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Mettler-Toledo International, Inc. (NYSE:MTD)

Q4 2008 Earnings Call Transcript

February 5, 2009 5:00 pm ET

Executives

Mary Finnegan – Treasurer & IR

Olivier Filliol – CEO

Bill Donnelly – CFO

Analysts

Peter Lawson – Thomas Weisel

Peter McDonald – Wall Street Access

Sung Ji Nam – JP Morgan

Dan [ph] – UBS

Mike Hamilton – RBC

Greg Halter – Great Lakes Review

Richard Eastman – Robert Baird

Jon Wood – Banc of America

Operator

Good day, ladies and gentlemen, and welcome to our Fourth Quarter 2008 Mettler-Toledo International Earnings Conference Call. My name is Jennifer and I will be your audio coordinator for today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions) Ms. Finnegan, please go ahead.

Mary Finnegan

Thank you. I am Mary Finnegan, Treasurer and responsible for Investor Relations at Mettler-Toledo and I'm happy to welcome you to the call today. I'm joined by Olivier Filliol, our CEO and Bill Donnelly, our Chief Financial Officer.

This quarter we have a presentation to help facilitate today's call. It can be found on our Web site at www.mt.com under Investor Relations. Also on our Web site is a copy of our press release which we issued today as well as the webcast which will be available for replay.

Now let me cover the Safe Harbor language which is outlined on Page 1 of the presentation. Statements in this presentation which are not historical facts constitute forward-looking statements within the meaning of the U.S. Securities Act of 1933 and 34. 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 the discussion in our recent Form 8-K. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the caption, “Factors affecting our Future Operating Results” and in the “Business and Management Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K.

One other item on today's call, we may use non-GAAP financial measures. More detailed information with respect to the use of and the differences between the non-GAAP financial measures and the most directly comparable GAAP measure is provided in the Press Release.

I'll now turn the call over to Olivier.

Olivier Filliol

Thank you, Mary. Good evening and welcome to the call. I want to start with highlights of the quarter and then Bill will provide details on our financial results and our outlook for 2009. Later on the call, we will provide additional commentary on the business and measures we are taking to manage in the current downturn. As usual, we will have time for Q&A at the end.

Let me start with the highlights of the quarter which are summarized on Page 2 of the presentation. While we had excellent financial results in 2008, market conditions changed clearly in the fourth quarter. The deterioration has been faster and steeper than we had anticipated the last time we spoke to you.

Given this challenging environment we are pleased to have grown local currency sales by 1% in the quarter. We saw growth in Europe and as expected growth in Asia, rest of the world was solid. Strict cost control lead to a 6% increase in operating profit and contributed to the 16% growth in adjusted EPS. We also enjoyed solid cash flow. Absent the timing of tax payment in the fourth quarter, cash flow grew by 20%.

Despite the business slowdown in Q4, we finished 2008 with record financial performance. For the full year, local currency sales increased 6%, operating profit grew 13%, and adjusted EPS increased 23%. We clearly expect more challenging market conditions in 2009 and have proactively initiated a cost reduction program to help insulate us from this economic downturn. We have also updated our assumption for 2009. I will have further comments later on the call but will turn it to Bill to discuss Q4 in more detail.

Bill Donnelly

Thanks, Olivier. And hello, everybody. Let me start with additional details in sales which are outlined on Slide #3. Sales were $509.7 million in the quarter, an increase of 1% in local currency. On a U.S. dollar basis, sales declined 4% in the quarter because of a 5% negative currency impact. For the full year 2008, local currency sales grew by 6%.

Breaking down local currency sales in the fourth quarter by geographic destination, we had 1% local currency growth in Europe. Our industrial business there aided by product inspection and transport and logistics grew modestly while food retailing in Europe enjoyed solid growth as well.

Lab in Europe was down modestly, up against very strong comps from a year earlier. For the full year, sales increased by 6% in Europe. Sales growth in the Americas declined by 3% in the fourth quarter. Retail enjoyed growth while lab and industrial were down.

For the full year, sales growth in the Americas increased by 2%. Sales in Asia, rest of world increased by 6% in the quarter with strong results in lab and food retailing and modest growth in industrial. For the year, sales increased by 16% in Asia, rest of world.

Now looking at sales by product area, laboratory sales declined by 2% in the quarter. This is against a strong 10% growth in the prior year. Pipettes did well in the quarter while most other product lines were down. For the year, laboratory sales increased by 7% on an organic basis.

Industrial sales increased by 2% in the quarter with strong growth in product inspection while transport and logistics also had a good quarter. Core industrial products were down slightly. For the full year, industrial sales increased by 7%. Finally, retail increased by 6% with solid growth in all regions and for the year, retail was up by 4%.

Now I'm turning to Slide #4 to cover the rest of the P&L. Gross margins were 51.8% in the quarter, 100 basis points improvement over the prior quarter – prior year quarter. We benefited from currency but we're also pleased to see the impact of price increases and stabilizing of raw material costs. This is as compared to rising steel prices in earlier quarters.

R&D amounted to $24.8 million or 4.9% of sales. This represents a 2% decline in local currency, principally due to the timing of certain R&D projects. Already in Q4, we started to see the benefits of our cost containment efforts as SG&A was $138.5 million, a decrease of 3% in local currency.

We continue to invest in emerging markets but this growth was more than offset by the impact of lower variable compensation costs which were down significantly in the quarter. We also made additional provisions for bad debt, mostly because of concerns with the overall credit market and finally as already mentioned we benefited from many of the cost control measures instituted in the quarter.

The net sum of all these items resulted in solid operating income, adjusted operating income increased 6% to $101 million. This compares to $95.4 million a year ago. You see that margins are up nicely in the quarter at 19.8% versus 17.9% in the previous year. Approximately 100 basis points of this increase is due to currency. We're pleased with the remaining 90 basis point improvement particularly in light of market conditions.

Now, continuing down the P&L, amortization was 2.8 million in the quarter, interest expense was 6.7 million. Fully diluted shares in the quarter were $34.2 million and at the end of the quarter was $34.1 million.

Early in the fourth quarter, we stopped our share repurchase program due to uncertainty in the credit markets. We expect to go back to the plan once we see more stability in the financial markets. For the full year, we repurchased 2.2 million shares. Our tax rate was 26% in the quarter and we expected to remain at that level for the foreseeable future excluding any discrete tax items. Finally, adjusted earnings per share was $2 even which is an increase of 16% over the prior year amount of $1.73.

Okay, now on to Slide #5, you'll see our P&L for the full year. As Olivier mentioned it was a record year for us with local currency sales growth of 6%, operating profit growth of 13%, and an adjusted earnings per share growth of 23% totaling $5.84 per share.

Let's now talk about cash flow. Free cash flow in the quarter was $39.4 million. This compares to $43.6 million in the previous year. This results in a free cash flow per share of $1.15 as compared to $1.18 last year. The decrease is the result of the timing of tax payments in Europe which were tied to the completion of some audits. In the fourth quarter of 2008, we had $30.6 million of tax payment versus $14.7 million in Q4 2007. So excluding the tax payments, free cash flow increased by 20% in the quarter.

The solid level of free cash flow was driven by working capital management. We recognized in these more difficult times that a focus on working capital is of utmost importance. DSO came in at 49 days, slight deterioration versus a year ago.

We instituted a number of measures early in the quarter to counter what we expect will be a trend of our customers to slow payment and potentially increase credit risk with them as well. Inventory turnover was 5.1. That's a slightly lower level than a year ago. That covers the quarter.

Now let me cover the financial aspects of our cost reduction program. We expect to reduce our cost structure by approximately $40 million on an annual pre-tax basis. We will incur total restructuring charges of between $15 million and $20 million, again pre-tax, of which $6.4 million was taken this quarter, in the fourth quarter.

We expect a substantial amount of the remaining charge to be taken early in 2009. The charges consist principally of severance related costs. Olivier will have additional comments on our cost reduction program shortly.

A final point I want to cover is our outlook for 2009. The current volatility and uncertainty in the global economy makes forecasting very difficult. We are managing the business quarter to quarter and keeping our focus. We have seen market conditions in the early part of this year which are much worse than during the fourth quarter of last year. This includes sales as well as orders and leads. While we believe that comparisons will become easier in the fourth quarter, we cannot see a compelling case for Q2 or Q3 to be an improvement in terms of growth versus Q1.

Given this framework, we are guiding to local currency sales growth of between negative 4% and negative 8% for the full year 2009. This would translate into an adjusted EPS in the range of $4.80 to $5.30, a decline of between 19% and 18%. Our guidance assumes no repurchases. As a reminder, adjusted EPS excludes purchased intangible amortization, discrete tax items as well as restructuring charges.

For the first quarter, we expect local currency growth to be in the range of minus 6 to minus 8% with a resulting adjusted EPS in the range of $0.80 to $.90 per share, decline of between 11% and 21%. That summarizes our current outlook for 2009 and the first quarter. I would share that this is a difficult market to forecast and certainly the most difficult I've seen in my 12 years with the Company. We're disappointed have to share this assessment. We're working hard on our execution and promise to deliver the best possible results.

I'll now turn it over to Olivier.

Olivier Filliol

Thank you, Bill. I will start with some comments on our Q4 business results and then focus the discussion on what actions we are taking, both defensively and offensively, to manage in this environment.

First with lab. Lab did not have a strong quarter for us but it was against a great Q4 2007. We saw weak spending overall with big U.S. and UK pharma with some accounts still linking year-end expenditures but most were quite restrained. Interestingly, we saw much better numbers from small and mid sized pharma in those markets.

Continental Europe was a somewhat different picture with solid growth from big pharma. Chemical companies are not an important end market for our lab business and they were quite weak at the end of the year after two strong years of growth. Academia was solid while biotech which is not a large market for us held up okay as we mostly sell to large biotech.

A few words on the industrial, we enjoyed good performance in some segments, mainly product inspection around the food safety topic as well as transport and logistics. Industrial sales into pharma has been okay as well. The auto industrial markets like chemical companies, aggregate, discrete manufacturing, et cetera, are where we see more difficulties.

Emerging markets have been a key source of growth for our industrial business, not surprisingly, we saw a sharp slowdown in emerging markets in Q4. We expect that to continue for the early part of the year that we should benefit when some of the government infrastructure projects work the way through the system later in the year.

Food retailing has a strong finish in 2008 and we are reasonably optimistic for 2009. There will be some comparison issues in certain quarters, but overall, we made good progress with our solution in many key accounts. These statements have been largely commenting on Q4, but we see much of the same relative trends for 2009 with the qualification that we expect some further deterioration in many of our segments as compared to what we saw recently.

Let me remind you that our biggest end markets are pharmaceutical, food manufacturers, and food retailers, which tend to show more resilience in economic downturns. Those are my comments on the fourth quarter.

Let me now provide some additional background on our cost reduction program which is summarized on Slide # 6. It is unclear how severe or how long the current economic downturn will be. Given this uncertain outlook, we have implemented a significant cost reduction program which will reduce operating costs by approximately $14 million on an annual basis.

The program includes a reduction in workforce of approximately 600 people or 5% of the total headcount. Approximately one half of these reductions are in manufacturing while the other half reduced our fixed cost structure. Reductions are taking place in the Americas, Europe and Asia.

In addition to the workforce reduction, we also are reducing our operating expenses. Salary increases are only being implemented where legally required. We have clamped down on discretionary spending. We are working with suppliers to reduce their prices to us and in some circumstances we are reducing working hours of our employees.

We carefully reviewed the elements of the program and its impact on each business to ensure that they do not impair our ability to execute our business strategies or the long term health of our Company. Our entire management team is deeply engaged in this program as well all feel it is essential to help mitigate the impact of this downturn.

In addition to this program, we will also reduce cost by continuing to shift production to China and we will place more emphasis on procurement and low cost count resourcing. We expect to benefit from lower raw material prices and lower transportation expenses in 2009.

In addition to expense control, working capital management is also receiving increased pension and resources in 2009. In order to ensure we continue to generate a solid level of cash flow in this deteriorating economic environment, we have put in place new programs for inventory Management, cash collections, credit controls, and all the cash flow related measures.

Our strategy is to focus not only on the defensive side, but also exploit opportunities that the current market represents. We think we can take advantage of our long, strong leadership position to gain further market share as weaker competitors struggle to handle the market downturn. We intend to capitalize on this opportunity while keeping firm to our core growth strategy.

Let me give you some specific examples. We will continue to invest in R&D at our historical rate of 5% to 6% of sales to ensure a continued stream of new product launches. We will keep pushing in emerging markets where we foresee growth although at a less robust rate than in 2008. With our early entry and long commitment to these regions, we enjoy strong leadership positions that we can further capitalize on.

We will continue programs to generate leads in areas such as e-mail marketing, search engine marketing, data mining and more. We will focus more energy on what we call sales booster programs, making sure leads are nurtured into quotes and quotes are in turn converted into orders.

We will seek out small but important pockets of opportunity in key markets. Yes, many of our markets will be down in 2009, but we see a number of opportunities to satisfy new and emerging customer needs. The key is to be alert to market changes. We remain close to these customers and be flexible enough to grasp the opportunities. We believe we are better positioned in order to execute on this front.

While we expect a slowdown in spending from our customers, it is important to remember that our largest end markets are pharmaceutical and food and beverage companies who should be able to weather the economic storm better than most industries.

Furthermore, we have approximately 1/3 of our revenue coming from service and consumables which we expect to hold up better than products in a downturn. The sales mix combined with generally low average selling prices of our products and a strong focus on execution should allow us to avoid the steep downturns others may experience.

Let me conclude by saying, we are fortunate to have a very strong franchise which has many advantages as we account in this downturn. We have market leading positions and the corresponding cost advantage in most of our markets.

We also have an unmatched global footprint, thanks to our broad sales and service network and an excellent product portfolio based on innovation and powerful customer pay back. Our franchise has significant diversification with respect to customers, end markets, products and geography.

We have an experienced management team in place throughout the world, well defined strategy, and an organization focused on execution. We also have well defined offensive and defensive measures tailored for the downturn.

Taken together, we believe this advantage is strongly positioned us as we enter this market downturn. We are convinced that we will emerge from this challenging environment an even stronger company, especially relative to our direct competitors.

That concludes our prepared remarks and I would now like to ask the operator to open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Peter Lawson from Thomas Weisel. Your line is now open.

Peter Lawson – Thomas Weisel

I wonder if you could just book through some of the guidance and how we should think about the declines in the lab, industrial and food businesses?

Bill Donnelly

I'm not sure if I completely understood the question. What do you mean by how you should think about them or what do you think the declines could be in the different businesses?

Peter Lawson – Thomas Weisel

Yes, exactly. Thank you.

Bill Donnelly

Okay, maybe on the lab side we're expecting that business to be down mid single digits. On the industrial side, more the mid to high. I would comment that probably if you broke the industrial business down into two pieces. We expect growth to continue in the product inspection business because of food safety and other considerations while the core industrial businesses maybe can be down a low double digit kind of number. Then we're assuming the food retailing business is flattish.

Peter Lawson – Thomas Weisel

Thank you. And then on the – I guess when did you kind of see this slowdown occur? Was it December quarter? And what are you using as a basis for the guidance? Is it kind of that worst period or the kind of the average period over Q4?

Olivier Filliol

Actually, December held up reasonably as January was clearly weak. We could expect some of the weakness in January because for example, the working days was less. We had also New Chinese Year in China which moved from February into January, but we clearly saw an overall weakness in our business across all the geographies, industrial, in particular, also impacted by the fact that many plants were closed for extended periods, and January was weak and we have clearly suggested our Q1 guidance based on that fact.

Bill Donnelly

Maybe just back to your December versus January, the month of December was in line with what we had in the fourth quarter.

Peter Lawson – Thomas Weisel

Okay. Thank you. And then just finally, could you remind us the percentage of revenues that come from the pharma, biotech, and kind of government NIH?

Bill Donnelly

Sure. Just as a reminder, lab instruments in total are about 44% of sales or so, and within that, you're talking maybe 40% to 45% would be kind of these life science categories that you're describing, but then also in our industrial business which represents about 43%, we're also selling into the manufacturing environments of pharma and biotech. That's probably a number in the 15% to 20% range, between process analytics, industrial, product and inspection.

Peter Lawson – Thomas Weisel

Okay. Just two final questions on the tax, what do you expect for 2009 and are you thinking a flat share count for '09 as well?

Bill Donnelly

I think at this point it would probably be good to model I think we're obviously reading that the economy could get – will be worse in '09 than '08, and if the financial markets improve, we might change our mind, but at this point I think it's a good idea to assume a flat share count. The tax rate at this point I think 26% is still the right rate to assume. I think we'll have some positive discrete tax items but the normalized rate would be in the 26% range.

Peter Lawson – Thomas Weisel

Thank you for taking my questions.

Bill Donnelly

Sure.

Operator

Your next question comes from Peter McDonald from Wall Street Access. Your line is now open.

Peter McDonald – Wall Street Access

Thanks a lot. Just sort of following up on that, so most of the deterioration began in January and how did you see it? Was it through orders? Or was it sales force feedback?

Olivier Filliol

Actually, we saw it in order intake clearly but also the actual sales, and we have some other leading indicators that gave us indications that we need to think that what we saw in January has also – will continue to last in the coming months.

Bill Donnelly

We have kind of a forecasting process with all of the units that's similar to what we gave guidance for Q4 on our call for Q3, and that process too is going to be just kind of a leading indicator, and so we had that process as well.

Peter McDonald – Wall Street Access

Okay and then just turning towards some of the consolidation going on in the pharma industry. How do you see that playing out? Is that also a factor behind some of the outlooks?

Olivier Filliol

We had some of the consolidation before. We sometimes see a short-term impact from that but in the medium, long term, it has limited impact and when we look at the most recent big merger that Pfizer initiated, the sales exposure that we have on that is less than $10 million, and so we don't think that this would have a major negative impact on us.

Bill Donnelly

It's probably less the mergers and more the fact that they are doing restructuring themselves and by reducing the number of chemists, especially but even to a certain extent biologists isn't helpful so that's probably a little bit more of a concern than the merger themselves. Of course some of the mergers will have further restructuring as an outgrowth of that.

Peter McDonald – Wall Street Access

Okay and then one final question, on the expense controls that you've initiated. How quickly do the savings start to translate through and can you walk through some of that?

Olivier Filliol

We actually some of the cost saving measures we already executed in end of November, early December, and more is now executed in January. We had actually already some positive impact in our Q4, as you saw us coming down in our PEX growth drastically and we certainly had already benefit and most of it will start to fully kick in, in Q1.

Bill Donnelly

Okay. Great. I will get back in the queue. Thanks a lot.

Olivier Filliol

Thank you.

Operator

Your next question comes from Tycho Peterson from JP Morgan. Your line is now open.

Sung Ji Nam – JP Morgan

Hi, this is Sung Ji in for Tycho today. Thanks for taking the questions. Could you address your cost structure? My understanding was that even in a top line constrained environment, there are levers you can pull, even with a top line decline, kind of wondering why the EPS decline assumption is kind of greater than the top line decline there, and if there are additional levers that you can pull to kind of improve on that?

Bill Donnelly

Sure. Of course, depending on how long this thing lasts, it could be that we would institute further cost initiatives beyond what we've outlined today. But as you guys have often pointed out on the call when we have extra sales when we grow a little bit more each quarter on the way up we have a relatively large contribution in terms of operating profit from that and this is maybe a little bit the other side of the sort. Our marginal contribution on the product from a factory point of view, i.e. variable material and variable labor is a number well into the 60% and you guys that run models on our variable contribution into OP when sales were going up usually calculate numbers between 30% and 35%, even 40%. So this is a little bit with high gross profit margins. There is some limits on how at least in a certain period of time how much SG&A you can take out of the structure or factory overheads.

Sung Ji Nam – JP Morgan

Okay. And in terms of new product launches, such as QUANTOS, do you expect those to kind of contribute to the top line? You mentioned QUANTOS contributing a half percentage point and also if you could comment on how that's tracking as far as consumable pull through and things like that, and your expectations for 2009?

Olivier Filliol

QUANTOS will have a positive impact on 2009. We are progressing according to plan. We are actually – the reception of the product is very good. We got also an award actually on the product in January so we are actually very happy. In terms of revenue, we are very close to plan. I say close because we see that this is also a major capital item and customers are a little bit watching also their spending on these items even that they clearly recognize the payback. 2009 clearly we see that this will have a positive impact. We are talking about a few percentage points for our lab tech business which is the (inaudible).

Bill Donnelly

The whole business I think we're still thinking probably 40 basis points or so.

Sung Ji Nam – JP Morgan

Great. Thank you.

Operator

Your next question comes from Derik De Bruin from UBS. Your line is now open.

Dan – UBS

Hi, this is Dan [ph] in for Derik today. Thanks for taking the questions. I was wondering if you could break out the growth in China for the quarter and then maybe what you're seeing there and what some of your expectations are in 2009?

Bill Donnelly

So, China grew by 7% in the fourth quarter. If you were to bifurcate that a little bit between our lab and industrial business what you would see is we actually had quite good growth on the lab side and just to give you a feeling I think it was mid to high teens and then little growth even maybe slightly down in the industrial business and I guess probably on the surface that makes sense. China though overall held up pretty good. What we saw a little bit in the fourth quarter was that emerging markets like China that had relatively stronger currencies did better than maybe some of the emerging markets that had weak currency and of course that's in part a reflection of what happened to pricing, relative pricing in those markets or some emerging markets, so – but China, we're pleased with how lab business held up and we're expecting that as some of their infrastructure projects come through. We think that the industrial side will improve in the second half of the year.

Dan – UBS

Okay. Actually on the industrial business, it was somewhat surprising to see the core industrials business for the quarter only be down just a bit. I was wondering if you could maybe talk a bit about what kept that from being down 5%, 10% given some of the things we're hearing from some of the other companies?

Bill Donnelly

Okay, well I guess a couple of things. One was within the number I quoted I think I had the P&L business in that number and we had a good project business in P&L. And the second thing is that service business does include a good service component and the service component overall held up okay in the fourth quarter and so maybe those kind of contributions maybe were a couple that I highlighted in particular. The product inspection business I would highlight within industrial did quite well but I think you were asking about the core industrial.

Dan – UBS

Right. On the core industrial, I know that most for about 45% to 50% of revenues are the industrial. Are you able to break out what percentage are actually those core industrial?

Bill Donnelly

Hey, just to give you a feel, product inspection is a little under $250 million.

Dan – UBS

Okay. I think you've given that before, but that's good to know again. One more question on the margins, just thinking about the gross margins in '09. Should the situation get worse, do you see yourself still being able to use pricing power or are some customers just saying we can't take these increases?

Bill Donnelly

I think as you guys know we started pushing price increases through in the fourth quarter and third quarter of last year. Those based on what we saw in the fourth quarter and the early part of this year would appear to be sticking especially when you consider that our raw material costs are coming down in parallel so, so far there is no signs, but of course, we're – I would describe it that we're monitoring that closely because of course we don't want to do something not smart with regard to pricing.

Dan – UBS

Sure. Okay. Thank you.

Operator

Your next question comes from Mike Hamilton from Royal Bank of Canada. Your line is now open.

Mike Hamilton – RBC

How are you, everyone?

Olivier Filliol

Hello, Mike.

Bill Donnelly

Hi, Mike.

Mike Hamilton – RBC

I think that's RBC actually. But I know if Robert Speir [ph] would be participating, his comment would be you guys need to work harder.

Bill Donnelly

No idea what you're talking about.

Mike Hamilton – RBC

Could you give an idea of run rate you're anticipating on the SG&A side as we roll through here the next couple quarters?

Bill Donnelly

Hey, Mike, maybe rather than talking about it in terms of run rate because as you know we have some variability with sales maybe I give you a feeling around more about what we might expect in terms of local currency growth and I think for the first couple of quarters out of the box, you would expect our SG&A to be down 6% to 8% in the first couple of quarters a year, maybe kind of growing up to that level and then as we mentioned already by the fourth quarter, it will still be down but maybe not down as much because you already saw some cost savings in the fourth quarter of this year.

Mike Hamilton – RBC

Yes. Absolutely fabulous fourth quarter gross margin. Obviously, you're still getting some trends in raw material improvements here and coming back to a previous question –

Bill Donnelly

And then also these price increases that we put through mid-year as well. And we have another round that went in the early part of this year.

Mike Hamilton – RBC

Is there anything that you're foreseeing in terms of mix that's going to negatively impact in here the next couple of quarters?

Bill Donnelly

On the negative side, not from a mix perspective, but of course there's some volume sensitivities. From a mix perspective, just the industrial business will be down more than the lab business and that's a good thing on gross profit margin.

Mike Hamilton – RBC

So it will probably be strong in that product business which will also help –

Bill Donnelly

Maybe take a little bit (inaudible) versus gross profit so maybe on the gross profit that's not as helpful, but I think we would expect even with volume adjustments we should be able to hold up on a year-to-year basis the gross profit margin pretty much in line.

Mike Hamilton – RBC

That's fabulous. I may have missed it. Did you throw out a CapEx outlook on '09?

Bill Donnelly

Right now we've got a number in the high 50s to 60 range. That does include this IT project that we've been talking about and just to give you a number an order of magnitude that's a number of the 20 million to 25 million range which is a little bit abnormal for us, but we're looking at something in that kind of range, Mike.

Mike Hamilton – RBC

Thanks. Again, really nice execution in here again in '08. Thank you.

Bill Donnelly

Thank you.

Operator

Your next question comes from Greg Halter, Great Lakes Review. Your line is now open.

Greg Halter – Great Lakes Review

Yes. I know you've talked in the past about moving some inventory from sea to air, I mean sea from air. Just wondering if you could comment on how that is progressing?

Bill Donnelly

I think actually, if you saw at the end of the year we got our inventory levels, the reduction when you look at the cash flow statement you see the reduction in Q4 was a bigger reduction than we had in Q4 a year ago. They're seasonally adjusted, and we did not exercise too much of that. I think there is some more opportunity actually down the road on that so we're – that's one of the programs we want to push a little bit harder. There was on all the routes we have, I think there are seven different routes and I think on two of them we did what you just asked.

Greg Halter – Great Lakes Review

Okay. I know you have I think 150 million of debt in your notes maybe coming due in November of 2010 which is still ways off but just wonder if you could comment on your thoughts or plans for that debt?

Bill Donnelly

Mary, those bonds are priced at?

Mary Finnegan

485.

Bill Donnelly

485. And so there's no incentive to do something early on those, and as you guys know we have 650 million of credit availability, so it's not, we probably have the luxury of waiting and so I think that that's what our intention would be. If the bond market were to improve, I think we could probably do a seven something bond these days in the seven to 10-year range. If that got better we might do something early but probably more in the short-term pay down bank debt than to pay down the bonds.

Greg Halter – Great Lakes Review

Okay. And your equity obviously had some impact from currency I would presume. How much did that reduce the equity account from on a sequential basis?

Bill Donnelly

That one I don't know by heart and there is probably two components there. I think the second component is the pension accounting that we do in the fourth quarter with regard to the unfunded position, because in the plans, the guys took a hit, the pension plans took a hit in the fourth quarter. Do you mind, Greg, if I get back to you an answer? I don't know it exactly by heart and maybe by the end of the call I can give you the answer.

Greg Halter – Great Lakes Review

Okay, not a problem, and one last one. I know you do have some small seasonality around your business, given this disruption, if you will, in the economic environment, and your business climate, do you see that changing at all for '09?

Olivier Filliol

No, actually we are right now seeing Q4 as a little bit the base for what we expect from 2009 in terms of industry and segment assessments, end user market assessment, and we're building off our operational plans accordingly.

Greg Halter – Great Lakes Review

Okay. Thank you very much.

Operator

Your next question comes from Richard Eastman from Robert Baird. Your line is now open.

Richard Eastman – Robert Baird

Yes, I just, maybe this is a follow-up to the last question, but you had mentioned earlier in the presentation that you were not expecting any improvement for the first three quarters in the business?

Bill Donnelly

Just to maybe say it differently, if you look at for us, we asked ourselves why would we expect Q2 and Q3 in terms of year-on-year growth to be better than our expectations of Q1 and we're making that assessment in part, Rick, based on the fact that we have limited number of backlogs, we're just looking at the situation overall. I can tell you that one thing is that in Q2 because of where Easter falls there are 3% less working days in Q2 this year than in Q2 last year, so I kind of look at that and say, hey, that's a headwind we have with regard to Q2 and then with regard to Q3 I believe that was our best growth quarter of the year and I think it's flat from a working day perspective. Of course, by the time you get to Q4, the comparison get easier so my comment wasn't to refer to sequential revenue levels but more year-on-year growth so apologize if that wasn't clear.

Richard Eastman – Robert Baird

Alright. And then could you also just give us a sense of the 40 million of savings layers in through the year, it looks like most of the charges or the costs will be absorbed in the first half. So is it – in your guidance, what level of hard savings do you have built in? Is it half of the 40 or?

Bill Donnelly

30 something million of the 40. Of course there are other things that we're doing as well on the material side and stuff.

Richard Eastman – Robert Baird

Okay.

Bill Donnelly

Just to give you a feeling we think our operating expenses should be down 3% or 3.5% year-on-year in local currency.

Richard Eastman – Robert Baird

Okay. Alright. Thank you.

Bill Donnelly

Sure.

Operator

(Operator instructions) Your next question comes from Jon Wood from Banc of America. Your line is now open.

Jon Wood – Banc of America

Hi.

Bill Donnelly

Hi, Jon.

Olivier Filliol

Hi, Jon.

Jon Wood – Banc of America

Bill, did you give – I'm sorry I jumped on late. Did you give an operating cash flow forecast for '09?

Bill Donnelly

I did not. If you go through kind of the mid point of the model, you would get a number in the kind of 140 to 150 range in terms of free cash flow.

Jon Wood – Banc of America

Free cash flow?

Bill Donnelly

Yes.

Jon Wood – Banc of America

Okay. So, I mean, obviously there is not nearly as much erosion as on the earnings line so you're around 210 down only modestly? I'm sorry, operating cash flow?

Bill Donnelly

I mean, yes, the 210 is down to this 140 to 150 kind of range.

Jon Wood – Banc of America

So obviously, what in terms of working capital benefits have you built in to the model?

Bill Donnelly

Okay, we built in some improvements in inventory and but maybe a couple things I would highlight that are maybe not positive that are built into that number is the fact that even though sales will be down for the full year we can imagine that there could be some working capital outflow if sales were to increase in the fourth quarter of the year. Then the second thing is that I'm assuming, because we had a good year, maybe not as good as 2007, variable comp wise, but certainly, we would expect variable comp accruals to be well down in 2009. That would be a working capital outflow.

Jon Wood – Banc of America

Okay. And so the conservatism around the capital redeployment is just based on the uncertainty out there? I mean what I'm asking is there potential to revisit the cash redeployment, the buyback issue at some point in 2009?

Bill Donnelly

Yes. I think if credit markets are better, if we see a market where sales are stabilizing to – certainly if sales start going up, we would be thinking about this in a different way, but maybe even the whole credit market thing I think we've seen some improvement in the last 30 days and I am hopeful the next couple quarters we see that improve as well.

Jon Wood – Banc of America

Okay. And then can you just give us some parameters on the services and consumables businesses as far as what you've built in for growth there?

Bill Donnelly

Okay. So on the services side, we built in, we think the number is going to be in 2% to 3% kind of range. That's probably a little bit lower than maybe some people would expect given pricing considerations and things but the one thing we want to account for is that we maybe have an assumption that some customers will due to plant shutdowns or temporary or permanent plant shutdowns will stop needing some industrial service so that's a little bit built into that number and then that would imply that the product business could be down 8% to 10%.

Jon Wood – Banc of America

Okay. And then consumables just not that big to move the needle?

Bill Donnelly

Yes, you can assume within the numbers our consumables is similar assumption like service.

Jon Wood – Banc of America

Okay. Thanks a lot.

Bill Donnelly

Sure. Thank you.

Operator

As there are no more questions I will now turn the call back over to management for concluding remarks.

Bill Donnelly

Maybe I just wanted to answer Greg's question as well, so hey, Greg, foreign exchange impact for the full year on equity was $23 million and then there was a pension adjustment of $48 million. Okay?

Olivier Filliol

Okay. Hey, thank you very much for joining us this evening. We know how busy you are and appreciate taking the time with us. Today's environment is extremely challenging but also provides opportunities for us in terms of reducing our cost structure and exploiting opportunities to gain market share. We believe we're strongly positioned to pursue these opportunities and emerge from this downturn as a stronger Company. We will speak to you again at the end of this quarter, but thanks again and good evening to everybody.

Operator

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

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Source: Mettler-Toledo International, Inc. Q4 2008 Earnings Call Transcript
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