Mettler-Toledo International Inc (MTD) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to our second quarter 2013 Mettler-Toledo International Earnings Conference Call. My name is Victoria and I will be your audio coordinator for today. I would now like to turn our presentation over to your hostess for today's call, Miss Mary Finnegan. Please proceed ma'am.

Thanks Victoria and good evening to everyone. I am Mary Finnegan. I'm the Treasurer and responsible for Investor Relations at Mettler-Toledo and I'm happy to welcome you to the call tonight. I am joined here with Olivier Filliol our CEO, and Bill Donnelly, our Chief Financial Officer. I want to cover just a couple of administrative matters before we get started.

This call is being web cast and is available for replay on our website at www.mt.com. A copy of the press release and the presentation that we will refer to is also available on our website. Let me summarize the Safe Harbor language which is outlined on page one of the presentation. Statements in this presentation which are not historical facts constitute forward-looking statements within the meaning of the US Securities Act of 1933 and the US Securities Exchange Act of 1934. These statements involve risks, 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.

For a discussion of these risks and uncertainties please see the discussion in our recent Form 8-K. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions Factors Affecting Our Future Operating Results in the business and management discussion analysis of financial conditions sections of our Form 10-K.

Just one other item. On today's call we may use non-GAAP financial measures. More detailed information with respect to the use of and differences between the non-GAAP financial measures and the most directly comparable GAAP measures is provided in our 8-K. I will now turn the call over to Olivier

Thank you, Mary and welcome to everyone on 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 the current business conditions as well as provide an update on our service business.

As always we will have time for Q&A at the end. The highlights for the quarter are on page two of the presentation. Local currency sales increased 1% in the quarter in line with the range we outlined on our last call. Both Europe and Americas did better than we expected while market conditions in Asia, particularly China, were more challenging than expected.

In particular we saw the situation in China deteriorate in June. We had another quarter of strong gross margin improvement which combined with the benefit of our costs control initiatives, drove a solid increase in operating profit. I am pleased with the 9% increase in earnings-per-share. Despite (inaudible) conditions which are less than ideal we believe we will generate solid earnings-per-share growth in the second half the year. We will have more to say on our outlook for 2013 in a few moment but now let me turn it to Bill to cover the financial results.

Okay. Thanks, Olivier and hello everybody. Let me start with additional details on sales which were $578.7 million in the quarter an increase of 1% in local currency. On a US Dollar basis sales also increased 1% as we had no currency impact to sales this quarter.

Turning to page three of the presentation, we outlined sales by geography. In the quarter local currency sales increased 5% in the Americas, increased 2% in Europe, while Asia/rest of world decreased by 5%. On slide number four we outlined the results for the first half of by geography. Sales increased by 3% in the Americas in the first six months and declined by 1% in Europe and declined by 3% in Asia/rest of world. All these amounts are local currency and organic.

On slide number five we show sales by product line for the quarter. Laboratory products increased by 3% in local currency while industrial declined 2% and food retailing increased by 5%. In the six month period which is shown in the next slide laboratory products increased by 1% while industrial declined 1% and food retailing declined 2%.

Turning to slide number seven of the presentation we show the P&L. Let me walk you through the key items. We are pleased with our gross margins which were 53.4% in the quarter, a 100 basis point improvement over the prior year.

We benefited from pricing, lower material costs, and an overall favorable mix. R&D amounted to $29 million, a 4% increase in local currency versus the prior year.

SG&A amounted to $173.4 million, a 2% increase in local currency as compared to the prior-year quarter. We benefited from our cost-control measures which were partially offset by higher sales and marketing investments as well as variable compensation.

Adjusted operating income amounted to $106.4 million, which represents a 5% increase over the prior year amount of $101.1 million. Operating margins were 18.4% anincrease of 70 basis points over the prior year.

We are very pleased with our operating income growth as well as the margin improvement in the quarter. A couple of final items on the P&L. Amortization amounted to $5.8 million in the quarter while interest expense was $5.5 million.

Our effective tax rate is 24% while fully diluted shares for the quarter were $30.8 million. Adjusted EPS was $2.35 per share, a 9% increase over the prior year amount of $2.15 dollars per share.

On a reported basis earnings per share were $2.24 as compared to $1.93 in the prior year. Reported EPS includes pre-tax restructuring charges of $3.2 million or $0.8 per share. This is primarily employee-related charges for cost measures announced in the second quarter of last year.

Reported EPS also includes $0.03 of purchased intangible amortization.

The next slide highlights our results for the first half. Let me touch briefly on the key items. Local currency sales were flat in the first half as compared to the year earlier period, gross margins have increased by 120 basis points while operating profit increased by 5%.

Adjusted earnings per share increased by 10% for the same period. Given the challenging economic environment we faced so far this year we're pleased with earning growth in the first half. Now turning to cash flow. Free cash flow for the quarter amounted to $78.2 million, a 13% increase over the prior year amount of $69.3 million.

On a per share basis this represents an increase of 17%. For the first six months our cash flow per share is up 24% over the prior-year period. We remain on track for our full year cash flow target in the $270 million range.

In terms of working capital I'm pleased with the continued improvement in ITO which reached 5.2 times this quarter as compared to 4.5 times one year ago.

We continue to gain additional transparency in our supply chain with the new promotion system which is helping to increase inventory turns. Finally our DSO was 45 days. This is four days slower than last year. Similar to what we saw in the first quarter this increase is related to China and is impacted by their reduced level of project activity where we benefit from advanced payments and by the overall liquidity situation there.

Let me spend a few minutes on a situation in China and what we think it means to our business. We continue to see liquidity issues in our Chinese customer base which is impacting demand. We do not see short-term improvement to the situation and we expect it to continue to impact growth in China. Our sales decline in China in the second quarter was more than expected with June orders being particularly weak.

The quarter got off to a solid start as reflected in April results. May was okay, but June was weaker than anticipated. The tightening credit situation which we spoke of with the spike in CHIBOR rates in June as a symptom was more of a factor than we anticipated. The government's attempts to rein in lacks credit practices is clearly impacting their economy more than we had anticipated the last time we spoke.

We continue to be bullish about China in the medium to longer-term and believe that as their economy moves more towards a consumer driven economy our lab and product inspection businesses will grow faster and our core industrial business will be reduced as a percentage of our total sales. One final comment. We have long believed that the growth in China will not be a smooth line. Rather we will face these ups and downs more so than in developed world we're seeing some of that right now.

Let me cover guidance. Although sales in the first half of the year were modestly below our expectations, we expect to see improvements as the year progresses. However, we see dynamics differently by region. Our businesses in the Americas are solid, while Europe is stable but below historical levels.

I've already mentioned China but clearly economic framework is more uncertain in emerging markets than in the developed world. At this stage we expect China to be down mid-to-high single-digits in the third quarter and to be flattish in the fourth quarter.

Now for specifics. For the full year we believe our sales and local currency will be between 1% and 2%. That is narrowing our range slightly from 1% to 3% which we had previously communicated. This reduces the midpoint of sales growth by 50 basis points and reflects the slower start to the year as well as our current outlook for the second half.

Although we are narrowing the top line we are slightly increasing our adjusted EPS guidance to the range of $10.45 per share to $10.60 per share or a growth rate of 8% to 10%. This compares to our previous guidance of $10.40 to $10.60 per share.

For the third quarter we would expect local currency sales growth to be in the range of 1% to 3% with our guidance of 1% to 2% sales growth for the full year. This implies about 3% sales growth as an estimate for the fourth quarter at this stage. With our sales growth assumptions for Q3 we expect earnings-per-share on an adjusted basis of between $2.55 per share and $2.60 per share for a growth of 6% to 8%.

A couple of additional points to cover with guidance. First currency. We would expect currency to have no impact on sales growth in the third quarter and reduce sales by about 1% in the fourth quarter. For the full year currency will be neutral to sales growth.

Now looking at the impact of currency on earnings for the remainder of the year we continue to face a little bit of a headwind in 2013. In terms of the Swiss franc versus the Euro we are relatively neutral given the hedges we have in place. However we're getting hurt with the Japanese Yen and some of our other smaller currency exposure. In total we expect currencies will reduce EPS growth by 3% in the third quarter and 2% in the fourth quarter.

A couple of additional points. We have continued to assume an effective tax rate of 24% for this year and we continue to assume that all our free cash flow will be used for the share repurchase plan. One additional item related to cash flow. Today the Board increased our authorization under the share repurchase program by $750 million. We have used up our previous -- would have used up our previous availability over the next 12 months and this increase will allow us to continue for the next several years.

We do not anticipate a change in our repurchase strategy. That is, we will continue to target repurchases equal to our free cash flow plus option proceeds. For 2013 this amounts to approximately $290 million. That covers my comments on guidance and I want to now turn it back to Olivier.

Thanks Bill. Let me start with several comments on business conditions. Lab increased3% in the quarter with good growth in the Americas and Europe and a slight decline in Asia/ rest of the world. In terms of product areas Analytical Instruments have very good growth but AutoChem and Balances had good growth.

Turning now to Industrial which was down 2% in the quarter, with product inspection basically flat and core industrial down 2%. The declines were driven by Asia, particularly China. We had good growth in core industrial in the Americas. Retail was up 5% in the quarter driven by project activity in the Americas and growth in Asia.

Now let me make some additional comments by geography. Europe was up 2% in the quarter better than we expected and Lab had strong growth and Industrial was up slightly. The UK, Benelux region, and eastern Europe were particularly strong. Americas was up 5% in the quarter,better than we expected as the economic environment has proven strong.

Finally, Asia/rest of the world was down 5% in the quarter and Bill already commented on China and I'm sure we will discuss more during our Q&A. That covers my comments on the current market conditions.

I want to now spend a few minutes updating you on our service business which represents approximately 23% of total sales with operating margins above the Company average. We have a wide range of services that provide clear value to our customers in terms of avoiding downtime, optimizing performance of their instruments and ensuring compliance with customer standard operating procedures as well as helping our customers increase their knowledge of applications and related processes. We have made important investments in our service organization over the last few years which we believe will drive further growth.

Two key focus areas are globalizing our service offering and increasing the percentage of our installed base that we service thereby increasing the amount of service revenue under contract. Let me provide some details of the initiatives that are driving these strategies. In conjunction with our Blue Ocean program we have invested in the clean sync, enhancing and standardizing of data about our installed base. With millions of installed instruments this is a significant project and we are still working through it in many of our units.

However, with better data on our installed base, our I-base as we refer to it internally, we can design more targeted and effective service marketing campaigns, tailored to the product life cycle of the instrument. Furthermore, with this data we can also target sales complaints for instruments that are nearing the end of their useful life. In 2013 alone we have plans for more than 500 [campaigns] to our installed base. At the same time that we are gathering more clarity on our installed base we are also working to harmonize and standardize our service offering around the world. With our decentralized organization, our service offerings have been local in nature.

While that has been effective we recognize that we will have greater leverage with a globally harmonized service offering and related operational model. What this means is that we have a common scope of work and detailed description of service delivered regardless of where in the world the service is performed. The harmonization process allows us to productize our services. This leads to the ability to market our services more effectively and more easily sell it at the point of sales. Our Blue Ocean program is a key enabler of this globalization of our service offering and the benefit of multi fold.

First a standardized global service offering is an important competitive advantage as our competitors are all local small service organizations. Second, we can standardize and globalize marketing campaigns and leverage internal global marketing resources to target additional service revenue. Third, we can enhance productivity as a standardized service offering which will allow us to create standard work flows. Finally, this approach will allow us to shift our pricing strategies to value base pricing rather than hourly base pricing.

We are still in the early stages of this transformation as we just went live with our pilot service organization Blue Ocean earlier this year. We think the potential in terms of service revenue growth and service margin is meaningful. We have complemented this investment in data and IT infrastructure with new equipment and automation tools for our technicians including hand held devices, automated signature capture pads and device service management dashboards. New uniforms and signatures on our vehicles have also reinforced the professionalism and strength of our service business.

Our service business provides a significant competitive advantage as it keeps us in close contact with customers and provides invaluable insight into our customers' instrument needs. I'm confident that the investments we are making will lead to solid growth in our service sales and profitability over the medium term. That concludes our prepared remarks. While market conditions are uncertain we expect to see improvements as the year progresses.

Although dynamics will be different by region. We recognize the uncertainty in our markets particularly in China and we will monitor it closely. We believe our costs structure is in good shape and believe that despite the more challenging market environment we are strongly positioned to capture growth opportunities and market share. I want now to ask the operator to open the line for questions.

Certainly. (Operator Instructions). Your first question comes from Ross Muken with ISI.

Hey, guys. Thanks. This is BJ in for Ross and Olivier I just want to dig in on the China. Can you maybe parse out of what -- what is behind your assumptions and mid-to-high singles decline in third quarter and I know that last quarter you mentioned and order of revenue mismatch that was driven by tightening credit conditions. Is this a continuation of the same or did the CHIBOR spike in last Q, was that an additional concern that China worsened? What are you seeing in China?

Let me maybe have Bill cover it because he was actually in a very close contact with the Chinese team for the last few days on these topics and he can give you certainly more details.

Sure. So first of all I think of CHIBOR what happened to it more as a symptom, right? We -- we do see tightening of credit, so for example I -- we see it in the customer base that we have more guys on credit hold, we actually have I mentioned on the last call and can see pretty significant reduction now in inventory in some of our lab dealer channels for example who would carry make-to-stock type of products. We see reduced big project activity and our feeling is that we still have a little bit of time yet for the overall situation to get to a little bit easier comp. And that growth rates return to maybe not where they were two, three years ago but still to a nicer growth rate more in line with their GDP or a little bit better.

The areas that we see that we're let's say most -- see the biggest weaknesses in the medium term are -- or the next couple quarters I should say relate to the industrial business. I think with regard to the lab business and the product inspection we feel a little bit better about that. I think particularly if you adjust for maybe the -- the reduced inventory in the channel and some of the credit holds that are in place.

Yes. I think that you guys have read a lot about it in the paper and -- and heard news reports about these credit topics, liquidity topics in China. I think we're seeing some of that manifest in our business. There's still a lot of good things going on even in the short-term and I guess nothing has changed in our minds about China for the medium to long-term. We continue to be very excited about our growth prospects there. Maybe I can let Olivier comment a little more there.

Yes. We definitely as Bill said we recognize that the short-term outlook we also feel a bit worse than on the last call, but when it comes to the mid term long-term the factors that I mentioned on last call are still very valid. I feel really in that sense comfortable that the key drivers like the overall manufacturing GDP growth will -- will remain healthy and will be driving our growth.

The increasing GDP per capita is for example one that is very relevant for us because that will mean more packaged food consumption helping our food inspection but also the pharmaceutical industry will benefit from that indirectly. We benefit with our instruments. There's a government experts that are really going onto moving into more value-added industries that will drive also a number of scientists in the workforce. Again, the fact of that it helps us very much. And I continue to see that there is good investments in automation and quality topics and we will certainly continue to benefit from that one.

So all-in-all these [mark up] factors are very favorable. They will be particularly favorable for the laboratory business and the product inspection business. We would recognize that these businesses have the better growth prospects than the industrial business and we have been talking for quite a while that we would foresee that our Chinese business which is currently skewed to industrial will rebalance more to a global average that we experience.

Great. Thanks for all that color and maybe Olivier just one what you mentioned in your prepared comments on service offering. Can you -- now, how should we think about sizing -- sizing that service option in the longer term, I guess, given some of the initiatives that you have rolled out? Any color would be helpful.

Yes. So currently about the 23% of our global sales we would clearly see that this ratio is higher in the west than in emerging markets and, however, I see good, good progress in emerging markets on the topic and I would foresee that they have actually good growth momentum for many more years on that topic. So we going to benefit from that effect. Then we going to benefit from all this initiative that I just mentioned.

Over -- over economic cycle I definitely expect service to grow more than product and with that I do expect that this share will go up, but we are talking about every year a few points. I'm not suggesting here that this is a radical shift. It's a journey and there is long way to go here, but every year a little bit will -- will help us to shift the mix. I like it so much because of course as a service business it is more resilience, more repetitive, and service has above group average profitability. So it's a good trend for us.

Thanks. I will step back in the queue.

Your next question is from Jon Groberg with Macquarie.

Thank you. Just maybe put a little more teeth around it if you wouldn't mind. What did China grow or decline by in the quarter and maybe can you talk about by division put some numbers around it? I think last quarter, too, you mentioned it was mainly small customers. I'm just curious if it's still small or if it's widening and that's of one of the reasons why it got worse in June.

Okay. So in terms of by division we had a decline in the laboratory business of let's call it 7% or so and about 15% or so in the industrial business and the retail business was actually up. If I look and you drill down a little bit on the lab numbers, it was AutoChem for example which is not a -- a big piece of that business, but it was down 90% in part because there were some big orders in the quarter a year before. And then our balance business was down in China and that's a largely reflection of us reducing inventory in the channel.

In terms of your comments regarding maybe it getting a little bit more broad-based I think that that is the case. It is the case, too, that maybe there were more orders we declined if you know what I mean, in the second quarter where we just felt this -- the margin and the prospects for payment on this one maybe were not -- not as good as they should be for us to accept the work. In that case most of those relate to some infrastructure related of projects maybe out in some of the second and third tier cities. Those are more government related and that would be and example of a relatively bigger entity, but -- yes, I would maybe also say that there's always some impact if -- on the general customer base because we're all seeing their small customers spending less and that has some impact on them, too.

That's helpful. So all in maybe down 10% and I'm curious I think before in the first half you thought your orders would be a little bit better than your revenues and in this quarter did that happen or -- or not?

Orders were a little bit better, John, but I think it's fair to say -- and I think we -- we would have -- we were entered in the quarter or came out of April thinking Hey, we ought to be able to put up a mid-single digit positive number and actually while orders were better than sales they were actually down around 5% or so in China and that was mostly incurred in the month of June. We were actually I think positive April, May combined.

Okay. And then one quick one. Just switching to Europe, which has been tougher. Do you get the sense that's just a bottoming out given some of the -- macro trends there do you get a sense that things might actually start to improve a little bit but it's been a lot of pent-up maybe demand for some products that might get released?

Yes. I would characterize Europe as bouncing along the bottom. Market conditions remain still uncertain, but they are definitely not getting worse from what we are seeing in countries and I would say when talking to the team they really express good -- good out looks and optimism.

You might recall that I shared that also on the last time we talked on the call that the team were feeling things were better than what we could read in the newspaper and it translated actually the numbers have I feel still that -- that's the case. Now, one explanation for that is certainly that comparisons and we now start to benefit from easier comparison so that's a little bit of reason why I say we bounce along the bottom certainly too early to see here good momentum in the economies and it -- it depends also by the different geographies. There were a few countries that I highlighted also in prepared remarks that have good -- good momentum and so I feel that's probably a fair characterization of how we see Europe at this stage.

Okay. Thanks a lot. I'll hop back.

Your next question is from Issac Ro with Goldman Sachs.

Hi, guys. Thanks for taking the question. I think we covered most of China pretty well and Europe as well. I want to maybe switch back to the United States. And if you could offer any comments on how you feel about capital spending. Going into the back half of the year we're still easing into this process I know it's a limited piece but just a general capital spending environment in the back half would be helpful. Thank you.

Okay. I think our view is that first of all we had a solid quarter in the Americas. Order growth and sales growth were both pretty good and our retail did well but actually our core product categories all had good periods. So it was a good profit period as well. And they built a little bit of back log and so we were feeling pretty good about -- about that.

In terms of the back half of the year I think you're going to see let's call it mid single digit maybe the lower end of mid-single digit but for that in the Americas and I -- I think we'll -- we'll see all product categories probably doing pretty good. I think the only product area that I can think of right now that maybe some of our core industrial products weren't particularly strong but actually the vehicle piece was -- was good and then maybe the -- the reigning business which has exposure to academia wasn't particularly strong but not -- not terrible either.

If I could just ask one follow-up on China it occurred to me to ask. Are there any particular parts of the end market dynamic whether it be industrial or academic or otherwise that were particularly volatile meaning did they decelerate into the end of the quarter? I think Olivier said in the prepared comments, said there was, I think, deceleration into June. I was just wondering if there was any onearea that really stood out. Thank you.

Just in China I would say the -- the liquidity topic that Bill mentioned certainly impacts in a different way end user industries. Everything that is infrastructure related is very much impacted by that and then we have a smaller private companies that are also impacted by it. But at the same time I want to also stress that there are market segments in China that remained actually very attractive and where we see also good activities. I would for example mention everything that is testing labs and (inaudible) markets and so on. We have not huge exposure to them, but they are healthy markets and -- and for example some food -- food processing market, food safety topics and so on remain good and what we are really working on is to make sure that we are shifting resources in our attention to these growth opportunities and -- and not getting hung up on the segments that will probably suffer also for quite a while. The liquidity thing is a short-term thing, but we will also have an impact from the overall economy that has slowed down.

Got it. Alright. Thanks very much.

Your flex question is from Dan Arias with UBS.

Hi. Good afternoon guys. Olivier or Bill I'm not sure if you guys touched on this during your first response, but what is the time frame that you think of in terms of the business mix in China moving more in line with the corporate average?

Well, we are talking about years. This is not a short thing. It takes years and I would say the way it's going to happen is by having the lab business and product inspection business having better growth in China than industrial so it's not that I expect here that we have continuous declines on industrial or retail. It's much more that the lab business and product inspection will have strong growth. So but to rebound we talk here about multiple years.

Got it. Okay. And then maybe on Blue Ocean I think better price realization is a part of the plan there so do you have a feel for how much incremental prices come out of just having a better model versus maybe what you were able to do because of pricing power in the market?

The way we should look at Blue Ocean, Blue Ocean is an enabler for us to continue all this programs that we have in place for -- for operational excellence and in particular around [spin] (inaudible) and pricing when we talk about the front then. So I'm not looking to Blue Ocean and say okay, we have this county going live with Blue Ocean and thanks to that we will have an extra 2% price increase the following year. I want to see that Blue Ocean is a complete-- and enabler for us to get more base of transparency get better pricing execution and all these topics and will help us to maintain this ongoing price increases that we have every year and getting even more sophisticated, but it's a continuous journey and a continuous program.

Okay. a part of the overall price realization process, not necessarily something explicit.

Yes. Yes. In the sense -- again,.

An enabler.

Got it. Okay. Maybe just one more. You had said last quarter that order cancellations were not expected to be anything of a real concern. I just wanted to see whether that was still the case was still in the case in 2Q and is still the case for the coming quarters.

We didn't have any order cancellations. I think I mentioned there were -- when we were talking about the Chinese team they did tell us they walked away from four what they felt were too low a margin vis-a-vis the risk from a credit perspective with some customers but it was never orders they expected but more orders they ultimately declined to accept. And -- but in terms of actually us having, , received orders and then customers contacting us to cancel them I'm not aware of, I mean I'm sure there are a few out there but nothing material such that I would have noticed a backlog adjustment or something.

I think what's happening regularly is that we welcome promising projects and teams can work along with they have it in their sales pipeline and then it doesn't materialize or we decide not to pursue it, but that wouldn't be in our -- wouldn't be booked as orders in our systems.

Okay. Thanks very much.

Your next question is from Brandon Couillard with Jefferies.

Hey. Thanks. Olivier coming back to Europe we seen some nice sequential improvements in the PMI figures there. Just curious how demand paced through the second quarter and if you could give us a sense of how orders shaped up versus revenue, that would be helpful.

Okay. So we -- in total overall we had good momentum and this related also to order entry and I would expect that we are going to benefit for the rest of the year. So rest of the year will be strong or better than year-to-date numbers.

And orders were good in the quarter. A little better than sales.

Thanks. And then, Bill, could you walk us through the major puts and takes in the gross margin line? I'm little bit surprised in the overall profitability strength given the uptick in food retail, but anything you could share with us in terms of that, FX material costs, pricing, and mix would be helpful.

Sure. So we had -- and now these are quarterly numbers so overall we had 100 basis points improvement in gross margin, we had 2.3% price increase in the quarter net realized and so you can -- the impact on gross profit margin from that was 110 basis points. Then we had about 60 basis points benefit from material cost-reductions which were material costs were down 2.4% in the quarter and then let's call it mix and other, but a lot of the other is the low volume and what happened with overheads was minus 70 BPS and that's how you got to the hundred basis points.

Great. Thank you.

Your next question is from Tycho Peterson with JPMorgan.

Hey, guys. I actually just wanted to follow-up on Brandon's first question there about trends sequentially in the quarterly. Can you help us quantify the drop-off in June and any color you're willing to give on how things trended in July?

Sure. In terms of let's say -- I mean there are different pieces, but in terms of June in China our orders were down -- it was the worst month in the quarter. I think it -- they were down in the order of 10% or so. If you look at a multi-year basis it's probably -- that sounds a little bit worse because that was the toughest comp as well. In the -- in the three months of last year's quarter.

If I go to Europe, we had a positive trend coming out of June. Orders were a good bit above the prior year and above the sales level. To give you a feeling our backlog is up a good bit. Actually I think it's the first time we have had a year-on-year backlog increase since the beginning of 2012. If I pull out China, which is usually accounts for a lot of our backlog as a company is actually quite a big increase which I think maybe to your point, Tycho, we see pretty good trends coming out in the western world, maybe a little bit offset with what we're seeing in China.

Okay. And then from a costs perspective it like you're going to hold the line with initiatives you've talked about at this point, right? Assuming things don't deteriorate further.

Yes. Absolutely. We feel that we have the right balance of -- of things going on. Of course, we continuously optimize our costs structure. That's -- and at the same time we invest, but if I look big picture, I feel actually confident that we have the right costs structure going forward. There are things that we feel are adapting for example also in China we do selective moves here because we definitely recognize that we need to do some [original] shift and we need also to maintain our productivity gains that we always pursue, but all-in-all no major new initiatives that are being launched here.

And then I guess as we step back and think about the bigger picture given the commentary on China and the macro situation if we think about the immediate to longer-term, for the next call it the the next 12 to 18 month, should we be thinking about low to mid single digit organic growth and high 20% incremental margins? Is that the right way to think about it if we're starting to think a little bit longer-term?

Hey Tycho I apologize. You broke up a little bit. I got the incremental margin number, but I didn't get the --

I'm just trying to think about as we think about the revenue growth should we be thinking about low to mid-single digit growth? I know it's early to be talking about 2014 but that's essentially the heart of my question how should we be thinking about things in the next quarter or two?

I think that that's reasonable. I -- , of course we're going to have some easier comps next year. We'll probably feeling -- we're certainly not going to have negative numbers coming out of China for the full year next year so I think we would probably say we -- sitting here today the lower part of mid-single digit to mid-single digits would probably seem realistic. We'll give you precise guidance when we -- in three months or so. And with regard to the incremental margins I think you're -- I think if I heard you right, you were saying high 20%s, maybe low 30%s and I think that's probably realistic.

Okay. Thank you.

Your next question is from Derik De Bruin with Bank of America.

Hi. Good afternoon. Well, Tycho and Brandon got most of my questions so I guess on the -- on the lab products business the -- is there anything -- I mean in terms of new product introductions or anything that's coming out I guess because could you can talk about what the R&D is yielding. The R&D you're still keeping it at 5% range. What's -- what's new in the pipeline, what can you expect over the next couple of years?

So that's -- I would almost say I come up here with the standard answer. We -- we definitely continue with our R&D commitments and investments. We are -- we have not been cutting back on that one even in the more difficult economic times and the pipeline is a continuous one. We -- every quarter we are launching a few new products and this is definitely also true here for the coming months and there's some good things coming out in the titration area. We have things that we are leveraging in the pH area.

Actually I could name it. I just realized of course bounce we have also something in the pipeline for the next three months. The usual things, nothing that I would particularly highlight and would say oh, this is going to make here a big impact, but it's very important to our story here that we come out regularly with product -- new product innovations to drive the product replacement cycle in the market. To expand our competitive advantage that we have in all the different lab segments. So yes. We feel comfortable and good stuff coming, believe me.

I guess if you think about the -- the -- the customers -- the situation in China right now I mean by are the customers going to -- where they can going to some of the local suppliers? The question being is this a chance that it's not just like business getting put on holds but there is potential for some lost business? I mean maybe you're not willing to extend terms or do this, but maybe some of the local suppliers are?

I don't -- I would see that when we walk away from deals. If we walk away from projects because of terms and conditions and the likelihood that it might go to another company is -- is high. That's a calculated risk that we are willing to take because we feel that the -- the right way and the sustainable way to do the business. But when -- absent of that one I do not feel that customers are looking for lower costs supplier. That's not what I observe at all.

I might even say that our expectation -- you probably heard us talk in the past, Derik, that from a competitive landscape point of view China is by far the most fragmented of the markets we compete in and that can't last forever and maybe we're going to have a little bit of natural consolidation because our competitors are -- many of our Chinese competitors are actually the ones who are most hard hit by what's happening right now so they're having their own access to capital issues as well as maybe some of their customer base on average is let's call it they're not getting paid in five days from Nestle and 12 days from Pepsi. So they have bigger things probably to deal with in that regard.

And on top of that they have been operating with big margins for quite a while so they are entering this economic situation with -- with much more difficult context.

Great. Thanks very much.

Your next question is from Sung Ji Nam with Cantor.

Hi. Thanks for the questions. So I was wondering about some of the other important emerging markets for you guys like Brazil, India and Russia and how things are looking in those areas.

Okay. Actually Russia had good growth but, again, easier comparisons. We had India -- actually I'm really happy how India performs. The growth in the quarter if I recall well was more modest but we had growth and I think it's a good accomplishment compared to what's happening in the market and I really feel well with that market and then we have some other markets like Eastern Europe that performed really well and continues to be happy especially considering that they have European context that could be challenging but actually the team performs very well.

And actually the -- as you saw, we had worse results in China in the second quarter but actually the rest of emerging markets did better than they did in the -- in the first quarter.

Yes.

Okay. Great. And then I guess one more question about China. Just was wondering you guys talked about shifting resources there maybe potentially near-term. Do you think that's sufficient as you look towards your longer term goals of rebalancing your customer mix do you think you have the right resources there in order to achieve that or is this -- is that going to require further investment in the near-term?

We -- in general would say that capacity that we have the facilities that we have are absolutely sufficient also for the long-term. There's one exception that I would mention here is that we are building a new plant in the western part of China, but that's actually to serve that region. We want to be closer to the customers there and this is mainly for the heavy industrial equipment for example retail scales where you need a certain proximity to have a good penetration in the market. So I would say definite investment in the market development. We think the opportunity also since we build a new manufacturing plant for to recoup business there we also are leveraging that new site for our market organization, but otherwise I wouldn't foresee big investments here to expand capacity even for a couple of years here.

Great. Thank you so much.

Your next question is from Richard Eastman with Robert Baird.

Yes. Good afternoon.

Hi Rick.

Olivier could you just speak to -- I know when you covered Europe we of blasted through there. I know we had the 2% local currency growth. Did industrial grow? You had mentioned lab was up strong, but did the industrial business grow as well?

Just a second. So the industrial business was up -- up modestly 1% roughly.

Okay. And did that all come out of product inspection?

Yes. Product inspection. Yes. It was actually slightly down in core industrial, up a little bit in product inspection.

Okay. And then can I ask, , when you give -- you shaved in your core growth guidance for the year for 2013 this 1% to 2% so we're not obviously talking about a great deal of growth, but I'm curious as you look out to that 1% to 2% for the full year, does the distribution look something like --, is lab plus 3% to 4% and industrial and food flat or -- I'm just curious if lab's growth rate exceeds that 2% number.

Well, if you pick the -- the mid-point of the range, it does, yes.

So 1.5.

Yes.

Okay. So lab is a faster grower and so, again, I guess that gives you a bit of an upward bias on the gross margin line given mix.

Yes.

And then also is -- is the price -- you commented about a couple points of price in the quarter. Presumably that's all coming in lab or are you able to capture some in product inspection?

Lab is the biggest contributor but product inspection does well overall and it would go in order lab, product inspection, industrial and then retail I think was actually negative.

So there -- so there is some -- there is some volume growth in lab outside -- or is it -- is it pretty much all price.

Yes. Well, volume can be a little -- I mean volume might be a little bit misleading, of course, because it's not standard units and the price points are so different, but if you -- if your point is if you pull out the impact of pricing out of the lab growth is it overall more flattish. I think that would be the answer.

That's how it plays out. Alright. And then also did you give an overall order growth rate for Mettler in the second quarter? Or could you?

It was better than the sales growth number by, I think, 2 or 3 percentage points.

Okay. Alright. And then just last Olivier you spent a lot of time on the service piece of the business. And just two questions. Actually how did that grow year-over-year in the second quarter? And then also when you see the slump that we're in on the product side, do you tend to see an acceleration in the growth rate in service? Do people tend to extend the service policy or -- or any correlation there?

Yes. Let me cover the second question before I get the basis for the first question. Mary is just looking it up. So on the second part actually often we see the opposite. We actually went -- the economy times is week people would cut also on maintenance budgets.

They would on one hands try to keep the product longer so maybe there is a bigger risk that the product might fail and, therefore, more repair but when it comes to maintenance contracts it's more challenging. And what we would also see is that customers would try to do the service more themselves in difficult economic times and then the third point I would stress is the service business depends particularly industrial business, depends on capacity utilization of our customers' plants. Now what we are experiencing here that service is doing well for us I think is really a reflection of all the initiatives that we were talking about before. We have been working on improving our service growth rates for quite a while and we start to so to really see the fruits. If I look at the number actually it was 6% and, therefore reflecting that this was strong. But I would explain it with our own initiative and not an economic phenomenon.

Okay. Okay. And as you -- as you go forward over the next, say three years do you target the same growth rate in service that you target for overall Mettler? Presumably service would be a little bit higher than products but maybe not.

Yes. I think that's a fair statement. I would expect service to do better. Not necessarily every quarter. What you would see is if product sales has a strong quarter it's going to be difficult for service to match that. In essence service will be certainly more steady, but if I take it over a certain time period I would definitely expect service to be above product growth.

Understood. Okay. Good. Thank you very much.

Thanks.

(Operator Instructions). Your next question comes from Steve Willoughby with Cleveland Research.

Hi. Thanks for taking my question. You have seen good gross margin growth in the first half. Just was wondering what your thoughts are on gross margin expansion in the back half the year. And then secondly, the impact from currency, are you still expecting about a $0.10 headwind in total this year?

I know the percentage is there.

Steve, that's a little bit higher and you're talking about currency on EPS it's probably closer to 16 -- $0.15 now.

Okay.

In terms of gross profit margin expansion we expect it to narrow in the second half of the year. The reason we're expecting it to narrow a little bit is that as a reminder in the middle of last year we put through a mid-year price increase and so we have at least for the first half of this year two price increases, the mid-year of last year as well as the January 1. So it's not that prices will decline but just year on year impact will be a less. As a reminder we had about 100 basis points gross margin expansion in the second half of last year versus the second half of 2011 and so I expect now numbers more in the 30, 40, 50 bit range in the second half of the year.

Okay. Thanks so much.

There are currently no further phone questions.

Thank you, Victoria, and thanks everyone for joining the call. As always if you have any questions please don't hesitate to call us. Thanks and good night.

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