Mettler-Toledo International Inc (MTD) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Mettler-Toledo third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. The company would like to remind you that the statements made during the conference call, which are not historical facts, may be considered forward-looking statements. 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 the Securities and Exchange Commission. This call is open to the public, and is being carried simultaneously (technical difficulty) on the company's website. I would now like to turn the call over to your moderator, Robert Spoerry, Chairman, President and Chief Executive Officer. Please proceed, sir.

Welcome to the Mettler-Toledo conference. I'm Robert Spoerry, the Chairman and CEO of Mettler-Toledo, and I would 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 in charge of Treasurer and handles also Investor Relations at Mettler-Toledo. This call is being webcast, and is available for replay our website at www.mt.com. A copy of the press release issued this afternoon is also available on our website. On today's call, I would first like to give you a short summary on the quarter. Then Dennis will go over the financials in detail. After that, I would like to provide an assessment of current market conditions and also provide an update on key initiatives. We will then open the lines for questions? Now, first let me make some summary comments on the quarter.

I'm pleased that we achieved EPS of 53 cents in the quarter, as compared to 51 cents last year. In local currency, sales were flat in the quarter while gross margins continued to increase very nicely over the prior year, due to the benefit of cost-saving initiatives. As expected, operating income was constant with the prior year. Finally, we had another quarter of strong cash flow, and recognized an increase of more than 20 percent over the prior year. In addition to our financial results, we made excellent progress in refinancing our bank debt, which comes due in May of next year. We believe that these refinancing, which we expect to finalize in the next several weeks, both strongly positions us for future and for growth and financial flexibility. Finally, our strategic initiatives remain firmly on track. Later on the call, I will update you on our new laboratory product launches and report on several operating initiatives, as well. Let me now turn over to Dennis, who will take you through the financial results first of all.

thanks Robert. As Robert mentioned, EPS was 53 cents, which was a penny above consensus and 2 cents above the prior year EPS of 51 cents. Sales amounted to 320.8 million in the quarter. This represents a 5 percent increase which consists of a 5 percent currency benefit and flat local currency sales, as compared to the third quarter of last year. This was in line with what we discussed with you at the beginning of the quarter. I will now discuss sales by geographic region in more detail. All of these numbers are without the benefit of currency.

Sales in the Americas were down 5 percent in the quarter and down 4 percent year-to-date. In the Americas, lab did modestly better than expected, while industrial was down. And retail was down double digits versus tough comparisons from the previous year. In Europe, sales were down 1 percent in the quarter and down 2 percent year-to-date. Solid performance in packaging and retail in Europe helped offset continued weakness in lab, especially drug discovery. Sales in Asia were up 16 percent in the quarter and 14 percent year-to-date. China generated strong results, while Japan was weak. By product area, Asia had pervasive growth in most products. Now let me cover sales by business area. Again, this analysis excludes the benefit of currencies.

Let me start with lab. Our lab business was down low-single digits in quarter, slightly better than what we expected at the beginning of the quarter. Balances and analytical instruments were down versus the prior year, as we continued to face reduced investment levels from our Biopharma customers. Their performance did improve over Q2, however. Drug discovery was down double digits again this quarter. Process Analytics had another very solid quarter, up mid-single digits. Industrial sales were up low-single digits in the quarter over the prior year. Transport and logistics had a very strong quarter, while packaging had another solid quarter. Our heavy industrial business was weaker than we had expected, with the exception of Asia. Retail was down modestly in the quarter, as strong growth in Europe was offset by expected declines in the U.S. due to tough comparisons.

Gross margins improved 70 basis points over the prior year to 47.3 percent. We are pleased with the continued improvement in gross margins, which reflects the benefit from our cost-restructuring initiatives. R&D amounted to 19.3 million, which is a 5 percent increase over the prior year in local currency. The ramp up is principally due to our new laboratory product rollouts. SG&A amounted to 92.8 million or 28.9 percent of sales, which represents an increase of 9 percent in U.S. dollars. Currency accounts for 6 percent of the increase, with the remainder due to higher medical costs in the U.S. and higher marketing costs as we prepare for the rollout of our new laboratory products. Adjusted operating income was 39.8 million or 12.4 percent of sales, as compared to 40.2 million or 13.1 percent of sales last year. We had a modest benefit from currency at the operating profit levels during the quarter. Margins adjusted for currency were slightly higher than our reported margins. The margin decline is principally due to the higher R&D and marketing expenditures, due to our upcoming product launches. Continuing down the income statement, amortization amounted to 2.9 million and interest expense was 3.1 million. Our tax rate remained at 30 percent in the quarter. This results in net earnings of 24.2 million or 53 cents per share -- a 4 percent increase over the prior year amount of 51 cents.

Moving now to cash flow -- free cash-flow generation was, again, very strong in the quarter -- up 21 percent to 36.7 million. As a reminder, we define free cash flow after taxes, working capital and CapEx. We had excellent results with respect to our day sales outstanding, which are now at 52 days. ITO was 3.2 -- slower than what we want, principally due to transfers from South Carolina to China in our new product launches. We spent 4.6 million on restructuring payments during the quarter. Last 12 months EBITDA amounted to 190 million and net debt was 220.7 million. This results in very strong credit statistics of net debt to EBITDA of 1.2 times and interest coverage of 13.5 times.

Before I turn it over to Robert, I want to give you an update on our debt refinancing. We made significant progress during the quarter, and expect to close a new bank facility in the upcoming weeks. The bank facility will be in the amount of 300 million and have a five-year term. Our present bank agreement was put into place at the time of our initial public offering, when our leverage was much higher. It therefore restricted us in certain matters. Our new facility is in line with other investment-grade entities, and therefore provides adequate financial flexibility. In parallel, we also continue to explore options to raise debt in the capital markets. From an historical perspective, longer-term interest rates are attractive, and we feel it's an opportune time to consider a more permanent layer of debt in our capital structure. That's all for my side, and now I'll turn it back to Robert.

Thanks, Dennis. I want to start by giving you a current assessment of our different businesses. As we discussed last quarter, we are experiencing a moderate decline in our lab business as a result of reduced spending levels from the Biopharma markets. As Dennis mentioned, labs did slightly better than expected in the third quarter. But we remain cautious with respect to year-end seasonality, and would expect this business to down moderately in Q4. From a long-term perspective, the fundamentals of this market remain very strong. The growth population is aging, and new drugs can be made to cure and (ph) more diseases, and thereby extend the quality of life.

Our industrial business was moderately weaker than we expected. This is being driven by our heavy industrial business in Europe and the Americas, which is more economically sensitive. Although current economic data appears to be slightly more encouraging, it will take some time until our investor business will see the upswing, as our value propositions for productivity and yield expansion are most compelling and CapEx utilizations is high. We would expect our transportation and logistics business to have another strong quarter in Q4, and packaging should recognize growth. But we will have more difficult comparisons in Q4 versus the year ago. Overall, we would expect industrial to be up low-single digits in the fourth quarter. Finally, we would expect retail in Europe to be up modestly for the remainder of the year. But the U.S. will be down versus double-digit growth last year.

In summary, there is no substantial change in our outlook for 2003 than what we provided last meeting in July. Current EPS consensus for Q4 is 71 cents, and we are comfortable with that level. Some of you have asked about guidance for 2004. As usual, we will provide this in conjunction with our fourth-quarter results. We also feel it makes sense, given the uncertainty with the global economy. It is probably worth repeating what I said a few moments ago, that even if the economy stays or continues to be promising, it will take some time before our franchise realizes the impact, as we are not typically at the leading edge of an economy cycle upswing. I want, now, to provide on our new laboratory product launches which began early October

We launched our new analytical balance, Lotus, in early October. Some of you saw a demonstration of this instrument at our investor day in July. Lotus provides concrete values to our customers by addressing specific needs of our laboratory customers. For example, Lotus can weigh significantly faster and more accurately, which improves the throughput in the laboratory. Furthermore, it has an easy man-machine interface, which requires less training time and can be configured for the specific user. Finally, it has a revolutionary design, which allows for easy cleaning which is very important to chemists who often used toxic substances or hazardous chemicals.

In addition to the instrument sales, we will also have corresponding service-related revenue, due to the installation and qualification and verification requirements of our regulated customers. With the launch of Lotus, we have also unveiled our new instrument control software, namely LabX (ph) for balances. Earlier we introduced LabX for titraters (ph), which has proven to be very successful as it helps to automate and improve productivity surrounding the titration (ph) process. LabX for balance has seen similar capabilities, in that automates the quality management of the balance. It automates, collects and stores key quality information on the balance, such as calibration information. It meets FDA requirements for electronic traceability, and it replaces tasks that were currently manually done. It allows the supervisor or lab manager to configure numerous balances from a central location, thereby ensuring that the standard operating procedures are consistently applied and followed. Finally, it provides data management to the user, so that all results can be documented and stored. In essence, this becomes an electronic logbook, which can then be fed directly into the user's laboratory information system. The software greatly enhances the productivity and accuracy of the chemists. LabX is unique to market in that it will be a platform for all metal telidra (ph) laboratory instruments, which provides a competitive advantage relative to our competitors who don't have similar breadths of products in their offering.

As we have discussed in the past, software is becoming an integral part of our solution. In drug discovery, we launched virtual lab, which can control various instruments from one single point. This automates the work flow across various instruments, and provides document management and informatics, thereby. And thereby substantially increasing the productivity of the chemists and accelerating the time to market for potentially new drugs. The software products not only help to complete our offering, but they also help to drive the replacement of the installed base -- the instrument.

Our other strategic initiatives remain on track. We will continue to allot (ph) our market management strategy throughout organization. For example, our packaging division recently piloted a program for the baking sector. This strategy encompasses identifying and prioritizing target segments and within target segments, defining targets account. By building databases to identify a treatment and purchase patterns, we can target strategies for both current customers and potential new customers by product and by location.

Let me now say a few words on China. The transfer of production from South Carolina was delayed because of SARS -- actually, as mentioned previously. However, it will be completed by the end of the year, and we will have the full benefit of the cost savings in 2004. Some of you may be wondering about the impact of SARS on our revenue line. We were certainly impacted through lost sales. However, our Chinese team did a great job to aggressively cover the market, and consequently, they reported a good quarter. We also benefited from our extensive sales and service network throughout Asia, which allowed us to maintain customer coverage even when the travel was restricted. Overall, we are very pleased with the status of our initiatives in China.

Another topic that some of you have asked about recently is the new FDA guidelines on Process Analytics Technologies, also known as PATs. PAT is a strategic initiative by the FDA to modernize the regulation of pharma-manufacturing and quality control. It will make easier for pharma companies to adopt new technologies in their manufacturing -- in particular, related to quality control. Currently, pharma companies typically address quality control after the fact -- that these, they produce a substance and then take a sample back to a lab to check the quality. With PAT, they will be able to move towards a quality-control process where a given parameter can be measured directly in the real-time manufacturing process. This opens up technology opportunities for in Process Analytics, and we are strongly positioned for these opportunities. Given our market leading position for in-line, pH oxygen and water and conductivity measurements.

As a matter-of-fact, we just recently expanded our parameters to include in-line carbon dioxide. This is a unit innovation targeted to the bio-reactor (ph) sector for self-culture (ph) growth. The PAT opportunities in Process Analytics will take some time to evolve as pharma companies change their processes. Opportunities also exist with our NC2 (ph) analytic technology of our drug discovery business, which are used in process development and scale-up (ph). Overall, we are not expecting significant in the short-term, but believe that in the medium and longer-term, we are in a strong strategic position to capitalize on this growth. That is all I have to say. Now I would like to ask the operator to open the lines for questions.

Thank you. (OPERATOR INSTRUCTIONS). The first question comes from Darryl Pardi of Merrill Lynch. Please go ahead.

Good afternoon, guys. Can you give us more color on the industrial business in North America? You kind of went through product line for Europe. Can you do that for North America, too?

Our North American industrial business has gone quite well in the early part of the year. In Q3, it was slightly softer. And I think the trend we had seen in the first half was quite strong. Obviously, it was more positive than actually what we expected. It's kind of hard to read the data right now, whether this is just a temporary effect or whether we should (ph) slowdown.

Okay. Was it a global issue that heavy industrial was weak and packaging and logistics grew?

Heavy industrial is a typical infrastructure business, and the infrastructure in today's world is really built in China. And that's very, very strong. And correspondingly, it was softer in Europe and North America. Transportation and logistics is really driven by the technology offering we have, this revenue recovery system, and we had good orders in several countries. And we continue to believe that this business will be a solid growth engine. Of course, sometimes we have a big project here and there. But in general, I think on average it will continue to do well.

Okay. What was the growth of the service business during the quarter? I think you guys usually mention that but --

Yes. It was low to mid-single digits.

Okay.

A little bit stronger in the last.

It was a little slower than in the past, and the reason for that was less part business. And what we have seen is that some customers are really delaying even repairs of the equipment that they simply don't use at given capacity usage.

Because the capacity usage is going down? Is your estimate?

Or it's not going up, and they don't need all the equipment yet.

Yes. Okay. And then just one last question. Can you just remind us what your process is when you introduce -- when you have a significant new product introduction, such as Lotus, in terms of marketing and sort of customer awareness? As far as getting it out -- the product out in front of your customers?

Okay, I mean that will -- there are several steps in the process. I mean, the first is, of course, training our own field organizations -- that's our sales and service people. And you know we have many of them around the globe. And they are probably the key communication vehicle with the customers, as we sell many of these products direct or in the case we go through indirect channels -- even in that case, we very often have the end-user contacts (ph) as well. Aside from that, of course, we have mailing campaigns started up even before that teaching campaign, and then as the product is ready, direct mail and then, of course, we do also some end-user advertising.

Okay. And when you say you had introduced the product -- your field sales and service organization is trained in those products and they are out in those full force? (multiple speakers)

Everything is in place. You know, customers can place orders as of now.

Great. Thank you very much.

The next question is from Paul Knight of Thomas Weisel Partners.

Hi, guys, this is actually Ross Mukin for Paul Knight. I just wanted to see if you could provide a little more color on Asia, more specifically China -- some of the growth initiatives there. What areas of the business are really seeing the pockets of growth that drove the 14 percent increase?

China has done well across the board. Again, the reasons for the growth in China are several fold. One of them is, of course, that China is more of a manufacturing place of today's world, and a lot of companies move manufacturing into that part of the world. But, of course, there are also local Chinese company who very successfully exporting. And that's another growth segment. And you know, how we achieved that growth, of course, we are constantly expanding our territorial coverage. We have actually very good sales and service network in China -- by far the best in industry. We, of course, continue to expand our product offering to the Chinese market. We have local warranty (ph) capability there, aside from the manufacturing. And I think we're very optimistic that we will see very solid growth in the future in China.

Would it be safe to say that most of the growth will be coming from the industrial segment as opposed to the other?

No, it's really both. I mean, companies as they manufacture, they very often have quality-control slabs (ph) surrounding these manufacturing processes and that, of course, triggers the demand for our laboratory product. But, of course, aside from that, there are other factors driving the demand in China. For example, food. A lot of food is not exported, and as you export this food into the Western hemisphere, you have to meet global quality standards. For example, quality control of packaged goods, including weight and metal contaminations. And, of course, that the drives the demand for these products in that part of the world. We do not only see it in industrial. We see it really across all of our businesses. Even in Process Analytics, a lot of that customer base is going very heavily into China. The semiconductor industry makes a lot of investments in China.

What percentage of total sales now are from Asia and China? And where was that maybe a year or two ago?

Yes. I think at the end of 2002, the number is about 11 percent. And that continues to increase. We just did some modeling on that, and we expect in 2004 that number to be around 15 percent.

Okay. Great, guys, thanks.

The next question is from Sara Michelmore of SG Cowen. Please go ahead.

Yes, great. I was hoping on the lab business -- it sounds like it was a little bit better than you guys had anticipated in this quarter. And it looks like from your comments that it is the balances and analytical instruments that came in a little bit stronger. Can you just comment on -- if that is the case? And then what the differences were for the lab business in the U.S. and Europe versus your expectations?

I think you are correct. Lab did slightly better than we expected. I would not attribute that to new product launches because these new product launches really have just hit the market and certainly did not affect the results of last quarter. Europe was a little below the United States in that sense. And clearly Asia had solid growth in the lab business.

But how did the U.S. and Europe stack up against your expectations coming into the quarter?

I would say Europe was a little bit weaker than what we expected, and the U.S. was a little the stronger.

Okay.

And then I would say, analytical instruments were a little bit better than we're expecting in total. And balance just slightly better.

Okay. And, Dennis, what was the other income you had on the P&L in the quarter?

Yes. We had some excess real estate in Switzerland that we sold during the quarter, and there was a gain of about $800,000 on that.

Okay. And I'm just curious -- on the retail side, it sounds like the European growth is finally coming back for you, but the U.S. growth is really stenting there. When to the comparisons in the U.S. start to ease out for you, do you think?

First of all, I mean -- last year we had an excellent year in the U.S. in retail. We had double-digit growth. And we never expected that to repeat this year. In the U.S., we see actually, you know, a lot of project discussions, evaluations. There is new legislation just being passed, which is called C00L -- C. O.O. L. -- country of origin labeling. That has a lot to do with the aftermath of September 11th, and the origin of goods to be traced back to the different origins in different countries. This requires a lot of new data on labels, that not only is related to software, but actually also related to hardware, because very often you need to assemble data from very different countries and that needs quite more powerful networks and information capability. And we believe that this will actually help -- that business will grow nicely in the U.S. next year.

Okay. And then lastly on Q4, it sounds like you are a little bit cautious on the lab business, just given the seasonal uptick you usually see. Can you just remind us what the comparisons look like for that business and which business lines were strong or weak last year?

Yes, last year in Q4 in lab, we were up mid-single digits. But AutoChem (ph) was up over 20 percent. So our drug discovery business would -- had a an exceptionally strong fourth quarter last year that we're a little cautious is going to recur.

Great. Thank you very much.

Next question is from Mike Hamilton of RBC Dean Rauscher. Please go ahead.

Good afternoon. I was just wondering -- I assume that most of the 4.6 million restructuring charge is showing up in the gross margin?

Of the cash payments?

Right.

No, that was just the cash payments against restructuring charges that we booked.

Ah, so nothing is showing -- nothing is flowing through P&L?

No, there -- actually, there is about $900,000 of severance and some other restructuring costs that are in the gross margin this quarter.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) And we do have a question from Rob Mason of Robert W. Baird. Please go ahead.

Yes, Robert, you mentioned Mettler's propensity to lag in an upturn. I was curious if you could just reflect historically, and give us some insight into maybe what kind of a time frame you have experienced in the past?

Maybe I explain first of all why I did say that. I mean, we serve many industries with solutions which help them to improve productivity throughput. And, of course, typically these solutions are necessary when you start to have bottlenecks, and you definitely need to have more capacity. We typically would lag, for example, the mechanical industry. First, they buy more raw materials, process that, and once -- you know, they really -- that fills their plants, and we would follow that after. That's just one example of one industry. Now your question is how much what we would lag. Probably I would say half a year to a year, typically. That is in particular for the industrial business what I describe here.

Okay. And does that take into consideration maybe the state of capacity utilization today versus prior recoveries as well?

I think that, you know, currently the economy is quite hard to read. One day you hear good news, and another day it's not so good -- a little bit a(indiscernible) picture. And I think, as I said as before, hard to predict. I don't hear from our customers that they are really having the capacity limits in our key segments -- in to most segments (indiscernible) I hear it. Electronics industries -- there are early indications, I think, they are really getting hotter. But that is not the key end-user market we serve. Of course, geographically, I would give you also different answers. I mean, in China the struggle is really capacity, and capacity is being built at a fast-pace. That is where we see the results.

Sure. Okay, and then Dennis, if you could just bring us up-to-date on the cost reduction activity? It sounded like Spartanburg is tracking the plan. Should we still assume around $6 to $8 million in savings that we will capture this year, even though we have had disruptions?

Yes. We are still targeting $6 to $8 million in savings for this year. But most of the Spartanburg savings will come next year, and we think that's kind of in the range of 4 million.

In 4?

Yes, 4 million related to Spartanburg.

Okay, very good. Thanks a lot.

We have a question from Sivec Gajhana (ph) from Argus Partners. Please go ahead.

Hi, it's the Divek Khana. I was just wondering -- can you just repeat what was the industrial, organic growth in the quarter? Dennis?

Industrial was low to mid-single digit.

And were the any acquisitions in the local currency number you're giving or is that organic local currency?

No, it's all organic with that.

Okay, great. And then do you think -- when do you think we can start showing some more organic growth in the company? Do you think it is sometime next year or do you think we can show as soon as the fourth quarter. When are you thinking?

I think (indiscernible) This is Robert. We're going to give you our guidance for next year in February, as usual. For me truly, as I said before, hard to read the economy. The way I read it currently, it's going to be slightly better than right now. But I think we all know it's a mixed bag. One day, you hear good news, and the next day you hear something else. And I think in that sense, it's also good that we wait with giving you too much guidance for next year.

And then I just had a question on the AutoChem business. Last quarter, you said there were some orders that were delayed. Are seeing any improvement in the pharma end-market in terms of putting orders? Or do you think we will see the typical fourth-quarter uptick? What's your view there?

I mean, we clearly do expect some seasonality in the lab business, and Dennis did mentioned kind of how much growth we expect in Q4. But specific to AutoChem, I think we had an excellent Q4 last year, and we don't expect to really top this off.

Okay. Great. Thank you.

Next question is from Chip Whitman of GE SS management. Please go ahead.

Hi, Chip with (indiscernible) GE. Can you please tell me if the new bank facility would enable you to more seriously consider repurchasing stock?

Yes, Chip, we're still in the process of getting that deal done. So we would like to get that finished off first. But we would expect to have more financial flexibility under the new deal than what we have currently got.

And Robert, I wonder if you could talk about your attitude towards share repurchase, if there weren't any hindrance.

I think that's not something we would -- which we would rule out. I think it is certainly part of our consideration.

Chip?

I am here. Thank you.

Did you hear?

Yes. okay.

Operator, are there any more questions?

We do have one last question from Lenny Shamunos (ph) from Draeman (ph). Please go ahead.

Lenny Shamunos; Yes, hi, can you talk a little bit more -- just to follow up on the AutoChem and the pharma end-users, what you're seeing in that market and how that has changed from what you saw, say, in the first and second quarter? And then I have a follow up. Thanks.

I think what we see currently, it's no different than what we have seen in the first few quarters. You know kind of (indiscernible) lab business did very well last year, and we were certainly caught by surprise in the first two quarters by relatively slow-expanding lab (indiscernible) in Biopharma. It got a little better in Q3. But certainly not materially different. We do expect a certain seasonality in Q4 and (indiscernible) kind of -- as Dennis gave you before, our expectations in terms of numbers.

Lenny Shamunos; Okay, and can you talk a little bit about your -- if you have a currency hedging program? And maybe you could provide some more color there? And what do you do to hedge some of your currency exposure?

Yes, let me just describe our major currency exposure is primarily, we are long in Euros and then we have some excess Swiss franc expenses. So we monitor that cross-rate very closely, and when opportunities present themselves, we do try to hedge that cross. In a back now we have got some hedges that run out maybe for the next four or five months that hedge maybe a half of that exposure.

Lenny Shamunos; Thanks. That is helpful.

And I'm showing no further questions.

Okay. Good. I would like to thank all of you for joining the conference call and wish you a good evening. Thank you.

Ladies and gentlemen, this will conclude today's conference. Thank you for your participation. You may disconnect at this time, and have a great day.