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Edited Transcript of MTD earnings conference call or presentation 1-Aug-19 9:00pm GMT

Q2 2019 Mettler-Toledo International Inc Earnings Call

Columbus Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Mettler-Toledo International Inc earnings conference call or presentation Thursday, August 1, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mary T. Finnegan

Mettler-Toledo International Inc. - Head of IR & Treasurer

* Olivier A. Filliol

Mettler-Toledo International Inc. - President, CEO & Director

* Shawn P. Vadala

Mettler-Toledo International Inc. - CFO

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Conference Call Participants

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* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Daniel Gregory Brennan

UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences

* Jason Andrew Rodgers

Great Lakes Review - VP

* Michael Leonidovich Ryskin

BofA Merrill Lynch, Research Division - Associate

* Patrick B. Donnelly

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Richard Charles Eastman

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Stephen Barr Willoughby

Cleveland Research Company - Senior Research Analyst

* Stephen Christopher Beuchaw

Wolfe Research, LLC - Director of Equity Research

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to our Second Quarter 2018 (sic) [2019] Mettler-Toledo International Earnings Call. My name is Maria, and I'll be your audio coordinator for today. (Operator Instructions)

 

And I would now like to turn our presentation over to your hostess for today's call, Ms. Mary Finnegan. Please proceed, ma'am.

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Mary T. Finnegan, Mettler-Toledo International Inc. - Head of IR & Treasurer [2]

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Thanks, Maria, and hello, 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 today. I'm joined here by Olivier Filliol, our CEO; and Shawn Vadala, our Chief Financial Officer. Let me cover just a couple of administrative matters.

 

This call is being webcast and is available on our website. A copy of the press release and the presentation we refer to is also on the website. Let me summarize the safe harbor language, which is 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 10-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's Discussion and Analysis of Financial Condition and Results of Operations 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 differences between non-GAAP and the most directly comparable GAAP measure is (inaudible) in our Form 8-K.

 

I will now turn the call over to Olivier.

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [3]

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Thank you, Mary, and welcome to everyone on the call, which we're doing from China. It is Friday morning for us and Thursday evening for most of you on the phone. I will start with a summary of the quarter and then Shawn will provide details on our financial results and guidance. I will then have some additional comments, and we will open the lines for Q&A. The highlights for the quarter are on Page 3 of the presentation.

 

We had a good second quarter results. Local currency sales growth was solid, and we are particularly pleased with the excellent growth in our Laboratory business and very solid growth in Core Industrial product lines. Total local currency sales grew 5% in the quarter. Excluding Food Retailing, which declined in the quarter, local currency sales grew 6%. Growth in the Americas and Asia was very good. We had another quarter of good operating margin growth, and despite headwinds from currency and tariffs, we achieved a strong increase in EPS.

 

Turning to the remainder of the year. With the exception of Food Retailing, demand in our markets is favorable and our outlook for the third quarter is positive. As we look towards the end of the year, we acknowledge greater uncertainty due to the deteriorating macroeconomic data and potential unfavorable consequences to the global economy due to trade disputes, particularly between the U.S. and China. We will monitor our markets closely, remain agile and be ready to adapt our plans if necessary. We remain focused on execution of our growth initiatives and believe we are well positioned to continue to gain share regardless of market conditions. Based on market conditions today, we believe we can generate good earnings growth in 2019.

 

Let me now turn it to Shawn to cover the financials and guidance, and I will come back later with additional comments on our business.

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [4]

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Thanks, Olivier. Sales were $731.4 million in the quarter, an increase of 5% in local currency. As a reminder, all growth is organic. On a U.S. dollar basis, this total sales increased 1% as currencies reduced sales growth by approximately 4% in the quarter.

 

On Slide #4, we show sales growth by region. Local currency sales were 7% in both the Americas and Asia/Rest of the World. Growth in the Americas, excluding Food Retailing, was 9%, a level we're quite pleased with. Sales growth in Europe declined 1% in local currency and was impacted by a decline in our Product Inspection business. Absent Product Inspection, growth in Europe was up 3% in the quarter, which is quite good, particularly given the 9% sales growth we had in Q1, which included some benefit from the timing of Easter holidays. Finally, China had another very strong quarter with 9% local currency sales growth.

 

The next slide shows year-to-date results. Local currency sales growth increased 4% in Europe during the first half of the year; 5% in the Americas; and 8% in Asia/Rest of World. In total, sales grew 6% in the first half of 2019.

 

On Slide #6, we outline local currency sales growth by product area. In the quarter, Laboratory sales grew 8%. Industrial increased 3%, with Core Industrial up 5% and product -- while Product Inspection was down 1%. Food Retail declined 8% in the quarter. As you heard from Olivier, Food Retailing reduced our overall sales growth by 1% in the quarter.

 

The next slide shows sales growth for the first half of the year. Laboratory sales grew 8% in local currency; Industrial grew 5%, with Core Industrial up 7%, and Product Inspection up 2%. Food Retailing declined 6% during the first 6 months of the year. Overall, first -- overall, for the first half, total sales were up 6% in local currency, 7% if we exclude Food Retailing.

 

Now let me move to the rest of the P&L for the quarter, which is summarized on Slide #8. Gross margin in the quarter was 57.4%, a 20 basis points increase over the prior year level of 57.2%. Productivity and pricing continue to be strong contributors to margin growth. Partly offsetting these positives were tariffs from the U.S.-China trade dispute and some costs associated with product launches. R&D amounted to $36.6 million, which represents a 7% increase in local currency.

SG&A amounted to $205.2 million, a 2% increase in local currency over the prior year. The increase was driven by investments in our field force, offset in part by our cost savings initiatives.

 

Adjusted operating profit amounted to $177.7 million in the quarter, which represents a 5% increase over the prior year amount of $169.3 million. We estimate currency reduced operating income by approximately $6 million. We also estimate the tariffs were a gross headwind to operating income by approximately $5 million. Absent adverse currency and the gross impact of tariffs, operating income would have increased 11% in the quarter.

 

Operating margins reached 24.3% in the quarter, a 90 basis point growth from the prior year. We're quite pleased with this increase given the meaningful headwinds we faced in the quarter.

 

A couple of final comments on the P&L. Amortization amounted to $12.3 million in the quarter; interest expense was $8.9 million in the quarter; other income amounted to $1.6 million.

 

Let's turn to taxes. We are lowering our effective tax rate for the full year from 20.5% to 20%. The effective tax rate in the quarter is 19.6%, which reflects the catch-up for the first quarter. Our effective tax rate is before discrete items and adjusts for the timing of stock option exercises.

 

Moving to fully diluted shares, which amounted to 25.1 million in the quarter and is a 3% decline from the prior year, reflecting the impact of our share repurchase program.

 

Adjusted EPS for the quarter was $5.16, an 11% increase over the prior year amount of $4.65. Absent currency and the gross impact of tariffs, and adjusting for the tax rate change, our adjusted EPS growth would have been 15% in the quarter, a level we are quite pleased at.

 

On a reported basis in the quarter, EPS was $5.06 as compared to $4.31 in the prior year. Reported EPS includes $0.10 of purchased intangible amortization, $0.09 of restructuring and a $0.09 difference between our quarterly and annual tax rate due to timing of stock option exercises.

 

The next slide shows our P&L for the first half. We're quite pleased with these results, which shows a local currency sales growth of 6%, operating margin improvement of 80 basis points and earnings growth of 11%. We're particularly pleased with these results given the meaningful headwinds we faced with adverse currency and tariff costs. That is it for the P&L, and now we'll cover cash flow.

 

On a year-to-date basis, adjusted free cash flow amounted to $193.5 million as compared with $177.3 million in the prior period. This represents a 12% increase on a per share basis. Our working capital statistics remain solid with DSO at 39 days and ITO at 4.5x.

 

Let me turn to guidance. We continue to feel very good about our ability to execute on our growth and productivity initiatives. As Olivier mentioned, with the exception of Food Retailing, demand in our markets is favorable. We acknowledge the deteriorating macroeconomic indicators and growing uncertainty of the impact to the global economy due to trade disputes. Our outlook for the third quarter is positive as we have assumed no change to market conditions.

 

As we look to the fourth quarter, we will face tougher comparisons due to a very strong growth in the prior year. We're also cognizant of the uncertainty in the global economy. We believe our business is less susceptible to an economic downturn than in the past due to the greater percentage of our sales in Laboratory and shift within our Industrial business to more attractive market segments. However, we don't believe we are immune to economic cycles and we will remain agile to adapt if necessary.

 

One final reminder. While the adverse impact of tariffs and currency headwinds in our business will be lower in the second half of 2019 as compared to the first half, we still estimate 2.5% earnings headwinds for the remainder of the year. For the full year, we expect adverse currency and gross tariffs to reduce EPS growth by approximately 4%.

 

Now let me cover the specifics.

 

We now expect local currency sales growth in 2019 to be approximately 5%. This is a 50 basis point reduction from our previous guidance, largely driven by weaker-than-expected results in Food Retailing. We expect Food Retailing to be down double digits in Q3 and down mid- to high single digits for the full year. Our full year sales guidance, excluding Food Retailing, is 6% in local currency.

 

 

We are raising the bottom end of our range and now expect full year adjusted EPS guidance to be in the range of $22.60 to $22.75, which is a growth rate of 11% to 12%. We'll benefit from the lower tax rate and beat in Q2, which is offset in part by the slightly lower sales growth and worse currency. With respect to the third quarter, we would expect local currency sales growth to be in the range of 4% to 5% and adjusted EPS to be in the range of $5.65 to $5.75, a growth rate of 10% to 12%.

Absent currency and the gross impact of tariffs, EPS growth in the third quarter would be approximately 14% to 16%. Furthermore, excluding Food Retailing, we would expect Q3 sales growth to be in the range of 5.5% to 6.5%.

 

Some final comments on guidance. With respect to the impact of currency on sales growth, we expect currency to reduce sales growth by approximately 2.5% in 2019. For the third quarter, we expect currency to reduce sales growth by approximately 2%. That is it from my side. And I'll now turn it back to Olivier.

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [5]

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Thank you, Shawn. Let me start by providing some additional comments on our operating results. Our Lab business continued to perform very well with 8% local currency sales growth in the quarter, which was against a good growth in the prior year.

Analytical instruments, pipettes and automated chemistry did particularly well. All 3 regions showed good Lab growth.

 

Our Laboratory business continues to benefit from disproportionate investments in field resources, Spinnaker sales and marketing initiatives and R&D investments. We expect market demand to remain favorable and expect good growth in the second half of the year. It won't be quite at the level we had in the first half, principally driven by more challenging comparisons.

 

In terms of our Industrial business, Product Inspection was down slightly in the quarter. This business continues to do well in Asia and we saw better growth in the Americas, but it was more than offset by a decline in our European business. We continue to feel very good about this business over the medium term. We would expect to see growth in the second half of the year, likely in the low to mid-single-digit type range.

 

Core Industrial did quite well in the quarter with growth of 5% in local currency. Growth was good in all regions. We would expect continued solid growth in the third quarter in Core Industrial and then they will face particularly challenging comparisons in the fourth quarter.

 

Finally, Food Retail was down 8% in the quarter. This was slightly worse than we expected. This business faces challenging market demand and the timing of customer projects activity, which is further impacted in that we are managing it for profitability and not for sales growth. We expect market conditions to remain challenging and this business will be down meaningfully this year.

 

Now let me make some additional comments by geography. I will start with Europe, which was down slightly in the quarter. Lab and Core Industrial did well, particularly as they were against the tough comparisons from the year earlier period. Both products inspection and retail were down in the quarter. For first half of the year, Europe is up 4%, a level we are very pleased with. For the second half of the year, we continue to believe Europe will be up low single digits, even with retail continuing to be a drag on sales growth, particularly in Q3.

 

Americas had very strong growth in the quarter. Excluding Food Retailing, Americas grew 9% in the quarter. Lab had very strong growth and Product Inspection and Core Industrial had good growth as well. For the remainder of the year, I would expect Americas to grow low to mid-single digits. Absent Food Retailing, we would expect Americas to grow mid-single digits for the full year.

 

Finally, Asia/Rest of the World had another quarter of strong growth. All business lines did well. China had another quarter of very good growth. Lab was again up double digits in China in the quarter, while Industrial was up high single digits. Our outlook for this region remains positive, although we would expect more moderate growth for the second half of the year due to multiyear comparisons.

One final comment on the business. Service had another quarter of good growth in the quarter, up 7% in local currency for both the quarter and first half of the year. That concludes my comments on the different pieces of the business.

 

Let me update you on our sales and marketing initiative, on segment newsletters, and then I will also provide some additional insights on our China business. Segment newsletters have long been an important tool and a core part of our Spinnaker sales and marketing approach. Our newsletters build brand awareness and showcase our industry expertise and knowledge of our customer processes. They highlight products and use case studies to discuss the trends and challenges most relevant to specific segment.

 

In total, we create 27 different newsletters covering our Laboratory, Process Analytics, Core Industrial, Product Inspection businesses across 18 different industry segments. These newsletters are workplace-specific, with content customized for decision makers such as chemists, scientists, R&D managers or production engineers. Two editions are published each year and translated in up to 15 languages. Overall, we expect to distribute about 2.5 million copies to our customers each year. This is a good example of the unique capabilities we have developed and fine-tuned with our Spinnaker sales and marketing approach. The newsletters have proven to be an important tool to communicate with our customers and generate interest for our products.

 

Now let me make some additional comments on China. I've been here over the last 1.5 weeks visiting our operations, conducting senior management meetings and we had our Board meeting in the last 2 days. As a reminder, China is approximately 18% of our total sales. China is similar to the overall group in that we have #1 market position in vast majority of our product lines here. Our market share is similar to our global market share, however, our relative market share is higher as we compete against a greater number of smaller competitors. I'm very happy with the team here and the progress and development of our global programs, mainly Spinnaker sales and marketing and investments in field resources. The R&D teams have also made excellent progress in new product development.

 

Lab now represents a little less than half of China sales, not too different than the overall company. I know that there are questions about the generics market here in China and the 4+7 initiative currently underway. A strength of our business here in China and globally is our diversification, while we do sell into the generics markets, it is only one piece of our lab offering here in China. We sell a wide range of products at relatively low price points to various customer segments in a variety of customer applications. While we may encounter weakness in one market segment, we often can make up for it with strength in other segments. Central to capitalizing on this targeting underpenetrated areas and shifting resources to faster growing segments. Within Lab, in China, automated chemistry is a good example of this. AutoChem in China was historically focused on academia, with limited service and pricing potential.

 

Over the last several years, we have shifted the focus to pharma and chemical. We have made investments in terms of our field resources and increased our sales and marketing programs. Currently, the chemical market is particularly attractive given some recent explosions and heightened priority on safety and production and scale up. We are able to capitalize on this demand, and our AutoChem solutions are now helping to set the standard for chemical safety. This is just one small example, but I think it gives you the sense of how we approach the market and continue to shift resources to the most potential.

 

Process Analytics in China is another example of this. They have achieved double-digit growth for many quarters by targeting and penetrating the bioproduction market.

 

Turning to Industrial. Historically, our business in China was more heavily weighted to Core Industrial, but this has changed over the last 10 years. Core Industrial now represents about 40% of the China sales, and the mix within Core Industrial has shifted from heavier industrial end markets, such as steel, cement and others, to faster-growing markets, such as food manufacturers, pharma and chemical.

 

Product Inspection is disproportionately smaller in China than the Rest of the World, but the outlook is very positive as the economy continues to mature and people eat more packaged food and demand higher quality in the product. This is an excellent example of how we target underpenetrated markets. For those of you that visited our Tampa facility last November, you had a chance to see our new mid-market X-ray instrument that we refer to as X34. The team in China has been working over the last 6 months to localize these instruments to reduce the cost and adapt some of the product features for local manufacturing. The results are promising and we will launch our new X34 for the Asia Pacific market in the coming weeks. Our global R&D priority on modular and reusable design was invaluable for this new product launch.

 

You can see from these several examples how our growth in China is being driven from value-added industry versus infrastructure that was historically at its core. We have a very strong team in China with many years of MT experience. They have consistently demonstrated the ability to react to the aftermarket conditions that can be challenging and change quickly.

 

That concludes our prepared remarks. We are very pleased with our results in the quarter. While the markets in the second half may be more challenging than in the first half, we believe we can continue to gain share and deliver good earnings growth. I want to ask the operator to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Tycho Peterson from JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Maybe Olivier, we'll start out with Product Inspection. Given what we've seen from some of your industrial peers, data points haven't been great. You're talking about a back half of the year recovery. Can you maybe just talk to your confidence in Product Inspection in particular getting better in the back half of the year?

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [3]

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Yes, let me comment. So we had already good growth in Americas and Asia. And we expect solid growth in Q3 in these regions as well, seeing also better spending from food manufacturers in these regions. It was really the Europe that was weak, but also against strong comparisons. For Europe, I feel Q3 to be relatively flat. But overall, I expect low to mid-single digits growth this year overall. This is below our long-term trend and it's below what I expect also here if I look a couple of years forward. But I certainly also expect packaged food customers will return to growth. And hey, we are really, really well positioned. We have leading positions here in multiple technologies. We see that customers combine more and more of these technologies, so so-called combitech is becoming more important. We have a unique position with our service network. So I feel very, very good about this. And of course, quality control in packaged food remains something very important. And just think about all the macro trends here that help us with the growing population in Asia and American markets, changing consumer trends. So feel good, but I recognize that in the short term, we could have expect a little bit more.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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And then, I guess, as a follow-up, if we think about just your Industrial business more broadly, can you talk to leverage you can pull if the macro continues to deteriorate? And then the guidance reduction seems mainly on the tariff front. Obviously, there's another 10% tariff coming out today. I assume that wasn't factored in, but how should we think about the impact of that? I know it's a little bit soon but...

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [5]

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Tycho, this is Shawn, maybe I'll answer the second part of the question. In terms of the tariff that came out today, that one has very little impact on our business. As a reminder, more than 90% of our imports from China are already subject to a tariff. So if we kind of, like, look at the last piece, it's probably in the growth -- on a gross basis, it's probably like $0.5 million a year on an annualized basis.

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [6]

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Back to the Core Industrial. I think we had actually really good growth across all the regions, another one in Q2, but actually for the whole first half. That reflects solid market conditions. But I want also to remind ourselves. As long as the economy is good enough, we feel actually -- we can actually drive replacement business, we can go for market share gain. Our segment marketing here helps really very nicely because we can go after the industry segments that have good growth potential. I certainly also feel that the team is executing very nicely. We have very good momentum in the Spinnaker initiatives. So I expect for 2019 year, mid single-digit growth. Good growth for this business, although a little lower than what we had in the last 2 years, mainly due to strong comparisons, especially in Q4. We're going to have a very strong comparisons coming up. But in terms of how we are performing, I feel good. And also as a reminder, the key industry segments that we serve here are a little bit less exposed to the economic cycles.

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Operator [7]

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Your next question comes from the line of Dan Brennan from UBS.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [8]

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Olivier, back to China, if you don't mind. One of your peers, Sartorius, obviously, discussed slower lab formation in China. I'm just wondering, it sounds like things are -- remain very robust for you there. But maybe can you discuss your lab business in China. And is there anything on that front that you're seeing?

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [9]

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Very happy how the lab business has been performing in China in the last couple of quarters. And I had a deep dive into the lab business also last Friday when I met our market organization team. I feel we are executing very well. And I see, really, the team to go after the many opportunities that are around. Now what's helping here, of course, is our lab business serves a broad range of end-user industries, a lot of different applications. And the price points of our solutions are at the low end. And so it's -- yes, we don't see a slowdown here. I think, rather, we have the comparisons topics in the terms that multiyear, we had really good growth. But absent of that, I feel really very, very good. And all these programs that we have in place, the Chinese team is executing very well on it.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [10]

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Got it. And then maybe just one other just related to China. I know a few of the peers, and I figured that Tycho already addressed this, but a few of the peers have discussed how the government there seems to be trying to favor non-U. S. players in certain areas and I'm not sure if it relates to any of your businesses. But is that something -- I know you've been in the country for 30 years and all your managers are local, so you're kind of part of the local fabric there. But is that something that you're seeing at all? Or is that something that could pop up and impact you?

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [11]

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Yes. Valid question, but really -- we have -- we don't see any of that, and we talked about that. And one of the reason is what you just said, 13 years in China. We are viewed as a local company. We have such a big presence. We have local management team. We have been around for so long. The Mettler-Toledo brand is viewed as a local brand, local company. And then, first, also because the big majority of the products that we sell are locally manufactured and we -- the big remaining part of imported products come from Switzerland. And we have hardly any products coming from U.S. So it's, for us, it's a nontopic. And we -- again, we are viewed here in a very good way. So yes, happy to report on that one.

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Operator [12]

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

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Michael Leonidovich Ryskin, BofA Merrill Lynch, Research Division - Associate [13]

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This is Mike, on for Derik. I want to talk about the -- you called out another robust quarter for service in the quarter. Anything in particular that stands out? It seems like it's just been a very wrong -- very long runway there. So wondering how the dynamics there play into the guide. And then a follow-up was going to be on the pacing of 3Q to 4Q. You gave a lot of comments on your expectations for Food Retail and the slowdown there. But even if sort of you -- if you backed that out, it looks like slightly more moderate expectations for the second half. I know part of that you talked to the general uncertainty in the macro and the Industrial. Just curious if there's anything more specific on that or if it's just general caution.

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [14]

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Okay. Let me take the first part, and then Shawn will address the second part. So service, yes, indeed, very good performance here that we have now for many quarters. We have shared with you our strategies on service. We are very focused on executing on that one. It's something that we have global programs that we are executing across all the businesses. And really, every country is involved. I see also pretty much every country with very solid service growth. As a reminder, service is today about 23% of our sales. We had the 7% growth in Q2 as well as year-to-date. And I -- my expectation is that we're going to continue to grow above group average with service. We have these programs that have many more years to go. We are far from being saturated on that one. And there are also different markets where we are kind of at the beginning of the journey. I would include also China, where we have solid growth in the last couple of quarters. But when you look at the percentage of service in total, there's more room to go. And I would also add 1 additional associated business, and that's the consumable business. That's also one that we are very focused on. I sometimes also look at service and consumables together, which is today about 1/3 of our business. That one, if combined, we had even better growth than service. So again, very happy how we performed on that. And services is very much also an execution topic. You need to be on top of all the tactical aspects of that. And we do well on this.

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [15]

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Yes. Mike, in terms of the other part of your question. We don't see any particular changes between Q3 and Q4 in terms of moderation in the business. But the one thing I would maybe highlight to you is that we do face a very difficult and challenging comparison in the fourth quarter of last year. Overall, we were up 8%. But in particular, our Core Industrial business was up 13% in Q4 of last year. And also Europe had a pretty strong number, too. So that's maybe -- it's just a comparison topic.

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Operator [16]

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And your next question comes from the line of Steve Willoughby from Cleveland Research.

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Stephen Barr Willoughby, Cleveland Research Company - Senior Research Analyst [17]

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Can you hear me now?

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [18]

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Yes, we can, Steve.

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Stephen Barr Willoughby, Cleveland Research Company - Senior Research Analyst [19]

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Okay, sorry about that. Shawn, I believe if I heard you correctly, you said that you're assuming FX and tariffs to be a negative 4% headwind now. And I had you down for -- you're saying that was negative 4.5% before. And so I'm just trying to figure out the moving pieces between your old guidance and your new guidance and how that all settles out. And then I just have one quick follow-up.

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [20]

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Yes. Steve, it might be more of a rounding topic. I'm not seeing any particular changes in terms of, like the tariffs versus what we talked about before. And if anything, the FX is modestly a little bit worse than the last time we spoke.

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Stephen Barr Willoughby, Cleveland Research Company - Senior Research Analyst [21]

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Okay. And then just double checking here, Shawn. At the end of your prepared comments, you'd mentioned that you're not assuming any change in market conditions. But then near the end of Olivier's comments, he commented about how the markets are more challenging in the second half than the first half. So how are you -- what are you assuming in terms of the overlying and underlying end markets overall?

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [22]

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Yes. Hey, we continue to feel very good about our execution. And what we're seeing in our business is, of course, it's always hard to look out beyond the quarter in front of us. Right now, when we look at our bottoms-up submissions from our units, we feel good about our Q3 guide, I mean, especially if you kind of exclude Food Retailing. So at this time, we don't feel like we need to build in any particular anticipated slowdown in the fourth quarter. But we also try to be transparent with -- we fully acknowledge that there are uncertainties out there in terms of moderating economic statistics, the trade tariff dispute, which is obviously a very dynamic situation which, back to Tycho's question, the direct impact on our business is very insignificant. But with this announcement, what impact that may have on the global economy is probably a bigger question.

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Operator [23]

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And your next question comes from the line of Mr. Steve Beuchaw from Wolfe Research.

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Stephen Christopher Beuchaw, Wolfe Research, LLC - Director of Equity Research [24]

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I'll ask 2. One, I actually want to revisit a topic that was -- you touched on very briefly later, but I wonder if you could give us a little bit more detail on it. And that is, you mentioned in your prepared remarks that in the event that the environment were to become more challenging, there are steps that you can take to offset those headwinds in terms of, I believe, your implication was the earnings power of the company. So it would be helpful to know what those steps might be and how big an impact do you think you could have if the macro does get worse.

 

My second question actually relates to food specifically. I appreciate that some of what's going on in food is in Europe, but it sounds like in food, the U.S. is also a little tougher. Be really helpful to understand thematically why it is that food has gotten so much tougher here relative to your expectations coming into the year. And what would you recommend that we keep an eye on as we try to diligence and keep an eye on what's going on with the pulse of that particular segment of the revenue stack?

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [25]

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Let me start, and then Shawn will add flavor to this. So in terms of how we can react if the economy changes or the market changes. So foremost that I would highlight is this flexibility that we have, how we can allocate resources. We have programs in place and we have a strong tool set that allows us to go after the pockets of growth in the markets that exist, particularly around segment marketing. We can guide our sales force to visit a certain type of customers by segments. And we can drive this also to our leads generation programs. And then we have shown also in the past that we are quite agile in shifting resources from one business to the other. So that's one avenue that we always leverage.

 

And the second one is, of course, we kind of implement a discipline in our cost structure. And this is certainly something that we also have a good track record and we have this agility in the system. Yes, I think that's the core that I would give. And, of course, we monitor the markets very cautiously and try to anticipate these things and it very much depends how severe it is. And the very high diversification that we have in our business helps us tremendously. As you can imagine, we have a huge diversification by country and we have a huge diversification by business and the end-user industry, and that comes to a big advantage to us.

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [26]

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Steve, I wouldn't add anything to Olivier -- what Olivier said other than he implies that we also tailor our actions to the situation. And so we leverage these programs. We're constantly looking for productivity gains and we'll adapt if necessary.

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [27]

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The second part was the Food Retailing. Here, as a reminder, for -- we always said we run our Food Retailing business for profit and not for growth. It's -- we call it kind of noncore to us in these terms. I'm very committed to the business, but it is a business that is below group average in terms of profitability. And so we have always managed that way, including also in recent quarters where we have taken some steps to reduce the complexity in the business. We have taken some step also to take some cost out of the business. And so that's one effect that we have. But the second effect, which is even bigger, is that the whole Food Retailing market is lumpy and it's certainly also impacted by changes going on. And we see here, this year, a bigger downturn than we expected. And we are not trying to fight that, but rather actually adjust to it again in terms of measures that we are taking. I'm not particularly worried about it in terms of from a strategic standpoint and from a group -- or a business franchise. We are comfortable with that. But of course, it hurts our top line numbers. But this is more for Q3 and the year. As for next year, I'm not that pessimistic at all.

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Operator [28]

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Your next question comes from the line of Patrick Donnelly from Goldman Sachs.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [29]

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Maybe one for Olivier. I know it's been asked a few different ways, but just on the Industrials, the Core Industrial's outlook. Obviously, we've seen a bunch of mixed data points, particularly even in the space. Can you just talk through, I guess, your visibility into the back half, confidence level, maybe even by geography, how you're feeling about that market overall?

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [30]

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Yes. If I look at our performance year-to-date, it has been really strong in all regions and not only here in Q2, but really, for the whole first half. We feel that we have good enough market conditions in pretty much all the areas of the world. I feel strong execution from the team. And so for the whole 2019, I expect mid-single-digit growth. The -- here also in Q3, where we have good visibility, I feel really good. But want to be cautious about Q4 just because of the comparisons. We are going to face a much stronger comparison here in Q4. That's the main reason. Then I would also highlight here what I said at previous occasions or in the context also of China, for Industrial, we serve a very broad base of end-customer segments. We can apply segment marketing to also guide our sales force to the most promising applications in the industry, even if some end-user industry would be hit more strongly by a tentative economic slowdown.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

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Okay. And then maybe just one more, just on the Americas. That continues to be a source of strength for you guys. Can you just parse out what segment has been particularly strong here? And then the outlook, I think you said mid-single digits ex Food. Could there be upside there? And what would be the upside levers?

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [32]

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So indeed, very happy with the performance year-to-date and certainly also in Q2. The lab continued to do particularly well. We had good strength in our product offering. The investment in field resources pays off very nicely. Industrial was also solid here. Core Industrial as well as Product Inspection was nicely up in the quarter. And I expect solid growth in this business also here in Q3. The one that was down was retail, that was significantly down. And I expect also Q3 retail would be down again. But otherwise, yes, feel very good about the execution. The team did very well. Our program -- sales and marketing programs show great fruits here in that region.

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Operator [33]

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Your next question comes from the line of Richard Eastman from Baird.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [34]

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Could you just maybe, Shawn, just give us a snapshot here of how pricing was in the second quarter? And then the cadence of price increases last year in '18, if I -- I think I have this kind of noted properly, but it would seem that pricing might be a little bit more challenged year-over-year in the back half of the year. I mean would we be plus 1% to 2% in the back half of the year?

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [35]

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No, no.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36]

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No?

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [37]

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Well, I fully agree that pricing will be more difficult in the back half. And Rick, that's also consistent with what we've been saying in our public commentary as well. And this is very much related to, like you said, the timing of the significant midyear price increases that we've put in place last year. I'd say it might be more in like the 1.5% to 2% range in the back half of the year. And then maybe just to respond to the first part of your question, I mean the program -- the execution around the world in the program is really fantastic at the moment. I feel very good about it. We're in the -- we probably did 2.5% or so in Q2, and I feel very good about how we're executing around the world.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [38]

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Okay. And then also, Olivier, within the Lab segment, you're kind of underexposed, so to speak, to a lot of the industrial process markets. But you do have some chemical exposure there, maybe petrochem exposure. Just any inflection or just change in trends within lab that you might associate to those more industrial-oriented markets.

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [39]

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No particular that I would highlight. I think here again, this diversification plays a role. And even in -- within the chemical industry, there are so many subsegments, from fine chemicals over to bulk chemicals and everything. We have different applications. On the prepared remarks, I highlighted, for example, the China dynamic where we are benefiting from a heightened focus on safety due to all these explosions that is triggering additional demands for us in the chemical industry, in particular for automated chemistry, partially also for material characterization and process analytics. So while you might have one segment that is maybe a little bit down, for example, the chemical industry, that is also serving the automotive world, but then you have other segments that are up. All in all, we see the chemical industry still being good for us, and I expect it to stay that way.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [40]

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Okay, okay. And just the last question for me. Is there any color you could shed -- you could provide on maybe the M&A pipeline? Is there a few things in there? Or is there anything active? How do you approach that these days, just kind of keep refreshing it? But maybe you can give us some thoughts there.

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [41]

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Yes, yes. (inaudible). Hey, very consistent on that one. It's -- the way we look at it, the way we approach it is very much from a strategic standpoint. We are focused on adjacencies that fit the strategy where we have important synergies. We don't need an additional leg. We certainly feel we are well diversified already. We have a very strong franchise. We don't need an additional leg. What we want is to acquire companies where we can add value, and we add value for our customer solutions. And so the targets that we have are typically bolt-on opportunities, in particular, Lab, Product Inspection area. We have -- if you look back, we have done a few acquisitions with Biotix and Troemner. And I would rather our target universe would be that kind of company. But it's not that we have something just around the corner. I think these are very much dependent on the availability of such companies. It's -- and the -- what I also want to add, we are very disciplined when it comes to valuation. We always have and we will also continue to be and -- yes, so I expect us in the couple of next years to continue to pursue that strategy. Yes, I think that fits well. And while we welcome M&A, it's not a must and it's not -- yes, we are very focused on this organic growth story.

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Operator [42]

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(Operator Instructions) And your next question comes from the line of Jason Rodgers from Great Lakes Review.

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Jason Andrew Rodgers, Great Lakes Review - VP [43]

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Can you hear me now? Hello?

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [44]

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Yes, we can.

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Jason Andrew Rodgers, Great Lakes Review - VP [45]

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Okay. China, I might have missed it, but did you give expectations for growth in the second half of the year?

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [46]

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Yes, we're looking at mid- to high single-digit growth for the second half, with good growth both in our Laboratory and Industrial businesses.

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Jason Andrew Rodgers, Great Lakes Review - VP [47]

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And then looking at Europe, the expected improvement that you're looking for in the second half. Is that primarily from better results you're expecting in Product Inspection and the slightly easier comps? Or are you looking for some type of improvement economically in that region?

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [48]

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Yes, I think the best way to probably look at Europe is on a year-to-date basis. We have this Easter timing topic that we talked about in the first quarter. So on a year-to-date basis, Europe is plus 4%. For the second half of the year, we're probably like low to mid-single digit, but it's going to have a little bit of this retail effect. If you exclude retail, we're probably more in the mid-single-digit range. So we're not expecting any particular changes in the second half. We're kind of assuming that the economy continues to be good enough for people to stick to their replacement cycles. And as we look at the third quarter outlook from our organization, we kind of feel good about what we're seeing in the execution in our business.

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Jason Andrew Rodgers, Great Lakes Review - VP [49]

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And then moving on to the Field Turbo program, is 200 -- is that still the figure for the planned additions for the year? And any issue in finding qualified candidates there?

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Olivier A. Filliol, Mettler-Toledo International Inc. - President, CEO & Director [50]

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Believe me, I have more proposals that I can approve just because I think it's a good process to always be selective and go for the most attractive one. As a reminder, this is kind of a bottom-up, top-down review process and we continue to have very good opportunities. But we also review the opportunities in the context of how we reach the economic -- the economy and in particular, also when it comes to countries and industry segments or business lines. I feel good about the projects around Turbo that are already approved. And Shawn and I will be on our annual budget around here in the coming weeks, and that will be certainly also a topic that we will further review. But I feel good about the program and we are still in the investment mode.

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Jason Andrew Rodgers, Great Lakes Review - VP [51]

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And then lastly, any change to the share repurchase expectations for the year? I think $745 million was the last number given.

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [52]

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No changes at all. No.

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Operator [53]

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And your next question comes from the line of Brandon Couillard from Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [54]

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Shawn, sorry if I missed this. But could you just help us with the gross margin bridge year-over-year between the components of currency pricing and the tariffs?

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [55]

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Yes, sure, Brandon. So as I mentioned before, pricing was good in the quarter, up about 2.5%. That had an effect of positive 100 basis points to the margin. Kind of offsetting that was the gross impact of tariffs, which was about 50 basis points. And then we had a variety of things kind of going both ways to make up the bridge.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [56]

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Super. And then, just an update on net interest and other expense for the year.

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [57]

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Sure. So interest expense for the year -- we'll just have Mary double check for you. $139 million for the year. Oh, I'm sorry, sorry, sorry. Looking at the wrong line...

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Mary T. Finnegan, Mettler-Toledo International Inc. - Head of IR & Treasurer [58]

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37.

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [59]

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30 -- oh, sorry. $37 million, yes, $37 million for the year. And what was your other question?

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [60]

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I guess just net interest and other kind of all rolled up together.

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Shawn P. Vadala, Mettler-Toledo International Inc. - CFO [61]

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Okay. And then other would be about $4.5 million. And that would be income, by the way.

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Operator [62]

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As there are no further question at this time, you may continue, speakers.

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Mary T. Finnegan, Mettler-Toledo International Inc. - Head of IR & Treasurer [63]

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Thank you. Thanks, Maria. Thanks, everyone, for joining us this evening. As always, if you have any questions, just let us know. We are in China, so probably the easiest way to get a hold of me or us is through email, but we're happy to get back to you. Take care, everyone. Have a nice night.

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Operator [64]

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And this concludes today's conference call. You may now disconnect.