Mettler-Toledo International Inc (MTD) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our second quarter 2017 Mettler-Toledo International earnings conference call. My name is Devon, 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, Devon, and good evening, everyone. I'm Mary Finnegan, I'm the Treasurer and I'm responsible for investor relations at Mettler-Toledo, and happy that you're joining us. I am joined by Olivier Filliol, our CEO; and Bill Donnelly, our Executive Vice President. I need to cover just a couple of administrative matters. This call is being webcast and is available for replay on our website. A copy of the press release and the presentation that we refer to is also available on our website.

Let me summarize the Safe Harbor language, which is outlined on Page 2. Statements in this presentation which are not historical facts, constitute forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. 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 Form 8-K. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions Factors Affecting Our Future Operating Results and in the Business and Management Discussion and Analysis and Results of Operation in 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 the differences between, the non-GAAP financial measure and the most directly comparable GAAP measure is provided in our Form 8-K.

I will now turn the call over to Olivier.

Thank you, Mary, and welcome to everyone on the call. We're conducting the call from Switzerland this evening and started a little earlier than we normally do given the time difference. I will start with a summary of the quarter and then Bill will provide details on our financial results and guidance. I will then have to some additional comments before we open the lines for Q&A.

The highlights for the quarter are on Page 3 of the presentation. We had another quarter of excellent results. Sales growth was very strong with great growth in Asia and Rest of World, including China as well as the Americas. Europe also had a solid quarter, especially when addressing for the Easter impact. We are very pleased with our ability to capitalize on our growth initiatives. We continue to expand margin, and EPS growth in the quarter was excellent.

We are very pleased with the second quarter and first half of the year. Our outlook for the remainder of the year is also very positive, although we will face more challenging comparisons. We continue to be optimistic that we can further our share gain and deliver strong performance in 2017.

Let me hand this over to Bill now to cover the financials.

Hi, everybody. Sales were $653.7 million in the quarter, that's an increase of 10% in local currency. Excluding the impact of the Troemner acquisition, our organic global currency sales growth was approximately 8.5%. On a U.S. dollar basis, sales increased by 7% as currencies reduced sales by 3% in the quarter.

On Slide #4, we show local currency sales growth by region. Sales grew by 10% in the Americas, 4% in Europe, and 15% in Asia/Rest of World. China sales growth was 22% in the quarter. Growth in the Americas benefited by approximately 3% from the Troemner acquisition.

On the next slide, we show year-to-date results. Sales grew year-to-date by 12% in the Americas, 8% in Europe, and 12% in Asia/Rest of World. China sales growth was 17% in the first 6 months. For the first 6 months, growth in the Americas benefited by 3% due to Troemner.

On Slide #6, we outlined sales growth by product line. Laboratory sales grew by 9%, industrial sales increased by 12%, and food retail increased by 2%. Troemner benefited the lab growth by about 3%. All comparisons are in local currency and are versus the prior year.

The next slide shows year-to-date growth by product line. Laboratory sales grew by 11%, industrial sales increased by 12%, while food retailing increased by 5%. Similar to what we had in the first quarter -- or similar to what we had in the quarter, sorry, Troemner benefited lab growth by 3% for the first half. All comparisons are in local currency and versus the prior year.

Now let's turn to Slide #8, and let me walk you through the key items in the P&L. Gross margins were 57.4% and that's a 30 basis point improvement over the prior year amount of 57.1%. We had a little tougher comparison last year as we had a 160 basis point increase in gross margin during the second quarter of 2016. We continue to benefit from pricing and also had productivity gains in the quarter. Offsetting this was negative mix. Material costs were down slightly as we obtained savings in certain material categories, but they are being largely offset by higher commodity prices.

R&D amounted to $32.9 million. That's a 10% increase in local currency. Growth in R&D in the quarter was driven by increased investment in product development.

SG&A was $193.5 million, that's an increase of 5% in local currency. Variable comp, investments in Field Turbo programs as well as employee benefit costs contributed to that increase.

Our adjusted operating income reached $148.5 million in the quarter, and that's a 15% increase over the prior year amount of $129.1 million. Currency reduced operating profit by $2.6 million in the quarter, or about a 2% impact to our growth rate. Adjusted operating margins were 22.7%, and that's a 150 basis-point increase over the prior year.

A couple of final comments on the P&L. Our amortization was $10.2 million in the quarter while our interest expense was $8.2 million in the quarter.

In terms of taxes. For purposes of adjusted EPS, we are reflecting our estimated annual effective tax rate of 22%. For the quarter, our actual tax rate was 20%. As a reminder, the difference is due to the timing of stock option exercises and the impact of the new accounting policy that went into effect this year with respect to the excess tax benefits of these exercises. We remain comfortable with our estimated full year tax rate of 22%, which is before nonrecurring discrete tax items.

Moving now to diluted shares. Fully diluted shares, they amounted to $26.4 million in the quarter, which is a 2.6% decline from the prior year, reflecting the impact of our share repurchase program, offset in part by higher shares outstanding due to the accounting change we just mentioned. Adjusted earnings per share was $3.92 per share, and that's a 22% increase over the prior year amount of $3.22 per share.

On a reported basis, EPS was $3.84 per share as compared to $2.93 per share in the prior year. Reported EPS includes $0.12 of restructuring and $0.06 of purchased intangible amortization. In addition, as already mentioned, reported EPS includes $0.10 due to the lower tax rate or reported tax rate.

On the next Slide, we show results for the first half of the year, which were excellent. We had a local currency sales growth of 11%. Our operating income increased by 19%, and our adjusted EPS increased by 28%. That's it for the P&L.

And now, I'd like to turn to cash flow. In the quarter, free cash flow was $113.2 million, and that compared to $108.9 million in the prior year. We remain pleased with our working capital management. DSO was 38 days, similar to the prior year. ITO was also consistent with the prior year at 4.6x.

Year-to-date, free cash flow was $172.4 million as compared to $138 million in the prior year. For the full year, we now expect free cash flow to be in the $400 million range. On a per-share basis, excluding the large facility programs we previously discussed, this is a 15% increase over 2016.

One additional comment. Principally, due to the timing of facility CapEx, we expect cash flow to be down in Q3 but it will be up in Q4.

Now let's turn to guidance. We've had excellent results over the last 4 quarters, achieving approximately a 9% local currency sales growth and a 21% earnings per share growth. We have benefited from a relatively stable global economy, and we've executed our strategies effectively. Going forward, we believe we can continue to execute well and also acknowledge that market conditions can change and comparisons matter.

Looking to the second half of 2017. We see tougher comps than in the first half. In the back half of 2016, our local currency organic sales growth was approximately 7.5% as compared to 5% in the first half of 2016. Secondly, we expect our retail business to be down double digits in the second quarter of 2017. As we've discussed with you in the past, our retail business -- our retail sales can be volatile due to the timing of projects. That provides you some background on our assumptions. Now let me cover the specifics.

Assuming that market conditions remain stable, we're increasing our local currency sales growth assumption for 2017 from 7% to 8%. Based on this sales guidance range, we now expect that adjusted EPS for the full year to be in the range of $17.25 to $17.35 per share, and that's a growth rate of 17%. This incorporates our Q2 beat, a higher sales growth assumption as well as the impact of currency, which have improved lately. Offsetting these positives is that we have higher variable compensation for the back half of the year given our better-than-expected results for the full year.

Now turning to Q3. We expect local currency sales growth to be approximately 5%. If you exclude retail, we would expect our growth to be in the 7% range in Q3. This will give us an adjusted EPS of $4.25 to $4.30 per share, and that's a growth of 9% to 11%.

One final comment. In terms of the impact of currency on sales growth, we expect currency to be neutral to sales in Q3 and reduce sales by about 50 basis points for the full year.

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

Thanks, Bill. Let me start with a summary comments on the business conditions. Lab had good growth in the quarter, particularly given very strong results in the prior year. We had a very good growth in BioClean, Analytical Instruments, and pipette. New product launches, Field Turbo investments, and innovative sales marketing initiatives are all contributing to growth in lab. We expect to see continued good growth in lab.

Industrial also had very good growth in the quarter. Product Inspection had another great quarter of growth. I will provide some additional comments on this business shortly. Core industrial also did very well in the quarter, driven by excellent results in China. Finally, retail was up modestly in the quarter.

Now let me make some additional comments by geography. Sales growth in Europe was good, especially considering we were impacting by timing of Easter in Q2 this year versus Q1 last year. Lab has growth against very strong results from the prior year. Product Inspection did very well while core industrial was down slightly, although up on a year-to-date basis.

In the Americas, lab did very well in most product lines. Product Inspection had another quarter of excellent growth. Core industrial was down against very strong results in the prior year period. Retail was also down in the quarter. Asia/Rest of the World grew double-digit in Labs, industrial and retail. As Bill already mentioned, China has accident growth overall with lab, industrial and retail, showing very good results. We benefited in China in the quarter from completion of some industrial project activity. As we look to the second half of the year, we expect to have very good growth in China in Q3 but would face tougher comparisons in the fourth quarter.

Before I cover Product Inspection, let me make some additional comments on service, which has grown 7% in the first half. As a reminder, service represents almost 25% of total sales and is a unique competitive advantage for us as well as an important platform for revenue growth. We have a service force of approximately 2,700 personnel, which is, by far, larger than any direct competitor and have invested significantly in training and tools to support the daily activity. Core to our service growth strategy is increasing the percentage of our installed base of the service contract. We have talked about this objective in the past and today, we can report that over the last 4 years, we have seen our service contract business grow by approximately 40% through these efforts. We're emphasizing service contracts versus service in general because we see the importance of moving our service business to be more contract based. We can much better plan now with technicians when their work is contract-based, and we believe the value received by customers is much higher when our work can be preplanned and address topics like uptime and preventive maintenance.

One of our core beliefs is that the quality of our service has been -- is at least as important as the quality of our products impacting the consumer experience. It helps us maintain very high rates of customer retention and therefore, reduces our selling costs in the long term. The intangible assets we presented by our installed base of product is along with our CRM data, the most valuable intangibles that we have. We use data collected on our installed base to promote the growth of both our product and service business, and to identify ways to bring value to customer. Our service business and our installed base are critically important to our future. We expect to continue to grow our service contract business at higher rates than the corporate average. And with the high profitability of our service business, this will provide a very nice mix impact to profit.

Another a strong performer has been our Product Inspection business, which has sales growth of 18% in the first 6 months. Let me provide a short update on this business, which represents slightly less than 20% of total sales or almost 45% of our industrial business. Product Inspection is more weighted to the West and customers are principally food as well as pharmaceutical and consumer goods companies. Our offering consists of checkweighers, metal detectors, x-ray vision, our sterilization solution to help ensure the integrity and quality of packaged items. We have the broadest product offering in the market and are a clear market leader in every major region except Japan. Our extensive service network is a very important competitive advantage for us.

The manufacturing productivity and uptime is critical to food and pharma companies. For global customers, the size and reach of service capability is a key consideration and no competitor comes close to matching our global reach.

We are generally recognized as a leader in innovation, which we reinforced earlier this year with the launch of our C Series, checkweighers. The C Series is a truly global product platform, covering the entire market from simple to high complex applications on the production line. All products are available worldwide and complying with global standards and regulation. Furthermore, they are a scalable with a flexible combination of mechanical and software option that can be tailored to individual customer requirements. The series sets standards for weighing sort of technology, and is what we refer to as future-proof that it has a modular design, making it easy for future upgrades.

While offering significant value for our customers, the C Series benefits us in terms of manufacturing, spare parts and service knowhow in the form of reduced complexity. We have significantly reduced the number of product lines from more than 50 to 10, while at the same time filling product gaps in the market and serving the full value [per need] with solution for both dry and wet environments. The series has the same software, manned machine interface and communication capabilities across all product lines, allowing for easy intuitive operation for our customer and more efficient production and supply chain requirements for us. Simple equipment design among the product lines greatly reduces the number of spare parts.

Growth drivers for Product Inspection are attractive, principally driven by concerns of product safety, across brand protection and manufacturing productivity. We continue to see global food companies looking to standardize globally their product inspection instruments. Our global presence and service network provides us with a unique advantage here.

Finally, since Product Inspection is heavily weighted to food, as food follows population overtime, we believe that in the future, emerging markets will provide very attractive growth opportunity for Product Inspection.

Product Inspection should grow above the company average over the medium term. We are currently expanding our manufacturing facilities to Product Inspection in both the U.S. and in the U.K. to accommodate this growth potential.

That concludes our prepared remarks. We are very pleased with our excellent results in the first half of the year. Our outlook for the remainder of the year is positive, although we will face more challenging comparisons in the back half of the year. With continuous good execution, we believe we can gain share and generate good sales and earnings growth.

I want to now ask the operator to open the line for questions.

(Operator Instructions) Your first question comes from the line of Ross Muken with Evercore ISI.

So maybe as we think about the end markets for second and maybe the geographies, where are you seeing the biggest inflections where you've seen growth kind of kickoff, continue to sort of accelerate and even when you look at your order book or you're staring at third quarter, you're sort of surprised at the trajectory or it's noticeably different than maybe a more smoother trend? And then is there anything where you've seen that happen and it's leveled off? Or in general, have you seen most of the markets kind of stay elevated that have sort of done that so far? Just trying to get a feel for maybe the slope of some of these businesses that have been improving for you.

So interesting question. I think one of the reasons that I wanted to call out in our guidance for Q3, Ross, is the impact of retail is that when you kind of look at a 3-year growth rate, including retail, and a 2-year growth rate, including retail, you kind of see Q1, Q2, Q3, all kind of at the same level. But when you start to pull out the impact of retail, actually, you see that there's just a modest little tick up, and I'm not sure if this -- the impact of certain part of the global economy. I mean we -- our general view is there's not too many bad parts of the world right now. But I think it's the fact that we got a little bit more Field Turbo in there. And so we're -- we feel good about what we see globally. There's some markets like China that we would say, hey, China is not going to stay at that kind of rate and they'll start to face much tougher comps later in the year. But overall, we don't see a slowdown. We see this 5% as more a little bit artificial impact -- "artificial impact" due to retail, which is kind of lumpy, just as a reminder for everybody, tends to be a little less profitable, particularly in a contribution line than some of the other businesses -- than the core businesses.

And on the emerging market side, that's what I'm more thinking about, where you've seen now this slope of recovery and obviously, China, as you mentioned, is running pretty high. I mean is that consistent across sort of all the subgroups within there? Are some of the earlier cycle stuff looking any different than mid or late cycle? Are some of the health care businesses just kind of steady stages? Give us a little bit of a picture on some of the emerging markets pieces. I'm just trying to get a sense for maybe trajectories.

We felt good about also the other emerging markets besides China. We had like in Southeast Asia that had a strong quarter. And even Russia and Brazil also did quite well. You might recall on the last call, we did also talk about India. We had in India mainstream of business growth against very good growth last year. India is a little bit impacted by some new tax regulations. So maybe for the second part, we've going to need to see a little bit of an impact. But overall, actually, really good results across all the American markets, and we stay confident that we're going to continue to see good momentum there, too.

Your next action comes from the line of Tycho Peterson with JPMorgan.

Just wondering if you can provide a little more granularity on growth expectations by segment for the back half of the year. I know you kind of touched a little bit on that to Ross' question. But in particular, on the lab market, I'm wondering what your expectations are given the funding environment getting a little bit better.

Yes, we had high single digit growth in lab for the second half of the year. And the Product Inspection business should continue to do quite well, although they had a very tough comp in the fourth quarter. And our core industrial business should be in that mid single-digit. It's the retail business that's -- where we're looking at probably a double-digit decline there in the second half.

Okay. And then let me -- your comments on service. Can you give us a sense as to which -- how much of the service business are under these broader service contracts? And how much of an emphasis you're placing now is on emerging market service attach rates versus a more developed market?

Okay. So the contract based businesses is about half of our total service business or close to half and had obviously been growing much faster than the rest of the service. The other part of the service would be the spare parts and break/fix. And that piece has now been growing as well. In the past, certainly, we even had [things] slide. And a particular reflection about the quality of our products becomes much better, and we have been successful to migrate customers to preventive maintenance, that also helps to reduce the break/fix aspect of it. So overall, it's a very healthy change of mix. It's, as I mentioned, improved the customer satisfaction, and it helps us to maintain a tight contact with the customer base. Now in terms of attachment rates or off-service contracts, we still have significant differences country-by-country, that's a question of maturity of our whole service development. And it reflects also the maturity of the country. Obviously, in the West, we have a much bigger installed base than in the East. And we bring more and more of these service programs also to the East, in particular, also to China, where we have, for example, experienced very nice growth rates and increasingly also in contract-based services. But it's -- in terms of -- we are clearly skewed towards the West when it comes to service contract business today.

Okay. And then last one for Bill. Can you just give us the margin components? How much price and material cost. I know you said that moved around a little bit. And what are you expecting in the back half of the year for those 2 components?

Okay. So price increases were up 230 -- prices were up 230 basis points in the quarter, and that's 210 year-to-date. And so that contributed about 1%. Then we had productivity gains, including kind of the material component and labor component. It was about 30 bps in the quarter, 60 bps year-to-date. And then the mix kind of -- mix and let's call it other would be then the reconciling items.

Your next question comes from the line of Steve Beuchaw with Morgan Stanley.

I really appreciate if you can spend a minute on Field Turbo. I very much appreciate Bill's comments that there's an increasing, and I mean this in a very good way, disconnect between growth and the underlying markets because of Field Turbo. Now that you have a few years of experience, I mean, how do you think about the sustainability of the growth rate of the sales force? And how do you want to refine the Field Turbo program going forward?

The Field Turbo is really defined as long-term initiative like the typical Spinnaker approaches. Every year, we get a little more sophisticated, but we don't see an end to the story. You're not going to sort of see us doing the same amount every year. We will certainly address that to the market conditions. But in general, we see opportunities really around the world and we are prioritizing, however, the businesses with the best profitability and certainly, also the best opportunity for us to win market share. The reason why I say the program has many more years to go is our average market shares are still giving us plenty room for many, many years to grow here through additional resources. And the additional resources help us to serve the consumer in a better way and to have better geographic coverage. So yes. I if I look at this year, we are, for example, planning to add another 200 people, roughly. We're certainly going to investigate for more opportunities also later this year. And from today's perspective, there's no reason why we wouldn't do something similar again next year.

Just 2 quick modeling questions for me. One is now that you've seen 2Q, you still think Easter was 2- or 3-point swing factor between the first quarter, second quarter in Europe? And then a quick one for Mary or Bill. Any chance you can give us a view on what the tax rate looks like beyond this year, given this year, we had a bit of an accounting transition?

Let me answer the last part first. So the tax rates sitting here today, we would say, same 22% rate next year. In terms of Europe, I tend to look at the year-to-date numbers and say that our lab business is up 8.5% year-to-date and our industrial and PI business is up about 5% year-to-date. And kind of looking at the details, I would say that 2% to 3% for the Easter impact on Europe is probably still a realistic number, particularly by looking at some multi-year growth rates, too, and if I adjust for that. But I think that, that is a reasonable assumption, Steve.

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

First question was on market share. Be interested if, maybe at a high level, you could talk a little bit about where you think you're gaining share most effectively? And then maybe, as a counter to that, where you think the opportunities from here going forward are most compelling for you to do better on the share front?

So because the data of -- is not so easily available from our competitors, we can't exactly -- quantify the numbers on quarterly basis or business-by-business or country. But in general, I definitely feel very strong about our Product Inspection business how we do there. Really very strong. But the whole lab portfolio does also extremely well. And I also feel like we do well on the remaining businesses. And when you think about geography, I feel strong across the world. So it's -- I wouldn't highlight a particular country or so. And -- yes.

Okay. That's helpful. And then maybe on the services side of the business. Can you talk a little bit about the types of investments you need to make at this point to drive continued growth there above the corporate average? And I'm interested, if that business grows as a percentage of total, what that means from an incremental margin profile of the total company. I'm wondering if that'll have a tangible effect.

So in terms of the investment, we have seen something going on for years. We have heavily invested in having better data on our installed base. We make sure that we have an understanding where all our installed base is with respect to decision-makers or users behind it. And having an understanding how the equipment is used, and then running marketing programs behind it. And that's actually very diligent work, detailed work, for developing service contract business. You need to do micro campaigns, and that's something that we have been really developing over the years. And we have invested accordingly in telesales resources, but also service development people. And then when you have the business, of course, we need to add more service technicians and heavily invest in training on product service technicians. We are proud of having a very well trained but also very specialized service force around the world. And so these are multiple investments. And of course, we always talk about our Blue Ocean program. So in that sense, there is also IT tools that support our service organization across the world.

Your next question comes from the line of Dan Leonard with Deutsche Bank.

First off, I was hoping you could elaborate further on what drove the acceleration in China, whether by end market, consumer class or anything you could offer color on.

Okay. I think the thing that's really changed the last couple of quarters is the industrial business. So we -- we're doing well in industrial. I think there's multiple factors contributing it to that. One is we've, going back a couple of years, redirected our sales resources to go to more selected industrial markets. And I think it's fair to say that, that process didn't happen all at once, right? That when you're approaching new segments, trying to gain share with customers, et cetera, it took a while to build that up and I think that's still improving. The second factor is we clearly believe that there was some pent-up demand in recent years coming from China. It's hard to quantify, but we certainly have seen it in other parts of the globe where the economy gets weak and there's, let say, something of a financial limitation on credit availability that we tend to get, eventually bounce back in our replacement cycles. And then maybe the third thing that is another tough one to quantify and it's probably a little bit into the coming quarters. But there's probably something to be said with the end of the 5-year conference coming up that they -- the government likes to talk about this program or that program that they've done, finished for the benefit of the "people." And we are today, much less of a direct beneficiary of such programs than we were in the past, but we're certainly an indirect beneficiary of pushing to get some of those projects done.

And is it possible you can quantify the growth rate between your industrial business in China and your lab business in China?

Yes, sure. So our -- year-to-date basis, our lab business is up mid-teens, let's call it. And our industrial business is up around 20%.

Your next question comes from the line of Dan Arias with Citi.

Bill, just following up on retail. I'm not sure how much visibility you have into 2018 at this point, but do you feel like -- do you expect the project work to snap back as you move to the beginning of next year? And I guess along those lines, I mean, what is the normalized growth rate for that business in the out years?

So maybe I start by trying to persuade with the idea that I want to answer your question, but I don't want us to get distracted on that question, too. If you look at what's going to drive our EPS growth to the long term, it's how we're doing in those core product categories. Retail is, by definition, lumpy. It represents today, Mary, help me, probably by the end of this year, somewhere around 8%, 7.5%, 8%, and it's materially meaningfully less profitable than any other businesses. So it certainly -- you guys need to -- we need to help you guys with expectations for it. But if you think about your long-term model, it's not going to be a key value driver. Now with that being said, sitting here today, we don't know that much. As you guys remember, our budget tour is coming up. We'll know a lot more on the next call and probably to give you some better insight. But sitting here today, we would always say our next 3- to 5-year expectation for retail is low single digits. And sitting here today, I wouldn't see a different number for 2018 than that.

As you might recall that in recent quarters, we were surprised, actually, by better retail numbers than expected. Some of that was driven also by European regulations for labels, so we had a little bit of a spike of business that we are facing now to all the comparisons and that business doesn't repeat. So again, this lumpiness of that business and we just accept it because as Bill said, it's kind of not the core that we want to focus on driving growth.

Yes. Certainly. I understand. Okay. And then maybe just within lab. I'm just curious about the pipettes business. That was one that was up last year more than I kind of would have thought it would be. So I mean at the halfway point of this year, how do you think that looks in 2017 compared to the growth that you saw in 2016?

Pipettes are growing. Last year, it grew around 10%. And this year, it's 150 basis points less.

Your next question comes from the line of Tim Evans with Wells Fargo.

Maybe I'll just turn to the balance sheet. Over the past 3 years, you've taken your leverage ratio up materially to return capital. And I was just wondering if that's something we should expect to continue. Should we think about that leverage rate remaining stable or perhaps even going down? Maybe any comments on that.

Okay. So Tim, I'm going to try to be persuasive again. So -- I -- you're -- and I'm only having fun with your comment materially. I think we've got an average of the last couple of years buying about $100 million a year over our free cash flow, and very much reflecting the fact that our balance sheet is pretty conservative and still is at the end of today. Sitting here today, we are expecting that in 2018, we're going to buy just equal to our free cash flow, which just as a reminder, we will, assuming things as they are today, we will buy about $0.5 billion this year. We bought about $0.5 billion last year. We will buy about $0.5 billion again next year. And maybe, one, not to get in too much in the weeds here, just one other thing is you guys remember that our free cash flow in '16, '17, probably a little bit early '18, will be impacted by all these building projects that we undertook. And this is a reminder the 2 main categories they fall into are, one, is this campus consolidation that we did as part of our efforts to reduce our Swiss franc cost base. We eliminated a number of facilities and are consolidating that into one this year, and then finishing it off next year. And then the second one is 2 plant pure expansions that we're doing. One in the United States and one in the United Kingdom because our Product Inspection business, as you guys hear from the numbers, has just been growing really well, particularly in the x-ray side and we just needed more facilities. And that's kind of behind us. That, for a lack of a better expression, somewhat artificial deflating of our cash flow for a couple of years here. We made up for that with some extra share repurchases and get back to a more normalized free cash flow level in 2018. I've been talking so much, Tim, did I answer your question fully?

You did. That's very helpful.

Your next question comes from the line of Derik De Bruin with Bank of America Merrill Lynch.

So can you talk a little bit about the Pharma and Biotech markets and also bio-production? In your process analytics business, you sell dissolved oxygen sensors and other tools that look at classically (inaudible) like bio-production campaigns, bio-manufacturing campaigns. Some of your competitors have commented about slowing the bio production market. I'm just wondering if you notice anything weird in terms of production scales and from your perspective in that market?

Okay. So life science, in general, is about 25% to 30%. We would include here different things. So we have biopharma, we have Pharma and CROs and so on. This is a market that we serve, in particular, with the pipette business, but also all lab business and to, certain degree, also with the process analytics business. You heard us just talking about pipette, how well we have been doing. So I'm very happy with that. And if I look at the Process Analytics business, we had excellent growth last year. This year, a little bit less so. But in terms of 2-year growth, actually remains really strong. And in that sense, I feel like we saw a little bit weaker now but that's because the comparisons were really so difficult. But in terms of market momentum, I definitely feel good and we're reviewing that business early in the week and the outlook actually, remains strong. So I feel actually good about the end-user prospects and in particular, also in the area of bio-production in the bio similars and all the related markets.

Great. And Bill, can you talk just a little bit about the gross margin progression in the second half of '17? Your second quarter numbers were a bit lower than what we had modeled.

Yes, sure. So correct, we're up about 30 bps in the second quarter and that largely was explained. These were up 160 bps in prior year. In the second half of the year, I think you can assume our gross profit margins will be up about 50 bps.

Your next question comes from the line of Steve Willoughby with Cleveland Research.

Bill or Mary, I'm just wondering, and I apologize in case I missed it, if you could just give us or quantify some of the -- like an EPS bridge between your old guidance and your new guidance. I knew you called out a number of things, including FX as well as some higher variable comps. So I just wondered if you could help us put some numbers around how you're thinking between your old EPS guidance, your new EPS guidance?

I struggle to be overly precise because each one was independently bottoms up, if you know what I mean, Steve. So -- but that being said, on the EPS side, we certainly built in some additional upside due to the higher sales expectations. We built in a -- some impact due to higher bonuses to be paid and has -- and we might note that, that has a little bit of a weird impact, I hope I can explain it clearly in the second half of the year because the first half of the year was so strong, it's got to mean we finished very, very well on our bonus plans for the full year, but with this kind of more mid single-digit growth in the second half of the year has a little bit of a disproportionate impact on the cost structure in the second half. And incremental margins would otherwise be even better in the second half. And then the we updated ForEx. ForEx is still a slight headwind for the full year, but certainly less of a headwind than it was last time. And then we added in the impact of what we've beaten this quarter by. So that kind of gives you the, hopefully, a flavor of how were we're thinking about it.

Okay. That's helpful. And just one quick follow-up then. Just on tax rate, just doing the simple math, just want to make sure we're looking at it right. For 22% for the year, we're thinking something in the -- somewhere 24%, 25% range in the back half of the year.

Yes, I guess, that it certainly -- it's got to be over. The only hesitation on the amount, remember, our pretax earnings are larger in the second half of the year than the first so you might not need that much of an impact to get there, but it's something north of 22%, yes, and 24%, probably.

(Operator Instructions) Your final question comes from the line of David Stratton with Great Lakes Review.

Really quick, would you go over what you're seeing in raw material costs? And any benefit from the Stern Drive program at this point in procurement?

Yes. So maybe we ticked off some projects that will layer in overtime, but I think we ticked off projects that had a total value savings about $9 million. Again, it won't be all realized at once related to the Stern Drive program. We were relatively flat in terms of material cost on a year-to-date basis, and I believe that commodity prices were negative, about $1 million, with offsets in other categories. And then another one that was negative, if I recall correctly, was electronic components. So electronic components and commodity prices are up and other categories are down. I think $2 million of negatives and $2 million of pluses, if I remember correctly.

All right. And then really quick, back to the service revenue. How much is Troemner benefiting that category?

So it would be -- so it could be 1% or something like that, I think. They're pure service business is certainly less than $10 million.

There are no further questions in queue. I'll turn the call back over to Mettler-Toledo management.

Thanks, Devon. And thanks, everyone, for joining the call tonight. As always, if you have any questions, please don't hesitate to contact us. Given that we're in Switzerland, probably the best way is through email. Hope everyone has a good night, and take care. Bye-bye.

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