Mettler-Toledo International Inc (MTD) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2005 Mettler-Toledo International conference. My name is Kellera, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to turn the presentation over to your host for today's conference, Ms. Mary Finnegan. Please proceed, ma'am.

Thank you. Good afternoon. I am Mary Finnegan, Treasurer, and responsible for investor relations at Mettler-Toledo. And I want to welcome you to the call. I am joined by Robert Spoerry, our Chairman and CEO, and Bill Donnelly, our Chief Financial Officer.

I will start by covering some administrative matters. I will then turn the call to Robert, who will provide you highlights of the quarter. Bill will then cover the financials in detail, and then Robert will provide commentary on our outlook and business. Of course, we will have time for Q&A at the end.

Now for the administrative matters -- first, this call is being webcast, and is available for replay on our website. 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 fact may be considered forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. 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 performance related to forward-looking statements, please refer to our filings with the SEC. We undertake no responsibility to release any revisions to forward-looking statements as a result of subsequent events or developments.

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

Thank you, Mary. I want to thank you all for joining us today on this call. We're very pleased with all aspects of our financial results for the third quarter of this year. Our sales growth was strong at 7%, which was both the recorded growth rate, as well as the local currency growth rate. All key businesses demonstrated growth. Our food retailing and transportation and logistics were particularly strong. In addition, sales growth was robust in all geographic parts of the world.

Our operating profit and cash flow generation was very strong, and our EPS growth excluding onetime items, was excellent at 24% growth.

As we look to the future, we are cautiously optimistic for the remainder of this year and for 2006. We will explain our outlook in more detail later in the call.

Let me now turn it over to Bill, who will take you through the financial results for the quarter. Bill?

Thanks, Robert. And hello, everybody. We had a great quarter. EPS was $0.72 per share. This compares to $0.58 last year, excluding in both periods the onetime items. As Robert mentioned, this represents a 24% growth, which we're very pleased with.

Now, let me take you through some additional details, starting with sales. Sales in the quarter were $365.4 million, an increase of 7% in both reported dollars and in local currency. To say it another way, we had no material impact from currency on our sales this quarter.

Let me give you more details on sales by geography and business area. All comparisons are versus the third quarter of last year, and all growth is in local currency.

I will start with sales by geographic destination. Sales growth in Europe was up 7% in local currency, one of the strongest growth rates we've had in several years. Product inspection, transport and logistics and food retailing all were strong drivers of this European sales growth. Our lab business in Europe was up slightly against a very strong Q3 of last year.

Sales growth in the Americas was up 5%. Retail had double-digit growth; industrial and lab had mid single-digit growth in the quarter.

Sales growth in Asia/Rest of World increased 11% in local currency. As expected, China's growth accelerated over the level we saw in Q2 and was up 17% versus the prior year. All product areas showed strong growth in Asia/Rest of World in the quarter.

Turning from the geographical perspective to business areas, let me start with industrial, which had one of their best quarters, with local currency sales growth up 9%. Excluding our T&L business, our core industrial business was up 4% in the quarter with particularly strong growth in Asia. T&L had very strong growth due to significant projects in both United States and Europe. Product inspection also had a good quarter with strong sales growth.

Our laboratory business was up 3% over the prior year. Exited product lines reduced labs growth by 1% in the quarter. Drug discovery had a strong quarter, with double-digit growth, and this is versus a strong quarter from one year ago. We had low single-digit growth in balances and mid single-digit growth in analytical instruments and process analytics. Pipette sales were basically flat for the quarter. Finally, food retailing was up 14% versus last year with very strong growth in both the Americas and Europe.

Now let me move further down the P&L. Gross margins were 49% as compared to 48.5 last year. We continue to benefit from cost rationalization programs to reduce overhead costs as well as procurement and redesign efforts to reduce product costs. Some of you may have expected to see an even larger increase in our margins given the 7% sales growth, but as a reminder, the excess growth came from primarily retail and T&L, and these businesses have -- transport and logistics, just to be clear. These businesses have gross margins below the group average.

R&D in the quarter amounted to $19.3 million or 5.3% of sales. This percentage is slightly below the level you have seen over the last several quarters. This represents a couple of things -- first of all, a conscious effort on our part to redirect R&D dollars to our marketing initiatives, specifically Spinnaker, which are aimed at improving our topline growth, and also impacting was the timing of certain R&D projects between quarters. We expect R&D to remain in this 5 to 6% range.

SG&A was $108.8 million, an increase of 4% in both U.S. dollars and local currency terms. We continue to make investments in our global sales and marketing initiatives and reallocate investments from R&D to marketing. This quarter also included increases in variable compensation due to strong sales growth, continued investments in China. And we also had some restructuring charge in litigation costs which were offset by investigation-related costs in the prior year.

The net sum of these items resulted in adjusted operating income of $50.9 million or 13.9% of sales as compared to 43.5 million or 4.7% of sales in the prior year. The prior year amount excludes investigation-related items. We are very pleased with our 17% growth and the margin improvement achieved in the quarter.

Continuing down the P&L, amortization amounted to $2.8 million. Interest expense was $4 million. This results in a net income of $31 million, $0.72 per share EPS-wise, which excludes the $0.12 tax charge. On a comparable basis -- that is, if we exclude the onetime items that occurred in both periods -- earnings per share was up 24% in the quarter.

Now, let me walk you through the nonrecurring tax items that we had this quarter. First, as we told you last quarter, we intend to bring back approximately $400 million in cash from our foreign operations in conjunction with the American Jobs Creation Act. As I think most of you are aware, this tax legislation gives companies like us the ability in 2005 to bring back earnings to the United States at substantially reduced tax rates. The incremental tax expense associated with the $400 million dividend is $13.1 million, and was recognized this quarter. The other nonrecurring item we recognized this quarter was a $7.7 million benefit due to the favorable revolution of certain tax matters, of which the settlement of a tax audit was the principal item.

One additional matter -- we will close this quarter on an amended and restated bank facility. We will increase our bank capacity from 300 million to 450 million, and extend its maturity for two years until 2010. As I mentioned on the last call, with the 965 Act, our balance sheet will be temporarily grossed up -- that is, we will have borrowings in Europe and cash in United States. Given the favorable bank market and higher utilization due to 965, we felt it was an opportune time to amend and extend our facility.

Now, let me turn to cash flow. We were pleased with cash flow generation in the quarter. Net cash provided by operations was $60.3 million, an increase of 28% over the prior year amount of 47 million. We saw improvements in DSO, which were 49 days in the quarter, a two-day improvement over the prior year. ITO on an LTM basis is now at 4.89. We are pleased with this improvement, and see further opportunity to continue to improve this going forward.

Now, let me cover our share repurchase program. During the quarter -- the third quarter, we repurchased 675,900 shares of stock for a total of $33.5 million. To date in 2005, we have purchased 2.2 million shares, or approximately 5% of our outstanding shares. We had a $200 million program in place which was approved by our Board last year. We expect to use approximately 150 of this by the end of this year. In order to provide continued availability for share repurchases in 2006, today, the Board authorized an additional $200 million to be utilized through the end of 2007. We will continue to use our free cash flow for share repurchases, as we believe it is an excellent way to return value to shareholders.

Our capital structure is very strong. At the end of the first quarter, we had net debt of 134 million versus the last 12 months EBITDA of a 223.4 million, which results in a net debt to EBITDA ratio of just 0.6 times. With this strong balance sheet, excellent cash flow generation, and an expanded bank facility, we have ample financial flexibility to repurchase shares and to pursue our acquisition strategy.

Let me now discuss our guidance. With respect to the remainder of 2005, we now believe that we will finish the year in the $2.80 range. The $2.80 range does not include onetime items that we covered earlier. For Q4, this implies earnings per share in the $0.90 range. Looking closer at Q4, I do not expect to see the same sales growth level that we had in Q3, which benefited from the project business in T&L and the retail. In fact, some of the strength we saw in Q3 may have some impact, a little, on Q4. I would expect sales growth in the quarter -- the fourth quarter, that is -- to be in the 4 to 5% range that we have previously provided.

As we look to 2006, we are optimistic that we can have another good year, but are realistic that there are reasons to be cautious on the economy, including the impact of rising oil prices and the sustainability of the European recovery. We will closely monitor the economy and adjust our plans as necessary. But today, we felt quite positive about our market position and our ability to execute our strategic initiatives. Assuming an economic environment similar to today, we believe we can achieve local currency sales growth in the 4 to 6% range next year.

There may be some variability between quarters, but we believe a target of 5% is realistic. A 5% local currency sales growth would result in earnings per share in the range of 3.20 to 3.25. At the midpoint of this range, this translates to about 15% earnings per share growth for next year. And we're pleased with that. It's in line with our targets.

In times of quarterly breakdown, we'll provide more guidance as the year progresses. But I would note that we expect to be in the range in Q1 of about $0.53 per share.

The final topic I want to cover is our equity-based compensation. We've always had options under our equity compensation program. And last year, we sought shareholder approval to add restricted stock as well. Our most senior executives will continue to receive options, as we feel strongly that their compensation should be tied directly to the creation of shareholder value.

We have reduced the number of nonexecutive managers that are eligible for equity compensation. Beginning this year, these managers will receive restricted stock. We believe the Company will gain more from these employees at the same cost through the use of a restricted stock program as compared to stock options. The actual cost of the program under FAS 123R will not change significantly as a result of the restricted stock component.

As you saw in our footnotes last year, the impact of FAS 123 was $0.15 per share in 2004, and is expected to be at a similar level this year. We estimate that the impact of our stock-based compensation programs in 2006 will be about $0.13 per share. This amount is not reflected in the guidance I mentioned earlier. We have benchmarked these amounts, and are confident that they are reasonable and represent a good long-term value to our shareholders.

Okay. That is it for my side, and I would now like to turn it back to Robert.

Thank you, Bill. I will begin by providing some additional comments on Q3, and then I will recap some of the key initiatives from last year.

Let me start with our lab results for Q3. We saw solid demand for our analytical instruments, particularly our thermal analysis and pH meters. Process analytics as well had another solid quarter. In balances, we continue to do quite well on the high-end as our products sold for tangible value to customers, particularly those in regulated markets. On the low-end or entry-level products, you do see some weakness. As part of Project Spinnaker, we have a task force developing a strategy to address this end of the market -- not only for balances, but for all of the low end products as well. They are evaluating supply chain, channel strategy, product mix, and marketing programs for this customer base. As we begin to implement this strategy, I would expect to see better growth from this end of the market.

You heard from Bill that pipette sales were basically flat in the quarter. This reflects reduced pricing levels from our standard jazz (ph) pipette products sold in the U.S. As a result of the litigation earlier in the summer, our distribution agreements with (ph) certain third-party manufacturers plan to chase (ph) pipettes was canceled. We are now selling direct in the U.S. our own manufactured products. Although the price are lower, our margins are higher because we managed back (ph) rather than just distribute those products.

The last piece of our laboratory business is drug recovery, which had a strong quarter and did defy (ph) a strong quarter from a year ago. Most of our ultra cam (ph) business is focused on the process development and scale-up needs of large pharmaceutical customers.

In process development, chemists and engineers determine how to manufacture a drug that has been discovered earlier. We have a leading market position in this area, and are generally considered the standard in the market. Our solutions consist of automated lab reactors, which simulates the manufacturing process in the laboratory vessel, as well as real-time analytics, which consist of probes that monitor in reaction that monitors the reaction in the vessel. We see the strong dynamics of this business continuing as pharma companies have tremendous incentives to accelerate this process and move the drug through the manufacturing quickly. We recently received a sizable order of automated lab reactors and analytics from a large pharmaceutical customer. A portion was shipped in Q3 with the majority of it to be shipped in Q4.

Turning now to the industrial business, which you have seen had a great quarter. Growth was driven by our transportation and logistics business. We spoke about this business on our last call, so I won't cover it all again. But hopefully, you remind (ph) that we are pioneers in the development of automatic dimensioning and basic capture technology for the transportation and logistics industry, and that we have the most accurate and the highest throughput solutions in this industry.

This is a project business. And we have several projects in both the U.S. and Europe that contributed to the growth in the quarter. Our outlook for this business is solid. But we do recognize that unlike most of our other businesses, there is variability in sales growth by quarter.

Our product inspection business had also a strong quarter. We have a record number of new products in this business, as we have significantly revamped our product portfolio over the last year. The upgrading of the product portfolio allows us to continue to globalize our offering and to move ahead of competition in many important design areas.

Recently, at the packaging show in Las Vegas, we unveiled to the North American market a new metal detector and a new checkweigher. We also launched a more standardized X-ray product to complete our range in this market. We view the dynamics of this market as strong, driven by the food manufacturers' desire to protect their brands from exposure to consumer health and safety concerns as well as government regulation.

Our high-end industrial business, which combined industrial scales and terminals with software packages, is also well. These solutions help customers manage data, such as transaction processing, formulation, batching, and support statistical process control. Finally, our standard industrial business performs well, driven by the infrastructure spending in China.

Now turning to retail, we had the growth of 14% in local currency. We have been talking for the last few quarters about the opportunities in this business. Somewhat like our transportation and logistics business, part of this business is also project related. And therefore, it has variability to its sales. We had several projects in Europe that we have been expecting for some time. In the U.S., we benefited from legislation surrounding nutrition labeling, as well as the growth in our data management software business. We expect solid results in the retail in Q4 as well.

That covers my comments on the quarter, and now I want to add some comments on our strategic initiatives for 2006 and beyond. As Bill already mentioned, we're cautious on the economy, and will continue to monitor it and adjust (ph) our plans accordingly. However, we have many positive strategic initiatives that we believe will yield benefits in 2006.

Let me cover the highlights, beginning with Project Spinnaker. As most of you are aware, we have the number one position in the vast majority of our products. And yes, our worldwide (ph) market share is around 20%. We believe we can increase this market share by increasing the effectiveness of our self-service and marketing organization. Project Spinnaker identified many opportunities, and we are now focused on four of them -- namely segment marketing, lead generation, field automation and pricing.

We are continuing to drive the segment base approach to marketing across all our product lines. So with this effort, we're identifying new segments that can be added to our marketing initiative.

We're also generating more and more leads via the Internet, through significantly increased telemarketing resources and also others (ph) we've met (ph). We are closely tracking and measuring these leads to understand the ultimate effectiveness of turning these leads into sales. We are in sales more disciplined in our discounting practice, and thereby are achieving better pricing.

Finally, we have put a task force together to identify ways to improve the productivity of our sales and service force through more automation in the field. We believe we are in the early stages of this initiative, and we continue strong execution. Spinnaker shall contribute to the growth for many more years.

The next strategic initiative I want to cover is the development of emerging markets. Our primary focus continues to be on China. We have increased the percentage of goods manufactured in China from 3% in 1998 to nearly 20% by the end of this year. Our strategy in China is twofold -- first, to capitalize on growth opportunities in the domestic market, and second, to provide low-cost production for our global distribution channel.

We see (ph) continued opportunities, and have committed to build a manufacturing facility in China in the course of 2006 and early 2007. This facility will replace an existing one and nearly double the capacity of the existing site. The cost of the facility will be in the range of $10 million, and we are confident it will yield excellent results.

Looking forward, our investor business will continued to benefit from infrastructure growth in China. As GDP per capita increases, we foresee significant growth opportunities across our higher end business, as demand for laboratories instruments, product inspection equipment, and similar products should grow significantly. In short, we feel strong, and we feel strongly that we will continue the sizable opportunities for growth in China.

Another emerging market area that we see opportunities is India. We have had our Company in India in place since 1990, which focused on our industrial business. And we have worked through a distributor for our laboratory offering. Given the growth in this market and our desire to more aggressively develop market, we will soon begin selling direct also for those laboratory products. We already have doubled the size of our direct salesforce in anticipation, and see solid opportunity for growth in this region.

New products continue to be a central part of our strategic initiative. As we look out over the next twelve months, you'll see many new launches of products and upgrades through the software offerings. We're also focused on cost, and have several initiatives to reduce product costs and improve the management and logistics of our supply chain. I've already covered our low-cost manufacturing in China, and we think we can save more than 30% in manufacturing costs.

In supply chain management, we're working on fully integrating our supply chain from development through logistics. We believe that significant opportunities exist through further supply consolidation, low-cost country sourcing, and the drive (ph) internally to share components and modules across the product lines. We also believe we can further streamline our logistics processes, which are quite global through the growing importance of our Chinese operations. Both (ph) together, we see opportunities to continue to reduce product, product costs, and process costs and reduce inventory investments in the coming years.

In summary, you can see we have many initiatives in place. And with solid execution, we believe we can achieve solid growth. With the benefit of these strategic initiatives and the economic environment similar to today, I believe the 5% sales growth and the dollar (ph) -- 3.20 to 3.25 in EPS, which translates into 15% EPS growth, are ambitious but reasonable targets for next year.

Before I open the line for questions, I want to comment on the press release we issued this afternoon, concerning the 10b5-1 plan for the sale of my 1996 options. The plan calls for the sale of 867,000 expiring options in the coming months (ph). These options were granted at the time of the buyout from Ciba-Geigy, and we were not a public company. And they will expire in 2006. At the time of our buyout and later times, I also purchased 346,826 shares of Mettler-Toledo stock, which I will own and have no intention of selling.

Of course, I remain fully committed to Mettler-Toledo, and the sale is being driven by the pending expiration of the option. My direct holdings in Mettler-Toledo in the form of stock and remaining options represent more than 20 times my annual base salary. I wanted to communicate directly to you my intentions. And of course, you will see the required filing over the course of the coming months as the sale transactions are completed.

That is all what we have from our side. And I now would like to ask the operator to open the line for questions.

(OPERATOR INSTRUCTIONS). Derik De Bruin, UBS.

Congratulations on a great quarter. Just looking at the guidance for '06, are you assuming that you're going to continue a moderate level of share buyback through that time?

Yes, similar to the amount that we repurchased this year (multiple speakers) set to repurchase this year.

All right. And when you look at the -- you said some of your lower-end instruments -- there was a little softness in some of those -- weaknesses. Any indication of where that's coming from?

I think the low-end of the market is just more price sensitive. There are of course more competitors who have low-end products. It's not our nature to compete too much on price. And I think maybe it's also a reaction to the very strong offering we have on the high-end, as we are so strong on the high-end, many of our competitors just shifted much more of their focused to the low-end, which takes a little bit of the strength we have.

As I mentioned, this softness in a smaller part, actually, of our total market is recognized. And we see actually quite a bit of opportunity to address that part of the market in a highly effective way. The contacts (ph) have been worked out. The strategies are in place. And we will soon start with the execution. And I'm pretty sure we will put some things quite differently in place, and through that establish competitiveness and leadership for the part of the market.

Again, I want to remind everybody the core of our business is always the high-end. And the low-end is something which never has been our stronghold, but more kind of an adjacency -- but I think an adjacency that will get increasingly competitive.

Along those lines, what type of gross margin expansion do you think you could possibly see next year?

We're looking at about 50 basis points -- and a couple of assumptions in that number. One is that we're kind of assuming a currency environment similar to what we saw today. As you know, we can kind of have gross up effects and things on the topline. And we're also assuming some higher growth rates in Asia than we will experience in the United States or Europe. And while at an OP level, we're doing as well in Asia as we do in other parts of the world, at a gross margin level, we don't do as well. And the reason for that is we have lower distribution costs -- and particularly, I have China in mind there. Lower prices, but lower distribution costs as well.

Okay. And just in terms of the currency impact on the topline for next year, are you thinking you're probably getting a headwind of around -- what? 2, 3% maybe?

For the full year, if we take the rates, I think, at the beginning of this week or so today or -- not that (ph) -- 2%.

Okay. Thank you very much.

Hey, Derek, maybe one comment, just in case -- for everybody else on the call, a 2% headwind on the topline and no headwind at the earnings line. And again, that goes to our balance in nondollar revenues and nondollar expense.

Richard Eastman, Robert W. Baird.

Robert, could you just give a little bit of color -- within the lab segment, could you just give some thoughts as to maybe what the different customer bases bid within lab -- pharma, industrial lab, academic?

I guess I can comment that maybe by segment, by industry, probably both important to maybe even talk about customers -- individual customers. Pharma spending in general, I think, it's slightly reduced. However, it depends heavily by individual customers. I think some pharma companies are actually doing quite well. And there, we see good investment levels. And maybe there are others who are more on the cost savings, and therefore, the demand isn't so strong. Other industries pay -- I think cosmetics, chemical, food companies -- pretty good. I think certainly slightly better than what we have seen before.

Geographically, not much difference. I think the lab business -- certainly, as mentioned, it's very well in the U.S., Europe -- maybe a little softer; but from the order intake we had in Europe, that's actually -- that's pretty encouraging. And Asia, as usual, did well.

Okay. So is it safe to say that -- just, I guess, characterizing -- the other industries grew at a better pace than pharma in the quarter?

I think pharma was all actually altogether okay -- maybe not as strong as all the time.

The product area that we have that has the highest percentage of pharma is the (multiple speakers) autocam (ph) business, and that had the highest growth rate within lab. I generally think we did probably even a little bit better on some of those lab customers. (multiple speakers) on some of the pharma people we cover (ph).

How did the service piece of the business do in the quarter?

We had a good growth in service in the quarter. Topline growth was 5% on the topline.

Okay. All right, and then maybe just a last question, in terms of India, just what would be a relative size of that business?

We'll find out. And the reason why I say it that way -- the reason for really changing the situation in India was that our distributor always helps (ph). He does a hell of a job, and we have a very high marketshare. And my experience is when we step into a market and try and supply our own methods, realize that the market is usually significantly bigger. (multiple speakers)

And is the strategy there to be -- with low-end products, you went through distribution, and now going direct will be the high-end, much like it is elsewhere?

Well, actually, that distributor handles all of our laboratory business. On the industrial side, he has already in place our own organization. That organization was put in place in the late '90s. Of course, the beauty of that is that we just can bolt on the lab business on the existing infrastructure. And as I mentioned during the call, we have been quite aggressive in adding people and setting up the organization. I expect substantial growth from India next year. And for substantial growth, I think there can be a couple of million dollars over the year.

Okay. And then forgive me, just one last question. Could you just remind me -- in terms of the pipette business, the distribution agreement -- what's the impact on the revenue line there? Our ASP is down, but our margins are up. But what's the revenue impact on an annual basis -- about?

About? Okay, so just -- I'm not sure if I have your question precisely. But we -- of the product line we're talking about, last year, I think we sold about $13.9 million of that product line. That product line will be down slightly in dollar terms -- on, let's say, the first we would get six to nine months afterwards -- it will be up on unit terms, actually, with our equivalent replacement product. And we would think over a 12-month period, we'll be OP neutral.

Okay. But we're just -- in terms of sales, the negative sales impact -- we're just talking millions of dollars -- 3 to 5 million or something?

Yes, that's probably about right.

Darryl Pardi, Merrill Lynch.

What were the orders in transport and logistics for? I know what the products are, but to ground shippers, air shippers? Was it one customer in the U.S. and Europe?

No, it was several customers in the U.S. and in Europe. It was mainly ground transportation. And the applications for these typical help applications that we will do the tracking of parcels, combining weighing technology, dimensioning technology, barcode reading, visual technology -- all integrated in one system across all in motion with high throughput.

Okay. And it sounds like the majority of the orders were delivered in Q3. Is that correct?

We actually have some backlog going into Q4 as well. And as well on the retail side.

I'm sorry; as well as on the what side?

As well as the retail side being another piece of the business that's somewhat project oriented that we expect to see some benefit in Q4 as well.

How penetrated is the ground shipping market at this point? I know it's a new customer base or a newer customer base for you.

It really depends on how you segment the market. If you look at these big transportation companies and their big hubs, no -- that market is quite well penetrated in the U.S. So in case they buy -- if you have projects like we had, then it's productivity-improvement driven, and also the technology integration.

In Europe, however, it's not nearly as penetrated. Actually, the UK was the first market to move towards that technology. France followed afterwards. We have heard from one customer who has moved in Germany. And hey, usually, if that starts, others will follow, and still apply the same pricing methods -- namely, a pricing method which is based on the so-called dimensional weight. So you take weight information and volume information.

Now this is -- you know, the big carriers and their hubs -- now of course you can take this then a step further into a market segment which we call the warehouse and shipping market. And that part of the market, frankly, is not developed at all yet. And we are just launching for that part of the market new product which then -- typical manufacturing companies produce the warehouse and shipping applications. The desire of everybody is to capture those data as early as possible, and in that sense, of course, there could be a significant opportunity also in the part of the market.

What do you think the size of that opportunity is relative to ground shipping?

I think that opportunity is probably three or four times larger than the existing opportunity. It takes still, of course, time to develop it. And you should not think that it's just going to happen at once. I think that will be a gradual process.

Okay. Bill, now that you have got or will have significant cash balance in the U.S., could we expect to see an acceleration of the share repurchase program?

That's not currently our intention. We would expect that just because of the way our cash flow pattern is during the year, as well -- Q1 is usually one of the lighter quarters cash flow wise. And we do have -- it's a grossed-up position, right? So we have debt balances in Europe and cash balances in the United States. So at this point, anyway, we're not planning any dramatic acceleration.

Does it make sense to deploy that cash, though?

I understand the logic. At the same time, in terms of our debt balances over in Europe, it will cause us to borrow more money -- incrementally more money in Europe as well then. The first quarter is not a strong cash flow quarter for us, so the idea of reaching in and borrowing a little bit more and redeploying it on -- you're redeploying the cash balance out in the United States. I'm not sure if that's maybe consistent with how we run the program. And also, I'd guess, there's a certain assumption that we have about cash flow throughout the year, and this idea of kind of the gradual repurchases over time. I think we're not trying to, let's say, make accelerated buyback under the plan. It's more kind of a gradual return of cash flow to shareholders, leaving room in the balance sheet for acquisitions.

Okay. Last question on -- the inventory turns just continue to improve. And you've added about a half turn since the beginning of '04. And I'm just curious for -- if you can give us some sense on how far you think you can continue to improve that?

I think if you go out, let's say, three to five years, we'd like to think we could get it to six.

Sara Michelmore, S.G. Cowen.

I am sorry if I missed this, but Bill, I was hoping you could talk about your organic revenue growth assumption of 5% in 2006 and the underlying assumptions there in terms of the product lines, as well as the geographies since things have bounced around so much this year?

Sure. In terms of -- let's start maybe with the businesses. In terms of our lab business, we are thinking of a growth rate in, let's say, 5 to 6% kind of a range. On the industrial business, because we're going to have the -- maybe some difficult comparisons with the T&L business. And we're not so sure that one -- maybe we have a little bit more caution about, let's say, infrastructure projects around the world, we are assuming more in the 4 to 5% kind of range. And in the retail one, there's always more variability in that. But we are currently assuming for budgeting purposes between 4 and 8%.

Then maybe thinking about it geographically -- we're assuming we can get around 10% growth or so coming out of Asia/Rest of World. And let's say 3 to 5% growth coming out of both Europe and the Americas.

Okay. That's very helpful. And could you just -- do you happen to have the share count at the end of the quarter as opposed the average over the quarter?

Sure. At the end of the quarter, it was 42.7 million.

David Katekian (ph), JPMorgan.

I have a question on the FAS charges. You guys are anticipating $0.16 over the 2006 year. And do you guys have any idea on timing for that -- sort of when they may fall into --

I apologize -- you broke up a little bit. You were asking about 123R?

Yes, you guys --

It should come ratably over the year.

Okay, so there's no sort of upfront more in 1Q or anything like that?

No, I did hear -- again, you were breaking up -- the current estimate is about $0.13 per share. I thought you might have 16. So I just want to correct that if it was -- unless I misheard.

Okay. Can you hear me better now or --?

Yes, I can hear you better now. So we're estimating about $0.13 per share for the full year, and that should happen ratably over the quarter.

Got you. Okay. And then, I know you talked a little bit about Europe sort of looking in the 3 to 5% growth range. Can you may be provide a little more color on which segments you think you're going to see more growth out of Europe and sort of your outlook for Europe in general?

Sure. First, as you heard from our numbers coming out this quarter, we did see improved growth in Europe. We see continued opportunity to penetrate in the lab area and the industrial area. And I would say this very much links to some assumptions about market share gain as a result of our Project Spinnaker. And then, we did assume a positive number for retail in Europe as well. But there's some implied more volatility in that number I think (ph) given the bigger range as well for the full year there. But of course, Europe is a big piece of our retail business.

(OPERATOR INSTRUCTIONS). Mike Hamilton, RBC Dain Rauscher.

Good evening. Could you just take a couple of minutes commenting on how you look at project business -- what piece of the total it is, how you price it, whether there's any incremental cost risk to that business?

Okay, so first of all, maybe when we say project business, it might have a different -- we're not talking -- in the industrial world, it's not like a Fisher Rosemount during a big distributed control system or something where we're doing percentage of completion accounting or something. When we say project, of course, there is some integration elements to it -- and putting it into a customer's site and usually linking with some IP systems. But it's not, let's say, a big risk in terms of -- from an engineering point of view.

Bill, if I may interrupt here, I just give an example -- let's go to retail. We may have a customer who feels this UC platform we have is great, and it fulfills most of his application needs, those which we have planned to -- built into the product. But he may say, hey, I need another feature which is relevant for my business.

And to give you an example, actually, we have one customer who feels he wants to use the display of the retail sales for cost promotion, but then during the front (ph) of the counter (ph) you buy some meat -- actually, on the display, it would say, when you buy meat, you can have actually a coupon for the buying. So that is what they call cost promotion. They do these programs to sell more at the same time.

Now, what that would mean -- we then need to somehow enhance the system software capabilities. We would do that traditionally with specialized partners. Such a project check can be very well-managed. It starts with the requirements definition. Then of course once we know that, we know the cost. We have a premonitoring system. And of course, timelines -- if he then has to do rollout (ph), we also do first testing in our labs. And we make pilot installations with the customers, and the customer is happy when we go into further rollout.

Hey, with that I just want to tell you this project adaptation are mostly software integration, as Bill mentioned before. And they're kind of -- they build on what we have. And in terms of the risk involved, it's really not significant. Now with that, maybe I want to give it back to you, Bill.

So I kind of heard maybe in your question -- when you asked that question about pricing, it's still our standard software packages and hardware which still accounts for the largest percentage of the overall price to the customer. So that maybe gives you a feel about risk. And when we use the word project, we are often referring to the fact that the customer is larger in size -- it's an order for, let's say, multiple hubs or multiple stores in retail. And probably, we have in our mind at least $0.5 million orders is a typical big project. And so hey, I'm kind of now -- did I get most of what you are asking there, Mike?

Yes, that was very clear. Thanks.

Scott Wilken (ph), UBS.

Just following up on the last question, Bill, is there any way you can quantify the dollar impact from the project work, or maybe the onetime sort of order flow so when we're looking at next year, we can think about what that represents in terms of a comparison issue?

I think if you pulled out the P&L and the retail piece of the business, probably the growth rate in the quarter was, let's say 4.5% or so.

Okay. So the difference there between the 7 and the 4.5 would be the onetime aspect?

Yes, but we always still have projects.

We'll have some projects, just maybe the onetime might not be -- just at this quarter, if I just wasn't in that business -- we know that in earlier quarters, for example, retail has been down, as you know. And we have certain assumptions about it over the medium-term. And this was a quarter that it was particularly beneficial. And in other quarters, it's been down.

Probably, if you look at year to date, you get a couple (ph) capacity (ph).

Okay. That's helpful. And then just looking at free cash flow -- if I'm doing my math right, I think trailing 12 months is something like 155 million. I know you had some timing issues in the fourth quarter last year. So could you maybe talk about -- is 155 million, sort of the right range for the year in terms of free cash flow? Or is there going to be some more onetime issues?

Just to make sure -- you're saying on a trailing 12 months, you got to 155?

154. Yes

154 -- so, hey, I think we're looking at a Q4 that's comparable to the prior year. Actually, it could be up. So at least the way you're calculating, I probably have a somewhat different number in mind on a trailing 12 months, and that's why maybe I'm off, but --

So you're saying, Bill, that the fourth quarter will be similar this year to last year?

Fourth quarter will be similar to the prior year.

So that would be more like 170 something. Does that sound right?

Actually, no, I -- but maybe we're calculating it slightly different.

Okay. The way you would calculate it, what would you come up with?

I think it has got to be in the 140-ish range. It's about -- we're going to have free cash flow about flat year-on-year.

Okay. And then the new facility -- the $10 million for that; will that be spent in '06?

(multiple speakers)

A good part will be 2006; some, 2007.

Okay, so we can think about the CapEx requirements being at least 10 million higher next year?

Not that much.

We'll try to cut back in other pieces of the business. But it should go up between five and 10 million.

And then just last question on the share count -- I didn't quite hear what you said in terms of finishing out the year in terms of share repurchase. Could you just reiterate that?

In the fourth quarter, we would expect to purchase between 40 and 45 million shares -- a dollar's (ph) worth of shares.

Paul Knight, Thomas Weisel Partners.

This is J.P. Jaketin (ph) in for Paul Knight. I wanted to apologize, because I jumped in on the call a little late if you had already gotten to some of these questions. But I wanted to talk about the tax rate for the third quarter. What exactly -- what was that figure?

So we had these two somewhat offsetting nonrecurring items. If you exclude those two items, it was 30%. And then the other two items were 13 million -- about.

And then like (multiple speakers) the 7.7 (ph) million, right? Okay. Great, thanks. And then how is the acquisition pipeline looking for you guys?

As usual, we work on of course acquisition opportunities. We are, as I mentioned many, many times, very careful in stepping through an acquisition. The screening will be a strategic fit. Can we operationally absorb it and manage it? And last, but not least, will it make financial -- is it financially sound?

Of course, we announce these acquisitions when they're ready to announce. So I cannot really be specific on anything. I also want to reiterate, and you have seen that with the guidance for next year, we're not dependent on acquisitions. We will have very solid earning growth based on our organic growth. The 5% we have given you translates into 15% EPS growth for next year. At that speaks (ph) on the operating leverage we have. And there is also a quite significant focus in the organization on this organic growth. This organic growth -- we know what we buy, and translates into very handsome profit growth.

Great.

But that being said, of course, acquisitions will be part of our future, and we will announce them when they're ready to announce.

One other question. Could you guys break out the different things like labs, industrials, retail -- in terms of like what proportion of the total net sales they made up?

Sure. In the quarter, lab was 44%, industrial was 43, and retail was 13.

Vivek Khanna, Argus Partners.

I just wanted to go back to the organic -- the growth rate that -- Bill, that you touched on that some of it was onetime in nature. And just looking at the project orders, are these anticipated, or they just come out of nowhere, and so you're kind of surprised by these large orders for retail, I guess, and in the T&L business?

We get them every year. But for us to have 14% growth in retail, is better than the corporate average, as they say. But we have medium-term targets that that should be a mid single-digit growth business. But it's got to be more lumpy and more volatile than some of the other businesses. And that's principally due to the mix of large projects at any one point in time. So next year, we're going to have this, let's say, 4 to 8% kind of growth rate in retail. And that will be against the backdrop of the 14% growth rate in this current quarter.

And then -- so you said 4 to 6% retail, and what did you say for industrial and lab? Sorry, I missed that.

Just to be clear, I said to 4 to 8 for retail, with 6 kind of being the median. And then 5 to 6 in lab, and 4 to 5 in industrial.

Okay. And then do you mind just telling us how -- in the lab business how you're -- I think you may have said -- how the balances business and then how the analytical instrument business fit in that segment?

Sure. In the current quarter, we didn't have -- we had low single digit growth in the lab balance business. We had actually double-digit growth in drug discovery. And in the analytical instruments and process analytics, we had kind of mid single-digit growth rates. Pipettes were flat in the quarter, and that's because they were down slightly on the standard shaft products, but actually up in units. That's mostly just the pricing strategy we have currently in the market.

Okay, great. Thanks. Nice quarter.

Gentlemen, ma'am, we have no further questions at this time. Please proceed with your closing remarks.

I would like to thank everybody for joining us tonight. You certainly have heard that we're very pleased with the quarter. We hope you're pleased as well. And with that, I want to wish you a very nice evening. Thanks for joining us today. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.