Mettler-Toledo International Inc (MTD) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our first quarter, 2012, Mettler-Toledo International earnings conference call. My name is Stephanie, and I will be your audio coordinator for today. After the speaker's remarks, there will be a question and answer 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, Stephanie, and good evening, everyone. I am Mary Finnegan, I'm the Treasure responsible for IR at Mettler-Toledo, and I'm happy to welcome you to the call. I am joined here today by a Olivier Filliol, our CEO, and Bill Donnelly, our CFO. I want to cover a couple administrative matters. This call is being webcast and is available on our website; a copy of our Press Release on 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 one of the presentation. Statements in this presentation, which are not historical facts constitute Forward-looking statements within the meaning of the US Securities Act of 1933 and the US Securities Exchange Act of 1934. These statements involve risks and 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 reference to the factors discussed under the captions. 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 non-GAAP financial measures and the most directly comparable GAAP measures is provided in the form 8-K.

I will now turn the call over to Olivier.

Thank you Mary. Good evening. I'm pleased to welcome you to the call. I will start with a summary of the quarter and then Bill will provide details on our financial results and our updated guidance. I will then provide an update on some of our growth initiatives for 2012. As always, we will have time for Q&A at the end. The highlights for the quarter on page 2 of the presentation.

We are very pleased with our local currency sales growth of 8%, which was strong and better than expected. We achieved this, despite slower growth in our markets and challenging conditions in Europe. In addition, [last year's] sales growth was particularly strong. Adjusted operating profit 10% and adjusted and EPS 14%. Overall, we are very pleased with these solid results in the start of the year. I will have some additional comments on our growth initiatives, but let me turn it to Bill to provide more detail for the first quarter results as, well as guidance.

Thanks, Olivier. Hello, everybody. Let me start with additional details on sales, which were $535.4 million in the quarter, an increase of 8% in local currency. On a US dollar basis, sales increased by 7%, which included a negative impact of 1% due to currency. Turning to page 3 of the presentation, we outlined sales by geography. In the quarter, local currency sales growth increased by 2% in Europe, by 7% in the Americas, and by 17% in Asia/rest of the world. Acquisitions contributed approximately 2% to total growth with 3% benefit to Europe and a 2% benefit to the US -- to the Americas.

On slide number 4 of the presentation, we outlined our sales by product area. In local currency, laboratory sales increased by 8% and industrial sales increased by 10%, while food retailing was down 1%. Acquisitions contributed approximately 5% to industrial growth in the quarter. Turning to slide number 5 of the presentation, we show the P&L. Let me walk you through some key items. GMs were 51.8%, a 60 basis point decline versus last year. We benefited from pricing and reduce material costs in the quarter. However, these benefits were more than offset by mix, especially a significant component of lower margin industrial products in China -- projects in China, as well as the fact that our mix of sales toward Europe was less than usual and we enjoy high margins on our European sales. Currencies was also a drag on margins.

R&D amounted to $28.7 million, an increase of 8% in local currency. SG&A amounted to 176 -- sorry -- $167.6 million, an increase of 4% in local currency. The increase was attributable to higher sales and marketing investments, particularly in emerging markets, which was offset partially by lower variable compensation. Adjusted operating income amounted to $80.8 million, which represents a 10% increase over the prior year amount of $73.8 million. Our operating margins amounted to 15.1%, a 30 basis point increase over the prior year level. We estimate that currencies, largely the impact of the Swiss franc versus the euro, reduced operating profit growth by 1% and our operating margin by 20 basis points in the quarter. A few final comments on the P&L. Amortization was $5.2 million, interest expense was $5.8 million, while fully diluted shares for the quarter were $32.4 million. Adjusted EPS was $1.66 per share, a 14% increase over the prior year reported amount of $1.45. The benefit of our lower tax rate off set currency headwinds in the quarter. On a reported basis, earnings-per-share was $1.62, a 15% increase over the prior year amount of $1.41.

Now let me turn to cash flow. The first quarter is typically our lowest cash flow generation quarter, but we are pleased with a solid start to the year. As a reminder, cash flow is seasonally weaker as it includes the payout of prior-year bonuses. Free cash flow amounted to $4.2 million in the quarter versus a negative $7.2 million last year. DSO stands at 43 days, while ITO on an LTM basis stands at 4.3 times. One final comment on our balance sheet before I turn to guidance. We are currently rated BBB/BAA2 by S&P & Moody' s respectively. With our December refinancing, our new bank agreement no longer requires ratings as part of the price grid. Instead, the price grid is based on leverage. The private placement market is our principal source of long [tantered] debt, and private placements don't require ratings. We, therefore, intend to drop our ratings in the coming weeks and eliminate the related costs. I wanted to just mention this so that you would have some context when I assume Moody' s and S&P will communicate that they are dropping our ratings.

Okay. Now let me turn to guidance. Let me start with some general comments and then get into specifics. First, we are pleased with the start to the year. It was a good start. We expect it to continue to grow faster in the coming than quarters than our underlying markets, but we do remain cautious about the overall economic environment, particularly Europe. Second, currencies are modestly worse than the last time we spoke. I am specifically, referring to the currency impact on earnings, not in terms of the sales line. In particular, the Swiss franc/euro exchange rate, as well as the Japanese yen versus the dollar are slightly more negative than the last time we spoke. With this backdrop, we will need to provide some specifics on our guidance.

For the full year 2012, we expect local currency sales growth to be in the range of 5.5% to 7.5%, so that's local currency sales growth. 5.5% to 7.5%. This compares to our previous guidance of 5% to 7%. The half point increased reflects better than expected growth in Q1, as well as considerations for our outlook for Q2. Our local currency estimates that I just provided include approximately 50 to 100 basis points of acquisition sales growth. We would also expect currencies to reduce our US dollar sales growth by about 2%, so that local currency numbers should be about 2% less in dollar terms. Now, we expect currencies to also reduce EPS growth for the full year by about 1%. The last time we expected currencies to have a more modest effect on earnings.

Given this, we are not changing our guidance for the year. We expect adjusted EPS to be in the range of $9.20 to $9.50, which represents a growth of between 10% and 14%. For the second quarter, we expect local currency sales growth to be in the range of 5% to 7% and adjusted EPS to be in the range of $2.10 per share to $2.15 per share. A growth rate of between 11% and 13%. We would expect currencies to reduce US dollar sales growth by approximately 3% in the quarter.

Okay. That covers my comments on guidance and the financials, and I now want to turn it back to Olivier.

Thank you, Bill. Let me start with several [comments] of business conditions. [Lab] did very well in the quarter, with an 8% local currency sales growth, which was on top of a 16% growth in the prior year. All product lines did well with process and balance is particularly strong. Automated chemistry also did well, but that comparisons were a bit easier. We are benefiting from our strong sales and marketing initiatives as well as good product pipeline. Industrial was up mid-single digits on an organic basis, with both product inspection and core industrial in this range. We are quite pleased with these results; particularly given the excellent results of the year earlier period when sales were up 21%. Retail was down slightly in the quarter, but had tough comparisons on an organic basis.

Now Looking at the geography, Europe was down slightly on an organic basis. This was again, 16% growth in the prior-year. Given the environment and the prior-year comparisons, we were not expecting much growth in this region. We remain cautious on the Europe, but we expect to see a bit better growth in Q2 as comparisons will be easier. Americas was up 5% on an organic basis. Lab was up solidly, while industrial was relatively flat. Our core industrial business was up nicely, while product inspection was impacted by very strong sales in the prior-year. Finally, turning to Asia and the rest of world which was up 17% in the quarter, better than we had expected. Lab continues to do very well. Industrial also did well, but a bit lower than what we have experienced over the last several quarters. We expect sales in this region to continue to be good but expected growth to moderate slightly from the levels we saw in Q1.

That provides some context on how we view our business today. We believe we can continue to grow faster than our underlying markets. An execution of our growth initiatives is key in achieving this. Let me provide some examples of recent initiatives. With sales and service organizations in 35 countries. Our global reach is an important competitive advantage, as we have many competitors that are regionally focused. Last month we extended our worldwide presence with the opening of our own organization in Turkey.

We have operated in this region through distributors for some time but believe we can more aggressively capture growth with our own sales and service organization. This market is attracted for our laboratory products given their importance of the pharmaceutical, chemical and food and markets. By utilizing our [spin accurate]marketing techniques, including segment marketing and database development, we can expand our presence in the country. Equally important, we can go after service opportunities in this region. We are also expanding our sales presence in the Vietnam, Indonesia, and Dubai. New products also continue to be an important driver of our growth. We have many new launches, including a new generation of moisture analyzers and a related proprietary consumable.

Moisture analyzers are using quality control in a wide variety of industries, including food and pharmaceutical. We have Incorporated many of the innovative features from our balances and [tight raters] into the new generation instrument. For example, the design includes [a hanging wing pan] this is the first of its kind for moisture analyzers. This design enhances measuring performance. Since heat, which can interfere with weight accuracy can now be isolated from the weighing center. We have also Incorporated our one-click interface, which makes operations simple, error-free and [fall], resulting in greater productivity for the customer. We are complementing this instrument launch with the introduction of a disposable reference substance. We refer to it as the Smart Can, which can be used to document the performance of the instruments in a simple 10 minute test. This is by far the fastest and easiest quality control test on the market today and provides a nice consumable stream for this instrument. We believe we are setting a new global standard for moisture determination with this introduction. This is just one example of numerous product launches currently underway.

In addition to [spinnaker] marketing and new product launches, we are also focused on margin improvement. As a reminder, our principal leaders for margin growth are pricing, supply chain optimization, low-cost country manufacturing, and productivity programs centered on Kaizen or Lean initiatives. Today let me highlight some productivity initiatives that are underway in Asia. In China, with the Blue Ocean implementation substantially behind us, we have a continued focus on growth but also renewed attention to productivity gains. The goal is to more than offset inflationary pressures to drive margin improvements. Early in the first quarter, we kicked off a new Lean program with a particular focus to reuse the overall cycle time. That is, we are looking at an entire process, from supplier to customer and have set an ambitious goal to reduce cycle time by 25%. Kaizen is a key tool of the program as we will review business processes, such as auto entry, service dispatching, and others.

We expect to not only achieve improved cycle times and quality levels, but to realize incremental sales growth on a high level of customer satisfaction. Those of you that are familiar with Kaizen methodology know that the fundamental component of it is enhancing employee satisfaction. While turnover in China is higher than our West countries, compared to other companies in the region, we do quite well. Kaizen invents will help us maintain the high level of employee commitment and engagement that we currently have. On the smaller organizations also embracing Kaizen to achieve efficiency. For example, our Thailand marketing organization recently performed to Kaizen on a contract renewal process for service calibration. Not only did they achieve a 40% improvement in productivity, they also noted an increase in revenue opportunities and a higher level of customer satisfaction. These are just a couple of examples of productivity initiatives we are doing throughout the world to continue to drive margin improvement. Whether it is spinnaker marketing, new product launches, productivity improvements, or pricing initiatives, execution is key to achieving this result. Strong execution has been and remains a critical component of our culture.

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

(Operator Instructions) Jon Groberg.

Hey, guys. Congratulations on a solid quarter given those tough comps and what seems like a tough environment out there. Can you maybe just -- before we talk, just two questions. The first is on margins. I know you mentioned, Bill, specifically on the gross margin front that I think you said you got pricing and you got productivity, but it was offset I some mix, both geographically on some of the products in China. Would you maybe just be able to quantify a little bit more and what happened there and how you expect that to play out through the year?

Sure. So we are talking about or trying to explain 60 bits in total. I give you kind of the big pieces. Price increases in the quarter, and this now excludes the impact of the China item, but would include some considerations around all the other businesses. That was 260 bips in the quarter. If you think about the impact on gross profit margin, when you do the math, that's about 130 bips, [around half that number]. The material costs were down about 30 bips in the quarter, so taken together, that's about 1.6%.

The impact of mix, including the impact of the lower margin, China jobs, was about minus 2% on the gross profit line. Think about that is roughly half coming from the China piece and the rest coming from other items, the largest of which was European mix. And then what is kind of left over is other, which is largely currency.

Okay. That's helpful. If you think about the year, I know you don't always break down kind of the operating line, but if you think about a year, how should we think about gross margins on a year-over-year basis given what you are seeing now for currency standpoint and some of the other mix issues?

I think currency won't have a big impact on gross profit going forward, so let's get the easier one out of the way. I tend to think that price increases won't be worse than this. In fact, I think it's more likely that it could improve from where it is as the year progresses. Material costs, I think that's probably not a bad number. We could probably see that throughout the year.

Now, on the mix side, I think we will have some continued negative mix issues, in part, because of Europe. On the China side, I'd like to think that that's less impactful as the year progresses, but we could still see a little bit of that in the course of Q2.

Okay. That's helpful. And then, Olivier, if you think about strong quarter year off of tough comps, but you think about moving throughout the rest of the year, you mentioned in particular Europe where you see some choppiness and challenges. Can you talk a little bit about China? What you saw towards the end of the quarter and from other companies that we've heard that have a little bit more overlap, but with you guys it seems like those two markets have been a bit tougher at the beginning of the year. Can you talk about what you saw throughout the quarter and what your expectation is for the full year? Thanks.

When we have a call last time, I was saying I'm looking forward to have Q1 under our belt. I would be more comfortable to have a better view of the whole year coming together. To be honest, sitting here today, I feel I need to see also how Q2 comes together to really get a better look. There is still quite a bit of uncertainty out there. We saw also that the quarter has quite volatility. You have heard us talking that January, for example, was rough. February and March actually came in quite nicely. We were happy about that. If I look from a geographic standpoint, we would certainly feel today that Europe is probably -- the outlook is a little bit tougher than what we had expected. US has good momentum. Asia, emerging markets in general, we observed it quite well. We had seen that China has -- generally, it was tough. We see still China continues to be challenging. When I say challenging, compared to previous years where we had excellent momentum.

So looking forward, I do expect that we are going to see better growth numbers out of Europe in Q2, but mainly because comparisons become easier. I do expect that Americas will be good because of the market environment, and then in Asia-Pacific --

I think we would expect growth rates to come down, including in China. I think we will still deliver probably double-digit growth rates. You will also see when you look at our financials, part of the reason we grew a little bit faster this quarter was we did take down a little bit of backlog in China, so the growth rate on orders was a little bit less than sales. I think we will more see now kind of the more normalized number in terms of sales in the coming quarters. So something in the low double-digit levels.

What we also saw in Q1 for China, our lab business did very well. Core industrial had more difficult environment. I wouldn't expect the lab business to continue as strongly in Q2 as we did in Q1. We always said for many quarters that we expect China not to continue with this high team growth. Now looking toward Q2, it's certainly going to be on the low team growth.

Hey, thanks a million. Again, congratulations on an impressive quarter.

Paul Knight; CLSA.

High, how are you? I was wondering if you could characterize the end markets a little bit, particularly on the retail side, the industrial side, and then perhaps even on the academic side, even though I know you have low exposure there.

Okay. Let me start with retail here. We talk about food retail. This is, in the meantime, less than 10% of our revenue. The food retail depends very much on large projects. These large projects are typically lumpy. I do -- we saw that also in Q1. We had a good business momentum in the Americas. I would expect that this is continuing, and I say that, basically, on the pattern of the big projects, I would expect Europe continues to be challenging.

Again, it is less the end-user in mind but much more based on the different projects that we've seen in the pipeline. When it comes to industrial, I want to differentiate between core industrial and product inspection. I would say that core industrial, we have reasonable end user market in the US should actually be quite favorable. As in Europe and Asia, we certainly are going to feel the uncertainty in the economy generals. Capacity utilization of our own customers are certainly not that high. We have to have an impact on our demand.

When it comes to product inspection, there, the end-user environment is very attractive for us, particularly in the food industry. This is to driven regulations. There is also good demand for quality control in general in the food industry at this moment across the globe. I would expect us to have good growth throughout the year.

When it comes to lab, here we need to differentiate. We have a good part of our lab business that is driven by the life sciences industry. The life science industry is less so about big Pharma. It's less about NIH and [econemia]; it's a wide range of end-user industry. I would say we are going to see more geographic topics than necessarily industrial topic or end-user industry topic. Here I would say Americas would be healthy, Europe challenging, and Asia good growth but not the same growth as we had in the recent past.

Specifically, you also mentioned academia. We are seeing that academia, as far as it relates to government funding, that is challenging. We see that in US, we see that in Europe. Lucky enough, we don't have that much exposure to academia.

And you had mentioned Blue Ocean and margin improving activity there in China. Have your plans changed at all of China as the source of manufacturing -- moving manufacturing to that market? Is there any change in your strategy there?

No. We definitely still perceive China to be a very attractive base for our production. We continue to expand our production in China, not just for the Chinese market, but also for the export market. What would be true is there is less product line that we are proactively moving to China, not that we feel any way different, much more that the big product lines that are really attractive to the manufacture of China are behind us. It's really an attractive market. We have the right skills. We have an excellent team. We have a good supplier base there, and in that sense we've got to continue to leverage it.

Thank you.

Isaac Ro; Goldman Sachs.

Good afternoon. Thanks for taking the question. Olivier, if I could ask another question on China. Just try to make sure I understand the nature of your comments there regarding the outlook. Sounds like you are calling for a nearer-term slowdown but longer-term expectations for that region. I just want to clarify that you, in fact, are saying that this is a temporary thing, or rather are you saying that this is more of a product that's an investment you've made on the longer-term basis we should be thinking about low double-digit growth versus high double digit -- or high teens?

I think we need to see from where we are coming. We had seven quarters of growth of more than 20%. Now we have Q1 which was still very strong. For quite a while we were saying that we would expect mid teens growth of China, and in that sense also kind of a coming down versus the historic growth. I would still see it that way, but still very healthy growth. We are still talking about double-digit growth that we feel is very sustainable for many more years.

The mix might change a little bit from where the growth is coming. In the recent years, our extraordinary strong growth in China was particularly coming from the core industrial business, partially also infrastructure related demand. (indiscernible) skills but also [seven] matching systems and auto weighing solutions. That part we always expected that it will slow down, and that's certainly what we saw in Q1. I would say going forward that will not have the same growth momentum as in past.

About the fundamentals and China remain very healthy, very promising. I would remind ourselves on one very attractive micro trend is the number of scientists joining the workforce. Since we have many personalized instruments in our lab offering, this is going to be a macro driver that continues to be very healthy for us. Also, the general trend that Chinese companies invest more in quality points, quality measures is going to be good for us. We see that the government is promoting industry sectors that are very relevant for us and will drive demand. So healthy macro trends and environments [on the past tense]. I want to confirm that we are using that we remain very optimistic for all of the medium and long-term growth prospects for us in China.

Great. That's very helpful. If I could just ask a follow-up. If I understand your comments correctly, it sounded like you are suggesting that the components of growth in your business will shift towards the lab side of the franchise. If that's the case, as I understand it, it looks like we are standing in front of a pretty good year when it comes to government funding for our research. Certainly, under the five-year plan this is a multi year dynamic. Without its backdrop, do you look at your portfolio in China for products and lab, and say that you could augment that or innovate in a way that it is in China, for China, and help accelerate the growth that you see relative to the market growth rate?

I think our lab offering today is already very well suited for the Chinese market. I definitely also feel that we have a very, very strong team. We talked at the last conference call about investments that we do in the Chinese markets like going after additional regions and second-tier cities, for example. These investments continue on and yield good results. It's about expanding the presence in China is more in terms of the franchise and the sales and service network that we have.

What we are, in addition, leveraging is a second brand. We have the second brand called (inaudible) that we clearly leverage in the Chinese market. Also to be present in indirect channels, and fully leveraged in opportunity. So yes, we are going to fully tap into that opportunity. You correctly mentioned the lab business. What I would also add, we have product inspection, which is the other part of our industrial business and clearly a very good growth prospects there. That's something that is not related to infrastructure. It's much more related to quality control and the food industry in China. Very, very good opportunities. Mid-term, long-term, this is going to play clearly to our hand. Will we see short-term, maybe a quarter or another quarter that these market trends will not be that forceful. It could well be. You heard Bill when he talked about the guidance of Q1. For example, lab, we might see a little bit less growth, but that doesn't mean that mid-term we would have a different perspective on the growth opportunities.

Okay. Thanks so much.

Jon Wood; Jefferies.

Hey, everyone. Did you give the China growth rate in the quarter? I think I missed it.

If I didn't, I can give it to you. We grew by 16% in China in the quarter.

Okay. Thanks. Bill, you mentioned the project business in China. Is that a discrete item, meaning it doesn't recur in the second quarter? Is that why you think the company overall, the organic growth rate goes down? It just seems like, why would the organic growth rate decelerate in the second quarter, given how much easier the comps are? I'm just trying to piece out if that China impact was discrete or not.

Hey, I think, first, maybe a comment about the deceleration. I think in terms of looking at multi year growth rate, and we feel that the trend is very much on a similar basis. With regard to the specifics about China; yes, I guess part of the point we are making is that there is, certainly, more of some of these big jobs pushed through and completed here at the end of the quarter than maybe we expected. There is actually -- our guys have some discussion that there's a belief that some of that was actually done intentionally with this whole five-year meeting that they had that they wanted to get some projects done. It seems like some things got rapped up a little bit on an acceleration basis versus what we had maybe forecasted earlier. If I look at the mix of backlog right now, there is, of course, still some more profitable jobs and less profitable jobs, but I would say the backlog mix today is little different than what we saw coming out in the first quarter.

Okay, great. And then my second question is on the incrementals. If you could quantify the sales and marketing investment impact in the first quarter. You talked about that in the fourth quarter being somewhere around $2 million, $2.5 million. Could you quantify that?

Yes, give me one second. If I look at our SG&A grew by 4% in local currency in the quarter and a little more than half of that came from emerging markets.

Okay. Great. And then Blue Ocean, that obviously impacted you in the second half of last year in China. What is the impact on a year-over-year basis in 2012? I think you are doing that in the US later this year, so I'd love to hear how we should think about the year-over-year impact in 2012.

Okay. I am not totally prepared on that one, so I apologize if I think out loud a little bit here. In China there was, certainly, some disruption of the sales force toward the latter part of the year, which maybe wasn't as visible to you because there was some impact more on the order side, I would say. If you look at our sales numbers, we are quite happy with how that went during the go-live period. I think in the US market, we will have some people and sales guys in training on the fourth-quarter. To be honest, Jon, at this stage I think it wasn't very visible to you that we didn't really impact how you guys were seeing the numbers, us implementing Blue Ocean and China. And I'd like to think that we have a similar, no-drama situation when we do the US role in as well.

Okay. Thanks a lot Bill.

Tycho Peterson; JPMorgan.

Hey. Thanks for taking my questions. Maybe just a couple points of clarification. On the lab business, if you look sequentially, you had a tougher comp this quarter than in the fourth quarter and you had better growth. With that in mind and the fact that maybe you are calling for that business to slow down a little bit in the second quarter, can you talk about the underlying dynamics? Was this budget flush on the part of Pharma, or what drove the growth acceleration on a sequential basis for lab, and why you are a little bit more cautious going into 2Q?

Hey, I understand. I think maybe a couple of comments to answer that. One was, we certainly saw an acceleration of growth in our pipette business. It grew quite a bit faster in Q1 than it grew in Q4. I don't necessarily expect that to continue. Linking your question to what Paul was asking earlier. It's the business we have that's most exposed to academics. The academic market and from what we hear talk and listening to peer companies and the like, I don't think of that as particularly good.

We competed well on the first quarter, but I think we grew by 6% in pipettes, and that's a really a good number. I think, particularly, feeds the other consumable oriented lab life science oriented companies. I think that could moderate a little bit. I think it's good to assume. The other thing that we had quite good growth in auto chem in the quarter. We had mid to high teens, growth rate there. If I look at the order growth rate, it would maybe be more what we expect on a normalized basis for that business, more in the mid-single digits. Those would be my two key remarks there.

To add to the geographic aspect of it, we had Q1 in China, in particular, very good growth lab, I wouldn't necessarily expect it the same.

And Tycho, I am also forget one other basic thing. I assume not only us but other companies, we definitely had a working day benefiting Q1 that you don't have in Q2. In Q2 I'm kind of looking at my guys here, it's flat. In Q1 I think we have couple extra days.

Okay. And if we think about the pricing dynamic, I know you called that out as a component on the gross margin, heading into midyear, should we expect another typical midyear price increase? A think you alluded to the fact that you may try to extract more on price. Can you try to elaborate more on that?

I think we would like to try to do a little bit more on pricing. We hated the gross margin decline, even if we could explain it analytically mix-wise we felt like we need to do a bit more there. I think we are working through that process internally. When I said that I felt it was more upside than downside on pricing in the second half, that was what we had in mind.

Okay. Do you see that as a function of mix trying to drive better product mix, or what is your strategy to try to push through pricing?

For pricing, I think the biggest single thing is we see win/loss ratios that support our ability to push through more on pricing. I think we are not trying to be greedy there from a customer perspective and trying to find a balance there, but our win/loss numbers look good and we think that, certainly, there are inflationary pressures in some parts of the business that we can articulate. The win/loss implies our customers value highly our products. Therefore, we want to push pricing when we think it can be done in a reasonable way from a customer's eye.

Just last one, as we think about your cost structure for the rest of the year; any change in your thinking about headcount ads? We talked think last quarter about some of the emerging-market headcount additions. Any sense that you are dialing back some of the additions in light of the macro environment?

I think one of the things that we talked about was that we committed to this field Turbo program in the second half of last year that we felt like it was important to add some more feet on the street, some more front end personnel. At the time we made that decision, early last year, mid-last year committed to those resources, economic environment was a little bit better than it was when those people started coming on board at the end of last year and now the early part of this year. Certainly, they have been contributors to what we think is market share gain in the period. Probably from an incremental margin point of view, they are maybe not as productive as our salesmen. That will probably take more toward the end of this year and into next year, but we have added a lot of -- not a lot, but for us, a good number of front end people. For that, as you heard in our SG&A analysis, a lot of those were in the emerging markets as well.

And going forward, our focus will certainly be on the emerging-market. You heard us talking about Turkey today, about Vietnam, Indonesia and so on. That's certainly places we will continue to make investments.

Okay. Thank you.

Sung Ji Nam; Cantor Fitzgerald.

Hi, thanks for taking the question. Olivier or Bill, you guys talk about taking market share. I'm assuming that's an important driver in this environment. Could you comment on the product segments where you feel like you are specially well-positioned to take share in the competitive dynamics in the current environment?

I feel strong about market share gains across all the businesses. I would maybe -- in food retail at little bit difficult to say. Our strategy there is simply focus on profitable growth. I've mentioned it's a lumpy business in terms of having a big project, but if I look at all of the other businesses, being it lab, be it core industrial products inspection, we have very good market positions. We are running our spinacle marketing programs across all the businesses. In that sense, I do expect that we are expanding our market share across all these businesses.

Great. And then in terms of tax rates, do use till anticipate 24.5%? And then longer-term how should we look at -- is their head room for potential improvement there? You know, in the outer years, or if you could come in on that.

At this point, that's our best estimate for a full year rate excluding discreet tax items. In terms of looking out forward, of course, it is something that we want to work on to continuously improve, but probably the biggest variable is really government law changes. That's probably going to be the biggest determinant of whether our tax rates move up or down at this stage for the future.

Okay. One last quick one. Your cash flow expectation for the year, is it still 15% growth year-over-year? And then if you could also comment on if there are any share repurchase is. I think you guys had around 700 million remaining. Is there further opportunities for the remaining year?

Sure. On the cash flow side, I think we are off to a good start. We are certainly going to hit our targets this year. I would be surprised if we didn't. And with regard to our share repurchase is, our intention would be to repurchase our free cash flow and estimated option proceeds as well this year, so we will stick to the normal formula.

Great. Thank you.

Richard Eastman; Robert W Baird.

Good afternoon. Bill, I'm just playing a round a little bit with the incremental margin. Trying to -- if I pull out the currency impact top line and EBIT line, it's not terribly significant. So the incremental looks like maybe 18%, 19%, yet the mix of shifted a little bit towards lab. I would think that would be beneficial since price would be helpful there. Does that number improve? Do you just have a quick answer as to why that's a little bit lower here than you'd expect.

Sure. So first, and you are an incremental guy, so -- .

My whole life is incremental. (laughter).

I think one way to refine the calculation is to pull out the impact of acquisitions. Of course, those incremental margins will be by definition be different than your core business. So Rick, if I adjust for incremental margins and the impact of foreign exchange year-on-year to get to an incremental margin for us in the mid-'20s, I do think that that number will improve, and we will have that built into our model that it will improve. The biggest improvement would be the less mix toward these Chinese projects that we talked about earlier.

Yes, okay. That would be helpful. All right. And then did you mention that acquisitions added a point to Europe's LC growth?

I thought it was more. I think it was 3 points. But let me double check.

Okay.

3% to Europe. Rounding, maybe it is 2.5%, but round to 3%.

Okay. That's fine. When you look at the mix within Europe, industrial and lab, and food and beverage, did you see the slowdown? Was at much greater on the industrial side? In other words, if you look at industrial and you assume the whole thing is down a point organically, what was the differential between industrial and lab in terms of growth or decline? Sure. So we had more growth in industrial, but that included, of course, acquisition benefits. If I pull that out, both businesses grew similarly at an organic bases. Which is, similarly, is zero?

No, 2% each and retail was down.

Okay. Lastly, the emerging markets piece of the business, did that stick around 35% in the quarter? And what was the growth rate -- China is half of it, but how did the other countries do? India, Brazil?

Everybody did good. The one exception was Russia. I think Russia had mid-single digits. Everybody else did well. Particularly, we had a really good quarter in Southeast Asia, really a good quarter. India had a good quarter in sales. I think a lot of it less on the order side, but still a solid quarter. I think I mentioned already that we had 16% growth in China. That would be kind of the highlights.

16%. Also, maybe just the last question. When you do look at the lab piece plus the 8% in LC, we talked a little bit about some of the markets that maybe are slowing a little. I think, Olivier, you mentioned America's was good, but is there any end markets within this lab piece where you are seeing double-digit growth in terms of end markets like Petrochemical or Chem any of the applied markets, perhaps? Can you fight a couple of the stronger markets if you have that visibility?

It's actually not easy for us to have that exact visibility. I would be hard-pressed to give you really an end-user market with double-digit growth. What I would say, in general, academia wasn't so good. It was, clearly, offset by all of the other market being industrial markets but also life science in general. Merging markets was very, very healthy for us or you're.

Just as a reminder, Rick, why it's difficult because in the US market we are selling the balances through Fisher and BWR.

Very good. Thank you.

Derik De Bruin; Bank of America.

Good afternoon. Hi, how is everyone? I -- could you talk a little bit about the acquisition? Were those things you did in Q4, or was that something you did in Q1? I didn't have anything in my model.

So we did the Eagle -- the old x-ray business [of Smiths], we did that in Q2 of last year. Division acquisition in Q3 or Q4 of last year.

Okay. Great. All right. So going back to something that Isaac asked. It looks like about a 6% organic revenue growth number that you did in Q1 up against the 17% comp. If you've used your local currency growth guidance of the high end of the range, its 7%. You use the FX, M&A impact, negative three and plus two, you end up at about a 5% organic number for Q2. So I'm just a little curious, even if you did some extra days, you certainly were well above 10% in Q1. The business seems like it -- it seems like it's a rather dramatic slowing off of what I would assume would be a stronger quarter with that. I'm just still a little bit confused.

Okay. Maybe you've got definitely one thing. The only item I would clarify with you, Eric, is that acquisitions are 1% in Q2 versus 2% in Q1. Which has some impact. And then the other comment would be is that our order entry growth, in particular, as it related to our Chinese industrial business, the biggest impact here is our order entry growth was less than our sales growth, largely explained by that item.

Okay.

And the other thing is, of course, we are going through our normal forecasting process, and this is a little bit how we see the picture.

Okay. Fair enough. Thanks. I will get back in the queue.

Sure.

(Operator Instructions) Greg Halter; Great Lakes Review.

Hello. Good afternoon. There's been a lot of discussion about China and so forth, but I don't know if you broken down the percentage that is in industrial versus lab and where you see that going maybe over the next three to five years.

Today the ratio is -- lab is around 35% to 40%, industrial is approaching 6%, -- or 60%, sorry, and the remainder is our retailing business. Clearly, we would expect the lab business to increase as a percent, and that would be at the expense of the industrial business of the retail business as well. But that's a small piece of it.

Okay. And I know there was share repurchase coming off the cash flow statement, but did you mention how many shares were acquired in the quarter?

Sure. We acquired approximately 362,000; I think to be precise, 361,777.

And the share count from -- average share count, I should say, from December's quarter is, basically, flat. Was that due to timing or option grants or what?

Actually, the biggest impact was exercised options due to retirements. We had two executives that had announced their retirement. I think that's public, yes? Okay. And they have exercised options. One has already had his last day with the company. One has announced it. It's been filed, and he will leave later in the year. So we had relatively more option exercises than you normally would have.

So when you see a decline going forward on the average basis, assuming you continue the repurchase.

Yes. I'm getting Mary's [head net]. Yes.

Okay. (laughter) And what do you envision for capital spending for the full year 2012?

A little bit less than last year. I would assume probably about $5 million less than last year, could be a little bit even less than that.

Okay. Thank you.

There are no further questions at this time. I turn the call back over to management.

Thanks, Stephanie. Thanks, everyone, for joining us tonight. Of course, if you have any questions going forward, please don't hesitate to call. Thanks and have a good night.

Thank you.

Thank you.

Thank you. This concludes today's conference call. You may now disconnect.