Mettler-Toledo International Inc (MTD) 2007 Q1 法說會逐字稿

Heavily accented speakers; transcript is best product. Some part unintelligible.

Good day, ladies and gentlemen, and welcome to our Q1 2007 Mettler-Toledo International Earnings Conference Call. My name is Kristin and I will be your audio coordinator for today. After the speaker's remarks there will be a Q&A session. [Operator Instructions.]

I would now like to turn our presentation over to your hostess for today's call, Ms. Mary Finnegan. Please proceed, ma'am.

Thank you. Good evening. I am Mary Finnegan, Treasurer and responsible for Investor Relations for Mettler-Toledo and I'm happy to welcome you, all of you, to the call. I'm joined here by Robert Spoerry, our Chairman and CEO, and Bill Donnelly, our CFO. I will start by covering some administrative matters and then turn the call to Robert, who will provide you highlights of the quarter. Bill will cover the financials in detail and then Robert will provide additional commentary. Of course, we will 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 Web site at www.mt.com. A copy of the press release we issued today is also available on our Web site. You should be aware that statements on this call, which are not historical facts, may be considered forward-looking statements for the 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 could 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 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 the use of and the 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 to Robert.

Thank you, Mary.

Welcome to the call tonight. We are very pleased with the great quarter, the first great quarter we had in 2007. This is our strongest first quarter ever and all key financial metrics are available for last year.

Local currency sales growth increased 8%. We were very pleasantly surprised at this level. Retail, transportation, and logistics in China were all nice contributors to the growth, but we saw solid growth across the board, most geographies and product lines. This doesn't always happen. All units performing well at the same time, but suddenly we like it very much as it is right now.

Our sales growth translated into nice operating leverage, which drove 27% increase in our operating profit. Added to this is the benefit of our share repurchase program and the lower tax rate versus one year ago and we reached a 37% increase in EPS for the quarter. Based on this great start to 2007, we have increased our guidance for the year.

Bill will cover this first quarter results in more detail and I will then provide additional comments on the business and update on initiatives around our service business.

Bill?

Okay, thanks Robert, and hello everybody.

As you heard from Robert, we had a great quarter and are off to a very solid start for 2007. Let me start with earnings per share which came in at $0.78, or a 37% increase, versus a year ago, when earnings per share were $0.57.

Turning to sales, which were $387.8 million in the quarter, an increase of 8% in local currency, currency added 4% and therefore reported sales in U.S. dollars grew by 12%. Breaking down sales by geographic destination, and all of these percentages, by the way, are in local currency, Europe increased by 4%, which was good, particularly given in the year-ago quarter we had sales growth of 10% because of a very large retail order. Europe had solid growth in lab and industrial, but retail was down due to the large job which I mentioned.

Sales growth in the Americas increased by 10% in the quarter and this was against more modest growth in the year-ago period. Pretty much all of the businesses had solid growth in the quarter, with retail being very strong. Sales growth in Asia/Rest of the World increased by 11% in the quarter. We had good growth in China, which was up 21%, while we saw weakness in Japan. By product line, we saw solid growth across the board in this region.

Now, looking at sales by product area, we had 5% growth in laboratory products, with solid growth pretty much across the line. In industrial, we grew by 9%, with our transport and logistics business up very strongly. We also had good growth in our product inspection business and in our core industrial business. Retail increased by 14%, with growth coming principally from the United States and Asia/Rest of the World. I've kept my remarks here brief, as Robert will provide some additional insight on sales by product line shortly.

Now let me turn to gross margins. We finished the quarter at 49.4%, which is up 20 basis points from the prior year. We benefited from volume and our cost rationalization initiatives, principally our Chinese manufacturing. Product mix and currency worked against us in the quarter.

R&D amounted to $21.3 million, or 5.5% of sales, a 3% increase in local currency. You'll likely see this growth accelerate as the year progresses, given the timing of certain R&D projects.

SG&A was $124.4 million, an increase of 4% in local currency. We continue to invest in Spinnaker initiatives and expanded our sales force in China as well. We also had higher variable compensation expenses. These expenditures were offset, in part, by the benefit of various cost reduction programs we took in the second half of last year. The net sum of these items resulted in very strong operating leverage. Adjusted operating income increased to $48.7 million for the quarter, as compared to $38.3 million a year ago. The amounts in both years include share-based compensation. This represents an increase of 27% and 150 basis points improvement in our operating margin. We are obviously very pleased with this growth and this margin improvement.

Continuing down the rest of the P&L, our amortization was $2.9 million in the quarter, interest expense was $4.5 million, and other income was $0.4 million, which principally reflects interest income on cash balances. As expected, other income was down in the quarter versus a year ago. This reflects the planned reduction in cash balances that took place over the course of the last year and a half.

Our tax rate in the quarter was 27%. I think most of you are aware that a new accounting pronouncement related to income tax went into effect this quarter. It is referred to as FIN 48. Upon adoption, we increased our tax liabilities by $4 million via a charge to equity to recognize the effect of the new rules. Going forward, we do not expect it to impact our ongoing tax rate, which we expect to remain at the 27% level. Of course, this is absent any tax rate changes by the various tax authorities around the globe. And, in addition, I would comment, and you've heard this, I'm sure, on other calls that FIN 48 will increase the number of discrete tax items that we have periodically. But that wouldn't impact the 27% rate.

Before I cover earnings per share, let me comment on our share repurchase program. During the quarter, we purchased 838,000 shares of stock for a total of $71.5 million, an average share price of $85.29. Fully diluted shares for the quarter were $38.9 million and $38.7 million at the end of the quarter. Finally, as I already mentioned, earnings per share was $0.78 in the quarter, a 37% increase over the prior year.

Okay, now let's talk about cash flow. Cash flow from operations amounted to $32.3 million, versus $19.1 a year ago. Free cash flow, which is after CapEx, was $27.1 million, versus $20.3 million last year. In the quarter, we benefited from higher earnings and lower taxes paid, which was offset, in part, by higher bonus payments. On a per-share basis, which is probably most appropriate for us, given our share repurchase program, cash flow per share was $0.70 in Q1, versus $0.49 one year ago, an increase of 43%. The strength of this cash flow can be seen in our working capital statistics. DSO was 49 days, a level we're quite pleased with, and our ITO was 51 -- or 5.1, I'm sorry.

That covers the quarter. Now, let me update you on our increased guidance for 2007. Based on economic and market conditions similar to today, we now expect earnings per share to be in the range of $4.18 to $4.28 per share, versus our prior guidance of $4.10 to $4.20. Last year, EPS, excluding discrete tax items, was $3.66 per share. This results in EPS growth projected for the year in the 14 to 17% range. For the second quarter, we would expect earnings per share to between $1.01 and $1.03.

Okay, that's it from my side and now I want to turn it back to Robert.

Thank you, Bill.

I will start by providing commentary on the first quarter and then provide an update on our initiative in the service field. Let me start with our laboratory business, which you have heard grew by 5% for the quarter. The growth was pretty broad based, with most product lines showing increases. Balances have mixing of (indiscernible) growth, which we are very pleased with. Analytical instruments admit to high single-digit growth, with particular strong performance in titration and pH meters, as they did benefit from new product launches in 2006.

Pipettes were up low single digits with continued growth internationally, while we also saw modest growth in the United States. Sales growth in the automated chemistry business was flat with the prior year. And finally, process analytics had another strong quarter with high single-digit growth.

Our industrial business came in strong with 9% sales growth. Our core industrial growth was up mid-single digits, with particular good growth in Europe that we were benefiting from improved investment climates, due, in part, to pent-up demand at several of the investments for some time. In addition, we are seeing the benefits here from our Spinnaker-related initiatives, as well as benefit from the new product introduction which came in in the course of last year.

Our transportation and logistics business was up strongly, reflecting good project activity, both in the U.S. and internationally.

Product inspection had a strong quarter, as it did benefit from the full rate of the new product introduction that occurred over last year.

X-ray, although a small part of the whole product inspection business, continues to demonstrate excellent growth as customers adopt these technologies.

Retail, as well, had a strong quarter and basically spiked from the quarter a year ago. The U.S. had some good project business that contributed to the growth as underlying growth in both U.S. and Asia/Rest of the World was strong as well.

As Bill mentioned, Europe was down, as expected, due to some big projects we had in Q1 last year.

That covers my comments on the quarter. Again, we had a very solid operation performance in the quarter and while market conditions remain positive, we are also seeing the benefits of our diligent execution and our strategic initiatives. During today's call, I want to update you on various initiatives within our service business. I believe you will find my comments on service (indiscernible) and that Bill very much focused on what you have heard many times from us, namely on execution.

33% -- approximately 23%, of our total sales is bringing margins above the company average. You will remember that several years ago we identified service as a key opportunity for profit growth. At that time, we established a central team to drive strategic and operational excellence throughout the organization. The results have been quite good, the sales and profits and service growing faster than the Company average.

Now, to make this more tangible, I'll highlight one of our key focus areas, which is to increase the percentage of our installed base that we service. While we'll never service all of our installed base, we believe a significant opportunity exists to increase the current percentage. This presents a substantial growth opportunity for the Company. Let me provide some more background.

If you look at the typical European countries, we service roughly 50% of our installed base. It's approximately 30% on the service contracts. We are focusing our efforts to increase the percentage of the installed base we service, in particular the percentage on the service contracts. You may be wondering why such a low percentage are on the service contracts. A couple of reasons, but probably the main one is that our products are very reliable and don't break. Consequently, customers have not always sold in terms of service contracts. They will call us to repair but not necessarily into our service contract. The reason we do not service the high percentage of our overall installed base is that there are a lot of smaller vendors out there, typically one or two-men operations that have tapped into this market. Here is where we see the competition, the smaller service jobs, rather than the multi-vendor operations that you may hear about from time to time.

To reach a high percentage, we start with gaining greater visibility into our vast installed base. We have developed tools to better man our database, the database of the installed products. This database captures information such as the model, installation date, maintenance history, and the warranty details. We will analyze the database to understand our installed base by product and age and tailor our service offering to the product life cycle stage.

While it is an obvious point that products have different service requirements throughout its life cycle, with the millions of products in our installed base, it is tailoring -- this tailoring is not such an easy task. It is a classic example of the old saying the devil is in the details. Once we identify the potential service needs and develop the tailored service contract, we implement marketing programs, which include telecommunications and telesales efforts to realize these opportunities.

As with any initiative, the key is solid execution. Let me give you a couple of examples. We are piloting a program in one location to convert warranty customer to service contract customers. A targeted mailing highlighting our calibration and preventive maintenance capabilities is mailed out 90 days before the expiration of the warranty contract, with the remainder that the warranty period is expiring. A follow-up mailing and the telemarketing campaign is closely -- is done closer to the expiration. In some ways, simple, but it has proven to be highly effective initiatives, since our customers are most focused on service when warranty expires.

Another example is in our checkweighing business. From our database, we are able to determine old customers who had purchased checkweighs 4 years ago and which are not under the service contract. We know these instruments will need a new battery replacement typically after 4 years. A battery in a checkweigher maintains older customer data from the instruments, including the product configuration. This is a protection for our customer in case of a power outage so that critical data is not lost. If the battery is not replaced timely, a customer could lose all of the data in the instrument. The instruments would have to be reconfigured and the data restored; a very timely and cumbersome process.

A target mailing (indiscernible) highlighting this need and, not surprisingly, we received a very strong response rate. The most important aspect of the campaign was not the battery replacement, but how it opens the door with these customers to discuss other service requirements and then finally enter preventive maintenance contracts.

These are two very detailed examples, concrete examples, of how we're trying to better leverage our installed base to grow our services. Our substantial installed base is the (indiscernible) and we see many opportunities to profit from it. Our central service team is working on other initiatives as well. Among these other initiatives a more disciplined pricing of spare parts and adopting a more systematic approach for [selling] and dispatching of service technicians, working to enhance the customer interaction, and maximize technician productivity.

We also have other initiatives to automate our field service force. We also believe there are a number of market factors which are favorable to our service business. These factors include the desire of customers to outsource many processes currently done in-house, as well as the increasing complexity of products and their embedded software switch, which are difficult for untrained technicians to master. A combination of these market trends and our own initiatives make us very confident that service can continue to be a source of profitable growth for us in the coming years.

That is all I wanted to cover on service.

In summary, we are off to a great start this year, but, of course, we have much to do still this year. We continue to remain cautious on the economy. Market conditions in our business are favorable and the overall market signals are quite good, even though sometimes slightly mixed. Our focus continues to be solid -- our focus will continue to focus on solid execution of our initiatives and we believe with this focus we will have a good remainder of the year.

Now, I would like to ask the operator to open the line for questions.

[Operator Instructions.] Tyco Peterson, JP Morgan

I guess the first question -- just congratulations on a great quarter. First question on margins. Can you just give us a sense of the relative contributions? I know you talked about a few moving pieces here. And so if we could just think about, I guess, how volume and price and things factored into the margins. That would be helpful.

Just to be clear, you're referring to the gross margin, Tyco?

Yes, absolutely.

Yes, okay. So in the quarter there were a number of things. The mix was slightly negative, but we had a nice impact due to volume, as well as what's called the leverage impact. The variable contribution on our products is, at the gross margin line, is in the 60s, and so that was a nice contributor. If you look at the currency line, it was actually slightly negative, around 30 basis points, in the quarter. And I guess those were the key elements. Yes.

Okay. Last quarter, I know you had, in transportation, you had a benefit from DHL. Was that a one-time thing or does that carry through?

Actually, that's still the ongoing.

That's still ongoing? Okay.

Yes. We have a nice contract with them for quite some time and it's not just them. We had a great quarter in P&L and it was driven by many different customers. Yes, by the way, some new great products, among others, pallet dimensioner. What's the big deal here, pallets are often shrink-wrapped, and it's very hard, the weight, not just the weight, but the volume, and this new technology can be -- you see a great accuracy. The customers have payback on these new products within a few weeks.

Okay. And can you just, I guess, talk a little bit about some of the trends you're seeing in product inspection? I know you talked about new introductions there. I know, I think last quarter, you benefited from the Parago recall on the aspirin. Are you seeing other recalls in other major installations? Or how do we think about growth, I guess, in that business?

Growth, as we have mentioned, product inspection was good. In particular, in the new technology field of x-ray, as I mentioned before. Of course, in particular there, we have some new application. I'll give you just an example here. Baby food, typically in a glass jar, you can imagine if you have some glass in the jar. That's a big deal for baby food and x-ray is actually a great technology to detect that in time. It's actually helped to prevent very expensive product recall. Product recall can be a couple of hundred thousand dollars, but, frankly, it's indirect damage, it's probably all of the same way to brands, the kind of damage you have.

We have dedicated products to those segments and we go after them in a very aggressive way. Product safety, and food safety in particular, is a big theme, a big theme around the globe. The congress delegation in China just recently made that one of the top three themes and we believe we are very well positioned with our metal detector, checkweighing, and x-ray products.

Thank you very much and congratulations.

Richard Eastman, Robert W. Baird

I wanted to see, Robert, as we push guidance a bit higher here for the balance of the year, should we continue to think of a local currency organic growth rate in the 4 to 6% range maybe shading the high end or are you willing to bump that up a little bit?

First of all, we're obviously pleased and pleasantly surprised with the growth rate in the quarter. I mean, we did enter the quarter with good backlog, but, clearly, order rates were strong throughout the quarter. And you can tell from the guidance we provided for the second quarter that the -- we continue to see positive visibility on the business. But as kind of a reminder, we're a pretty short backlog business. We have a little more than a month of backlog. Most of the product lines actually far less than that. And then, when we look out to the second half of the year, we do see that it will be tougher comparisons. We hear the news a little bit about the weakening U.S. industrial market, so while everything we see today looks quite positive, we're reluctant to, let's say, raise the overall expectations in the medium term for our growth rates.

Okay.

I think we don't want to get carried away. We have a great start, we feel very good about the business, but it's early in the year.

Okay, no, that's fine. And then, do you sense or do you know was there any price realization year over year in the quarter? When I look at the 8% local currency number, any price realization in there?

Sure. There was price realization. Hey, we think we can get close to 100 basis points for the full year. It might have been a little bit less in the first quarter. Mostly because the mix of products is usually a little less on the lab side in the first quarter, as opposed to the fourth quarter, and lab is where we have, on average, our best price increases.

I would highlight one other thing too, Rick, and I realized I forgot to mention it when Tyco asked his question, as we start to see some impact of steel pricing on, not just on the raw, or let's say our industrial products, but even in machine parts areas and a few things. So, price increases, we're seeing them get pushed through. That was certainly part of the 8%. We think we can get to 100 basis points for the full year. It might have been a little less in the quarter because of mix, a little more retail, a little less lab. Hey, raw material prices, we're working hard to keep those in line.

But we're certainly going to do some price increases in products which have a big steel content, fabricated steel, or stainless steel, and want to make sure that we do that in time. Our expectation is that this raw material price is going to stay up for a long time.

If I recall, you show about a quarter lag in your raw material prices? In other words, steel would probably hit you more in the second quarter than the first?

We had the full hit in the first quarter.

You did, okay. Okay. And then, can I ask just a detail question. Can you give us the percentage of total sales that were in lab, industrial, and for retail in the quarter?

Sure. Lab was 44, industrial was 42, and retail was 14.

Okay. And then, one last question. Robert, you had mentioned I think as part of the commentary, or maybe Bill did, as part of the commentary on SG&A, that you had added some sales people in China. Can you just give us a picture of what the distribution looks like now in China versus maybe a year ago?

Well, we have many, many more sales people in China. The sales people sell direct to key accounts and of course, in parallel, we'll be able to service dealers and support dealers. We are investing heavily in our sales force in China.

Is part of the sales, when I think of your Chinese sales, do -- what percentage of those are direct for its distribution or are they all direct?

No, it's not all direct. If you attempt maybe a guess and not --

That's fine.

-- at the (indiscernible) numbers, then I would say probably 60% of our business is direct and then 40% is to small distributors.

Paul Knight, Thomas Weisel Partners

This is Jonathan Palmer in for Paul Knight. I was wondering could you break out what percentage the service business is of the total revenue? I'm not sure if you mentioned that.

23%.

Yes.

And then, in terms of the installed base, you mentioned 50% right now. What's the goal you'd like to get to?

That depends upon the country. We have not established the clear objectives. But I think for high-end (indiscernible). Let me say that way that we believe -- I did tell you that 50% of the installed base we do service, but only 30% of that is on the service contract. And I think that's really where we are focused. We want to add much more on the service contract because that's really (indiscernible) the product safety of our service force. So I think for high-end products and for let's say mature markets, the target we should have is getting that close to 40, 50%.

Okay. And switching gears, you mentioned on the industrial side that there was pent-up demand in the core segment. Can you characterize that a little bit better?

Well, the European economy was not easy for many years. And particularly in Germany, companies were really, really not investing. But finally the German economy which is, of course, the key growth engine for Europe, turned around and I think investment [clients] have become much better. And, of course, as usual, when that happens some pent-up demand comes out. We have very, very strong order-taking, for example, the industrial business in Europe, and that's what I meant.

And do you see that visibility continuing for the remainder of the year?

I think the outlook of the European economy is quite positive. When I look at the move in the European communities, people are, of course, thinking much differently at this time. They also drive very much on the export to Asia, and Asia is still doing great. In that sense, I'm quite optimistic for the coming quarters, yes.

Peter McDonald, American Technology Research

I may have missed this, but barriers to entry in service, how it's mostly, say, mom and pop type companies, how are you addressing that and kind of what are you positioning it to customers as?

You mean how we do service products with small customers?

No, against kind of what you're seeing in the markets now, kind of the competition that you're up against.

Yes. Okay, so kind of, again, keep -- when we sell our products, often they need repair and often they need the service contract. For the big key accounts, the big pharmacy coops, big four companies, we typically serve them. But often smaller companies will elect to have a local service company, it could be a local distributor, which has selling some products and family-owned and all of that, little service organization, maybe two or three people. Now these people, of course, are local and therefore can compete very cost effectively, but what they come to is really as we upgrade our products they are more sophisticated -- the sophistication. It's more technology integration with more (indiscernible) combined with more tools. You need to do all of that. And that's where we have the main competition currently, but I think that's changing as technology is evolving.

I should also mention these four corner service organizations, big companies who come in and say, hey, I'll do all your service in your factory, in your retail store, or in your lab, frankly, we have never seen this as a big issue. We have maybe lost one or two contracts, but shortly afterwards had them back. A customer, when it comes to service, they want to have a very competent partner. Those who know those very products, which they will have service, and you need (indiscernible) trained people and you actually need to be very fast in rendering services. Can you imagine if you are the service aggregator and then you need to outsource this to another organization how much times it takes and, frankly, doubles the customer, since the customer is, frankly, not interested in paying more. So, hey, it's really (indiscernible) where we had the competition, but I think it's basically about efficiency.

Very good. And then, a little bit on the retail segment, what's driving the strength? It's been very strong in the past 12 months or so. Is there an upgrade cycle? Is it new products? Or is it just --?

It's a combination. I think, of course, we have the good economy. We've got good (indiscernible) behavior and, of course, in that sense, the retailers do better and they do spend more on technology. That brings me to the second part. Our new products have fantastic technology. Don't see that as a retail scale, see it as a scale, (indiscernible) PC, and on the PC, you have dedicated software, and I'll just give you some imagination of what that is.

You have, for example, a German customer who bought this platform and what he's doing, he's actually installing promotions. And the centerpiece is the scale to promote product -- consumer goods company. Installed promotion is much more effective than paper promotion or whatever promotion. And, in particular, when you do it at the point of sale, you really have the attention of the people. You can now use the display, which is a big display, like on the PC of the scale to customer product, which comes with the product you just bought. So maybe you buy some meat and you want to cost promote some cheese with that and you create the coupon for the customer. I can tell you these return rates are very significant. They are probably 5 to 10 times higher than other promotions these companies have been doing so far. And that, of course, generates tremendous payback for the customer. But it's really the technology which allows the company to do quite different things, in particular when it comes to the marketing in the store.

Again, good quarter, and thanks for taking my question.

John Groberg, Merrill Lynch

Congratulations. You've both seen a good quarter, as in a great quarter. Just trying to figure out how to hit star, one faster so I'm not at the end of the Q&A here.

You mentioned, and we've heard this from a few companies, that Japan was kind of weak. Do you have any ideas to what's going on in Japan or why that is?

Actually, frankly speaking, we don't think it's execution -- or we don't think it's market conditions, we think we're not executing as well as we should in the market. And I think we've made a few changes there in ways that we think will help. There is no reason why, because our market shares there, on average, are not as high as many of other countries. Even though the environment is quite different, it is a different market with stronger local players than we face in most markets. But we continue to think that it's a place that we should be able to grow actually at above market growth rates because of the relative market share we have. So I think, from our point of view, it's something we just plain want to do better in that market.

It sounds like a similar Japanese theme in the sense that you think the market is doing okay, it's just maybe a little tougher place to compete for some foreign companies?

Yes, but we can do better.

Okay. And then, the laboratory business, you mentioned, well, you said it only grew 5% or so, which we've heard from other people that there actually has been a pretty good pickup in pharma spending in general, big pharma. Can you just comment on the whole laboratory business, where maybe you're seeing strength from an end market and where you're seeing less strength?

Actually, the lab business has performed very much along expectation with overall mixing of (indiscernible) growth. That does compare to very strong Q1 a year ago. Very frankly, had surprisingly good results. We are happy with the performance. We see continued good growth in all sectors - pharma, chemical, food, and so forth. Maybe the one part, which we just discussed before relative to Japan, which is very much the laboratory business we have, we weren't so happy with the performance in Japan.

Just as a matter of background, John, we grew our -- the best quarter we had last year in our lab business was in the first quarter. I think you'll see better growth rates out of our lab business for the remaining quarters.

Yes, I saw it was 8%. But people have been pretty strong on top of that last quarter, so I was just curious. And then plans with your auto cam? I know that's a business that has been flat. Is there any -- are you still looking to maybe getting rid of that business or any takers? What's going on there?

Well, we have been -- we are not trying to get rid of it. We are just trying to reprioritizing the business and we are streamlining the product offering to our core strength around reaction engineering and intake to analytics. That core is doing well. And that is what we actually go after strategically.

The pieces that we would -- the product lines that we are already in the process of gradually deemphasizing are not a significant piece in total. Maybe we're talking $10 million in sales.

And the last question, you know retail is strong again. Any update on profitability there?

We are making good progress.

Still below the corporate average?

Yes. I think we'll never be on corporate average to manage your expectations.

Mike Hamilton, RBC Capital Markets

Could you start, Robert, with just some views on what you're seeing in Russia and Eastern Europe?

Eastern Europe and Russia are good markets for us, Russia, driven by the raw material sector. Any of those raw materials we discussed before, in terms of price increases, are actually coming out of Russia, nickel or so. So we are very happy with the growth in Russia. Also, other Eastern European countries do well and the base in those countries is getting bigger every quarter.

Could you give a little picture on the service side by geographic area, where you've got the best penetration, where you think the best opportunities are?

In both terms, our service organizations are strongest in the European markets. I think they are reasonably strong in the U.S. But maybe the attachment rate of service contracts not at the level that we'd like to have it. That's why we do all what I just explained. And then, of course, in Asia, in general, we are much more in a buildup. The installed base is growing and we settled -- our service technician network is being expanded. And you may also layer on top of this the Asia culture. The Asian culture needs to be educated that service is a very important thing. And very often people think your product is a great product, that they don't need servicing. Of course, that's true, they don't break, but you need service to assure the performance. And that's why we are pushing heavily in terms of education. That they understand performance contracts are very important.

Do you see any opportunities or threats off of the weak U.S. dollar now?

No.

No. Actually, (indiscernible) we'd say we are relatively naturally hedged against currency movement and that's really not an issue for us.

Even if you looked at it by product line, there isn't anybody that we would somehow pick an advantage versus us because of the change in currency.

Robert, I think it's time to scuttle the catamaran and go into the unlimited power class. Take care and congratulations.

[Operator Instructions.] Derik de Bruin, UBS

It looked like the SG&A line was a little bit higher than I expected this quarter. Anything in particular going on?

No, actually, I think it might be currency impacts. It actually only grew 4% in local currency.

Okay, that certainly explains it. I jumped on the call late, so I'm not sure what -- my apologies if I'm a little redundant, but what do you think is the -- you were certainly thinking about potentially of a slowing environment as you went into 2007, and clearly that isn't happening. I guess, have -- has your market outlook changed at all?

Hey, I've been kind of reiterating a little bit what -- this is something Robert had commented earlier, is that I think we're really -- of course, we were very pleasantly surprised, really pleased with the start to the year. I think that our visibility, as far as it goes with our relatively short backlog continues to be positive. At the same time, we look ahead, we hear a little bit of concerns about the U.S. industrial market and we do have tougher comps in the second half of the year, but, hey, I think we just don't want to get carried away. Overall, we feel pretty good about how the market looks and certainly feel great about the start we have.

[Operator Instructions.] You have no further questions at this time.

Okay, then, I would like to thank everybody for joining us today. We wish you a very nice evening and goodnight. Everybody, thank you.

Thank you.

This concludes today's conference. You may now disconnect.