Mettler-Toledo International Inc (MTD) 2005 Q2 法說會逐字稿

Good day,ladies and gentlemen. And welcome to the Mettler-Toledo International Q2 2005 earnings conference call. My name is Carlo and I'll be the coordinator for today's presentation. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session during today's presentation. [OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to Mary Finnegan, Treasurer and Investor Relations. Please proceed, ma'am.

Thank you. Good afternoon. I'm Mary Finnegan, Treasurer and responsible for Investor Relations at Mettler-Toledo. And I want to welcome you to the call this afternoon. I'm joined by Robert Spoerry, our Chairman and CEO; and Bill Donnelly, our Chief Financial Officer. I'll start by covering some administrative matters. I will then turn the call to Robert, who will provide you highlights on the quarter. Bill will, then, cover the financials in details, and then Robert will update you on current market conditions and our strategic initiatives. Of course, we'll have time for Q&A at the end.

Now, for the administrative matters. First, this call is being webcast and is available for replay on our website at www.MT.com. A copy of the press release we issued today is also available.

You should be aware that statements on this call, which are not historical facts, may be considered forward-looking statements for the purposes of Safe Harbor Provision under the Private Securities and Litigation Reform Act of 1995. 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 our performance, please refer to our filings with the SEC. We undertake no responsibility to release, publicly, any revisions to forward-looking statements as a result of subsequent events or developments.

One other item on today's call -- we may use non-GAAP financial measures. More detailed information with respect to use of and differences between the non-GAAP financial measures and the most directly comparable GAAP measures is provided in the press release. I'll now turn the call over to Robert.

Thanks, Mary. I wanted to thank you you all for joining us, today, on this call. We are very pleased with our second quarter results, particularly the improved local currency sales growth and it's a very strong increase in our EPS, after, of course, adjusting for one-time items which Bill will explain later on.

Our sales gross in the quarter was an increase of 7%, of which currency was benefiting us 2% and we grew in local currency by 5%. We are especially pleased to see better performance in Europe, which was [indiscernible] with most of our laboratory and industrial product lines in Europe showing good growth.

EPS, after excluding the one-time pipette litigation charge and investigation costs from last year, was up strong 13%. Finally, our cash flow generation was solid in the quarter.

Our outlook for the remainder of the year is very positive and we are about efficient to achieve our financial targets for the year. Bill will now provide more details on the financials.

Thanks, Robert. Hello, everybody. We had a good second quarter and, as Robert just highlighted, we achieved a 13% or $0.08 per share increase, if you adjust for the one-time items. Let let me go into some additional details, starting with sales.

Sales in the quarter $368.6 million, an increase of 7%, consisting of a 5% local currency growth and a 2% currency benefit. In addition, exited product lines reduced sales by, approximately, 1% in the quarter.

Before I get into details on sales, I want to remind you that we focus on local currency sales growth, which drives our operating performance and is a much better measure for us than U.S. dollar sales growth. So we'll focus on numbers and constant currency for the remainder of the sales discussion. All comparisons are versus the second quarter of last year.

I'll start with sales by geographic destination. Europe recognized a 3% local currency sales growth. Sales growth was solid in most laboratory and industrial product lines, while retail was down.

In the Americas, sales grew at 3%, although this was below the level we saw in the first quarter, it was in line with our expectations. Sales growth in the Americas was relatively consistent among lab, industrial and retail-oriented products.

Sales growth in Asia/ Rest of World, was up 13% in local currency, a little better than we expected at the beginning of the quarter. China was inline with our expectations, while Japan and southeast Asia came in a little stronger. Sales in the region were strong in most product lines.

Turning from geography to business area, let me start with lab which had a strong second quarter, with sales up 6% over the prior year. Exited product lines hurt lab growth by approximately 1% in the quarter. The sales growth was driven by Balances, Analytical Instruments, and as well, Process Analytics. Sales growth in Drugs Discovery was down slightly against the strong comp from the prior year but orders, at the same time, were actually up.

Industrial Products were also strong in the quarter, up 6% over the prior year. Our core Industrial and Product Inspection Businesses performed well, while our Transport and Logistics Business had a very strong quarter. Robert is going to provide you an update on our T&L Business a little later in the call.

Finally, in retail, sales were down 3% in the quarter, due to decline in Europe.

Let's move down the rest of the P&L. Gross margins were 48.9% as compared to 48.7% last year. We continued to benefit from cost rationalization programs to reduce overhead costs, as well as procurement and redesign efforts to produce product cost. Pricing was strong in most product areas, except retail, and steel prices tended to hurt our industrial product lines.

R&D amounted to $20.9 million or 5.7% of sales, on target with what we expected and slightly higher than last year. SG&A was $108 million, up 7% in U.S. dollars. Of this increase, 3% was due to currency and the remaining 4% was local currency growth. Factors contributing to the local currency growth were investments in our global sales and marketing efforts and higher corporate governance costs, including [SACH]-related costs. These were partially offset by investigation costs included in last year's amount. The net sum of these items resulted in an adjusted operating profit of $51.4 million as compared to $46.7 million in the prior year.

Continuing down the P&L, amortization amounted to $3 million in the quarter, interest expense was $3.8 million. Our tax rate, excluding one-time charges, was 30% in the quarter. We recorded a one-time charge related to our previously disclosed pipette litigation of $21.8 million or $13.1 million after tax or $0.30 per share.

Let me walk you through the details of this charge. Of the total, $19.9 million is non-cash write-off of the intangible asset associated with the license agreement that under dispute. The judgment terminated the contract and, although we're still considering our legal options with respect to the case, we determined that the asset has been impaired and should be written off. Also included in the charge are litigation-related costs of $1.9 million.

As previously stated, we do not believe that the judgment will have a material impact on ongoing financial results. We will replace the product whose license we lost with a product we already sold in the European market, but had not sold in the U.S. market. Even if we lose some sales, our margin will eventually be higher because we'll manufacture these products.

The net result is net income of $18.3 million and earnings per share of $0.42 per share, which includes $0.30 charge previously discussed -- or just discussed above. On a comparable basis, that is, if we exclude one-time charge of pipette litigation, as well as the investigation costs from last year, earnings per share was up a strong $0.13 (ph) -- 13% in the quarter.

Let me turn to cash flow, net cash provided by operations was $50.6 million, an increase of 11% over the prior year amount of $45.5 million. DSO improved in the quarter from 51 days down to 48 days, and we continue to see improvements in our ITO, which improved to 4.7 from 4.5 last year. We're pleased with these continued improvements in working capital.

During the quarter, we repurchased 977,900 shares of stock for a total of $46.3 million. And as I mentioned last time, our intention is to use our free cash flow in 2005 for share repurchases. This, of course, could change with a sizeable acquisition or other developments but we're now moving towards this target.

Our capital structure remains strong. At the end of the quarter we had $160.8 million of net debt and -- versus a last 12 months EBITDA of $213.8 million, which gives us net debt-to-EBITDA of .8 times. This gives us adequate financial flexibility to continue our share repurchase program and have room for possible acquisitions.

One topic I wanted to comment on, is our plans with respect to the American Job Creations Act of 2004 that allows the repatriation of foreign earnings at substantially reduced tax rate. We're currently finalizing our analysis, but estimate that we'll repatriate approximately $400 million in cash from our foreign operations. These earnings are primarily from our low-tax countries of Switzerland and China. This will result in one-time tax charge of up to $15 million with cash costs lower of about $8 million, because of the utilization of tax credits. We expect to have a significant pay-back on the $8 million over the next five years, with anticipated tax savings of, approximately, $40 million.

The implementation of this tax act will result in our balance sheet being, quote, unquote, grossed up. That is, we'll have debt overseas and excess cash in the United States. We estimate that in two years our balance sheet will be back to its quote, unquote, previous state. In terms of what we'll do with the cash, we'll expend it per the guidelines outlined in the tax act; however we're making no changes to our uses of our cash flow that we've discussed with you in the past. That is, we'll continue to use our free cash flow for share repurchases and acquisitions. We expect to finalize the American Job Creations Act in the third quarter.

In terms of guidance for the remainder of 2005, we now believe that we'll end up at the high -- mid to high end of previously given guidance of local currency sales growth and earnings per share. These ranges are for local currency sales growth 3 to 5% and earnings per share in the $2.65 to $2.75 range. In terms of Q3 guidance, current consensus is $0.65 per share, which we think is reasonable. Our earnings per share guidance does not include one-time charges related to the pipette litigation nor any impact of the Job Creation Act. That's it for my side. And now I'll turn it back to Robert.

Thanks, Bill. I want to start by adding to Bill's comment on sales performance and on our outlook for the remainder of the year. I will then provide an update on selected strategic initiatives.

Looking at our geographic markets, as mentioned at the beginning of the call, I was really pleased to see the sales growth and the improvement of sales growth in Europe in the quarter. In Europe, sales were solid, both in the laboratory and industrial product line with transportation and logistic being very strong, in particular. Retail was below last year as they faced very challenging comparisons. Expect to see improvements in our European retail business during the remainder of the year. Overall, across all businesses, expect sales in Europe for the full year to be in the range of low single digit.

Sales growth in the Americas came in pretty much as we expected. Industrial growth was solid, but that's expected. We saw it below the very strong level we had in the first quarter. Retail has a solid growth, which was better than in Q1. As we look at Q3, order intake on the industrial in the Americas looks very solid.

In terms of Asia, China came in as expected. They face tough comparisons with the prior year. China has strong backlog entering into Q3. Japan and southeast Asia had very strong sales growth in the quarter. And we don't think we will continue that -- that that will continue for the rest of the year.

Now turning to market conditions in our different businesses. Laboratory had a strong quarter and this, despite a very solid quarter last year. Balances as well as Analytical Instruments were the principle growth drivers. Drug Discovery was down, slightly, in the quarter, but has a much better backlog than at the same time last year. It continued to see strong demands in our Process Development Area with continued weakness in our Discovery Business.

Industrial had another quarter of solid growth. Industrial growth in Asia was strong and our Transportation Logistic Business globally had outstanding quarter. As we've not spoken about this business recently, I thought I would provide brief update on the business.

We've been a pioneer in the development of the [Indiscernible] and basic capture technologies for the transportation and logistic industry for many years. And we have the most accurate and highest throughput solutions in the industry. Our solution help freight carriers recover revenues through [indiscernible] pricing, based on dimension, as well as weight. Our solutions also have operational cost savings and help, of course, the information of the [Indiscernible].

Sales growth in the second quarter was strong, both in the U.S. and Europe. In the United States, dimensioning is a more mature technology and carries focus is more on the improvement of the read rate, the ability of the system to read accurately the bar coding. They are adding more readers, demanding faster and more accurate solutions and increasingly looking at camera-based systems, which gives two dimensional capabilities. We have [indiscernible] the radio solutions to address these needs.

In Europe, the market dynamics are somewhat different. The technology adoption of the dimension is not mature. Furthermore, we see a lot of consolidation in this market as many big U.S. carriers look to expand the geographic presence. Our opportunities in the business includes Asia, which is owned a small portion of the total business now, but has tremendous opportunities for growth.

You also see opportunities selling to warehouse or logistic companies who want to install dimensioning instruments so they know they are being charged correctly. They have need for systems which are smaller and more flexible than those used. We are holding out such a solution in several markets in Europe. Although our Transportation and Logistic Business is small portion of the overall industrial business, it has a strong growth dynamics.

Finally, a word to retail. As I said before, retail was down in the quarter. We select challenging comparison in the second half of the year and based on our strong project pipeline, we would expect to see modest growth in the retail for the remainder of the year and low single digit growth for the full year. That's all I wanted to cover in terms of the businesses.

In terms of our strategic initiatives, I want to provide you an update on Project Spinnaker which, as you know, we initiated about year ago with the goal of improving our organic sales growth. Most of you know that the more than 75% of our product lines, we have the number one global market leadership position. Even so, our world market share costs all our products is around 20%. So we believe we can increase the market share by increasing that -- the effectiveness of our sales, service and marketing organization. In the course of the Project Spinnaker we identified many opportunities and for the time being, we narrowed the list to four focus areas; namely, segment marketing, regeneration, field automation, and pricing.

Today, let me talk -- take you through what we're specifically doing in one of these areas, namely, in the area of regeneration; and also have your measuring the progress on this initiative. Since the first quarter of the year, we are measuring leads in our sales organization throughout the world. Our goal is not to just obtain great number of leads but rather, a great number of high-quality leads. We're also tracking the source of leads, which includes leads from our service organization, from e-mail campaigns, seminars, direct mail campaigns, exhibition, trade shows or our telemarketing departments. We also continue to closely track the lead generation from our web track form.

In addition to tracking leads, we're implementing marketing initiatives to generate more leads. As you know, one key initiative to generate more leads is segment marketing. Since the beginning of this year, we've added 10 new segment marketing campaigns in such areas as cosmetics, snack food, flavors, [Indiscernible] and the chemical industry. Our segment marketing campaigns have proven to be very successful in generating new leads in sales.

Our initiatives to increase our leads include significant increases in telemarketing, or providing incentives to our service organization. Finally, we are also expanding our electronic lead generation to enhancing our web consent through e-mail campaigns, online ads and expanding the use of key word in search engines.

Now, of course, you wonder about the results. The results of all of this effort is significant increase in the number of leads. In those units, that we have [Indiscernible] along with our Spinnaker implementation we are seeing very significant double-digit growth in the numbers of leads. We are convinced that the increase in the number of leads will increase our sales momentum.

Project Spinnaker is more directed to the top line growth, but also, as you know, we have defensive strategic initiatives which will help us to improve our cost effectiveness and also efficiency of our working capital, including our efforts around supply-chain management. Our goals in supply-chain management are two-fold: To reduce the cost of managing our inventory, as well to reduce the inventory levels.

Last year, we expanded our procurement initiatives to include the full supply chain to gain greater efficiencies of costs and assets. This made many good progresses and are now very short with starting the operation of our North American logistic cup in Ohio. In addition to cost savings from a more centralized approach, this move will help us to reduce inventory levels. We are already seeing improvement in our inventory terms but see further opportunities to increase the inventory term to five times.

On the procurement side, we continue to be able to offset price increases with savings in other areas. Overall, our material purchasing, our material costs are flat, despite inflation and pressure from the field and other commodity price.

In summary, we are very pleased with the result of the quarter and the progress on our initiatives. Our sales growth has improved, and order entry or backlog as we enter Q3 is very solid. We remain cautiously optimistic for the remainder of the year. That's all I wanted to report and now I want to ask the Operator to open the lines for questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS] Our first question from the line of Darryl Pardi with Merrill Lynch.

Good evening, Robert, Bill, Mary.

Hi, Darryl.

Hey, Bill, the gross margin expansion was a bit lower than I anticipated and a bit lower than we've seen in the past few quarters. Yet the sales mix, I think about lab being up 6% and retail down a bit, would have expected that to widen a bit more. Is there anything in the quarter that led to that sort of narrower or -- less gross margin expansion?

I think one thing is, you start -- we start seeing it in quarter of the prior year -- around this time last year is when we were starting to pick up ,quite nicely as, maybe, let's say one comment. I think the comparisons are getting a little bit tougher.

But probably if I dig into the details, we were -- we had a higher mix ,as Robert mentioned, of T&L projects within the group. Gross profit margin on those, cause it's kind of a systems project and we're integrating in other people's product, would have eaten into it a little bit And, as well, we saw pressure in terms of retail pricing.

We looked at the details in terms of pricing on Laboratory and most of our Industrial products and Process Analytics and even Product Inspection; and we generally are quite happy with realized pricing levels. But retail due to, let's say, some pressure on some larger orders was weaker than we expected in the current quarter. We also took, I think, if I looked at the year-on-year numbers, we had a little bit more inventory charges in the period, but I think pricing and retail and the mix towards T&L were probably bigger effects.

Okay. The Chinese government floating you on, looks like we could see as much as a 10% move over the next 6 to 12 months. Are you still thinking that will be neutral to results with higher dollar sales in China offsetting the higher expenses?

Yes. Of course, we need to monitor it every quarter and there could be periods where we move a little bit one way, depending on how much production we're shifting at one point in time versus how fast we're growing the local business. But using the first half of the year numbers it's pretty close to neutral and we're going to take, I think Mary told me today, relatively small kind of one-time, had a balance sheet exposure I think of 100, or 150 grand as a result of the balance sheet -- you know, we had dollar receivables in the Rainin Company. So there was a little bit of a hit, there, for Q3 but not a material number.

Okay. And, Robert, could you talk about progress with -- or where customers are implementing Lab X for the Balances?

Yes. Happy to do that. Progress on that equation is excellent. We're probably there at the percentage of 30 to 40% of the instruments being sold in conjunction with Lab X. On Balances we have many pilot installation in all key markets -- long and good profit rate. It's a very clear differentiator and also, as you know, very key for the push our new products. The value proposition of Lab X is really strong, in combination with the new Balances. And of course in that sense, we not only interested to see it on the progress of Lab X for Balances but also impact it has on the new balances itself.

In terms of the Balance business, frankly, I was very happy with the growth we've seen in the quarter. In spite of a difficult comparison to the previous year. I think that it shows that the new product are very well-received. Hopefully, we can continue to build on that in the rest of the year.

Okay. Great. And, at this point, are you now offering, on the pipette side -- are you now offering the basic pipettes, the [Thin-on] LTS pipettes in the U.S. in place of Gilson?

Yes, of course. Maybe just for everybody, as part of this termination of the contract with Gilson, we have, now, of course to find alternative solutions. We have comparable products which are more economic, which we have sold outside of the U.S. and, of course, just now launching these product in the U.S. We have on those products, many factory costs which are, frankly, much, much below the purchase price we had to pay to Gilson beforehand and, of course, selling those products.

We are very pleased with the acceptance of these products in the U.S. market and we are optimistic that we are going to kind of protect our operating profits. Though might lose -- or we will lose some sales volume, but we'll sell our own products and because we manufacturer them, we have, also, the manufacturing margins. And in spite of some sales decline, they'll, of course, enjoy the better margin and hopefully help to us remain on the high profitability level.

Okay. Do you know who they -- what the route to market is now? In absence of Gilson in the U.S.?

No. It's unclear to us.

They have a small distributor that's announced they have distribution rights. Whether they'll be others, as well, we're not sure yet.

Okay.

I mean, as Bill mentioned before, of course we keep our options open. And of course we're considering to further appeal. But, of course, for the moment, the situation is clear and we are selling what we have.

Great. Thank you very much.

Thank you.

And our next question from the line of Paul Knight with Thomas Weisel partners.

Bill, how much cash did you say you're bringing back?

$388 million, approximately, $400 million.

So that's -- where's that on the balance sheet?

We're -- we haven't done it yet, but we will be doing it, so we're going to take down -- use existing cash balances, which, as you can see, the amount of cash we have on the balance sheet today is mostly located overseas. And then we're going to make some borrowings, as well at -- on the overseas lines and then take that money back to the United States, pay down some debt here. But, then, sit with the higher cash balance for a couple of years, assuming that we don't do anything. But, of course, we're going to be targeting acquisitions, as well.

What do you assume for foreign currency impact just the current exchange rate?

When you say foreign currency -- ?

When you give the second half projections, you're assuming what type of translation rate environment?

The current rates.

And then, Robert, on the organic growth, you're now guiding 3 to 5%, what do you think the normalized organic growth is going to be after all of the internal initiatives are accomplished?

First, the full-out guidance is on the higher end of the range.

Yes.

And, I always did say, in a normal economic environment we can go in the range of 5 to 6%. And I think, what we have shown here in the quarter is good proof of that. And with all of the other things we do with respect to Project Spinnaker, among others initiatives, but also new products, I'm really optimistic this is very doable.

Okay. And then lastly, what did you say in the north -- in the Americas growth rate was, Bill?

3% in the quarter.

Okay. Thanks.

And, sir, our next question from the line of [Peter McDonald] (ph) with UBS.

Thanks for taking my question and good quarter. First, how much left on the share repurchase plan?

We have, approximately, $123 million remaining on the programs, and we have, of course, the opportunity to expand that with court approval as well.

You plan on drawing that down mostly this year, or -- ?

I think we've stated previously, we would target around our level of free cash flow.

Okay.

I think people are assuming some number in the $140 million kind of a range.

Also, pharma spending seems to be rebounding a bit could you maybe talk about the outlook in that segment a little bit?

Pharma spending?

Hey, Peter, I think, first of all, the Pharma results have been encouraging in channelling Q2. And, yet, our [Indiscernible] in Q2, better than in Q1, and in that sense we're certainly optimistic, yes.

Okay. And finally, maybe talk a little bit about where the areas of focus is for your acquisition plan?

Same as we told you in the past. In terms of businesses, we focus on opportunities in the field. And to find Packaging Inspection, but that would be metal detectors, check weighers or x-ray or related technology. The reason why we say that, these products have great value proposition to the custom, in terms of productivity improvement and product safety, food safety. We see there are some opportunities to further expand.

Then, number two, of course, in channel what we'll call or Llaboratory business, just adding on other product lines. And, then, number three, Process Analytics. Process Analylitics is a business which does very well within total portfolio file businesses. And we would see there, also, further opportunity to extend measuring parameters, which we cover currently.

Okay. Thanks a lot.

Thank you.

Thank you.

Sir, our next question from the line of Sara Michelmore with SG Cowen.

Good evening, everyone.

Hi, Sara.

Bill, just quick housekeeping. What was the share count at the end of the quarter, please?

43.035 million Thanks for the precision. Robert, I just a question on this European retail business. It's been down pretty significantly the last couple of quarters, you touched on it briefly. I'm just wondering if you could talk a little bit about the market dynamics, there. A - the market growth; B -- if there's any new competitive dynamic going on? Lastly, how do you get that business back into positive territory?

Okay. Of course, as you all know, European retail was difficult after the conversion of the Euro, where a lot of the trading was replaced. And, therefore, the market declined just after that, significantly. We had some quarters, with growth, others where we had also some decline. But the European retail business, for example, last year, single digit growth, so that wasn't that bad. In Q1 and Q2 this year we had difficult comparison versus last year, because last year we had one big order. the timing of this project is just a little different. The outlook for Europe, actually, for the second half is showing decent growth, meeting our range and we'll be okay with the number.

Okay. So we are looking for a mid-single -- at least a positive growth number for that European retail business in the second half of the year?

Yes. Again, just to repeat myself, we had a mid-single digit growth last year. in total.

That's very helpful.

What we're doing to get this -- we have a lot of new products with a lot of new capabilities [indiscernible], which I mentioned many times before. Bill did also mention that we had some pricing pressure from customer in that business, we actually make big concerted moves for product cost reduction and we have very specific targets, but not only targets. we actually have very specific, concrete measures which give us a lot of belief that we're going to meet the targets. And we're going to have good product cost reduction to come in the course of next year on those product lines.

Okay. Then on the Industrial Business, clearly had a much stronger first half on organic bases, I think, than you all were expecting heading into the year. Just wondering if you think that's sustainable near-term?

Yes. A good part of the growth comes from the P&L business and you know, frankly, the backlog is very strong in that business -- the backlog this year. With all of the new products we have I'm optimistic, as well. And, then, last not least, I mentioned that very briefly, so far, we have been very much focused on the big transportation companies in that segment. But when we start to look at the other opportunities in that business, like, the smaller warehouse shipper segment, but also the OEM system integrator we see additional opportunities. We, actually, having ready with new products for those markets. And furthermore, Asia, frankly, a market which is [indiscernible]the technology, but we know from many of our bigger companies, the bigger companies, again, those global express carrier and they are ready with big investment coming from eastern Asia.

Great. Thanks, everyone.

Sir, our next question is from the line of Richard Eastman Robert Baird.

Yes. Hi, Bill, Robert, Mary.

Hi, Rich.

Just a quick question on the Service business in the quarter, how did that fare year-over-year? Is that running yet?

Yes. In terms of the overall Service Business -- give me just two seconds. It was -- Service in the quarter was up in local currency -- 5%. And so inline with the product business.

Okay. And what personal of sales roughly?

It was $84 million.

Okay. I can do that. Okay. And, then, just a second question. Bill, you had mentioned in your commentary, again, the Americas was up 3% versus the 7% first quarter. You mentioned that the 3% on plan?

Yes.

I'm curious, just explain that a little bit. It doesn't look like the comparison was really difficult. And I'm curious, is that just some lumpy shipments that, perhaps, fell into the first quarter? Or how should we view that business, going forward? If, in fact, it is not slowing down relative to your plan, how should we view that business for the second half of '05?

Okay. First of all, maybe it was a little bit us having insight in terms of when the T&L business would actually be shipped, timing wise, in terms of the order backlog. But just to give you a feel, we were in the Americas -- in Q1, the 7% was against a zero growth quarter in the prior year. And the 3% this quarter was against a 4% growth in the prior period. Now, I think we're certainly expecting something above the 3% for the next two quarters.

Okay. All right. And, is it -- you use that -- is that driven by -- which of the three business groups?

Actually, if I go down the list, pretty much everybody should have some level of growth there. I -- especially -- with just picking a couple examples. Auto Chem has a couple of million more backlog. The Retail business we're expecting a pick-up.

Okay.

Second half. So.

Okay. And, then, just one specific question on the Lab business. Given the Lab was up 6% in local currency, was Balances -- were Balances up more than 6%?

We were around that number, at the high-end, yes.

Okay. Very good, thank you.

Welcome.

And, sir, your next question from the line of [Vivek Khanna] (ph) with Argus Partners.

Hello, good evening. I had a couple of questions. Can you just tell us when you will anniversary these exited product lines?

Pretty -- it will go through -- okay, the largest one of them, which relates to this Electronics Business we did in Life Science area, will still have a comparison through to the fourth quarter. Beyond that, not really.

So, mainly in the fourth quarter you will exit it?

Yes.

Then, what was the China growth in the quarter, did you give -- I don't think you gave that.

China was up 7% in terms of the sales number, I think. And, probably, close to double that on the order side.

Order entry was very strong.

Great. And then what's your view on margin expansion, here? It seems like the margins fairly flat, year-over-year. Just wondering what, if you get, maybe -- when do we start to see some real margin expansion? If we get to 7% revenue growth? What's the magical number here?

I -- we're optimistic that we'll continue to deliver nice margin expansion. I think we're at this 5% level, we'll continue to get improvements and if we get something above 5%, even more. We're optimistic.

And, then, the rational for bring the dollar -- for borrowing in European countries and bringing them to the U.S. is it more economical? Is that why you're doing that?

Sure. Kinda the way U.S. works is,that if you have earnings taxed overseas at lower rate, then the U.S. rate, which is 35% for federal income taxes, the minute you bring that dividend of that earnings home, you have to pay up to the 35% rate.

So let's say in Switzerland today, we pay around 20% or so they'd want to tax 15% on that -- lay a 15% tax on top of the dividend. And there's a tendency to try to keep the money overseas and find other ways to get yourself liquidity in the United States, if you can, via making European acquisitions or other types of investments. And this is an opportunity for us to do this and will save us taxes over the coming years -- pretty -- a good pay back.

Have you been able to identify any acquisitions or it's still very preliminary?

I think preliminary, but I think it's also fair to say I would feel -- I think it's fair to say we all feel better about the pipeline today, than one year ago.

Great. Thank you very much. Nice quarter.

Thank you.

[OPERATOR INSTRUCTIONS] Sir, our next question is from the line of [David Gidion] (ph.) with J.P. Morgan.

Hi, guys, how are you doing? Calling on behalf of Tycho Peterson, tonight. Answered most of my questions. One question we did have, in regards to China, again, could you maybe share some color on where you are in the manufacturing shift in China?

Yes. I can give you some ideas there. Probably 15% of our sales are -- group sales from products manufactured in China. We're constantly transferring more production to China, probably in three years from now, the number is going to be 25% or so.

Of course, aside from just the manufacturing, the procurementing, which I mentioned before, works also in global sourcings and investment plans to source more and in China, in terms of parts, components or sub-assembly and had, of course, a positive impact.

Okay.

And manufacturing capacity and we have three plans. We have the plans, not only the manufacturing capabilities, but also R&D capabilities. We have in the range of tons and tons of plenty R&D guys in China. These guys design products for the local market but these products, which are designed for the global markets, are very often both complementary low-end products for the low -- global [Indiscernible] distribution.

Okay. Thank you very much.

Very welcome.

And, sir, we have a question from the line of Scott Wilkins with UBS.

Yes. Good afternoon. Just have, first, just a question on the cash flow, Bill. Is your guidance for free cash flow still 140? Did I hear that right?

Yes. That's the number we're targeting.

Just looking at the first half of this year, I think it's around $45 million or so, you're about $20 million below the pace last year. So, where do you see the big catch collection opportunity in the second half that will get you to that target?

Okay. So, maybe I should start by explaining why it's down and then, what we -- if I look at at, it's mostly due to two items where we had additional cash flow, let's see benefit last year. The first one being the impact of our bonus programs at -- throughout the whole organization. We accrue bonuses for one year and pay them out in the next year. And that impact in -- on cash flow in 2004 versus 2005 was a negative $15 million in this years. Then we had, I think, about $11 million on the payable side outflow year-to-date. The -- so, we will have profit growth. We'll recover the payables number by the end of the year, is my expectation.

And we're seeing improved working capital on DSO inventory turns through our supply management initiative, among other things, I think that -- and, of course, we have a base growth in our EBITDA. So I think taking all of those things together, that's what -- that's how we see the year coming out.

That's helpful. Just with the cash balance, it looks like -- looks like you used some debt, it looks like to finance some of the stock repurchase. Just curious why you're looking to build up cash on the balance sheet, right now? And not just using the cash flow to repurchase stock?

I think that's a great question, Scott, and it fits into the 965 or the Tax Act I described in my conference call script. The way that worked is we are building up cash balances to make our dividends under that plan. Normally, throughout the year bring money back from switzer land and China into the U.S., but because of the benefits under the Tax Act, we're waiting to do it until we quote, unquote, finalize our plan. And that has a technical meaning when I say that. And we expect do that in Q3 and you'll see us bring -- gross-up our -- borrow overseas, as well as take the catch overseas and bring it back to the United States.

Got it. Just a question kind-of following on along to Vivek's question on operating expenses, just on operating expenses. I think I heard you right, that SG&A expense is up 4% on a local currency basis. Just curious, why the increase there? And why not more leverage? And, then, second, I didn't catch the local currency growth in R&D. And maybe, I know you guys have been spending heavily in R&D, and have--

Actually --

-- a nice new product pipeline, just wondering if you are going to need to spend at that level, going forward?

Actually, maybe I just answer the R&D one first. Really wasn't much growth and I think it was 1% in local currency on the R&D side.

Let's talk about SG&A for a second. So first comment would be that in -- we're making some investments on the Spinnaker side, some upfront investments. Robert talked a lot about the telemarketing, but as well other things. There's some lead time between -- first step is making the investment; second step is increasing the leads, which we're now seeing now. Then we believe there's a ratio we can expect for the increase of leads, in terms of increase sales on a time line.

When do you start to get some of that leverage, do you think?

Actually, I think part of it we already saw that quarter. Our sales growth, clearly, has been better in Q2 than it was previous quarters.

Yes, if you adjust for the exited product line, the 6% number was one of the best numbers we reported in a while. Then we expect to hope -- we expect that we'll continue to see above our recent growth rates in the coming quarters.

Then, second thing is, that, and I think I described this a little bit on the phone call, in last quarter, and that is we're somewhat more front-loaded in terms of our corporate governance, Sarbanes-Oxley type cost, this year versus last year. The last year Q3 and Q4 had a lot of those types of costs and this year I'm accounting for them ratably, throughout the year.

One last one, since I think I'm one of the last people here. Exited products, anymore opportunity for that, going forward? Any other thing you could divest that would be able to improve the return profile company?

We're continuously looking at those opportunities, but there's nothing imminent.

Got it, thanks a lot, guys.

Thanks, Scott.

Sir, we have no further questions at this time. Back over to the group for any closing remarks?

Thank you for joining us on the call today. If you have any questions, don't hesitate to give us a call.

Thank you.

Thank you, bye-bye.

Ladies and Gentlemen, we thank you for your participation in today's conference. This does conclude you presentation.