Mettler-Toledo International Inc (MTD) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Mettler-Toledo third-quarter 2004 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

The Company would like to remind you that statements made during the conference call which are not historical facts may be considered forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. For further information concerning issues that could materially affect financial performance related to forward-looking statements, please refer to Mettler-Toledo's quarterly earnings releases, annual report and periodic filings with the Securities and Exchange Commission. This call is open to the public and is being carried simultaneously on the Company's website. I would now like to turn the call over to the moderator, Robert Spoerry, Chairman, President, and Chief Executive Officer. Please proceed, sir.

Thank you. Good afternoon. I am Robert Spoerry, the Chairman and CEO of Mettler-Toledo, and I want to welcome you to the call. Today I am joined by Bill Donnelly, our Chief Financial Officer, and Mary Finnegan, who is in charge of Treasurer and handles also, investor relations. This call is being webcast and is available for replay on our website at www.MT.com. A copy of the press release issued today is also available on our website.

I will start the call with a short overview on the quarter and then Bill will walk you through the numbers in more details, including the guidance for next year. I will then highlight some of our businesses, and we will also then at the end open the line for Q&A.

Let me now start with some summary comments from the quarter. We achieved EPS of 54 cents in the quarter, which includes 4 cents of investigation-related costs. Excluding these costs, EPS was up 9 percent of the prior year's amount. We had another quarter of positive sales growth with an increase in local currency of 3 percent, in line with our expectations. Gross margins were strong, increasing 120 basis points over the prior year. Our cash flow generation continues to be solid, and therefore, our Board has authorized today an additional 200 million of share repurchases. Finally, although we remain cautious on the economy, we have specific goals and efficiencies in place for next year.

Before I turn it over to Bill to cover the numbers, let me give you a brief update on our investigation. When we last spoke, we still had certain non-financial matters that had not been completed. These matters involved, primarily, personnel-related issues. We have made substantial progress with respect to these matters and we expect to complete them shortly.

With regard to the financial aspects of our investigation, we mentioned on our last call that the audit committee had completed their independent investigation. Since then, we have been in contact with the SEC and are in the process of responding to their questions. That is all I have to report on this, and I want now to turn the call over to Bill.

Thanks a lot, Robert. Hello, everybody. As Robert mentioned, we had solid operating results in the quarter. That gave us an EPS of 54 cents per share, and that includes 4 cents per share of investigation-related costs. This compares to 53 cents last year.

Looking at the numbers in more detail, you'll see sales increased by 7 percent in US dollars and consisted of a 3 percent local currency growth and a 4 percent benefit from currencies. As most of you know, it is local currency sales growth which is an important driver of operating results, and the number you should focus on. The additional comments I make on sales will be on a local currency basis.

By geography, sales in the Americas were up 3 percent in the quarter versus the prior year. Process analytics, retail, and packaging were particularly strong. In Europe, sales were down 1 percent in the quarter versus the prior year, and this is a trend we've been experiencing all year. Our laboratory products had solid growth, while our industrial business was down due to a much stronger transport and logistics business last year. Asia and the rest of the world was up 11 percent. China continued to be a strong driver with sales growth in the 25 percent range. We also saw some nice growth in the quarter from Japan. This is not something we had seen earlier in the year.

From a business line perspective, most product lines in lab had solid growth during the quarter. Balances were again up mid single digits. And analytical instruments and pipettes also had similar growth rates. Drug discovery had positive growth, but it was lower than the growth rate we had experienced earlier in the year. Offsetting those growth rates was our third-party electronic component business, which was down in the quarter, as we continue to consciously exit some customer relationships. Process analytics continued to produce strong results with another quarter of double-digit sales growth. Industrial sales growth was flat with the prior year, again, a trend we've seen since earlier in the year. Our core industrial weighing business was up slightly, while our transport and logistics business had challenging comps from a year ago. The growth in industrial was driven by Asia with Europe down slightly and the U.S. up slightly. Packaging was up low-single digits. It was up nicely in the United States and in Asia, but down slightly in your. Finally, retail was reporting mid single-digit sales growth, and this is about what we were expecting.

Now let me go down to gross margins. They were 120 basis points above the prior year and reached 48.5 percent in the quarter. This quarter, we benefited from mix as well as some sustainable improvement in individual product lines. As I mentioned last time we spoke, I think we'll continue to see further upticks in gross margins going forward, but I don't expect them to continue at this more than 100 basis points level. But we should continue to see nice increases because of our efforts there. R&D amounted to 20,200,000. This is on target with what we expected and down slightly on a constant currency basis.

SG&A was 104.7 million, and as mentioned in the press release, included 2.7 million of investigation-related costs. Excluding these costs, SG&A on a local currency basis was up 5 percent. Higher Sarbanes-Oxley-related costs accounted for approximately 2 percent of this increase.

In terms of investigation costs, we now estimate the total cost could be in a range of 5 to $6 million. The final aspects of the investigation have taken longer than we originally anticipated. You'll note that the actual costs incurred in Q3 were lower than originally anticipated. And we expect the remaining costs will be incurred in Q4. Adjusted operating income, which as a reminder, we define as gross profit less R&D and SG&A, but before amortization, was 40.9 million, which is up 9 percent on a comparable basis to the prior year. By comparable, I mean that is excluding any investigation-related costs, but including Sarbanes-Oxley-related costs. And in addition, we absorbed in that amount $2 million of Sarbanes-Oxley-type costs.

Okay, now looking at the operating margin percentage, currency didn't impact our absolute Op amount very much, but it did impact the margin by about 50 basis points.

Moving down to amortization, amortization was $2.9 million, and interest was, as well, 2.9 million. This gave us net earnings of $24.6 million, or 54 cents per share. And again, that included 4 cents of investigation-related costs. Adjusting for investigation-related costs, our earnings per share increased 9 percent of last year.

Turning now to cash flow, operating cash flow was $47 million. That compares to 39.1 million in the prior year, an increase of 20 percent. We're pleased that we continue to generate a lot of cash. And as mentioned last quarter, we are seeing improvements on our ITO. Our ITO on an LTM basis was 4.6 times. That compares to 4.2 one year ago. DSO was 51 days, a day better than a year ago. Last 12 months, EBITDA reached 200,400,000. And net debt at the end of the quarter was 140.8 million. This gave us a net debt to EBITDA ratio of less than one times.

Now, let me give you an update on our share repurchase program. Earlier this year in February, the board authorized a $100 million program, of which we have spent $60 million to-date. Today, the Board authorized an additional 200 million in share repurchases through the next two years. This increase is driven by our consistently growing level of cash flow. You'll note that this year, we are expecting our free cash flow will exceed net income.

And we should highlight again that our balance sheet remains strong, with our net debt to EBITDA ratio below 1. We believe we can maintain our current investment-grade rating even if our debt level increases. As a result, we are very comfortable to continue with a meaningful share repurchase program while at the same time pursuing our acquisition strategy. We have ample financial flexibility for both. Of course, we'll adjust our share repurchase program based on actual acquisition activity, our continued cash flow generation, as well as our stock price and other factors.

Now, before I turn it over to Robert, let me give you some insight into our guidance for the remainder of this year and as well, next. At the time of our last call, we had stated that our guidance for 2004, excluding the cost of the investigation, would be in the 235 to 240 range for the full year. Again, these numbers include investigation-related costs. We now feel that we'll be at the high end of this range, at the top specifically. And for Q4, current consensus is 79 cents (ph) per share, which does not include any investigation costs, as most of you guys have built those costs into Q3. We estimate that investigation-related costs could impact Q4 by 2, perhaps 3 cents per share. Further, we expect our corporate governance costs will be higher -- even higher than we had originally estimated. And as a result, we expect our Q4 EPS to be in the range of 75 to 77 cents per share.

Now, as we look at 2005, there is a certain level of uncertainty surrounding the economy. Higher oil prices and the strength of the recovery in Europe are probably two of the most significant unknowns today. We would be impacted if the economy deteriorates beyond what we see today. Although the economy remains a question mark, we feel very good about our strategic initiatives to grow the business next year. New product introductions will continue to be an important part of our story, as well as our initiatives to improve the effectiveness of sales and marketing. We also have initiatives on the cost side, including those to improve our supply chain. Robert will cover all these points in more detail in a minute. With these initiatives, and assuming the economy stays as it is, we would expect local currency sales growth to be in the range of 3 to 5 percent. And assuming this sales growth range, we should achieve earnings per share in the 2.65 to 2.75 range.

One final clarification -- I know that all of you are aware that there are proposed changes for the accounting of stock-based compensation. The guidance we have given today did not build in that. We will do so once the rules have been finalized and adopted. Now let me turn it over to Robert.

Thanks, Bill. I am pleased with the results of the quarter. Sales were in line with our expectations. In Europe, our sales in the quarter were pretty much what we have seen all year. We have yet to see a meaningful recovery in Europe. In the Americas, we continue to see modest growth, as we expected, and we see continued benefits from the improvement in the market, as well as the successful new launches of our product line.

Industrial instruments are stable, with Europe continuing to hold us back from growth. Retail came in as expected with mixing of (indiscernible) growth. Altogether, the business continues to perform on track.

Bill went over the numbers for next year. We recognize there remains much uncertainty about the economy, and we will continue to monitor and update our planning accordingly. We are encouraged by our own initiatives and our ability to execute them.

Let me cover a few of them now. One key initiative for Mettler-Toledo over the next couple of years is to improve effectiveness of our global sales, service and marketing organizations. Earlier in the year, Olito-Tilio (ph) became the global ad of our market organization. And this past summer, we initiate the project Spinnaker. For those of you familiar with the sailboat, you know that the Spinnaker is a high-levered sail. If you have enough wind, you gain a lot of speed. For us, the wind of Spinnaker's sales are the ideas that help us to realize growth opportunities and gain share. To kick off the project, we held a series of workshops with the market organizations throughout the world. We did a detailed and systematic analysis of the entire sales and service process. We identified many growth opportunities and then ranked them in terms of price leverage for the group. Out of this process, we identified three high potential areas for initial focus, namely regeneration, pricing, and field automation.

Let me explain what I am referring here to. Let me start with the regeneration, which is at the core of our sales productivity and our ability to gain share. We are not satisfied with the number of qualified leads we currently generate. The variances between business areas and geographies make it clear that we can improve. We know that we do see not every order opportunity in the market. If we can gain additional transparency into these unseen customers and areas of the market, this is our greatest opportunity for growth. We have already started to address this through our global segment marketing programs, which I have spoken to you about in the past. We've been testing these techniques in selected areas of our business and I feel that we have redefined the processes. Every business unit in the organization is now working on these techniques and I am confident it will yield strong results. We are making a significant investment in our telemarketing resources, our e-marketing efforts and various other marketing programs, which we are convinced will lead to additional productivity with our nearly 1000 salespeople. As well, help us to attain additional share in the market.

Pricing is another opportunity for us. While we have always tried to push pricing where there are opportunities, during these detailed workshop, it became apparent that pricing and discounting variances were too great and that we need more transparency in pricing. For example, we performed detailed analyses of discounts applied by sales rep, by product, and by customers. What we have found so far is that there is a strong correlation between the experience of a salesperson and the discount given. Therefore, we need to enhance our training of sales personnel to emphasize value selling and limit, thereby, discounting authority.

We can also see that through analysis, we can be more scientific in our pricing strategies, as we implement them into the various market niches around the globe. We are still in the early phase of this initiative, but expect to make much progress in this in the next 12 months.

The final area of productivity opportunity is the automation of the processes of our field service organizations. There are over 2000 service technicians around the globe, and we believe that through investment in automation, we can increase the productivity significantly. And perhaps more importantly, we can further distinguish the Mettler-Toledo franchise as the premier service company in our industry.

The program includes continuing to expand remote service capabilities in our products and several offerings to customers that bring clear value. We also will prefer to automate the workflow of our service technicians to increase efficiency, improve quality and enhance customer satisfaction. This initiative will take some time to implement, but we will make investments into service management systems in the coming years. In summary, we are very excited about the potential of Spinnaker, which I think you will see is an important opportunity for us as we look into next year.

Of course, new product introduction will continue to be important as well. Innovation has always been key for us. And a prime example is the effort that we have made to replace the entire balance portfolio. In our history, we have never had such a comprehensive replacement of a product line in such a compressed time period. I thought it might be helpful to give you an overview of our balance portfolio so that you have a better understanding of this project. As most of you know, balance is our core product line and represent about 20 percent of our total sales. Within balances, there are four levels. We have entry balances, basic balances, stand-up products, and also professional products. The different levels relate to the different applications of the balances, with the entry (ph) balances used in the market such as jewelry, and our high-end professional level used more in regulated markets, such as the pharma industry. We are the clear market leader in balances, and this has translated into a profitable product line (indiscernible).

We began to replace our entire balance line more than 18 months ago, and have now completed the replacement of our entry and basic levels. One year ago, we commenced a major part of the program with the launch of the new standard analytical balance, the excess balance, which has met with very strong customer acceptance. We are very pleased to have been awarded the R&D (ph) 100 award for its revolutionary design (ph). In Q3 of this year, we completed a replacement of our standard balances with the introduction of our new standard precision balances.

On the professional level side, earlier this year, we introduced a professional level of precision balances. And in the first quarter of next year, we will launch our new professional analytical balances. This is our high-end balance targeted to the pharma industry. We will then have a couple smaller launches later next year and we'll have updates on the entire portfolio by the end of 2005.

We have spoken a lot about the value of these balances -- the value they provide to our customers. This includes faster weighing, easier cleaning capabilities, enhanced (indiscernible) machine interface, as well as enhanced software and communication capabilities. This balance replacement also offers benefits to Mettler-Toledo, namely in the form of a common hardware and software platform. In the past, we had eight statement (ph) balance platforms, which have now been reduced to three. This provides synergies in manufacturing and R&D, and (indiscernible) also in the training of our sales and service personnel. Our customers also benefit in terms of common interface, which helps them in training time as well.

We also have services that go along with this (ph) product rollout. For example, initial qualification packages we refer to as Ipek (ph). The service assures a customer the compliance, the traceability, and the accuracy of the data at the time of installation.

Last, but certainly not least, these balances allow the most effective use of our new instrument control software, LabX for balances. I won't go into details on the value of the software, as I know I have covered that in the past. But the design, particularly demand machine interface of the new balances are said (ph) to provide best interface through this instrument control software.

I've covered the balance in some more details, but on our (indiscernible) provision, we also have a rich product pipeline. For example, we will introduce a new generation of metal detectors and tech wares (ph) next year. In the industrial, we will soon launch a new version of our formulation software, Formweigh, and the new version of our FreeWeigh statistical process control software.

We also have initiatives on the designing (ph) side. We have made much progress in our performance efforts over the last five years. We have now expanded this initiative to focus also on the entire supply chain. You heard Bill mention earlier our improvement in ITO versus a year ago. And I think you will continue to see improvements in our inventory levels. With the globalization of our supply chain in recent years, we are making the necessary investments to ensure that our supply chain is sufficient and that we are able to effectively serve our customers.

With these (indiscernible) and biodefensive (ph) initiatives in place, we feel that EPS numbers Bill outlined to you earlier are reasonable, assuming the economy stays as it is today. We have built a strong franchise over recent years, and I see us becoming even stronger in the coming years. I would now like the operator to open the line for questions.

(Operator Instructions). Our first question comes from Darryl Pardi.

The share repurchase program, do you expect to maintain the same pace of share repurchase going forward?

I think for the short-term, we feel comfortable about our stock price right now. We think it's a good value, so we'll continue to purchase at a similar pace. I think it's tough to see what will happen longer-term, as well with regard to acquisitions. But at least for the short-term, we'll continue this kind of pace.

Thanks. You actually segued into my second question. Acquisitions -- you now several times talked about over the last couple of meetings with investors, acquisitions -- since I've done a large acquisition update. Strategies, what might be in the pipeline?

Okay. Let me first say a few words on the strategy on (indiscernible) in the past. First, acquisition are an integral part of our growth strategy. The focus areas are clearly more on the laboratory side of our business. But also in the field of packaging inspection, we see opportunities, and also in the field of process analytics, we see opportunities. The acquisitions we are pursuing are always acquisitions on one side to reinforce existing businesses. And of course number two, to also add complementary product lines to our current offering.

Darryl, we are very strategic in when we look at acquisitions. We are not just adding business so that we have added something. It must have a fit with what we do, number one. And then number two also, it must provide us the financial returns we are looking for. And in that sense, we are selective, but clearly we are looking. We're looking at several matters always. But not having done something in the recent years doesn't mean we're not continuing to work on it.

Is there any change in the intensity of looking at acquisition opportunities?

I think in the past years, let's say the last 1.5 years, -- as I have told you at those occasions, we were very much focused on operational matters, restructuring, cost savings. And I made it quite clear that this is the first priority. But with many of these projects being completed, we certainly have more energy and appetite for acquisition.

Okay. Just lastly, on China, with the recent rate hike, there's actually been some discussions that the Chinese government will need to raise rates further, potentially curtail some more of the government programs. It sounds like China slowed a little bit. But I wonder if you could give us some thoughts and outlook going forward in China.

We had, in the first two quarters, extraordinary strong growth in China. We still had very good growth in the third quarter. Certainly, we're not planning that China will provide us the growth we had in the first half of this year for the rest of year, and also for next year. But nevertheless, we feel China is going to grow quite nicely next year again. But it's clear that we have seen a certain slowdown in the growth in China in Q3. The growth was still very nice. But I think some of the programs to cool down the economy are simply also reasonable (ph) to us.

Our next question comes from Sarah Mishelburn (ph).

Thank you. I was hoping, Bill, you could go through the revenue forecast for next year by business line. Or at least give us an idea, directionally, relative to '04, what you think the growth rates for the relative businesses are going to be.

Sure, I'd be happy to do so. Maybe I give you -- start with a certain amount of geographic flare.

That would be great.

Geographically, maybe segueing from what Robert said, we don't anticipate that we'll have the same type of growth rate coming out of China. We think we'll continue to have really nice growth rates. But the 25 percent year-to-date is not a rate we're banking on for next year. We do expect to see Europe doing better. We're not expecting big growth rates of Europe, but as you know, it was down this year, and we do expect some growth coming out of Europe. And that's got to, because it's a bigger base, will offset the slight decline in the growth rate in China and the U.S. We think o-U.S. will continue to grow modestly in next year.

If I look at the business more in terms of the overall kind of sectors, I think most of the guys are kind of falling into this overall 3 to 5 percent type of range with laboratory related businesses being a little bit better on the industrial side; packaging being better than base industrial businesses. And the retail business should fall into that type of a category as well. And process analytics will continue to grow well. But of course, this year, they had one big order related to a large brewing installation. And so it won't grow quite as much next year but they'll still have solid growth.

So, are you still looking for double-digit growth in Asia?

Yes.

Okay, okay. And how big is the Asian business now as a percent of your total revenue?

Asia, rest of the world is 15 percent -- a little bit more of our total business.

Okay. And if you could walk through going from the revenue growth, you know, we're looking for -- I think if I did my math right -- 15 percent plus EPS growth. What are the big levers as we look out for operating margins, specifically next year? Are you looking for a decent amount of gross margin expansion? Or is it primarily expense off of -- I'm sorry -- leverage off of operating expenses?

There are a number of things that were doing that should help to expand the gross margin and continue to help expand the gross margin. One of those Robert referred to in his -- when he was talking about project Spinnaker. Certainly, we think that we can continue to expand margins via pricing. We have done some pretty detailed analysis and put some procedures in place that should allow pricing that can clearly be a lever again next year.

On the productivity side, there are things we're working on in the procurement area and the supply chain that will help. On the SG&A side, while we'll of course eliminate the investigation-related costs, and there may be some come back on the SOX-related or corporate governance-related costs, but that won't be so significant. We are investing more in sales and marketing next year as part of this driver of Spinnaker. And the payback from that certainly will come, some will come next year, but some of it's kind of built in the base for the future.

Okay, Bill. So how much operating margin expansion are you looking at, or is implied in that guidance for next year?

We should be able to have about double the operating profit growth that we do the sales growth.

Okay. That's helpful.

And I stayed away from operating margin just -- there could be some impact, of course, due to exchange rates.

Fair enough, fair enough. And Robert, it sounds like the lab business next year is going to be your strongest growth business. Can you just run through what you're seeing as far as customer demand patterns, any geographic differences, any businesses within the laboratory business that are stronger or weaker?

Yes. I think now in labs, I feel, certainly, I have seen from (indiscernible) and (indiscernible) explanation, we have a good year -- year-to-date, very nice contrast to last year. Key reasons for that are, of course, parts being improved, completions in the customer base. We see, certainly, that having improved. But also at the very same time, we see the benefits of the many new products we launched. In particular balances do very well. But certainly, other product lines do also have a decent growth, being that they are analytical instruments or being at the private businesses. Also, Ultachem (ph) has a good year so far. And we also expect that fourth quarter for them will be a quarter of significant growth year-on-year.

In terms of the outlook for next year, we will continue to profit from the many new products. Many of the products have been launched in the course of the year or even late this year. So we're going to have the full-year impact next year. We're also going to add more new products next year. So that momentum should carry forward.

In terms of geography, I would say it's pretty uniform. What we see in the last, maybe with one significant exception. I've had the Rainin (indiscernible). With Rainin, of course, we had very significant growth in Europe from a small base. But this international of the Rainin franchise is going well. We have been building up the sales and service infrastructure for that business. And we have very unique products from Rainin. And they find excellent market acceptance, and we make good progress in Europe.

Great, that's helpful. Thank you.

Thank you. Our next question comes from Martin Sankey from Nueberger Berman.

Thank you. It's Nueberger Berman. First, on an administrative note, the e-mail that was sent out with the press release and the tables, you're service sent in a form that is not easily readable. Could you have that service resend the press release in formats that are more easily accessible?

Martin, I'll take care of that.

Okay, thank you. Now for the real question, in authorizing a $200 million share buyback, do you, Robert, you and your Board of Directors probably considered returning cash to the shareholder via dividend. Would I be correct in thinking that a cash dividend is not likely in the near future? Or, and I guess in general, what is your thinking about a cash dividend?

Let me say a few words. This significant share repurchase program, of course, is decided very carefully upon. We have, of course, as we just discussed a moment ago, also in parallel, an acquisition strategy. And we are convinced we can do significant acquisition at the same time as we do this share repurchase program and still keep our investment grade. That's the first comment I'd like to make.

Now, maybe a little bit the question of share repurchase versus dividend. Currently, we are of the opinion that with a share repurchase program, we have more flexibility in respect to optimizing that in conjunction with acquisition. While in case, we will institute a dividend payment program that we would of course then be much more of a permanent institution. We certainly are discussing that. And at this point in time, we have not made decisions on the dividend program. But I would not want to rule it out forever.

Okay. Would it be fair to think that it is off the table in the near-term?

Off the table near-term? It's all a question of what is near-term. But certainly you know for --

I think we'll examine it, ask ourselves the question again in the course of 2005. What we can't tell you is what the answer would be at that point in time.

Okay. Thank you.

Thank you, sir. Our next question comes from Derik DeBruin of UBS.

Most of my questions were answered, but I'll take a couple of stabs here. You've done a lot of heavy R&D investing as part of your new product launches. Do you see that overall trend still continuing around the 6 -- between the 6, 6.5 percent level?

Yes, I think directionally, that's correct. I think 6 percent or so of sales for R&D is typically what is being spent in this industry. But probably as a Company, we, as Bill mentioned just before, we will put more and more money, or direct more money toward sales and marketing efforts, to support project Spinnaker, and really get the best return on all these investments being made in these new products.

Okay. And I guess could you -- I guess in terms of -- how many people are you hiring? Or is it not hiring, is it more training? Exactly, I guess, in what form is your SG&A spending taking in terms of rolling out Spinnaker?

For project Spinnaker, we had people in very specific areas. For example telemarketing. We will have early next year, probably close to Q1, something like 50 telemarketing people -- a very significant increase from before. In the different business units, we are adding marketing people for segment marketing programs so that we have more of these initiatives for the global market organizations. We make investments, for example, in the field automation. We have put together a crew of experts, IT and process-oriented people, which can help us to automate the field organization, in particular surrounding the service process. So we make very specific investments in a few areas. Of course, we have probably more ideas right now than investing. We do this step-by-step. We initiate a few programs, try to get the return on those and then move onto new opportunities. We have a long list of he opportunities.

Okay. And when you look at potential impact from foreign currency next year, could you think -- about what you're thinking about possible top-line, bottom-line impact?

Okay maybe I -- if you look at today's exchange rates, of course, and that's let's say the best, maybe, place for me to start -- clearly today's rates would provide us further dollar benefit on the sales line. If I were to look in on the earnings line, it would be very close to neutral. The key driver or the key item that could impact us on the earnings line would be movements between the Swiss franc and the Euro. We don't like the Swiss franc to strengthen versus the Euro. And I think if you looked at today's rate versus the average rate for 2004, you would not see a material difference.

Okay. And finally, just one question. Realizing of course that the pharmaceutical industry is a small part of your overall customer base, are you hearing anything specific in terms of what the outlook is for pharmaceutical company spending next year?

Of course you hear a lot of people saying it's improving; others who are not so sure. Our assessment is and our planning is based on it being pretty much the same as this year.

Okay. I would agree with that. That seems to be what we're hearing as well. From (multiple speakers) sources, yes. Okay thanks a lot. Congratulations on a good quarter.

Thank you, sir. Our next question comes from Richard Eastman from Robert Baird.

A couple of things. Could you just go back over -- what portion of sales was the lab, the industrial and the retail? Could you just give me a percentage of sales in the quarter?

Do you have the second question? I'm just pulling those in front of me.

And then I just wanted to go back as a category if you could, unfortunately, just repeat how lab did year-over-year, industrial did year-over-year, and retail.

Okay. So first on the percentages. The laboratory business was about 38 percent in the quarter. The industrial business was about 42 percent. And the retail business was about 13 percent. And if my math is right, that should give us 100 percent? Okay.

It doesn't, but --

Say it again?

It's not right, but. It gives us 93, but --

38, 42. Oh, hey, sorry, I dropped off one column in the lab -- or one row in the lab. It's 44. My apologies.

Okay. And then you said just as a segment, lab was up -- did you say mid single digits or high single?

Okay, mid-single digits; industrial was a little bit better than flat; and retail was --

Mid sitting (ph) line (ph)?

Yes.

Is that right?

I just want to make sure. Yes, exactly.

Okay. And then, Bill, could you just talk for a minute again to the gross profit margin? We talked a little bit about the strength of the mix. And are we talking -- is it -- can you maybe generalize by segment? Or is it product? And can we expect the gross margin to stay at 48 percent plus for next year?

Certainly, we expect our gross profit margins next year to expand, okay? If I were to look at impacts year-to-date, there's a certain benefit for mix. There's some product -- what I would describe as productivity things. And the productivities could fall into either pricing or on the cost side. But on the cost side, we have taken down costs in products that, particularly those that are not highly -- high with metal content. Okay. We have procurement efforts. Metal prices have hurt us and that tends to impact more industrial-oriented products. And then our pricing power has been good. You know, pricing, of course, power is enhanced when you have technology leadership. But we have not been able to pass through quite all of our metal price increases on those type of businesses. But certainly in the laboratory side, we've done a nice job in pricing. As well, a pretty good job in pricing on the service side.

Okay. And then two question specific to the lab business. I guess one is, with some of the pharma disruptions that we've seen with products pulled and perhaps some of the legacy acquisitions here, and mergers, how do you see the pharma business into next year? And then I also have a question on reimbursement rates. We're kind of hearing in Europe there's been some changes in reimbursement guidelines -- excuse me, in Asia. And I'm just curious if you're seeing an impact from that.

Maybe, I'll say first, word on how we see the pharma industry next year and then I'll pass back to Bill for the other question. Hey, Derik DeBruin just asked the question before, we see the pharma industry for next year pretty much the same as this year. We don't see a major change. What you have been asking about, one company having a problem with some of their key (indiscernible) drugs. Yes, that may happen. But it then really means in that area of account, I cannot answer you. Probably, I frame this a little different. Typically, a big pharma account is in the range of $5 million of sales for us. So if one of them has a big problem, then maybe those sales go down. But in the overall context, it's not very material. We have seen also a similar impact when two of them did merge in the past. And during the year of getting reorganized and merging activities, you had those sales then may be to (indiscernible) a third of those. But then recover, usually, thereafter. So I don't think you know that this event on one of the (indiscernible) drugs, does really impact us too much. Now Bill, the other --?

On the reimbursement side, I maybe have not picked up on this. Are you talking about in, as it relates to drugs for people's health-care?

Well, even on the lab side, on the development side.

Which drugs do you mean with reimbursement?

Pardon me?

What do you mean with reimbursement?

Well, the customers -- your customers -- trying to get basically reimbursed on government -- for government expenditures, government-funded discovery and development more at the lab level? I've not seen that.

No. And just if you think through with the nature maybe of our customer mix, the type of labs you're talking about are not that big a percentage of the business with the exception of the pipettes. The pipette guys don't do those type of labs. Of course, the balance guys do as well, but it's not a very big percentage of their business.

Okay. All right. Thank you.

Mark Roberts from Wachovia Securities.

Thank you. Good afternoon. Actually, my question has already been asked by Robert. I was wanting a breakdown of the revenues by category and I already have that. Thanks.

Thank you, sir. Our next question comes from Vivek Khanna (ph) from Argus Partners.

I had a question in terms of the North American organic growth. Can you just give that, Bill? I missed it.

We were up 3 percent in the quarter.

And then did you give the growth in the lab business for the autochem (ph) business? What was that like?

We were up a little -- mid to high single digits.

Operator, are there any more questions?

Sir, we now have one more question from Melissa Kim (ph) from J.P. Morgan Chase.

I was just hoping you could expand a little bit more on the industrial trends and the moderation of growth there, maybe what end markets specifically are growing?

It's mostly related to our two areas. I would say one where we have pretty significant drop-off would be in the transport and logistics area, where we had a number of large contracts last year with some of the big carriers, like the FedEx's of the world; it wasn't with FedEx, but those type of companies. And then just in general, in kind of some of the general industrial categories, where particularly in Europe, we're not seeing as much spending as we saw in the past.

Okay thanks.

Thank you. We do have one more question at this time from Martin Sankey from Nueberger.

Just quickly, when you provided fourth-quarter guidance, you mentioned a 75 to 77 cents a share number. I presume that's all in as opposed to before --?

That includes an estimate of 2 to 3 cents for the investigation-related costs.

Okay. Just double checking to be sure. Thanks.

Thank you, sir. (Operator Instructions). Sir, we do have one final question from Scott Wilson from UBS.

Yes, Bill, just the guidance for next year -- just so I'm clear -- so if I take 240 right, which would be net of the investigation costs, I assume like, I don't know 8 to 10 percent op profit growth, you get a number like 260, 262. And then the rest, to get to your 2.65 to 2.75 is share repurchase? Is that right?

Yes, that's principally how we would get there.

Okay. So just on the fourth quarter then, so the all-in number includes the expense for the investigation, right? The --

Correct.

Okay, the number that you gave. Okay. And just what was the ending share count number for the quarter? It looks like with the 60 million share repurchase, count only came down by about 300,000. I was wondering if you could give us maybe the ending number.

I'm not sure if I have that number handy right now. Scott, I'll have to call you back on that.

That's fine. All righty.

Thank you, sir. I'm showing no further questions in the queue at this time. I would like to turn the program back to you, Mr. Spoerry.

Thank you. I am going to conclude by saying that we are really pleased with the operating results for the quarter. Our local currency sales came in as expected, and we had very strong margins. You saw also that we had an excellent cash flow generation in the quarter year-to-date. And as we look into next year, we are also cautiously optimistic on the economy and our opportunities, even though there are some uncertainties relative to the economic development. But we are pleased and excited about our own growth initiatives which we have in place, the new products, the efforts around new projects; Spinnaker to improve the effectiveness of our sales and service organization; also Asia will continue to provide us growth, maybe not as much as this year, but certainly solid growth is also foreseen next year. We also have seen that we have ample financial flexibility to repurchase shares, and at the same time, we are going to, of course, continue to pursue our acquisition opportunities. Taken altogether, we are in a solid position as we look into next year. And that concludes the remarks of the Company, and I'd like to thank you very much for joining us tonight and wish you a nice evening. Bye, everybody.