Mettler-Toledo International Inc (MTD) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our fourth quarter 2006 Mettler-Toledo International earnings conference call. My name is [Verona], and I will be your audio coordinator for today. I would now like to turn our presentation over to your hostess for today's call, Ms. Mary Finnegan. Please proceed ma'am.

Thank you. Good evening. I am Mary Finnegan, Treasurer and responsible for Investor Relations for Mettler-Toledo, and I'm happy to welcome you to the call. I'm joined by Robert Spoerry, our Chairman and CEO, and Bill Donnelly, our Chief Financial Officer. I will start by covering some administrative matters, and then turn the call to Robert, who will provide you highlight for the quarter; Bill will cover the financials in detail, and then Robert will provide commentary on our 2006 results and our outlook for this year. Of course we'll 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 Web site at www.mt.com. A copy of the press release we issued today is also available on our Web site.

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 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 the 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, and good evening, everybody. I'm glad you are joining us tonight. We are very pleased with the great finish we had to the last year. Actually, it was our best quarter in a long time, and much better than we expected.

Sales in local currency increased 8% in the quarter, with solid results across the board. Sales growth was higher than expected. In particular, we have very healthy demand from our balance and analytical instrument business, both in Europe and the United States.

In the fourth quarter of 2005, our lab business had grown [and] above 9%, and therefore, we had assumed more [temperate] growth in the fourth quarter of 2006, which did not play out. Also, retail came in a little better than we had thought so. The strong sales growth drove operating profit growth to +16%. Combined with the benefit of our share repurchase program and the tax rate change we had, our EPS growth was 30% on a comparable year-over-year basis.

Based on the strong finish to 2006, we now have increased our guidance for this year. Bill will cover this in the Q4 results in more detail, and then I will provide additional comments on the business and our outlook. Bill?

Thanks, Robert, and hello, everybody. We're pleased to report another strong quarter and a solid finish to 2006.

I'll start with earnings per share, which on a reported basis is $1.31, which includes $0.04 per share of share-based compensation. On a comparable basis, this represents a 30% increase over Q4 2005. For the full year, earnings per share on a reported basis is $3.86 per share, which includes $0.14 of share-based compensation and a $0.20 benefit due to some discrete tax items that we had last quarter. Excluding these non-comparable items, earnings per share would be $3.80, which represents a 29% increase over the comparable 2005 earnings per share.

Now let me provide you with additional details on sales. Sales in the quarter were $462.3 million, an increase of 8% in local currency and on an organic basis. Currency benefited us by 4% and, therefore, our reported sales in U.S. dollars grew 12%. For the full year, local currency sales growth was 7%.

Breaking down sales by geographic destination, in the quarter sales growth in Europe increased by 7%, with solid results in most product lines. For the full year, sales growth in Europe was 7% as well. The sales growth percentages are all in local currency.

Sales growth in Americas increased by 6% in the quarter. The growth was driven by strong lab as well as industrial growth. As expected, retail was down in the quarter. For the year, sales growth in the Americas increased by 5%.

Sales growth in Asia/rest of world increased by 14% in the quarter. We saw solid growth in most product lines in this region during the quarter. As expected, we saw higher growth in China, which grew by 14% in the quarter. For the full year, sales increased by 10% in Asia/rest of world.

Turning from geographic to product views, let me start with laboratory products, which as Robert mentioned came in stronger than anticipated with a growth rate of 7% in the quarter. This is on top of the 9% growth in Q4 of last year. Balances and analytical instruments led the way with very strong growth. AutoChem as well had solid growth, while pipettes were down slightly in the quarter. For the full year our laboratory business grew by 6%.

Sales in our industrial business increased by 11% in the quarter. We had strong growth in our core industrial instruments, particularly our vehicle scale business. Our Product Inspection product lines and our transport and logistics business also did well. For the full year, industrial sales increased by 6%.

Finally, food retailing increased by 1% in the quarter and 11% for the full year. In Q4 2005, you will remember that food retailing increased 22%, and therefore, we had expected retail actually to be down somewhat this quarter. We're happy to report the base business did better than expected, similar to what we saw in Q3, which accounted for our better-than-expected results.

Now let me turn to gross margins. We finished the quarter at 50.5%, which is down 10 basis points from the prior year. We benefited in the quarter from pricing, volume, as well as procurement and China manufacturing impacts, but this was more than offset by product mix that worked against us. In particular, strong sales in some lower-margin industrial products, especially in Asia, reduced gross margins in the quarter. For the full year we had a 30 basis point expansion of our gross profit margin.

Research and development expenses were $21.8 million, or 4.7% of sales, a 1% increase in local currency. SG&A, including -- sorry -- excluding share-based compensation was $132.3 million, an increase of 8% in local currency. Higher variable compensation, increased investment in China, and charges associated with cost reduction programs were the principal drivers of the growth.

The net sum of these items resulted in adjusted operating income of $79.5 million, which represents a 16% increase over the prior year and a 50 basis point expansion.

Continuing down the P&L, share-based comp was $2 million, amortization amounted to 3 million in the quarter, while interest expense was 4.7 million and other income was 1.4 million. The other income principally reflects interest income on our cash balances.

Our tax rate in the quarter was 27%, as expected.

Before I cover earnings per share, let me comment on our share repurchase program. During the quarter we purchased approximately 1.1 million shares of stock for a total of $83.4 million at an average share price of $73.63. This brings us to $265.8 million, or 4.1 million shares at an average share price of $64.18 for the full year. Fully diluted shares for the quarter were 39.7 million, and 39.3 million at the end of the quarter. During 2006 we reduced our fully diluted shares outstanding by 7%.

Finally, as I already mentioned earlier, earnings per share including share-based comp was $1.35 in the fourth quarter, a 30% increased over the prior year. Year-to-date, excluding share-based comp and the discrete tax credits, earnings per share was $3.80, which is a 29% increase over the prior year. Including share-based comp, but still excluding discrete items, our full-year EPS was $3.66.

Now let me turn to cash flow. Cash flow from operations amounted to $51.9 million, slightly below the $59.5 million last year. Free cash flow, which is CapEx -- which is after CapEx and adjusted for the impact of share-based comp, was $41.4 million, versus $48.6 million last year.

In the fourth quarter of 2006, we made $14.1 million more tax payments as compared to the fourth quarter of 2005. In addition, we made a $5.8 million voluntary pension contribution in the fourth quarter. We had no such contribution in 2005. If we exclude tax payments and the voluntary pension payment, focusing on the true underlying cash flow generation, we had an increase of 21% in free cash flow in the quarter. If you look at it on a per-share basis, which is probably most appropriate for us given our share repurchase program, you would see an increase of 29% in the quarter.

The strength of this cash flow can be seen in our working capital statistics. DSO remained at 48 days, a level we're very pleased with. And our ITO had a nice finish to the year and came in at five times. For the full year, free cash flow amounted to $172.7 million. This compares to $148 million in the previous year, an increase of 17%. For the full year we had higher tax payments of $10.9 million. Our free cash flow in 2006 was $4.24 per share, versus $3.42 per share in 2005, an increase of 24%, a level we're quite pleased with.

That is all my comments on the quarter and the full year. Now let me update you on our increased guidance for 2007.

We ended 2006 with good momentum in our business and continue to be optimistic that we can have another good year. We assume our end markets remain positive, and we have confidence in our ability to execute our strategic initiatives. Of course, we're always cautious on the global economy, and we'll continue to closely monitor it and adjust our plans as necessary.

Assuming an economic environment similar to today, we continue to believe we can achieve local currency sales growth in the 4 to 6% range in 2007. This has not changed from previous guidance provided to you, but of course it's on a somewhat higher base. We now believe that a 5% local currency sales growth would result in earnings per share in the $4.10 to $4.20 range, as compared to our earlier guidance of $4.00 to $4.10. This translates into a growth rate of 12 to 15% over our 2006 earnings per share of $3.66. This number includes share-based comp and reflects an estimated tax rate of 27%, which is comparable to the full-year tax rate for 2006. With respect to this first quarter we are currently in, we expect solid sales growth in the 5 to 6% range, and earnings per share in the $0.67 to $0.69 per share range.

That's it from my side, and I'd now like to turn it back to Robert.

Thank you, Bill. I will start by providing commentary on 2006 and then the increased outlook for this year before I will discuss initiatives to drive growth and profitability for 2007.

In 2006, we had local currency sales growth of 7%, which was slightly above our medium-term guidance of 4 to 6%. We would expect 2007 to have sales within the guidance range of 4 to 6%.

By geography, we would expect Europe and the Americas to generate sales growth in the 3 to 5% range, slightly below the 2006 level, due to the [lax] growth in food retailing sales, and we would expect Asia and rest of the world to generate sales growth in the range of 10 to 15%.

Let me give you some additional insight by product line. I will start with lab, which had a 6% local currency sales growth in 2006, and yet very solid growth across most product lines. Balances did particularly well due to the many new product introductions and the benefit of our marketing program. We would expect to see improved sales growth in pipettes and our AutoChem products as we look into 2007. Overall, we expect growth in the 5 to 6% range for the laboratory business this year.

Industrial also had growth of 6% in 2006, with both our core industrial and Product Inspection businesses performing well. We would also expect sales growth in the range of 5 to 6% for the industrial business for this year.

Food retailing has now had three years of strong sales growth. (indiscernible) significantly -- we have significantly increased our market share, and have now a very solid position in the U.S. and European markets. However, given the strong growth of [11]% in 2006, we expect this business to grow more modestly in 2007. We believe it's going to grow in the range of 3 to 5%.

We have had great performance in 2006, which was driven by the solid execution of our strategic initiatives. Now let me highlight these initiatives, which, I believe, position us well for continued growth in 2007 and beyond.

I will start with Project Spinnaker, which you have heard us speak about, of course, many times before. And it still has our undivided attention, and it has many more years before it reaches its full impact. We may not mention it every quarter, but it continues to be a key priority to gain additional shares in our markets.

The cornerstone to Spinnaker is segment marketing and lead generation. We have a [well-stacked structure] methodology that systematically identifies which segments to target and which customers within these segments to pursue. We still have many segments and countries to go in terms of full implementation of segment marketing.

In addition, we recognize it is not a (indiscernible) project. We will continue to refine and improve the process. For example, the [early adopters on] segment marketing, namely our Process Analytics business -- they are now in their second [phase] of segment marketing. They have refined the approach and are much more effective this time in penetrating market segments and customers. We expect this to be a continuing process within all our marketing organizations.

Another initiative (indiscernible) Spinnaker, which is complementary to segment marketing, is our go-to-customer initiatives. Our senior business leaders and technical leaders do join sales personnel to visit key accounts and target segments. Of course, it reinforces our customer relationships, but also builds deeper knowledge of these segments and customer processes, and, of course, how our products can improve these customer processes.

But this initiative is not only directing our R&D efforts. Of course, we are targeting to segments where we want to generate many more leads, but these visits also generate much more insight and allows us, thus, to enhance the solution offering.

In addition to segment marketing, we have changed our marketing communication material from product orientation to an industry orientation, which better emphasizes the customer's perspective and the value of our products and services provided. We have increased and redirected our resources for lead generation away from traditional avenues, such as (indiscernible) advertising and telemarketing, and now invest much more into electronic marketing. We're also measuring campaign effectiveness to identify best practices and to understand key metrics. These efforts are paying off in a significant increased number of leads.

Our R&D efforts are at the core of what we do, and our focus to accelerate the replacement of our installed base, of course, depends very much on our technology efforts. In 2006, we have made great product launches, including a breakthrough in our laboratory weighing, with a balance that weighs small amounts of expensive substances accurately and efficiently. We also introduced a titrater that removes many of the manual aspects of the titration process. And we also launched new x-ray machines and we also launched new industrial terminals, just to name a few.

Through close relationships with our customers, which we are deepening with our segment marketing and go-to-customer initiatives, we have a keen understanding of the processes, and we know very well how our products can improve the customer's processes. By articulating the tangible paybacks of our products, we can accelerate the replacement cycle. We have a solid pipeline of new products as we enter 2007, and we believe that we will continue to drive our growth line.

Emerging markets. Emerging markets now account for approximately 18% of our sales, and their growth potential makes them strategically important to us. Nearly 20 years ago we opened our first manufacturing plant in China, and our Chinese manufactured products represent today already 20% of our product sales. We see this percentage to continue to increase as the markets grow and as we continue to transfer manufacturing production to China.

We have expanded our foothold beyond China into other fast-growing emerging markets like Southeast Asia, India and Russia. We have an expansive product range and distribution network for these markets, and see continued growth opportunities. We believe China will continue to benefit from new plant construction and the desire of manufacturers to move their quality control and quality control standards to global standards. In India, growth is being stimulated by increased life science research, and Russia is enjoying peak investment in the raw material sector, and has a very healthy consumer spending environment.

Turning to our costs, we continue to focus on our low-cost Chinese manufacturing, and we also have global efforts in procurement and we also are optimizing our supply chain. We also took some targeted restructuring measures in the second half of 2006 to streamline various operations around the world. We believe this provides us an improved cost structure should the economy weaken, and otherwise provides additional investment opportunities should the economy remain solid.

We are not only focused on costs, but also on working capital. You heard from Bill our statistics on DSO and ITO, which we are very pleased about.

Our successful management of working capital is contributing to our strong cash flow, which allowed us to repurchase 4.1 million shares in 2006 and reduce our share count by approximately 7%. We will continue to repurchase shares, as we believe it's an excellent way to return value to shareholders.

Our balance sheet remains very strong and provides us ample flexibility for acquisitions.

We remain confident in our growth initiatives for 2007 and beyond. Based on the strong finish of the year, we have now increased our outlook for this year, which Bill outlined to you. Of course, we remain cautious on the economy, but ended the year on a solid note. We continue to believe that with a solid economy and strong execution of our initiatives, in the medium-term we can generate local currency sales growth in the 5% range, and of course our margin expansion efforts can generate operating profit growth of 10%, and our share repurchase will help to drive EPS to 15%.

In all, we won't hit these perfectly every month, every quarter, but we feel that these are realistic targets in the medium-term. Thank you for your attention, and we would like to ask the operator to open the line for questions.

(OPERATOR INSTRUCTIONS). Tycho Peterson.

Starting, I guess, with the retail business, I know you were up against difficult comp. And just looking back, I know that business grew about 20% in the third quarter. Was it just the difficult comp that was the cause of the weakness there?

Yes. We had in Q4 2005 an extremely strong quarter. And actually, in Q4 2005, that business was up in the range of 20%. And on that base, we did not assume such a strong Q4 this year. In particular, (indiscernible) no big projects foreseen in Q4 this year. But we, frankly, had a very solid base business with a lot of smaller projects to come through, and that added up to the better-than-expected performance in Q4 this year.

Okay. And then, on the pipette business, I noticed you talked a little bit about modeling a recovery in that. Can you give us a sense -- you mentioned it was a little bit weak this quarter -- what the underlying trends are there?

It's, first of all, a very successful trend internationally, where we grow very nicely with the pipette business. In the U.S. market, we didn't do so well. That's a little bit the aftermath of the Gilson separation, which we still felt in Q4 this year. But we are optimistic that very soon we'll also turn the corner on that part of the business.

Okay. And then, as we think about the guidance here, can you give us a sense -- just broadly speaking, if you will -- about how we should think about gross margins? And then can you also remind us how much is left in the buyback?

Sure. We would expect a gross margin expansion similar to what you saw this year over the course of the whole year. I think 30 basis points is a very realistic number. We'll probably have a little bit -- Asia will continue to grow in total. And while the gross profit margins there are a little less, of course, the operating margins are quite good. And then, in terms of the share repurchase program, we continue to look to buy our free cash flow and option proceeds in total. And at the end of December we had 365 million or so remaining under the program.

Great. Finally, for Mary, if she's on the line, can you give us a sense of -- I know you're returning to Pittcon this year, and you guys had kind of opted, I think, in the past couple years not to participate. Can you give us a sense of what led to the change in strategy?

I can comment on this. Our program at Pittcon won't be much different than the last two years. We'll be at Pittcon with a very reduced presence. We feel for maybe some customers it's important. But with our changed marketing programs, frankly, we want to go much more closer to the customer, and we don't expect for many businesses they come to see us there; we'd rather go and see them at their sites. So we have a booth there, but it's a very limited presence. Not much different than in past years.

Peter McDonald, American Tech Research.

What is driving the strength in Europe? Is it a market recovery? Is it product mix?

It's broad-based. Broad-based by country. Pretty much every country has better performance in Europe, so frankly it's the economy which is improving. And why is the European economy improving? It has a lot to do with the emerging markets, which are important export markets to the European countries, and that of course has helped them to do better.

If you look across different industries, we have seen good performance in Europe in lab, in the industrial sector, and also in the retail sector. I think in channel the (indiscernible) clearly improved. And last but not least, of course, we have been talking a lot about our initiatives to improve our sales growth with the Project Spinnaker. And of course these programs are equally effective in Europe as in other parts of the world. And then, of course, it's always hard to quantify the effect of this, but we had many great new products. I did mention some of them during the conference call. So, all these things together, I think, make it [up].

Talking a little bit about price in '06, what was the impact on growth for pricing?

We think we ended up realizing close to 100 basis points in terms of the weighted average growth rate across all the product lines. We might of had -- with Asia growing faster, the average ticket price per unit sold probably went down. But if you just waited on the individual product lines, we certainly got a decent price increase in the majority of our product lines.

Congratulations on a good quarter again.

Richard Eastman. I'm sorry. Derik de Bruin.

Back in 2003, whenever the Pfizer/Pharmacia merger happened, you had some problems [because] you had large AutoChem orders that got canceled, I believe, that were going to Pharmacia. Could you just talk about -- there was a lot of chatter about Bristol-Myers potentially going away. Could you just talk about implications of pharma mergers, and if you're at risk for something like that again?

Maybe just to recap what happened at the time of the Pfizer merger, frankly, it didn't impact us that much. Kind of maybe to put everything in perspective, typically, a big pharma account is $5 million, $6 million for us on an annual basis. Of course it can be one year a little more, another year a little less, but not that different from year to year. And typically in the merger phase, we will see maybe going down 20, maybe 30% as some decisions are pending. But typically, after two years it comes back to the level we had before, as they are back on investments into their R&D and drug recovery processes. So on the big scheme for the Company, these pharma mergers don't make a big impact. Typically, [often these] pharma mergers don't come all at the same time. And of course, Bristol-Myers in that (indiscernible) than Pfizer.

Right. That's very helpful. When you look at the industrial business, you had -- when you gave guidance last quarter you talked about some concerns about the U.S. slowing. And I guess, in terms of that having been (indiscernible) [first-quarter guidance], can you just talk about what you're seeing trends specifically in the U.S. economy, and I guess still how your outlook is for that market?

We are happy with the outlook in our industrial business. We had very solid order entry both in Europe and the United States. We were talking to you that Asia wasn't -- or in particular China wasn't so strong in the beginning of the year, but we have seen increased momentum in the second half here and also in particular in Q4. The industrial business had very solid momentum in China. So we are very optimistic from that point of view.

Again, as in the other businesses I mentioned before, solid product line, very good marketing programs. And then -- and particularly, too, for the industrial business, a lot of focus on the new emerging markets. The team is working on strategies for India, for Russia, for the Middle East and European countries, and all these initiatives together make me quite positive and optimistic for this year.

I think our comments last quarter, Derik, were a little bit that -- hey, we had built our plan in a way that maybe the second half would be a little bit weaker. I think we at that time hadn't seen any signs of it being weaker, and certainly don't see it today. But I think that's a little bit how we built our plan, and hopefully it will turn out better than that.

Richard Eastman.

Just wanted to ask a few questions. Could you give us a sense, Robert, of just kind of how new products will impact '07? I know you touched on a few, but should we be thinking that the new product flow in '07 will be weighted, perhaps, more towards lab or industrial? Just trying to get a sense of what the flow would be and, perhaps, what the incremental growth that you envision in '07 from new products may be.

I think 2007 will be similar in terms of new product launches as the last two years. In our case, and with the breadth of our offering, we always have a lot of new products to be launched. So it's never one big launch, and then next year maybe not so much.

The second one, which I also want to say, is that when we launch new product, of course, you see an impact in the year you launch, but often the effect lasts much longer. [Until] all our customers understand the power of the new products, it just takes longer. I think the probably biggest difference in terms of new product launches is not just the product, [continuation] of those products, but what we bring with the new products. We have much, much better marketing programs. I can give you for illustration purposes two or three examples.

The new titration line, which we launched last year, which was, by the way, a phenomenal success in the second half. We did equip all our sales force with return on investment calculators. They had a logic database behind it, and they could enter the competitive products in use and enter what we can offer to that. And after having entered all this data, we actually could show the customer how much money he can save in case he buys a new one. And of course we are not just doing it in such a rational way, but when you take the customer through the logic, then it really flies.

[Paying channel], all our new product launches, our R&D people, marketing people have been really going through [classes] and programs [so] that they understand when we launch the products we have a value story. And that's really important. There is a huge installed base of products out there, and that installed base does work. And the customer may not see a reason to replace it. And we somehow ask the customer for money, and there is only one way we can convince the customer to spend money in case he's going to have a good return. And so we have really tremendously improved (indiscernible) this is a long answer to your question. I think the new product launches are, in terms of numbers, very equal to the past. But probably the effectiveness of our marketing program behind them will help us to even get a little more out of it.

Have you gotten much traction out of the LabX product?

In titration we do. In LabX, we made very good -- in balances we made very good progress, and we are working very hard on platforms for other analytical instruments. We just want to do this in a logical sequence, because sometimes it's just important to have launched a new platform, the new instruments before we have the LabX version to that instrument.

Okay. But that's still a big part of your plans for the LabX and the (multiple speakers)

Absolutely. We are actually increasing the R&D power behind LabX, because we feel it's strategically so important.

Bill, when you -- switch gears for a second. When you talk about the price realization being perhaps a weighted average point in '06, should we be thinking the same thing for '07? And does that capture a higher ASP from new products, or is that pure pricing on existing products?

I think this is a good assumption for this year, that we get another 1% increase realized prices on the same product. Often when we launch the new products we, frankly, do a bigger price increase, because there is a better value proposition behind it, as I just explained before.

I understand. I just wanted to make sure we weren't double counting there. Could you tell us what you took in the way of restructuring in the fourth quarter? I think you had mentioned it might be in the 2 million range. Is that a reasonable number?

We took a little bit more in the 3 million-and-change range.

Is that an SG&A number?

It's all in SG&A.

Mike Hamilton, RBC Dain.

Good. Thank you. I was worried that you had made pulling the plug on the Q&A a permanent feature in the call. Nice to be chatting with all of you. Congratulations on a great year. Everything of mine has been answered, except for the fact that, obviously, you had building momentum in the back half of '06, particularly when you look at the very strong fourth quarter of '05. What factors do you see that could potentially slow that momentum coming into Q1, or is order activity such that the momentum is pretty well in place?

I think, as you probably can read from our increased guidance, we are pretty optimistic for this year. Otherwise we wouldn't have increased the guidance.

Paul Knight, Thomas Weisel Partners.

This is Jonathan Palmer in for Paul Knight. I was just wondering, did you guys give operating margin guidance for next year? Did I miss that?

We didn't give guidance. Our general feeling is that we target in the area of 50 basis points, hopefully a little bit more, but some of that depends on currency levels.

Just switching gears, in terms of the manufacturing, do you have a target in terms of what you want to produce in China for this year? I know you mentioned earlier about 20% of the products coming from there.

I think that's not so much a target. We push as much as we can to China. But of course there is always a problem on the other side, namely how many trained people we have there, how many R&D people we have there. And I can give you general, maybe, guidance. I believe that that number is going to be 25% in two, three years from now.

Maybe just as a follow-on to that, what is the incremental gain by pushing it, the manufacturing, to China?

Our channel experience is we can reduce manufacturing costs 40%, sometimes more, sometimes a little less. But the trick of it is, of course, that we over time not only shift the manufacturing, but also the related [R&D], and that you have the full value chain -- value-added chain in the low-cost environment. And most product lines, ultimately, will get there. But again, that's back to what I said before; it's just taking some time.

And then, onto Project Spinnaker, are there any specific end markets or customers that you're going to be targeting in 2007 that maybe you haven't looked at yet?

Absolutely. Segment marketing is a constant, constant rollout of new waves of segments, so a segment is an industry. And of course you look a little bit over at what is just working well, and of course I'm just picking an example -- Process Analytics, which is now for many, many years (indiscernible) they of course are now going more after (indiscernible) chemistry, due to the very healthy situation there. Bio fuels being very much a topic, and a lot of investments being made there (indiscernible) they go after these segments. But we have so many segments to cover and so many different product lines, that is an ongoing journey for a long, long time. And that opportunity is not close to depletion at all.

Thank you very much for taking my questions, and congratulations on the year.

Jon Groberg, Merrill Lynch.

Congratulations on a great quarter. A few questions. The first question has to do with you mentioned that, particularly in Asia, one of the reasons gross margins wasn't as -- didn't expand as much as you would have liked is that you were selling lower-cost, lower-gross margin instruments. Looking out to this year, assuming maybe slower growth in the U.S., slower economy in the U.S. -- though that's not necessarily playing out; that's what a lot of people predict -- and assuming continued growth, say, in Asia, and similar spending patterns on the type of instruments that they're buying, would that -- would you still feel comfortable with a 30 basis point improvement in gross margins? Or what's kind of built behind your assumption there?

We've built up a model that gets us to that number. And to the extent that we hit a sales number in that range that we've given guidance to, I'm very confident about our reaching our op and earnings target. It could be if the mix is a little bit weighted towards Asia as compared to what we assumed in our initial model, that maybe the gross profit margin will be a little bit lower, but then it would be offset with lower SG&A costs as well, because the cost of the distribution channels in Asia are less as well. But taken in total, Jon, I'm pretty confident that given this normal mix that we have expected and given guidance to, we should be able to hit this 30 basis point margin improvement.

Frankly, we've been increasing the Asia content in our total business over the -- and particularly Asia industrial, for probably now three, four, five years in a row. And we've had more than enough pluses to offset that impact. I expect to see the same next year. We will have higher prices, hopefully better cost structure with procurement, a few more things manufactured in China. So, we think we'll get there.

And then, on the laboratory business, I heard today from a company that they're already starting to see -- if you look at big pharma and even big biotech -- these initiatives that have been years in coming, and getting more sophisticated in procurement. Are you seeing any of that, of people wanting to sit down with you and saying, hey, we want to start negotiating larger, larger deals with you? Are you nervous that you don't have the complete portfolio to compete in those situations? Just curious how you're looking at that.

A couple of answers. First of all, in terms of the breadth of our offering relative to these customers, or whether we have limited offerings, I don't think at all that this is an issue. These customers buy best-in-class, and then those products (indiscernible) we are competing we are a leader, and our name stands for a lot of innovation and quality. And again, back to our customers, they're buying best-in-class.

In terms of your other part of the question, how is the procurement? Is it getting more intense? Do you have more negotiations? I don't think so. Of course, since many years sometimes [customers] make an effort to centralize procurement to have global contracts or regional contracts, I don't see an increase in tendency here at all. And it, frankly, varies. One customer tries it here, and then it erodes over time; then maybe another one comes up, and so forth. We know how to handle these things.

Thanks. And then, a final question, could you just clarify again -- in this fourth quarter it looks like you had a number of, you were saying, onetime charges on the -- that affected the free cash flow. I just wanted to understand those a little better.

Sure. In terms of tax payments, you'll remember back in 2005, the Jobs Creation Act, s965, allowed companies to repatriate a significant amount of dividends back to the United States at a low rate. And so that -- by doing that, what you -- you wanted to, if you could, delay any tax payments that you could from '05 into '06, which allows you to maximize your foreign tax credits utilization. And so we did that in Switzerland. It's a little different tax system than the U.S., so we just arranged to make those tax payments in the fourth quarter of this year. So, there was a significant increase in tax payments.

A second thing was in the United Kingdom, we have, similar to what we have in the United States, a pension plan, a defined benefit plan which we've frozen. We've stopped increasing benefits in the plan; no new entrants; people don't earn service credit anymore. And that currently has an underfunded position. We are not required under any legal terms to make a contribution to it. But, we felt that with the strong cash flow that we have had this year that we wanted to make an extra contribution to it and close that gap. So we did in the fourth quarter. We didn't have a similar voluntary contribution in the prior year.

Great. Thanks a million. Congratulations.

[Chris Erent], Select Equity Group.

My question has been answered. Thanks. Actually, I do have one other question that came up. Pardon. The charges that you took in SG&A of a little more than 3 million and change, I guess -- do you find that as extraordinary? And would there be charges -- do you anticipate charges in 2007 on a quarterly basis? Could you give us a sense, if so, what magnitude and so forth?

Sure. So, right now we haven't built any restructuring plans into our budget. We do do them periodically if we see a market where we think that there is an opportunity to increase the efficiency in the service or production or sales area, which is in effect what we did in the third and fourth quarter of this year. We just saw that there were some opportunities to make the cost structure a bit more efficient, and to make room for investments in other areas, and that's what we did. So, if you go back the last number of years, we've had some of these programs. But frankly, the last two quarters we've had a little bit more of them.

So, that implies that the -- I think that $3 million would be 65 basis points on the fourth-quarter sales. So, that -- I would think that the guidance for 2007 is relatively conservative in that respect.

I think it -- hey, if sales growth comes in stronger, it certainly could be conservative. But if sales growth doesn't come, it may not be as conservative. The point, Chris, is that we want to make this -- we're really happy with the investment returns we've been getting in the R&D areas, as well as in the sales and marketing area. And to keep -- make sure we have a cost structure that allows us to make these investments, we need to make these adjustments to reallocate resources. And that's what we've done this year. I'm hoping that sales growth does come in good and we have the opportunity to make investments to lay the groundwork, from a sales and marketing or a development point of view, for 2008 growth rates as well.

Fair enough. Thanks.

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