Mettler-Toledo International Inc (MTD) 2009 Q2 法說會逐字稿

Good day, and welcome to the second quarter 2009 Mettler-Toledo International earnings conference call. I will be your audio coordinator for today. (Operator Instructions). I would now like to turn the call over to your hostess for today's call, Ms. Mary Finnegan.

Thanks, Abigail, and good evening, everyone. I am Mary Finnegan, Treasurer and responsible for Investor Relations at Mettler-Toledo, and I am happy to welcome you to the call. I am joined by Olivier Filliol, our CEO, and Bill Donnelly, our Chief Financial Officer. I want to cover just some administrative matters. First, the call is being webcast, and is available for replay on our website at www.mt.com. A copy of the press release and the presentation that we refer to on today's call is also available on our website.

Let me summarize the Safe Harbor language, which is outlined on Page 1 of the presentation. Statements in this presentation which are not historical facts constitute forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. For a discussion of these risks and uncertainties, please see the discussion in our recent Form 8-K. All of the forward-looking statements are qualified in their entirety by references to the factors discussed under the caption "Factors Affecting our Future Operating Results," and in the business and management discussion and analysis of financial conditions and results of operations section of our Form 10-K.

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 measure and the most directly comparable GAAP measure is provided in the press release. I will now turn the call over to Olivier.

Thank you, Mary. Good evening, and welcome to the call. I want to start with the highlights of the quarter, and then Bill will provide details of our financial out looks and our updated outlook for 2009. I will then continue with additional comments on the business, an update on our cost reduction program and highlight a few of our new product launches. As always, we will have time for Q&A at the end. On Page 2 of the presentation, the highlights of the call are summarized.

Market conditions remain very challenging. There are some initial signs that the downturn in the global economy may be slowing. However, given that our business tends to be more late cycle, we have not seen it yet. At the same time, we believe we are bouncing along the bottom. As we expected, due to the extraordinary quarter of last year, our local currency sales declines accelerated from the first quarter. We experienced global currency sales decline of 14% in the quarter. However, the two-year growth rate remains about the same as last quarter, and we expect a similar number next quarter. We are pleased that our operating profit and EPS exceeded our expectations due to strong execution on our cost reduction program and the benefits from pricing and improved material costs. Specifically, operating profit reached $61.7 million, while adjusted EPS amounted to $1.17.

Finally, we had good cash flow generation in the quarter. With our strong Q2 results, we have again increased our full-year guidance. Bill will provide some more details on this, as well as on our results for the second quarter, and I will then have some additional comments. Bill?

Thanks Olivier, and hello, everybody. Let me start with additional details on sales, which are outlined on Slide Number 3 of the presentation. Sales were $407.4 million in the quarter, a decrease of 14% in local currency. On a U.S. dollar basis, sales declined by 21% in the quarter as a result of negative currency of 7%. Breaking down local currency sales by geographic destination, in the quarter, we had an 18% local currency decline in Europe, while sales declined 15% in the Americas, and 6% in Asia rest of the world. From the six months, we had local currency sales declines of 14 in Europe, 13 in the Americas and three in Asia rest of the world. By product area in the quarter, laboratory sales declined by 11%, industrial sales decreased by 16%, and food retailing declined by 26%, due in part to a strong project activity in the prior-year periods; specifically, retail grew by 16% in the year-ago quarter. For the six months, lab was down 10%, industrial was down 12, and food retailing declined by 17%.

Turning now to Slide Number 4, let me cover the rest of the P&L. Gross margins were 50.6% in the quarter, a 40-basis improvement versus the prior year. The impact of the drop in value was largely offset by our cost reduction program and overall favorable mix; but in particular, the benefits of our pricing initiatives, as well as lower raw material costs. We're obviously quite pleased with that number. R&D amounted to $22.1 million, or 5.4% of sales compared to $26.7 million or 5.2% of sales last year. This represents a 12% decline in local currency, which reflects the timing of projects as well as a reduction in external Company spend. We saw the benefit of our cost control measures, especially in the SG&A line, which was $122.5 million, a decrease of 16% in local currency. The reduction reflects our cost reduction efforts, as well as lower variable compensation.

Adjusted operating income amounted to $61.7 million as compared to $75.2 million a year ago, a decline of 18% versus the prior year. Continuing down the rest of the P&L, amortization expense was 2.8 million in the quarter. Interest expense was 6.8 million, which included a non-recurring charge of $1.8 million associated with our bond -- the tender of our bond, as well as some other related financing costs. This amount has been excluded from the adjusted EPS. I will have some additional comments on the bond tender and our debt structure in a moment. Fully diluted shares for the quarter were 34.2 million. Our tax rate in the quarter remained at 27% versus 26 in the prior year. You will also notice during the quarter that we incurred a restructuring charge amounting to $0.30 per share related to our cost reduction program.

We expect to spend $40 million on the program in total, of which about 29 million has been incurred to date. We also had a non-recurring charges of $0.04 related to our bond tender. We have excluded these amounts from adjusted EPS. Finally, adjusted EPS was $1.17, a 16% decline from the prior year amount of $1.40. Our cost reduction efforts helped to mitigate the impact on EPS from the significant decline in our sales volume. Let me turn now to cash flow. Free cash flow in to the quarter was $72.4 million as compared to 63.7 million in the previous year. Working capital remains steady. DSO was at 44 days, while ITO is at 5.1 times. We have been implementing a number of programs to improve working capital efficiency. We are quite pleased with our progress to date.

That covers the quarter, and now I want to cover a couple of items related to our debt structure. During the quarter, we diversified our debt structure. We tendered for our outstanding bonds due in 2010 and received 50% or 75 million of them, and we're pleased with that result. We were also issued a hundred million dollar six-year private placement at 6.3%. With these actions, combined with our $950 million bank facility which matures in 2013, our debt structure is solidly positioned. Now, let's turn to guidance. Based on our current assessment of the market, we have updated our outlook for 2009. I mentioned this on the last couple of calls, but it's worth repeating that the current uncertainty in the global economy makes forecasting very difficult. Based on the first six months' results, we've narrowed our full-year sales guidance range to negative 10 to negative 12%.

Previously, the range was negative 8 to negative 12; however, we have increased our expected adjusted EPS to the range of 4.92 to 5.42 per share. This compares to previous guidance for adjusted EPS of $4.85 to $5.35. Finally, just a reminder, adjusted EPS excludes purchase and tangible amortization, restructuring charges and other one-time items. With respect to guidance for Q3, the third quarter of last year was very strong, with local currency sales growth of 10%. Given this backdrop, we expect local currency sales growth to be in the range of negative 13 to negative 15% for the quarter. This would give us a two-year growth rate about the same as what we've experienced year to date, and we expect adjusted EPS to be in the range of $1.13 to $1.17. That's it from my side for now, and I'd like to turn the call back over to Olivier.

Thanks so much, Bill. I will start with some comments on second quarter business results, update you on the status of our cost reduction program and provide information on some recent product launches. Beginning with lab, lab was down in the quarter against strong sales growth one year ago. By product line, pipettes are holding up due to their much higher consumable stream. Automated chemistry, despite traditionally serving the pharma market, is doing well. We are seeing the payback on significant marketing investment such as sales boosted programs, which are aimed at identifying pockets of growth. Similar to the first quarter, the weakness we are seeing in lab is in balances and analytical instruments, some of which is due to top comparisons, but also due to softened end markets.

Turning now to industrial, as expected, our core industrial business weakened further during the quarter due to reduced manufacturing output in all regions. Product inspection was down in the quarter against strong comparisons from a year ago, although we did have nice growth in Asia. Food and retailing was down significantly in the quarter, more than we had expected. Contributing to the decline was the very strong comparison of the prior year period, and we also seen a slowing of project approvals. We don't expect this trend to change in the near future. Service, which accounted for 25% of sales, was clearly better than our product business. We had growth in lab and retail, while industrial service was down, reflecting continued reduced capacity utilization and plant closures among our customer base.

Finally, let me also comment on sales by region. Starting with Europe, which held up nicely for some time but is now clearly seeing the impact of the economic downturn. Europe weakened further in the quarter, with Germany facing difficult market conditions. Business continues to be very challenging in Eastern Europe and Russia due to economic and currency declines. Looking forward, we think it is possible that Germany will continue to weaken, while the UK and Southern Europe appear to be bottoming. In the Americas, while we had declines in the most product lines, the two-year growth trend was similar to what we saw in the first quarter. As America was the first region impacted by the slow down, it appears that we may be bottoming in this region. In Asia, specifically China, our lab business was up in the quarter, while core industrial products declined due to reduced export activity. Product inspection showed nice growth as a result of the drive to better food safety. Looking forward, we would expect industrial business to pick up later this year, with the benefit of the stimulus programs. Those are the comments on the second quarter results, and an overview of what we expect in the coming quarter.

One reminder as we look forward. We will continue to face very difficult comparisons in the third quarter, while comparisons will start to be easier beginning in Q4. You heard from Bill that gross margins are holding up fairly well. We are benefiting from pricing as our annual (inaudible) increase (inaudible). Our pricing initiatives which we have implemented over the last 18 months are yielding good returns, which are particularly beneficial given the environment. Finally, we are also benefiting from the reduction of material costs. Our material cost index is actually down nearly 4% to last year. Now let me update you on the cost reduction program. As we discussed last quarter, the program is targeting annual cost reductions of a $100 million and includes a workforce reduction of about 10% or 1,000 positions.

At the end of the June, we were well on track, if not ahead of schedule with the program. We are substantially complete with the headcount reduction. We still have some work to do, as evidenced in the amount remaining in our restructuring charge. The final elements of the plan will be completed during the third and the fourth quarters. While these actions are difficult, the implementation has gone well with minimum disruption. These actions have been taken in a very diligent manner, so the substance of our franchise was not impacted. While cost management is critical in this current phase, we have not lost sight of the longer-term picture and our need to grow the business. We continue to invest in the business to reinforce our long-term position for the long term. In product development, our pipeline remains robust. Let me highlight a few of our most recent product launches. We just launched a new laboratory mid-range balance, which will be used by a broad customer base, including pharma, cosmetics companies, food industries, metal, education and (inaudible) industry.

The balance is high-performance, but also has the robustness needed for these types of environments. Its applications include, among others, checking for quality control, formulation for easy dosing, and piece counting. It is easy to learn, can be programmed with automated shortcuts for preferred applications, and can be easily dismantled for cleaning. These features help to improve the productivity, reduce training costs and improve accuracy for our customers. We have also optimized our manufacturing and sourcing strategy to lower production cost for this product. While the weighing sensors are made in Switzerland, the housing and all the components are made in China. By implementing an assembly house concept in four worldwide locations, we can ensure fast assembly according to customer specifications and low cost. Another recent laboratory instrument introduction is our new thermal analysis product for melting point. Melting point is one of the most determined physical properties in materials consternations. It is used in quality control and R&D, and its key segments include pharma and chemical. For example, in drug formulation, all ingredients have to be tested for identity, and this can done by determining their melting point. Our new product incorporates our one-click man/machine interface that has proven so successful in our integration line. Individually stored measurement programs can be started with a single press of the color touch screen.

It is, therefore, easy to operate and increases productivity by allowing the simultaneous testing of six samples. A digital camera is incorporated into the instrument, which records a high-resolution video so customers can playback the melting process on the instrument. Initial customer feedback has been very strong. One final example from our industrial side is our new terminal for the hazardous production area. We have always been a market leader in this segment, but now we will greatly strengthen our position with the most (inaudible) offering in the market. Typical customers include chemical, pharma and petrochemical companies, and it is a segment that is becoming increasingly important in emerging markets. The new terminal is a high-end solution targeted to hazardous areas where customers are concerned with the risk of explosions. Our new terminal also offers a unique feature to enable the control of related process accessories, such as input and output valve, directly in the hazardous zone. Furthermore, the terminal features an extensive range of widely used industrial protocols for communication with high-level automation systems. This allows for a wider use of applications.

The rollout is supported by a comprehensive marketing package, including segment-specific brochures, webinars, webcasts and e-learning tools. This further solidifies our strategy of strong provisions in this demanding but very attractive segment. This is just a sampling of our new product launches as we continue to invest in R&D to further expand our market leadership during this downturn. Sales and marketing also continues to be an investment area for us as well. We are emphasizing short-term campaigns, and are increasingly utilizing marketing techniques, such as webinars and e-learning tools, to increase leads. This covers the topics for today.

In closing, while the market is challenging, we believe the actions we are taking will not only allow us to weather this downturn, but will position us very well for the future. Our cost reduction program is well on track and provides, to a degree, some buffer to the environment. We continue to invest in R&D and sales and marketing to ensure we continue to expand our market position in this environment. We believe we will emerge from this downturn a stronger and leaner competitor with greater market share. That concludes our prepared remarks, and I would now like to ask the operator to open the lines for questions.

(Operator Instruction). Your first question comes from the line of Chuck Murphy with Sidoti & Company. Your line is open.

Hi, guys. I was just wondering if you could give us the currency impact you're expecting for sales in the third quarter and for the year?

Sure. For the third quarter, we expect in the area of around 4%; and if I look out to Q4, it should be, based on today's rate, actually slightly positive, maybe 3%, which would be about a 4% decline for the full year.

All right. And then just wondering, is there anything new on the acquisition front? I mean, are you guys feeling like you might get more aggressive; and if so, is there a specific side of the business that you'd be targeting?

Yes, Chuck. In general, our commitment remains very much the same. We are very interested in bolt-on acquisitions. In the past, we looked at opportunities; evaluations were often not right for us, and we have -- we continue to look at opportunities. We have things that we are looking at, and I would hope that some of them can materialize. But again, I want to stress the point it's bolt-on acquisitions, and we care very much that the strategic fit is good. And if the financial valuations are right, we're going to do them.

Okay. All right. And my last question was, have you guys seen any benefit at all yet from the stimulus, and are you expecting anything anytime soon?

Okay. There are two regions that have a significant stimulus package that impacts us. Let me start with China, which has certainly the most ambitious stimulus package programs. We are very actively tracking all of these opportunities. I was just talking to the Chinese team last week. They gave me an update. They are right now tracking about 2,700 tentative opportunities for us. Some of them have already materialized. We saw some impact in Q2.

But the majority of it will certainly rather come late in this year, and we definitely expect an impact -- particularly with the industrial business in China, but also in lab, we see some good funding of research activities. The other region that we benefit is in the U.S. There we clear that the funding of research activities will also to help us, but certainly not in the same amount as we see in China. And this will take a bit more time. We have not seen yet too much of benefit. I would expect that it is coming more in Q4. But I wouldn't want to overstate the impact from us from the U.S. stimulus package.

All right. Thank you.

Your next question comes from the line of Tycho Petersen from JPMorgan. Your line is open.

Hey, good afternoon.

Hi, Tycho.

A question, I guess, just initially here on the cost reductions -- and I appreciate the additional color you provided -- the remaining 11 million that's left under the current program, can you give us a sense of what that's going to entail? I mean, it sounds like you're done with the headcount component. So is there -- are there additional kind of sourcing costs to work out, or is it a footprint issue? What is the purpose --

It's -- a bigger piece of it is people related, particularly in countries where the discussions go through a certain legal process, and there's notification periods and things like that. And those tend to be some of our more expensive countries. But there are some components, like remaining lease periods for facilities exit and things like that. I would like to -- right now, we probably can do a little bit better than that $40 million number, but there might be one or two new ideas we have as well. So -- but the majority of it is people related.

Okay, and then the question on R&D strategy, I guess we saw R&D down about 12%, I think, this quarter. When do you expect to kind of start to dial that back up, and can you give us a sense as to whether there's going to be any kind of a broader shift in focus, any kind of emerging -- I don't know -- areas that you're going to be focused on in terms of the R&D strategy?

The fact that R&D came down in the quarter to a certain degree, it has also to do with the product launch pipeline. It's not always the same in every quarter; but certainly also the general focus on cost measures had an impact on R&D, and we had diligent reviews of all of the first-party expenses that we had in R&D. That had some impact; and of course, we had also a selective head count reductions in R&D. But we did not cut back on specific projects. We did not cut back in the general product launch pipeline or product development pipeline. So I definitely expect us to continue our current R&D approaches and our R&D strategy. In terms of making additional selective investments and going forward allocating the growth that we would have in R&D resources, it would go typically to the businesses with the higher margins, and this is particularly in the laboratory area. The laboratory area, product inspection, and to a lesser degree also process analytics.

Maybe a couple things to add to what Olivier said. I think we'll continue this theme of the segment impact. Our segment marketing programs also drive product development decisions. And as you've been seeing in the recent years, we'll continue this theme of developing more and more segment-specific products, and we think that's a good growth opportunity. And then I also wanted to provide some additional context on just the cost number. We -- because of the global nature of our business, we have a lot of R&D projects that might have guys from China, the United States and Switzerland all working on them. And one of the things that we've tried to do is just reduce the amount of travel within the R&D budgets as well to try to get these guys, pushing them on new technologies, video conferences, things like that and using some of the electronic means in terms of the engineering systems. And we think that that is a good improvement and a sustainable improvement in terms of our R&D productivity.

Okay. That's helpful. And then just maybe last one clarification. I think, Olivier, in your comments you said industrial may pick up later this year as a result of the stimulus. I wasn't sure if that was directly commenting on Asia; and either way, can you give us a sense as to what your view is for the industrial segment for back half of this year into next year?

Okay. Hey, the comment about the stimulus package was very much targeted to China, and that's where we see the big impact. We don't have that much of a stimulus package in other Asian countries that would benefit in the industrial business. Bill, do you want to give us the flavor how we see industrial for China in particular?

Yes. Hey, I think, in general, we think that, including into next quarter, the industrial business will continue to to be the hardest hit of our business areas. I think, just as a reminder, China industrial, I believe, in Q3 last year grew something like 35%. And so it will still be a tough comparison for our Chinese business; but as Olivier said, we continue to see more and more of these projects coming in the pipeline, and I think you'll start to see probably improving numbers in China coming in the fourth quarter. But overall, we think the comparisons start to get easier -- to a certain extent in the fourth quarter, at least with regard to the U.S., but more so next year.

Okay. That's helpful. Thank you very much.

Your next question comes from the line of John Groberg with MacQuarie. Your line is open.

Good afternoon. Thanks a million for taking the call.

Thanks, John. So can I -- to just follow up a little bit on the last question, what exactly are you seeing in China? Because China in terms of reported GDP keeps putting up pretty decent numbers, and historically you guys have been kind of a two-times GDP grower there, but it sounds like that's not the case now. Can you maybe just kind of say -- describe what you're seeing there versus kind of what the macro numbers are showing? Yes, of course. So let's quickly go through the businesses that we have. Lab business did very well for us, as we had already in Q1. Q2 did again grow double digits. So we are actually very happy. We feel that we are gaining market share, and this is not just because the market is giving good growth opportunities. Actually, our team is really doing a great job, and we have done strategic investments in the last few years that certainly pay off also for lab. A similar story also for product inspection.

The general awareness of food safety is very high in China, and we see that this benefits our business. But we have also done important investments in product inspection down in China, and we will do actually more so in the coming months and quarters. So these two businesses did well. When I look at the industrial business, we had quite significant declines; but against very difficult previous quarters, and we are suffering from the fact that for a few months, the whole infrastructure investments were down. This is now coming back. And then the other impact that we clear see is the export business and the multinational investments in China is weak. But going forward, we see a lot of government money going into infrastructure and state-owned companies, and that's actually the part that is driving growth for us, and I clearly expect us to come back on this and then benefit from the overall economic growth and GDP growth that China offers. .

That was going to just be kind of my question, was you're seeing these numbers that they're putting up in the stimulus, but are they favoring local -- like, for example, are they favoring local competitors over you, and is that one reason why potentially you're not growing it as fast? Is there any of that in the stimulus?

No. Hey, it is a little bit of a topic; but when I talk to our management team, it's not that we feel discriminated because of that. We act actually very much as a local company, also in China, and our solutions are very well differentiated. And so in that sense, I don't think that's an explanation.

Yes. I would also say that we should distinguish a little bit, too, on -- a lot of the numbers coming out of China are GDP-driven, and sometimes the manufacturing GDP numbers, particularly as they relate to our sector, are maybe a bit of a laggard. And I think the most common example is we benefit from greenfield sites historically in China the last few years -- multinationals coming in, building a chemical plant, putting up a food or pharma plant and wanting to use the same kind of equipment that they have in the west. There's just less of that going on right now. We think, of course, that that investment will come back; but in the sectors we're most focused on, I think we're not what's driving a lot of that GDP growth you're seeing in China. But that will come.

Okay. And then, so you did a great job talking about kind of the products and the geographies. Can you talk just about customers? So for example, within lab, right? You have pharma. You have more kind of academic, and then you have more even kind of industrial within lab. So can you maybe just talk more about some markets, what you're seeing?

Yes, yes. Okay. So pharma in general clear held up better than all the other industry sectors; but of course, also challenging. Then academia did particularly well. However, it's not such a big share of our mix. And the part that we had really a tough time is the industrial customers. And that's -- for our lab business -- and this goes in many different industrial sectors. Just to name one, for example, that remains very difficult is the chemical industry. So about 50% of our lab revenue comes from industrial customers, and that's the part that drove actually the decline.

Good, thanks. And then can you -- last question here, just kind of on end markets. Can you maybe describe how you're thinking about maybe some of the industrial markets when they do come back? For example, you have process -- you have -- maybe you have facilities, as you said, that have been shut down or furloughed where service revenues are down, but presumably you have instruments that are sitting there. So when things come back on from a manufacturing standpoint, is the industrial growth still going to be muted in 2010 in your view? Or just maybe kind of how you're thinking about -- when there is a recovery, how that plays out?

The big question is how fast our customers will increase their capacity. If they rapidly increase their capacity, of course, we're going to benefit. One of our major challenges that we have for our industrial customers is that they have reduced working days and they have reduced the number of production lines that they are running. Sometimes there are even closed plants. If they build up again capacity, this will drive growth and this will drive upgrades, and this will drive also our service business. So that's the crystal ball. How fast will this industrial base build up again the capacity?

So it's fair to say, though, that if it's just a function of capacity utilization coming on, but not new capacity, that could still remain a more challenging environment for some of your industrial businesses?

Yes that's fair; especially because even in the last few years, particularly in the western countries, we are very much dependent on upgrades, replacements, and to a much lesser degree benefited from new greenfield plants. When it comes to emerging markets, that's a little bit of a different story. I think Bill gave a little bit of flavor before. Like in China, we did benefit in the past from many new greenfield plants. I think that will take a little bit more time that we see new greenfield plants coming back.

Okay. Great. And then just last question. I noticed you didn't buy back any of your shares. What's kind of your plan on the buy-back for the rest of the year? Thanks.

Sure. We did not buy back shares during the quarter. We felt like we did a couple of things with regard to the tendering of the bond and the issuance of the new facility. We also did some things in terms of locking up some of our interest-rate exposures that I think we have put a lot of the ingredients in place. I think we're -- that that's something we're clearly looking at. We're not quite ready yet to initiate, but I think you'll see us in the coming quarters certainly looking at restarting the program.

Your next question comes from John Wood with Bank of America, Merrill Lynch. Your line is open.

Hey, good afternoon.

Hi, John.

Hey, so Bill, for the cash flow, it's still around 200 million for the year. Is that in the right ballpark?

We gave guidance of a lower number. I think, on the last quarter, it was in the range of 150 million, and I think we'll clearly exceed that number based on how we did the second quarter. But I think 200 million would probably be at the high end. Just to make sure we're talking the same definition, I'm talking about free cash flow, so after working capital, after CapEx, et cetera.

Yes, I was talking operating. So CapEx is still like 50 million?

Yes, that's about right. Yes.

Okay. And you think you can get better than 150 million at this point?

We'll do better than 150 million of free cash flow this year, yes.

Okay. So can you give us a sense monthly how the order book trended April, May and June?

Yes. Okay. So April was the weakest, and because of working-day difference. But when we look across the whole quarter, we feel like we're bouncing along the bottom. So it's -- yes. We haven't seen much differences in the momentum in the market.

And even the entry to this quarter -- it's bouncing around, the two-year growth rate staying in this kind of range seems to be the trend.

So Bill, if I look at the third quarter two-year growth rate, at the mid-point it's like down four or so, it's little worse than the second quarter. Is that just a function of, like, the German comments -- the Germany comments you offered, basically Western Europe?

I wouldn't read too much into it. It's as much maybe a little bit of rounding on both sides, too. Yes, I think -- hey, I don't mean the two-year growth rate to be so precise.

Okay.

I think whether it's three or four or two, these are all numbers that are in the range.

Okay. And then, can you give us a sense of FX? What impact did that have on the gross margin?

It was around 50 bps improvement. But if you kind of go down to the pieces, clearly the volume impact of us not having -- this having a 14% decline more than offset that. To give you a feeling, our -- as Olivier mentioned, our raw material costs were down more than 4% in the quarter, and our pricing is up in this mid-100s range that we've talked about in the past. So we're really pleased with how the overall gross profit level is coming in. It's being somewhat, of course, massed by the volume effects, but we're pleased with margins overall.

All right. So it basically was flat year over year or without the currency, despite the volume decline in gross margin.

Yes. That's a fair assessment, yes.

And so for the full year, I mean, the margins stay at this kind of level the first half, somewhere around 50.5%, or did they deteriorate as a result of the currency situation?

Even with building in some of that currency, I think you'll see for the full year we'll be ahead. But if I look out to Q4, there could be some --, because currencies will go the other way. There could be some of this impact of that diluting a little bit the margin in the fourth quarter; but, hey, I think it would probably be flattish.

Okay. And so what would you estimate -- so of the $100 million, or like 25 on a quarterly basis, what proportion was reflected in the second quarter P&L?

A number in the low 20s.

Okay. So you'll be -- The third quarter will have the full benefit of that?

Hey, there's a couple of things that will take place in the fourth quarter. But I mean, yes, we'll be very close to the target at that point.

Okay. All right. Thanks a lot.

Sure.

Your next question comes from the line of Peter Lawson with Thomas Weisel Partners. Your line is open.

I wonder if you could just talk through a couple of points on the guidance. How should we think about the declines in lab, industrial and food business for the rest of the year?

Sure. Maybe kind of some overall comments. So if you think about Q3, we're kind of looking at this same two-year growth rate about that we've had on a year to date basis. Q4, I think that many companies at this point will be -- there's a little bit more guesswork with regard to Q4. As you guys know, in this industry, there's tended to be many customers who did budget flushing in the fourth quarter. The fourth quarter is always the highest quarter in terms of the percentage of sales coming from product versus service, so it will be interesting to see how they play back. We have been a little bit cautious on that fourth quarter number in the guidance we've provided, and I think we'll know better the next time we talk to you guys at the end of the next quarter.

Now, in terms of -- let me start maybe with kind of a little bit on the product cited. If I look at the lab number, I think we'll probably see a number in the third quarter similar to what we saw in the fourth; but certainly because of the comparisons, a much better number in the fourth quarter, but likely still a decline. Then, on the industrial side, again we'll see something similar -- frankly maybe a little bit worse, because I'm somewhat worried about that comparison in China as well as maybe this impact of more of the Germany business. And again, the same as -- and I'll say this every time -- the fourth quarter will be better because of comparisons. Food retailing will do better in the third quarter than it did in the fourth, and that's largely a comparison statement. Now if we look at it geographically, I think that the numbers should be within the same margins about that we saw this past quarter. If we have an area for upside surprise, it's likely -- it could be that maybe the China number turns out a little bit better; and if we have an area of downside surprise, it's probably on the European side. But I feel pretty good about that range overall.

In terms of kinds of customer segments, I think that we'd have no reason to really comment much differently than we have to date. I didn't see anything that started out in the month of July that would make me feel different about pharma, different about biotech, different about food, than what you -- what Olivier commented on earlier.

And the tight EPS guidance you have in 3Q versus this really wide range for the full year or 4Q ,is that related to that mix issue that you talked about?

Actually it more relates to the fact that -- I mean, if you out also run the numbers, Peter, it could be -- there's really quite a range for sales growth in Q4 within that EPS range. And I go back to the statement that I think we'll feel smaller about Q4 in three quarters. I'm not ready yet to just take that two-year growth rate that's been a reasonable barometer of the first two quarters of the year, and my forecasting would say it will be a reasonable barometer again in the third quarter. I think, because of this budget flushing effect, I don't want to just do that yet for the fourth quarter. If it works out that way, we'll certainly be more at the higher end of the range if things kind of -- the two-year growth rate continues, but I think it's a little premature at this point to point in that direction.

And then just on this kind of potential inflection end point for the industrial business, what gives you the confidence that that's coming, and what should we be looking for to see that?

Hey, I -- if we -- just the way in which you worded your question maybe made us look at each other and think we hadn't quite worded things appropriately. I think we're not sitting here looking for an inflection. We don't see an immediate inflection point. We see easier comparisons coming in industrial, and we see the fact that there's a China stimulus program that will have a meaningful impact on our industrial business in China. So China could be the one place where we see more of this V recovery.

Kind of stepping back and looking at our business -- industrial business in the west, I want to just maybe reiterate one point that Olivier made earlier, and that's this idea that our western industrial business is largely a replacement business; and because it's largely a replacement business, it -- the nature of industrial products are that they wear out, and it's -- we would not at all expect the declines next year to be -- we don't expect any kind of significant decline next year in our industrial business. We kind of feel this -- we're getting down to a certain level here. Things will bounce around, and they'll pick up when manufacturing GDP starts picking up sometime in 2010.

Okay. Thank you, so much.

Okay.

Your next question comes from Peter McDonald with Wall Street Access. Your line is open.

Thanks a lot. Most of my questions have been answered. But just, what's the level of core activity that you're seeing? And can you talk through what you're seeing in lab specifically?

Yes. Hey, leads generation in core activity in general have been good, but our challenge has much more been that the conversion rates have been challenging, and the time between quote and closure.

Okay.

and we haven't seen a particular change in this in the last few months; and of course, it got really worse in Q4 and early in the year, but we are kind of at the similar -- at similar ratios as we were in the last -- at the end of Q1. And Q2 continues, and early indicators of Q3 remain the same.

And in terms of your R&D spend, are you focusing mostly on productivity enhancements, or are you changing, moving, shifting your focus from, say, higher-end instruments to a mid-range or lower price point given kind of the competitive landscape, and the market pressures?

I wouldn't say that it has an immediate impact on our R&D approaches. It has more impact on our marketing messages, and how our salesforce operates, and how we train our sales force. Value selling clearly becomes more important. We equip our salesforce with a return on investment calculators that they can use with customers, and in that sense, I can confirm that value selling becomes more important. But we do not see a general trend that people would go for lower cost solutions or so. I think it's much more up to us to highlight the differentiating factors that our solutions have good payback, and we want to support our customers to get the investment approvals from the purchasing department and the (inaudible) finance group.

Okay. So it's getting it across the finish line?

Yes.

Okay. Thanks a lot, and good execution again.

Okay. Thanks, Peter.

Your next question comes from the line of Derik De Bruin with UBS. Your line is open.

Hi, good afternoon.

Hi, Derik.

Hey, as FX swings back to a positive, how is that going to impact the SG&A line, I guess, with some of the cost cuts you've undertaken? Are they going to be offset when you get the headwind? Because if I remember correctly back when you gave 3Q guidance, you were going to -- the FX thing was certainly going to be a -- certainly had a dramatic impact on lowering your SG&A expense before you guys went into really dramatic cost cuttings mode. Can you just walk us through how you see the impact again?

Yes. Hey, just -- let me start with like what will drive operating profit, the impact, and then I'll come back to maybe cosmetically how it might look because of currency. So as a starting point, we're very well hedged in terms of our earnings right now. We have a bit of a headwind right now. I think we might have had a couple million buck headwind in the quarter. So $0.05 cents or something like that, and that was Swiss frank versus Euro driven. When we go out, and in the fourth quarter when the currencies start to change, you'll see our sales in reported dollars will go up an extra -- if we use today's numbers, an extra 3%, and so will our SG&A. But local currency numbers, you'll continue to see kind of this new level -- these sustainable cost-cuttings we've done won't be impacted by currency in terms of how they drive profitability. So the fourth quarter will make sales look a little stronger. It might dilute the gross margin line a little bit. SG&A will look slightly like a higher number, but the impact on operating profits should be de minimus.

That's incredibly helpful. Thank you. And just because I'm lazy, what is the initial -- what's the interest expense impact of the new debt structure?

I'm lazy, too. I'm looking over at Mary. In the fourth quarter -- I'm sorry, in the third quarter, it's going to go up, about $600,000 to $800,000.

Great. I think most of my questions have been answered. So, thanks.

Thanks, Eric.

Thanks, Eric.

(Operator Instructions). Your next question comes from Richard Eastman with Robert Baird. Your line is open.

Yes. Hi, Olivier and Bill and Mary.

Hey.

Hi, Rick.

A quick question. Is the weakness in Europe that surprised you in the quarter, is it tied at all to the retail weakness that surprised you in the quarter?

Mostly. Mostly. Actually, retail came in softer than we expected, and it's particular in Europe, yes.

Okay. And can I just make this -- can I make -- draw the same conclusion that because Europe is softer, maybe we're moving from minus 8 to 12 to minus 10 to 12 in local currency for the year? Is that primarily a Europe impact?

Hey, it's a Europe impact. It's also just the math of us having come 1% below the bottom of the range of this quarter.

Okay. All right. And then also, Olivier, did you say when you talked to the service and consumables piece of your business, was that business in local currency up in the quarter?

It was basically flat in the quarter.

And as a reminder, there's working day differences in Q2, and it's service and consumables, of course, that are impacted the most by that. On a year to date basis, it's basically those -- both areas, consumables and services are flat.

Okay. And then also, Bill, could you just break out the charges that -- the pre-tax charge was 13.9 million in the quarter? Would you happen to have that?

I think it's -- there is a small piece on the interest expense line related to the bond tender, and the rest, I think, is on the other charges line. Yes, the rest is all on the other charges line.

Okay, and then in the quarter, could you just size industrial in reported dollars? Was it 42, 43% of sales, or -- industrial? That would be helpful. Just two of the pieces.

So in the -- for the quarter, lab was 45, industrial 43, and retail 12.

Okay. And lab was 43?

Lab was 45. Industrial 43. Retail 12.

Okay. I think that's it. Thank you.

Okay. Thanks.

Thanks.

And there are no more questions. I will now turn the call back over to management for concluding remarks.

We thank you for joining us this evening. We know how busy you are and appreciate taking the time with us. We will speak to you again at the end of the quarter. Thanks again, and good-bye.

Thank you. Good-bye.

This concludes your Mettler-Toledo conference call for today. You may now disconnect.