Mettler-Toledo International Inc (MTD) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2006 Mettler-Toledo International conference call. My name is Angela, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Mary Finnegan, Treasurer, Investor Relations. Please proceed, ma'am.

Thanks, Angela. Good evening, everyone. I am Mary Finnegan, Treasure and responsible for Investor Relations at Mettler-Toledo, and I want to welcome you to the call. I am joined by Robert Spoerry, our Chairman and CEO; and Bill Donnelly, our Chief Financial Officer. I will start by covering some administrative matters. I will then turn the call to Robert, who will provide you highlights of the quarter. Bill will then cover the financials in detail, and Robert will provide commentary on our outlook and business. Of course, we will have time for Q & A at the end.

Now for the administrative matters, first, this call is being web cast and is available for replay on our website at www.mt.com. A copy of the press release we issued today is also available on the website. You should be aware that statements on this call which are not historical facts may be considered forward-looking statements for purposes of the Safe Harbor provision under the Private Securities 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 can materially affect performance related to forward-looking statements, please refer to our filings with the SEC. We undertake no responsibility to release any revisions to forward-looking statements. One other item, on today's call we may use non-GAAP financial measures. More detailed information with respect to the use of, and differences between, the non-GAAP financial measures and the most directly comparable GAAP measures is provided in the press release.

I will now turn the call over to Robert.

Thanks, Mary. Thank you for joining us this evening. We are very pleased to announce another quarter of strong operating results. Sales growth in local currency was 5%. All business areas delivered growth. We had another quarter of gross margin expansion which helped to drive a solid 10% increase in our operating profit. Our EPS gross on comparable base was 22%, and cash flow generation was also very solid. We have had a strong first half in 2006 and [are about patient] for the remainder of the year. Based on market and economic conditions remaining as they are today, we have increased our full year EPS targets. We will comment more on this during this call.

And now let me turn it over to Bill who will take you through the financial results.

Thanks, Robert, and hello, everybody.

As Robert mentioned, we had another great quarter of operating performance and are pleased with our financial results. Earnings per share, excluding equity based compensation, was $0.88 versus $0.72 one year ago. This represents a 22% increase. Our earnings per share was $0.84 including $0.04 of share-based comp. In the second quarter of 2005, we had a $0.30 charge for the pipette related litigation. The $0.72 that I referred to does not include this one-time charge.

Now, let me go into some detail starting with sales. Sales in the quarter were $389.2 million an increase of 5% in local currency. Reported sales in U.S. dollars grew by 6%. I know we guided some of you to expect little or no currency impact this quarter, and it appears that currency added 1%. The explanation is that our local currency sales growth was just under 5.5%; and with 20 basis points of currency effect, the rounding gets you to this 6%.

Now, let me take you through sales by geography and business area. All my comparisons will be versus the prior year and all growth rates will be in local currency. Starting with geographic destinations. In the quarter, sales growth in Europe was 4%. Food retailing had double-digit growth due to some large food retailing projects. Lab and core industrial business had modest growth, while transport and logistic was down because of the large projects we discussed in the year-ago quarter. Product inspection had solid growth in the quarter. Year-to-date, sales growth in Europe was up 7%. Sales growth in the Americas also increased by 7% in the quarter. The story here was similar to Europe with strong growth in retail and modest growth in our lab and core industrial businesses. Product inspection had good growth in the quarter; and for the six-month period, sales growth in the Americas are now up 4%. Sales growth in Asia/rest of world increased by 4% in the quarter. China was up 8, while Japan was down due to very strong growth in the year-ago quarter. For the six-month period sales growth are up 8% in the region.

Turning from geography to product areas, let me start with laboratory products which grew by 3% in the quarter, a little below what we expected as we entered the beginning of the quarter. However, orders were up 5% and we expect better growth in Q3. All product lines in laboratory had moderate to good growth except for pipettes. As we explained in past calls, we have replaced a product we distributed with our own manufactured product, and now sell this product at a lower average selling price, however, with higher gross margins. While the sales were down slightly in the quarter for our pipettes, the higher margins actually contributed to nice operating profit growth for our pipette business. Year-to-date, our lab business has grown by 6%. Sales in our industrial business increased by 3% in the quarter, pretty much as we expected as last year we had benefited from some large T&L projects this quarter. We also saw a higher growth rate in product inspection than we expected -- or than we had experienced in the first quarter. For the six-month period industrial sales were up 4%. Finally, food retailing increased 20% in the quarter, with strong double-digit growth in both the United States and Europe. This sales growth was higher than we expected due to the timing of some orders that came in a little faster than we had originally planned. For the six-month period sales are up 16%.

Now let's move down the rest of the P&L. We're very pleased with another quarter of gross margin expansion, a 50 basis point increase to 49.4%. The principal contributors to our gross margin expansion were the benefits of volume, pricing, and various cost rationalization initiatives. Mix was actually slightly negative in the quarter because of our stronger retail growth. R&D amounted to $20.6 million or about 5.3% of sales. This represents a 1% decline in local currency terms. We will probably see additional local currency growth in R&D as the year progresses. We have a number of new projects getting under way. SG&A, excluding share-based comp, was $115.5 million, an increase of 7% in local currency. The growth in SG&A was principally due to variable compensation and continued investment in sales and marketing initiatives. These initiatives include -- these investments include initiatives focussed on new channels for our entry level products; various segment marketing initiatives; e-commerce initiative, including search engine marketing; and continued investment in the automation of our field service organization. In the quarter, we also had increased investment in our sales and marketing organization in China. The net sum of these items has resulted in an adjusted operating income of $56.4 million which is a 10% increase over the year-ago quarter and as well as 60 basis point improvement in our operating profit margin.

Continuing down the P&L, share-based comp amounted to $2.1 million and on an after-tax basis represents 4% of net income. Amortization amounted to $2.9 million in the quarter, interest expense was 4.4 million, and other income was 2.6 million, which principally reflects interest income on our cash balances. To remind you, due to the American Jobs Creation Act of last year, we have excess cash balances in the United States and debt in Europe as we repatriated about $400 million in 2005 to take advantage of the one-time tax reduction on foreign intercompany dividends. As we've explained on previous calls, our balance sheet is grossed up; that is, we have cash in the U.S. and debt in Europe. We'll use our U.S. cash balances for share repurchases while our foreign cash flow will be used to reduce European debt. We expect this gross-up effect to be eliminated by the end of next year.

Let me now cover our share repurchase program. During the quarter, we purchased approximately 800,000 shares of stock for a total of $49.2 million. As we've discussed with you in the past, our target for share repurchases is to spend our free cash flow plus option proceeds. We estimate this amount to be about $180 million this year. With this level and our earlier authorization limit, we would have approximately $50 million remaining at the end of this year. The Board approved today a $400 million increase in the program, which will be effective through the end of 2008. This will allow us to continue the program for next year and into 2008. It also gives us some flexibility to increase our repurchases beyond this level should conditions merit. We continue to believe that the share repurchase program is an excellent way to return value to our shareholders. Our capital structure remains very solid and provides significant future financial flexibility.

Turning back to the P&L, net income was $34.8 million, which is 15% higher than the prior year. And that is on a comparable basis which excludes share-based comp and the one-time charge of last year. As I mentioned earlier, earnings per share in the quarter amounted to $0.84 and included $0.04 of share-based comp. EPS growth on a comparable basis was 22% in the quarter, a level we're quite pleased with.

Now, turning to cash flow. Cash flow from operations amounted to $53.1 million versus 50.6 a year ago. Free cash flow, which is after CapEx and adjusted for the impact of share-based comp, was 51.5 million versus 45.3 million last year. DSO were two days better than the prior year while ITO was 4.9, versus 4.7 a year ago. We are pleased with the continued strong level of cash flow generation in our business.

Let me now update you on our guidance for the remainder of 2006. Assuming market conditions and an economic environment similar to today, we expect to reach our second half targets. As we've told you on earlier calls, we expect solid growth for the remainder of this year in our lab and industrial businesses. Retail and T&L will have more difficult comps. The net of these should be sales growth in the 4 to 5% range for the remainder of this year. With good growth in our most profitable product lines, we should be able to deliver very solid earnings growth in the second half. We're revising upward our full year EPS, which we now expect to be in the range of $3.26 per share to $3.31 per share. And that is including share-based comp, which we expect to be in the $0.14 per share range for the full year. Earnings per share without share-based comp should be in the 340 to 345 range. This represents approximately 16% growth over the prior year and compares to our previous guidance of 336 to 341. For the third quarter, we would expect local currency sales growth to be in the 4 to 5% range, and earnings per share to be in the $0.79 to $0.81 per share range including equity comp. Without equity comp, earnings per share would be in the $0.82 to $0.84 per share range.

That's it for my side, and now I want to turn it back to Robert.

Thanks, Bill.

I will start by providing commentary on our business and provide an update on our productivity initiatives with service and supply chain management. Let me start with our laboratory business which had a solid first half year. This business is executing well into Q3, which bodes well for the start of the second half. Our industrial businesses came in pretty much as we expected, given the strong sales in transportation and logistic that we had in the previous year. I would have liked to see a little more growth from China, but I expect it to improve in the second half. We are also pleased to see continued growth momentum on the product inspection area. The core industrial business is well-positioned for the second half, although it will face a tough comparison against some large T&L orders we had in the second half of last year. Food retailing had another good quarter, both in the U.S. and in Europe. As we have spoken about in the past, this business on a quarterly basis tends to be a little more volatile than other businesses. Our product portfolio is strong and the business is well-positioned. However, the comparison in food retailing will be more challenging in the second half; and we see limited, if any, growth in the business for the remainder of the year.

Let me now provide an update on further developments within our service area. We spoke to you recently on our marketing initiatives in service, including new marketing brochures, communication materials to emphasize the scope and the value of our service offering. We've also added telemarketing resources to more aggressively identify and follow up on potential new service leads. The initial focus is on our installed base, which given its size, can provide nice lead potential. These marketing initiatives remain well on track. In addition to these initiatives to grow sales, we have also launched a worldwide service initiative centered on productivity improvement and on operational excellence. These initiatives should lead to further margin improvement and higher customer satisfaction. Initially we will focus on the service processes and [as we standardize] them across the businesses. We are monitoring progress on productivity by measuring response time, first-time fix rate, and other benchmarks. We are rolling out automation tools to assist these productivity initiatives. These tools are software-based and automate many service operations, including customer calls, technician dispatches, service orders, et cetera. This high automation level will streamline processes and ensure consistent quality levels throughout our service organization.

One final aspect of service is becoming important to our customer, and this is remote service capability. This increasing software content of our instruments, the ability to perform remote service-- that is, to monitor, diagnose, and intervene remotely-- maximizes the up time of our instrument and therefore customer processes. A recent example in our food retailing business demonstrates this. A German food retailer has 1,200 of our US network food retailing scales installed in more than 100 stores across Germany. These scales are based on PC technology and host a multitude of software applications. To meet the customers' requirements, a software update was needed. In the past, a technician would have had to visit each store and update each scale individually. It would take approximately 30 minutes per scale or in total 600 man hours. This will take numerous technicians several days, if not weeks, to complete. So you see remote service capability, no store visits were required and the upgrade was completed over several days in a total of 17 hours. This equates to about 10 minutes per store, a 97% reduction in the time required. Through remote servicing we can ensure that the customers have no disruption to their business, and we can reduce our cost thereby and improve our margins. In summary, service is an important element of our growth and profitability and we continue to see opportunities to improve both through these focussed initiatives.

Another initiative that we are making solid progress on is our supply chain initiative. Our manufacturing base has become increasingly global in the last few years, as the percentage of goods manufactured in China has grown. We have sizeable cost savings in transferring production to China, but we want to minimize the increased inventory investment and transportation costs required due to longer lead times from China. To achieve these objectives requires streamlining our global logistics model. Let me give you an overview on how we are doing this. We have plants around the world today, each of which is responsible for the manufacturing and global distribution of one of our products. No two plants make the same product. Ideally, what we would like to do is to drop ship directly from one production facility to the end customer. Within some regions, for example, a European plant to European customer, this is possible. But if the customer is outside the region, the lead time is not sufficient and the transportation costs will be too high. To overcome these issues, we have established two regional hubs, one in the U.S. and one in Europe, to allow the delaying of customization and final assembly. This means that we ship semifinished products from our factories to the hubs, who then finalize the the product by incorporating the customer's required man-machine interface, software, and operating manuals and packaging. This allows us to ocean freight as oppose to air freight to semi-finished products and components, thereby significantly reducing freight costs. It also allows us to provide excellent lead times to our customers. We can also maintain a larger SKU offering for our customer without stocking additional inventory. We have implemented this model for a number of our products already and are now designing next-generation products with this logistic model in mind.

I think an example might be helpful to illustrate what we are doing. A pharmaceutical customer in Italy places an order for pipettes and tips and expects delivery within two days. This deadline precludes us from shipping directly from our facility in Oakland, California. Furthermore, there are specific packaging requirements that are necessary for an Italian customer versus a German customer. Therefore, it is most cost effective in terms of shipping cost and minimizing inventory levels if we bulk ship pipettes and tips without final packaging to our logistic hub, in this case in Switzerland. They then process the order; prepare the final packaging, including meeting various document and language requirements; and ensure drop shipment to end user within these two days. We still have work to do on this initiative, but we have made nice progress on [ITO]. In the last three years, while the percentage of products manufactured in China has doubled, our inventory turn has increased from 4.3 to 4.9 times. Our goal ultimately is to move our inventory turn to 6 times. We recognize that will -- that will take a few more years to get there. In addition to the service and supply chain initiatives as I just outlined, our other initiatives including new product introductions, emerging market initiatives, and Project Spinnaker also remain well on track.

Finally, I want to comment on our expanded share repurchase program that we had from the Board approved today. The increased program demonstrates our belief in the strengths of our organic growth potential. We believe our franchise can generate mid-single digit organic sales growth with continued margin expansion. When taken in combination with our continued share repurchase program, it should drive mid-teen earnings growth over an economic cycle. Sales growth should be driven by our Spinnaker initiatives, increasing the percentage of our business coming from fast-growing emerging markets, and by our continued investment in new product development. Margin expansion will be driven by price increases, continued cost optimization, the continued leveraging of our Chinese manufacturing capabilities, our supply chain initiatives, and the variety of other product -- productivity initiatives. In sum, we remain confident in the prospects for our Company.

That is from our side, and I would now like to ask the operator to open the line for questions.

[OPERATOR INSTRUCTIONS]. Paul Knight, Thomas Weisel Partners.

This is Peter Lawson in for Paul Knight. Just wondering if you could talk through the metrics you look at for potential M&A activity?

Okay. We always, of course, start with strategic fit. If you look over time, we've built our business on a series of kind of concentric circles that had synergies between the various businesses, and I guess that's always our starting point. But then if I were to start to talk about financial criteria, we -- we do discounted cash flow models and using risk adjusted rates of return, depending on the circumstances of the acquisition, and we've never done and have no intention of doing dilutive deals, but I would say those would be the key highlights. Probably our focus areas would be more in the laboratory side today. We also like process analytics and the product inspection business.

What kind of size deals would they be?

Can be anything. A small technology acquisition of a few million dollars up to 100 or more million-dollar business.

Okay. And you mentioned T&L being a tough comp in the next quarter.

Yes. How much of that -- what's the revenue for that T&L business? Our T&L business is in 50 to $60 million range on an annualized basis, but if you'd model it by quarter it can be a bit volatile.

Okay. And then, finally, I wonder if you give me the dollar break outs of the different -- the three business divisions.

Well, in terms of the percentage of our sales by the businesses, we have about 43%, 44% in the laboratory area; around 42% in the industrial area; and around 14% in retail. I think that added up to 100.

And that's for this quarter or just the year?

It's this quarter, but it's not materially different for the year. Maybe little bit more lag because of the fourth quarter.

Okay. Thank you so much. I'll jump back into the queue.

Sure.

Peter McDonald, American Technology Research.

Good afternoon. You mentioned getting some benefits from pricing. Can you give a little more color on that?

So every year we typically do a price increase, let's say, in the range of 1 to 1.5% on list price. I would say, depending on product lines, a good part of that would stick. I would say, probably on an annual base we have across everything we do includes the service --

About 100 basis points --

100 basis points, yes.

-- which is probably the best we've done in a couple of years.

And then what gives you the confidence in a rebound in lab and industrial for the second half of the year?

Order intake. We had very solid order intake in lab year-to-date, and we have good start into the quarter.

Yes. Our normal forecasting process, as well.

Okay. And then finally, longer term, how high do you think gross margin can ultimately go, or margins in general?

I think -- one of the statistics that Robert mentioned on the phone today was an interesting one. He talked about the fact that in the last three years we've doubled our business in China and generally speaking, products manufactured in China. And when we transfer production down there, we're usually cost reducing products by 30% or so. In addition, if you look at our technology leads, we feel like we have solid technology leads in most of our core product lines. So at this point, our medium term model out the next three years shows no reason why we can't continue to expand gross profit margin by product during that period. The only comment I would make is that there is -- there's going to be some mix changes over time as we expect China to grow faster than the core group -- or I should say China, India, those emerging market countries will grow faster than the average. They do have lower -- we do have lower gross profit margins in those countries, but because of the low distribution cost and at operating profit margin they're amongst our most profitable businesses.

Okay. Great. I'll jump back in the queue.

Richard Eastman, Robert W. Baird.

Hi. Robert, a couple things. I just wanted to stay on China for a minute. You mentioned you'd like to have seen a little bit more in the way of sales. And I'm just curious, the primary product lines, the lab and industrial, was there -- was there anything from a shipping standpoint or any particular reason why sales ticked down a little bit this quarter?

Yes, it was mainly from the industrial business and in particular from the more heavy capacity business which tends to be more a government-driven business, and I guess you have read that the government has been trying to somehow cool down the growth to some extent by a tight money supply. We have actually a lot of projects. These projects have not been properly funded yet and therefore we're just very careful in how we attack them.

Okay. And then could you just give us an update on the manufacturing side? You were, I think, just completed construction and opened a new facility there?

No, actually, we just broke ground a couple of months ago for a new facility, and that new facility will be in the new industrial park where we already have one plant. And this new plant will provide us enough capacity, we believe, for the next five years, and we'll also move out of an old one which we have more in one of the cities. And of course, in this new factory we'll also have much better productivity than at the old location.

So do you go from three facilities to two?

No, actually major facilities we'll have afterward three and currently --

We have three with one under construction.

-- under construction, and the completion of the new one will be mid next year.

And then just a question on the food retail business, when you'd mentioned little if any growth for the balance of the year, are you -- are you thinking growth year-over-year or does the business flatten out sequentially?

So that's year-over-year, and you may recall we had some big projects in the second half of last year and [inaudible] to really perform well last year in the second half of the year, so we will face just tougher comparison.

Okay. And then just the last question I have, your comments on the remote service capabilities are particularly interesting, and I'm curious how do you -- first of all, are your instruments all remote-service capable and -- on the lab side, anyway? And then, secondly, how is that -- is that a subscription model? I mean, how do you charge a customer for that, is that a monthly fee or service contract?

Yes, so a couple of comments. First of all to your question our old products having those features, clearly not. We incorporate those features in many of the new products' releases, but typically on the higher end of the new products we would have it. The lower end you cannot afford to have that technology incorporated in that product. You did also ask whether it goes across to different businesses. Most prominent it's in retail. We have many industrial products -- high end industrial products with that technology. The lab products, some of them have it. Those which are PC connected and where we work through LabX and all these software tools, but that's yet on a smaller base. But ultimately I think it will also will apply very much to the lab. How we charge for it. First of all, let's talk about the benefits of that technology. I guess it's obvious. Two things, really. It takes much less time to get it done, so up time is much faster. And then also you need less time for the technicians. The customer really appreciates it and in that sense we get fully paid. I give you now one example of a big food retailer. We have actually there a software feature where in case a product goes wrong we get immediately alarm into our call center and within minutes our service tech can intervene and, of course, we have a service contract for that where we get well paid for it.

Okay. Okay. Very good. Thank you.

You're welcome.

Derik DeBruin, UBS.

Hi, good afternoon.

Hi, Derik.

Hi, Derik.

Robert, you made the comment that you think your confident in delivering mid-single-digit sales growth over the length of an economic cycle. So I guess it begs the question where do you think we are in this cycle?

Hey, I -- that's a good question and I wish I would know. I can share with you my gut feel, and I think the way we see our business right now, we feel we are in a good part of the cycle. Why we guide for maybe a little less growth in the second half of the year, that's due to what Bill and I have mentioned several times, this is -- this may be tough comparisons we have due to some larger retail and T&L projects in second half of last year. But the core business I think will have solid growth in the second half of the year. We have not seen slow-down in the investment pattern of our customers recently. And, hey, it's also us doing a lot of new things. I think you have seen that in recent times we have put a lot of emphasis in for sales and marketing excellence, now also increasingly on the service side, and that all helps just to keep that going.

Okay. Can you give us an update on the process analytics business?

The process analytics business does very well. We have double-digit growth in that business. The reason why we do very well on that business, on one side there are -- the pioneers and these new marketing techniques we apply now in the other businesses and they have leads there in that respect. But then otherwise we also have constantly expanded the parameters we can cover in our targeted industry, so we have an increasing technology portfolio so we can do more with the same customer.

I'd also a comment, they've done a very nice job the last five years expanding every year their operating profit margin.

Could you talk a little bit about the, I guess, the R&D spend, and how you see that going? Do you -- I know you're always investing for new product development. You've recently launched a wide variety of products. Where are you in the R&D investment cycle?

Hey, probably you are asking based on us showing less growth in our R&D year-on-year. We are not slowing down R&D. I don't want to leave that impression at all. Part of it may be less growth in R&D, is also shift of R&D more to China, and frankly, these people, as I expressed many times in the past in China just costs much, much less than western R&D people. And then Bill also made the comment that we are working on some new projects where we will initiate R&D work in due time, and that will require some additional R&D investments. So in channel, we are certainly not running down R&D to a low percentage. We will continue to guide you for R&D investment in the range of 5 to 6% of our sales number.

I think, too, with some of the increased investment on the marketing side, too, I think that's going to -- over the medium term make us increasingly more efficient in our technology and how we develop our products as well. Better position for particular segments and things.

Great. Thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS]. Vishal Saluja, Seligman.

Thanks for taking my question. Bill, I have a question on the free cash flow now that you've taken up EPS for the last two quarters. Should we also assume that free cash flow is going to come in ahead of plan?

That's a -- we are running a little ahead on the cash flow side, as well. I -- I think a lot of that would have to do -- as you know, we're measuring free cash flow after CapEx. I'd have to study a little bit more in detail our timing of our spend on the Chinese plant. But certainly it's -- we don't think we're going to miss our expectations on the cash flow side.

Okay. So we're in the 150 to 160 range for the year?

I would think at the higher end of that range, and particularly depending on this CapEx item, maybe a little bit -- sometimes taxes paid can make a little bit of difference as well. But I think we're probably shooting for the high end of that range.

Got it. And then to get to your guidance for the second half, are you relying on any level of acceleration in any parts of your business, whether it's geographically or product-wise? Or is it just a sort of continuation of the same with --

Continuation of the same, but kind of knowing, let's say, some of the more detailed underlying patterns in the business, particularly when you say continuing in the same being what we've experienced in the first half of the year. I think in -- in the course of this quarter, we did build a little bit of backlog in some of the product lines.

Okay. So, given that you're not a very backlog-oriented company, can you talk a little bit about the visibility that you have, in particular in the lab side of the house, because it sounds like you've -- you have a good start to that quarter.

Well, of course, we're towards the end of the month here, so we have some insight in terms of how the quarter goes. Our lab business -- the lab balances don't have much backlog, Vishal. The analytical instruments have a little bit more. And auto chem has backlogged, and I'd say certainly our order entry exceeded sales in the course of Q2 so we built a little bit of backlog here. But our backlog as a company in total is only about a month worth of sales, so it's not a significant number.

Okay. Thanks a lot. Appreciate it.

[Vivek Khanna], Argus Partners.

Hi, good evening. I just had a question. What was the reason for the order growth being higher than sales in the lab products division?

Timing.

Timing, yes. The -- just a little bit more orders at the -- towards the end of the month, I guess.

Okay. So just -- so that was what caused that. Okay. And as you look out into -- you've seen now, you've had, I guess, one month of backlog and you'ev got another month here. Are you seeing similar kinds of order patterns or did the -- or is there some acceleration that was unusual at the end of the quarter?

Hey, I think, of course, the timing of orders is -- has patterns. We don't get alarmed if it's jumping around a little bit occasionally. I think what the message we want to give you is the fact that, hey, we finished the quarter on a solid basis. We've started -- in terms of the order growth, we've started this quarter in good shape; and we feel reasonably confident sitting here with this 4 to 5% sales growth estimate for the quarter. Hopefully we're going to beat it, but we feel it's a realistic target this quarter. Especially -- and it's a good number, especially given the retail growth we had in Q3 of last year.

And you said the -- last question -- Europe was 4% a year ago -- I mean, this quarter, growth?

Yes.

Maybe I missed that.

Yes.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Paul Knight, Thomas Weisel Partners.

Robert, congratulations on the quarter.

Thank you.

Can you describe the currency effect that you have as it translates over regarding Mettler and your manufacturing operations in Europe? And then, secondly, where are you with your transition of manufacturing from Europe and other markets into China?

Let me take the second question, and Bill will give you an answer on the currency impact. So where are we in the transfer of manufacturing from the western plants to China? I think that's a gradual process. In terms of magnitude, probably close to 20% of our sales are coming from products manufactured in China. That's substantially up to what it was five years, three years ago, and that will, of course, continue to grow. I would expect in three or five years, that will be number above 25%. So we'll constantly transfer volume, the single biggest problem that we have is HR resources in China, trying to educate the people. I told you before we are building the infrastructure in China to make that transfer possible, and to transfer often means also that you need the corresponding R&D skills in that part of the world. So it will be a gradual process, but we constantly approach that way. Now, Bill, maybe a few words to the currency impact?

Yes. I think you were specifically asking about European currencies, Paul, and if we look at our cash flows and cash outflows by currency, you would see that our European currencies pretty much balance each other. We have a little bit more Euro-based revenue which is offset by a little bit more Swiss franc-based expense because of the plants and their R&D functions being in Switzerland. That's been a pretty stable relationship reasonably. I think it's maybe marginally better today than it was a year ago, but not a material amount. So the recent movements of the dollar hasn't had -- doesn't have much impact on our earnings at this point.

Thank you.

You're welcome.

And, ladies and gentlemen, this concludes the question-and-answer session. I would now like to turn the presentation back over to Mr. Robert Spoerry for the closing remarks.

Yes. I'd like to thank you all for attending today's conference call. I hope you have seen that we delivered a very solid quarter. We are happy with the performance ourself, and we're quite optimistic for the rest of the year and by now I want to wish you a nice rest of the day. Bye, everybody.

Ladies and gentlemen, we thank you for your participating in today's conference, and this does conclude your presentation. You may now disconnect. Have a wonderful day.