Mettler-Toledo International Inc (MTD) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to our second quarter 2007 Mettler-Toledo International earnings conference call. My name is Kirsten, and I will be your audio coordinator today. (OPERATOR INSTRUCTIONS) I would like to turn our presentation over to your hostess for today's call, Miss Mary Finnegan. Please proceed, Ma'am.

Thank you, Kirsten and good day, everyone. I am Mary Finnegan, Treasurer and responsible for Investor Relations at Mettler-Toledo and I am happy to welcome to the call. I'm 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 cover the financials in detail and then Robert will provide additional commentary. 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 website at www.mt.com. The copy of the press release we issued today is also available on our 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 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 measure and the most directly comparable GAAP measure is provided in the press release.

I will now turn the call to Robert.

Thanks, Mary. Good day to all of you thanks for joining us on this call. We are in Shanghai right now and have just completed a visit to our new factory and we did celebrate our 20th anniversary here in China with the Board of Director. I will have some additional comments on our China operations later, but first I want to cover the highlights of the quarter.

We are really pleased with another quarter of strong operating performance. All key financial metrics were well above last year. Local currency sales growth increased 7%. We saw good growth across the board and are pleased at this rate which we achieved despite retail being down because of difficult comparisons the previous year. This strong sales growth drove a 17% increase in our operating profit.

Our strong operating performance combined with the benefits of our share repurchase program and lower tax rate versus the prior year led to a 27% increase in EPS. We have again raised our guidance for this year due to the strong quarterly results. Bill will cover this in the second quarter results in more detail and then I will have some additional comments on the results and our initiatives afterward. I now turn it over to Bill.

Thanks Robert and hello, everybody. As you heard from Robert we had a great quarter and are really pleased with our results.

Let me start with earnings per share which came in at $1.07, a 27% increase versus a year ago when earnings per share was $0.84. This is on GAAP basis. You will notice the beginning this quarter we are reporting adjusted EPS which excludes purchased intangible amortization for both periods. On an adjusted basis earnings per share was $1.09 which was also a 27% increase over the prior year amount of $0.86 per share.

We adopted adjusted EPS to be more in line with our peer instrument companies, most which report in this manner. This is an item a number of you have asked about us recently. We evaluated the merits with our Board and ultimately determined that this was the more appropriate valuation measure. Going forward this is how we will report and give guidance.

Turning to sales, which were $430.5 million in the quarter, an increase of 7% in local currency. As Robert mentioned we are quite pleased with this growth rate which we achieved despite retail being down in the quarter. If you exclude retail, sales were up 9% in local currency. On a U.S. dollar basis, sales were up 11% in the quarter, which includes a 4% currency benefit.

Breaking down sales by geographic destination and all of these percentages are in local currency, Europe increased nicely at 7% with strong growth in laboratory instruments and industrial products, while retail was down as we had some large food retailing projects one year ago. On a year-to-date basis sales in Europe are up 5%.

Sales growth in the Americas increased by 4% in the quarter with strong growth and industrial including our product inspection business. Laboratory products also had good growth while retail was down here due to strong project activity one year ago. Year to date sales in the Americas were up 7%.

Sales growth in Asia/rest of world increased by 14% in the quarter. We had very good growth in China, which was up 20%. Most other regions showed good growth as well, except for Japan, which was down slightly. By product line we saw solid growth across the board in this region. On a year-to-date basis sales have increased by 12% in Asia/rest of the world.

Looking at sales by product area, we had 6% growth in laboratory with solid growth in most product lines except AutoChem which was down slightly. During the quarter we sold our SFC product line which focused on super critical fluid chromatography. It was about a $10 million product line on a full year basis, so will not have a big impact on us going forward. For the first six months laboratory sales increased by 6%.

In our industrial business, we had 11% growth in our core products and as well with product inspection. For the first six months industrial sales have increased by 10%.

Finally, retail was down in the quarter but up 4% on a year-to-date basis. I've kept my remarks here brief on the sales but Robert will provide you some additional commentary by product line shortly.

Now let me turn to gross margins. We finished the quarter at 50% which is a 60 basis point increase over the prior year. We benefited from higher sales volume and our cost rationalization initiatives while product mix, currency and higher steel prices worked against us.

R&D amounted to $22.5 million or 5.2% of sales. That's a 7% increase in local currency. As I mentioned last quarter, we expect a higher growth rate in R&D that -- than what you experienced in previous quarters. And this relates to the timing of certain R&D projects.

SG&A finished at $128.9 million. An increase of 6% in local currency. We continue to invest in Spinnaker initiatives and expand our sales force in China. We also had higher variable compensation expense in the quarter. These expenditures were offset in part by the benefit of restructuring actions taken in the second half of last year. The net sum of these items resulted in nice operating leverage.

Adjusted operating income increased to $63.8 million for the quarter as compared to $54.3 million a year ago. The amounts in both years include share based compensation. This represents a 17% increase and an 80 basis point improvement in the margin. We were pleased with this growth and our continued margin expansion.

Let me continue down the rest of the P&L. Amortization amounted to $3 million in the quarter, while interest expense was $5 million and other income was $0.4 million. The other income principally relates to interest income on cash balances. Similar to what you saw in the first quarter, other income was down in the quarter versus a year ago. As a reminder this reflects planned reductions in our excess cash balances that took place over the last year and a half. Our tax rate in the quarter was 27%.

Before I go over earnings per share, let me comment on our share repurchase program. During the quarter we repurchased 718,000 shares for a total of $69 million at an average share price of $96. Fully diluted shares for the quarter were $38.4 million, and $38.1 million at the end of the quarter.

Finally, as I already mentioned earlier, earnings per share was $1.07 in the quarter, a 27% increase over the prior year. On an adjusted basis earnings per share was $1.09, also an increase of 27% over the prior year.

Now turning to cash flow. Cash flow from operations amounted to $60.6 million as compared to $53.1 million last year. Free cash flow, which is after CapEx, was $55.3 million, versus $51.5 million last year. Cash flow per share was $1.44 versus $1.25 in Q2 one year ago, an increase of 15%.

The strength of this cash flow can be seen in our working capital statistics. We saw further improvement in DSO, which now stands at 46 days. As I mentioned to you in the past we are quite pleased at this level. We also achieved further improvement in our inventory turnover, which came in at 5.2 times as opposed to 4.9 times one year ago.

That covers the quarter. Now let me update you on our increased guidance for 2007. Assuming an economic environment and market conditions similar to today, we now expect earnings per share for 2007 to be in the range of $4.28 to $4.33. This compares to previous guidance of $4.18 to $4.28. Current guidance represents approximately 17 to 18% earnings per share growth over the prior period. And I'm excluding the one time tax benefit we had in 2006.

On an adjusted basis, we expect EPS to be in the range of $4.35 to $4.40. Last year adjusted EPS, which excluded purchased intangible amortization and discreet tax items, was $3.72. This results in adjusted EPS growth of 17 to 18% this year.

For the third quarter we would expect earnings per share to be in the $1.02 to $1.05 range. On an adjusted basis we expect it to be $1.04 to 1.07.

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

I will start by providing commentary on the second quarter. And then give you an update on some new product launches and I also will provide you an update on our Chinese operations.

Let me start with our laboratory business, which you have heard growth of 6% in the quarter. Balances had a solid quarter with particularly nice growth in Europe. Analytical instruments were also strong and did benefit from new product introductions. We continue to have strong growth in our international pipette business, growth in the United States.

You heard from Bill that we sold our virtual business. We feel this will allow us to better focus on our core AutoChem offering, namely on reaction engineering and related real time analytics.

Process analytics had modest growth against the strong quarter of one year ago.

Our industrial business had growth of 11% and this despite of our transportation and logistics business being down as they had solid growth in the last year. We saw growth in core industrial and product inspection in all regions of the world.

As expected, retail was down in the quarter given the very strong activity of a year ago.

That covers my comments on the quarter. We had solid operating performance in the quarter while market conditions remain positive. We are also seeing the benefits of the diligent execution of our strategic initiative.

As always, we have a good flow of new product launches which continues to be an important part of our growth strategy. I want to take you to a couple of examples on how our new products provide attractive pay backs to our customers.

The first is from our process analytics business. We recently launched a fully digital analytical sensor system, which is used in continuous operation processes such as in pharma, chemical or (inaudible) industries. They are used for in line measurements of pH or dissolved oxygen. The new sensors have fully integrated electronics with intelligent sensor management. They can be precalibrated where start up is fast and easy, and configuration errors are reduced. The sensors also offer realtime predicted diagnostics information which can indicate where maintenance or replacement will be needed. This allows down time to be planned and managed in a cost effective way. Finally, because of the productive maintenance, the sensors have a longer usable life. With greater up time and reduced unplanned maintenance, customers can get pay back in less than one year from these new products.

Another example is from our transportation and logistic product group, where we are leading provider of integrated solutions and these solutions do include weighing, dimensioning and barcode reading equipment. We Recent introduced a revolutionary solution for the dimensioning of pallets. Global transport companies have struggle with stability to dimension pallets due to their irregular shape as well as reflection from the shiny plastic film wrapping them. Also large dimensionals require substantial space which disrupts the work flow in our warehouses. Our new solutions have more powerful optic technology to improve accuracy and we incorporated a unique design which allows customers to mount it on the ceiling, on the floor or on the wall, thereby maximizing the flexibility in the setup of a warehouse. In the test pilot the customer was recapturing lost revenue of approximately $25,000 per day. Of course, not all customers will achieve that level, but the payback is expected to be quite fast in terms of recapturing revenue.

The final example is the recent launch of our new generation of thermoanalysis instruments. Known as our excellence line. Thermoanalysis instruments are used in quality control and R&D applications to test material characteristics over a wide temperature range. For example, they are used to test plastics and design plastics for airplanes. Our new line improves productivity by allowing the simultaneous analysis of different thermal events. That is the testing, for example, of weight changes and energy absorption at the same time. The sensors are more accurate which allows the analysis of small sample sizes and weak material effect. The new color screen is easy to see and operate. (inaudible) can be opened and closed touch-free which is faster and also provides improved security by preventing cross contamination. Finally the line has a model of concept where the automated software allows maximum flexibility for the customers to expand the application.

We are just launching these products now and initial customer feedback is very positive. These are only a couple of examples which do demonstrate the strong payback of our product launches to our customers.

As I mentioned at the beginning of the call, we are right now in China where we are recognizing our 20th anniversary of our operations. And at the same time have been celebrating the opening of a new manufacturing facility. Our operations in China have been a real success for the Mettler-Toledo group. We have in China strong market positions in all segments. We have a solid customer base with local Chinese companies, but of course also with our traditional multinational companies and also state owned entities. We have extensive manufacturing facilities with a long history and we are the clear number one company in the weighing industry here in China.

The mix of our business in China is different than what we will see in Europe or in the United States. It is more concentration towards the industrial business. Our enthusiasm for these markets reflect our expectation, namely that the needs of the Chinese markets will evolve and will expand towards the portfolio and the mix in the portfolio as we see it in all parts of the world.

The growth drivers in China illustrate this point. We see demands from local manufacturers for basic infrastructure needs as well as better quality control equipment to ensure they are meeting worldwide quality and export standards. Multinational companies continue to make direct investments into China which also drives the demand for a wide range of products. Also China will continue to grow as a research location which will significantly benefit our laboratory business. And finally, greater consumer demand is fueling an increase into the number of food retailing locations and also the heightened need for product inspection instruments is based on the drive toward ensuring food safety.

Our new facility has a modern layout and is conveniently located to an already existing facility and therefore allows for significant improvements in the productivity of these operations.

China is a very important part of our global strategy. With our strong market position, extensive manufacturing capabilities, and the successful operating history, we are well positioned to continue to capitalize on the growth opportunities of this region. Our emerging market strategies are not just in China, but also includes all the fast growing regions such as India, Russia, southeast Asia and Middle East and European countries. These combined with our strong product pipeline, our marketing initiatives under project Spinnaker and our overall leadership position in our markets make us confident of our growth prospects also for the future.

That concludes our prepared remarks. Now I would like to ask the operator open the lines for questions.

(OPERATOR INSTRUCTIONS) Your first question is from the line of Tycho Peterson with JPMorgan.

Good afternoon.

Hi.

Congratulations on the quarter. I guess just kicking things off. You talked a little bit about the increase in R&D spending. Can you give us a sense where the incremental dollars may be going? Are these new focus areas for you or just more focused on product line extensions.

I think it's a combination of both. If I may just put some more color behind it. Being not just in China, I can tell you that we have increased significantly our R&D capabilities here in China. This is just that we can better serve these markets, but also because we put more and more product designs for the global needs into China, on one side also, of course something which helps us to save some costs. In terms of for existing product, as always it's a mix.

We have a lot of new products which we place others in the life cycle. But we have increased spending for some new product applications which, of course, are not [being built] right out of what we do right now, but being just logical extension of our current business.

Especially maybe with this increasing focus on segmentation and having products that fit individual segments that help us build up valuable niches around our core technology.

And maybe just to put again some color on Bill's statement, you have heard us talk about segment marketing for many times. Segment marketing was initiated to have a better customer orientation and the initial step of that was to somehow change our product communication to our end users to a very targeted end user communication so focus on certain industries. Now the next logical step is that once we [took] the specific segment, we do fine tune our offering also to that segment.

I give you an example of that. Our micro balances are very often used in applications to control stents. The medication you apply on the stent needs to be carefully weighed. And we have now re-designed that micro balance to better suit that very application and in that sense we have become a very strong partner of that industry.

Okay. Can you talk little bit about the process control and maybe anecdotally about the opportunity going forward for that, and the x-ray business and how quickly you think that business can ramp. There's obviously a lot of scrutiny on things like food supply and just generally speaking what some of the underlying trends are there.

The process analytics is more the business where we measure analytical parameters in the process itself. And that part of the business has been doing very well for many years. It's stimulated by an overall trend. Namely that you want to measure these analytical parameters in the process rather than taking samples from the manufacturing line into QC labs. You can imagine through that you get much better quality control, much better yield in the process.

We have been focusing on specific segments like the pharma industry, chemical industry, [bore] industry, over the years. Not so much in the food industry. Through that very focus I think we will make great progress.

The new technology which I described before is frankly way ahead of others. We also actually provide alternative technology which I cannot speak too much right now to measure all the parameters in the process. All these together give us great confidence that business will have solid growth in the future.

Now in terms of food and food safety which, of course, is an important trend, that is more our product inspection business which does this end of line product inspection. And where of course in food industry we can measure different parameters. We did speak to you in the past about the x-ray business, the x-ray business which can pick up contaminants in foods. But also metal detection is part of that. These two businesses do perform solidly. And also in the traditional markets that being in Europe and U.S. and the particularly in China it's a huge topic. The Chinese authority are very focused on food safety. And they put a lot of regulations and measures in place to improve that. I think you all have been reading about products being contaminated and that will be addressed. It will drive the demand in this part of the world. In our product inspection business, our portion of business in Asia is relatively small and we see a very significant upside in this business. Also today we have opened a smaller facility for that business here in China so that we can better address that market.

Okay. And then two quick questions on the financial side. On the divestiture, can you remind us, I know it's a small business but did that incorporate a loss for the quarter? And then on the margin side I think you talked a little bit about the steel pricing. Can you give us a sense of where there is an opportunity to hedge there or hedge more than you already are now?

Okay. So first of all with regard to the divestiture of the SFC business, we did take a small charge in the quarter it has to do with related to intangibles. That charge was about $0.02 per share. And then in terms of the second part of your question was --?

I guess just talk about the impact of steel pricing on the margins.

Steel prices were probably eating in around 100 basis points during the quarter in terms of the overall margins if I look at the pure steel categories. We are pushing through price increases related to that. I think that is probably our first reaction.

Much of what we buy is not what you would call raw steel. It's often processed via coming to us either via machine parts or fabrications. I think we are never getting the full impact of changes in steel prices. But 100 basis points isn't a small number either. In terms of a strategy around hedging that is not one of the strategies we are undertaking. What we have been trying to do more is using low cost country sourcing either in Eastern Europe or in China. Then as well we are continuing to look at opportunities to further consolidate spend with suppliers not only within our individual manufacturing units but across our manufacturing units. At this point in time we think there is no need to go after hedging as a complement to that.

Thank you very much. Congratulations.

I think the most important thing is that we do this price increases and we actually have in many product categories made midyear price increases and we will also do again beginning of next year other price increases to really offset all these effect.

Will you be able to quantify probably what level you are talking about? Is it low single digit price increase here midyear?

We think for the full year we are going to pull out around 100 basis points. When I give you that number, I'm excluding what we would call the impact just purely on these product lines that where we are just pushing through raw material price increase effects. So our core level.

Okay. Thank you very much.

Your next question is from Richard Eastman with Robert Baird.

Yes. Just Robert, could you just walk us through for a second. In North America, growth decelerated a bit. Was that the impact of the food retail business. And I say decelerated, I mean from the first quarter. Is that the food retail business which was down here in the quarter?

Yes, the food retailing business is the impact that you see in the quarter was purely related to the food retailing, just to give you -- I'm pulling in front of me -- an impact. So if we look a year ago we had in the first quarter we had 45% growth in food retailing in the U.S. and then we were down 9% in the second quarter. So if I look kind of amongst the core product lines, actually our growth in industrial and industrial accelerated in the second quarter and lab was about the same.

And so was the food retail was down 9% in just the U.S. then? Or was it similar in international?

Just the U.S. in the second quarter I think it was down low single digits globally.

Okay. All right. And then Bill, could you give us the percentage of sales, for modeling purposes, the percentage of sales just reported sales in lab, industrial and food retail.

In the quarter it's 43% lab, it's 44% industrial, and 13% retail. And just as a reminder, you will see that trend with lab pulling ahead of industrial, at least that's what I would expect at this point of time, by the time we get to the end of the year, because the lab business tends to be the one where we see the bigger fourth quarter impact.

Okay. And then a question I have, when we entered this year kind of modeling the year and thinking through the year, it looks like the lab business year to date, as well as the food retail business year to date, are maybe on plan or on what we would think of as budget. The industrial business would be the piece that's running ahead year to date. Is that a fair way to look at the business at the end of June?

I think we knew the retail business had a super year last year with some really big projects. Of course, that wasn't part of the plan this year. And in lab, as you say as well pretty much along what we expected.

Robert, since you're actually in China, it sounds like. One of the things that has hit our radar screen in the last two days is we have seen a number of industrial companies basically reacting to China's announcement that they are going to effectively, as of July 1, cut substantially cut the tax rebate on exports out of China. And this -- a number of industrial companies that have noted that as raising their cost on source product out of China. And I'm curious, is there discussion of that in China now and maybe what your opinion of that is relative to Mettler?

Maybe let me start off and then Bill can answer the second part of your question. I think first of all what concerns cost effective manufacturing in China, even after this visit I'm more convinced we have substantial saving by manufacturing in China. We went through a series of analysis during this week and again and again it was confirmed 30 to 50% cost saving is very, very possible when you transfer. For us the transfer has been hugely successful. We will transfer more to China. Even if tax flow may change, in the grand scheme it's a smaller thing.

By the way, this new plant which we just opened is a new entity so that again we have tax holidays for a few years and that again we will be beneficial for us. Bill, you may want to add [the other part.]

Like many things in China, sometimes the law gets written and you are trying to understand exactly how it applies. We had a similar experience a few months ago when they announced the tax rate increases, we actually did the full analysis and as Robert just mentioned with the tax holiday and things we actually think we will have a slightly slower tax rate in China for the next couple of years than we enjoyed the last few.

Similarly, in this, we actually had some government officials at our opening yesterday. And we had some discussions with them around this new law and our expectation is that at least the majority of our products won't be subject to this. It's very product specific how it will be implemented and we're not expecting it. We won't know for sure until a couple quarters down the road.

Okay. And then just the new facility that you are opening, are there any specific product lines or -- that you are going to transfer in there? In other words, should we look to the lab piece of the business or industrial for the cost savings?

The New facility was built on one side to have more capacity for the future and also to replace a very old facility, actually the facility where we started 20 years ago. And just to maybe give you a description of the old facility, it was multi-building, multi-floors, and in that sense, not really a good layout. The new facility is now much better in terms of just manufacturing layouts. We have made tremendous improvement in the way we operate the theme or division [needs] to have Western productivity in this low cost Chinese environment. And that team is working hard against that and we felt that it will be important that we provide them the right set up to accomplish this.

Now of course, you are going to continue to transfer. I think you all know that in rough terms 20% of our revenue is made from products manufactured in China, and I would foresee that to increase to 25, maybe even 30% over coming years. Not more than that, I think you should be aware that the bottleneck is really how many skilled people you have on the receiving end here in China. That's the real challenge, to have enough people, trained people, management talent which can absorb all we transfer. Now we, specifically to your question, what are the fields we transfer, I would say mostly it's industrial and retail. I think retail is very much already imbedded here in China. We don't profit yet from it to full extent because this transfer are just in the ramp-up phase. But I think the retail products will come to a big extent out of China. Also in the industrial, a lot of the products are made here in China. On the lab it's more the low end laboratory products. It is also the (inaudible) branded products which are made here in China.

Great. Thank you.

Your next question is from Peter McDonald with American Technology Research.

Hi, thanks for taking the question. First, what percent of sales are coming from newly launched products in the last year or so?

I haven't looked at the number this quarter, but we were always traditionally running in the mid-20s to high 20s on that number the way we define it. So looking on an LTM basis how much of your new products comes from products launched in the previous 12 months. I think that trend is probably -- it certainly wouldn't be at the low end of the range there. There has been a number of new product lunches. Yes, so the vitality index is good.

And then kind of what's driving the gross margin upside? Is it manufacturing? Is it sustainable for the next couple of years or so?

I think we are doing many good things in gross margin. Maybe I would highlight this one comment that I often bring up, is that with our Asia growth, if I look at our business like let's pick China for example. China at an operating profit level, makes more than the corporate average, our business in China. But at a gross profit margin level it actually is dilutive. So we have this and I could make a similar statement, for example, about our service business, so let's talk about China because it's maybe a bigger impact. So we are expanding our gross profit margin despite that impact of mix going against us principally mix related to our China business and Asia business growing faster than the corporate average. With that, we also have actually some negative impact on the gross margin line currently due to the steel prices, which we mentioned, and little bit on the foreign exchange side as well. Because we have this ballooning sales effect from the weak dollar.

But now if I look at all of the things we are doing good, first of all it is that we are transferring production to China. It is that the guys are very focused on product cost reductions within their individual product lines. And I think we really have a lot of actually good momentum inside the company where this is kind of becomes the mind set. Continuous productivity improvements, continuing product cost reductions, and in complement, that we see the need for price increases and not only the need but let's say the opportunity for price increases. So taken together, those things should be positive.

But maybe one last thing on the topic is we benefit a lot when we can have this kind of let's call it more than mid to high as opposed to just a mid level of sales growth. Our variable manufacturing costs on each product we sell is not so much. So if there is a lot of contribution. So we certainly benefited this quarter from having let's say 7% sales growth as opposed to 5 or 6. That's helping our gross profit margin.

Just may add here, kind of over in the last ten years, our gross margin has gone up close to 10% over those ten years. Aside from these things Bill mentioned, these product cost reduction efforts through better design, China manufacturing, you also have very conscious efforts on the pricing side. We did discuss that a little bit before in the call Also the software content in our offering is increasing, which helps and then we have under the leadership of Bill, the global procurement effort. And all these things together make this a sustainable trend.

Finally, on the TA business, is the majority of your customer base, is that industrial or have you found it kind of expanding into pharma and biotech and other areas?

It's really not biotech. Yes. Pharma to some extent. But it's mostly industrial companies, yes.

Okay. Thanks a lot. You're welcome.

Your next question is from Derik De Bruin with UBS.

Hi, good afternoon.

Hi.

I guess when you start looking at the back half of the year, I mean, the comps are getting a little tougher, it's like you -- have you seen any sign at all in the weakness in the market that suggests you are going to butt your head up against tougher comps and have a harder time with the delivering your guidance?

I think we have seen really good momentum and when I look at the order intake, we have certainly indications there at least to some extent into the second half of the year. Based on that, we are optimistic for the second half of the year. We are very much aware of the tougher hurdles in the second half. When we now issued the guidance for the rest of the year with this earnings call, we kept this all in our mind and our forecast is based on that.

Fair enough. And Bill, can I just get you to do a math question. The change in excluding the amortization and the intangibles, what's the pre-tax on that? For the quarter? It's basically $0.02?

Yes, yes, the pre-tax is about a million and change in the quarter and $2.1 million for the full year or for the half year, sorry. $4.2 million is our estimate for the full year.

4.2 for the full year. Okay. Great. Thanks.

Your next question is from Jon Groberg with Merrill Lynch.

Hey, guys, [nihau ma]?

How are you?

Good. Just on the following up on this switch of accounting. It's the second quarter in a row that one of you guys has decided to switch to this and just want, as a clarification, simply because of the way that a lot of the other companies in your space do this and you want to be valued on similar metrics. Is there any change in your outlook as to how you view your M&A opportunities or whether you're getting more aggressive with M&A and wanted to get little more clarification there?

Sure. Let's start out with, of course, the process that there is been a trend amongst several of our peer group companies to move in this direction. It begged the question, what did we think. We reviewed it as a management team. The merits of this method and we discussed it with our board and ultimately decided that this was a -- the better method and more appropriate in terms of you guys. Many investors had also given us similar input. Now, in terms of is there any signal or anything with regard to M&A, I think M&A is part of our strategy but you shouldn't read that this item in and of itself is any change in terms of emphasis.

Okay. Thanks for the clarification. I lost -- three companies in front of me here and I lost the second question so maybe if you follow-up with me, I will ask you then. Thanks, guys.

(OPERATOR INSTRUCTIONS) Your next question is from Paul Knight with Thomas Wiesel Partners.

Hi, Robert.

How are you?

Can you talk about the size of your China facility? You were saying you have a new space. Can you -- what's the square footage, when did it open and how does it compare to what you had?

Maybe best way to answer this to you is, this new facility will allow us to increase capacity in the order of 40% and we think it should be sufficient for the coming couple of years.

And it's up and running now?

It's up and running. So you should not be worried about hiccups in the transfer. It's all behind us and the team has done a wonderful job to assure they kept up customer deliveries. Not only for the domestic markets but also globally.

And then the other is, you admit -- you talked about thermal analysis and the pH business. Can you quantify what portion of the Company it represents right now, Robert?

It's -- so first, our analytical instrument business in total is in the $150 million range. This is within that piece. And so those two product lines in total would represent I think about 6% of sales.

Okay. Congratulations. Have a good trip.

Thank you.

You have a follow-up question from the line of Richard Eastman with Robert Baird.

I wanted to ask you, when we talk about food safety and we talk about your packaging business, your product inspection business, we tend to talk about technologies, your x-ray metal detection, check weighing, that are basically for inorganics. Do you have any interest or any activity, R&D activity, looking at technologies that would test for bacterial content?

No, we don't. Maybe I need to explain this a little bit. Technologies we currently have, what you just mentioned before, x-ray technology, check weighing, metal detection, these are all in line in the end of line packaging equipment. Typical rate that they check is 600 to 1000 packages per minute, and that's really our stronghold.

These things you mentioned before are actually offline technology, even on-line typically we'll take samples there, and you put them to a testing lab and then the testing lab will do those tests. These tests may actually take a couple of days until the customer has feedback. Of course, you are asking the right question. Customers would love to have these technologies, in process, in line technologies, but that's a long, long shot and we feel at this point in time it will be the wrong efforts for our side.

I understand.

And we have plenty of opportunities in what we have. I should say this as well. The x-ray business is really a technology which is gaining acceptance. It was coming from Japan; in Japan it was an accepted technology for a long time. In the mean time the European and U.S. customers are gaining confidence in it. There's plenty of work to just accomplish that. Then as I mentioned before, the Asian part in the packaging inspection business is small. It's a small percentage of their total business. While of course it serves food industry and food industry relates to population. And in that sense the biggest part of that business in the future will be in Asia. So we are doing a lot ourselves to build up that opportunity for Asia.

Okay, very good. And then just a clarification, you mentioned earlier about a charge you took on the sale of SFC. Is that -- where exactly is that in the P&L on a pre-tax basis? Is that gross margin?

It's in SG&A.

Okay. Thank you.

You have a follow-up question from the line of Jon Groberg with Merrill Lynch.

I'm back. You said the word, Japan, and it sparked in my memory. It's been a tough go there. I think you mentioned you were changing some management hoping to execute better. You said up front it was still lagging a little so curious how things were going there.

We will take a little time to really make the final call, but Japan is mainly lab business and we have a new manager in place in Japan. And I'm very confident that the guy ultimately is going deliver our expectations.

So, you know, time line for you is --

I think towards the end of the year, early next year we will see those benefits.

And maybe to give a little context in terms of the size of the business for us, we never had that large a business in Japan. I think it's even less than 3% of sales for us. So it's mostly, as Robert said, lab focused, and, therefore, we don't have the same industrial or retail business there.

Okay. Thanks.

We have a follow-up question from the line of Tycho Peterson with JPMorgan.

Thanks for taking a follow-up. I'm wondering if you can give an update in terms of the size of your procurements in China. I think you talked about a year go as it being about 74, $75 million in local sourced components. Where do you stand today?

Okay, in terms of -- I guess there are two key statistics if you think about how much does China mean to our cost structure in supply chain. Robert mentioned one, we have 20% of our total product sales coming from China. If you think about it in unit terms, in our weighing business I think something we calculated recently 80% of our weighing units are manufactured in China. With regard to sourced product, the $70 million number we were moving about 10 million per year adding to that number. So I can't remember now. It's not a statistic I look at all the time, whether the $70 million number was last year's number or the forecast for this year. We have been add being $10 million per year in that category .

Okay. Great. Thank you.

There are no further questions at this time. Do you have any closing remarks?

We will conclude by saying thanks for joining on the call. If you have any questions don't hesitate to give us a call. Thank you.

Thank you.

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