Mettler-Toledo International Inc (MTD) 2003 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Mettler-Toledo second-quarter earnings conference call. (CALLER INSTRUCTIONS). As a reminder this conference is being recorded. The company would like to remind you that statements made during conference call which are not historical facts may be considered forward-looking statements. The forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. For further information concerning issues that could materially affect financial performance related to forward-looking statements please refer to Mettler-Toledo's quarterly earnings releases, annual report, and periodic filings with Securities and Exchange Commission. This call is open to the public and is being carried simultaneously on the Company's Web site. I'd now like to turn the call over to the moderator, Robert Spoerry, Chairman, President, and Chief Executive Officer. Please proceed, sir.

Thank you. I would like to welcome you to the Mettler-Toldeo conference call. I'm Robert Spoerry, Chairman and CEO, of Mettler-Toledo and I'd like to thank you for joining us today. With me in New York this evening are Dennis Braun, our CFO; and Mary Finnegan who is taking care of Treasurer and handling also Investor Relations. This call is being webcast and is available for replay on our web site www.mt.com. A copy of the press release issued this afternoon is also available our web site.

On today's call, I would first like to give you a short summary of the quarter. And Dennis will go over the financials in more detail. After that, I would like to provide an assessment of current market conditions and also our outlook for the remainder of the year. Also I would like to update you on our key initiatives. We will then open the lines for questions. First let me make some summary comments on the quarter. I am pleased that we achieved EPS of 57 cents in the quarter as compared to 54 cents last year, which excludes the restructuring charges and tax gain taken last year. In local currency sales were flat in the quarter. But higher gross margins and the benefits of cost savings initiatives put in place over the last 12 months drove operating income growth by 5 percent. We also had another strong quarter of cash flow generation which was 20 percent increased over the prior year period. in general, our activities and our principal end-markets are in-line with forecasts, with the important exception of the bio-pharmaceutical markets where we have seen an unexpected reduction in spending.

I will speak about this in more detail later. Unfortunately, because of this reduced spending level, it is necessary to revise our outlook downward for the remainder of the year. Of course, we are actively managing our costs in light of the changes in the bio-pharmaceutical market. Our growth strategies focused on providing high-end solutions that yield tangible value propositions to our customers remain firmly in place. As a result we're solidly positioned for growth once these market conditions improve. We will speak about all these points in more detail throughout the course of this call. Let me now turn it over to Dennis who will take you first through the financial results for the quarter.

Thank you Robert. EPS was 57 cents in the quarter and was based on 45.5 million shares outstanding. This is a 6 percent increased over prior year EPS of 54 cents on the same basis. On a reported basis, EPS was 61 cents last year. Sales amounted to 321.4 million in the quarter. This represents an eight percent increase in U.S. dollars due to currency and flat local currency sales as compared to the second quarter of last year. This was modestly below our expectations set at the beginning at the quarter.

I will now discuss the sales by geographic region in more detail. All these numbers are without the benefit of currency. Sales in Europe on a local currency basis were down 1 percent in the quarter and 3 percent year-to-date. In the Americas, sales were down 4 percent in the quarter and down 3 percent year to date. In Q2, in both Europe and Americas, weakness in the lab was partially offset by better-than-expected growth in industrial. With particularly strong growth in packaging, transport, and logistics.

Sales in Asia were up 13 percent in the quarter and 12 percent year-to-date. During Q2, China generated very strong growth rates, while Japan has been weaker. By product area, Asia had very strong growth in industrial and retail, with modest growth in lab. Now let me cover sales by business area. And again, these analyses exclude the benefits of currencies.

Lab -- our lab business was down mid-single-digits in the quarter. Clearly, below where we expected. Balances were down and discovery was down double-digit. We are encountering a pull-back in investment from our bio-pharmaceutical customers, which Robert will speak about in more detail. Process analytics had another very solid quarter. Industrial did better than we expected with growth in the mid-single-digit range. Both packaging and transport and logistics had excellent growth in the quarter. Retail was down in the quarter driven in-part by tough comparisons in the Americas, as Europe was stable relative to the prior year. Gross margins improved 110 basis points to 48.7 percent versus the second quarter of 2002. If we adjust for currency, gross margin actually improved 180 basis points. We are very pleased with this improvement, which reflects the benefit of our cost restructuring initiatives.

R&D amounted to 19.3 million which is a 2 percent decline from the prior year in local currency. As we mentioned last quarter, we expect R&D to be relatively flat with the prior year on a local currency basis. SG&A amounted to 94 million or 29.3 percent of sales which represents an increase of 14 percent in U.S. dollars. Currency accounts for 10 percent of the increase with the remainder consisting of 3 percent due to higher medical costs in the U.S. and slightly higher marketing costs, as we prepare for the rollout of our new laboratory products later in the year.

Adjusted operating income was 43.1 million as compared to 41.0 million last year. Our operating margins on a reported basis were 13.4 percent versus 13.8 percent last year. However, adjusted for currency, our margins in the second quarter this year were 14.4 percent. I know I mention this last quarter, but I think it is worth clarifying the impact of currency on our financial results. With almost 60 percent of our sales outside the U.S., our sales are impacted by the changes in exchange rates versus the dollar. In this quarter, currency increased sales by 8 percent. Our global operations create a relatively natural hedge in terms of foreign currency. What that means is that our foreign currency inflows roughly match our foreign currency outflows. Therefore, although the current weak dollar increases our sales, it has virtually no impact on our operating profit. However, the weak dollar does impact our operating margins, as we take our naturally hedged operating profit and divide through by the higher reported U.S. dollar sales level due to currency. Adjusting for these factors, we derive constant currency margins of 14.4 percent for the quarter, a solid improvement over the prior-year level of 13.8 percent.

Continuing down the income statement, amortization amounted to 2.8 million and interest expense was 3.7 million. Our tax rate remained at 30 percent in the quarter. This results in net earnings of 25.8 million or 57 cents per share, a 6 percent increase over the prior year amount of 54 cents. On a reported basis, EPS last year was 61 cents per share. Moving out to cash flow. Free cash flow generation was very strong in the quarter up 22 percent to 32.8 million. As a reminder, we define free cash flow after taxes, working capital, and capital expenditures. Capital expenditures were lower in the quarter due to the inclusion of the Rainin Instrument building last year. DSO was very strong at 50 days. ITO was 3.2-times, a slight slowdown due to the production transfers in our new product launches. In order to ensure that there's no disruption with the production transfers, from South Carolina and Batoon (ph) to China we were building safety inventory levels.

We spent 6.2 million on restructuring payments during the quarter, principally related to the severance payments associated with the closing of our Batoon facility which was completed during the quarter. Last 12-month EBITDA amounted to 190.9 million and our net debt was 256.2 million. This results in very strong credit statistics of net debt to EBITDA of 1.3 times and interest coverage of 12.4 times. One item I want to point out on the balance sheet is our debts. You'll notice it is classified as short-term. As I mentioned last quarter our debt consists of a bank facility that becomes due in May 2004. With very solid credit statistics and our excellent history of cash flow generation, we are in a very strong position for our refinancing. The current favorable interest rate environment also makes timing suitable for a new deal. We are currently analyzing various financing alternatives and foresee having a new deal in-place by the end of year. That is all for my side. And I'll amount turn it back to Robert.

Thanks Dennis, I want to start by giving you an assessment of our different businesses for the second half of this year. Our lab business has consistently generated steady growth. And this was also the case for full-year 2002. We are now experiencing an unexpected moderate decline as a result of reduced spending levels from bio-pharmaceutical markets. From a long-term perspective, the fundamentals of these markets remain very strong. The world's population is aging and new drugs can cure many more diseases and thereby extend the quality of life. Currently, however bio-pharmaceutical companies are under significant cost pressure. The impact of generics, the rising health-care costs, global price harmonization, and increasing FDA scrutiny are creating challenging cost environments for this industry. Also, last year fewer new drugs were approved. bio-pharmaceutical companies understand these challenges and also recognize that to overcome them, they need to find new drugs. In fact, activity for new drug approval is more promising as of late. Also impacting our web business is some consolidation in the pharmaceutical industry -- the combined entities spent significantly less on R&D. During the quarter, we firm orders that were canceled for this very reason.

With these factors and also our cautiousness with respect to the typical year-end seasonality, we expect labs to be down modestly for the remainder of the year. This is quite a different assumption as when we entered the year. Industrial is really doing fine. And we feel it will be up modestly for the remainder of the year. We expect continued solid growth in packaging and strong growth in our transportation and logistic area. The remaining industrial business will be up slightly. We would expect retail to be down in the U.S. due to difficult comparisons, where business has been very strong in the previous years. And in Europe the retail business will be up modestly. I want to make one additional comment on Asia. You've heard from Dennis that China had a strong quarter. And therefore, little impact from SARS to-date. We're still cautious about this because our sales force was hampered in their ability to visit customers up and until June. As a result, there was significantly less new quote activity, which could impact us in the range of 5 to 10 million of sales and the second half.

With these assumptions, we expect full year 2003 sales before currency effects, will be flat with the prior year. This compares to moderate growth that we had previously sought. Our cost restructuring initiatives are now on track as we closed our French facility during the quarter. SARS is impacting our production transfer from South Carolina to China. We will likely be delayed by one quarter and therefore, have revised our closing date to the end of this year. We also recognize that the market conditions in the lab business have changed and are looking closely at eliminating additional costs from our structure. We do not intend further extraordinary restructuring costs as of this time. However, we do want to ensure that our cost structure is aligned with our sales base without sacrificing our strategic initiatives which are critical for our future growth. With this lower sales level, we would have EPS in the range of 215 to 220 versus 215 last year.

This is obviously not the news we wanted to deliver today. But unfortunately, it is necessary given current market conditions in bio-pharmaceutical. The good news is that our other businesses are generally very well on track. Also positive news is that our strategic (indiscernible) to our high-end solution is turning out to be right on target and making a lot of progress. Let me give you a couple of examples on this. One challenging drug research is that instruments have different independent controls and different software. For example, our reaction engineer system typically consists of liquid handler, a reaction box, (indiscernible) analytics and an HPLC instrument. The processes between these different instruments are interdependent. But the scientists must manage various computers and software to ensure that information is linked between the different instruments. We will soon launch a new software which we call Virtual Lab (ph) that can control these various instruments from one single point. This automates the workflow across the various instruments and provides document management and informatics, thereby substantially increasing the productivity of the chemist and accelerating the time to market for potential new drugs.

Another area which is on the forefront of technology development is in retail. As you know, we provide solutions that help retailers manage their fresh goods. A large German retailers Meteor (ph), recently opened a store of the future which makes use of those latest technologies to allow retailers to most effectively manage their inventory and to allow customers a better shopping experience. If you were a customer at this store, you pick up terminal at the store entrance and enter in there the items you want to buy. The terminal then determines the most efficient route for you to take you to the different items you want to purchase. It uses our our FDI technology to track your purchases as you put them into your shopping cart. We have piloted in the store a visual recognition system which can identify the fruit or vegetable on a scale. Of course, the price is determined by weight for the customer and the retailer has all the relevant information to manage its fresh goods. When you leave the store you simply hand your terminal over to the checkout person, your account is charged, and you receive a bill in the mail later. Of all the technologies in this store of the future, ours received the highest rating for customer acceptance in a survey done by the Palton (ph) Consulting Group.

Software is often the linking element across our instruments. Our new release of PharmWay (ph) is one example which illustrates this point. PharmWay is used in production of pharmaceuticals such as aspirin or other tablets. The software is used on our industrial terminal and is directly integrated into our manufacturing plant's SAP system and has a certified interface. Therefore, it is assesses what needs to be produced and steps the operators through the formulation job. It's error-proof. It will not allow the operators to enter any one amount. This new software release allows paperless production. And everything is documented electronically. And it also is in compliance with GMP and GAMP. The value to the customer is improved quality and productivity as well as ensuring compliance with regulatory agencies.

Service is another example of providing high-end solutions. It's solid value propositions to our customers. We have seen significant growth over the last few years from our regulatory compliance offering and our remote service offering. We now have dedicated teams that do consultative service selling in which our complete capabilities are tailored into specific offerings that focus on the customers' business goals. We do a criticality assessment of the instrument at the site and determine a service plan based on the impact of that instrument on quality, accuracy, and regulatory compliance. Let me give you an example. We analyzed one facility of a world-renowned beverage manufacturer. The assessment was done on 57 instruments in use. And it was determined that if we could reduce down-time by one-half of 1 percent, they would save $5.3 million in profit. Based on this we developed a comprehensive asset management program to ensure maximum up-time -- specifically response time by device, training and information, and reporting. This is just one example, but I think it illustrates the impact of this tailored approach. These are only a few examples of our strategic direction and shows that by our high-end solutions, we can provide significant value to customers.

In addition to these sample I just highlighted we have an extraordinary number of new products -- particularly in the lab area -- that we will introduce later this year and into next year. We did not the cutback on our (indiscernible) during this challenging period. And consequently have a very strong product pipeline. We have new generations of balances, titration, and pH meters, which all provide significant value to customers versus what is in the market today. We're very excited about the potential of these products and look forward to showcasing them to you. That is all I have to say. But before we open the lines for questions, I want to summarize what we have talked about today. We're facing a setback in market conditions. Particularly in bio-pharmaceutical markets. The long-term fundamentals of these markets remain very strong but challenging in the short-term. In general, activities in our other and markets remain very much on-track. Our strategic growth initiatives are also well on track.

New products will help the growth of the lab business next year. And Service (ph) and Asia continue to be solid gross growth engines for the Company. And last but not least, our cost restructuring programs are yielding benefits. All of these factors combined, position us well for growth once the market conditions improve. Now, I would like to ask the Operator to open the lines for questions.

Yes, if you do have a question at this time (CALLER INSTRUCTIONS). Martin Sankey, Neuberger Berman.

Hello Robert, how are you? Could we just burrowinto the bio-pharmaceutical? You mentioned some of the things behind it, in terms of just the industry turning down. But it -- could you talk as to the particular lines of business that saw the turn down? For example was it laboratory automation? Was it the drug discoverythat went away?

Let me take you through the different pieces. First of all, let me start with pipettes. Pipettes usually are heavily sold into the bio-pharmaceutical markets and we have seen high-single-digit decreases in the bio-pharmaceutical sales of pipettes. The good news is that in the pipette business, we were able to compensate this decline by increased activity in academia and also in the international expansion of Rainin. And therefore Rainin business was up low-single-digit in the quarter. Clearly, it was hit in the bio-pharmaceutical markets to a significant extent. But we could compensate that. Then the auto-chem products -- they are pretty much all sold into bio-pharmaceutical applications and they were down double-digits. We think we had no way to escape into other adjacent markets. The balances -- we sell them, often through indirect distribution channels. And in that sense, we don't get all the end-user data. That's what I hear from our channel partners is that their sales into life science applications are down for new equipment --typically in the range of 5 percent. And that's exactly what we have seen for balances. And analytical is a very similar case here. So, Martin, we have seen all our different laboratories product lines being affected from the slowdown in bio-pharmaceutical. But to different extent as I just explained.

Okay, you mentioned that you had four cancellations of significant orders during the quarter. Were they in the auto-chem area?

Yes. And I didn't say four. I said large orders canceled -- several million dollars.

They were all auto-chem?

Yes.

When these orders were canceled, did they give an explanation?

It was really kind of to consolidation activity and closing of facilities. These were firm orders that we had. but then they said hey we're going to close down these facilities.

Okay, I'll ask one last quick question. Then I'll get back in queue. On currency, you mentioned the sales affect -- any bottom-line affect or where you effectively hedged?

Martin, just reemphasize -- 8 percent benefit on the sales line. But virtually no benefit at the operating profit line.

Okay and that looks to be the case for the rest of the year?

Yes, that is what we are expecting. Maybe a little less on the sales line -- just due to the rates for the second half of the year last year.

Martin, if I may just add here. Many of our peer groups are U.S.-based instrument companies. And of course they profit quite a bit from the weak dollar at this point in time -- there are not situation than we have.

Darryl Pardi, Merrill Lynch.

Good evening guys. Just to follow up quick on Martin's question. You said -- you said the balances of life science applications were down 5 percent. Was the overall balance sales down 5 percent as well?

It was less than that.

Less than that, okay. Were there any differences geographically in the bio-pharmaceutical business?

Yes there is. The Asian piece is actually growing. And that has a lot to do with many governments having targeted the bio-pharmaceutical market as a growth industry for their country. And significant government funds being transferred that way. So we had to go to lab business in these segments in Asia.

And Europe and North America it looks like --

A very similar story.

Just lastly, can you talk about your other lab customers? Food and beverage, chemical, how are things with those other customers?

This was much more in-line with our expectations. And maybe I'll just kind of repeat what our expectations where when we ended the year. We did expect that lab would grow -- you know, low to mid-single-digits. And this is the type of growth we have seen in these other laboratory markets.

(CALLER INSTRUCTIONS) Richard Eastman, Robert W. Baird

Just a question on the cost initiatives. You mentioned South Carolina is going to be postponed until the end of the year. I think we had spoken in the past about perhaps 8 to 9 million of savings in '03? Is it fair to just cut that in half and say we'll see maybe 4 million?

It's not that dramatic. I would say we're still kind of targeting in the 6 to $8 million range for savings.

Really? This year you'll realize that much?

Kind of more in the 6 to 7. And then the Spartanburg savings will not go away. It will just be deferred more into 2004.

Okay so we'll pick up a little more 2004. Can you just remind us what percentage of your lab business is in Asia? Roughly?

It's a number like 15 to 20 percent.

Lastly, I may be a little bit surprised you have assorted turns business. And I may be a little bit surprised that you are essentially removing any fourth-quarter seasonality from the numbers. What -- why is that? Is that just a conservative move or have some of the orders that had six-month shipping targets been pulled as well?

Rich, we were surprised also what happened in lab business. And as I said before, the lab business was a very solid growth-contributor in the last couple of years. And we always at least mid-single-digit growth, even after the end of last year. So it came to us as a surprise -- what we have seen in Q2. And in that sense, what will change it? And how quickly will we change? That is for us the unknown. We just have seen that interest is here, but money is not being spent. And I think companies -- for all these reasons I explained before are just sitting very tight with money and I think it would not be the right thing to assume that they're just going to release it easily, as we have seen this tough money release so far.

Here is kind of a simplistic cut of your numbers. If I take out the growth in the second half of the year, I lose maybe 65 million or so in sales from -- I guess, from that I was projecting. If a just scale that at the same margin, that's about 15 cents a share. So that part kind of reconciles, but I guess that I'm a little bit surprised that you'll be able to manage your overhead costs that well, given that kind of lack of sales volume.

Rick, we're talking in the range of similar numbers. But one of the things here is, we're trying to be cautious on the impact of SARS in China. And expecting that to really -- our people are telling us it could be one month of lost sales, starting in the third quarter.

Do you know, what's really working in our favor is the very strong cost-profit margins we have. You see and we have seen, they expanded quite substantially year-on-year.

Blake Goodner, Bridger Capital. (ph)

I just wanted to get clarification on a couple of things. First off, does your laboratory guidance of, I guess you said, modestly down for the year. Does that include any of the new product launches?

These product launches will start end of September, early October. And typical lead-times not have a big impact this year. That is probably the short answer.

So they are not in the '03 guidance then?

Nothing significant.

They will not have a big impact this year.

Secondly, you mentioned that due to the SARS impact in Asia, there was listed quote activity. And you think you lost, I think you said something like 5 to $10 million -- you could have been impacted?

This is a little uncertain. We had strong sales in the quarter. We had very good order intake. But our people tell us they had much less quote activity. And we're going to see the impact of SARS only -- actually in Q3. How much it's going to be? I cannot really tell you in great accuracy. But we say the potential damage could be 5 to 10. And that's what we built into the model.

Are those lost sales completely? Or are those just delayed until later?

Delayed, delayed, delayed, delayed. Yes.

Delayed. Lastly, can you just explain to me -- when you say that your free cash flow was up, or your operating cash flow was up 20 percent year-over-year. By looking in the chart, it looks like to me like your operating cash flow was down modestly and your free cash flow after CapEx was about flat year-over-year. So, could you just explain to me things for that calculation? How was it up north of 20 percent?

If you look at page 9 of the earnings release -- it is entitled condensed consolidated cash flow statements. At the very bottom there's reconciliation of net cash provided by operating activities to free cash flow. If you go to the bottom line of the free cash flow, the 32,765 versus the 26,967. That is how we're calculating the 22 percent. And one of the major deltas here is we're excluding the restructuring payments. Those are primarily the severance payments for (indiscernible) which are not a incurring item.

Thank you and I'm showing no further questions at this time.

Okay, I would like to thank you all for joining us today. As most of you know, our investor day is on Monday. And we have, so far, very good response. So we're looking forward to this day so that we can showcase all our new laboratory products. And I think you will see at this location that these instruments will provide very tangible value propositions to our customers and therefore, will be a solid growth engine for the coming years. We'll have extremely competitive weapons in this market. We look forward to seeing you there. And I will hope it's well worth all your time investment. If any one of you has a question relative to this investor day, please don't hesitate to contact Mary. Mary is right now in New York, but she has access to e-mail and voicemail and get back to you very shortly. Thank you very much for joining today and wish you a good evening. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference. You may now disconnect. And have a good day.