Mettler-Toledo International Inc (MTD) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter for 2004 Mettler-Toledo International earnings conference call. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

At this time, I'd like to hand the conference over to your host for today Miss Mary Finnegan, Treasurer and Investor Relations. Please proceed, ma'am.

Good afternoon. I am Mary Finnegan, Treasurer, and responsible for Investor Relations for Mettler-Toledo. And I want to welcome you to the call today.

I am with Robert Spoerry, our Chairman and CEO; and Bill Donnelly, our Chief Financial Officer. I will start by covering some administrative matters. I'll then turn the call to Robert, who will provide you highlights of our fourth quarter results. Bill will then cover the financial in detail; and then Robert will discuss our outlook and growth strategies for 2005. Of course, at the end, we will have time for Q&A.

Now for some administrative matters. First, this call is being webcast and is available for replay on our website at www.MT.com. A copy of the press release we issued today is also available on our website. You should be aware that statements on this call, which are not historical facts, may be considered forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties that could cost actual events or results to differ materially from those expressed or implied. For further information concerning issues that could materially affect performance related to forward-looking statements, please refer to our filings with the SEC. We undertake no responsibility to release publicly any revisions to forward-looking statements as a result of subsequent events or development.

One other item. On today's call we may use non GAAP natural measures. More detailed information with respect to use of and differences between the non GAAP financial measures and the most directly comparable GAAP measures is provided in the press release. I will now turn the call over to Robert.

Thanks, Mary. I want to thank you for joining us today on this call. We are very pleased with our fourth quarter results and I will start by providing some summary comments on the quarter.

We achieved (indiscernible) of 81 cents in the quarter which includes 2 cents of investigation-related costs. Excluding these costs, EPS was up 15 percent over the prior year. We are pleased with the strong results.

Our sales gross in the quarter was an increase of 8 percent of which currency was a benefit of 5 percent and our local currency gross was at 3 percent. This was in line with our expectations. We are pleased to see improving market conditions in Europe. Our cross margins in the quarter were the highest level ever, increasing 210 basis points over the prior year.

Finally, our cash flow generation continues to steadily increase. In 2004, we spent just over 100 million on share repurchases and reduced at the same time our net debt by $60 million.

Before I turn it over to Bill to cover the financials, I want to provide some remarks on the investigation. We have now completed the remaining non-financial aspects of the investigation. The SEC has informed us that they are returning the investigation files and that they have no further questions at this time.

That is all on the investigation and now Bill will provide more details on the financials.

Thanks, Robert, and hello, everybody. We had a great quarter with solid operating results and achieved an earnings per share of 81 cents which included 2 cents of investigation costs, as Robert mentioned. This compares to 72 cents last year and, excluding the investigation cost, is a 15 percent increase.

For the full year earnings per share was $2.37 including 8 cents of investigation-related costs. In 2003, we had an 8 cent restructuring charge as well so taking out these two one-time items our earnings per share growth for the year was 12 percent.

Now let me get you into some further details, starting with sales. Sales in the quarter were 399.2 million, an increase of 8 percent consisting of a 3 percent local currency growth and a 5 percent currency benefit. If we take into account certain product lines that we have exited, our growth would be in the range of 4 percent for the quarter.

As we have explained previously, we focus on local currency sales growth which drives our operating performance more so than U.S. dollar sales growth. So we will continue to outline local currency sales growth numbers throughout the presentation.

Let me give you a breakdown on sales by geography now. Europe had 3 percent local currency sales growth which we are pleased with. This region had been down for the first three quarters of 2004. Q4 brought us to a flat level of local currency sales growth for the full year. Laboratory Instruments had solid growth and we saw improved results in our industrial instruments during the fourth quarter as well.

In the Americas, local currency sales decreased by 1 percent in the quarter and left us at a 2 percent growth for the full year. While industrial instruments were up solidly in the quarter in the U.S. our laboratory business was down modestly.

Asia, rest of world increased by 13 percent for the quarter, 15 percent for the full year. We expect to continue to see double-digit sales growth in the region again this year. However we don't believe it will reach the 15 percent level of last year.

Now turning to -- from a geography analysis to a business area analysis, let me start with our lab business. Laboratory products grew by 2 percent in the quarter and 4 percent for the full year. The exit of an electronics component business we did for one of our biopharma customers reduced sales by 2 percent in the quarter and 2 percent for the full year. Adjusted for this exit, sales per laboratory estimates were up 4 percent in the quarter and 6 percent for the full year. Process analytics and drug discovery were the strongest contributors within this business with double-digit sales growth in the quarter. The balance business was flat against a strong quarter in Q4 of last year.

Looking at industrial products, we had improved results despite cover comps. We grew 5 percent in the quarter which brought us up to 1 percent for the full year. We exited a certain product line and product expansion reduced the full year sales growth by about 1 percent for the quarter as well.

Finally in retail we grew 5 percent in the quarter and 8 percent for the full year. We are happy to see growth in all geographic regions for retail but especially strong growth in Asia.

Now let's move down through the rest of the P&L. Let me start with gross margins. Gross margins reached nearly 50 percent in the quarter at 49.7 percent. This is a 210 basis point improvement over Q4 of 2003. A few factors contributed to this improvement. Let me take you through them.

First, our efforts to consolidate facilities and reduce overhead helped. Second, we benefited from a mixed shift of Americas and China to Europe in the quarter. Just as a reminder when we sell in China, we have lower sales price but as well lower distribution and sales cost and that will be discussed further later.

The third benefit to gross profit margins was the fact that we had a nice volume and that the variable contribution our products is quite high so we benefited from volumes.

Fourth, we continue to see the benefit of additional value added, specifically software content in our offering. These benefits -- the four of them taken together -- were somewhat offset by some negative currency impacts to margin but in sum, with a 210 basis point gross margin improvement we are really quite pleased.

Now moving down the P&L further, R&D was $22.2 million or 5.5 percent of sales. This is on target with what we expected in constant with the prior year in local currency terms. SG&A was $117.3 million. This was a 16 percent increase. Of this increase, 5 percent was due to currency and the remaining 11 percent could be explained as follows.

First as we mentioned in our press release, we had investigation-related costs of 1.1 million which is 1 percent of the SG&A growth. Fax-related costs accounted for another 2 percent of the increase. Higher variable compensation expense also added about 2 percent and net investments related to our marketing initiatives around Spinaker (ph) added about 1 percent.

Finally the remaining 5 percent is due to higher variable selling costs and other general expense increases. These cost increases is the other side of the sales mix shift from America and China to Europe. We have higher distribution costs in Europe than in China for obvious reasons, salary levels, but European distribution costs are also higher than the Americas because the higher percentage of our sales in Europe are through direct channels vs. indirect channels in many of the European or -- sorry -- Americas businesses.

The sum of all these items resulted in an adjusted operating income of $59 million. Excluding investigation costs, operating income was up 11 percent in the quarter versus the prior year. For the full year, excluding investigation and restructuring costs, the restructuring cost being in the '03 year, operating income increased by 10 percent.

We also had significant third-party SOX-related costs in the quarter and the year of 1.4 million and 3.5 million, respectively. If we pull out the SOX costs as well as the investigation cost, operating profit increased 14 percent in the quarter and 12 percent for the full year.

Now continuing down the P&L, amortization amounted to $3.6 million for the quarter. Interest expense was 3.2 million. Our tax rate continued at 30 percent. This resulted in net income of 36.3 million and the earnings per share of 81 cents which included, again, the 2 cents of investigation.

Now I'd like to turn to cash flow. Again we were pleased with cash flow generation in the quarter and for the full year. For the quarter, net cash provided by operations was $44.1 million versus 38.8 million in the prior year. We are pleased with that result which was a little stronger than we anticipated. You will notice that we made a $10 million voluntary pension contribution this year to our U.S. pension plan. As we've mentioned on past calls, we have frozen this plan and have taken steps over the last few years to close the funding gap.

Some further comments on cash flow. DSO was at 51 days at the end of the period. This is constant with the prior year and we view this as a good number for a international company like ours. Our ITO improved to 4.6. This compares to 4.3 one year ago. We are pleased to this improvement but want to drive this number above 5 in the coming years.

For the year, net cash flow provided by operations reached 166 million. With this strong level of cash flow generation, we are able to repurchase over $100 million of stock and reduce our net debt by 60 million. We had a very solid capital structure and ended the year with net debt of 136 million and EBITDA of 206 million, resulting in a net debt to EBITDA ratio of .7.

This gives us plenty of flexibility to -- financial flexibility to continue with our share repurchase program and also have room for acquisitions.

In terms of guidance for next year, on our last call, we outlined 2005 sales growth estimates in the range of 3 to 5 percent and earnings per share growth in the 10 to 15 percent range over what we expected to achieve at the end of '04 or what we expected to achieve in terms of earnings per share at that point in time, excluding investigation costs.

Specifically, we gave guidance for next year in the 265 to 270 per share range. Obviously we finished the year better than expected but I don't think we should just add the 10 to 15 percent growth to this better than expected earnings per share number. We are really pleased with the year and how we ended and we think it bodes quite well for 2005. Our previous guidance remains and we feel confident with that range.

One more comment about the full year guidance before I move to Q1. The 3 to 5 percent sales growth includes some additional effects for these product lines we started exiting earlier this year. Adjusting for those exits adds another 1 percent to sales growth and implies a 4 to 6 percent organic local currency growth in our base business.

Now in terms of Q1 guidance I want to point out that we noticed First Call is currently showing a consensus of 51 cents per share for the first quarter which is much higher than how we budgeted the year to come in. This would imply a first quarter EPS growth of 24 percent which is not in line with our full year growth expectations or what we discussed on our last call. We would expect Q1 EPS to be in the range of 43 to 46 cents per share and this would be a good start to achieving our target for the full year.

We will provide additional guidance on the remaining quarters later this year but you should assume for now our normal seasonality, that being with the fourth quarter being our strongest quarter, because of the seasonality on sales.

One additional point. These numbers do not include the impact of expensing options, which will require starting in Q3. We will provide guidance on the impact to us as we get closer to that date. Some of you have asked us what our intentions are, with respect to equity-based compensation due to the new accounting rules. You can see by our disclosures that this will not have a significant impact to us. Pro forma calculations show an impact of EPS of about 7 percent.

Our current equity incentive plan allows for both restricted stock as well as stock options. We will evaluate both scenarios to determine the best trade-off in terms of employee motivation and shareholder value.

In terms of cash flow, we expect to generate a strong level, again, in 2005 and would estimate that net cash provided from operations will be in the $170 to $180 million range. Capital expenditures next year -- sorry this year should be around 30 million which should give us a net cash flow in the $140 to $150 million range, well in excess of our estimated net income and in line with our 2004 levels. We do not expect a big increase in cash flow this year as we experienced last year or in 2004 where we increased from around 108 million up to the 144 and that is due to a number of comparability issues.

First we pay out our variable compensation numbers in the first quarter of the following year so for example this quarter will pay out last year's incentive. We exceeded our targets in 2004 so the payout will be higher than it was in 2003 or related to 2003. In addition, the timing of some supplier payments which we normally made in Q4 ran into the beginning of this year. These two items will give us some lower cash flow in Q1 which will then recover over the remaining three quarters. But we are quite confident we will still finish the full year in the $140.50 million range.

That's it for my side. I now want to turn it back to Robert.

Thanks Bill. Bill just gave you the outlook. Now let me first give you some comments on this before I discuss our initiatives to drive gross profitability in 2005.

Last year, we generated local currency sales gross of 3 percent. If you adjust for exit from certain non strategic product lines, our gross was more like 4 percent. As Bill mentioned we continue to feel comfortable with the guidance for this year. It's very similar growth level at this local currency sales in the range of plus 3 to 5 percent.

In terms of geography, we will expect growth in Europe to improve over what we saw last year. We began to see this in the fourth quarter and think trends will continue.

In the Americas, we will expect growth to improve modestly. In China, in 2 '04, we had unusually high gross due to the very favorable investment climate. While we expect China to still grow, it will not be able at a level we saw in 2 '04.

Let me give you some additional insight into 2005 by business area. I'll start with Lab. In 2004, we had solid growth in our laboratory (inaudible) reflecting approving market conditions with customers and the success of our many new product launches. Our lab customers it increased investment lab (indiscernible) last year. We expect similar investment levels this year and so have again many new product launches.

Overall, we expect similar trends to what we had last year.

With our industrial instruments, we had some different dynamics in 2005 vs. last year. Sales of industrial instruments were flat last year as strong sales growth in Asia, particularly China, was offset by stable sales in U.S. and declines in Europe.

Sales growth in 2004 was (indiscernible) by substantial longtime transportation and logistic projects in 2003. Growth in China was driven by capacity expansion which we expect to continue but that is already mentioned at the lower level.

On the other hand, we see improving trends in the Americas and most recently in Europe.

In 2005, we will open a challenging comparison from transportation and logistics behind us. Taken altogether, we will expect improvements in our industrial instruments in 2005 over what we experienced last year.

Finally, with respect to our food retailing business, we saw better investments activity in 2004 after several years of reduced spending levels. We anticipate that this market condition will continue and sales growth will be in the mid-single digit range.

Let me now discuss our strategic initiatives which position us well towards achieving growth in 2005.

We have spoken with you at many occasions about our five core strategies for growth. Which are 1, to further gain market share in several countries to targeted strategies for market penetration. 2, to capitalize on growth opportunities in Asia and other emerging markets. 3, to continue to reap the industry and technology innovation. 4, to ensure an efficient cost structure and 5, to pursue strategic acquisitions.

Let me highlight some of the initiatives we have underlined in these growth initiatives. Technology innovations is the central part of our growth strategy. Our new balances continue to meet with strong customer reception. We recently received a meaningful order from a global cosmetic company that uses them in (indiscernible) environment together with our LabX software solution to manage their base to base existing and new fragment (ph) mixtures and ensure a globally consistent quality.

We will soon launch the next key part of our balance line replacement with our new high-end analytical balance. The product line is called XP which is targeted to customers in the regulated markets that combines is important. Increasingly software is becoming a differentiating factor for us as we provide significant value to our customers to enhance data management, easier regulatory compliance, and the ability to network and control numerous instruments from one location.

Our new XP balances combined with LabX software are especially suited to improve the productivity and meet the demanding standards of regulatory laboratory environment.

We also have software offerings to improve the productivity of the chemist in the drug development process. Our new product that works with lab software is named (indiscernible) platform that automates workflow, integrates instruments and enhances the functionality of electronic logbooks. To understand what I mean it is helpful to understand the current workflows in the typical development lap.

A chemist designs experiments in his lab notebook. This could be a physical notebook or electronic one such as an XO Scratchy (ph). He then thinks about what instrument he needs to use to conduct these experiments. He then goes around to each instrument and programs it for these experiments. He then runs the experiment, collects the data, analyzes the data and records the results. With Virtual Lab, the chemist can sit at his computer and with one software program complete all these steps. This, of course, saves tremendous amounts of manual steps and as a result the chemist's time is freed up to focus on chemistry.

We are very excited about the fourth quarter rollback installation of virtual lab for major pharmaceutical customers. It is all rolled out in multiple sites in the U.S. and Europe and directly pulls back almost several hundred chemists.

The customer estimated that it will increase its productivity of the development process by approximately 30 percent. It is not only the lab we provide solutions to improve the productivity and efficiency. It also occurs with our industrial customers and retail customers, as well.

I recently visited a key European food retailer which is using our UC technology in their stores which are state of the art. UC is a PC-based network scale, typically used for the management of fresh goods. There are many features of the UC which help to facilitate workflow in the store. Specifically, retail space high turnover in their stores and training can therefore become expensive and time-consuming. With UC technology counter personnel can easily access training modules, instructions for specific information on the product the customer is interested in.

For example, it is increasingly common to see deli counters in grocery stores carry a dozen different types of each product (indiscernible) such as ham. Because of the expanded selection, customers are often seeking information about the specific kind of ham or the difference between the selections. With the UC, operators can quickly and easily access comprehensive information on each different pack of product, thereby answering the customer's question and helping to facilitate the sale.

The UC also allows easy product low cuts or PLUs to an operator -- even one who is unfamiliar with the item. With a few keystrokes can obtain all relevant information on the fresh goods.

Finally, UC technology offers a selling opportunity for retailers by effortlessly providing customers with information on complementary products or recipes for fresh goods they are purchasing, thereby improving the cost promotion of products. You can see how the UC technology can greatly enhance the productivity of our customers, the food retail.

It's the only couple of complete examples we have. Many more of the product will be launched next year. We are looking forward to this product launch. In addition to new product launches, our other growth initiatives include our Spinaker project, which I spoke to you about at our last conference call.

This project is aimed at increasing the effectiveness of our global sales service and marketing organization and, thereby, increasing our sales growth and profitability. Our initial focus is in expanding our segment marketing program; and we are finding our techniques to significantly increase the lead generations. In addition, we are working to improve cross margins through more structured pricing, discounting and focus on value selling.

Finally, we are both enhancing the use of automation goods to our field service stores (ph). It is our only immediate steps in what will be an ongoing program to improve revenue growth and productivity of our growth wide sales and service organization.

China will remain in that attractive gross market for us. I mention that gross may not always remain at the level we saw last year but we are convinced of China's long-term potential. We see great opportunity in this market. Not only with capacity for expansion but also as new demands emerge. For example, consumers are shifting to buy food in grocery stores which creates demand for our food retailing solutions.

As we eat more in grocery stores the demand for packaged food increases and likewise the need for our product inspection offering. Furthermore, as China exports market continues to grow rapidly, local manufacturers need to adhere to global quality standards which our solution can help to ensure. We will see that continue to grow in our product offering for our multinational and domestic Chinese customers.

Service. Service will continue to be a growth area for us. By expanding remote service capabilities in our products and continuing to expand our value-added services. Service is also becoming increasingly important in the emerging markets and we are building our service base in Asia by adding a managerial level and providing them with (indiscernible) service training programs.

We are actively making service an integrated part of our solutions in these high-growth areas. We will continue to focus on the cost side, by shifting more manufacturing and sourcing to China. That also makes solid progress in our procurement efforts over the past few years and in 2004 a procurement savings in such areas as in telecom, print circuit boards, and memory chips, helped us to mitigating factors such as higher steel cost.

We recently expanded through all of the procurement teams to focus on the entire supply chain, including invested capital. We have started to see results in this area through (indiscernible) inventory turns that Bill spoke about earlier. We would expect further progress this year.

In addition to our growth initiatives, we will continue to generate a strong level of cash flow. With our strong balance sheet this allows us to pursue strategic acquisitions as well as return excess cash to shareholders by share repurchases. As you can see, we have placed strong initiatives to increase growth. We are fortunate to be growing from a position of leadership. We have a fundamentally strong core business and record of solid operating performance coupled with a strong balance sheet.

These initiatives have taken firm hold in our organization and we are now focused on executing them with operational excellence.

That is all from my side. I now would like to ask the operator to open the lines for questions.

(OPERATOR INSTRUCTIONS). Paul Knight of Thomas Weisel.

Robert, with the balance sheet you are building, can you refresh us where you are philosophically with acquisitions? Has that changed where you maybe have been in the last five, eight years?

Paul, as I said in the past, acquisitions are a very integral part of our way going forward. I repeat, we were cautious the last two years. With acquisitions we talked of the economy but also because of our focus being on cost restructuring. This is now very much behind us. I think it is a very strong balance sheet. Both pursue acquisitions. We all do that right diligently. Diligently as it makes strategic sense; but also that we buy businesses which, financially, are justified in our framework.

We of course set right concrete targets; we are working on that continuously; there is, of course, nothing very complete I can report to you today.

The other question then would be on, geographically, China. You mentioned it has slowed down in Q4. Why do you think that occurred and then could you also address, is the Indian market going to be significant in the future?

Let me talk first about China. Slowdown we had in Q4 is a little bit of what happens in 2 '03, in 2 '03 you may recall in the middle of the year, there was the SARS disease which deadlocked a lot of the business at that time and then when that was through Q4 we had a hell of a Q4 in China in 2 '03. So that makes a tremendously difficult comparison. Actually we were very pleased with the Q4 results of last year in China.

Of course the government is trying to reduce the investments climate and cool it down a little bit; but in spite of all of that we felt very very positive about the China growth last year.

The reason why we are so positive about it is not just the funding (ph) of the government itself which it may be a little less today but really mostly these (indiscernible) companies which makes significant investments in China; and the last time I was in China that was just in course of November. Every time I am there I am impressed with who many new factories you find there. It's amazing. And that, of course, (indiscernible) really not growth opportunity.

I still did mention we would expect good growth also to come from China next year.

India, India's slightly different. I think India is maybe less the manufacturing engine of the growth but that doesn't mean that there aren't ; opportunities. Typically people refer to the India opportunity more in the servicing subspace. But I would also say, particularly in the last field we search, we see more and more activities in India. We have significantly improved our business in India; and we have by now a strong sales and service organization and we believe we have a lot of really significant opportunities there. Last year, we had very substantial growth also in India.

Are you going direct in India now?

Yes we do have our own organization there.

When did that occur?

When did that occur? Actually occurred a couple of years ago. Cannot really recall that in greater detail but probably three years ago; and we started small and then as we felt we had good (indiscernible) significantly expand in the course of last year.

Tycho Peterson of J.P. Morgan.

Congratulations on the quarter. Question for Bill. Wondering if you could break down the GM gym contribution from the volume facility consolidation and software?

The facility -- so it's 210 basis points in total. The contribution in terms of what we refer to as period expenses or reduced factory overhead was probably around 50 to 60 basis points. The impact of the higher value-added content software and other things, that was probably 30 to 40 basis points.

In terms of China. You talked in the past about I think with getting to 25 to 30 percent of manufacturing over there. Where are you now and what is the timeframe?

I think you know, China manufacturing, of course, will gradually increase. Give you a rough feel I think in three to five years that number is probably going to be in the 40s. It will have its limitations, typically, what we push to China on more the lower end products. Where we need a lot of R&D technology and engineering support. It is not going to make a lot of sense to push it to China.

But (indiscernible) are working heavily on this global supply chain recruitment efforts. We are sourcing more and more for the (indiscernible) in China and in that way also profit of course from the low manufacturing cost in China.

So what percent of manufacturing is done there now?

(MULTIPLE SPEAKERS)

I think for the full year it was about 16 percent of our product sales came from products manufactured in China.

16. On the balance business, what are you projecting in terms of growth for this coming year? Just roughly?

In terms of balance growth for '05?

Yes.

It will be low single digits somewhere between 2 and 4 percent. Hopefully if European economy continues the Q4 trend, I hope to be at the high end of that range.

Darryl Pardi of Merrill Lynch.

Could you give us more color on the growth in lab in the U.S. or in the Americas, I should say. Maybe walk through the product lines, end markets?

Let me answer that question before I hand it back to Bill for more financial details. Q4 in the U.S. -- was actually a good quarter even though we didn't have gross in the U.S. in lab. The reason for that was, we had a significant dealer stocking in the previous year which this year they just had somehow lower stocking levels at the end of the year. And used (ph) sales of the dealers were actually very strong in Q4. And that transacting I think the business in U.S. is actually on a very good trend.

Now Bill, you might want to add some color to the numbers.

So as you know that not all of our business is dealer related so Robert was commenting on the balance sheets of the business. If we look at our AutoChem business we did exit and in the AutoChem business we have the drug discovery oriented products and then the process development ones. There were some product lines that we got exited from in the course of '04 that were in the discovery and almost 100 percent of those were sold in United States. It was somewhat their historical base. I'm talking like synthesizer type businesses and a couple of other things.

Yes I was going to ask about that. So is that included in the 2 percent? You talked about the effect of dropped product lines. Is that --?

Actually, we are really in that number more focused on the electronics. We probably could have added in that piece as well (inaudible). It wasn't as large. It is only really large if you start looking at it in terms of -- it only starts moving the percentages if you look at the U.S. lab business because those product lines are so U.S. focused.

But end market demand is consistent with what you have seen in previous quarters (MULTIPLE SPEAKERS) was an issue of pull through. I'm sorry, inventory at the air distributors.

Inventory distributors. There was even, I think -- we shipped the stuff overseas from our Swiss plants and I think there was even some things that didn't get delivered until the first week of January that in order so because customs just took a little longer. But yeah, no, in terms of end user we feel good about the overall lab business.

Robert, I understand that Mettler is not going to have a booth at PittCon this year. Is that correct?

That's correct. We have made a very conscious decision to make (indiscernible) this year. We have been, over times, the most effective way to spend exhibition dollars (indiscernible) actually in any exhibitions and we actually are not at PittCon to save money but we are actually reallocating that money to small mini fairs as is different from customer locations. We have a big program on the way. All over the country. Just do it in a more effective way for our customers and ourselves.

Is there any financial implications from that? I know PittCon is a relatively expensive event for you. Should we think about costs for that over the course of the year? (MULTIPLE SPEAKERS)

We won the battle on eliminating the PittCon cost but they found a way to put it in these mini shows. I think for us our feeling wasn't that our marketing dollars in North America were too low. In fact, we think if properly applied we can get good investment from our marketing dollars. We are just saying that our marketing dollars are better spent in these customers' specific or regional shows. We made similar investments in other pieces of business like the bus I think that I think you saw the bus at the packaging show, Darryl, I can't remember. But there are others of these investments in marketing we see getting very good paybacks.

That makes sense. My question is more one of timing. PittCon was kind of a large expensive event for you that happened in Q1, typically. Is it large enough there, should I think about it might alter -- ?

Just to give you a feel, after taxes, our cost got picked on, was less than a penny.

Derik De Bruin of UBS.

Could you refresh us on your share buyback plans? I believe you used the last 40 million of your old programs this quarter and you have another 100 million outstanding.

We actually have, entering this year, we had closer to 200; and the past year we looked at the program. We expect that we could expend most of our free cash flow if not all of our free cash flow this year into a share repurchase plan; and I mentioned that our free cash flow should be in 140 to 150 range. Of course, we will evaluate things like what happens acquisition-wise, what happens to our share price. We could become more or less aggressive based on those factors.

But just to give you a feel, we could repurchase something like 150 million of our shares and still make $4 or $500 million of acquisition and still feel very comfortable with our credit statistics. So we think there's room in the balance sheet to do both.

I guess now that we start looking at the SG&A expense for 2005, should we back out the investigation cost that occurred in '04 and essentially use that as the base level from which to do our estimates?

That's correct.

I guess where will you eventually see gross margins going to? It's in the current fourth quarter (indiscernible) or is it?

I think directionally we see them going -- continuing to go north. I think there are things we are doing on the cost site. There are things we are doing in terms of bringing further value-added to our products that should continue a generally positive trend. The fourth quarter we have a high variable contribution. So that's price minus variable manufacturing costs to our products and, therefore, the fourth quarter you'll always see a very high gross profit number because of that. It will be some time before we start hitting the fourth quarter numbers for the full year but I continue to think that in '05 we will achieve better gross profit margins than we did in '04 assuming neutral currency environment.

The review guidance is 3 to 5 percent in local currencies. What do you expect to get another 5 percent boost as you did in this quarter from FX?

I have that number calculated. It's about between 1 and 2 percent for next year based on the exchange rate environment as of February 5.

Mark Roberts of Wachovia.

A number of my questions have been answered but one question I have as a way of looking at where your strategic emphasis is, are you able to give us a breakdown of your expected R&D budget for next year kind of by vertical category, foodservice, industrial, lab?

Percentagewise, we certainly spend more on our laboratory-oriented products. We get very good return on the investment there; and we can drive higher gross profit margins with that investment and we just feel the need to trigger replacement in the installed base. Product lifecycles, we try to drive a little shorter there. The other (indiscernible) would be if you looked at it in terms of, what are we doing when we are doing this. What you see is more and more emphasis on software content across all of our product lines in terms of our R&D investment.

Maybe one other trend that's directionally you'd see is every year China is kind of accounting for a higher and higher percentage of our R&D spend.

So, is it fair to say that it's more -- you think about it more geographically as opposed to the vertical market segments?

I think my first comment was lab-oriented so we think about it lab-oriented. We think about it in terms of what we can do with our products. In that sense I think of software. And then, finally, we think of it geographically in the sense that when we look at where our growth is going to come in the coming years, we continue to think of China and other emerging marketplaces like India, like the former Eastern Bloc countries that they will provide growth. And a lot of that growth will be product based out of our Chinese manufacturing facilities. More to a point, somebody asked earlier is, what percentage of our products are manufactured in China? We continue to see we need to spend R&D dollars in China to increase that percentage over time and we will do that.

Sara Michaelmore of S. G. Cowen.

Lot of my questions have been answered, too; but I guess a couple that I had worked on, the industrial outlook for next year, it sounds like you are expecting better growth than the flat growth trends for the full year in '04. Should we think about it being a mid single digit growth trend like it was in Q4 or somewhere in between?

I think the industrial business will be around the corporate average, for the full year, be in kind of this 3 to 5 percent. What the mix will be different in the sense, Sara, that while we didn't see much robustness in Europe and the Americas in '04 except maybe in the fourth quarter, and there was lots of growth in China, I think the China comps will get a little bit tougher. We won't have quite the same growth rate coming out of China but we will see better numbers coming out of U.S. and Europe. But in total it should average out about to where the overall corporate average is.

Then on the outlook for the lab business, it sounds like you are expecting slightly better growth for the balances. Do you think the double-digit growth trends in that process analytics syndrome discovery business are sustainable?

Yes. Maybe a comment about the balance business. The fourth quarter was the only period that we saw a little bit less growth. Previous -- for the full year, we actually had a decent number for laboratory balances. With regard to AutoChem, we continue to think we will see good growth there. In that business, with regard to (indiscernible) analytics I think they did have one large contract in the course of this year so they have a little bit tougher comp. But adjusted for that I guess we probably would expect at least high single digits, anyway.

Then maybe I will ask this gross margin question a different way. When we think about sustainable gross margin improvements, what are really the leverage there for '05?

I think that every day there is blocking and tackling stuff going around on the cost side and bringing more value into the product. Some of that is sometimes lost in things like currencies or pricing levels at a particular point in time, can move that either more or less. One of the things that I think will be an important contributor to gross profit margins in '05 is the efforts we have made in terms of pricing. We really tried to in an intelligent way go after more aggressive pricing where we felt the market would bear it in '05 and I think that that will be a contributor to it as well.

Actually, if you ask me what would be the single biggest item that pricing will probably be it and (MULTIPLE SPEAKERS)

Pricing, really, in many ways as I described before we (indiscernible) initiative. Yes, the price increases but at the same time also discounting on products. That really cut back on discounting. People have many more hurdles to get discount authorities. We'll have some very good impact also next year.

And should we think about a positive mix shift to European sales being a big impact or is that a more modest impact?

The fourth quarter number in Europe is better than what we expect for the full year so I don't know if it will be that dramatic. In China we will grow more in the quarters next year than they did in the fourth quarter. So some -- it won't be as much as you saw in the fourth quarter but directionally it should be good.

Vivek Khanna of Argus Partners.

I just have a question. Can you tell me what the share count was at the end of the quarter and then I had another. I missed the revenue by segment between lab industrial and retail?

The share count I think was 100,000 less at the end of the quarter than the weighted average during the quarter so I think that is 44.7; and Vivek, just to make sure I got it right, I think you were just asking about business area. And what we said earlier on the call was laboratory business was 2 percent in the quarter, 4 percent for the full year, and then as we got out of this electronic component business for the biopharma customer, the third-party component business. That added about -- you can add another 2 percent if you wanted to kind of pro forma that effect in. And then on the industrial side, we had 5 percent in the quarter and 1 percent for the full year and some of the product lines we got out of in the product inspection business would have added another 1 percent there. And then --

Are those adds are for the quarter or for the year? 2 percent and 1 percent?

Actually it is the same numbers for both years.

So lab business actually grew 3 in the quarter?

The lab business actually grew 4 in the quarter. 4 in the quarter. 6 for the full year and industrial was 6 and 2. And retail was 5 for the quarter and 8 for the full year. And, again, those are all local currency numbers.

Why do you think North America was weaker this quarter?

It's in the lab business and it's, again, we got rid of some of those discovery product lines. They were U.S. based products sold almost exclusively to U.S. customers and, then, in terms of just timing of some sales with the balance, the dealer channels, there were two things there.

One was, if we look at end user sales we actually had a positive number in the quarter but our shipments to them which I think is a reflection of two things. A little bit of stocking issue and then the fact that actually we had a pretty large order landed down there on the shores just after the end of the year.

If you make all these adjustments the organic growth for the quarter was what maybe 5 or you think that's being a little too aggressive for the whole Company?

It's always tough. I'm careful about these things like dealer stocking and stuff like that. There could be -- there are probably positive things that didn't come to my attention in other parts. But I think the exited product lines is something we can get our arms around and that is a 1 percent number for the full Company for the quarter.

So next year the organic guidance -- is it 4 to 6 or 3 to 5?

3 to 5. But there is the full year effect of getting on these exited products adds about another 1 percent to that number.

So it would be like 4 percent?

That 4 to 6 adjusted for that piece, yeah.

Darryl Pardi of Merrill Lynch.

Bill, why did the amortization pick up in the fourth quarter?

Good eyes. One of the product lines we exited we wrote off some good will with that.

So what level of amortization should that (MULTIPLE SPEAKERS) going forward?

We should be 12 million next year.

Sarbanes-Oxley related expenses in 2005? Do you expect to have any? (MULTIPLE SPEAKERS) Let me rephrase that. Of the one-time nature charges for consultants and some of the other startup costs.

Here's the way we've been thinking about it internally, Darryl. I think, clearly, we are going to have reduced third party costs in terms of Sarbanes-Oxley. That is clear. But as you know, we have also made some commitments to beef up some of the financial staff. Kind of postmortem on the acquisition or the investigation. And so what we would like to do is basically redeploy the dollars that way. But net net I think it certainly won't be any higher and hopefully will even save a little bit there.

Can you do give us the growth for service in the quarter? Do you have that handy?

I do have it handy. It was a good number. If you have another question I will have the answer by the time -- .

Robert, in China, taking you out the next few years, what level of growth do you think is sustainable?

I think we (indiscernible) double-digit growth into '05 and I would also expect a similar type of growth in the coming year.

We have many businesses which I referred to before, which are under represented being the food retail business, the product inspection business but all I see is more and more research. Laboratory research being done in China. And of course (indiscernible) the shift from manufacturing to China these are all nice growth drivers. I feel very confident.

The service number we had high single digits in the quarter which brought us to mid single digits for the full year.

Richard Eastman of Robert W. Baird.

(inaudible) Along the lines of this gross margin Bill if I adjusted 800 basis points of consolidation and value added mix, your incremental margin on a local currency sales basis is still well over 100 percent. Is that -- are these pricing moves that you talk about and lack of discounting, did that disproportionally impact the fourth quarter? Where is all this margin coming from?

Let me just rephrase the question just so I make sure I'm answering the right way. I can't remember one of the previous callers said 'hey Bill' I listed 4 things that contributed to the gross profit margin improvement and they asked me for an estimate of 2 of them and I gave that estimate. That estimate accounted for -- those 2 items accounted for about a half of the 210 basis points in total. I think you're asking me about the other half now?

The other half is -- just trying to do the math it's maybe $18 million on a call it an $11 million local currency sales change. Again, there's some -- what is that? Why is that as high as it is? And the other two issues would be this mix shift towards Europe? And also I guess software content?

I think the software content was one of the things I added in when I discussed it. I think the impact certainly, hey, just there's a couple of things that have happened. Historic -- okay, so I guess it is obvious that our sales prices in China are lower than our sales prices in Europe or the U.S. So if we sell a little bit more in Europe and a little bit less in China we get a gross profit benefit to that. At the OP margin, there isn't much of an impact because of course our distribution costs are much lower in China.

I'm just kind of zeroing in on the gross margin line, why that is not -- it's not all that (MULTIPLE SPEAKERS) and why that is not sustainable?

I think it -- I think we did say it is sustainable in the sense that I am saying that for the full year next year our gross profit margins will continue to improve.

Maybe what I didn't want to -- what I was trying to maybe not get people too excited is I don't think we will see a 210 basis point gross margin improvement next year or in Q1 of next year. I'm sorry -- this year being '05.

'05, I understand. Then just, secondly, in terms of the fourth quarter, the growth you saw in Europe as you defined it was more in the industrial segment of the business. Could you just -- would that, within the industrial segment was it greater in packaging (inaudible) or the general industrial scale business?

(MULTIPLE SPEAKERS) So first Europe was good, both in the United -- sorry Europe was good both in lab and industrial, actually, so and then I think the packaging number in Europe was better than the industrial number. But maybe that is my affinity to that business. I just want to assume it's better. Let me check that. In the quarter, packaging did grow a little bit more but they both grew pretty good in Europe. And the laboratory business in total grew.

But you're right. Most of it was driven by more on the industrial and product inspection.

And that did pick up because I know you had a weak comparison in the fourth quarter last year, but you did see growth sequentially? You know above what we would be seeing now (indiscernible)? In Europe?

Yes, in the sense of -- because we compare year on year.

Last question. Some of these products divestitures particularly on the drug discovery side. When you say you got rid of those products, did you sell those product lines? Was there any cash flow from that?

No -- within the mix that we are talking about, there is some that we are, we'd like to try to sell in the course of next year but that would not be -- I don't think we need to build in a huge share repurchase as a result of a relatively small line. Most of the ones we talked about is we just phased out further sales efforts, further R&D investments in them. And one I think on the electronic side, that was just a specific business where we approached this customer and said that we didn't want to stay in that any longer.

Rick, you know with the transfer of the Ultra Tran business phone (indiscernible) existing facility on the East Coast, did concentrate, decided not to transfer each and every one product. Certain products had too much complexity. Too much manufacturing cost and too little sales volume and we made the cut there.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time. I will turn it back to management for closing remarks.

Thank you for joining us and if you have questions you know how to get hold of us. Thanks. Bye-bye.

Thank you.

Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program.