Mettler-Toledo International Inc (MTD) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our Third Quarter 2013 Mettler-Toledo International Earnings Conference Call. My name is Jay and I will be your audio coordinator for today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

I would like to turn our presentation over to your hostess for today's call, Ms. Mary Finnegan. Please proceed, ma'am.

Thanks, Jay, and good evening, everyone. I am Mary Finnegan. I am the Treasurer and responsible for investor relations at Mettler-Toledo and happy to have you joining us tonight. I am joined here by Olivier Filliol, our CEO, and Bill Donnelly, our Executive Vice President.

Now, for some administrative matters, this call is being webcast and is available for replay on our website at www.MT.com. A copy of the press release and the presentation that we will refer to on today's call is also available on our website. Let me summarize the Safe Harbor language, which is outlined on page 1 of the presentation. Statements in this presentation, which are not historical facts, constitute forward-looking statements within the meaning of the US Securities Act of 1933 and the US Securities Exchange Act of 1934. These statements involve risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from those expressed or implied by any forward-looking statements. For a discussion of these risks and uncertainties, please see the discussion of our recent Form 8-K. All of the forward-looking statements are qualified, in their entirety, by reference to the factors discussed under the captions, factors affecting our future operating results, and in the business and management discussion and analysis of financial condition and results of operations section of our Form 10-K.

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 measure, is provided in the Form 8-K. I will now turn the call over to Olivier.

Thank you, Mary, and welcome to everyone on the call. I will start with a summary of the quarter and then Bill will provide details on our financial results and guidance. I will then comment on current business conditions, as well as provide an update on new product launch, as well as some additional investments we are making in emerging markets. As always, we will have time for Q&A at the end.

The highlights for the quarter are on page 2 of the presentation. Local currency sales increased 1% in the quarter, with the decline in China worse than expected. However, Europe did a little better and the Americas had a solid quarter in line with expectations. We had another quarter of gross margin improvement, which, combined with the benefit of our cost control initiatives, drove a solid increase in operating profit and earnings. I am pleased with the 8% increase in earnings per share, given the modest sales growth. While economic indicators have pointed to some improvements, we have not yet seen that translate into our markets. We do expect some modest improvements next year and we are initiating selected investments in anticipation of more growth. Bill will provide additional details for the remainder of 2013 and for 2014 and I will now turn it over to him to first cover third quarter financial results.

Thanks, Olivier, and hello, everybody. Let me start with some additional details on sales, which were $591.7 million in the quarter; an increase of 1% in local currency. On a US dollar basis, sales increased by 2%, as currencies benefited us by about 1% in the quarter. Excluding the impact of exited product lines in China, local currency sales growth was 2% in the third quarter. I'll have some additional comments on China, including product line exits later on the call. One additional comment in terms of the quarter, order entry was again better than sales with 3% growth. This translated into good backlog growth versus the prior year.

Turning to page 3 of the presentation, we outline sales by geography. In the quarter, local currency sales increased by 5% in the Americas and 7% in Europe. Asia/Rest of World decreased by 8%. China was the main contributor to the Asian decline, with its sales down by 12% in total and 9% excluding the impact of exited product lines. Without the impact of the exited product lines, Asia/Rest of World declined 6% in the quarter. On slide number 4, we show year-to-date results by geography. For the nine months, local currency sales increased by 4% in the Americas, by 1% in Europe, and declined by 5% in Asia/Rest of World.

On slide number 5, we showed sales by product line for the third quarter. Laboratory products increased by 3% in local currency, while industrial declined 3%. Food retailing increased by 14% and again, adjusting for Chinese product line exits, the industrial sales declined by 2% in the quarter. The next slide shows year-to-date sales by product line. Laboratory products increased 1%, while industrial declined 2%. Food retailing has increased 3% year-to-date.

Now let me turn to slide number 7 of the presentation, which shows our full P&L. Let me walk you through the key items. We're very pleased with our growth margins, which were 53.8% in the quarter; a 50 basis point increase over the prior year. We benefited from pricing and lower material costs, which were offset in part by an unfavorable mix and some currency headwinds. R&D amounted to $29 million; a 2% increase in local currency as compared to the prior year. Growth in R&D is impacted by the timing of new product launches and we continue to benefit from increased R&D activities in low cost countries. SG&A amounted to $173.4 million, which is constant with the prior year in local currency. We benefited from our cost control measures and lower variable compensation, which was offset by higher sales and marketing investments. Adjusted operating income amounted to $116.1 million in the quarter and this represents a 6% increase over the prior year amount of $109.2 million.

Our operating margins were 19.6%; an increase of 70 basis points over the prior year. We estimate that currency reduced operating profit growth by 2% in the quarter and reduced operating margins by 60 basis points. We're very pleased with the growth in operating income in the quarter. We were able to overcome the more challenging than expected market conditions in China, as well as an adverse currency environment.

Behind the scenes, it was also a quarter where we went live on two large projects. Our largest US unit went live on Blue Ocean and we started running European logistics through our new hub structure in the Netherlands. Both of these projects are complex and had their own challenges and a fair amount of management attention. Nevertheless, we were able to drive solid operating profit growth in the quarter.

A couple of final comments on the P&L -- amortization amounted to $6.7 million in the quarter. This is higher than last year's and last quarter, as it reflects additional amortization associated with adding more users to Blue Ocean with the previously described go lives. Interest expense was $5.6 million in the quarter, while our effective tax rate continues to be 24%. Fully diluted shares were 30.6 million, which is a 3% decline from the prior year, reflecting the impact of our share repurchase program. Adjusted earnings per share were $2.60, an 8% increase over the prior year amount of $2.40 per share. On a reported basis, earnings per share was $2.43 per share as compared to $2.28 in the prior year. Reported earnings per share includes a pretax restructuring charge of $5.5 million or $0.14 per share. This is primarily employee-related charges for cost measures announced last year. Reported EPS also includes $0.03 of purchased intangible amortization.

The next slide highlights our year-to-date results. Let me touch briefly on the key items -- local currency sales were flat as compared to the year earlier period in the first nine months. Gross margins have increased by 100 basis points, while our operating profit increased by 6%. Year-to-date adjusted EPS has increased by 10%. We're very pleased with the earnings growth achieved in the first nine months of this year.

Now let me turn to cash flow -- we had another strong quarter of cash flow generation. Free cash flow amounted to $107.6 million; a 23% increase over the prior year amount of $87.3 million. On a per share basis, this represented an increase of 28%. Year-to-date, our cash flow per share is up 26% over the prior year period. For the full year, we expect free cash flow to be in the $270 million to $275 million range and we're pleased with our working capital ratios during the quarter. [ITO] was at 5.2 times this quarter as compared to 4.6 times a year ago and our DSO was about 44 days, about a day slower than last year.

This probably is a good time to spend a few minutes on our current market conditions as we see them in China and what we think it means for our business. Market conditions in China, during the quarter, were weaker than expected. Last time we spoke, overall, we saw differentiated demand with certain sectors investing, such as environmental, food safety, and auto, but many others are not investing. On the lab side, we had challenging comparisons and continue to feel the impact of credit constraints by certain customers, such as dealers. We also saw that many industrial customers who buy our lab equipment spent less. We would expect the overall dynamics on the lab side to improve in the coming quarters. Now, for the industrial business in China, we see continued weakness driven by the government slow down in infrastructure investment, which is having a direct impact on industries, such as steel and cement. We also see slowed down investment by many industrial customers, as we see less new plants and plant expansions.

As mentioned earlier, we exited certain businesses in China; specifically, this relates to project businesses done with smaller regional governments as part of their infrastructure development. We have reviewed these businesses and determined that we see insufficient return opportunities. As a result, we restructured some of our activities in China and are directing resources towards more profitable opportunities. This will allow greater focus of our engineering and marketing resources on segments of the market that are driven by consumer consumption, such as food, pharma, testing labs; segments which are more resilient to the economy and the future direction of that economy. China sales by destination were down 9% in the quarter, without the impact of these product line exits, which reduced sales by a further 3%. In Q4 and in 2014, these exited product lines will reduce sales growth in China by about 2%.

While we expect sales in China to continue to be impacted in 2014 due to these market conditions, we remain bullish about China in the medium term. As their economy moves more toward consumer-driven segments, our lab and product inspection instruments will grow faster and our core industrial will be reduced as a percentage of total sales. I mentioned this last quarter, but I think it's worth repeating again. We have long believed that the growth in China will not be a smooth line, rather it will face more ups and downs than in the developed world. Clearly, we're seeing some of this now.

Let me cover guidance for Q4 and for 2014. We see dynamics differently by region. Our businesses in the Americas are solid and we see improvement in Europe, but this region remains below historic levels. I've already mentioned China, but clearly the economic framework is more uncertain in this region than in developed regions. Now, for the specifics -- for the full year of 2013, we believe our sales growth in local currency will be approximately 1%, at the lower end of the 1% to 2% range we provided last quarter. This is largely driven by our current view of short-term growth in China. With this slightly lower revenue estimate, we're narrowing the top end of our 2013 adjusted EPS guidance to a range of $10.45 to $10.50 or growth a rate of 8% to 9%. For the fourth quarter, we'd expect local currency sales growth to be in the range of 2% to 3% and adjusted EPS of $3.70 to $3.75 or a growth of 7% to 8%. For 2014, our current expectation is that local currency sales growth will be in the range of 3% to 4% and adjusted earnings per share will be in the range of [$11.35 to $11.55] (Company corrected after the conference call). Using the midpoint of our 2013 guidance, this implies an adjusted EPS growth of 8% to 10%.

In terms of how the year plays out, we'll provide more details on quarterly estimates throughout the year. However, in general, we expect better growth as the year progresses. Specifically, we expect China to continue to be weak in the first half of next year. Therefore, more EPS growth will come in the later part of the year. I felt it was worth it to point this out, as we now have first quarter estimates assuming 16% EPS growth, which would not be in line with our current thinking. Before I turn it back to Olivier, let me cover some specifics on the guidance, as I know you will be updating your models.

First, currency -- we would expect currency to have no impact on sales in the fourth quarter and for the full year 2013. In 2014, we also expect currency to be neutral to sales. In terms of its impact on earnings, we would expect currency to reduce earnings by approximately 2% in the fourth quarter. For the full year 2013, currency is reducing earnings overall again by 2%. For the full year 2014, we expect currency to reduce earnings growth by approximately 1%, with more of the impact in the first half of the year as compared to the second half.

A couple of additional points -- we have continued to assume an effective tax rate of 24% for the remainder of 2013 into 2014 and that all free cash flow will be used for share repurchases. As I already mentioned, we expect free cash flow to be in the $270 million to $275 million range this year and about $290 million next year. This represents a 10% increase on a per share basis for free cash flow next year. Just one final item for your models -- we've assumed amortization expense in Q4 will be similar to the level that we reported in Q3. Amortization in 2014 will amount to approximately $28 million; an increase of $4 million versus 2013, mostly due to more users on Blue Ocean. That covers my comments on guidance and I now want to turn it back to Olivier.

Thanks, Bill. Let me start with summary comments on business conditions. Lab increased 3% in the quarter with good growth in Europe and the Americas and the decline in Asia/Rest of World. In terms of product areas, balances and process analytics had good growth. Turning now to industrial, which was down 3% in the quarter, with product inspection up low single-digits and core industrial down 5%. The decline in core industrial is driven principally by Asia, particularly China, although we also had a decline in core industrial in the Americas. In Europe, core industrial was roughly flat. For product inspection, we had great growth in orders, but not everything was filled because of lead times. Retail was up 14% in the quarter with growth in all regions, but particularly strong growth in the Americas, due to project activity.

Now let me make some additional comments by geography. We were very pleased with the growth in the developed world in the quarter with Europe up 7% and the Americas up 5%. This compares very favorably against our direct competitors and peer companies and supports that we are continuing to gain share. I realize the strength of the developed regions was a bit overshadowed by China and the dynamics in China that specifically impact us given our overweight to the industrial sectors. As a reminder, we are very focused on industrial in China, which accounts for 60% of our Chinese sales and even our lab business in China has a large component of industrial companies.

That covers my comments on current market conditions. While the overall economic framework is not ideal, we continue to see opportunities for growth and share gain. Let me walk you through some of our current focus areas. These are just a couple of the many examples we have. New product launches continue to be an important driver of growth and capturing share. An example from our laboratory offerings addresses a common challenge in high throughput QC labs, due to the accidental mix up of sample beakers during weighing and titration. This type of mix up can cause inaccurate test results, as well as potential liability issues for our customers.

In conjunction with the launch of our new high end balance and our new in motion automated sample changer, we have developed an innovative RFID chip tag for titration. Since weighing is often the first step in the titration process, the RFID chip tag will capture all relevant data from the balance when a sample is weighed. Once captured, the information does not have to be reentered into the titrator; thereby eliminating any potential for mistakes. Furthermore, the titration process is more efficient, as beakers with different liquids can be loaded quickly on to the automated sample changer without concern about the correct order, since the RFID chips have all relevant information to ensure titration is done correctly. The titration RFID technology is just one of the several intelligent features available in our upgraded Excellence analytical balance.

This launch provides numerous enhancements that improve productivity, accuracy, and security of the weighing process in the lab. For example, an easy to see green status light indicates the balance is level and routine calibration testing are up to date. Another feature ensures results are not compromised by electrostatic charges that can occur with normal handling of beakers. These features help take the worries out of weighing, which is especially important to our pharmaceutical and auto-regulated customers. The balance is also compatible with our laboratory software, LabX, which provides full traceability. We completed the development and launch of this upgrade in less than 12 months, which demonstrates our agility in quickly responding to our customer needs.

Finally, we are also focused on accelerating the development of new emerging market economies of Indonesia, Vietnam, and the Philippines. Recently, I had the opportunity to discuss the progress in these regions during the annual budget tour. After further review, we are committed to adding additional front end resources in the emerging markets. This will include an increase in our direct field presence in Indonesia and development steps for the Philippines. We have already established a presence in Vietnam and are now working on our growth strategy for the medium term. Additional resources will also be added in Turkey and Eastern Europe. These are tactical investments, as we want to ensure we have the resources to capture share in these regions that have impressive growth potential. That concludes our prepared remarks.

In summary, we recognize that conditions remain challenging, particularly in China. We have good market positions in this region and will monitor developments closely. Our cost structure is in good shape and we believe that we are strongly positioned to capture growth opportunities and market share.

Now, before I turn it to the operator, I want to make a comment on today's organizational announcement that Bill has been promoted to Executive Vice President and that will Shawn Vadala will assume the role of Chief Financial Officer reporting to Bill. The implementation of these roles and related responsibilities has been underway for some time. I'm very pleased to have such a strong and deep finance team at the Company. The finance leadership team, Bill, Shawn, and Mary, have been together for more than 15 years and have tremendous level of knowledge and experience in their roles. These promotions are an acknowledgment of the broad role Bill plays within the organization, which has been made possible by the increasingly important contributions Shawn has made in the finance organization. We expect to have Bill, Shawn, and Mary together for many years to come. Bill, I'm sure you would like to make some additional comments as well.

Sure. Thanks, Olivier. Let me just make a couple points. First of all, I want to say that I'm very happy with my role here at Mettler-Toledo, excited about this development; not only for myself but, of course, for Shawn. Some of you have met Shawn in the past. He's been group controller and has been at Mettler-Toledo for about 16 years. In addition to Shawn's financial responsibilities, he's been the leader of our pricing initiatives that we've been talking about for many years. Shawn is based in Ohio and worked for us in Switzerland for five years earlier in his career.

In terms of myself and what this means for me, let me start by saying that I am genuinely enjoying my job and I'm happy to come to work every day. I marvel at what the Company has accomplished over many years, but I'm just as excited about the future and a we can all accomplish together. I'm grateful to have such a strong finance team with nearly 50 years of combined experience, just between myself, Shawn, and Mary. Their competence has allowed me to expand my role and to help Olivier to move the Company forward.

For you guys, being the investment community, the impact of this organizational change will be limited. Shawn will continue to drive our internal financial processes under my direction. Mary will continue to report to me and we, Mary and I, I mean, will continue to be your contacts for investor relations purposes. The bottom line is, no big changes from your perspective. That's it from my side and from Olivier's side and I suggest we now open the lines for questions.

(Operator Instructions)

Ross Muken, ISI.

Congrats, Bill.

Thank you.

Let's start out with [Asia Pac] and China. You gave some color on some of the specific end markets on the industrial side that were weak -- metals, mining, materials et cetera. It seems like there are some real structural issues in those parts. As you look at the rest of the industrial or applied or environmental complex in Asia Pac and China, specifically, were there any pockets where you saw some better order trend over the course of the quarter or where you felt like you're going to get a bit better contribution in '14 based on the trajectory change?

Maybe I'd start with the following, I would say that there's an element, and we've talked about it many times in our business, about how comparisons go. I think on the order entry side, we started seeing some slowing growth in order entry and eventually declined last year and now this year, we're talking about let's just compare apples to apples, I think. We had a total of 12% decline, including these exited product lines, and on the same basis, I think, order entry was only about a 3% decline. I do tend to think that the comparisons will become easier starting in the second quarter of next year. That's just maybe an overall comment. Then you made some specific questions in and around segment areas. I think that, if we look at these segments that are close to the consumer spending trends, you see a lot about consumer confidence in China.

We see nice numbers coming out of -- for example, we were talking today with a Chinese leader of a bottling business and reporting super growth recently. We do see that the food segment of the market, as one example, particularly food quality topics, is going quite well. As you mentioned, environmental, it has gone well, but not as many of our products go into that segment. I think that Olivier often talks about the impact of capacity utilization and from a capacity utilization, I think that there's still excess capacity overall, from a Chinese point of view, but I think it's good that it's starting to be eating up, into a little bit recently, their manufacturing GDP numbers and leading indicators to that haven't been too bad. We do expect things to improve overall.

Also, just to stick on the topic, talked about sort of a changing mix over time and clearly lab, as a percentage of total in some of these applied markets, food, et cetera, will be a bigger part of the exposure. Remind us where are you now in terms of mix in the region? Then the question is how long is it going to take if some of these base markets that have helped you over, I don't know the last five or 10 years, and many other players don't sort of rebound or take some time to rebound? How long will it take for the mix to shift to a favorable enough level for you to get back to more historical or significant teens or double-digit type growth rates in China and the region?

Maybe the double digit and mid teens numbers, I think, we would not expect those for next year. We do expect growth and pretty decent growth in the second half of the year. But probably, our view would be, before we see mid-teens again, it would be, at a minimum, probably '15.

Okay. Lastly, on Europe, can you just dissect there just maybe the pacing of the quarter?

Ross, just quickly back on China, I want to stress the point, the part that will take longer for us to recover is the part where there is significant over capacity and consumer confidence will not really help there. That takes, typically, multiple quarters. However, there are regions in China that are still developing and there we see actually growth. I was happy to see that the west, for example, for us in China has good growth. I am actually confident that next year we'll find segments and we will find multiple territories that will yield good growth for us. It takes just a little bit more time than for the other segments, steel but also chemical and so on, that will take a couple of quarters to rebalance because they have over capacity. That's maybe an additional flavor why we feel comfortable that later next year, China will show better numbers for us.

In terms of how the pacing went in Europe, order entry regrowth was, I think, 1 percentage point less than sales growth in the quarter, but it shows it was not just us eating into backlog. It was a solid number for Europe. I think we'll have a decent growth number coming out in Q4. I would not expect it to be 7% again, but I think we'll see a mid-single-digit kind of growth number in Q4 as well.

Thanks, guys.

Isaac Ro, Goldman Sachs.

If I could just maybe spend another minute on China. I'd be interested if you could put more color on what you're seeing in terms of market penetration there? Specifically, I think there's been some controversy over the last few years as to the fact that, on the one hand, you've done a great job capturing the opportunity, on the other hand, the marginal customers you're working with are typically in Tier 2 and 3 cities. I think in the summertime, when there was a little bit of the spike in the [shybor] dynamic, there was some concern about their access to credit and so forth. I'm just wondering this quarter if you could maybe put an update on how you feel about your market penetration and if that was up to your expectations as you put the greater Chinese performance in context?

I feel extremely good about our market position. We are certainly the strongest brand. We are perceived as having an excellent quality. We have a very strong team and we have a very good coverage. We are facing a lot of competition there, local competition, as mentioned at previous times. The Chinese market is still very fragmented, in particular, in the industrial area, but I feel very comfortable that we can maintain this very strong position. I would, however, recognize that the current environment leads to situations where we are walking away because margins get too low or we are walking away because payment terms are not attractive to us.

These kind of businesses can go to competition, but that's okay for us. I feel, also, that our strategy, that we are pursuing, of expanding our coverage in China, going to second tier, third tier cities is still a very good one. I have continued evidence that this development will go on and that we can capture additional market share by this strategy. I really feel the team and the strategy is very solid and we just need now to overcome this economic cycle and these challenges. It doesn't come fully unexpected. We always said that China is offering very good growth prospects, but it's also more volatile than in the western markets. We enjoyed excellent growth for many, many quarters and now we are challenged and nevertheless, we didn't expect that it would last that many quarters.

Certainly, also when we talked last time, I would have expected better number for this quarter and that's certainly one reason why we remain cautious going forward. But to me, the long term prospect of China remains very, very good. We see, also, that, in particular for the type of equipment we are selling in China, we are in a favorable position and the drive towards quality is helping us, also, relative to competition. We are known for the best quality products and that position as well versus international competition and also versus local competition.

Great. Thanks. One follow up here on the food retail business, I know it's small and less of a driver for the overall, but it looked like a pretty solid print there on growth this quarter. I'm wondering if there was a one time event we should keep in mind or if there's a dynamic there that could persist through the end of the calendar year? Thanks a bunch.

It's a lumpy business and often it can be driven by large projects. In this case, actually, it was a particular large project. The US actually did well on retail and we had also Europe that did well.

It was a relatively easier comp. The comp gets a little bit tougher, but I think our market position in retail remains pretty solid.

Got it. Thanks so much, guys.

Daniel Brennan, Morgan Stanley.

Maybe you could spend just a little bit more time on the topic that you're on now, China, but in terms of the businesses that you exited in the quarter, maybe just give a little more color about the decision behind that? I know you gave some quantification of the impact on growth, but any color on what those businesses have been doing for you? As we look out, is this something that we should expect going forward for you to be more tactical on any other parts of the portfolio in China?

These were businesses that, as long as the economy was doing well, were attractive to us. Now, where the economy becomes difficult, we certainly face margin pressure there and then in particular, the financial terms became difficult. Payment terms that just were not acceptable for us and that's certainly also driven by the structure of who owns the businesses that is buying the type of equipment and so we decided to exit it. I would stress the point that this is businesses that we were historically only doing in China and we don't have that kind of business in US or Europe. I do not foresee that this becomes now a prejudice for more to come. I think that was an exercise that we had do this summer under these new economic circumstances and I, in that sense, look at it as a one time effort that we have to do here. But it carries forward into next year.

I would add that I think by making that decision to do that, it allowed us to be able to communicate more easily with the Chinese management team about redirecting resources to the better growth opportunity by making that decision then and it was easier for us to push for investment in other areas.

Thanks. As you mentioned, Olivier, when you look at some of the signs on China manufacturing PMI, some of the vernacular indicated grinding kind of steadily but slowly up, but yet, certainly, the difficulty for us to watch from the outside how your industrial business is doing inside and how much of the benefit was from the build out and now maybe the kind of low utilization despite the manufacturing PMI increasing. Maybe the question is, from the visibility that you have and the cushion maybe you've built in for next year, what do we look for to maybe help us get comfort as we watch some of the macro indicators over there and for the trend line in your industrial business? Anything you can help us with there?

I would start with the point that the key challenge that we face in many of the industry segments is that the manufacturing GDP growth came down versus expectations and so many of our customers have over capacity. In that sense, even if manufacturing GDP growth recovers, it first needs to recover so much that the over capacity is reduced or eliminated. That's why Bill referred before that we see fewer new plants being built and there is less planned expansions. Predicting exactly this one is difficult, but having consumer confidence coming back is a first step towards seeing or having our customers again getting confidence that they will sell more and therefore, need to have increased capacity. These very early trends are going in the right direction and we are just facing a delay until we are going to see it in our numbers. Of course, it varies also by product lines, as well as business segments. For example, for the food industry, I would expect us to see it much faster than, for example, in the chemical industry.

Could you let us know what's implicit in your guidance next year, Olivier, for China industrial? As you look at '13, what's implicit and whatever kind of improvement or more gradual decline is built into your guidance for '14? Thank you.

It will have, we expect, mid-single-digit growth coming out of Asia and then China might be a little bit less than that because of the impact of these exited product lines. We would assume that lab does better than industrial within that mix. Yes, you probably will see even some minus maybe in industrial at the early part of the year, but the overall picture will be something like how I described.

Within industrial, we would expect product inspection doing better than core industrial.

Product inspection will do very well, but percentage-wise it's not that big of a number yet, not the same ratio as we have in the west.

Great. Thank you very much.

Jon Groberg, Macquarie.

Congratulations, Bill and Shawn and Mary. Last quarter, Olivier, you spent a bunch of time talking about service revenues. Can you maybe give us an update on what those did in the quarter and maybe geographically?

Yes. Service was, in the quarter, 3.5% growth. Actually, we did pretty well across the globe. Americas maybe a little bit less; Bill mentioned on the call that we went live with Blue Ocean in US and you can imagine a go live for Blue Ocean impacts, definitely, also the service organization and in that sense, we were a little bit lower there. But overall Europe and actually Asia and including also China was reasonably well on service.

Okay. Thanks. Olivier, I know you mentioned that most of your -- and Bill mentioned your free cash flow is going to applied back into buy backs, as you historically have done, around a 3% or 3.5% cash flow yield right now in terms where the stock is. I'm just curious, as you think about maybe in China and wanting to diversify a little bit away into outside of the core industrial into some of the markets are growing faster and you look at some of the other analytical tools and technologies that are out there that are continuing to grow fairly fast in China, do you think about maybe looking at -- you've done deals in the past, like smaller adjacencies, that could give you access to new technologies that might help you to improve that mix of your business in a geography like China more quickly?

The M&A strategy remains really the same. As you mentioned, we are interested in adjacent technologies. We are interested in consolidating the markets, but I would not give particular focus on China. There are not that many opportunities and to be honest, acquisitions in China are not that easy. There are always complications with it, too. At this stage, I have also to say I prefer that our team is focused on the organic opportunities. I really think that with our portfolio, we have many opportunities and we don't need to do acquisitions to regain good growth out of China. It's not of a particular focus.

I might add that maybe the start of your question, Jon, might have implied M&A versus share repurchase and I think we both feel that, to the extent we identify opportunities that make sense, there's plenty of room in the balance sheet to absorb acquisitions and that wouldn't hinder our share repurchase plans.

Right. I wasn't saying so much just for China, but I was just thinking you say that, for example, your product inspection or food testing or some of these areas that are less represented in China and maybe as a firm overall, there could be, if you want to move away from having as much exposure in pure industrial, there are some pretty clear adjacent technologies that analytical tools that people use in areas like food safety testing and other areas. That's more what I meant in terms of -- and to your point, Bill, not that you'd have to do one or the other. But I just didn't know if that was at all more of a focus in terms of looking at some adjacencies that you might get into.

We remain very interested in these and you have seen us do, for example, acquiring to vision inspection companies in the last two years, so these kind of adjacencies remain of high interest to us. Vision inspection is a technology that has accelerated growth, is very complimentary to the PI portfolio, and would definitely also or will have a good impact on emerging markets. We are interested and we pursue these acquisition opportunities, but there is nothing that I see here materializing in the coming weeks or that I would have something to announce here.

Okay. Thanks.

Tycho Peterson, JPMorgan.

Thinking about some of the comments for '14, can you talk a little bit about pricing -- what's baked in the guidance for pricing?

I think we're going to be able to do a number in the 150 basis point range. That's a little less than we had this year. As a reminder, we did a mid-year price increase in 2012, which benefited us this year. But the way we see the market, at that point in time, we're able to push through a mid-year price increase in part because of a lot of sense of inflation coming and we don't see that opportunity now. But a number in the 150 basis points, we think, is realistic for next year.

Can you break out, for this quarter, these margin benefits that you saw from price material cost and mix?

In the quarter price increases were up about 240 bps. As a reminder, that had about a 120 bps impact on the gross profit margin just the way the math works.

Okay. Olivier, you commented on selective reinvestment to give us a sense of some of the new product flow, but are you able to kind of quantify the extent to which you're stepping up some of the investments for next year?

The way we should look at it, we always launch many products every year and in that sense, I would first say, an individual product doesn't make a huge difference to the top line and the same, however, I would also say to the R&D budget. Our R&D budgets are relatively stable and I would also expect for next year that the R&D purchase remains about the same what we have had in recent years. I do expect that our productivity continues to increase in R&D, because we are also leveraging low cost countries in R&D activities. The investment that I was referring in the prepared remarks was more towards field resources. The example that I gave on the call was, for example Indonesia, Vietnam, Philippines, Turkey, Brazil, but many other markets. This is, in essence, less related to product innovation, but making sure that we have really a good coverage in the different markets and different territories investing in application specialists. But sometimes it can be also the expansion of our telesales team or auto marketing activities. Again, investment more towards growth through field activity and field presence.

Sticking with the cost theme, when things slowed a year ago, you took out incremental costs. How do you think about things in the current environment given the present set of challenges, in particular with China, that you talked about here?

For China, we are taking measures. We started, actually, already early in the year and these are still underway. We have selected head count reductions and we are certainly also doing resource shifts. Bill referred before to the business exits that we have that allow us to redirect the attention of the team to more attractive segments and this is associated also with resource shift. Besides that, in the September timeframe, Bill and myself were on the global tour budget reviews with all our operating units; with this operating unit, we are assuming a modest improvement of the economic environment and this is reflected in the operational plans. Should the economic environment change for the worse, of course, we would have to go back and rethink some of the assumptions and related cost base. But it's not that we feel that we already need to initiate here another cost program.

Okay. Thank you very much.

Dan Arias, UBS.

Unfortunately, I am going to ask about China, but I only have one question. Bill or Olivier, are you seeing any exits from the markets in China aside from your own? I think over the summer, you had talked about maybe ending up in a better position once the smoke had cleared on the cycle we're in, just from some small players deciding not to stick it out. Can that still be the case?

I have a hard time to give you concrete examples, but the fact is, in China, particularly in industrial weighing world, we are talking about hundreds of local competitors; many of them are family owned and small regional players. I definitely would observe that they are faced with even more difficulties and the financial situation makes it also very difficult for them. Yes, I do expect that we will continue to emerge stronger out of that situation, but it's very difficult to quantify what this really means.

Okay. Thank you.

Paul Knight, Janney Securities.

Congratulations, Bill, particularly.

Thanks.

As we've seen this recovery and the economic indicators like PMI, it seems like the recovery has been slow globally. Why do you think that is? Obviously, you had [lower end] organic growth. What do you see happening in customers' attitudes creating this kind of slow shallow recovery?

You're probably wording the question in a way that's a little different than how we think of it, so it's hesitating a little bit. First of all, I think we've always been a little bit late cycle would be kind of one comment when it comes to economic recoveries. Second thing is, if you think about our western businesses, our western businesses always have -- are largely replacement in nature; either the replacement of own products or the replacement of competitor products. Replacement cycles rely, to a certain extent on economic stability. I think, right now, we're definitely benefiting in Europe from both of those. I think, for the first time in a while now, in 2013, Europe is not having a lot of noise and we see now a return to good growth in Europe as a result of that combined with easier comparisons because of it. In the Americas, I think we very much see the same.

I think our Americas numbers were solid in the quarter with 5% growth and I think we'll put up something similar in the fourth quarter. I think in terms of what we see in China, it's a combination of things. It's the growth. We're a little bit later cycle, this impact of capacity utilization and the investment in new plants and plant expansions that Olivier talked about and then the fact that our business is going through a little bit this transition from some of the older infrastructure-related segments to some of the newer segments and how that evolves over time. Our view is we're going to start to see some modest improvements next year.

Certainly, we'll grow more in '14 than we did in '13 on the top line and China is a little bit the variable. If China goes better faster than we think, that could be an upside. As well, we need to see if there could be another bump in the road there or somewhere else as well.

Last question would be labor costs in emerging markets, is that an issue? Is it more difficult, less difficult tone there and that's second question?

I think we have similar type of inflationary pressures on labor and other factors in emerging markets, particularly in China, but very much in line with what we've had in recent years. I would say that our teams there have always done a good job of productivity gains. We focus on that a lot in China, make investments, whether that be in automation, in lean processes or whatever, and we expect that to continue. The one thing I might add to it is that our -- vis-a-vis our pricing initiatives, our emerging market countries are getting better at realizing prices than in the past. I think that's one additional lever that we have now going forward to help us overcome some of this inflation that you talked about.

Olivier, you talked about South Asia and do you think South Asia has the same opportunity that you saw in China ten years ago?

Yes. I wouldn't too much correlate it with China. I would say, in general, emerging markets. Actually, in China, we have a particular situation because we started extremely early. We were really one of the very first point companies there and we very early on built up production plants, had local engineering. It's certainly one of the reasons why we are more askew with the industrial business mix. But the other emerging markets don't have the same business mix and typically, actually, we would even first enter a market through a lab and product inspection and then industrial would follow.

That's partially now also the case with these new Southeast Asia markets and yes, I have big hopes. We have an excellent team. We have a very strong base today already in Singapore, Malaysia, and Thailand and that strong team is a bridgehead to go into Vietnam, Indonesia, and Philippines. In that sense I would rather see scaling up that presence to these new markets rather than saying it's out of China or has a connection with China.

Yes. Thank you.

Sung Ji Nam, Cantor Fitzgerald.

Maybe just another question on emerging markets, if you could talk about some of the like India, Brazil, and Russia, which I think, in aggregate, are pretty sizeable business for you guys and how they performed in the quarter and what the outlook might be in those areas?

Let me start maybe by saying while emerging markets in total is about 36%, a little bit more than half or about half is coming from China and then the remaining countries all are much smaller. None of the other countries would actually be more than 3%, so we have important markets like India. We have Brazil. We have Russia and I mentioned Southeast Asia, but also countries like Korea and so on. In general, I have to say I'm pleased with how they are performing. I would first also say we have very strong teams in all these countries and we have a very strong market presence. In India, you have heard me talking in the past, we still have some development to do.

We, for a couple of years, didn't grow as we wanted and then we had the leadership change and made some other changes two years ago. I feel that the team has actually emerged very strong out of these changes, but I would also recognize that the Indian market, the Indian economy is a challenging environment right now. But how we do relative to competition and peers, I'm very pleased by that. So that's maybe as a context. I would recognize that several emerging markets are impacted by the Chinese slow down. We would see that, even in Brazil, because Brazil would also export a lot of things to China and so there are side effects or you have all the neighbor countries of China, of course, that are also impacted.

Great. Thank you.

Derik De Bruin, Bank of America.

Bill, can we talk a little bit about just expectations for margins in 2014? Just running through my model and assume you do the same general share buyback, it looks like generally flattish operating margin forecast for next year. Is that where you're looking?

No. We're going to do, I think, a little bit better than that. I think we'll have 50 basis points.

Okay. Just historically, in Q4 you always have --

Just to be clear I was talking about the number. We always talk about that number before amortization and then you'll have amortization increase, I think, by $4 million or something.

Got it. Okay. For Q4, typically you have, you always have to jump between Q3 and Q4 in terms of the gross margin number. Same trend this year?

Yes. Let's call it 50 bps versus Q3 and I think could be a couple points more than that.

Great. Finally, for interest expense, guidance for 2014?

Interest expense will be a modest increase of, let's call it, something like $1.5 million or something.

Great. Great. Just wanted to do some clean up. Thanks.

(Operator Instructions)

Brandon Couillard, Jefferies.

Bill, looking back over many, many years, I can't recall you ever guiding such a narrow range for local currency growth for your initial cut. It feels like a lot can happen between now and a year from now. Anything, particular message, hidden in this dynamic?

No, not really. Probably because the midpoint that we felt was the most likely number required that we have a narrower range. I know that sounds kind of funny, but it would have been funny to give guidance of 2.5% to 4.5% so we gave guidance of 3% to 4%. I wish I had a more scientific way to give it to you, Brandon.

Fair enough. Could you give us a sense of what you're anticipating for local currency growth by geography and perhaps by segment? That'd be helpful.

Sure. I think that we're going to have, in '14, we'll have low to mid-single growth in Europe and the Americas, with the Americas being a little bit better, Europe being a little bit worse. The Asia/Rest of World number should be in the mid-single-digit range with China being a little less, largely just because of the product line exits we described and the impact that they'll have for, let's call it, the first three quarters, two quarters of next year. That gives you a feeling, geographically, in terms of the divisional view or product category view. We should get mid-single-digits coming out of our lab business. I think because of the big China mix, our industrial business, our core industrial business will be flat, but we'll have high single-digit growth in the product inspection area and let's assume that ends up being low to mid-single-digit kind of growth rate combined and then retail will be flattish.

Thank you.

There are no additional questions at this time. I turn the call back to our presenters.

Thanks, Jay, and thanks, everyone, for joining us tonight. Of course, if you have any questions or follow up, don't hesitate to give us a call. Take care.

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