Mettler-Toledo International Inc (MTD) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our first-quarter 2013 Mettler-Toledo International earnings conference call. My name is Jay, and I will be your audio coordinator for today. 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 our presentation over to your hostess for today's call, Ms. Mary Finnegan. Please proceed, ma'am.

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

I want to cover just a couple administrative matters before we begin. 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 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, uncertainties, and other factors that may cause our actual results, level 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 form 8-K. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the caption, Factors Affecting our Future Operating Results, and in the business and MD&A of financial condition and results of operations in 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, and welcome, everyone, 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 for 2013. I will then comment on current business conditions as well as update you on some of our strategic initiatives. As always, we'll have time for Q&A at the end.

The highlights for the quarter are on page 2 of the presentation. Local currency sales declined 2% in the quarter, modestly below what we expected the last time we spoke. Europe and America came in pretty much on track with our expectations, while market conditions in Asia and the rest of the world were more challenging than expected. In fact, all the growth was better than sales growth overall, and especially in China. However, we did not convert it to sales at the rate we hoped.

I am very pleased that, despite the decline in sales in the quarter, we were able to strongly expand margins. Our cost actions initiated last year, as well as our pricing and supply chain initiatives, helped to contribute to this improvement. As a result of this good margin improvement we were able to increase EPS by 11%. Uncertainty remains in the global economy, but we continue to believe that global market conditions will improve as the year progresses.

We'll have more to say on our outlook for 2013 in a few moments, but now let me turn it to Bill to go over the financial results.

Thanks, Olivier, and hello, everybody.

Let me start with additional details on sales, which were $524.4 million in the quarter, a decrease of 2% in local currency. On a dollar basis sales were also down 2%, as we had no currency impact to sales during the quarter. Turning to page 3 of the presentation, we outline our sales by geography. In the quarter local currency sales increased by 1% in the Americas. They decreased by 5% in Europe and 2% in Asia/Rest of World.

On slide number 4 of the presentation we outline our sales by product area. In the quarter industrial sales were flat with the prior year while lab sales decreased 2% and food retailing was down 9%. All of those amounts are local currency and organic.

Turning to slide number 5 of the presentation we show the P&L. Let me walk you through the key items. We're very pleased with the gross margins, which were 53.3% in the quarter, a 150 basis point improvement over the prior year. We benefit from pricing, from lower material cost, and from an overall favorable mix. These benefits were somewhat offset by lower sales volume. R&D was $27.7 million, a 3% decline in local currency verses the prior year. SG&A was $166.1 million, a 1% decline in local currency as compared to the prior year quarter. We benefited from our cost control measures, which were partially offset by higher variable compensation.

Adjusted operating income amounted to $85.4 million, which represents a 6% increase over the prior year amount of $80.8 million. We estimate that currencies reduced operating profit growth by approximately $1.3 million or about 1%. Nevertheless, our operating margins were 16.3%, an increase of 120 basis points over the prior year. We're very pleased with our operating income growth and the margin improvement, especially given the relatively weak sales environment.

A couple of final comments on the P&L. Amortization was $5.1 million in the quarter. Interest expense was $5.4 million, and our effective tax rate is 24%, which is on track with the guidance we provided you last time. Fully diluted shares for the quarter were 31.1 million. Adjusted earnings per share was $1.84, an 11% increase over the prior year reported amount of $1.66. We estimated that currencies reduced adjusted EPS by approximately 2%. Given the challenging economic environment, we're very pleased with this earnings growth.

On a reported basis, earnings per share was $1.69, and that compared to $1.62 in the prior-year period. Reported earnings per share included pretax restructuring charges of $5 million or $0.12 per share. This is primarily severance-related charges for the cost measures we announced in the second quarter of last year. Reported EPS also includes $0.03 of purchased intangible amortization.

Now, turning to cash flow. As a reminder, our first-quarter cash flow is typically our lowest of the year, because it is when we pay bonuses for the prior year. In the quarter, free cash flow was $9.6 million as compared to $4.2 million in the prior year. There are a couple items worth highlighting. First, we benefited from lower variable compensation payout. As a reminder, we didn't meet our financial targets in 2012 for compensation purposes, and, as a result, our variable comp pay out was about $25 million below the prior year. Offsetting this somewhat is we had higher tax payments and pension contributions this year.

In terms of working capital, I'm pleased with the improvement in ITO which was 5 times in the quarter, and this compares to 4.3 times a year ago; both of those numbers on an LTN basis. We're gaining additional transparency in our supply chain with our Blue Ocean implementation, which is helping us to be more efficient in our supply chain.

Finally, our DSO was 49 days. This is six days slower than last year. The increase is related to China, and it's impacted, because of the way we do the calculation, by the reduced level of project activity where we benefit from advance deposits. We also see some tightening of liquidity in the Chinese customer base, and this is part of the explanation for the disconnect between order entry and sales growth. More delayed shipments leading to or pending upon credit holds. We expect to see improvement in China's DSO as the year progresses. We also expect the China order conversion situation to improve during the year, but not until the second half of the year.

We remain comfortable with our full-year target for cash flow of approximately $270 million.

Now let me cover guidance. Although sales in the quarter was modestly below our expectations, we believe that the economic environment is generally developing as we expected. We expect improvements as the year progresses, particularly in the second half.

Before I get to details on the guidance, let me make some comments on order growth. As Olivier mentioned, our order growth in the first quarter was higher than our sales growth. Specifically, orders grew by 2% in local currency, as compared to a 2% decline in sales. This was particularly true in China, where order entry growth was plus 5% as compared to a decline in sales of 1%. This is the opposite of what we faced one year ago, if you remember. We highlighted on our Q1 call last year that the order growth rate overall, but especially in China, was less than the sales growth rate.

A couple of items contributed to our slightly slower order conversion rate in the quarter. First, for China, it reflects a slower than expected start to business coming out of their Chinese New Year. Business just came in a little later than we planned. We also had a high number of orders on credit hold awaiting advance payments or payments of open balances.

In our US lab business we also had a difference between order entry and sales growth. This is largely explained by the start up of our logistics hub after the Blue Ocean go-live during Q1. We also saw it in Europe, where orders exceeded sales as the timing of the Easter holiday impacted deliveries.

One last thing I can share in terms of business trends is that April is the best month of the year in terms of growth for us. This gives us additional comfort that our business is moving in the right direction.

Let me now update you on guidance. For the full year we continue to believe that our sales in local currency will be a growth of between 1% and 3%. With this sales increase and the benefit of our out-performance in the first quarter, we now expect adjusted EPS to be in the range of $10.40 to $10.60 per share, or a growth rate of between 8% and 10%. This compares to our previous adjusted EPS guidance of $10.30 to $10.55. For the second quarter, we would expect local currency sales growth to be in the range of 0% to positive 2%. This would translate into adjusted EPS of between $2.30 and $2.35, or growth of 7% to 9%.

A couple of additional items to cover with guidance. First, currency. We would expect currency to reduce sales growth by approximately 1% in the second quarter. For the rest of the year we would expect currency to be neutral to sales in the third quarter and reduce sales by 1% in the fourth quarter. For the full year currency will reduce sales growth by approximately 1%. All those currency comments were already built into the EPS guidance that we provided.

Now looking at the impact of currency on earnings for the rest of the year, we'll continue to face a little bit of headwind in 2013 in terms of the Swiss franc to the euro. We are relatively neutral, given the currency hedges in place. As a reminder, we have hedged approximately 75% of our full year $100 million Swiss franc-to-euro exposure at a rate of $1.20, which is on par with the level in 2012. However, we're getting hurt with the Japanese yen as well as the Swiss franc versus the dollar. In total we expect currency will reduce EPS growth by about 1% for the full year.

A couple of additional points. We continue to assume a tax rate of 24% and that all free cash flow will be used for share repurchases.

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

Thanks, Bill.

Let me start with several comments on business conditions. Labs declined 2% in the quarter, with declines recognized in most product lines and geographies. A couple factors are going into these results. First, Europe continues to be impacted by the difficult economy. As a reminder, more than 50% of our Lab business is non-life science related, and it is this piece that is impacted most by the economic slow down. Our Laboratory business in the US, particularly at the lower end, was impacted by the startup of our logistics hub on Blue Ocean, as Bill mentioned. Finally, Asia had an excellent quarter in Lab in the first quarter of last year as local currency sale were up more than 20%; so they had challenging comparisons.

Turning now to Industrial, which was flat in the quarter with Product Inspection up very solid mid-single digits, while Core Industrial was down. Core Industrial was down in all three regions, reflecting the late cycle nature of our business. Retail was down 9% in the quarter.

Now let me make some additional comments by geography. Europe was down 5% in the quarter, maybe slightly lower than we had expected, as retail was down almost 20% in the quarter. Lab and Industrial were down modestly in Europe. America was up 1% in the quarter, on track with what we expected. Product Inspection did very well in the Americas. We had modest decline in Lab, while Retail was down mid single digits. Finally, Asia/Rest of World was down 2% in the quarter, with strong growth in Retail, offset by modest declines in Lab and Industrial. That covers my comment on current market conditions.

Let me now update you on a couple of strategic initiatives, starting with our strategy of expanding our product offering for the entry level market. We recently extended our balance and titrator product line to include an entry level offering which offers just basic features. While these are global products, they are particularly important for emerging markets. Let me provide some additional insight. Our new family of entry level balances is known as NewClassic [Mean]. It is targeted to meet customers' basic daily weighing operations. It will help us extend our market positions in segments such as metal, electronics, plastics, and academia. Key features that are important to customers are its reliability. Although entry level, it has state-of-the-art technology and it is compliant to ISO and GLP standards.

Equally important to this customer base, it is easy to use, no training is necessary, and it has an intuitive interface in which users can obtain direct access to applications and calibration. It is easy to clean, requires less power usage, and has robust industrial design. Initial customer feedback has been positive, with performance and industrial design ideally suited to the price position of this product.

Similarly, we are currently launching Titration EasyPlus, which is extending our titration presence to the entry level market. We are targeting customers in low-end food, beverage, and chemical markets. Designed with a small footprint to suit emerging markets, it has the same quality level of all titrators. Important to this customer base is that it is easy to install and has a simple user interface for easy operation and troubleshooting.

It is available in 14 languages and offers remote support and service through a special website and hot line. NewClassic Mean and Titration EasyPlus will be produced in China which will also allow us to achieve targeted [margins]. The products will be available worldwide, although the biggest market for these product will be China.

A low cost channel is critical to the success of our extension in these entry level markets. One low cost channel we have been using in an increasingly effective way is our non-visiting customer strategy, or NVC approach. NVC is a direct sales approach leveraging back-office resources for [teles aids] to specifically identify customers. A critical element of this approach is a strong web presence to support the sales and support processes. We also have a comprehensive marketing launch campaign for these products, including extensive communication and sales tools.

In summary, our markets are challenging, but we expect to see improvement as the year progresses, particularly in the second half. We are confident in our market position and believe we have opportunities to further gain share. Extending our market reach to the entry level is just one example of such opportunities. We are focused on launching initiatives and continue to closely monitor our cost structure. We recognize that execution is key to successfully maneuver in this environment, and it continues to be our key focus.

That concludes my prepared remarks, and I want to ask the operator to open the line for questions.

(Operator Instructions)

Paul Knight, CLSA.

This is actually Brian Kip on behalf of Paul. I just wondered -- you guys alluded to April being the strongest month you've seen this year. Can you guys give a little more color on that in geographic where the strengths were and maybe even product mix? Thanks.

So it was a strong month, the best of the year. We experienced growth in pretty much all parts of the world. We had even better order growth than sales growth in the month. US was strong. Europe was -- and, hey, when I say strong I mean vis-a-vis year-to-date trends. Order growth was strong in China, sales growth less so, a little bit we are continuing to see some of this order conversion topics in China partly related to some of the orders were larger jobs so they weren't quickly shipped out.

But also we are putting a little bit more emphasis on credit controls down in China, and so we're the opposite maybe in a way of channel stuffing, really keeping an eye on how much inventory is in the system. But in terms of product categories because of the -- I am not sure I have seen all the details on that because April just finished, but probably the lab in particular was one that saw an accelerated trend because China is so weighted towards industrial, I assume, the industrial sales numbers will be a little bit weaker than the last.

Thank you. I guess just another follow up. You cited the margin improvement for pricing lower material cost and a better mix. Are these lower material cost and better product mix something you expect going forward, or you think there could be headwinds going there?

I think we're going to continue to have gross margin expansions throughout the year. You guy wills remember, though, if you look at our progression or gross profit margins last year we had quite good gross profit margin expansions in the second half of the year. So I think in terms of comparison point of view it won't be as much expansion. But I think you can assume another 75 up to maybe 100 bips in Q2, as well.

Thank you very much for that color.

Isaac Ro, Goldman Sachs.

This is actually Joel in for Isaac. Just on your comments on your entry level products that you guys are looking to expand. You made some comments on those projects reaching your margin target. I am just wondering how that compares to the total Company gross margins. Should that be a drag or a benefit to gross margins?

I actually expect for both new products that it would be similar to what we experienced in lab overall. That's why I was referring to that we actually devolved but also produced these products in China. With that we make sure we have a cost effective structure which will allow us also then to have this lower price point. Then I was also adding to this that I was talking about this non-visiting customer approach that we have to sell the products. Of course this is also a way for us to keep the sales costs down. Then on the service side we try to have a more self service aspect that goes with it that also allows us to maintain good margins on the product. Overall, I do not expect that this low end product line will change something to our average margins that we have in the lab business.

Great. Then just one on China. You made some comments on credit tightening. I was wondering what specifically is giving you guys confidence that those trends should buck up in the back half of the year? Thanks.

So in terms of the credit tightening comment, that mostly relates to more a comment about order entry conversion, that maybe that's translating to us waiting a little bit more for, depending on the product category, either advanced payments or payments like from distributors on open account. Once we're on a more stabilized position there, then your -- then the sales growth will be more in line with the order growth. So we expect that to happen in the course of the second quarter. In the second quarter still we would expect overall the order growth to exceed the sales growth. In fact, I think sales growth could continue to be flattish, maybe even a modest decline. But, based on what we have seen April year-to-date, I'd be surprised if we didn't finish with mid- to high-single digit order growth in the first half for the first half of the year. Then we'd likely turn to growth rates and sales more in line with that order growth rate in the second half of the year.

Great. That's very helpful. Thanks.

Steve Willoughby, Cleveland Research.

On the new lower end products maybe I missed it, but wondering -- are these products launched already? When will you be launching those products? And if you could talk about the competitive environment for both of those products.

Actually both products were launched. Titration Easy Plus was really launched in the last few days, weeks. And the New Classic Mean was launched already at the beginning of the year. As always global roll out, all the markets launch exactly at the same time, but in general the big markets have launched, and we have also received already the first customer feedbacks that are really very promising and very happy. In terms of competition, that's a little bit the nature of this entry level market. There we are facing the non-typical competitors. They are sometimes local competitors that try to enter a market. Like in China you would start to see local companies trying to get into titration markets because they wouldn't have really technology to compete in the mid-tier.

So we are facing different competitors there. It's definitely more fragmented, and that's actually why we want to be there. I think the benefit of us also being in that market is we set quality standards than also in the entry line markets that are very difficult for competitors then to meet. And that's a strategic move why we have these products because it prevents actually local competitors to establish themselves in the market. So it's, yes, I think as mentioned fragmented more local ones and different than what we face between mid- and high-end.

Okay. Thanks very much.

Derik De Bruin, Bank of America.

Just sort of big picture question. How much is FX overall a drag on the earnings for the full year?

In terms of earnings per share it's about $0.10 per share or about 1% in terms of the growth rate.

Got you. Okay. And I guess if you were sort of doing a 5% organic revenue to growth number of the Company I guess what would be the incremental margin that you're getting? What I'm basically trying to say if we sort of think about 20 -- I am trying to look at the future when you think about a more normalized EPS growth rate when we start looking at the future, if we're thinking about back to some mid-single digits, currencies being neutral. I am just trying to get a leverage number according to growth number.

Of course we are currently benefiting, Derik, from the efforts we did on the restructuring side in the middle of last year. So that's making our incremental margins look quite high. I think on a normalized basis through '14 and beyond we think we'll run if we're growing mid-single digits or better, we should be growing or having incremental margins of better than 30%.

Great. I guess can you talk about -- was there any sort of unusual timing, any events in the quarter or did any particular markets slow down dramatically towards the end of the quarter, or was it pretty just choppy throughout the quarter. Was it unusual, orders delayed at the very last moment? I'm just trying to get a sense for -- did people seem surprised that things are happening?

I don't really think so. I think maybe as implied with some of what we have written in the script, we are a little surprised that day order conversion, the order entry conversion to sales was a little bit slower than we expected. There were a couple of things that we could like hit ourselves in the head and say, hey, of course Eastern Europe. We had already thought about the Chinese New Year, January verses February, but it did seem to come out a little slower. Maybe the closest thing to a surprise would be we probably are having more discussions internally on this keeping the receivables in check in China. But I think Olivier and I, if you asked us three months ago you're going to grow order entry 2% in the first quarter you are going to feel like you are on track, and we would say very much so. I think the recent trends in order entry in China would probably be in line with what we would have said earlier on how things should track in China. I think it is going to take some time if we look at Q2. I think we'll see another -- one more soft quarter of sales growth, but I think orders look to be off to a good start in China. So I think we should do okay there, and that will mean a return to decent growth in the second half there.

Okay. That's exactly what I was looking for. Thanks a lot.

(Operator Instructions)

Jon Groberg, Macquarie.

First of all congratulations. I don't know any other company that has grown their earnings 11% on a minus 2% local currency growth. So that's something to be commended for and stand a little bit in awe of. So I guess I am curious on some of the trends. Is Europe maybe -- some customers mentioned Europe was extremely weak -- sorry competitor that Europe was extremely weak in the quarter. Maybe just digging in in different businesses in Europe and what your out look for the rest of the year there?

Let me take it a little bit overall, and then Bill can certainly comment specific about business. Europe and European end markets continue to be uncertain as we talked about it also on the last quarter call. But I would definitely see that conditions don't get worse. Sales in Europe in the quarter came in as expected except for the retailing that was weaker. If I look overall by the different countries most countries actually were down in the quarter with the exception of the UK which was modestly up. But we had this phenomenon that Bill was talking about before that all the growth was positive actually in the quarter, which indicates that we are seeing some improvements.

We expect to see some modest growth in sales in the second half. Also in that context as a reminder, our business in Europe is really primarily a replacement business. Customers can and do defer purchases, but at some point purchases cannot be further delayed. They will start to buy again. This is certainly something that we are seeing happening, and that's also the reason why we see things gradually improve for us in Europe even when you read the newspapers you wouldn't really feel that way. But for us it looks actually better, and this is certainly also confirmed when I talk to the different [gentlemen] in Europe. They are starting to express some confidence that things are really starting to get better. Bill, you might want to comment a little bit more by business line.

So again order entry trend was better overall than sales growth, and that continued in Europe in the month of April. If I look at it in business area the lab business did better than the industrial business, and I would expect that same trend to kind of continue in the second quarter. In terms of maybe specific countries, I think we see somehow some of the impact of easier comps. I think the only country that looks year-to-date to kind of jump out in a good way is the UK, but for us it's a small market. I wouldn't read too much into it, but we in the first quarter and second quarter did pretty well in the UK.

Just to be clear were orders in Europe overall actually positive or just greater than your sales growth?

Both.

All the growth in the quarter was positive.

1% and a little bit better than that in the month of April.

Okay. And then going back to the issues in China. Sounds like the quarter for revenue standpoint was slightly weaker but overall wasn't too different than what you had planned. I know you planned order growth to be higher than revenue growth in particular in China. But is there any worrying going on there? I am trying to think what is the reason for there being more difficulty in terms of people either getting current or being able to make the payments in order for you to ship the products that they need?

Let me maybe start again with some overall comments on the Chinese market. And giving maybe first a little bit of mid-term perspective and then coming back to the short term. If I look, we have really built overall these years a very strong position in China. I definitely expect to continue to enjoy strong growth for many years. Our business in China is more weighted to the industrial sector as compared to the overall global business. But we expect to gradually migrate our Chinese business to the global mix over time. So lab business and product inspection will enjoy faster growth. This all is also supported by the mid-term growth drivers that we see for China. Topics like overall manufacturing, GDP growth, organization and infrastructure efforts of the government, increasing GDP per capita growth, government's effort to support science. One thing that we always talk about is incredible number of scientists graduating every year and joining the workforce.

Finally, this increasing effort to focus on quality as well as regulation as well as topics like food safety that are really important driving forces for our business. So the mid-term looks actually unchanged very favorable for us. For -- if I come to the short term topic here we expect that the sales trend will improve in the second half. We don't view the current market as robust. Infrastructure spend has been slower to develop than expected. We see less new plan development, and we also see some tightening of the overall liquidity in the customer base as we were referring before. So the bottom line is that we expect China to improve but we do not see strong growth on the short term horizon. However, we feel definitely positive about the medium term for the reasons I just outlined above.

Great. Thanks a lot.

Ross Muken, ISI.

This in Vijay in for Ross. Maybe, Olivier, I just wanted to get back to the guidance commentary and acceleration of revenues in the back half. When you look at this back half ramp what are some of the variables which would swing? What are you sort of looking at? What are the swing factors?

So we were just talking about auto entry being stronger than sales. With that our backlog building up. Then we clearly also have previously year comparison topics that will become more reasonable for us going forward in different markets. And then I -- we have also kinds of early indicators that continue to give us confidence that things will develop as we were expecting already earlier this year that we always felt that the second part will be stronger. We see supporting indicators in terms of leads generations, quote activities and general feedback that we get from our sales people. These are all factors that support our view that things will improve, and I would say the April numbers kind of just give us an additional data point on all this.

I guess I was more trying to get at if you look at some of the variables and number of moving parts, are there any maybe particular sub segment within the new geographies which you are concerned that you would be monitoring more closely I guess?

New ones, no actually not in particular. I am just thinking about -- not particular.

I think the one kind of reiterate something we said in response to a question from Derik. So far the year is playing out in terms of order entry very much as we would have expected. And at the time we made the comment that maybe the one thing that's a little bit different than three months ago is we are probably looking at this Chinese credit topic a little bit more closely than we did. But other than that I can't point to a product category or a geography that's requiring additional attention, than maybe what we would have told you guys three months ago.

I was mentioning earlier on the call that food retailing came in for example a little bit lower than expected, but I don't think that this will be the case for the full year. I think this was more of a Q1 phenomena than for the full year.

Thanks for the color. You know maybe, Bill, one coming your way. Balance sheet looks very healthy. Can you talk about some of the flexibility you have in terms of balance sheet, using your balance sheet capabilities, especially if this macro were to take a turn towards the down side?

Well, I think I want to reinforce what you said. I think we believe we have a very healthy balance sheet. We have a low net debt to EBITDA ratio. We are not in the position where we have a lot of cash trapped overseas. In fact we have no real cash trapped overseas. We generate good cash flow. We're going to have another year of good cash flow this year. We're -- are -- you can assume that we'll continue to repurchase shares equal to our free cash flow plus our estimated option proceeds. And that, within that balance sheet, we have room to on top of that do the type of bolt on acquisitions that we've done in the past, not that the pipeline right now has anything unusual in it, but there is certainly room to do the normal Mettler sized bolt ons.

Thank you.

(Operator Instructions)

Richard Eastman, Robert W Baird.

Bill, could you just talk to -- just give us -- what did sales actually do in China year over year in the first quarter? And did that -- what's the difference between the lab business and the industrial in terms of how it performed from a sales perspective?

Okay. So sales declined by 1%. The lab business did actually a little bit worse than the industrial business on the sales side. That compares to --as a reminder we grew 31% in lab in Q1 a year ago. I can tell you that our lab business had order entry growth in the 20% range in the first quarter. I think that's more of a timing topic.

Okay.

If I recall China last year was a plus 16% for the whole of China.

For the whole of China last year and lab was plus 30.

Exactly. So we had actually Q1 was the strongest quarter in the year for China and definitely was still a very good quarter last year.

Okay. And then the other questions, when we talked about the geographies, maybe we missed a little bit in China when it came to sales for the reasons you've mentioned, but when you think about the product area, would the slight miss from the earlier guidance in terms of local currency, is that -- would that all be food retail? Or which of the product categories maybe slightly misplanned from a sales perspective in the quarter?

Food retail was a significant part. I would say most of the other categories except within industrial the product inspection did actually well.

Product inspection a little bit more, lab probably on the orders about what we expect but a little bit worse on the sales side and then of course the China piece.

Okay. And then Bill you had mentioned that -- when you talked about the gross profit margin, you had mentioned that the mix was favorable. I am kind of looking at the lab declining more than industrial. What mix are we talking about that actually helped the gross margin? Is it service?

It's more a comment on geography and the mix of products we sold and in particular on the industrial side we didn't have a lot of big project business flowing through. I think if you go back to your notes a year ago, Rick, you will remember that we had a lot of Chinese projects kind of being flushed through the system at a low margin, and we were a little surprised on the down side Q1 a year ago.

Okay.

So I would say it's less a mix from this quarter verses last quarter and more this quarter verses the year ago quarter.

Okay. And how did the service business do in the quarter? Did that grow year over year?

Actually it was a good quarter. We had 6% growth. Very happy how that [resolved].

Okay. So that would have also helped your gross margin as well.

Actually good growth across all the regions which has worked to highlight including also in Asia Pacific emerging markets.

Okay. Thank you much. Nice work on the quarter.

Jason Rogers, Great Lakes Review.

Looking at the gross margin could you break out the basis point benefit from the pricing, the lower material cost and the mix for the quarter?

So the price increases benefited us by more than 100 basis points kind of in that 100 to 125 basis points range. Material costs in that 40 to 50 basis point range, and then what was left over is kind of mix and other.

What's the current expectation for the pricing benefit for the full year?

I would assume that the pricing for the full year will be kind of in a similar range to this. As a reminder, we did some mid-year price increases last year. So it will get a little bit tighter in the second half of the year. But I think there are some good programs going on in the pricing side that will hopefully lead to some lower discounting and a couple other topics. So I don't expect a meaningful change down but maybe a little bit down in the second half verses what you saw.

All right. Then finally if you could indicate the number of shares that you repurchased in the quarter as well as your CapEx forecast for the full year. Thank you.

Okay. So we repurchased 341,109 shares during the quarter. And in terms of our CapEx forecast for the full year, you can assume something around 90 million.

Thanks a lot.

Difei Yang, WallachBeth Capital.

I have a quick one. With regards to the order entry conversion from order entry to sales, would you educate me on how that process works, and what's the typical delay time from order entry to realizing sales?

So, Difei, maybe just kind of stepping back. Generally Mettler has a short cycle business, but you can imagine we have everything from pipettes that, when we get the order we ship them out the next day, to bigger ticket items that need to be engineered to order to customer specifications which could take let's say anywhere from two weeks to six weeks depending on the product. And Then finally we sometimes receive orders for big projects. Maybe I give an example in the retail store area where they might be expecting us to deliver to a series of different stores over a six month period. So each of the different business lines has different order conversion factors. But, generally speaking, Mettler, if you look back over time, there is usually not much of a disconnect between order entry and sales growth in a period of time, because we just -- generally most of the sales are actually relatively short cycle items, and we frankly don't get many really big orders that can make that look odd. What we experienced this quarter was for a variety of factors, and I could go through -- just one more time go through and count them by region.

We -- in China we had a couple of impacts. One is coming out of the February Chinese New Year. The orders just came in a little bit later in the quarter, and so there was some delay in pushing to April. But probably even a bigger impact is that China includes more projects, more long engineered to order products, and then we said some of these credit hold topics that we've talked to at several points during the call. In the Americas we started up on our new Blue Ocean system, our US hub. And so there was some delays in terms of order shipment at the end of the quarter. But, as I mentioned, we caught that back up now in the month of April. And then, finally in Europe, we had a little bit of a timing topic with the way Easter fell being right there at the end of the month of March. And Easter tends to have a bigger impact on working days in Europe than you would typically see in the US. So this reference to order conversion is almost a way to explain how we would have some difference between our order rate -- our order growth and our sales growth.

Thanks. That's very helpful. So, just a quick follow up. Are these orders firm orders, and so in other words, can a customer change their mind and cancel the order before the products are shipped?

The short answer is that like with most customers we of course would offer them that opportunity as long as we don't work on it. In the case of anything that is engineered to order, we are typically getting deposits in advance, so it would be normal that a customer would have paid us some money to do a custom product. Do customers cancel? It happens, but to be honest it's a very small percentage. I would struggle to -- every year we lose a few orders for different factors after they've been accepted, but it's a really small number and just to give you a feeling, I'd be surprised if the number was 1% in the course of the year.

Thank you. That's very helpful. Thanks.

Steve Willoughby, Cleveland Research.

I was just wondering if you could maybe explain a little bit more what you're -- what's going on as it relates to the China credit issue? I don't really understand what you are seeing in terms of -- is it just you're concerned about customers paying you, or I guess if you could maybe elaborate a bit more on that?

We just see slower payments coming from customers, and so I have not experienced as much where we're putting -- we're not shipping orders waiting for -- depends again if it's an engineered order product, we might be waiting for deposits. Or, in the case of dealers and distributors, we can in many cases be just saying, hey, we'll ship it to you as soon as you pay your unpaid balances. And we just saw a little bit more of that. I am not reading too much into it. I just think it as much reflects we think in a place like China with such a fragmented customer base and many start up companies, as you know, in that part of the world that it's good if we're disciplined on the credit side, and we felt it necessary to be so. As you guys know it's not -- on the industrial side of the business I think China is going through some you know slow down in their growth rates and probably there is parts in the customer base that is feeling that.

Okay. And then if I heard you correctly, you said your order growth was up 20%. I think that was in China in April. Was that right?

No. The comment was in the context of our lab business. I think it was Rick was asking about lab sales growth in the quarter, and I just -- lab was down slightly. It was actually the order entry growth though when lab was much better. It was a number in the 15% to 20% range. I think it was 20%. That was the only thing I was commenting on. So that was first-quarter lab order entry growth.

Got you. Thanks so much

Sorry, China, not the whole lab division, yes.

I understand. Thank you.

China.

Thank you.

Tycho Peterson, JP Morgan.

I guess a question on the cost saving actions that you have talked about previously. Can you just talk about how we should think about those flowing through for the next couple of quarters?

Kind of pulling out my schedule here, Tycho. We should be -- we should have incremental savings over last year for the programs we started implementing in the second half of around $15 million. The -- as you might remember, those should be largely offset over the course of the full year by the fact that we're also going to have higher incentive comp just to get back to budgeted levels of incentive comp. And I think that's not a new thing. That's something we have talked about in the past.

Okay. And then on the margin side, as we think about your gross margin strategy, can you talk about with about a 30 year business manufactured in China how you are thinking about the cost dynamic there? Do you have to look opportunistically at second tier cities or even countries outside of China for labor reasons?

This is something we continuously monitor. However, the way we look at it is while we see wage increases, we have every year very significant productivity gains also. We have lean manufacturing initiatives. We have the teams that are looking at automations, and of course our own quality managers are helping here us to increase the competitiveness of our own Chinese manufacturing facilities. So we clearly offset the wage inflation and we are not concerned that this is going to negatively impact our margins I would say in contrary I'm very pleased about the progress that I have seen. We are moving to the west also in terms of manufacturing in China. But I would say this is mainly to serve the west of China in a better way.

So when we talk, for example, about weaker scales, transport is an issue and distance, and we are in the progress of building our manufacturing capacity in the Changzhou area exactly for that reason. But it's -- we don't have currently specific plans that we would also produce in Changzhou for global exports just to benefit from labor costs or arbitrage. And with that context there is also no plans to go into new countries like Vietnam or other low cost countries for manufacturing. Having a good supply chain base, in particular related to suppliers and having a good outbound logistics is very important to us. In essence China is a very good manufacturing base for us. We have also very good team, and we have both R&D capability that we can leverage. So all in all I think we have a good position also in the long term even if wage increases would go on in China.

Okay, and then last one, food retail was down off a fairly easy comp. Can you just talk a little bit about your visibility for that business going forward, and are there things that maybe strategically you need to do to try to improve the trajectory?

For a couple of years now we have always said that our priority for the food retail business is to maintain profitability and not to focus on growth. We participate in a more selective way in the market. We are kind of more -- we are disciplined when it comes to large tenders, large projects, but also when we look at geographic penetrations we are selective there. So the way I am monitoring this business is less on the top line and more at the bottom line. Of course when we have a sales drop like we experienced the in Q1 it has an impact also on the bottom line. But we have been working on costs measures now for many quarters in the food retail business. We have taken multiple measures and these are good measures and I feel that this is supporting our strategy here that we have with food retail.

As also stated earlier in the call, while Q1 was below expectations on food retailing, I feel like for the full year it should remain as expected more or less as much as we have visibility at this point. And you hinted about the fundamental strategic thinking behind food retail. Here I would say food retail, while it has a below group average profitability, when I look at it from a marginal contribution, it is actually still attractive and remains attractive, because we have a significant cost sharing when it comes to the different producing units. Because at the producing units we produce not just food retail products but also other products. We have synergies in purchasing. We have synergies in engineering, and of course we have also synergies in the front end when it comes to service and the overall support infrastructure that you need in a country. So all in all, even as food retail is a more challenging business compared to the other business lines that we have, we are committed to it because it has a good marginal contribution.

Thank you. That's helpful.

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

Thank you, Jay, and thanks, everyone, for joining us this evening. Just as a quick reminder, we will have an investor meeting at our Baltimore Automated Chemistry business on Friday, July 26. In the coming weeks we'll provide more information, but I just wanted to give you another reminder. Of course if you guys have any questions please don't hesitate to give us a call. Have a good evening, everyone. Bye.

Thank you.

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