Mettler-Toledo International Inc (MTD) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Mettler-Toledo Fourth-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. If anyone should operator assistance during the conference please press "*" then "0" on your touchtone telephone. As a reminder ladies and gentlemen, 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 on the Company's website. I would now like to turn the call over to the moderator, Robert Spoerry, Chairman, President and Chief Executive Officer. Please proceed, sir.

Thank you good afternoon everybody and welcome to the Mettler-Toledo conference call. I'm Robert Spoerry, the Chairman and CEO of Mettler-Toledo, and I want to thank you for joining us tonight. With me in New York this evening, are Dennis Braun, Chief Financial Officer and Mary Finnegan, who is our Treasurer and handles Investor Relations. This call is being webcast, and is available for replay our website at www.mt.com. A copy of the press release we issued this afternoon is also available on our website.

On today's call, I will first like to give you a short summary on the quarter. Then Dennis will go over the financials in detail, our guidance for 2004, and the share repurchase program we announced this afternoon. After that, I would like to provide an overview of 2003 and also will provide additional comments on the topics Dennis will cover. With that, we shall now start with some summary comments on the quarter.

I am pleased that we achieved EPS of 72 cents in the quarter, as compared to 69 cents last year. Sales came back to growth and increased in local currency by 2%. It was modestly better than we expected since the last time due to our core laboratory and our industrial businesses. Cost from operations increased nicely over the prior year, for the third straight quarter, due in part to the benefits of our cost saving initiatives. Operating profit was up 5%. Finally our cash flow generation for the year was very strong reaching 106m in 2003, a growth of 12% over the previous year. But you will hear later on the call our strategic initiatives remain firmly on track, and position us well for 2004. I will give you a further update later on in the call. Let me now turn it over to Dennis, who will take you first through the financial results and then the share repurchase program and our 2004 guidance.

Thanks Robert. As Robert mentioned, EPS was 72 cents, which was a penny above consensus estimates and 3 cents above the prior year EPS of 69 cents. Sales amounted to 370.4m in the quarter. This represents a 10% increase, of which 8% is due to currency and 2% is local currency sales growth. This is better than we expected as we saw some slight improvement in our core laboratory business, and our industrial business came in a bit stronger than we had forecasted at the beginning of the quarter.

I’ll now discuss sales by geographic region in more detail. All these numbers are without the benefit of currency. Sales in the Americas were flat in the quarter and down 3% for the year. In the Americas, lab had a solid quarter and process analytics were strong. As expected, drug discovery and retail were both down versus tough comparisons from the previous year. In Europe, sales were down 2% in the quarter and also for the full year. During Q4, we saw some slight improvement in our core laboratory well industrial remained weak. Asia had another very strong quarter with sales up 24% resulting in 17% growth for the full year. China had another great quarter while Japan remained weak. By product area, Asia had robust growth in almost all product areas with the industrial product lines the strongest.

Now, let me cover sales by business area. Again this analysis excludes the benefit of currency. Starting with lab, our lab business was up slightly in the quarter while we had expected it to be down slightly. Balances had a solid quarter helped by the introduction of our new analytical balance, the XS in October. Analytical instruments had a strong quarter do in part to new products and also we had some customer projects that have been pending for quite some time that were finally released. Drug discovery was down double-digits against a Q4 2002 comparable growth of more than 20%.

Pipettes had their quarter all year with growths in the mid single-digit range due to double-digit increases in tips and multi-channel pipettes. Process analytics had another very strong quarter, up mid single-digit. Industrial sales were up mid single-digits driven by strong results in Asia in most product lines, which were partially offset by continued weakness in Europe. Retail was down slightly in the quarter principally as a result of the tough comparison in the U.S.

In term of service revenue, we saw mid single-digit growths in service with higher gross coming from our value-added services and basically flat growth in our spare parts. This is a similar trend that we’ve seen all year.

Gross margins improved 60 basis points over the prior year to 47.6%. The improvement in gross margins continues to reflect the benefit of our cost restructuring initiatives and shifting manufacturing to China. We had a record level of R&D, which amounted to 20.9m in the quarter representing an increase of 4% over the prior year in local currency. The increase is principally attributable to our new laboratory product rollouts. SG&A amounted to $101.2m or 27.4% of sales, which represents an increase of 14% in U S dollars. Currency accounts for 8% in the increase due to variable selling cost in conjunction with our local currency sales growth, continued higher medical costs in the U.S., and higher marketing cost as we prepare for the roll-out of our new laboratory products. We also have some severance related costs related to our cost restructuring initiatives.

Adjusted operating income, which is a reminder, is earnings before amortization, interest, and other income, was 54.1m or 14.6% of sales, as compared to 51.4m or 15.2% of sales last year. The margin percentage decline is due to currency. For the full year, margin percentage adjusted for currency is consistent with the prior year. Continuing down the income statement, amortization amounted to 3.1m and interest expense was 3.5m. Our tax rates remained at 30% in the quarter. This results in net earnings of 32.9m or 72 cents per share, a 4% increase over the prior year amount of 69 cents.

Turning to free cash flow, which you might recall we defined as after-taxes, working capital, and CAPEX. We had excellent cash flow generation in 2003, amounting to 106.5m, which is 12% greater than our 2002 level of 95.2m and exceeded our 100m target set at the beginning of the year. Included in our free cash flow amounts are voluntary pension contributions in Q4 2003 of 17m and 19m in Q4 in 2002. Restructuring payments, which we do not include in free cash flow, amounted to 16.8m in 2003 and 11.1m in 2002.

Before I move on to Q4 cash flow, since we have mentioned pension contributions, I wanted to give you a brief update on our pension plans. With the actions we have taken over the last two years, we are in a very solid position with respect to our earnings status. Our non-U.S. plans are slightly overfunded, while U.S. plans are under-funded by approximately 15m. As we've mentioned last year, we've taken steps in the U.S. to freeze our pension plan, thereby eliminating any future service cost increases from this item.

Now, turning back to cash flow. Our Q4 cash flow was 30.7m versus 34m in 2002 due primarily to upfront payments of 3.1m associated with our refinancing and bond offering. Capital expenditures were also 1.6m higher in the quarter. In terms of working capital in the quarter, we saw further improvement in DSO, which were at 51 days versus 53 days in the prior year. ITO was 3.2 times and as I've mentioned before we continue to see opportunity for improvement in this area.

In summary, we are very pleased with our demonstrated ability that consistently generate a strong and growing level of cash flow despite the less than favorable economic conditions that we've faced over the last couple of years. Since 2000, we have increased our free cash flow by a cagier of 16% per year. Last 12-month EBITDA amounted to 192.4m and net debt was 196.4m. We have a very strong capital structure as evidenced by the ratio of our net debt-to-EBITDA equaling 1.0 times. Because of this strong financial condition in our consistently high and growing level of cash flow, the Board of Directors today authorized the share repurchase program with an initial level of $100m over the next two years. The timing and purchases will depend on the level of acquisition activity, business in market conditions, the stock price, trading restrictions and other factors. With this strong level of cash flow, we expect our credit statistics to remain very robust. At the same time, we have significant financial resources to pursue our acquisition strategy.

One final topic before I turn it back over to Robert is our guidance for 2004. We are cautiously optimistic about 2004, as we anticipate gradual improvements in our customer spending patterns and expect economic conditions to be strong in Asia, improving in the U.S., and weak in Europe. Based on this assessment, we estimate the sales in local currency will increase between 2% and 4%. We would expect EPS in the first quarter to be comparable to the growth rate we experienced in Q4. For the remaining quarters, we would expect gradual increases in the growth rate as we experience increased levels of customers spending. Overall, we expect the EPS growth for the full year 2004 to be in the range of 5-10%. That’s all from my side and I will now turn it back to Robert.

Thanks Danny. I will begin my comment with an overview of 2003 and then provide comments on our 2004 outlook as well make some more comments on our share repurchase program. Looking back at 2003, where we face challenging world economy and there we were affected by an unexpected softness in our BioPharma markets. The long-term fundamentals of this market are strong. However, in 2003 BioPharma firms faced short-term pressure improving reduced new direct approval hike and price regulation and the market was also effected by consolidation, spending level are not at historical levels, although we did see some improvement in our core laboratory offering in the fourth quarter. Our industrial business was very strong in Asia as multinationals companies shift production to China to gain advantage of cost base. This manufacturing shift is impacting our industrial business in the U.S. and also in Europe. In the U.S. industrial business, we saw a flat performance while it was weak in Europe. Finally with retail, we still had not seen the recovery in Europe from the reduced spending post-Euro conversion. Furthermore, the European retail industry has been by weak consumer confidence. In the U.S., retail was down principally due to a very strong 2002 Q4.

In spite of these changes or challenges, we did not loose focus on building for the future, and we've accomplished a great deal last year. We began launching numerous new products, one of which was our new generation of analytical balances, which may reach many of you so at our Investor Day back in July. This balance has met with great market reception, as it is groundbreaking in design and enables faster speed and easier cleaning, which is crucial for our users to avoid contamination by toxic substances.

During this quarter, we will launch our new generation [titration] balances, which also provides greater speed, features a leading edge user interface, and also facilitates the automation of laboratory documentation. Coinciding with the launch of this next generation balances, we unveiled our instrument control software LabX for balances. We spoke to you in the past about the success with LabX for titration, and now LabX balances is an extension of this offering, which allows for comprehensive instrument control and the fully laboratory compliance. It clearly positions us now as a strategic partner to our customer into ways that we can help them to improve their business processes. Ultimately, LabX will be a common platform across our diverse portfolio of laboratory instruments.

On the industrial side, we are excited about the upcoming launch of [Crystal] and identification technology based on CCD camera. This instrument provides unparallel packaged reiterates and compliments our dimensioning offering to provide a complete solution to our transportation and logistic customers. We have had excellent performance in recent past installation.

Another area of success for us in 2003 was China, which is now our third largest market. Sales growth in this region was up very strong double-digit as we continue to so forth our multinational customer while moving production to this area. In addition, we had expanded fixed product offering for the local market, which is also driving sales growth. As you know, we opened a new facility and successfully transferred the production from our South Carolina and French operations to this region resulting in sizable cost savings. In 2004, we will recognize incremental savings from these initiatives of approximately $12m. Because of the weakness in our BioPharma end market, we recognized the necessity of taking additional cost actions in our laboratory business, particularly in our drug discovery business. We initiated several actions including the consolidation of certain drug discovery locations. Also in other parts of lab business, they have taken some headcount reduction. You would expect analyzed savings from these actions to result in reduced cost of 3-4m because of the timing of certain actions; we won't get the full year benefit this year.

Finally in Q4 of last year, we solidified our capital structure with the refinancing of our bank debt and the issuance of a 7-year senior bond. We took advantage of attractive long-term rates and have ample financing flexibility to pursue strategic acquisitions as well as establish a share repurchase program, which Dennis did mention earlier. May be I will chip at a couple of point on this topic. We feel the share repurchase program reflects our confidence in the future prospects of our franchise. We believe it will be accretive to earnings per share, enhance shareholder value, improve the liquidity of our stock, and mitigate dilution for employee-stock option program. Although we have established this program, we are not losing focus on our acquisition growth strategy. We saw excellent cash flow generation and availability. Under our new bank facility, we have significant financial resources to pursue acquisition and establish this program for stock buybacks. Of course as Dennis mentioned, the actual timing of purchases will depend on many factors.

Now turning to 2004, as Dennis mentioned, we are cautiously optimistic in our outlook for this year. We expect to see gradual improvements in our customer-spending pattern. We saw a bit in Q4 and would expect to see more throughout in course of this year. In terms of the economy, to some extent it's still uncertain. We expect a strong growth in Asia to continue and to U.S. to continue the improvement we have seen over the last several months. On the other hand, we are concerned about Europe as the economies are still weak. We don't see any immediate improvement in Europe as they face low consumer confidence, a strong Euro, and the lack of structural reforms. Finally, we have also have factored into our outlook, that in certain of our product lines, more so on the industrial side, we will see improvement despite the capacity utilization in manufacturing. Based on these assessments, we are still on plan that the incorporated earning growth with moderate sales growth.

In terms of growth by business areas, we would expect that our new products introduction will help to mitigate weaknesses in Bio Pharma spending and therefore should see modest growth in that. We would expect industrial in the U.S. and Asia to generate growth while we remain concerned about investor business in Europe. With respect to retail, we've put both difficult comparisons behind us, and we would expect to see modest growth in this area. With all of these factors together, as Dennis already mentioned, we expect sales growth to be in between 2-4%, which will result in EPS in 5-10% range.

The drivers of growth in 2004 include many of the key strategic areas that I touched on earlier. First the real benefit from new product launches, the result of our record R&D spending over the last year. On the laboratory side I already mentioned several -- that will have several of the balance introductions later in the year as we move to replace our entire balance line by the end of 2005. In industrial, we have numerous new products including our next generation of Freeweigh, our statistical quality control for food and pharma and cosmetic companies. We also will launch new version of Formweigh, our formulation software for the Pharma and food industry. In packaging, we will launch [Utime], a new generation of metal detector and X-ray machine.

We do expect continue growth opportunities in China not only from our multinational customers as they continue to develop this area, but also as we continue to expand our geographic sales and service coverage. We also see strong opportunities for penetration in China in process analytics, packaging and retail. We have made significant investments in these areas during the course of the last year. Service is another primary initiative for us as we are -- as we continue the transformation from repair and maintenance business to be a provider of value-added services. I've consulted this service approach in which we critically assess all instruments in an area, determine the best strategy for optimizing performance, is meeting with increased success.

Finally I mentioned the cost savings earlier, but want to mention again here. We should have incremental savings from the closing of our Spartanburg facility in the range of $4m. The savings from our laboratory initiative will range from $2-3m this year. To summarize, with that quality feeling, first we faced difficult environment in 2003 but accomplished the great deal and stayed firm to our plans for building the future and consequently are in a very solid position at the end of 2004. Although the economy remains uncertain, we will benefit from new production introduction, growth initiatives in service and Asia and cost restructuring actions. Consequently, with moderate sales growth, we expect to achieve EPS growth.

Finally in terms of investor relations, I would like to mention the following. We will not have the formal presentation at [Pacom] as many of these products are the ones that we showed at our Investor Day before. However, Mary will be organizing a couple of tours, so please contract her if you are interested in visiting our booth. Finally, we are tentatively planning an Investor Day in Switzerland during the week of July 26. I recognize that this involves time and budget commitment from you, but I think it would be well versed and we would be looking to welcome you at our state-of-the-art manufacturing and R&D capabilities and give you a first hand view on that. That is all for now. I would like now to ask the operator to open the lines for questions. Operator could you please open the line for questions.

If you have a question at this time, please press the "1" key on your touchtone telephone. If your question has been answered, and you wish to remove yourself from the queue, please press the "#" key. Our first question comes from Darryl Pardi of Merrill Lynch.

Good evening guys.

Hi, Darryl.

Hi, Darryl.

Currency -- the guidance you know 2-4% top-line growth and 5-10% EPS growth implies only modest margin expansion. I just seem to see there are a lot of positives for next year, aid new products, which generally have higher margins; you have just the cost savings alone we are talking -- $6-7m of cost savings. What's offsetting that? There are increased medical and insurance costs you are having, is there is something that you expect in sales mix for next year that's kind of negatively impact margins?

Yeah Darryl let me try to take a shot at that. I mean offsetting some of these savings are increases that we're going to have. You mentioned the U.S. medical cost and that continues to be an item we are fighting as well as insurance including D&O insurance, escalating compensations increases well as we are going to have some increased corporate governance cost to deal with Sarbanes-Oxley legislation. So, we are very focused, as you guys know, on controlling our cost but certainly these times are going to result in increases and mitigate some of the permanent cost savings that we've already achieved.

Okay. In the fourth quarter can you talk about you said [inaudible] in North America, a continued weakness in Europe, but generally that sales to pharma were better than you had anticipated. Was that -- can you just talk about how pharma looks geographically?

Yeah. So. Yeah. If we look, it was fairly strong across the different units. I would say, for the quarter, primarily strong in the U.S. and Asia, and Europe was fairly low-single-digit type growth.

Thank you.

Our next question comes from Ross Mukin (ph.) of Thomas Weisel.

Hi guys, its Ross Mukin for Paul.

Hi Ross.

Hi Ross.

Hi. If you could just kind of expand a little more on what you're seeing in your drug discovery business? I know, you talked about some restructuring that you are looking at. Maybe on more of a product base, just kind of by product, or by area within drug discovery, what you are seeing? Because a lot of the other companies we've heard from have seen a strengthening in especially the smaller biotech customers. So kind of trying to understand what's driving the double-digit decline still in the business?

Okay. Maybe I just want to recall that in 2002 actually our drug discovery business did surprisingly well.

Right.

We had nice growth in that year, which was a little bit different then the market it performed that year. But that you have seen throughout 2004 for pretty much every quarter, we had, you know, quite a significant decline. You did ask about which businesses did well within drug discovery, you know, if I look at it from a product point of view, that [insight] to technology would be better, this is technology where we can in the process itself in the ray, actually in itself to a real-time chemistry analysis. That is a technology which is in great demand and that we have seen a really good performance. In terms of geography, Japan was quite difficult; actually more difficult than other products of the worlds. But we also have declines in the U.S. and Europe in drug discovery. You did also ask by customer segment - pharma versus biotech, our key customers are really in pharma for [inaudible] products, and we have of course seen similar patterns in pharma industry in terms of the decline. In U.S. consolidation has an impact; the Pfizer-Pharmacia merger did affect that business quite a bit and promoters have been delayed or even pushed out.

Great. And just quickly on a geographic basis, is there any segment within your business that has been strong in Europe where that you expect to be improving in Europe over the next year?

In terms of improvements?

In terms of top-line growth?

Yeah I think you know, just going to the different businesses -- and to little bit our expectations. Retail sector in Europe I think we really are at the bottom, but we have seen quite improvements. We actually had some good Q3 performance -- Q4 was then a little slower, but I think in general we have built a nice backlog there. And I think we'll see some recovering into retail business in Europe. I think the laboratory business in Europe will also slightly improve in course of each year in particular on those product lines that we launched product line over the balance business. Process analytics had solid performance in Europe, I would expect that to continue this year out of the pipettes business and at where we are really building up the market and taking [Inaudible] that’s [slow] to okay in Europe. Where will suffer in Europe is more on the industrial side. And these are four reasons I mentioned before. The shift of manufacturing to Far East, in particular China, I think that's an ongoing trend and I don't think that that trend will soon cease I think. Also the strong Euro will hamper the exports from the European countries and that's just on top of what I said, affecting the manufacturing sector.

Great. And just quickly what are you guys are -- I know you said 2-4% top-line growth for the year. With respect to FX, you are assuming that rates will stay relatively near where they are currently for the next year?

Yeah I think for Q1 we would expect the top-line benefit from currency to be kind of in the 6-7% range.

Okay.

And assuming that currency rates stay approximate where they are at for the rest of year, we expect the full year benefit to be kind of in the 4% range.

Super. Thanks. That's it from me.

Okay, thanks a lot.

Sure.

Thank you our next question comes from Richard Eastman of Robert W Baird.

Number of things. Could you give us the mix of business -- geographic mix of business in dollar or just wait the year so -- we in the general sense of the mix?

Yeah that’s just going to take a while -- both Mary and Dennis are just looking at numbers.

Okay.

May be you have another question in between.

Yes. And I wanted to see in terms of -- when you think of the product mix - lab, industrial, retail, is there any one product category that's particularly sensitive to the strength of the Euro; in other words, that you export a large percentage of those products to the U.S.?

Yeah, impacting metal detection.

Okay.

We make those products in U.K., the [Safine] manufacturing facility in Manchester and they export quite a bit to the U.S.

Okay. So, that's one area that again competitively are you suffering a bit there?

Well, you know, I think the pound is really strong and it does not get even worse there.

Okay.

But just to make you clear, we actually had a good year in metal detection, worldwide and [don't take the] U.S.

And then also -- I just -- just a general question about incremental margin. I realize that currency is going to play around with the cost numbers here, but it's a little bit curious to me that we are capturing some good incremental margin at the gross margin line? And yet it's slipping away from us at the EBIT line and I am -- is that basically because our admin and R&D is denominated in Euro whereas our manufacturing is largely U.S? Why is that the case? I mean if Dennis you walked through and said you kind of made some adjustments for currency but I am a little, I am confused as to why we are seeing the incremental margins -- the gross line, by the time we get to the EBIT line there isn’t any.

Yeah. I think, Rick, it's a good question and if we look in percentage terms the EBIT margin percentage is about flat year-on-year when you adjust for currency.

And so we should look at the flat sales adjusting for currency for the year and just reconcile it that way?

Yeah. So we are getting some improvement on the gross margin line. We are making some investments on the R&D line. I mean we had a record R&D this year, local currency on growth basis of about 2%. So -- and then the SG&A line we had a couple of million of severance cost this quarter.

Okay. So that that would be over the book currency because -- again when I kind to try to follow your math and I go back our notes and look at some of the cost savings that you had expected to deliver from sourcing the lab restructuring at Spartanburg I had my note salary increases might cost you $15m or so in '04. But it -- to get the high end of your guidance, it would appear to me that you are still looking for an incremental margin at the EBIT line or perhaps 35% of that type of number. Does that seem achievable?

35% of what Rick; I am sorry.

Just the incremental sales Dollar. Can you drop that down to the EBIT line?

Let's try a little high at the 35% level.

Okay.

I think if you look at our linear guidance there, it's probably more in the 25% range.

Okay and then add in the cost savings and the cost increases?

Yeah. Okay. And hey Rich just to come back to your opening question. So roughly for the year, it is about 4% Americas, 43% Europe, and 14% Asia for the full year 2003.

And just to put -- can you put China in perspective? Is it half of the 14 or --?

Yes, in that range.

Okay. Alright and just one last question, Robert, when you look into '04 has there been a change in tone or pace or priority on acquisitions and we haven't seen them for a couple of years, I realized we've kind of lots of distractions, but I mean is there, is it more likely we will see an acquisition or two in '04 or about the same as what we --?

Actually we'd say last year 2003 we were very much focused on these restructuring initiatives in the Company. I think that is always good to have the house in order before [want of revenue] companies to Mettler-Toledo. What concerns this year, of course I cannot give you complete information on timing and bulk, but certainly we are working on acquisition, this is thought of the ongoing strategy for Mettler-Toledo. As I did also mention, we have the financing in place. We feel with where we right now, we have a significant availability, in spite of the share buyback programs and as seen over the many past years, acquisitions are not the key goal drivers for Mettler-Toledo, but they are part of our goal strategy and that will of course be also fall in the future.

Okay, alright. Thank you.

Yes, thank you.

Our next question comes from Sara Michelmore of SG Cowen.

Great, thank you. Robert hoping you could comment some more on your U.S. outlook for 2004. It sounds like you expect the improvement to be gradual over the year, can you just drill down and give us a sense of how you expect the three business units to perform and if you are expecting sort of a gradual recovery in all three or is there, you know, one that performs better coming in the first half or more, you know, it's more consistent throughout the year?

I think what we have seen in Q4 in labs in the U.S. was encouraging and when I say lab I mean core labs, certainly part of the story there is the new product launches. We are going to have some more new product launches, as I just mentioned earlier in the conference call; and I would expect that the core labs business is going to continue its growth in the U.S. I think the retail business will also see growth in U.S. this year. There are legislations in the work which will be beneficial to the retail business, with all these disease [crashing] which came up like mad-cow disease; traceability of food is very important and that of course is also a [crashing down] of information systems and also putting this information on food labels and that where we can put [inaudible] [into whole]. The industrial part is the one part where I am not so clear in what we should expect. I think that’s probably where I would see only a really gradual improvement. The manufacturing sector into U.S. is still not very strong and the seasonal effect, I mentioned many times already, in my point of view, it's not necessary to know recycle businesses. With that, I mean, all from, you know, brands are having a first to buy the [inaudible] to the patients before you than looking to productivity improvement for more throughput or capacity expansion.

Okay. And on the guidance, are you assuming any of the share buyback in the EPS guidance for 2004?

No.

Any level of share buyback in 2004?

No. The guidance doesn’t include that.

Okay. And how about a cash flow target for 2004?

Yeah. For 2004, we are targeting something in the $110-115m range.

Okay. That’s great. And just a last question I have is, can you give us a sense for what your R&D growth targets would be for 2004, and maybe do it on a kind of currency neutral basis will be helpful?

Yes, on a currency neutral basis we are targeting kind of a 2-3% local currency growth in R&D.

Great. Thanks so much.

Thank you. Our next question comes from Derik de Bruin of UBS.

Hi, good afternoon.

Hi, Derik.

Hi, so I am -- just want to go through one more time on the FX on the top line and the bottom line drop through, so if you are assuming a 4% benefit for the year, and so the rest -- then all that benefits is going to be eaten up in the margin line?

Yes, Derik, basically, we fairly naturally hedged as far as currency, so unlike a lot of the other companies that are really benefiting on their operating profit line, it's not going to have a significant impact one way or the other for us in 2004 as we model it.

Okay, so could you give us how much your operating margin and gross margin targets are for 2004?

Yeah, we’d hope to get some margin expansion there for the full year. I think we are looking at kind of in the 50 basis points type range on the gross margin; and a similar type expansion on the operating profit margin on a constant currency basis.

Okay and could you classify how much in the fourth quarter came from new products, how much revenue?

Well that’s a tough number for us to really quantify right now. I mean, obviously the excess balance did have an impact for us and we expect that to continue into '04 but to try to quantify that numbers is tough right now.

But maybe I can add some comments here. I mean the last balance business is roughly 20% of our total sales and that product line will be replaced in the next 1.5-2 years. So we'll have really a lot of new products in that segment. That's not the whole typically the guides you have been given here we replaced 20-25% of our sales volume with new product and we certainly we are at the very good point in time in terms of the product and we have a lot of new products to bring to the market.

Hey, I just - the final question would be on what's your expectation out for the interest expense for the year?

Yeah, we’re targeting something in the $13-14m range for interest expense.

Okay. Thank you.

Okay.

Thank you. Our next question comes from Mark Robert of Wachovia Capital.

Thank you, good afternoon. As you are moving more and more of the production to China are you seeing an increase in competition from Asian based companies or are you seeing competition from your traditional competitors who are also moving their production to Asia/China?

Yeah. First the second part of your question, it's quite clear that some of our competitors have also seen that there is opportunity for low cost sourcing in China in that sense they do the same as we do. We however are ahead of them just to [inaudible] you feel we have today a China organization which has roughly 800 people. We have many, many R&D people in China; we are in that sense well ahead of competition, but clearly competition is also moving that way. In terms of Chinese moving in to our traditional markets, new competitors out of China, frankly nothing visible at this point in time and I think the danger of that is quite small. In our business, it's not only a matter of having products, but it's very much a matter of having distribution channels and service organizations. And of course, this Chinese like all of that, it's not so easy for them to break in and I am frankly not so worried about it. A lot of our business is also not just moving boxes, actually that's a small part of our business and bigger part of business is selling solutions, which needed [inaudible] customer into facing consultation and only after that you can then complete the [desistance] towards the needs of the customer. And that of course even more needs sales service capability very close to your customers.

Okay. And one other question if I could. Accounts receivable jumped up a little more than what I had anticipated. What's -- can you talk a little bit about the linearity in the quarter and were there any unusual items that caused receivables to jump up?

Yeah, Mark, with local currency sales growth we expected our receivables to go up but also the currency is playing an impact there. So, if you are comparing on a constant-currency basis this year and versus last year end, receivable balance is actually down $4m on a constant currency basis or about 2%.

Okay. and I was actually doing a calculation on the day sales outstanding. It -- mostly I did the calculation wrong, too quickly; it looks like it went up a little bit?

Sequentially, from the third quarter?

Yes.

Yeah, it did. It went up slightly but we normally see that trend when the [inaudible] local currency sales and also seasonality in the fourth quarter, a lot of it's skewed towards the December revenue, which we don’t typically [add] in until the first quarter of the next year.

Okay. Thank you.

Thank you. Our next question comes from Chris Shibutani of J.P. Morgan Chase.

Thank you. If I could dig a little bit more into the challenges that you are seeing in the U.S. drug discovery market, you historically have described how you have a very diverse customer base and yet you sight that the Pfizer-Pharmacia was particularly impactable. If we see additional consolidation, as there is potential for, might there be more impact greater than you would currently project?

I were -- may be talk for drug discovery this year quite moderate. We believe that this business is going to grow low single-digit this year and that's on a low base after the decline of last year. We actually have a [inaudible] at the end of this year, and therefore we see this as a various realistic target. I mean in terms of diversified customer base, we surf here pretty much pharma companies and yet sometimes we are affected by consolidation. But sometimes in OTC, it's only a matter of time and that’s the -- at Pfizer, we have seen that things are now starting to improve and that some of it came back. So these are usually more temporary phenomenon spent longer lasting ones.

The areas where you are seeing declines -- it's being put primarily in the context of I guess challenging markets. Can you comment about what you think your share positions are doing in some of these businesses? Are you gaining or perhaps losign share to contribute to the growth decline we have seen?

You know, where we had declining sales is on -- the only product of the drug discovery namely in the [sink sizing] business. That has a lot to do with the market itself. If I look at it actually in terms of units we sold then actually we did well. But that has a lot also to do with the mix our product offering. We are selling today much more manual or semi-automated systems, entry systems. We have seen that this is -- where to market is much more today, the price tack is effect to [inaudible] lower than to typically equipment before. But of course you sell quite a bit more, but I think this has spread out the system installation many times and the ultimate duty system installation will be upgraded with more in ultimate versions once they have reached throughput and capacity limits. So, I think, you know, if -- we have been here in one business it's really in depth -- the part of the businesses, [heavy loss], account risk, competitions. We do have information of competition and actually their sales are down equal amounts as were ours.

Okay, and then lastly, there was a mention of interest in M&A. Did you or could you comment upon areas that you think you might be relative to be more interested or sort of what the objectives behind, you know, certain pursuits in M&A that you might have?

Well, to the objectives I mean several of them. First of all to mention, it should help Mettler-Toledo to driving more of its business impact to those markets. Then of course it also should help Mettler-Toledo to build strong leadership provisions; this is part of a philosophy we always have, that being the businesses we are in, we want to be in a strong leadership position. Now, specifically in terms of the end-user or the applications, we have mentioned many, many times that we see above average opportunity for growth. Still in drug discovery, I think the setbacks we had last year, we see that not as a permanent form, but much more as a temporary setback. That factor has been growing consistently over a longer time period with very good R&D growth rates. And, I think, even though there are some challenges right now in that sectors, which probably are even getting a little smaller, just [inaudible] by now, this sector has plenty of opportunities at the same time to finding new drugs needs using different business processes and therefore type [inaudible] like we have.

The second segment, which we feel attractive, is the one for process analytics. I think very logical reasoning for that going faster is that more and more of the analytics and quality control applications are moved from the lab into the processes out and through that you have real-time informatics and control and through that, of course, you have much by the yields in your profits. Transportation logistics is also another mark where we strongly about. Last year we did not do an acquisition but we made a very sizeable R&D investment into this product line, which I described before [inaudible] product line and I am pretty optimistic that this new [TCD] based camera system will help us to find [verticals] more punctual in this transportation logistic segment. So, these are some of the key areas we are looking for growth.

Great. Thank you for the detail.

Welcome.

Thank you. It appears there are no further questions.

I'd like to thank you all for joining us tonight. Thanks a lot for your interest in Mettler-Toledo, and I wish you a good evening. Thank you.

Ladies and gentlemen this concludes today’s program. You may now disconnect. Good bye.