Mettler-Toledo International Inc (MTD) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Mettler-Toledo 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 require assistance during the conference, please press "star" then "zero" on your touch-tone telephone. As a reminder, today's conference is being recorded.

The company would like to remind you that 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 & Exchange Commission. This call is open to the public and is being carried simultaneously on the company's website.

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. Good morning, everybody. I am Robert Spoerry, the Chairman and CEO of Mettler-Toledo, and I want to thank you for joining us today. I apologize that this call is on such short notice.

Yesterday afternoon we filed our 10-Q for the second quarter and we wanted to speak with you as soon as possible to give you highlights of the quarter and an overview on the investigation.

Today I am joined by Bill Donnelly, who was appointed Chief Financial Officer yesterday and Mary Finnegan, who you know is our Treasurer and handles Investor Relations. This call is being webcast and is available for replay on our website, www.mt.com.

A copy of our 10-Q filing and the press release, we issued yesterday, are also available on our website. I will start the call with a discussion on the investigation and then Bill will provide more details on the second quarter results. As always at the end we'll have time for Q&A.

Let me start by saying I am pleased that the financial aspect of the investigations are now completed. There is no need for any change to our previously filed financial statements.

The company reached this conclusion after an investigation by an independent counsel and the forensic accounting firm into certain issues related to our financial information from the last three years. This is positive news and what we fully expected.

With the completion of these aspects of the investigation, our outside auditors were able to complete their limited review of the first and second quarter financial statements and we filed our quarterly statements accordingly.

I want to provide some insight into the investigation as I was unable to do so a couple of weeks ago. The investigation stemmed from certain allegation made by an employee with respect to the company and various company processes.

The audit committee felt that the allegation to be looked at from a broad perspective. Let me provide some insight into four of the key areas that the investigation focused on.

First, the investigation reviewed the adequacy of our information system in North America with respect to tracking operating performance and reporting financial results. In particular, they reviewed the types of information our sales and service personnel in the field service receive and whether inadequacy in the underlying information system could effect the preparation of our financial statements.

While we have determined that we need to make improvements in the visibility and timeliness of the information to our field organization, the shortcoming did not impact the preparation of our financial statements.

Second, investigation looked at how certain inventory write-downs were identified and recorded in both 2002 and 2003. We are continuing to work on improving our processes for tracking and valuing inventory. Certain of the review of our methodology for overweighing and recording certain reserves and how and where these reviews, were recorded either at the unit or at the group level.

As you are aware, we have decentralized our global organization structure. We are committed to be structure, which keeps us in close contact with our customers and allows us to adopt quickly to the development in our markets.

We recognized, however, that we need to adhere to a more standardized methodology for accounting for reserves including where, either at the unit level or at the group level these amounts are recorded. Our aim going forward is to have more of these reserves recorded that exposure exists at the unit level.

The final area that was a focus was the operation of certain of our internal controls. This included the internal audit function, certain internal financial controls but also such topics as our referable procedure and other employee related policies.

There were, of course, other items that were looked at and reviewed but these areas are probably the most significant ones. Investigation focused primarily on financial matters. Based upon the results of the investigation, the company concluded that the restatement is not necessary.

However, it became evident during that process that we need to make changes in the leadership of the oversight and control of our financial operation and strengthen our financial team, not only in terms of the number of resources but also in terms of experience level and also through more active training programs. Yet always had a relatively lean corporate spend, as resources were dedicated to the business units.

However, given our decentralized organization and through increasing demand service of our company, we recognized importance of a strong and big team.

This is the reason that the board has asked -- and Bill has accepted to come back in his role as a CFO. I think many of you on this call know Bill, but for those who don't know, Bill Donnelly was our CFO from 1997 until mid-2002. For the last two years, he has been responsible for our packaging division, as well as for our global supply chain organization which includes procurement, electronic manufacturing and global logistic.

He knows the organization in great detail and has substantial in-depth handsome experience as a CFO. From 1997 to 2002, Bill buildup the finance organization to handle the demands of the public company.

The environment for finance and control has changed dramatically in the last two years, with the passage of Sarbanes-Oxley legislation. Bill has my and the boards complete confidence and the mandate to make the necessary changes to our finance organization. Some of his changes are already underway.

In addition to strengthening our finance team, it was also recognized that the tone from top of the finance operation must be corrected to ensure that it is consistent with maintaining strong corporate governance.

Let me provide some explanation of what we mean by the tone from the top. We have a decentralized organization with a performance-oriented culture.

At the same time, this performance orientation must be balanced by completing communication that we expect all employees to hold themselves to the higher standards. Our leaders most effectively communicate these two examples; Bill will work to ensure that our finance organization has the correct tone, so that the preparation of our financial statement is unquestioned.

Finally, we also recognize that we need to enhance our vapor ball procedure. We recognize that it must be easy for employees to raise complains and concern confidentially to the appropriate level within the company and through the audit committee. We are making various changes to our internal audit structure and the functions in compact this process and develop more quickly to enhance our procedures.

A couple of additional points that I know, you really want to have information on. First, as you saw in the press release, we estimate that the total costs of the investigation will be 4 to 5 million, of which 1.2 million was recognized in the second quarter. I realize this is a lot of money.

However, it reflects the audit committees and my approach to this investigation, namely, to have the work done in a thorough and comprehensive manner. These costs include the cost of the investigator, our lawyers, forensic accountants, our auditors, employee related costs and other costs. Next, the independent investigation has been in contact with the SEC staff, and has kept the SEC staff informed of the audit committees' efforts.

Finally, there are still some open areas with respect to the investigation that do not involve our financial statements or financial reporting, principally regarding personal issues. We believe the resolution of fees and other matters will not have a mature impact on our financial performance. In fact, covered a number of items on the investigation; let me summarize the key points.

Independent investigator have completed the financial aspect of the investigation and identified no items that the company believes require a restatement. In the course of this process, several areas were highlighted, which need to be strengthened, in particular to make changes in the leadership of the oversized and control of our financial operations to correct to the "tone at the top" and to ensure it's consistent with our commitment to maintaining strong corporate governance. You can see that we're moving quickly and decisively to address this issue.

And I'm pleased that the financial aspect of the investigation are now behind us, I'm not happy that the process has been costly and has created uncertainty for you our shareholders. It was important for our Audit Committee, Board of Directors and me that this process will be handled at thoroughly and efficiently as possible. I'm very confident that we have done this, but do recognize that it has been an expensive process. I want to assure you that we've taken the investigation and its results very seriously and are working to strengthen areas that we're highlighting that needing attention. That covers my remarks on the investigation and I now want to turn to Bill to provide an overview of our second quarter results, which has been were quite strong. Bill?

Thanks a lot, Robert. Before I cover the financials, I want you all to know that I'm quite excited to return to the position of CFO. I look forward to working with Robert and with rest of the finance team to continue to move the Mettler-Toledo Company forward. I also want to say that I know many you in the call today, and for those of you I look forward to again working with you in the future and for those of you who are new people that I haven't met before as well I look forward to meeting you and developing relationships going-forward.

OK. Now, let me a look at the second quarter results with you, which you can see from our press release as well as from the 10-K filing were quite strong. We had earnings per share of 62 cents, which was 5 cents higher and above 9% higher than last year's earnings per share of 57 cents. Sales amounted to 344.5 million in the quarter, this represents a 7% in dollar terms, which consisted of 4% local currency growth and 3% due to currency.

Now, let me provide a little bit of additional insight into that sales growth. First, I'll start with a look at from a geographic standpoint and then we'll take a look at the business units and all figures I'm going to cover in this next section are in local currency.

Starting with the Americas, sales were up 4% in the quarter this compares to a flat Q1. Our growth was broad based but in particular the lab business was strong across most of its product lines. In Europe sales were down 1% in the quarter although the European economy appears to be stabilized, we've not seen too much of a pickup be at in our overall business level.

We continue to believe that our fitness will take sometime for the European economies to gain strength, but especially in our industrial applications. Asia and the rest of the world continued to grow quite nicely it was up 7 - 19% sorry. China continues to be the driver in that region with excellent growth, while Japan was down modestly. From a business unit perspective, lab had a greater quarter.

Sales growth was in the mid-to-high single digits, the strength came across most of the product lines, but I'll highlight in particular strong performance in Drug Discovery.

Process analytics, another outstanding quarter with double-digit sales growth. Looking at the industrial business lines, local currency sales were up slightly in the quarter while our core industrial businesses grew modestly, our transport and logistics business was actually down significantly because of the strong comparison with the year ago.

Finally, looking at our retail business, that was up mid to high single digits in the quarter.

Now, kind of, moving my way down to P&L, gross margins were constant with the prior year at a very strong 48.7%. We have been seeing some continuous upticks in our margin quarter-by-quarter, that's, kind of, stopped this quarter, because we had some mix impact, as well as some higher raw material cost particularly in steel kind of flow through, there is a lot of steel, particularly in China with the truck scales rail businesses and as well we had the exchange rates working against us. I want to make the comment that I see no reason why on a go forward basis we should not resume this uptick each quarter.

Looking at the R&D number, it was 20.2 million, this was as expected and was up slightly on a constant currency basis. SG&A was a $101 million, this is a 7% increase in dollar terms, currencies accounted for 3% of this increase, it also includes investigation cost of 1.2 million in this quarter.

We expect the total investigation cost to be in the $4 million to $5 million range, and I would expect to recognize the rest of that in the third quarter. The remaining increases in SG&A were due to marketing related expenses, particularly with regard to new product launches, also some higher medical costs in the US and higher corporate governance cost.

So if look at adjusted operating income, which is, as a reminder, earnings before amortization, interest and other income. It was 46.7 million in the quarter, a 9% increase over the prior year amount of 43.1 million. We have provided a reconciliation of adjusted operating income to net earnings in our 10-Q filing.

Moving down the income statement, amortization in the quarter was 2.9 million while interest expense was 3.3 million. Our tax rate remained at 30% in the quarter. These overall numbers then result in a net earnings of 28.4 million or 62 cents per share, which was a 9% increase over last year's 57%.

Now lets talk about cash flow, operating cash flow in the quarter amounted to 45.5 million that compares to 30.7 million in the prior year, which is an increase of 48%, a number we're quite pleased with. ITO improved to 4.5 times and again we're happy to show some progress as you know we've been talking to you about this area for a sometime. DSO improved slightly to 51 days, and as previously mentioned we spent $3 million on share repurchases in the second quarter prior to suspending the program once the investigation started.

Now with the financial aspects of the investigation behind us, we will relaunch the share repurchase program this quarter. We have less than $50 million of debt outstanding outside of our public bond or beyond our public bond, therefore we have ample flexibility to use our discretionary cash flow generation, which continues to be strong for both acquisitions, as well as this share repurchase program. Those numbers now give our last 12 months EBITDA up to nearly to 200 million precisely a 198.8 million and puts our net debt level at a 144 million.

We've had -- we have a very strong capital structure as evidenced by our net debt to EBITDA ratio, which is now below 1. Let me spend a moment on guidance, before I give it back to Robert.

At the beginning of the year, we told you that our estimate earnings per share would be to grow 5 to 10% and give you a feel that's in the range of $2.30 to $2.40 per share. This, of course, did not include any investigation related costs.

We expect to finish in the top half of that range, excluding investigation related costs in terms of the Q3 numbers. After incorporating the investigation related costs, we would earnings per share to be in the 49 cents to 51 cents per share and again I highlight that after investigation related costs.

OK. That's it from my side. Let me turn it over to Robert.

Actually at this point in time, we'd like to ask the operator to open the line for Q&A.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the "one" key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the "pound" key. Our first question is from Paul Knight of Thomas Weisel. Go ahead.

Hi. (inaudible).

Hi Paul.

Do you have any revenue guidance this year

Sorry, could you here -- there was a lot of static on your line and it was difficult for you to hear -- up for us to hear you, so could you please repeat the question?

Hi. I'm just wondered, if there is any revenue guidance this year?

Yes, revenue guidance will be up in multiple currency terms, in the area of % to 4%, and we look at those type of numbers for the second half of the year. That's on an organic basis, before any acquisition effect and again before currency effects.

OK. And could you tell me about China, what's your product mix you have in China and do you have manufacturing?

Yes. In China, we have all our businesses represented in particularly the industrial business but also the life and the retail business. We do have too many factoring sites, roughly 800 employees in China, good part of that is in manufacturing, but also more than 100 employees are in R&D.

The assignment of our Chinese operations are to serve the domestic market in China, which is a very strong market right now, as more and more multinational companies move manufacturing to China but also, the local market, the local companies are also doing much better in terms of exporting, so also we see great demand from that end.

A second part of the assignment of our China operation is to make low cost products not only for China, but for the --- and for the global market, so that we can augment complete our product offering with very cost competitive low end products.

OK. Thank you. And one another thing was, the geographical distribution that can probably backed out but do you have it on a revenue basis for North America, Europe and Asia?

Yes, it's approximately Europe and the US in the lower 40% range and the rest comes from Asia and rest of the world with China being the biggest piece of that.

Can you breakout North America from Europe?

Yes -- no I'm sorry, I was saying that Europe and the Americas are both in the 43%.

OK. Thank you so much.

You're welcome.

You're welcome.

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

Yes. Good morning. Couple of questions. Bill, just wanted to clarify the 49 to 51 cent third quarter includes about 6 cents of investigated costs, so pro forma would be 55 to 57?

That's correct.

All right. And then I have a question just regarding that the whole investigation, I know early on the Audit Committee notify the SECs if this was ongoing? Should we expect any follow-up from the SEC? I don't know that what the process is there, but is it possible that they could come back with their own investigation after the fact?

Well, I cannot answer that with lot of precision to you Rick. I think the process we have come through is that we did first of all inform the SEC right at the beginning of the investigation, we went back to the SEC many times to get some in interim report and also to seek their advice.

And of course, also when we came to the end of the investigation to give them a final report. And of course it will be up to the SEC to decide on what they want to do going forward. But I can tell you the approach of the Audit Committee has been to be extremely thorough comprehensive and this matter has been taken very seriously, high as top notch independent investigator who has a lot of experience in how to do such an investigation and in that sense I think we have done what we have to do and could do.

Thanks. OK.

I might add as well that the process by which we are now issuing our financial statements and specifically talking about that will not having a restatement reflect the confidence that management specially Robert and I have about the financial statements themselves and so while you cannot determine what the SEC will ultimately do that reflects our feelings about the financial statement themselves.

And is there granted, we didn't have to restate prior financials, but are there any accounting changes that will start to flow through P&L, I mean anything at all prior depreciation anything?

No. The nature of what we were focused on, I would more go to the point about how we have accounting practices as oppose to accounting principles, and I think the kind of things you are talking about more relate to accounting principles.

OK. And then just one of the thought in terms of systemic cost going forward; we talk a little bit about adding some people. Is that a rounding error or will that be meaningful going forward?

We don't thing it will be meaningful going forward, but probably more important we had feeling would be that something we're getting to return at.

And one last question Bill and this might be too granular, and I can follow up what you prefer but when I go through the Q, I notice some of the segment out profit changes and in Switzerland why is their such a large segment profit accounted for in Switzerland? Why are the net number costs against that?

Yes, maybe I explained what Rick is referring to just in case some of the listeners don't follow. Inside of our 10-K we have segment information that segment represents -- those segments represent actually aggregations of a number of segments. And in Switzerland the way the debt requirements work is we're actually presenting our operations within Switzerland and the disclosure is actually our third party sales within the country of Switzerland, while our profit would be, actually the profit we earned in Switzerland, which includes our manufacturing profit we make on exporting outside of Switzerland. So, to a certain extent Rich, to answer your question, we're making a good bit of money on selling product from Switzerland to outside of Switzerland. But the disclosure, the net sales number is actually only our sales within the Swiss market. So, you have, kind of, this implied very high margin but it has more to do with the nature of the disclosure than that there is not more cost supply to it.

Basically were you capturing profit, I mean, within the company itself as part of...

(inaudible)

Because obviously, its a high margin and also its...

Net well, I think, it's a fair comment that, of course, Switzerland is one of lower taxed countries in the world. But I think, it's more to the point, if you're looking Rick, and for example the first quarter -- sorry the three months ended June 30, you'll see that we had $11.9 million in net sales and $10.9 million in segment profit. So it looks on the surface say these guys have a 90% margin in Switzerland, that's an incorrect assumption. The fact is that the net sales number is only net sales to third party customers in Switzerland, while as our total sales coming in Switzerland include a lot of intercompany sales outside the Switzerland and that segment profit number includes all of that profits. So, it's almost an apples and oranges type comparison to look at those numbers as an operating, in fact to do the calculation of segment profit, as a percentage of segment sales.

OK. All right. Very good, thank you.

You're welcome.

Thank you. Our next question comes from Darryl Pardi of Merrill Lynch. Please go ahead.

Good morning.

Hi, Darryl.

Good morning.

Could you discuss the sales mix a little bit further that led to the -- to your consistent gross margin area?

OK. So, first of all, maybe I try and almost the anticipate the question. You would generally think we have a strong lab quarter, that's generally a good thing for operating margins and that's a usually very much the case. I would highlight though that this quarter our lab business was particularly strong, as we pointed out in the US and Europe.

And in the US, a large piece of our lab business goes through Fischer and BWR, particularly the balances and that piece of the business is at a slightly lower gross profit because we're selling through a distributor, but of course our distribution costs are lower as well.

Secondly, in China, you generally have somewhat lower prices than you have in other parts of the world, but you also have, as you can imagine with the lower cost of labor in China and that part of the world, we also have much lower distribution costs. So that's why, that's part of maybe why lab growing nicely during the quarter didn't have as much of an effect as you might think. Then as well, you have, I mentioned on the call, we have steel prices, steel prices did move against us in our -- some steel price, particularly on some of the heavy-duty trucks and things like that in the Chinese and the US market. And then we had some currencies playing against us at least at the gross margin line.

OK. And thinking about steel prices going forward, clearly China's -- truck scales in China would anticipate to continue to grow, did -- does it roll into your pricing, have you guys secured for contracts in steel or...

What I will tell you is that we actually saw a drop in steel prices in July, and so I want to continue in China, I want to see how that starts to play out, I should be careful to answer that. In China, we saw a drop in steel prices in July.

The nature or the type of steel - we are not such a big purchaser of steel that I think it's cost effective for us to hedge it, so I wouldn't expected they all to go into that type of activities.

OK.

But - and the other comment would be, as we are of course continuing to push price increases as well, we're relevant.

Actually, in US we made quite significant price increases in June.

You'd perhaps steel price increases in June?

Yes. Correct. Yes.

And then, Bill, who will be taking your position as head of packaging?

What we have done is, appointed a interim division head. He is a very experienced packaging guy. He is running actually the most profitable unit within the packaging business, and we want to take a little bit of time to digest things and see what we want to do there longer-term, but at least in the interim that person will run that business, he is US based.

OK. And just last question, you've mentioned that Japan - sales in Japan were down, could you just give a little color on that, whether that's a trans initiative or?

I think, Japan actually will come back. We had good order intake in the last couple of months. We just changed over a system in Japan and that had a certain impact there and the cut over for the quarter. But the channel improvement in the Japanese economy, I think, ultimately be visible and solving our case.

OK. Great. Thanks.

Thank you, Darryl.

Thank you. Our next question comes from Spencer Wang of SG Cowen. Please go ahead.

Thanks for taking my question. Just a one quick question I have regarding this investigation that based on the resolution it appears that there was not a significant issue with the overall financial reporting and accounting status. But - the question I have is, what led to the replacing of the CFO?

And by the way, Bill, welcome back and we -- just curious, if you could give us a little more details on the -- what led to that and the sort of the implication of the new management?

OK. I tried to cover that during my remarks on the investigation, maybe I'll just repeat some of what I just said there. We are living today in a new world, in the world of Sarbanes-Oxley where, of course, we as a company want to live up to high standards and high corporate governance standards. You also realize that our company is one, which is highly decentralized with a lot of operating units around the globe. And of course, given that framework, it is extremely important that we have a topmost finance organization around the globe, that we provide them significant training, that we constantly upgrade it, that we give the finance organization also very clear standards and directions.

And that's really what made the audit committee and the board chose a new CFO. They just want to make sure that we have all of that in place what I just said. At the same time, I want to repeat - and hopefully, this is clear to all of you, we had a very expensive review of our accounts for the last couple of years, and there is really no need for restatement, there wasn't anything wrong in our financial statement.

So this is just to clarify, this change is more of an upgrade to really tighten up the process but I mean this is not -- there wasn't anything wrong with the previous management that's -- is that the message?

As I just said, there wasn't anything wrong with the financial statement of the company. We did want to upgrade the organization and we did want to make sure that we have a very clear tone from the top of the financial organization into our global financial organization.

Thanks.

Welcome.

Once again, ladies and gentlemen, if you do have a question, please press the "one" key at this time. Our next question comes from Mike Whitfield of Wachovia Securities. Please go ahead.

Thank you. Good morning. Bill, if you could remind us what your expectations are for CapEx for the balance -- of the whole of 2004?

In the range of about 35 million, but hey Mary, if you're on the line, can you correct me if I got that wrong?

No, Bill that sounds right.

Thank you.

You're welcome.

Our next question comes from Derik De Bruin of UBS. Please go ahead.

Hi Derik.

Hi. How are you? I'm actually in trans, particularly, I apologize I got on the call late, could you please, just tell me what you have seen in terms of just the overall promissory market and I guess there has been some problem I guess looking in the company in the second quarter, and I mean clearly you guys had a good uptake in your laboratories, I was just wondering, if there were any other pockets of potential weakness or any, you can see any sedation at all in your company having?

No. Derik, it was hard to really understand you very well. I think there is a bad line but my perception of your question was that you are asking about the health of the pharma end user market?

Yes. Exactly.

And what we're observing? Now, first of all, let me just repeat what you heard from Bill, we had really a strong second quarter in our Lab business, with mid to high single digit growth in the Lab business.

And actually it was quite broad-based; it came from the balance side, in the balance side it came as a result of this many new products we have launched and we will continue to launch. But also in the analytical instrument basis, we have very solid growth as also in the process business.

And then the real highlight was our Drug Discovery business, which has many quarters of reduced sales, mainly five quarters in a row. And finally, we had a very solid order intake in Q4 -- Q2 and also for the yesterday's number.

And I guess maybe having said that, we see that the end user expanding is actually getting better but that we also have a lot coatings from our company in place, aside from the new product from the balance side also a lot of new technology on the Drug Discovery side where we had really strong offering with our real time chemistry analysis tools.

And as you certainly recall from my previous remarks, the FDA is really supporting a lot of initiatives for in Process Analytics Technology, PATS they call it. And we're seeing quite a nice demand on that end.

So, having said that, I believe the Lab business will continue to do well also in the second half of the year. Certainly, comparisons will get a little more difficult. You'll recall that our lab business last year, started to recover in Q4 of last year.

And so, we did have certainly some easier comparisons in the first half than we are going to see in the second half, but overall I am optimistic on the lab business.

Great. And just one follow-up, so on the Process Analytics side, how much was the new business just coming from people upgrading their bioreactors or new bioreactor production for the biotech drug for in drug production?

For just to be very clear, we have two elements which play this Process Analytics technology; one is our traditional Process Analytics technology, and that's of course serving very much the pharma market, but also food market, beverage industry.

That market is growing GDP like, but we are doing much better in that space. I would say, due to excellent marketing programs. Then the other part where we are profiting from this Process Analytics technology is really in the field of Drug Discovery, where certain analytical technology which was used more or so far in the laboratory environment for process development, scale up and so forth, is now finally also moving more and more into the production, and that part is actually doing also very well. I think, we have these two effects combined, Derik.

OK. Thanks a lot.

Very welcome.

Thank you.

Thank you. Our next question comes from Jeff Rode (ph) of Seagull Blaine (ph). Please go ahead.

Hi, guys. Good morning. Most of my questions have been answered, and I did want to congratulate you guys on getting through this in a timely fashion. I guess, I was just curious, Bill, will you be staying in the Chicago area or transferring over to the Columbus offices?

Actually, Robert showed me that there is a new discount airlines from Chicago to Zurich. So -- most of you guys did knew me when I did the job sitting here, you often asked me, why did I -- why was I living in Zurich with the amount of time I spent in the States.

And I think, I'll leave my family in Chicago and I'll be here probably every other week, and in Columbus probably the rest of the time. I'm already traveling a lot with the packaging job and so it -- I think this is, Rob and I feel very comfortable in this structure. OK?

Hello, operator?

Yes, sir.

Are there any more questions?

Yes, we do have a few more questions remaining.

OK.

Would you like to take the next one?

Yes, please.

Our next question comes from Todd Peters (ph) of American Century Investments. Please go ahead.

Hi. Good morning. Thank you for taking my question. Do you have any cash flow forecast for the year and you commented that your net debt level is down and talking about share repurchases as well as acquisition. Can you priorities the use of the cash over the next say, six to twelve months over share repurchase versus acquisition, as well?

OK. So, first of all, in terms of cash flow generation in the second half of the year, we certainly will add at least another $50 million plus in free cash flow. In terms of our priorities, I would say, it's purely a return question and what I mean by that, acquisitions with the right -- with the better return in share repurchases, we'll of course make those.

But acquisitions to a certain extent, you also need to have them. If I were to look out for the next six months, I think, most of our free cash flow will be spent on share repurchases, if you go beyond the six-month period, I think, we'll of course be looking to add acquisitions that have even better returns, but I can't necessarily guarantee that, that we will find them, but if we do that's what we'll do.

May be just to add here during the investigation, we've suspended the share buyback program but of course that we are now through that, we intend to come back on that.

Right. Thank you.

Thank you. Our next question comes from Scott Wilkin of UBS. Please go ahead.

Yes. Just further question on the cash flow, Bill. Just looking at it from a trailing 12 month basis, it looks like its I think around 130 plus million, just curious if there were some onetime issues or something that would lead to it being down in the second half of the year -- year-over-year?

First, I mean there were some benefits in terms of -- I mentioned for example we have about I think I said $8 million or $7.5 million benefit in the first half of the year for taking inventory down.

I am not sure if we can get another 7.5 million out of inventory in the second half as compare to the first half. But beyond that, I see no one-time items and I do expect cash flow growth in the second half of the year. Perhaps my 50 million plus was may be I didn't pronounced -- I would probably put the emphasis on plus.

Got it. OK. So, there is an upside to that number clearly?

Yes.

And then just a question on your guidance, just -- the 230 to 240, was a pro forma for the expenses for the investigation?

We started out the year without having the -- we started out with 230 to 240 without investigation cost. We're now saying, we're in the top half of that range, before investigation cost and before any impact of the share buyback.

OK. Just based on the run rate, it looks like that would imply sort of a 6 to 8% EPS growth rate in the second half of the year and I am just trying to understand that when I couple that with your revenue guidance of 3 to 4% which just seems conservative.

You're saying that -- I wasn't sure your number if you were calculating that Scott with or without share buybacks -- sorry with or without investigation costs.

Yes. If I take out the investigation cost and then use your upper end of your range, you know, sort of indicate sort of the mid to high single digit earnings growth rate in the second half. So I was just wondering, if there were something on expense side that you are planning for?

The one expense side and that we will have in the second half would be incremental Sarbanes-Oxley cost over the prior year but I think that we will, as I said finishing the top half of that range and hopefully we'll do better but I think we have to give it some time to see.

OK. Thank you.

Thank you. Our next question is a follow-up from Paul Knight with Thomas Weisel. Please go ahead.

Hi. Just wanted to ask more details about the Process Analytics technology. Just wanted to know about what percentage of revenue this generates and the kind of growth rates you are seeing?

OK. So the Process Analytics business is a business of profit $70 million within Mettler-Toledo. And then as I refer to with my last answer, we also have within the Drug Discovery business a part, which we call real time chemistry analytics.

Actually the Drug Discovery business, which hold together roughly 60 million or 55 to $60 million, and of that $55 million to $60 million, 60% is in the process development scale up and also in the field of technologies for use in PAT application Process Analytic Technology application.

Do you have growth rate for those sectors?

So in the first part of that I described, we believe we can the market will be growing probably GDP type, but we believe we can grow one at a time spent (ph), that these number like 6%, 7%. While in the Drug Discovery sector we believe it's going to be 10%, 15% per year.

OK. Thank you so much.

Welcome.

We have one final question from Derik De Bruin of UBS. Please go ahead.

Thank you.

Derik.

Yes. Hi, just one maybe on. Do you have, just I missed it from the earlier comments Robert, but could you just say that the remaining issues that's been investigated they're not of financial nature and so you do not expect any additional cost to come out of it?

That's correct. Financial investigation is concluded. There is no need for restatement. The remaining part of the investigation concern matters, which have no impact or we believe have no impact on the financial statements of the company and there are more in the field of, you know, how to treat certain employees in the company.

OK. Great. Thank you very much.

You're welcome.

I'm showing no further questions.

OK. Before we conclude this conversation, again I'd like to thank you very much for attending so early in the day. We are very pleased with the financial aspect of our business and we're also very pleased that this investigation is completed, and the corresponding uncertainty has now been removed.

We're committed to take (inaudible) the actions necessary from the investigation and to correct the weakness, which we have noted during the process. You have seen that in the second quarter we had accelerating sales growth trend.

We reflect that as our customer buying patterns is improving gradually, also from a geographic point of view Asia remains strong and the US is gaining some momentum. Looking forward we are cautiously optimistic that the trend will continue that way.

We have taken many steps in the last couple of years to position the company in a strong way. It does include a lot of investments in R&D.

We are launching many new products. We also are looking at further improving our business through new marketing and sales program the different business are solid, our lab business is gaining some more momentum, our Drug Discovery business is back on growth and also the process analytic business which we discussed various time at this call is gaining strength.

Our industrial business is still not strong in Europe. It's gaining momentum in the US and clearly in China, we benefit from the strong industrialization of that country. And finally our retail business did see a nice turn around in the first half of this year with improved cost structure. We also will nice profit pullthrough on that end.

So in summary we are very confident about the fundamentals of our business and we are confident that we will also move forward in a very good way that we are well positioned to build on the solid foundation and to improve our operating results.

I'd like to thank you for joining again this morning and I wish you very good day. Bye everybody.

Ladies and gentlemen, this concludes the conference.

We thank you for your participation. You may now disconnect.

Everyone have a great day.