analyst

Derik De Bruin — Bank of America — Analyst

Patrick Donnelly — Citi — Analyst

Matt Sykes — Goldman Sachs — Analyst

Josh Waldman — Cleveland Research — Analyst

Brandon Couillard — Jefferies — Analyst

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