Mettler-Toledo International Inc (MTD) 2007 Q3 法說會逐字稿

Good day, and welcome to our third quarter 2007 Mettler-Toledo International conference call. My name is Cara, and I will be your audio coordinator for today. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS). Now, I would like to turn our presentation over to our hostess for today's call, Ms. Mary Finnegan.

Thank you. Good evening. I'm Mary Finnegan, Treasurer and responsible for investor relation for Mettler-Toledo and I am happy to welcome you to the call. I'm joined by Robert Spoerry, Bill Donnelly and Olivier Filliol. I will start by covering some administrative matters and then turn the call over to Robert. Now for the administrative matters. First, this call is being webcast and is available for replay on our website, 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 purposes of the safe harbor provisions under the Private Securities Litigation Reform Acts of 1996. Forward-looking statements involved 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. One other item on today's call, we may use non-GAAP financial measures. More detailed information with respect to the use of 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. Good evening everybody and welcome everybody to the call tonight. I will start by summarizing the highlights of our third quarter. Afterwards, we'll speak on the details of the third quarter results and give you also a piece of guidance on the quarter. After that, I will follow Bill by providing additional comments on the quarter and also the outlook. In recent times, many of you have been asking about the inflation pressure we have on the raw material and, therefore, we want to cover this topic and we will also discuss with you what measures we are taking to offset this pressure. Towards the end of the call, we will cover the management transition that was announced today and, of course, we will have time for Q&A at the end.

I will begin with the highlights of Q3. We are very pleased with another quarter of excellent operation performance. All key financial metrics were well above last year. Local currency sales increased by a strong 7%. We saw a good growth across the board and are very pleased with this rate which we achieved despite retail being down because of a very difficult comparison to previous year. The strong sales growth at 20% increase in operating profits. Our strong operating performance combined with the benefits of our share repurchase program led to a 24% increase in adjusted earnings per share. We have raised our guidance for the remainder of this year and also established the guidelines for next year, which forecasts another year of solid EPS growth. I will now turn the call to Bill to cover these points in more detail

Thanks Robert and hello everybody. As you heard from Robert, we had a great quarter and we're really pleased with the results. Let me start with adjusted EPS which came in at $1.15, a 24% increase over the prior year amount of $0.93 per share. In 2007, adjusted EPS excludes $0.02 for purchase intangible amortization expense and also excludes a $0.03 per share net benefit from discrete tax items. In the prior year, adjusted EPS excludes $0.02 per share for purchase intangible amortization and a $0.25 per share net benefit for discrete tax items. I know that's a lot to digest but on the last page of our press release, we have a table that I think that outlines this quite clearly. Let me start with sales which were at $442.6 million in the quarter that is a 7% increase in local currency. As Robert mentioned, we're quite happy with this growth which we achieved despite a drop in retail which had tough comparisons. On a U.S. dollar basis, sales increased by 11% in the quarter which includes a 4% currency benefit.

Breaking down sales by geographic destination and all these percentages are in local currency by the way, Europe increased by 5% with strong growth in laboratory instruments and product inspection while retail was flat. On a year-to-date basis, our sales in Europe are up by 5%. Sales growth in the Americas increased by 4% in the quarter with solid growth in laboratory and industrial including product inspection. Retail was down against strong project activity of a year ago. Year-to-date sales in the Americas have increased by 6% . Sales growth in Asia and rest of world increased by 18% in the quarter as we saw good growth throughout the region. On a year to-date basis, sales are up 14% in Asia and rest of world. Now, let me take you through sales by product area. We had 8% growth in laboratory with good growth in most of the product lines except AutoChem which was down slightly. On a year-to-date basis, laboratory sales are up by 7%. Industrial products grew by 10% in local currency with strong growth in product expansion and solid growth in our core industrial products.

On a year-to-date basis, industrial sales have increased by 10%. Finally as expected, retail was down by 5% in the quarter against strong project activity from a year ago on a year-to-date basis retail is up by 1% in local currency. I've kept my remarks here brief as Robert will provide some additional insight in sales by product line in just a minute. Now, let me cover with you gross profit margins. We finished the quarter at 49.5%, that's a 70-basis point increase from the prior year quarter. We benefited from higher sales volume, good product mix, and our cost rationalization initiatives while we're negatively impacted by higher steel prices which I'll cover in more detail shortly. R&D amounted to $22.7 million or 5.1% of sales, an increase of 7% in local currency. SG&A was $129.5 million, an increase of 6% in local currency. We continue to invest against (inaudible) initiatives and expand our front-end resources in Asia. We also had high variable compensation expense in the period because of the good performance.

These expenditures were offset in part by the benefit of the various restructuring initiatives we undertook in the second half of last year. The net sum of all these items resulted in strong operating income. Adjusted operating income increased by 20% to $66.8 million from $55.8 million a year ago. Our operating margins improved by 110 basis points over the prior year. We're certainly pleased with this growth and continued margin improvement. Continuing down the P&L, amortization amounted to $2.8 million in the quarter. Interest expense was 5.5 million. We had no other income this quarter versus 1.4 million last year, which reflects the plain reduction (inaudible) excess cash balances. Our tax rate in the quarter was 27%, which excludes the $0.03 per share net benefit from discrete items. In the quarter, we resolved certain tax audits and other manners related to prior years and recorded at $3.4 million discrete item. Offsetting this was a $2.3 million discrete cost due primarily to a tax law change in Germany, which reduced the value of our deferred tax assets there. Going forward, we remain comfortable with a 27% as our normalized rate. During the quarter, we repurchased 1.2 million shares of stock for a total of $108.6 million and average price of $94.04.

Year-to-date, we purchased 2.7 million shares for $249 million. Fully diluted shares for the quarter were $37.6 million and at the end of the quarter, they were at 37.1 million. Finally, earnings per share on a reported basis was $1.16 in both Q3 of this year and Q3 of last year. To look at the real performance, we need to exclude purchase in tangible amortization and discrete tax items in both periods. Doing that, you arrive at adjusted EPS of $1.15 in the third quarter which represents a 24% increased over the comparable amount of $0.93 cents per share last year. Now, turning to cash flow, cash flow from operations amounted to $76.2 million versus $67.5 million last year. Free cash flow which is after CapEx was $70.5 million versus $59.5 million last year. Cash flow per share was $1.88, a 28% increase over the $1.47 level of Q3 last year. The strength of the cash flow can be seen in work capital statistics. We saw further improvement in our DSO which ended the quarter at 46 days. As mentioned in the past, we're very pleased with this level. We also further increased our inventory turnover which came in at 5.3 versus 4.9 one year ago. Both of those numbers are LTM basis. That covers the quarter. Now let me turn to guidance. For the fourth quarter of this year, we expect adjusted EPS to be in the range of $1.51 to $1.53. This represents a 15% growth over the prior year. In terms of local sales currency growth in the fourth quarter, we have been telling you for some time now that we will have a challenging comparison in Q4. We expect in Q4 to have sales growth in the 4% to 6% range. This compares to the fourth quarter of last year where we had local currency sales growth of 8%, which again compared to local currency growth of 7% in 2005. So it's the comparison is against two strong quarters. Our recent internal forecast confirmed this mid single-digit growth for Q4. However, our strong operational leverage will continue to allow us to have a 15% earnings per share growth in the fourth quarter.

With this Q4 guidance, we would expect to end the year with adjusted earnings per share in the range of $4.54 to $4.56. This represents a strong growth of approximately 22% over the prior year adjusted EPS of $3.72 per share. As we look to 2008, we remain optimistic and believe that we can have another good year. We assume our end markets will remain positive and we have confidence in our ability to execute our initiatives. We remain cautious on the global economy, particularly the uneasiness in the U.S. financial markets. We will monitor conditions closely and adjust our plans if necessary. Assuming an economic environment similar to today, we would expect local currency sales growth to be in the 4% to 6% range in 2008. With this top-line growth, we would expect adjusted EPS to be in the $5.17 to $5.27 range. This excludes $0.07 cents of purchase intangible amortization and would represent a 15% growth in terms of adjusted EPS. One more topic, our Board of Directors approved a $600 million increase to our share repurchase program. We continue to believe this share repurchase program is an excellent way to return value to our shareholders. Our intention remains to use our free cash flow plus option proceeds to repurchase shares. Should market conditions warrant, we also have the flexibility to add to this base level of repurchases. Our net debt to EBITDA remains at 1 times which provides a very strong capital structure and allow us of flexibility for share repurchases. That's it for my side. I'll give the call back to Robert.

Thank you. I would like to make some further comments on the third quarter results. Let me start with our laboratory business, which had very solid growth of 8%. Balances were up strongly. Our analytical instrument has another quarter of very strong growth as they continue to benefit from many new product introductions. We continue to have nice growth in our (inaudible) of business. As expected, process analytic has solid growth as they are benefiting from recent product launches. Our industrial business had local currency sales growth of 10%. Core industrial had solid growth while product inspection had very good growth. Our product inspection business is benefiting from several internal factors including a strong product portfolio, enhanced sales and marketing programs, and expanded service network, and an improved position in emerging markets. External growth drivers include a global focus on food safety. As expected, retail was down in the quarter, given the outstanding project activity of last year in the United States. Let me remind you that the timing of project rollouts can influence a given quarter for resale quite a bit. However, given that retail is approximately 15% of our total business, this has a small impact for Mettler-Toledo in general. That covers my comments on the quarter. We are optimist as we look into the coming year.

Our end markets are positive, and we continue to see the benefits of our diligent execution on our strategic initiatives. As Bill mentioned, we will continue to monitor the economy closely and adjust our plans if necessary. Our guidance for 2008 is in line with our medium-term guidance which we have given you many times, the 5%, 10%, and 15%. That this, we believe we can grow out of topline in mid-single digit range and given our operational and financial leverage, this will translate into 10% operating income growth and 15% EPS growth. As we look at the economic environment today, one question that many of you may have asked is the impact of the inflationary pressure on our raw material costs. Bill has some additional comments on this topic and what we are doing to offset this. Bill?

Let me start with some facts on spend categories in the inflation we are seeing. In 2007, approximately 1/3 of our material purchases or $80 million will be in metal-related categories. The biggest components for us are carbon steel, fabricated sheet metal, machine parts and metal weldments. The largest price increases are when we are buying steel with little value added such as stainless or carbon steel. While components with more value added like machine parts, the impact is, of course, less because the price we pay reflects less just raw steel prices. Across these categories in total, we're experiencing a cost increase of approximately 8% or in the range of $6 million. So now the question is what are we doing about it? First, we continue to try to use sourcing strategies to combat these costs. Our low-cost country sourcing initiatives is a key element of this strategy. In total, we'll source an additional $10 million from low-cost country suppliers this year versus last year and expect a similar increase next year. In addition, we're in the process of expanding our supplier base beyond China to Eastern Europe. In certain categories, sourcing from China is not feasible because of freight cost lead times. A good example is the metal fabrication we used in our metal detectors. We will increase our sourcing from Eastern Europe next year as an alternative to going to China.

This gives us much better prices than we can get from our UK suppliers that we currently used but with lead times that fit our supply chain needs. The second are of focus is price increases. As you know, we have a focus strategy to increase prices every year and to minimize discount levels pretty much across all our product lines. For product lines with large steel content like some of our industrial products, we've been increasing prices more aggressively than in the past and at multiple times during the year. Since last year, we have raised prices on metal detectors and check wires by more than 3.5% and on vehicle weighing by more than 4%. Next year, we'll push through additional price increases and will monitor steel price levels throughout the year. So in summary, we're confident that we've been able to compensate for steel price increases impacting our business and this is best evidenced by our expanding operating margins. We continue to enjoy in all these product lines. Inflationary pressure in other category is significantly less than what we see in steel. I will hand it back to Robert now.

Thank you. Let me just make additional comments to what you heard from Bill. As Bill mentioned we are focused on realizing price increases each year. General price increase varied by product line but they will be in the range of 0% to 5%. The talk of price increase for 2008 is higher than in the previous years. Furthermore, as part of Project Spinnaker, we have various initiatives on the way to become more effective in pricing. For example, we have taken measures and (inaudible) the process for discount approval and also they have lots of tools to track the discount by salesperson. We like to use this information to reduce unnecessary discounts as well as the level of discount authorities. We are also ensuring that our salesperson have the necessary tools to effectively sell our products based on clear value propositions to our customers. This starts by defining the value proposition at the time the R&D project is initiated. We have found this to be a great discipline for R&D and also for product management personnel.

The program also includes elearning toolboxes and return on investment tools to effectively equip our sales people to discuss the value of our product which we then, of course, want to communicate to our customers. Having covered this, I would like to turn over to the management succession plan which we announced today. On January 1st, Olivier Filliol will be become the CEO of Mettler-Toledo and I will assume the role of Executive Chairman. I am very pleased to have someone of Olivier caliber to hand over my reins. He has a great strategic mind, excellent leadership and a proven record of execution. He is extremely talented and very well prepared for this new role. Let me explain a little more about Olivier's background and why the Board and I think he is the right guy. Olivier has been with Mettler-Toledo for close to 10 years and has been involved with many parts of our organization. He assumed responsibility for our process analytics business in 2000 and led the business to an outstanding performance level. The key drivers for the success were a long string of successful new product introductions, (inaudible) improvement in the marketing and sales program and the key focus on details of operational excellence. Process analytics has consistently been the best performer within the group for the last five years. Many of the concepts we apply today throughout our whole group were pioneers in the process analytic business.

In 2004, Olivier assumed responsibility for our global sales service and marketing, which is comprised of 40 market organizations located throughout the world. In this role, he developed and spearheaded Project Spinnaker. Its initiative to raise the overall effectiveness of our sales marketing and service activity has been one of our key growth initiatives in recent years. As the head of global sales service and marketing, Olivier has become knowledgeable about our product, our customers, our markets, and also competition. In addition, he has organizational responsibility for our business in emerging markets including China. He helped to define our strategy and to drive strong levels of profit growth in the region and build a strong (inaudible) in these markets which are very critical for the future of Mettler-Toledo. Prior to joining Mettler-Toledo, Olivier spent four years at bank consulting in various assignments around the world. He lived and worked in Europe, North America, and Asia. He is a proven leader and has earned deep respect throughout the organization. Mettler-Toledo's success depends on the development of sound, strategic initiatives and equally important the successful execution of these initiatives. One thing that strikes me most about Olivier is that he's equally effective in the conceptual strategic work as in the execution of those. The Board and I are very confident that Olivier he will be highly successful in his new role. Of course, Olivier will not be acting alone, we have a very experience and a very strong executive management team in place. And of course, I will also provide support to Olivier and the management team in my role as executive chairman.

I have been at the helm of Mettler-Toledo for 14 years and, in fact, my entire professional career has been spent at M.T. It goes without saying that I'm closely tied to the company and I intend to remain very close to the company in the future. I remain an employee of Mettler-Toledo and I will move into a new role in which I will support Olivier and the management team. Initially, I will focus on the transition and on an ongoing basis, I will be involved with the strategic organizational and corporate governance matter and coordinate the work between the management and the Board. I think an obvious question on your mind is why make the change now. In fact, this is an opportune time to make a change. Our business has solid momentum and we have very well-defined and proven strategies to deliver growth. We have a strong and experienced management team in place to execute the strategies. We also have someone of a great talent and leadership who is ready to take on this role. The Board and I are convinced under the leadership of Olivier, Mettler-Toledo will continue its track record of significant growth into the future. Let me turn it over to Olivier so he can make some comments himself.

Thank you, Robert, and hello, everybody. First let me start by saying how excited I am about this opportunity. Mettler-Toledo is a truly great company. During my ten years with the company, I have seen many parts of the businesses in most parts of the world and have developed a strong passion and deep respect for our people, our organization, and our culture. In recent years, I spent a great deal of time designing and implementing Project Spinnaker. This has given me valuable knowledge and insights into our customer base, our products, our sales and service force as well as the market dynamics and our competition.

Based on this knowledge, I'm confident that our growth strategies are sound. Over time, these strategies will evolve. They must to reflect changes in the market, but I do not foresee any big changes now. Robert and Bill have often discussed that (inaudible) sales growth, we can generate 15% EPS growth. You can see from our recent results that incremental sales growth has a powerful leverage effect to our bottom line. Initiatives such as Project Spinnaker growth in emerging markets and technology innovation are all aimed at driving incremental revenue growth. Our excellent management team and I will continue to focus on execution of these strategies. I'm also very pleased to have Robert's support in our journey to the future. One final note from my side. I recognize that Mettler-Toledo has a very good track record of delivering solid and reliable returns for shareholders. You have my personal commitment to put forth every effort to deliver the same in the future. Initially, my focus will be more internal. That is, on the organization, the businesses and our growth initiative. But I'm very much looking forward to meeting you at our next investor day. With that, let me turn back to Robert.

Yes, thanks Olivier. I want to make some summary comments on today's call and then we will open the lines for Q&A. You can see from the third quarter results that our business is doing well. Also, we (inaudible) guidance for Q4 and our outlook for 2008 is very solid. Mettler-Toledo has a well-defined and effective strategy in place. Let me quickly summarize what we are doing. We are focused on excellence in sales and marketing to further penetrate existing markets and gain market share. We also continue to work hard on technology development and product innovation to create clear value propositions to our customers. Furthermore, we are expanding our position in emerging markets to capitalize on the accelerated growth in these markets. So for operational excellence, we continue to optimize our structure and finally, although acquisitions are not a must for our future success, we continue to believe that they can contribute to our future growth. Today, we announced that while an expanded (inaudible) purchase program which reaffirms our confidence in the growth prospect of the company. And finally, with the carefully planned management succession, the Board and I are convinced M.T.'s growth records will continue. With that summary, I conclude the prepared remarks and now I want to ask the operator to open the lines for questions.

(OPERATOR INSTRUCTIONS) Your first question comes in the line of Jonathan Palmer with Thomas Weisel (inaudible)

Good afternoon, congratulations, Olivier.

Thank you.

I was wondering if you could just maybe give us a little more color on the internal initiatives you mentioned what those will be.

Internal initiatives in terms of growing our business?

Yes. You mentioned that your initial focus would be an internal focus. I just wonder if we can get some more color there, maybe more specifically which area of the business or what programs.

I will let Olivier handle that question.

Okay. In terms of priority, my focus will certainly be on growth. I'm very focused on this for many years with the Spinnaker and (inaudible) projects. It's also, Robert and Bill, often talked about this 5, 10, 15 model. This incrementing sales growth has a tremendous leverage as you have seen in the case of the current quarters ago. That's the reason I'm focused on the topline growth. This isn't to say that the invested capital and the margin expansion will lose focus but we have many initiatives ongoing in this area, but growth will be our priority.

In terms of strategy as Robert said, I think we are in good shape. I'm very much behind the strategy, having been closely involved in definition for the last several years. Probably, my focus is more in two areas. Assuring proper implementation and, two, being alert to adapt the strategy where circumstances will require. Currently, I don't see any major changes in the strategy that we need to make. So I would articulate our current strategies as follows. Excellence in sales and marketing to further penetrate existing markets and gain market share. Work hard on technology development and innovation and in so doing, creating clear value proposition for our customers. Expand our position in emerging markets and accelerate the growth in these. (Inaudible) continue to (inaudible) in the company through operational excellence and finally, continuously look at acquisition opportunities even though they are not enough for our future success. They remain part of our strategy going forward.

That was very helpful. Thank you. Bill, I was wondering if you could give me a little help on the housekeeping question here. What was the breakout percentage wise between the segments of total revenues?

In terms of the size of the businesses?

Yes. Exactly.

In the third quarter, about 43% of sales coming from lab, 44% from industrial, and about 13% for retail. That's pretty much how the full year will play out this year as well.

Great. Thank you very much. And congratulations on a great quarter.

Thank you.

Your next question comes from the line of Richard Eastman with Robert Baird.

Yes, good afternoon. Robert, could you maybe just address for a second or two. It looks like Asia and rest of the world accelerated a bit and it wasn't necessarily an easy comparison. I'm just curious which product lines were market categories? You mentioned strong across the region, but was it strong in lab, you know, industrial, or was that led by industrial?

Particularly strong in industrial. Solid growth in the lab business. And I say this in particular for the (inaudible) part of the world. Maybe as a matter of background, I want to tell you that we have the management team spent a lot of time with our Asian emerging market operations in China but also in India to develop plans for growth. We have a lot of very concrete initiatives and these initiatives are finding good traction and we are very optimistic also for the near and longer-term future.

Robert, can you just size, an approximate size, annual size, of what you do in India at this point? In the U.S. dollars?

Yes, I think in the range of $40 million.

$40 million is probably the budget or so for next year. Okay.

And we certainly have plans for double-digit numbers here.

Okay.

Maybe the most significant opportunity in India is on the lab side. You may recall that we have changed the way we go to market in India. We formally had a distributor and made that change a good time ago and we are ready to really go after that opportunity by now.

Okay. And then also I had a question on service. How did it grow and what percentage of sales was that in the quarter?

It grew pretty much at the rate of the product business.

About 23% of sales.

And we have plenty of initiatives in service to make service grow. That has a lot to do with new features in our products to promote service in a better way and all these things add up around the globe.

I had noticed -- on a trailing basis through six months, you've managed to make pretty significant improvements in the gross margin and service. Has that continued?

Yes, we don't study it at the gross margin level. What I can tell you is that we -- at the operating profit margin level, we did continue to have some expansion there. We tend to focus at that way because the gross margin can in part just be a little bit the result of a mix between parts and service levels and geography, so we probably don't even focus that much on that piece internally.

Okay all right. Well, thank you.

Thank you.

Your next question comes in the line of John Groberg with Merrill Lynch.

Congratulations on another fantastic quarter.

Thank you.

And I don't know if I should congratulate you, Robert, or Olivier but I will say congratulations to both. I was glad to hear that Olivier already has the Mettler, hey down, saying hey. One quick question on Olivier item. I know you guys are kind of all over the place. Where is Olivier going to be based?

He's going to be based In Switzerland.

He is? Okay. And then --

And if I may add here, at least from my experience, the CEO is based around the world.

Sure.

We have operations around the world and if you need to visit those and work with those teams and frankly, the location isn't that important.

Okay. And then, on the service question, I had a couple kind of competitive landscape or just kind of market dynamic questions. There's been a couple of competitors in the lab space specifically who are being a lot more aggressive in doing this multi vendor service. I have talked that a little bit with a few guys about this and you don't think it's a strong value proposition. I'm just curious if you're seeing any impact in your own service offerings. It sounds like, you said, still kind of growing at the rate of your products so maybe you're not seeing any. I just wondered if you could provide an insight there.

You're absolutely correct in your statements. Of course, there are companies who do offer this. We have not seen any impact of this. I told you in the past, you know, we may have lost one thing (inaudible) contract but very soon afterwards, we had it back. At the end of the day, you know, customers require excellence on those products in terms of service and only if you're deep in it and very competent, you can respond in the right time and make the customer happy. No customers in case, they were tempted to do something else quickly found out - it's all about having the right service and not just maybe consolidated service offering. So I don't really think that's an issue.

We, on the contrary, see plenty of opportunity ourselves in service. We have many, many initiatives underway in service among others to really do a better job in marketing service. We apply now Spinnaker programs also to service part of our business. But we also work hard on the productivity improvements throughout our global service organizations and each and every part of our country, service organizations are involved in productivity and improvement programs. As I mentioned before, when I spoke to Rick, we incorporating more and more service capability into the product we launched. And add these features which we launched in this product actually make it even more difficult for others to compete on service (inaudible).

Okay, great. Thank you for elaborating a little bit more on that and just kind of a larger market question. Listening to some other peers, not everyone is a direct comp, obviously, but others have had much stronger growth in the U.S. and a little slower in Asia. I think Rick was on the phone was alluding to you as a very strong to Asia, a little kind of, he was 4% or so in local currency in the Americas. Is that just a function? Was industrial growing much quicker as a function of your product portfolio as far as what people are investing in in the U.S. and just, you know, curious as you mentioned about potential acquisitions as a use of cash as well, if there has been any answer, I'm sure it's going to be no, but if there' s any shift or can you elaborate more as to where you're looking at to potentially build out or expand on businesses?

First of all, our U.S. business, we are happy with it. Maybe I'm overlooking at it in terms of order intake and backlog and all of it, so it's often a question of timing. The retail business, we did discuss that earlier in the call. We had a very big roll out of project activity a year ago (inaudible) this quarter. But again, this is pure timing of these projects. So we are happy with the sales growth we have on our laboratory business in the U.S. We have very solid backlog on the industrial side and we are optimistic that the retail business on maybe a longer time horizon, not just on a quarter by quarter basis. We still have very good sales growth in the U.S. The macro trends are of course those we have been saying many times. There are (inaudible) shape of manufacturing to China and that is not only something happening here in the United States. It's happening also in Europe. Maybe with the weakening of the dollar and the exchange rate movements, people will start thinking more about the gun manufacturing in the U.S. But frankly, I haven't seen so much of that flowing through investments at this point in time. But I think the macro trends are very much in line with what we told you in past times.

Just to elaborate further on Robert's point. Actually, our retail business in the U.S. was actually down in the quarter and if you pull that impact out, I think we're actually as Robert said pleased with how the lab and industrial business did. And the retail business was down because they delivered a large product in Q3. It's the lumpier business particularly to start breaking it down into geographies. In terms of our mix in Asia different than others, I mean certainly versus most peer companies, we have more of an industrial mix and the industrial business in Asia grew very well.

And if you drill down a little deeper, I'm sorry I was on a little late because a couple companies reporting, but if you drill down a little deeper on the industrial side, is it just a manufacturing moving there or are you benefiting from other major trends? Is it the process analytics business that continues to be kind of a driver there?

Absolutely. Also, product inspection business. For example, you read a lot about food safety. Food safety is not only a topic here in the United States, it is also very much topic in China. Therefore, that business grows very fast and by the way, we are starting from a very small base (inaudible). That business is tied to food and food is tied to (inaudible) and therefore, there is plenty of growth opportunity in this business in Asia.

Okay, great. Lastly what I was alluding to as far as use of your own cash -- you often hear as instrument companies and particularly when in good times getting a little concern maybe about lumpiness in revenues trying to go more consumables. Is that any focus of yours at all and maybe trying to come up with higher margin consumables to put over some of the instrument -- you have the pipette business with the consumable piece. Portions of your balances but it's still very much an instrument business. I just curious if there's been any shift or just ideas around, maybe where you would use that cash and how you would look at it.

Yes, whenever we develop new products and through new product innovation, we try to come forward these ideas, new consumables. Sometimes we find something because it can be tied together. But on all the products that's not possible. One big consumable, I would say we have, that's our service business. You know, what percentage is it, it's in the range of 25% of our revenue and we do a lot to just grow that business through measures I have explained before. Over time, I think our consumable part of the business is going up gradually. One way we could accelerate it will be through acquisition but that would be totally outside of our franchise and we feel that is not the right strategy for us. We would rather build it around the (inaudible) we have. I will call it [inconcentric] circles, so we will not have a dramatic shift in this.

Okay. Congratulations again, and I note the irony in my compliment here but I compliment you on having a strong bench and a good succession plan.

Thank you.

Your next question comes from the line of Mike Hamilton with RBC (inaudible).

Good afternoon everyone.

Hello.

Robert, in my 28 years, you're as good as CEO as I have ever run across. Congratulations on a fabulous career. No questions here tonight.

Thank you. Thank you very much, and hey, I can assure you my single biggest ambition as a CEO is to make sure that my succession is as good or even better than I was. I have been working hard on this for many, many years. I actually handpicked Olivier ten years ago and put him to a care development program in the company and made him ready for this and the guy is ready for this. I'm deeply convinced. The track record of success at Mettler-Toledo will continue in the future.

Your next question comes in the line of John Wood with Banc of America Securities.

Hi John.

Hi, thanks. Can you buy what your 2008 model implies for steel cost installation?

We've actually assumed that we will have relatively flat component costs for the year. That's with some increase in terms of steel. But something less than we have today probably in the 2% range and we are going be able to offset that with component costs and additional low-cost country sourcing.

Okay. Thanks. One more. Can you discuss, I guess, at any better, any more specific detail, any manufacturing line consolidations you anticipate in China or Europe next year?

There's not any plans to shut down production, but what you will see is that again next year, the percentage of our products that we manufacture in China will increase probably in the area of maybe an additional 2% or so over what it was this year. I mean, it's kind of an ongoing effort, and, you know, more and more of the value added in terms of not only manufacturing but R&D is being done in China. Because we are focusing our efforts on growth in that part of the world, what you see is an increasing number of products that have been in effect designed for that part of the world.

Thanks.

Sure.

Your next question comes in the line of Derek De Bruin with UBS.

Hi guys, this is Dan in for Derik. Just two quick international questions. I was wondering if you could you give us an idea of what percentage of your sales are now coming from your emerging markets? And then quickly, if you could estimate what percentage of your products are now being manufactured in China, currently being manufactured in China?

Let me take the first question and Bill, maybe you will take the second one. Roughly 20% of our sales coming from emerging markets and what are those emerging markets? That's of course, India, China, Russia, Eastern Europe, and also Brazil to a lesser extent. That strategy we have is very straightforward. We will first all we increase that base that 20% and we also want to, in that base, (inaudible) the growth. So 20% growing at 15%, except 3% for the corporation but our strategies may be to take that base to 25% and make it grow 20% and then we have 5%. So we are investing a lot of money to, you know, R&D, to more sales and service people and getting ready for -- getting more out of these markets and we are very happy with the progress we are making.

I think in terms of the percentage of manufacturing we probably will have -- I don't have a full year number -- but I think it could be in the range of about 20% of our product sales come from products manufactured in China.

And, you know, that probably is going to creep upwards year by year as we shift more and more, you know, sourcing to China, components coming from China for global products but also complete products being continuously pushed more that way. We have significant savings as we do so and we have a long history to do this, we have a lot of experience and also we have all the capacity in place in China. We have made, you know, that significant investment into a new infrastructure, a new plant, and we certainly have done that in anticipation of all that growth we are talking here.

Okay, thank you. And then -- real quick. Realizing it's sort of in a few years since you have done a deal, I was wondering if you could sort of give us your feel for where you're at with acquisitions in your mind set there.

Yep, yep. Let me maybe -- you hear a few more words. To answer your question, I think you know that we are heavily focused on organic growth right now and we often talk about the 5%, 10%, 15% (inaudible) topline growth translating into 15% EPS growth. That is a model we have well proven in the last 10 years and we believe it is going to be (inaudible) for coming years. And with that being said, you know, I just want to say we will have a great and very successful journey into the future absent acquisitions. Acquisitions are for us, not an absolute must to grow the company. They are more an opportunity to even top this off. In term of acquisition, we are very focused, as I said many times, focused in terms of it making strategic sense, making it also digestible from an operational point of view and holding up to all of our financial criteria. And in that sense, we are continuously screening and looking at certain matters. But we are certainly not desperate and will not take steps which are maybe not providing us the right answer to all these questions I (inaudible) mentioned before. Yes, our financial structure is strong even in spite of the big share buyback program we are announcing today. We will have a lot of financial flexibility to pursue acquisitions.

Got it. Okay, that's it for me. Thanks.

You're welcome.

Your next question comes from the line of Tycho Peterson with J.P. Morgan.

Hey, this is Dave speaking for Tycho tonight.

Hi.

First, congratulations to the two of you.

Thank you.

A lot of my questions have been taken. I guess first, and this question probably goes to Bill. Bill, are you able to expand (inaudible) with the EPS guidance for 2008, any assumptions in there, share account? It sounds like tax rate is going to be at 27% but this gross margin, anything like that?

Sure. Hey, I think we are talking about a mid-single-digit growth so let's pick 5% as the midpoint of the range. Based on today's exchange rate environment you could see another 2%, 2.5% in terms of U.S. dollar growth. In terms of operating margin expansion, you're going to be looking at 40 to 50 basis points again a little bit depending on what your exchange rate assumption is and in terms of the tax rate, about the same as this year, 27%, if you exclude discrete tax items and I don't know of any significant discrete tax items. I guess that would probably be the key things. I think in terms of the repurchase plan, we have made an assumption that we're going to again repurchase our free cash flow plus our option proceeds. That will give you a number something north of $200 million for next year.

Okay, that's really helpful. And then just to go back to the steel topic for a minute -- I know you talked about passing through some of that with price increase. When you look at the guidance for next year, for the 4% to 6% growth, is it safe to assume that's all product growth or is there some incremental pricing that's, I guess, more than the offsetting of the costs?

If there's not an abnormal level of price increase. We are raising our price levels every year. We would expect to realize price increases similar next year as we did this year. But there's not in that 5% an unusual level of price increases. And certainly even the numbers we talked about on the vehicle business and things are not so material to impact the organic growth numbers.

Okay. Great. That's all I have. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). Your next question comes in the line of Greg Holter with (inaudible).

Good afternoon guys and thank you for taking the question. Just have one for you. I don't know where you domicile your cash and I presume it's all over the world but I'm just wondering if you have any difficulty moving it around with some of the changes that have occurred regulatory or financially, whatever, in terms of getting cash either into the U.S. or out given repatriation status and so forth?

Sure. I guess I will handle that one. Okay. Hey, as you guys remember, we put in place a new tax structure, legal structure last year in terms of subsidiaries. One of the things that we feel that we accomplished with that is we were able to repatriate funds in a very tax efficient way. In effect that, if you guys remember, two years ago or something, the American Jobs Creation Act came 965 was the tax regulation number. Many companies repatriated cash that had been stored overseas because they were trying to avoid repatriation costs. We're now in the position as a company to in effect not have any toll to pay in terms of our repatriation. I know that Mr. (inaudible) has made a proposal recently that would somehow start to immediately tax earnings even if they were domiciled overseas and at least as I currently understood that that would not impact us, so we will continue to be able to have this cash tax rate which is more in the low 20s or so as opposed to our effective tax rate in the 27% range.

Great. Thank you very much.

Sure.

It appears that there are no further questions, do you have any closing remarks?

I would like to thank you all for joining us tonight. Have an enjoyable evening and all the best in the meantime. Thank you.

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