Mettler-Toledo International Inc (MTD) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to our second-quarter 2014 Mettler-Toledo International earnings conference call. My name is Pete, and I will be your audio coordinator for today.

(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, Pete. And hey, good afternoon everyone.

This is Mary Finnegan. I'm the Treasurer, and I'm responsible for Investor Relations at Mettler-Toledo. And happy that you're joining us today.

I'm joined here by Olivier Filliol, our CEO, and Bill Donnelly, our Executive Vice President. I have just one quick comment before I do the Safe Harbor.

We are doing this call today from China. We've been here this week, and over the course of the week we have experienced a dropped phone line once or twice when we are doing conference calls. I wanted to mention it because I hope it doesn't happen, but in case it does just sit tight and the operator will work to reconnect us as quickly as possible.

Let me just do a couple administrative things. This call is being webcast, and is available for replay on our website. A copy of the press release and the presentation that we will refer to on today's call is also available at the website.

Let me summarize the Safe Harbor language, which is outlined on Page 1. 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 by any forward-looking statements.

For a discussion of these risks and uncertainties, please see our recent form 8-K. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Factors Affecting Our Future Operating Results and in the Business And Management Discussion and Analysis of Financial Conditions and Results of Operations in our form 10-K.

Just one last item. On today's call we may use non-GAAP financial measures. More detailed information with respect to the use of and difference between the non-GAAP financial measures and the most directly comparable GAAP measure is provided in our 8-K.

I will now turn the call over to Olivier.

Thanks, Mary. Welcome to everyone on the call.

As Mary mentioned, we are making the call from Changzhou China, as we just completed a week long visit, including management meetings and our Board Meeting. I will also visit some of our auto Asia locations in the course of next week.

I would start with a summary of the quarter, and then Bill will provide details on our financial results and guidance. I will then have some additional comments on 2014, including some thoughts from our China visit. And as always, we will have time for Q&A at the end.

The highlights for the quarter are on Page 2 of the presentation. Local currency sales increased 4% in the quarter, with good growth in Americas and solid growth in Europe. We are pleased to have modest sales growth in China, and Asia was in line with our expectations.

Similar to what we saw in the first quarter, due to the benefit of various cost control and margin initiatives, and despite negative currency headwinds, we generated good growth in earnings per share. Let me turn it to Bill to provide more details on the financial results, and then update to our guidance for the year.

Thanks Olivier, and hello everybody. Let me start additional details on sales, which were $608.8 million in the quarter, an increase of 4% in local currency. On a US dollar basis sales increased 5%, as currency benefited sales by 1% in the quarter.

Turning to Page 3 of the presentation, we outline sales by geography. In the quarter, local currency sales increased by 5% in the Americas, 3% in Europe, and 3% in Asia Rest of World, all as compared to last year.

Without the impact of exited product lines, sales in Asia Rest of World increased by 5% in the quarter. For China specifically, local currency sales increased by 2%. And excluding exited product line, sales in China increased 6% in the quarter.

The next slide provides details on first-half sales, which increased by 4% in local currency. For the six months, sales increased 4% in the Americas, 6% in Europe, and 2% in Asia Rest of World. Asia Rest of World had a sales increase of 4% if you exclude the China exited product lines.

Sales growth by product line in the quarter is highlighted on Slide Number 5. Laboratory increased by 6% in local currency, while industrial increased by 3%. Adjusting for China product line exits, industrial sales increased by 5% in the quarter, while food retailing was down 1% in the quarter.

For the six-month period which you see on the next slide, laboratory increased by 6% in local currency and industrial increased by 2%. Adjusted for China product line exits, industrials would have increased by 3% in the first six months of the year, food retailing is up 3% year-to-date.

Now I would like to turn to Slide Number 7 and walk you through the key items of the P&L. Our gross margins were 53.9%, a 50 basis point increase over the prior-year margin of 53.4%. We benefited from pricing and lower material costs, which were offset somewhat by unfavorable currency as well as mix.

R&D amounted to $32.1 million, a 7% increase in local currency. SG&A amounted to $183.1 million, which is an increase of 3% in local currency. Increased sales and marketing costs and higher variable compensation were offset by cost savings initiatives and lower employee benefit costs.

Adjusted operating income amounted to $112.9 million in the quarter. That represents a 6% increase over the prior year amount of $106.4 million. Our operating margins were 18.6%, an increase of 20 basis points over the prior year.

We estimate currency reduced operating profit by $2.3 million in the quarter. Without this impact, operating profit would've increased 8% and operating margins 80 basis points in the quarter.

A couple of final comments on the P&L. Amortization amounted to $7.3 million in the quarter, while interest expense was $6 million even in the quarter. Our effective tax rate continues to be 24%.

Fully diluted shares for the quarter were $29.8 million (sic - see Press Release), which is a 3.6% decline from the prior year, reflecting the impact of our share repurchase program. Adjusted earnings per share were $2.57 per share, an increase of 9% over the prior year amount of $2.35. Currency reduced adjusted EPS by approximately 2.5%.

On a reported basis, EPS was $2.49 as compared to $2.24 in the prior year. Reported EPS included pretax restructuring charges of $1.9 million, or $0.05 per share, which is primarily employee-related costs. Reported EPS also includes $0.03 of purchased intangible amortization.

The next slide provides details on our year-to-date results, which are similar to what you had in the quarter. Specifically for the six months, local currency sales increased by 4%, operating profit is up by 6%, and adjusted EPS increased by 9%. For the six-month period, currency reduced EPS by about 3.5%.

Now turning to cash flow. Free cash flow in the quarter amounted to $95.7 million, a 22% increase over the prior year amount of $78.2 million. We are pleased with the strong cash flow, which benefited from good working capital management, offset to a degree by higher tax payments. Working capital statistics were solid in the quarter with ITO at five times and DSO at 43 days. On a year-to-date basis, free cash flow is $129.7 million versus $87.8 million in the prior year.

One additional comment on our balance sheet before turning to guidance. You saw in our June 8-K filing that we entered into a $250 million worth of fixed-rate financing. One-half of this financing would be funded later this quarter, end the remainder will be funded next year to coincide with the maturity of an existing fixed-rate note.

We wanted to take advantage of what we view as attractive rates to increase the percentage of our fixed-rate debt. Although the long-term rates are very attractive, the financing is about $0.025 dilutive to EPS this year.

Now let's turn to guidance. Market conditions are about the same as we compared -- as compared to the last time we spoke. Conditions in the West are relatively solid, although we face tougher comparisons for Europe for the remainder of this year. Asia should continue to improve.

Maybe some more about China specifically. We see our business year as generally on track with our previously described expectations. While sales growth in China was a bit better in the quarter than we expected, we still remain cautious on the region given the overhang in certain segments.

As economic growth here continues, the over-capacity in certain segments will diminish, and we expect to see more investments in new plants and new lines. While we see some signs of an improving investment climate, the return to the strong growth levels of the past is not yet on the immediate horizon.

We expect China sales to be up modestly in Q3 and Q4, principally due to easier comps. As a reminder we estimate exited product lines will reduce local currency sales by about 2% in China for the full year. So in summary, we are estimating mid-single digit growth in China in the second half adjusted for exited product lines.

In terms of other emerging markets, macroeconomic conditions in China -- sorry, in Russia are very weak. Brazil and India had good results in the quarter, and are performing well. Given this outlook, we are making no change to our full-year expectations of sales growth of approximately 4% for the year.

We are also maintaining our current full-year EPS guidance. Specifically, we expect adjusted EPS to be in the range of $11.45 to $11.60, which is a growth rate of 8% to 10%. This is in the same range as we provided last quarter. For the third quarter, we would expect local currency sales growth to be approximately 4% and adjusted EPS to be in the range of $2.82 to $2.87, or a growth of 8% to 10%.

As you're updating your models, let me cover some additional specifics on guidance. First, currency. We would expect currency to have no impact on sales growth in Q2 and reduced sales growth by approximately 1% in Q4. For the full year, we expect to have no impact from currency on sales.

In terms of the impact of currency on earnings, we would expect currency to reduce earnings growth by approximately 1% in the third quarter and be slightly negative in the fourth quarter. For the full year 2014, currency is expected to reduce earnings growth by 2%.

One final comment regarding models. With our Q3 guidance and full year guidance you will likely be updating your Q4 numbers, too. One question you may have is why we are maintaining our guidance range, although we exceeded our guidance for the second quarter.

We have two factors weighing on this. The first, as already mentioned, is we have this $0.025 headwind in Q4 due to long-term debt we added via the private placement. And second is that given our expectation of a better growth environment next year, we are investing in some front-end resources in the second half.

Our Field Turbo Program, as we refer to it internally, has been discussed with you in the past. As a reminder, these are additional sales and service personnel to capture specific growth opportunities.

As I look at the development of these Turbo Programs, we will see higher expenses associated with them in the second half of this year, particularly in the fourth quarter. While this will help position us well for next year, we recognize the additional costs are a drag this year as salesmen take some time to become fully productive. These two factors highlight why we didn't increase our guidance despite the beat this quarter.

Okay, that's it for my side. And I want to turn it now back to Olivier.

Thanks, Bill. Let me start with summary comments on business conditions.

Lab increased 6% in the quarter with good growth in balances, pipettes, analytical instruments, and process analytics. Automated chemistry was down in the quarter due to timing, as their order entry was good and their outlook for the remainder of year is quite positive. Industrial increased 3% in the quarter. Product inspection had good growth, while core industrial was consistent with the prior year. As expected, retail was down slightly in the quarter.

Now, let me make some additional comments by geography. Europe had sales growth of 3%, and most countries reported growth with the exception of Russia, which was down double digits. While we face more challenging comparisons in Europe for the remainder of the year, I'm pleased with how well we are competing in this region. Our strong product offering combined with our Spinnaker sales and marketing initiatives are principle factors contributing to our solid performance.

Americas increased 5% in the quarter. We have good growth in lab and product inspection. Core industrial was down slightly against strong comparisons from the prior year. Retail was also down in the quarter. Asia Rest of the World increased 3% in the quarter.

Let me now make some additional comments on China. Market conditions are developing as expected, and our business continues to be on track with what we outlined last year as expectations for this year. Specifically, our core laboratory instruments and our product inspection business continues to do very well, with growth in the double digit range.

Similar to what we experienced in the first quarter, process analytics was impacted by new GMP regulations surrounding water purity that went into effect last year, and as result was down double digits. Finally, core industrial increased 3% adjusting for the exited product lines.

You heard from Bill that we expect to have growth in China for the remainder of the year. While we will benefit from easier comparisons, we also are making good progress on resource prioritization and reallocation to segments of market where profitable growth exist. We are leveraging our Spinnaker sales and marketing tools to identify potential customers, and then design sales and marketing strategies to penetrate these segments.

We remained convinced about the long-term potential of this market. Our product portfolio is well-positioned to benefit from many evolving trends in China, including the increasingly prosperous consumer, the many graduating scientists, the government's efforts to move up the value chain in manufacturing, and the increasing focus on product quality and consumer safety throughout the economy. Specifically, our laboratory, process analytics, product inspection, and certain segments in core industrial all remain very well positioned to capture growth arising from these trends.

One additional comment on our quarterly results before I cover some additional topics is service. We had good growth in the quarter, with service revenue up 7% as compared to the prior year. We had good growth in all geographic regions and in most product lines. We continue to benefit from our investments in service, which I covered with you last quarter.

Now let me turn to some product innovations, which continue to reinforce our market leadership. I have a couple of examples from our laboratory offering, starting with our new family of premium end pipettes. Under the umbrella name of XLS+, these pipettes have our proprietary Lite Touch system, which has an ergonomic focus by reducing the force of pipetting. Highly regulated customers who are sensitive to security issues and high throughput labs are prime customers for these instruments.

While we already lead the market with our ergonomic technology, we have further enhanced our offerings in several ways. For our single-channel instrument, an improved sealing system provides greater ergonomics and improved results, particularly with more delicate experiments.

The instrument can also address more customers due to its new sterilization capabilities. Our new high-volume multi-channel instrument is smaller and 25% lighter, and therefore provides greater productivity, accuracy, and fewer handling errors. Finally, we have a new software system for our electronic pipette which provides easier use, greater accuracy, and better security. This allows customers to more easily adhere to their standard operating procedures and good laboratory practices.

We now have an entire XLS+ product offering with an attractive and modern design. Initial customer reception is positive, and we have an extensive marketing campaign that is supporting the launch. In addition to the customer benefits, the new product line will also reduce manufacturing costs. Our pipette business remains very attractive, with solid growth dynamics, good margins, and nice consumable and service stream.

We also have some new offerings in our pH business. For those of you that attended our Investor Day last July, we demonstrated our high-end bench pH meters, known as SevenExcellence. We are strengthening our market position with the launch of a new portable pH meter, the Seven To Go.

The instrument's simple [mains] and navigation can shorten measurement time, and the new status light helps to ensure the quality of the ongoing measurement. The Seven To Go's ergonomic design provides utmost handling comfort, and the graphic display allows operation even under difficult lighting conditions. Productivity is further enhanced through our proprietary intelligent sensor management system that reduces overall errors and speed work flows. Finally, we have developed specific kits for several industry segments, which includes a meter, center, and accessories making it very easy to use for our customers.

In order to further expand our pH offering, we also recently launched a more basic version of a benchtop instrument to penetrate emerging markets. The product has less features and models, and its attractive pricing meets the needs of price-sensitive customers in our emerging markets and indirect distributional channels. The instrument's inherent intuitiveness and ease of use make it an ideal for telesales.

To further minimize overall costs, the market introduction, marketing, and product training is heavily centered on the web. These two introductions, introductions are examples of how we are leveraging our market position in pH to garner more market share. Our business is very solid with good growth dynamics, attractive consumable stream, and strong margins.

We also continue to make great inroads with our automated chemistry offering. Over the last few years, we have worked with a large pharmaceutical customer to develop and implement their vision for the lab of the future. The lab is focused on sustainably decreasing time-to-market for new medicines and increasing the overall R&D productivity by automating many elements of process development. This is the step in drug discovery and scale-up process in which the pharma company is trying to determine how most efficiently and safely a drug can be mass produced. Because it is at the end of the entire drug discovery process, the quicker it can be developed, the sooner the drugs can be launched.

Although under tremendous time pressure, most pharmaceutical companies lack a standardized automated approach to process development. The lab of the future incorporates our automated lab reactors in situ probes, and a common software platforms to standardize and automate the entire process. We have successfully rolled out our solution in the initial pharma company, and several other companies are now introducing it to their organization. We very pleased with this development, which reinforces our leadership in this business.

Let me make a couple of concluding remarks before I open it for questions. We remain cautiously optimistic in our Western markets with an acknowledgment of tougher comparisons on the horizon in Europe. We are executing well and believe we can continued to capture growth opportunities in these regions.

Emerging markets, in particular China, are developing mostly as expected. While certain core industrial segments are weak, we see good growth potential in our laboratory and product inspection businesses. We expect to see growth in China for the remainder of the year. Overall, we continue to focus on execution and capturing more share.

That covers my comments. And I want to ask the operator to open the line for questions.

(Operator Instructions)

Brandon Couillard, Jefferies.

Hello, this is [Sachin] in for Brandon. Can you hear okay?

We can.

Bill, service gross margins has steadily improved in recent years. What type of initiatives are underway to bolster the productivity of the service organization? What do you perceive as the incremental opportunity for service gross margins over the next two, three years?

Okay. Maybe a few comments on what's been going on to date, and also what we would expect in the future. There's a number of different initiatives, both on the cost side as well as on the pricing side. On the pricing side, we are, as part of our overall pricing program, see the opportunity, have good pricing power within service, particularly on proprietary spare parts, but in general if we are providing value-added, we can get good pricing benefits.

Maybe also on the sales side, we are benefiting from the volume increases, and a lot of that is driven by doing a better job at the point of sale selling service and capturing more and more of the service business via service contracts, which allow us to plan better. The service technician, we sometimes refer to reducing the windshield time of the service technicians is a good driver on the productivity side.

So on the productivity side, we introduced -- we invest a lot in IT solutions related to Blue Ocean and otherwise. And those solutions help our service technicians to be more productive, to have higher first-time fix rates, and more standardized the work as well.

Then I would, in terms of maybe future margin expansion opportunities, I don't have a specific target that I want to give at this point, but if you go back to the list I just gave you, none of them have run out of headroom yet. There's still much like the Spinnaker story on the sales side. There are many years of operating profit, gross margin profit expansion opportunity within our service business.

Got it. Thanks.

Derik de Bruin, Bank of America.

Hi. Good afternoon.

Hey, Derik.

Hey.

Early morning for us (multiple speakers)

I'm sorry?

I just said, for the record it is early morning for us.

Got you.

We're 12 hours ahead, of course.

All right. Can you talk a little bit about Russia, in the sense that how big a business is that for you? Can you estimate what that drag was on the business?

It is 2%, and it is down in the low 20s. So I guess it is 40 bps, 45 bps.

It is encouraging to hear that your beefing up the infrastructure with your Turbo program in anticipation of growth for next year. I guess with that in mind, can you give us a little teaser in terms of what you are thinking, or is it still too early in terms to talk about 2015?

Actually the way -- we started that early in the year. We did a multiple analysis in terms of where we feel we have penetration gaps. We analyzed this really by the different product lines and the different geographies.

For bigger geographies, we even went within territory level to looking and sub-segmenting the countries, and then we overlaid that with the profitability of the different business lines, and that gave us, then, priority which areas we want to invest in the (technical difficulties). And we are currently working with the countries and the different business leaders to develop concrete plans, business cases. Then we are going to roll that out throughout the next quarters.

We, of course, are not going to do everything in Q4. We're try to time it. What we have seen from previous [field approval ways] that we have been running is, of course it takes a little bit of time to onboard the people and then you really do the thorough training, and we try to accelerate the payback time by supporting the salespeople with a lot of telemarketing activities, specific segment campaigns so that we can feed them with good leads, and in that sense accelerate the pipeline development.

Maybe in terms of, I think you're also getting at the guidance question, and our attention at this point would be to give guidance on the next call. But sitting here today, our expectation is that we will grow faster in 2015 than we did in 2014. But it's a lot of economic data and other things for us to digest before giving specific guidance.

Right. I guess that's what -- I guess what it is. You're typically a very conservative Company. So the fact that you are doing all these initiatives is encouraging, which is sort of what I was getting out. I guess on that note, I will get back in the queue.

Thanks, Derik.

Isaac Ro, Goldman Sachs.

Thanks, guys. Good afternoon. Good morning, sorry. On the Southeast Asia part of the world, wondering if you can maybe put a little more color on what your expectations are for the back half of year?

Okay. Maybe I can give you a feeling from a year-to-date basis. We are up low single digits. And as you can maybe imagine, the weakest part is coming from Thailand, although Thailand was certainly better in Q2 than they were on a year-to-date basis. I would say -- sorry, better in Q2 than they were in Q1. In terms of the comps for the region, we have a comp in Q3 that will be similar to the comp we had this past quarter, but I would expect actually our growth rate to be slightly better.

I think the one thing I would highlight is that in Southeast Asia has quite a tough comp when it comes to Q4. We grew mid-teens in Q4 last year due to a couple of big orders. But our view is that the trend there overall is improving. I think Olivier would probably have more insight. He will be there next week. So we will probably know more next time. But other than this tough comp, we would say that things have bottomed out and are generally moving in a pretty good direction. And we are making investments in that part of the world.

Okay. Then just maybe a follow-up on the financial side of things. Last quarter you talked a little bit about the Board's decision to raise long-term leverage targets. Now that you've had some time to think about investing, both in the Field Turbo and some of your other initiatives, and you mentioned the restructuring on the debt towards the back half, could you give us a sense of timeline to increased leverage target?

Like most things, we will do it step-by-step. But I think at this stage you could assume, absent us surprising ourselves with a bigger than expected acquisition, which I think would be highly unlikely, maybe adding an extra $100 million or so a year.

Understood. Thanks a bunch.

To the base of free cash flow that we already do.

Okay, got it.

Jon Groberg, Macquarie.

Hey. Good morning. I think it was mentioned, sorry I don't remember if it was Bill or Olivier, but you said you see some improvement in China but don't really see it returning to gross days of the past. Was that just a comment for this year? And I guess I'm trying to think, historically Bill, I think you, when you've laid out the gross scenario for a company like Mettler it's emerging markets growing certain rates.

Then some of the developed markets at slower rates to get your overall growth target. And I'm just wondering is that -- has that model changed at all in your mind? And if so, what other types of things are you looking at in terms of accelerating the revenue growth?

Hey Jon, I think we definitely see that China will get back to very good growth in our mix. And we talked about the macro trends that are very favorable for us, and we feel that we can outgrow the GDP growth of China, but we want also to be cautious.

We have seen many quarters of 20%-plus growth for Mettler-Toledo in China in the times where there were huge investments in infrastructure, and there was the stimulus money from the Chinese government. These times will not come back, and we don't rely on these kind of times. It is not that we need big stimulus money and big infrastructure projects to have really good growth for us in China.

In that sense, we would feel that we are going to see in China a good healthy growth, but also a more sustainable growth maybe that we have seen in the last five years. When I say sustainable growth, nevertheless I would recognize that China will remain more volatile than a mature Western market.

In terms of timing, we did talk that the second part of the year will gradually get better. Next year should also already get significantly better than this year, and then it will take probably some time that we will see this high single, low double-digit growth that we expect. Then I really think the growth prospects are very attractive.

And being in China this week, and actually I was already here last week, just reconfirmed that there is a lot of things happening here that we don't read in the Western press. And it is been always impressive when you are here and see all the things that the government are driving, new economic zones. Then also new industries that they want to gear up. And it was great to see how our Chinese team are very much aware of that and are shifting also resourcing to really tap into these opportunities.

Okay, that's helpful. And I don't think you had any acquisitions contributing to your organic growth. Is that correct? And if so, where do you stand?

You made a similar comment, Bill, about well, if you did a big acquisition. But would you hope to do some acquisitions this year, even if smaller? Or where do you stand on the M&A front?

Our M&A strategy is quite a consistent one. I'm very interested in pursuing acquisition opportunities. We have a thorough approach as we are -- we constantly actually monitor tentative targets. We try to really nurture these targets, and we are actually constantly also talking to companies. And you have seen us doing a couple of acquisitions last few years.

I expect us to continue to do that, and there are a couple of opportunities that we are reviewing as of this stage. So our commitment is definitely here. What Bill was referring to is this big acquisitions adding another leg to the Company also. The acquisitions that we do at this stage are typically ones that are in the range of $20 million to $50 million of revenue, and we can definitely finance these kind of acquisitions with our free cash flow.

Okay, thanks.

Tycho Peterson, JPMorgan.

Tycho, can you hear us? (Multiple speakers) Now we hear you, Tycho.

I just wanted to follow up on Derik's original question about some of the reinvestment you're going to be making. I'm wondering if you can talk either by geography or segment where you see the incremental headcount addition?

It is going to really be across the globe. We -- for example, next week I am in Southeast Asia. We are going to review in particular investments in the Philippines, but also in Indonesia. But I have also projects that under review that relates to service in Europe.

We are looking at telesales opportunities out of Poland. I think that gives you a flavor how broad-based it is. And it is really across the different business lines and geographies. I think that's the approach of the Field Turbo.

We do them. They are relatively small projects. So when I talk about Philippines, I talk about two handfuls of people. When I talk about telesales in Warsaw, I talk about a handful of people.

These are many smaller projects, but the beauty of it is I always have strong business leaders that can focus on it and really drive it. And it is not a single big bet on one opportunity.

Than I guess as we think about the US market, core industrial, you had a tough comp there. So that was down slightly. But can you talk about some of the gives and takes for the US market in the back half of year, whether it is an industrial improvement, or maybe the academic market's getting a little bit better?

We are not as exposed to the academic market maybe as some of the other guys, but our pipette business, which is the one with the biggest exposure, has been doing quite well relative to past periods. It's also got some exposure to government money. And that business has done much better the last couple quarters than it had in 2013 or 2012, and we would expect that to continue.

At the high-end instrument side, we are expecting a very good second half, both in our AutoChem product line as well as some of our other analytical instruments. In the product inspection area we will have an excellent Q3. I think the Q4 maybe has a really tough comp. If I recall correctly 2013 Q4 had a blowout in the Americas in the food safety area. But that business is rolling very well.

On the industrial side, I think we feel pretty good. It was a little bit hidden in our industrial numbers in this quarter that it didn't get much project business, for example like in the T&L area where you are having big projects with the UPSs, FedExes of the world. That business was actually down quite a bit in North America but what I would describe as our core standard industrial products, actually I think grew mid or high single digits in the quarter.

In terms of the second half, maybe absent a tough comp here or there, our Americas business looks pretty good. And I see no reason it shouldn't grow mid single digits, maybe even a little better.

Lastly, Bill, you called out pricing on your gross margin comments. Just anything incrementally -- incremental there to add about your ability to push through pricing increases?

Yes, I think on a year-to-date basis we are about 170 bps or so -- no, sorry. I was mixing up material cost. We're 210 bps, we are actually 240 bps in the quarter. And I wouldn't be surprised if that number wasn't a little better in the second half. There are a couple areas we've been looking at around service pricing, lab balance pricing in Europe in general. We feel like we have good pricing positioning right now.

So I think you won't see that -- you never know if there's a funny mix or something or a couple of big projects, but overall I think you'll see pricing continue to move in a positive direction in the second half. We feel very good about the competitive position of the technology portfolio right now vis-a-vis competition.

Okay, thank you

Paul Knight, Janney Capital Markets.

Hi, Olivier and Bill. Could you talk to the food retail business? It was down in the June quarter, it appears, versus Q1. And then could you talk to Europe? Was Europe a little lighter than you had even expected?

On food retail, I wouldn't read too much in the numbers. It is a very project-driven business. It is a rather lumpy business, and so we are always going to see ups and downs.

But I want to also to ourselves that retail for us, our focus is not on the top-line growth. It is actually really focused on operating profit. It is a business that is below the group average when it comes to profitability.

So we have really the strategies and the team focused on margin expansion rather than just the top line. And that means also we remain very disciplined in the project business. As you can imagine, this project business, [often our] tenders and pricing is always a key, key topic.

While we have in all other businesses excellent positions where we can really enforce us price increases, food retail is the one where this is the most difficult, and accordingly we can't be focused on the top-line growth without looking also at this margin [topic]. That's the reason why we are not [alerted] at all and we are okay with that performance.

To Europe, actually I am very pleased about the European numbers. Q2 was actually good. What you need to realize is that Europe was also impacted by, for example Russia. Russia was down. And in that sense had an impact on Europe. But it certainly met my expectations. I would say even modestly up if I look at core Europe.

Maybe to add to Olivier's comments, maybe to give you a sense, Paul, the retail business on a two-year basis actually grew. So we had a very easy comp in Q1, had decent growth against it. We had a tougher comp in Q2, but on the two-year basis we actually grew a little bit faster.

And maybe a couple of comments in more detail on the European position. I think the one business that didn't grow as much as we expected in Europe was our product inspection business. That had a lot to do it just more -- we finished the year with more of a -- quarter with more backlog than we expected. Actually order growth was just fine in product inspection.

But reiterating Olivier's point, the comps do get tougher. I think we grew our lab business about 10% in Q3 last year. So we will face a tougher comp as we go into the second half.

Thank you.

Tim Evans, Wells Fargo.

Hi, yes. I was wondering if you could comment on the competitive dynamics in China, particularly with the local competitors over there?

While most of the countries in the world we are facing only few computers, we have in China an interesting situation that when it comes to industrial division we face hundreds, if not thousands, of local competitors. These are very small regional players. There are just a few ones that are bigger, but then they are typically only competing in very focused business lines. We have been living with that competitive landscape for decades now.

I haven't seen any major changes that alert me. However, we constantly monitor that situation. And we also monitor in which area they experienced growth and what kind of profitably levels.

What we would typically see is that competitors can grow in certain segments. Like we have seen often in the last 12 months when we walked away from certain deals because terms and conditions and payments, particular payment terms, these businesses were picked up by competitors.

But we were okay with them picking it up because honestly, the projects were just not attractive, and in that sense we lived with that. But strategically I don't see that any competitor here are making moves that are jeopardizing our position. These were a few comments on industrial side.

If I go to lab, the situation is actually different. We have mainly global players that compete with us. The local players are competing in a totally different league in terms of quality, but also price. But customers would clearly differentiate that.

And in my update last week that I got from the local lab team, I was actually pleased to see that the local Chinese competitors for different product categories, I would rather got weaker than stronger in the last two, three years. We feel actually comfortable with that competitive landscape.

Thank you.

Richard Eastman, Robert W Baird.

Yes, good day. Just a couple of things. Bill, you identified price capture in the quarter. And I'm a bit curious, does that pertain -- is it skewed at all on the hardware versus the service and consumable side? Is a 5 and the other a 0? Are you capturing any price in the hardware?

Definitely capturing price in the hardware. I would be surprised if the differences were more than 50 bps.

Okay. Also Olivier, can you provide maybe again, just to double-back to China again. With lab plus double digits in China, I'm curious, are there any of the product lines that are definitely leading? Is it balances or AutoChem? What's your product position within China in the lab market?

When we talked about double digit, we meant core lab. The core lab is really basic balances, analytic instruments. We -- actually pipettes did also well. So it is this product category.

Actually, if I recall well, automated chemistry did also well. So actually really our whole core lab portfolio did well. I think that we flagged that we are serving here a different customer base than the industrial division. It reflects also these macro trends we are benefiting from, like the number of scientists joining the workforce, these trends towards more quality control, and then also the move in more value-added industries.

I would also say that lab in general is earlier in the cycle then industrial products. So for me seeing this core lab growing double digit is an early indicator that things should get better.

Is there an emerging service market for you there, or that that still in its infancy as well?

The service market and also our service revenue is actually developing well. I'm very happy about the growth rate, but it is coming from a low base. And your statement that it is in an early phase is fair. It is a little bit to be differentiated by different business lines and service types. We have [for example] in China a situation where the government still provides calibration services themselves.

So it is a situation where there is a delicate -- we don't want to compete and cannot compete with the government for money calibration services. But that's a market that will open up in the future, and in essence still offers great opportunities.

There are other product lines where we can offer our full-service capability. For example, in the automated chemistry area or in the product inspection area and so on where calibration is not so important, then we can offer our full-service offering. And that certainly something that we are focused on and will further leverage in the coming years.

I'm a little bit curious again, staying with China for second, but I'm a little bit curious. Your product inspection business again was plus double digits. And I know your business isn't lab oriented, it is more production line oriented. But again, we heard so much during the first six months of the year just regulatory schemes on the food service side and compliance issues and a re-org of their food safety administration.

But again, that all pertains more to the lab then it does to the production side. Is that a fair comment?

Regulations to a fair degree, yes. But the awareness is really huge about all food safety topics. I heard so many examples of retailers in China, Walmart, but also local Chinese companies that are increasing the pressure on their suppliers that they really enforce good food safety practices. We are often also invited to seminars and trainings that these retailers provide to their suppliers, and we raise the awareness for physical contamination that can be prevented through our [metal detector] x-ray systems.

We certainly also see that the big brands, food producing brands, are taking actions to protect themselves through better public inspection solutions. Demand is good, the awareness is good for our solutions.

But I would also state that while product inspection on a global scale is about 16% of our revenue, in China it's still significantly lower. It is more like the 5%-ish. So there is a way to go for us to reach the same penetration levels as we have in the West. And that's why I always refer to the fact that China offers not just growth in line with the GDP, but actually offers additional growth because there are product categories that are still underpenetrated.

I see. Okay, very good. And then one last question. Bill, given where you are in the buyback year to date through June, anything change in terms of the targeted dollar amount that you would like to put to work by the end of the year?

No. Same as we've talked about last quarter, which -- help me out, Mary.

Towards $400 million?

Yes

Okay.

About $400 million.

Great. Thank you so much.

Dan Arias, Citigroup.

Good afternoon, guys. Thanks. Bill or Olivier, on the server side you have mentioned trying to bring more of the installed base under contract. So just curious where that percentage stands at this point? I think it was 20% or so the last time we talk about it. Has that inched up at all at this point?

A) I think, first, it have to be maybe a more narrowly defined, like for example maybe our laboratory instruments might be closer to that level. But if you look at our business in total, we wouldn't yet be at that rate. The fact that our service business grew 7% or so, if I recall, is -- and our product business, of course, if you do the math grew less than that, is reflection that that's increasing.

But of course our installed base might average, I don't know, high single digits, number of years. If you take everything, it is a small move in terms of percentage terms. But I think both of us feel that there's -- continues to be good mid to high single-digit growth opportunities in service for many years to come.

I think the interesting part here is that the attachment rates of service differs highly country by country. We just talked about China before where the penetration and attachment rates is significantly lower than in the West. But also within the West, within Europe we see big differences, and one of the key measures that we are following is really looking at this penetration rates country by country, understanding why we have differences and developing plans with the local country management, how we can increase these penetrations.

When we were referring to Field Turbos before, that (inaudible) in an area where we are also leveraging this Field Turbo. For example, doing more telesales of service product to attach the attachment rates to the installed base of recent years.

Got it. Okay, perfect. And then quickly, Bill, not sure if I missed it, but did you give the order number for China?

Orders were in line with sales. I think backlogs, almost perfectly flat with last year in China.

Great, thanks a lot.

Steve Willoughby, Cleveland Research Company.

Good morning, guys. Thanks for taken my question. A couple of things for you. First, raw materials. How much were they a benefit in the quarter, Bill?

Raw material costs were down about 2%. Of course, that's not all it costs to sales. Just to give you a feeling, it's, on an annualized basis, that's 2% down on maybe $450 million or so.

Okay. And then just backlog in general, did you build backlog across the business in total at all?

I think we are modestly up. Mix-wise it changed with -- I made a reference to, I think specific to Europe, but in general product inspection grew backlog quite a bit.

Okay. Then just my final thing is, given the past four quarters you've put up pretty good growth in Europe. When you look out going forward, is mid single-digit growth in Europe still possible, or is it maybe more in like the low single digit to mid single digit range, do you think?

Hey, I think if we look -- let's talk like a five-year window. We would say, hey if Europe grows 3% or 4%, that would be well in line with our overall group targets. If it grew 5%, we would be doing better than we would expect.

Okay. Then if I could squeeze one more in for Olivier. Olivier, you maybe comment regarding some things you've seen in China that we may not have seen in the Western press so far that you thought were interesting or exciting. Just wondering if you can elaborate on that at all?

Okay. It starts that when you are in Shanghai, as well as Changzhou. You feel that the economy is actually feeling quite healthy. You see activity, you see new things happening, investments happening.

The second thing that I felt really good about from the Chinese team is you see that there is still also greenfield activities, maybe less than in recent past, and certainly not yet back to normal. But there is still investments in new production sites. There is also new developments of regions and cities where the government is actually really proactively investing in the future.

There are new infrastructure being funded by the government because they want to develop and promote new industrial zones, and some of them are actually really big and promising. These are things that at least I don't see too much in the European press about. And it gives a different perspective when you are here and you have the Chinese team showing the different opportunities that are --

And maybe one other anecdotal one to -- they sometimes -- we hear in the press about these empty cities. I'm sure there are still some there, but in the train ride from Shanghai to Changzhou no, what was once some empty cities there are now full. That's over the last couple years.

So it is always better to be here. It is a naturally optimistic place. But I agree with Olivier, there are maybe more positive signs when you're here on the ground than sometimes what you hear in the news, and I think we saw some good, was it NPI numbers or something, come out this morning. So hopefully, that was a good thing.

To give you a fun one. We inaugurated our new plant in Changzhou seven years ago. And at the inauguration we planted trees. And the trees grew in the time. But on the opposite side of the trees, there was a farmland, and in the meantime they are starting to build new residential buildings, huge buildings.

And I was here -- I was [more or less] last year, and within a year you see this building coming up. It so much faster than the trees are growing. It is actually unbelievable how fast things are still happening here.

Of course, when you see them being built, they look totally empty. But I picked up actually from our management team that different of our employees have actually bought one or the other things there. And so it seems to be real, and yes, it feels good when you see that.

I really appreciate all the color, guys. Thanks so much.

(Operator Instructions)

Sung Ji Nam, Cantor.

(Technical difficulties) Olivier, I was wondering, your lab products and AutoChem and product inspection businesses are still growing at a high rate and in the developed countries in North America and in Europe. Are there opportunities for further market expansion, or is the growth largely coming from taking share from your competitors?

No, actually I would really say both. I differentiate here maybe by product categories. If I talk about automated chemistry, it is definitely not just market share gains, this is about developing also new opportunity and new markets.

The Lab Of The Future that we referred to in my prepared remarks is a classic one. This is not winning against competition. This is actually working together with our customers for new solutions to their problems. That's really developing the markets.

In product inspection we have in particular one product category, and that's x-ray where the market is still developing. This is not yet a matured market and one that we are just replacing installed base, not that all. Actually, it is very much about convincing customer that this is the right technology to detect more physical contamination than they can do with metal detection.

When you think about [core] lab, if I take for example, a balance. The balance in the West is more replacement business. When it is a replacement business, when we are growing faster than market, of course it is about gaining market share.

Okay, great. And then more specifically for your pipette business, you talked about a lot of innovations there. And I believe this is a scenario where you're still number two in the marketplace. And was wondering if you are gaining any traction in terms of taking share from your number one competitor there?

In the pipette business our market position differs very much by geography. Actually in the US we have an excellent market position. And when we look towards Europe and Asia, we are clearly not the number one, and there are even regions where we are number three, four player.

Our emphasis in terms of gaining market share is, of course, in this underpenetrated market, now for pipettes this is something that doesn't happen overnight, even if we have superior products it is a lot a lot of fieldwork convincing customers and converting whole accounts. The service business plays also an important role in providing a total solution to the customer. A lot of room for market share gain, but again this is significant work, and the product alone will unfortunately not just make the difference.

Got it thank you. And then Bill, quickly. When you talk about making incremental investments in anticipation of accelerated growth next year. Is this a second-half event, or will this continue into next year as well?

I think Olivier made the point that we have an overall plan of investments that we can make. We're not making them all beginning in the fourth quarter. I think we want to make some beginning here in the third quarter, but a good number in the fourth quarter. Then we're going to see how the market plays out a bit.

But there -- I think there's maybe two comments to it -- or two takeaways. One is that we do think 2015 can be a better growth year than 2014. That we see specific growth opportunities that we think are worth investing in, and the ideas go beyond just the short term in terms of what we could absorb investment-wise.

Great, thank you.

There are no further questions at this time. I would now like to turn our presentation over to your hostess, Ms. Mary Finnegan.

Thanks Pete, and thanks everyone for joining us today. As always, we are available for questions. Of course, we are here in China. And just given the time difference, and to make sure that we can be responsive to your questions, it might work best if you e-mail me any questions, and then we are happy to shoot an e-mail back or give you guys -- we'll call you back.

I think you know my e-mail, but in case you don't, mary.finnigan@mt.com. Take care, everyone. Thanks. Bye-bye.

Good day, thank you.