Mettler-Toledo International Inc (MTD) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, my name is Martina and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Mettler Toledo second quarter 2012 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Mary Finnegan. You may begin your conference.

Thanks, Martina.

Good evening, everyone. I am Mary Finnegan, Treasurer and responsible for Investor Relations at Mettler Toledo and I'm happy to welcome you to the call. I'm joined today by Olivier Filliol, our CEO, and Bill Donnelly, our Chief Financial Officer.

I want to cover just a couple of administrative matters. This 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 the 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, 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 with reference to the factors discussed under the caption Factors Affecting our Future Operating Results and in the Business and Management Discussion and Analysis of Financial Condition and Results of Operation section of our Form 10-K.

The last item on today's call, we may use non-GAAP financial measures. More detailed information with respect to the use of and differences between the non-GAAP financial measures and the most directly comparable GAAP measure is provided in the Form 8-K.

I will now turn the call over to Olivier.

Thank you, Mary. Good evening, and I welcome you to the call which we are doing from Switzerland tonight.

I will start with a summary of the quarter, and then Bill will provide details for our financial results and our updated guidance. I will then provide an update of some of our growth initiatives. As always, we will have time for Q&A at the end.

The highlights for the quarter are on page 2 of the presentation. We are pleased with our local currency sales growth of 6% in the quarter. Market conditions were weaker than last quarter, particularly in Europe. In addition, prior year sales growth of 11% was very strong. We were pleased to achieve a 13% increase in adjusted EPS in the quarter. We do not expect market conditions to improve in the short-term and have initiated appropriate cost control measures.

While we are managing cost levels more closely, we will also continue to make strategic investments for future growth. This includes investing in emerging markets, our [Spinnaker Sales] marketing programs, new product development, and our Blue Ocean program. With our strong focus on execution, I believe we can outgrow the market and continue to take market share. We will cover these points in more detail on this call.

But let me turn it to Bill to provide more details on the second quarter results as well as guidance.

Thanks, Olivier, and hello, everybody.

Let me start with additional details on sales, which were $570.3 million in the quarter, an increase of 6% in local currency. On a US dollar basis, sales increased by 2% in the quarter, which included a negative 4% impact from currency.

Turning to page 3 of the presentation, we outlined sales by geography. In the quarter, local currency sales increased by 6% in the Americas, 14% in Asia/Rest of World, while they declined by 2% in Europe. Acquisitions contributed 1% to total sales growth and contributed 2% to European sales growth.

The next slide provides full-year sales. For the six months, sales have increased by 6% in the Americas and 16% in Asia/Rest of World. Sales were flat in Europe for the period. Acquisitions contributed approximately 1.5% of sales growth in the first half and contributed 2% to Europe and 1% to the Americas for the six months.

On slide number 5 of the presentation, we outline our sales by product area for the second quarter. In the quarter, Lab sales grew by 8%, while Industrial sales increased 6%. Food Retailing declined by 6%. Acquisitions contributed 2% to Industrial sales growth in the quarter, so our core product lines, Lab and Industrial, grew by 6% on an organic basis in the quarter.

The next slide provides year-to-date sales growth by product area. Laboratory sales increased by 8%. Industrial sales also increased by 8% and Food Retailing declined by 3% for the first half. Acquisitions contributed 3% to Industrial sales growth.

Now, turning to slide 7, which shows the profit and loss statement, let me walk you through the key items. Gross margins were 52.4% in the quarter, a 40-basis point decline from the prior year. We benefited from volume pricing and currency. However, these benefits were more than offset by some unfavorable mix, mostly within the Industrial business and the fact that Europe was weaker than prior year. And Europe as we've commented last call, has the highest percentage of direct sales, and therefore the highest margin within our regional mix.

R&D amounted to $28 million, a decrease of 1% in local currency. SG&A amounted to $170 million, an increase of 3% in local currency. The increase was related to front end investments largely in emerging markets, offset by lower variable compensation. Adjusted operating income amounted to $101.1 million, which represents a 7% increase over the prior year amount of $94.5 million. Our operating margins were 17.7%, a 90-basis point increase over the prior year level.

Let me give you a couple of final comments about the P&L. Our amortization was $5.4 million in the quarter, while interest expense was $5.7 million. Fully diluted shares were 32.0 million. Adjusted earnings per share was $2.15, a 13% increase over the prior-year reported amount of $1.90. We benefited from a lower tax rate in the quarter, which was partially offset by currency headwinds. On a reported basis, earnings per share was $1.93, as compared to $1.82 in the prior year. Reported EPS includes pretax restructuring charges of $7.8 million, which represents $0.18 per share.

Given the current environment, we are enacting a series of cost control measures. These include the exit of certain product lines, transfer functions to lower cost countries, work force reduction, and rationalization of certain operations. We expect to complete these initiatives over the next two years. Total restructuring charges, including the amount recognized this quarter, will range between $20 million and $25 million, which is primarily for severance cost. We expect to reduce operating costs by approximately $40 million annually when these measures are completed. This means we will not get the full benefit until sometime in 2014.

The next slide summarizes our results for the first half. Adjusted earnings per share was $3.80, a 14% increase over the prior-year amount of $3.34 per share. Now, let's talk about cash flow. Free cash flow amounted to $69.3 million, on par with the prior year. DSO amounted to 41 days, while ITO was 4.5 times. We're pleased with both of these levels. For the first half of the year, free cash flow is up 16% over the prior year.

Let me update you on currency matters before I turn to guidance. As most of you know, our primary currency exposure is the Swiss franc versus the euro. Traditionally, these exposures have range between $150 million and $200 million, with our Swiss franc expenses typically higher than our European revenues. The combination of the decline in European revenues and the meaningful decline in the euro exchange rate, corresponding to a significant increase in the Swiss franc exchange rate, has led to our exposure being now comprised of $100 million of Swiss franc/euro exposure, and $85 million of Swiss franc/US dollar exposure.

As most of you know, we have not hedged the Swiss franc/euro historically, given the operational nature of the exposure. Hedging cannot eliminate the risk for us but rather pushes it out to the future. Our philosophy has not changed in this. However, we felt it was prudent to remove some event risk. As a reminder, the Swiss National Bank in September 2011 pegged the Swiss franc at CHF1.20 to the euro.

Given increased uncertainty surrounding the euro, we have now locked in the current forward Swiss franc/euro rate for the next 12 months on the majority of our exposure. While this will not eliminate our currency risk, it would provide us an adjustment period to correspondingly look at cost structure adjustments, if the CHF1.20 peg was removed. We do not view this as an ongoing hedge program, but rather a program to eliminate event risk in the near term. Once a clear resolution for Europe is known, we would expect to remove the hedge. Maybe one other background comment on it is that given interest rate differentials between the euro and Swiss franc, it was at an historically low cost in terms of being able to purchase this insurance.

So now let me spend a minute on guidance. We are pleased with our results in the first half of the year but acknowledge there is greater uncertainty in our markets than there were three months ago. Global growth has slowed, particularly in Europe, and we need to adjust sales expectations accordingly. As I mentioned earlier, we've initiated cost control measures throughout the organization. These include head count reductions and reduced discretionary spending. It will also include longer-term projects, including some to reduce our Swiss franc cost structure.

With that as a backdrop, let me provide some details. For the full year 2012, we expect local currency sales growth to be in the range of 3% to 5%. This compares to previous guidance of 5.5% to 7.5%. For the full year, acquisition growth represents approximately 50 basis points. With this top line reduction and the benefit of our cost initiatives, we now expect adjusted EPS to be in the range of $9 to $9.40, which represents a growth of approximately 8% to 12% over the prior year. Previously, we had expected adjusted EPS to be in the range of $9.20 to $9.50. We acknowledge that the range is wider than we typically provide and this reflects wider sales guidance and greater uncertainty in the market today.

For the third quarter, we would expect local currency sales growth to be in the range of 0% to 4% growth with adjusted EPS in the range of $2.15 to $2.35, a growth of between 7% and 17%. In terms of the currency impact on sales, we would expect currency to reduce sales by approximately 6.5% in the third quarter and reduce sales by approximately 4% for the full year. This is based on current exchange rates.

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

Thank you, Bill.

Let me start with summary comments on the business conditions. Lab did well in the quarter with an 8% local currency sales growth although the previous year comparison was not as challenging as what we saw in the first quarter and what we will face this quarter. In terms of product lines, Analytical Instruments, AutoChem, and Process Analytics did very well. Balances and Pipettes also have growth. We continued to benefit from our sales and marketing initiatives, pricing, as well as good product pipeline.

Industrial was up mid-single digits on an organic basis. Our Core Industrial business was up low single digit, a good result, given the 18% organic growth in prior-year period. Product Inspection was up nicely against a strong prior year.

Retail was down in the quarter with declines in all regions of the world. Now, looking at the geographies, Europe was down 4% on an organic basis. This was weaker than we expected, driven by Core Industrial and Retail. We don't expect improvement in Europe in the third quarter.

Americas was up 6% on an organic basis, a little better than we expected. We had good growth in both Lab and Industrial. Core Industrial, which faced strong growth in the prior year, was up low single digit. Product Inspection had a good growth in the quarter. We would expect sales in Americas to remain solid this quarter.

Finally, Asia/Rest of World was up 14% in the quarter, a little better than we had expected. Lab and Industrial both had double-digit growth. We expect sales growth in this region in the third quarter to be high single digit to low double digit. Let me also comment on the cost measures that Bill discussed. We are reducing head count, streamlining product categories, and transferring activities to lower cost countries. These actions will make us even more cost competitive in the coming years. We will remain alert to changes in market conditions and we will take further actions if the environment weakens.

That provides some context on how we view our Business today. We believe we can continue to grow faster than our underlying markets and execution of our growth initiatives is key to achieving this. Let me provide some examples of how we are positioned for growth. China has been an important driver of growth for many years. As we have spoken to you in the past, our business in China is more weighted to Core Industrial as compared to Mettler Toledo's worldwide mix.

We believe future growth will change our sales mix as China's economy further develops. We believe this is particularly true with respect to China's strategic intentions to its sciences, product quality in general, and food safety specifically. With our broader offering, we are well-positioned to capitalize on these dynamics.

A great example is our Product Inspection business in China. As a reminder, our Products Inspection business provides solutions to food producers and pharmaceutical companies to help them ensure product quality. We have the most extensive offering in the market from checkweighers, metal detectors, X-ray, and most recently, vision inspection. We're the clear market leader and the dynamics of these markets are very positive given concerns surrounding food safety and quality concerns with pharma industry. Product Inspection represents approximately 17% of total group sales and enjoys strong operating margins.

In China, we have a leading market position in Product Inspection, which represents less than 10% of China sales as Product Inspection adoption by food producers is below the level of the West. We have the broadest offering in China and have recently launched our Vision business to this market. We are recognized for the quality of our instruments and for our extensive regional coverage, with more than 30 sales and services offices throughout China. This provides much better field service coverage as compared to any other competitor. Approximately 65% of our customers are food, 20% are pharma, with the remainder chemical and auto.

There are five factors contributing to strong growth dynamics of this business in China. First, food and pharma industries continue to grow faster than overall GDP, creating positive momentum. In particular, packaged foods enjoy accelerated growth as evolving lifestyles are creating more demand for convenient food options. Second, while food safety regulation in China are more heavily weighted to chemical contamination, we expect a clear move to physical contaminants over time. Metal detectors and X-ray instruments are the most important products for physical contamination detection.

Third, China has heightened focused on GMP, good manufacturing practices, which is also a driving growth for quality instruments. Fourth, increasing wage inflation is driving demand for automated solutions. And finally, market conditions are likely to remain positive, given the continued evolution of the middle class and the increasing demand for higher quality products.

We are strongly positioned with multi-nationals and large local Chinese companies. We are working to offer low cost instruments and expand our proven segment marketing techniques to capture more share in the medium and smaller local Chinese entities.

Although Product Inspection in China is a small portion of its business today, its growth will likely exceed that of our overall Chinese business. This is one example of how we can capitalize on the increasing focus on quality in China and other emerging markets. We believe there are similar opportunities in other product categories such as Process Analytics, certain Analytical Instruments, and certain industrial quality control offerings.

Let me provide another example of how we are well-positioned in niche markets to capture growth. Our automated chemistry group provides technology and software to translate bench scale chemistry into commercial processes. Biopharma and chemical companies are under intense pressure to bring products faster to market. They must create numerous opportunities, evaluate them quickly, and eliminate poor candidates. We are the market leader in automated lab reactors and associated analytical tools which analyze chemical reactions in the realtime. With this information, our solutions helped increase R&D productivity, develop safe processes, and ensure commercial processes deliver higher yields at lower costs.

Our principal customers are pharma and chemical companies. While pharma budgets are down, R&D spending is still significant. We also see big pharma continuing to decline, but being replaced by mid-size pharma, CROs, and generics, which will continue to take a bigger piece of the profit pool.

The market dynamics for Automated Chemistry are very strong, as we estimate almost two-third of potential users do not use any technology at all. Of the one-third that does use technology, one-half is in-house engineered solutions. With such a small piece of the potential market penetrated, we believe there's a big opportunity to migrate these chemists and engineers to new technology to improve productivity.

[Spinnaker]-type marketing programs are key to identifying and targeting these potential users. We recognize we need high value marketing to make these contacts aware of our deep knowledge in this area of our solutions that can help them solve problems. Emerging markets also provide a significant opportunity for Automated Chemistry. It is estimated the [life size] tool spend will grow at twice the level of the developed markets by 2020. We are very well positioned to capture this growth trend.

We also see opportunities in other markets, such as polymer, petroleum, and petrochemicals. Finally, we have the largest service force in this market, which provides not only a competitive advantage, but good growth opportunities as well. Product Inspection in China and our Automated Chemistry offering are just two examples of how we are positioned well in niche growth markets.

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

(Operator Instructions)

Your first question comes from the line of Jon Wood with Jefferies. Your line is open.

Good afternoon.

Hi, Jon.

Olivier, so it looks like you lowered your top line by 2.5 points local currency. We'd love to hear specifically what drove that from a geographical perspective, as well as if you can, from a product line perspective versus your last update.

It's certainly a reflection of what we have seen already in the second quarter. You heard us saying that Europe came in weaker than expected. We would certainly see an ongoing uncertainty about how Europe will develop and we want to remain cautious with our expectations from the European markets.

I would also say the Americas, while we still see good momentum, we are a little bit more cautious for the rest of the year than we were during our last call. When I look to emerging markets in China, I would also see that a recovery of the Chinese momentum like we all expect might take a little bit longer. So it's a combination of all three regions, but I would certainly emphasize the European market that is definitely weaker than we expected on the last call. So that's a geographic view.

When we look at more from a business line, we would see food retailing certainly be with a weak outlook for us. Then when I look at Core Industrial, they're certainly also suffering from this economic uncertainty and so I would also see that Core Industrial will be weaker. The other businesses, I would expect similar to what we have seen year-to-date.

Okay, great. That's good color. Go ahead.

I was going to maybe put a little bit of numbers on that to give you a feeling, Jon. So we probably think the Lab business could be growing maybe 2% or 3% in the coming quarter, which certainly is a little bit less than what we've enjoyed the first part of the year. And then the Industrial business will do a little bit better than that, maybe 4%, maybe 5%. The food retailing business, though, is going to be weaker than we expected. That could be as much as 10% down in the third quarter. And then geographically, it will slow up a little bit more in Europe. So it'll probably be at a 5% to 10% decline in Europe and the Americas will be similar to what we saw in the first half of the year, maybe a little bit less, a point or two. Then we'll see the rate come down we think somewhere around 10% or so for Asia/Rest of World.

Okay, that's great. Can you, Bill, call out China in the quarter and parse out the Core Industrial from the Lab there?

Let me just pull that in front. Okay, so China in the quarter grew by 10%. And the Lab businesses grew mid-teens and the Industrial businesses grew around 10% or so. We actually had a large decline in Retail. Retail was down high teens.

All right, great. Thank you.

Sure.

Your next question comes from the line of Jon Groberg from Macquarie Holdings. Your line is open.

Hi. Thanks for taking the questions. So can you, Olivier or Bill, can you maybe talk about just looking at 3Q because if you take your midpoint of your guidance, in total revenues, year expects to be down 5%. I'm just taking the midpoint roughly but EPS to be up close to 10% if not a little bit more than midpoint. I know you get a little bit of currency benefit relative to where you've been in the third quarter. Can you maybe talk about how you expect that to flow through the P&L in the third quarter?

Okay. Just maybe repeating things that you said, but you're right, midpoint of the range at around 2% and we should have 6%, 6.5% impact due to exchange rates. So in terms of our gross profit margin, you'll see it relatively flat compared to what you saw a year ago, which from a trend perspective is a little bit better than what you saw the last couple quarters where we had decline. It could be 10 or 20 basis points one way or the other, but relatively flat.

Our operating expenses, you'll see in local currency. You won't see much growth in terms of operating expenses. In fact, you could even see a little bit of a decline on the SG&A line and that reflects some of the things we talked about in terms of cost measures.

Okay. That's helpful. And then are you planning -- I remember last time when things slowed a little bit, you suspended doing the buybacks. Are you still going forward with your buyback plan?

No, no change in plans. This was an extraordinary situation at that time. The situation today looks very different. I would --

It had more to do with the financial markets than our business.

Exactly.

So, no change there? You would continue to expect to use your free cash flow to buy back stock?

Yes.

Correct.

Okay, and then just one last one for me, if I can. You mentioned, Olivier, the US being a little bit more cautious. Is that more from just what you read and what you see? Or are you starting to maybe see a little bit of that come through in orders and more from the ground, from the sales force? Or is that just being cautious, given from a macro perspective?

It's definitely the latter one. Of course we read also the newspaper, we also see in general that there's --

PMI numbers.

PMI numbers that indicate that. If I talk to our business people, our field people in general, we still see good momentum.

Okay. Thanks for the questions.

Your next question comes from the line of Dan Arias from UBS. Your line is open.

Yes. Thanks very much, guys. On the cost actions and the margin improvement or the margin efforts, can you just remind us how much of your manufacturing is now done in low cost regions and maybe comment on the ability to move production over there in a way that makes sense?

So today, we produce about 30% of our product that we sell worldwide in low cost countries, in particular in China and about 40% of our material purchase is coming from low cost countries. The measures that we are talking here is actually very broad based. It is not just manufacturing-related. It's also sourcing of materials. That plays a role and we're also looking at sourcing services more from local countries. So it's a wide range of activities and it's not just related to the production of products.

Okay. Thank you. And then I guess on the expenditures for Blue Ocean, how did the reductions in costs make you think about taking that program global? Is that something you're going to stay on course with? Or maybe do you slow those plans a little bit?

I think in terms of our operating margin expansion over the medium- to long-term, that's one of our key enablers. So we're going full steam ahead on the program.

Okay, and then I guess maybe just one more question on pricing. Bill, I think last time you talked about pricing in the Lab business maybe coming off a bit this quarter. Is that something you saw and maybe just extend beyond Lab and talk a bit about what you think you can do pricing-wise for the rest of the year?

In the quarter realized prices, we estimated were up 270 basis points and that's 260 now on a year-to-date basis. I would be surprised if that number didn't move up a little bit more than the next couple quarters again.

Okay, thanks.

Your next question comes from the line of Ross Muken from ISI Group. Your line is open.

Good afternoon, or I guess, good evening for you guys. How should we think about the pacing in some of these geographies where we saw the deceleration? If you look at the macro data, and you mentioned PMI before, we saw a pretty decent stepdown in June and it looks like it's continued a bit into July. How would you characterize it, particularly in the more challenged parts of the business, in terms of the magnitude of change and the timing?

I guess first comment would be, Ross, we very much reflect a little bit of forward-looking view in this combination, looking at our leads, PMI data, and what the guys in the field are saying when we came up with things. We did have in the course of the quarter less order growth than we had sales growth and that also played into it and that's probably one of the items that we contributed to things.

Now, if we look at actually lead generation numbers, I think we're reasonably satisfied with what we see. So maybe a little bit less in some parts of the world but if we look at those numbers globally, regeneration looks pretty good. And I think you get a sense from Olivier as well that our discussions with the field guys are, again, reasonably good. Now, that being said, we think what we've proposed as guidance is probably realistic assessment.

If you felt like there was one part of the -- whether it's geographical or subsegment specific, that you probably expect the largest variance from corporate plan as it stands, where do you think, maybe at a more drilled down level, we're more likely to see things come in above or below, depending on that trajectory between Q3 and Q4? Just from a global demand perspective in terms of what you're seeing in orders versus where the expects are?

From a geographic standpoint, it's definitely Europe, where we have seen a rapid decline over the last few months and we certainly forecast that it's going to stay very challenging. Within Europe, if I look at the business lines in particular, also Food Retail, where we have first some comparison topics, but then secondly, also that we see that orders have slowed down significantly, and the second business line that is certainly also more impacted is Core Industrial, Core Industrial Europe.

Great. Thank you so much, guys.

Thank you.

Your next question comes from the line of Paul Knight from CLSA. Your line is open.

Hi, Paul.

Hi, guys. Just to follow up Ross on Europe. I guess the Laboratory supply side of the business is fairly resilient in the European marketplace?

As a reminder, we do -- our Laboratory business -- I know you know this, but I think it helps the people listening to the question -- doesn't include just lab stuff sold into life sciences. We have a lot of industrial customers that are buying the equipment as well, chemical companies, for example, but food companies as well. And so we would expect Lab to be more resilient, but there is a meaningful portion of that Laboratory business that's also going to industrial customers that has some similar dynamics to our Industrial sales.

And Laboratory was the highest organic growth rate in the quarter, Bill. What would be the products you would highlight behind that?

In terms of the Laboratory business, Process Analytics really did the best of the major product categories. Our Automated Chemistry and Analytical Instrument businesses both did quite well. What's maybe interesting, Paul, about those last two is ticket price-wise. Those are higher ticket price items. Now, AutoChem, I think is a business that we have that's just executing really well now, good product cycle, as well as good penetration in some of their key accounts. The Analytical Instrument business largely benefits from a relatively -- one of the easiest comparison it has with a prior-year quarter is the second quarter and I would say that explains it the most.

And then I guess looking back on Q1 gross margin, was an item we all looked at in Q1. It seems like the sequential improvement in gross margin, mix is better in Q2 and I guess the ultimate question is, it looks like China is improved on profitability as well. What will your thoughts be there?

We would expect gross margins to improve trend-wise versus the prior year in Q3. That'll be driven by, as I mentioned earlier, our pricing should add a little bit more in the course of the quarter. Forex is going to be marginally better. Then mix-wise, I think it also could be maybe not better than the prior year -- because I think we'll still going to have a headwind in Europe -- but at least within the Industrial business, I think some product categories will do better than others. The biggest headwind we have on gross margin now is the fact that our European business, which is the place where we have the highest percentage of direct sales as opposed to sales through distributors and therefore the highest gross profit margin, is the weakest region.

Okay, thank you.

Your next question comes from the line of Isaac Ro from Goldman Sachs. Your line is open.

Hi, good afternoon.

Hi, Isaac.

Hi, guys. Could you maybe comment on the China (inaudible) visibility that you have into the government funding sources? I think we had talked about pacing of those dollars from the five-year plan. And then also, the dynamic you're seeing in maybe Tier 2 versus Tier 1 cities? I think the Tier 2 cities were a new area focus in the last year or so.

So let me start maybe with the first piece about funding. What we have certainly seen is that big project, that they are less funded at this stage for two reasons. On one hand, the stimulus funding that we benefited over the last few years is definitely gone. That has one impact. And the second one is, we see that in this transition of leadership, many projects are on hold. People want to wait until the new leadership is really in place and that the decision-makers, the new decision-makers, are really confirming this project. I would, however, expect that this situation will rapidly improve and will then be helpful for us.

When it comes to the new five-year plan and how that can benefit from us, there are different initiatives in this five-year plan that are beneficial for us. It's more focused on size. It's more focused on quality. It's also more focused on environmental topics where there will be demand for our product. So in general, I would say this is beneficial. So all in all, I think this change in leadership will [ultimately] be beneficial for us and should start to yield already improvements in the coming weeks and months.

Great. And then maybe on the financials, Bill, could you comment on how you feel about pricing power right now, especially for the back half of the year? And then on the share repurchase, do you guys give out how many shares you repurchased? (inaudible) you might see a little bit more willingness to buy back more than you previously guided to in the back half, if you got attractive prices?

Okay. First, on pricing, the details on pricing look good. Win/loss reports look good. Price realization reports look good. We feel pretty confident that we'll have a continued positive trend in the second half on pricing.

Now, in terms of the share repurchase program, as a reminder, we file a 10b5 plan that allows us to purchase through blackout periods. The way that we execute that is we're purchasing fixed dollar amounts and that fixed dollar amount would therefore the number of shares purchased would vary to a certain extent, based on the stock price going up or down. In terms of us doing something more, there's not something that we're disclosing at this time, whether our Board would consider that at some stage later in the year, that's possible. But I'd say there's no certainty of that at this point.

Fair enough. Thank you much.

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

Hey, thanks for taking the question.

Hi.

First, maybe just on the cost actions, I mean, how much of this is accelerating things you would have already been doing in terms of the transfer of product lines? And can you maybe comment on exiting product lines? You made that comment earlier. I'm just also wondering, is it disproportionately biased to any of the business segments?

Okay. In terms of exiting product lines, we do have a couple of areas that we did exit. They both fell. They're relatively smaller product categories. I think it's not something that we need to further adjust guidance or something like that. They're product lines within Industrial and within Retail that we were focused on there.

In terms of geography, you can imagine there's a focus on Europe in general, which has the biggest weakness and to a certain extent, we've been talking to you guys for a while about us trying to, over the medium term, reduce our Swiss franc cost structure over time. Now, in terms of things we would have done otherwise, I think in some cases what we're doing reflects volume, but many of the things -- you're correct -- are things that we would have done at some point over time but maybe look to accelerate it to a certain extent. I would also highlight maybe that some of the things that we're able to do as part of this program are things that are enabled to a certain extent by some of the investments that we've been making in the Blue Ocean program as well that allows us some more flexibility because we're on a common set of systems and data and processes that allow us to move things a little bit more nimbly than we might have in the past.

And in terms of your comments on the back half of the year, you talked about expectations for Lab to be up a little bit, 2% to 3%, I think you said in the third quarter. Presumably, that's all US? Or given light of the funding environment, what I'm wondering, are you projecting the US academic market to be down here in the back half of the year?

As you know, academic maybe compared to some of the other guys in this space is not as big a segment, with the exception maybe of the Pipette business. The Pipette business, that's not one of the strong points, although I would highlight we'll probably do better than most in that segment because it's an area where our market share has been higher in biotech and pharma. And so it's been getting a little bit more emphasis from us and we do actually see that trend-wise we appear to be doing better than maybe competition in that particular sector. But the feedback we get from the Pipette guys is that's not a particularly strong area right now. But we were happy actually. We had modest growth in the US Pipette business. I think compared to what I've seen with other guys with similar product categories, that seems to be pretty good.

One thing I would say, I think we expect growth in the US with emerging markets would also be a contributor to the global (inaudible) so not just the US.

And then just last one I guess from a portfolio management standpoint, you talked about the product line divestitures. Do you see other opportunities for business divestitures? You'd gotten rid of some of the Food Retail business a couple of years ago, for example. Alternatively, just comment on how you're thinking about M&A in this environment.

Nothing of particular size here. This product line streamlining that Bill discussed before, these are really some relatively small product lines, very specific to applications. What we did for the divestment of the software business that we did in Retail two years ago or so, that was more sizable and I don't see us doing anything in particular of that size in the near term. Actually, we feel very good about the current portfolio and the current franchise.

And then from an M&A perspective, are you looking at doing capital deployment a little bit more aggressively in the current environment?

The strategy really remains the same as we have now the last few years. We are focused on more on close adjacencies that yield good synergy potential. They're typically sizes of $20 million to $50 million businesses. We continue to screen the markets. There is nothing of particular that I would see to be discussed or announce. I don't think that the market offers particularly good opportunities in these times. So, yes, I think we will really pursue a very similar strategy as we have done in the last few years on this one.

Okay, and then one last one and I'll hop off. Can you comment on trends in July versus June, just in terms of how much things deteriorated month to month? Thank you.

At this point if I look at order trends, the two months, I don't think we're looking at a materially different picture.

Okay. Thank you.

Your next question comes from the line of Derik de Bruin from Bank of America. Your line is open.

Hi, good evening.

Hi, Derik, how are you?

Good. Maybe I'm being a little bit slow but in the second quarter, you did 6% local currency growth and you grew earnings by 13%. In the third quarter, you're guiding to the midpoint of local currency at 2% and looking at 12% EPS growth. Is it the restructuring? Is it currency? What's giving you the confidence that you can support an equivalent level of growth with a lower volume basically coming through?

It's almost completely explained by the cost measures we described.

Okay.

And maybe to a smaller extent, a little bit better margins.

Okay. That's fine. That's what I thought was going to be the answer. I just wanted to make sure I'm not being slow on that.

No, you got it. As always.

When you look at the cost actions that you're taking, it sounds like things are going to be moving a little bit slower than they did last time, in 2009 when you did it. Is that because you're doing more ongoing investment right now, because you've got things like Blue Ocean going on? Could you talk about just how quickly you're moving and I guess what you're doing now compared to what you did then?

Well, I think the sales numbers are -- our view of the market is different, too. We're suggesting a 2% organic growth the second half of the year as compared to -- I guess we had a 10% decline or something in 2009. And we were running it some quarters where the mid-teens down. So I think very much that's a reflection on it. But we made investments in '09 in strategic areas and we're making investments now as well.

Okay. Great. Most of my questions were answered. Thank you.

Your next question comes from the line of Sung Ji Nam from Cantor. Your line is open.

Hi. Thanks for the questions. Just going back to emerging markets and specifically China, what percent of your business in China is project oriented?

Well, the Industrial business, which represents about 60% of sales or so, has a meaningful amount of project business. If I were to talk about big, big projects maybe in a normal cycle it might be as much as 15% of that sales, maybe even 20% in the really good times. That's the part of the business that's probably we see the most. If we look, for example, and you guys can see it a bit in the balance sheet, because we have less deferred revenue than we normally do and that's almost completely related to China. Less big projects which have more of a deferred revenue mechanism as part of how you recognize things there.

Okay. And then in terms of maybe some of your relatively larger other emerging market regions, like India, Brazil, and Russia, could you comment on what trends you're seeing there and what your outlook may be? I know India, for example, would be, with the currency might be having some difficulties in things like that. If you could comment on that?

(inaudible) To maybe just frame it, China is actually really the biggest country in the emerging market mix. It's about half of our emerging market sales. And then it rapidly drops off to smaller numbers. India was in the range of 3% growth, 3% of total sales, also Russia, it's actually even lower than India. So this becomes smaller numbers.

India has actually performed well for us. Year to date, we have actually growth north of 20% in India, which I feel is an excellent accomplishment by the team, considering that the currency is actually a difficult situation for us in India. And India overall is certainly more challenging than it was in the previous years. Did very well there. If I look at other emerging markets, also South East Asia, for example, Korea, very happy with all of these numbers and what the team is doing and also countries like Mexico. Eastern Europe was weak but had actually a tough previous year. Brazil, we certainly also see that the economy, economic situation is more challenging than we had in the past. But all in all, I am very happy with all the emerging markets and many of them actually performed much better than China and China was a 10% growth up against a strong previous year did actually also well for us.

Okay, and then finally from me, could you maybe talk about the competitive landscape, obviously very fragmented there. Are they facing obviously similar challenges and is this a good opportunity for you? Are you finding opportunities to take greater share in this environment?

When we talk about competitors we have in the Lab space, mainly global competitors, as when we talk about Core Industrial in particular, we face more local competitors. I would certainly see a situation where we have a competitive advantage that is particularly also beneficial in this more difficult economic environment. We are certainly very agile with our marketing programs and with our very strong direct sales approaches. We are close to the customer, which is always good in these environments. I would clearly see that we continue to gain market share. I don't see that as the big opportunity to change the competitive landscape. I think it is a more continuous evolution here. Our overall programs that we have in place in terms of coming out with new products, implementing superior marketing programs, expanding our field force, these are all initiatives that help us continuously win market share and is not particularly focused in an economic cycle.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Richard Eastman from Robert W. Baird. Your line is open.

Just a couple things. Bill or Olivier, how did the service piece of the business perform relative to the product piece against that local currency growth rate?

So our service business grew by 4% in the quarter and the product business grew slightly more. To the extent that we're seeing a change in our growth rate, we probably expect a similar growth rate in service in the second half of the year and most of the decline would relate to the product side of the business.

I see, okay. All right. And then Olivier, your comments on America, on the Americas, I was trying to maybe summarize what you were talking about. Is there a particular piece of the business, Lab or Industrial, specifically that you're more or less concerned about? And is that from feedback from the sales force? Or is it just a general tone that you feel is weaker?

It's also a little bit of what we see in the pipeline and the two weaknesses or areas of slowdown that I would see is Food Retail, certainly slowing down. The second one is, of course, Core Industrial, is always more exposed to changes in the momentum. Lab did actually perform well for us and I would expect them to continue. Product Inspection had also a good second quarter and I certainly see good ongoing momentum there, particularly also driven around food safety topics. That is a key topic around the world, but particularly in the US.

Okay. And then can I ask, given Mettler's manufacturing exposure to China, as we look at some of these product transfers, do we still consider China to be a low cost region?

Yes. Probably you're talking about, particularly for direct labor people, Rick, you're often talking a tenth of the price.

Sure.

And our cost of material, for our type of material, often we would probably average 20% lower than some product component categories even more.

Okay. So we don't need to develop a different region, for instance, to serve the euro zone?

No.

Eastern Europe or something?

No. And what we need to realize, of course we experience also wage inflation, but our productivity gains in our Chinese facilities are actually quite impressive and there is a very strong focus of our team to continue on that path. We see productivity gains in production area, but we certainly see that across the whole value chain and not the least on the sales side, service side, for field people. So the topic of cost increase in China is, of course, a topic but I feel we can offset that nicely through productivity gains.

I see. Okay. And then just the last question, the $7.8 million of restructure that you took in this quarter, what would be maybe the anticipated benefit in the second half?

Well, just maybe the key way in which you'll see it -- and not all of it relates to our operating expenses -- but as I mentioned in response to another question, you'll see a decline in our SG&A expense in the second half.

Yes. Okay.

Decline in local currency.

Okay. All right, thank you.

(Operator Instructions)

Your next question comes from the line of Greg Halter. Your line is open.

Hi, guys. Thanks for taking the questions.

Sure.

I'm not sure if I heard the number of shares that were repurchased in the quarter or six months.

We repurchased 435,318.

All right. And given the change with the cost control measures, any change in your thoughts on capital spending for the year?

Maybe I'd answer it in terms of cash flow. We do see that we'll probably do a little bit better on the cash flow side. I think we had guided to a 15% growth in free cash flow and we'll probably do a little bit better than that.

Okay. Looking at R&D, just wondering if there are any change in your thought process there, again, given the cost control measures and what your expectations may be for 2013 as well.

Our R&D strategy is a very continuous one. It's not particularly impacted by these cost programs that we have in place. And we do R&D for so many different product lines and we have so many new products that are coming in that you will see a little bit of a quarterly changes that can be driven by peaks in certain product launches. But all in all, I would say the R&D pipeline, as well as the R&D investment, is quite a steady one.

I would maybe add that one of our productivity gains that we get in R&D, Greg, is what I would describe as some kind of low end R&D, where we're talking about drawings and stuff like that. We're doing more and more of that in low cost countries or outsourcing and that's giving us productivity gains with our western guys. And we've also invested the last couple years in some programs and systems that allow us to work better on a global basis, PLM type of stuff, and we're starting to see some of the benefits from that as well.

Or to build on what Bill said, we have, [for example,] expanded our software development capability out of India, which is complementing development that we do in Switzerland. You can imagine that this from a cost standpoint, this is very beneficial to do it in India.

All right. And one last one for you, given the implementation of the ERP, just wondered if you've run across any issues that may be being compounded by the situation in Europe and other parts of the country relative to the core businesses?

No, Switzerland has been up and running on the new system for quite some time. So not there. China has been up and running, as you know, since Q3 last year and then we're targeting taking the US, the main part of the US operations, in the early part of next year. So there's not anything going on now that I would say is even an operational challenge in this regard. I mean, there's changing management topics always with a new system and of course we're enhancing it as well as we go along because we want to get more and more out of it. But nothing that I would say is causing operational headaches.

All right. That's good to hear. Thanks.

Your next question comes from the line of Robert Goldman from CLK. Your line is open.

Okay. Thank you. Couple questions. You mentioned the $40 million of cost savings would be fully experienced in 2014. You gave us a little bit of feel for what might happen in 2012 but unless I missed it, I wasn't sure how 2013 comes out. Should we assume half the benefits in 2013? Or just help us explain how to get from zero cost savings to the $40 million.

Over the time sequence?

Right.

Yes, I would say that we'll probably be in the run rate during the middle of '13 more than half, probably closer to three-quarters of the way to that target. And as we get farther and farther into it, we'll disclose to you guys how that's progressed and hopefully we'll do a little faster and hopefully we'll do a little more. I think the $40 million number and it being ready by the early part of '14 is probably a realistic assumption at this stage.

Okay, and then -- actually, that answered the question. Thank you very much.

Sure. Thank you for your question.

There are no further questions in queue. I'll turn the call back to management for closing remarks.

Thanks, Martina. And thanks, everyone, for joining the call. Of course if you have any questions or follow-ups, don't hesitate to give us a call. Thanks. Bye-bye.

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