Mettler-Toledo International Inc (MTD) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our third-quarter 2014 Mettler-Toledo International earnings conference call. My name is Kyle and I will be your audio coordinator for the day. (Operator Instructions).

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

Thanks, Kyle, 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.

I need to just cover a couple administrative matters before we get started. This call is being webcast and is available on our website. A copy of the press release and the presentation that we refer to today is also on our website.

The Safe Harbor language is outlined on page 1 of the presentation. Let me just cover it briefly. 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 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 the business and management discussion and analysis of financial condition and results of operations in our Form 10-K.

Just one last item. On today's call, we may use non-GAAP financial measures. More detailed information with respect to the use of and differences between non-GAAP financial measures and the most directly comparable GAAP measures is provided in our Form 8-K.

Let me 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 have some additional comments before we open the lines for Q&A.

The highlights for the quarter are on page 2 of the presentation. Local currency sales increased 6% in the quarter, with better-than-expected growth in Europe, despite strong results in this region in the year-earlier period. Americas continues to perform quite well and Asia/rest of the world had good growth against easier comparisons.

Solid topline organic sales growth, combined with our margin improvement and cost-control initiatives, led to good growth in earnings per share in the quarter. While there is greater economic uncertainty today, we feel good about our outlook for the remainder of this year and for 2015.

I will have some further comments on our outlook later on the call, but now we will turn it to Bill to cover the numbers.

Thanks, Olivier, and hello, everybody.

Sales were $629.1 million in the quarter. That's an increase of 6% in local currency. On a US dollar basis, sales also increased by 6% as currency had no impact on sales in the quarter.

Turning to page 3 of the presentation, we outlined sales by geography. In the quarter, local currency sales increased by 7% in the Americas, by 4% in Europe, and by 7% in Asia/rest of world, all as compared to the prior year. For China specifically, local currency sales increased by 4%, which was modestly better than expected and included the delivery of two large projects.

The next slide provides year-to-date sales, which increased by 5% in local currency. By region for the nine months, sales have increased by 5% in both the Americas and Europe and by 4% in Asia/rest of world.

Sales growth by product line for the quarter is highlighted on slide number 5. Laboratory sales increased by 6% in local currency, while industrial sales increased by 7%, driven by strong growth in product inspection. Food retailing was flat in the quarter.

For the nine-month period, which you see on the next slide, laboratory sales increased by 6% in local currency, while industrial sales increased by 4% and food retailing was up 2%.

Now turning to slide number 7, let me walk you through the other key items in the P&L. Our gross margins were 54.6%, an 80 basis-point increase over the prior-year margin of 53.8%. We benefited from pricing and lower material costs, which were offset somewhat by unfavorable currency and mix.

R&D amounted to $30.4 million, an increase of 3% in local currency. SG&A amounted to $168.5 million, which is an increase of 7% in local currency. Higher variable compensation expense and increased investment in our field sales organization were offset in part by cost savings and lower employee benefit costs.

Our adjusted operating income was $126.7 million in the quarter, and that's a 9% increase over the prior-year amount of $116.1 million. Our operating margins were 20.1%, which is a 50 basis-point increase over the prior year.

We estimate currencies reduced operating profit by about $1 million. Without the impact of currency, operating profit would have increased 10% and operating margins would have increased by 80 basis points in the quarter.

A couple of final comments on the P&L. Amortization amounted to $7.2 million, interest expense was $6 million, while our effective tax rate continued to be 24% (technical difficulty)

Fully diluted shares for the quarter were $29.4 million, which is a 3.8% decline from the prior year, reflecting the impact of our share repurchase program. Adjusted earnings per share was $2.95 per share, a 13% increase over the prior-year amount of $2.60 per share. Currency reduced adjusted earnings per share by approximately 1%.

On a reported basis, earnings per share was $2.89, as compared to $2.43 in the prior-year period. Reported EPS includes pretax restructuring charges of $1.1 million or $0.03 per share, which are primarily employee-related costs. Reported EPS also included $0.03 of purchased intangible amortization.

The next slide provides details on our year-to-date results. Specifically for the nine months, local currency sales increased by 5%, operating profit was up 7%, and adjusted earnings per share have increased by 11%. For the nine-month period, currency reduced earnings per share by about 2.5%.

Now turning to cash flow, free cash flow for the quarter amounted to $106 million, relatively consistent with the prior-year amount. We continue to benefit from good working capital management, which offset to a degree by the timing of tax payments and higher CapEx. Working capital statistics were solid in the quarter, with ITO at 5.1 times and our DSO at 42 days.

On a year-to-date basis, free cash flow of $235.7 million, as compared to $195.4 million in the prior year. This represents a 25% increase on a per-share basis.

Now let me turn to guidance. Forecasting is particularly challenging as we have a few different factors impacting our guidance. First, we are coming off a strong third quarter with results better than expected. Second, we feel very good about our market position and our execution. Third, we are continuing to invest in front-end resources, what we refer to as our field turbo programs.

Offsetting these positive influences is the high degree of uncertainty in the global economy and the increasing volatility in financial markets, which could ultimately create greater uncertainty in the global economy and our customers' investment outlook. These are some general comments and Olivier will provide some additional comments shortly.

Taken altogether, we expect local currency sales growth in the fourth quarter to be in the 4% to 5% range in local currency. This should result in adjusted earnings per share in the range of $4.12 per share to $4.17 per share, or a growth rate of 8% to 9%.

With this guidance, we expect full-year 2014 sales growth to be in the 4% to 5% range and adjusted EPS to be between $11.60 and $11.65, a growth rate of approximately 10%. This compares to our previous guidance of $11.45 to $11.60. The increase reflects our outperformance in Q3. Furthermore, we are absorbing about $0.06 of greater currency headwinds in the fourth quarter as compared to the last time we provided guidance.

Through our margin enhancement programs and cost-control initiatives, we are able to offset this negative currency headwind and not lower guidance for the full year.

For 2015, our initial guidance is that local currency sales growth should be in the range of 4% to 5% and our adjusted earnings per share will be in the range of $12.80 per share to $13.05 per share, reflecting a growth rate of approximately 10% to 12%.

Let me provide you some additional details for your models. First, currency. We would expect currency to reduce sales growth in the fourth quarter by approximately 4%. For the full-year 2014, currency will have no impact on sales. For 2015, we expect currency to reduce sales by approximately 2%.

In terms of the impact of currency on earnings, we would expect currency to reduce EPS growth by 2% in this coming fourth quarter. As just mentioned, this is more negative as compared to the last time we spoke to you, principally driven by a weaker yen, a weaker Canadian dollar, and a weaker Aussie dollar.

For full-year 2014, currency is expected to reduce earnings growth by 2%. For 2015, we expect currency to reduce earnings-per-share growth by approximately 1%.

Okay, one final comment as you update your models. Our full-year 2015 guidance is in line with current consensus. However, quarterly numbers are different. We will provide specific quarterly guidance throughout the year in 2015, as we typically do, but I did want to point out that the current consensus for the fourth -- for the first quarter reflects a 22% earnings-per-share growth and second-quarter consensus is at 16% growth rate.

Both of these quarterly growth rates would be above our expectations. At this stage, we anticipate that the quarterly growth rates for 2015 will be in line with our full-year EPS guidance that we just provided.

Okay, that's it for my side, and now I would like to turn it back over to Olivier.

Thanks, Bill, and let me start with summary comments on business conditions.

Lab increased 6% in the third quarter, with good growth in pipettes, analytical instruments, automated chemistry, and process analytics. Balances had also growth in the quarter, despite strong growth in the year-earlier period.

We're executing quite well in our laboratory business, combination of strong product pipeline and Spinnaker sales and marketing initiatives. I expect results in the fourth quarter and into 2015 to continue to be solid in lab.

Industrial increased 7% in the quarter. As expected, product inspection had very good growth, up 12% in the third quarter. The outlook for this market is favorable, given the focus on brand protection in general and food safety in particular. We are well positioned in this business with strong relative market share, the most extensive product portfolio, and the largest service network in the industry. We will face tougher comparisons as we get into 2015, but expect product inspection to have good growth in the coming years.

Core industrial was up 4% in the third quarter. I am pleased to see growth in all regions of the world. We would expect low single-digit growth for our core industrial business in the fourth quarter and into 2015.

Finally, retail was flat in the quarter, but I expect some better growth for the remainder of this year and into next year as we have a couple of European orders that will benefit us.

Now let me make some additional comments by geography. As mentioned earlier, European sales growth was a little better than expected and amounted to 4% in the quarter. We had growth in most countries in western Europe, with exception of France, which was down slightly. Eastern Europe was down modestly, with Russia particular weak. We are cautious on this region, given recent negative news.

We will face more challenging comparisons in Europe overall, but I'm happy that we continued to execute very well and are capitalizing on our Spinnaker sales and marketing initiatives and strong product pipeline in this region.

Americas had another very good quarter, with sales growth of 7%. We had good growth in lab, product inspection, and core industrial. Retail was down in the quarter against strong comparisons from the prior period. Our outlook for Americas is good.

Asia/rest of the world increased 7% in the quarter. Market conditions in China continued to stabilize and the growth of 4% was slightly better than expectations. In China, we again had very good growth in our core laboratory product offering. Product inspection, retail, and core industrial also had growth in the third quarter.

In general, China remains on track with our previously described expectations. We will remain cautious, given the overcapacity in certain segments and the lack of investments in new plants and production lines. While we expect conditions to continue to improve, the growth path remains tentative.

We expect China sales to be up modestly in the fourth quarter and expect better growth in 2015, principally due to easier comparisons.

In terms of other emerging markets, India, Brazil, and southeast Asia all performed well in the third quarter and we expect continued solid performance from these regions.

One final comment on the quarter, service had good growth in the quarter, with revenue up 8% as compared to prior year. We have good growth in all geographic regions and in most product lines.

Let me update you on our field turbo program. We mentioned last quarter that we were selectively adding sales and service personnel to capture specific growth opportunities. We worked hard in recent months to identify penetration opportunities at detailed level, by product category and geography and customer segment. By benchmarking across various units, analyzing territory coverage, the size and mix of relevant end-user industry, we can identify gaps where we can invest in additional sales coverage to gain growth and share.

We cannot pursue all these opportunities at once, so we prioritize based on expected returns. The investments are not always frontline sales personnel. It can also be segment specialists, inside sales, telesales, or telemarketing resources. The additions are very specific and directed.

For example, we are adding service sales personnel in Thailand, a high-end (technical difficulty) salesperson in Germany, service technicians and inside salesperson in Turkey, telemarketing and telesales in eastern Europe, to name just a few examples. We expect to add more than 200 headcount over the next 12 to 18 months.

We also see potential for additional resource additions in the future. These resources, combined with our Spinnaker sales and marketing programs, are the foundation for our strategy to continue to incrementally gain market share.

One final topic I want to cover today is key account management. As we have discussed in the past, our business is very fragmented, with no end customer accounting for more than 1% of sales. As a result, few of our sales are subject to corporate procurement programs scrutiny.

However, we increasingly see opportunity for growth through global key accounts as multinationals seek to develop global standards for quality and automation in their operations and R&D. Relationships at these customers often involve corporate engineering, R&D, quality control, and other functions.

Let me explain this a little more. While the customer decision to purchase our instruments is almost always made at the local level, through targeted programs we have been able to exploit our global capabilities to gain share in large global companies, especially in our product inspection and lab businesses. Much of these increased efforts are derived through an increased desire by customers to globally control their product quality.

In most product categories, the quality of our solution, our global presence, and service capability provide hard-to-match value proposition for customers as compared to our competitors. Customers appreciate having one strong partner globally when they invest in programs to enforce global quality standards and service standards.

We see a growing trend towards enforcement of these global quality standards with our multinational customers and we believe we are uniquely positioned to take advantage of this trend. This is evidenced by some recent orders, but we expect to gain more in the coming years.

That concludes the topics for today. Let me summarize key messages as we look to 2015. We believe we are positioned well for continued growth. We are cautious on China and on emerging markets in general, but we believe we see improved growth in these regions. We expect Americas to continue to perform well. Europe is a bit mixed, good result in the third quarter, but more recent market data is mixed. We also face tougher comparisons in this region.

Taken altogether, we believe we can continue to gain market share by capitalizing on our sales and marketing programs, including our field turbo investments and strong product pipeline.

Our continued focus on margin-enhancement initiatives, combined with our strong cash flow generation and share repurchases, should continue to drive earnings growth next year and beyond.

I want to ask the operator now to open the line for questions.

(Operator Instructions). Brandon Couillard, Jefferies.

Olivier, just qualitatively, could you give us a sense of the trend that you saw in particularly Europe and China in the period and whether you are qualitatively feeling directionally better about your progress and, I guess, the broader macroenvironment in those two regions?

As stated, I was certainly pleased to see Europe coming in better than expected and our outlook, in that sense, stays favorable, particularly when I listen to my team.

We were, for example, on a big tour back in September where we visited the units and I was in recent contact also with the general managers. What I hear from them is actually positive and makes me actually -- or encourages me, really, for the future.

What is more difficult is the news that I pick up in the newspapers, and that's certainly a more challenging environment when you read that. But we don't see that challenge in our own number at this stage.

When it comes to China, I would say that our numbers have also slightly been above what we expected, but the environment stays challenging. I would say, of course, what we hear through the news, but also what I hear from our own managers, there are certain businesses that do really well -- for example, the core lab business, where we continue to have very good growth numbers. Similar to Q1 and Q2, we have in Q3 actually double-digit growth in core lab.

Process analytics is still challenged, but that's mainly because last year we had a favorable environment due to regulation changes. Then when I come to product inspection, they had good numbers in China and I expect them to continue to do well, but in China, we have a smaller piece of product inspection than the global average, so it has a little bit less impact.

When it comes to core industrial, which is actually a big part of our Chinese business, we had some growth and I expect, actually, that business to do okay going forward. But it is a business that is exposed to infrastructure investments, government spending, and certainly I do expect that this will continue to be challenging because there is still overcapacity in China and there are industry segments that are still suffering because of that.

All in all, I would say Q3 clearly showed that things gradually get better, but we remain cautious when it comes to China and Europe.

Thanks, and then, Bill, in terms of the guidance next year, what are you factoring for share repurchases? Should we expect it to be north of 100% of free cash flow next year?

And then, what are you baking in for local currency incremental margins? Will the field headcount expansions put you to the lower end of what you would otherwise normally expect?

Okay, so on the share repurchases, we're probably going to do something in the range of $75 million to $100 million more than our free cash flow. I go back to what we talked about -- I think it's now two quarters ago where we want to pick up on the share repurchase program, given our balance-sheet position. We just think we could do with a little bit more leverage in our capital structure.

With regard to incremental margins, they should, on a currency-adjusted basis, remain in the low to mid-30s, and maybe one thing. I think one of the things we feel good about with regard to the field turbo program is that it was very much a story of resource allocations. We have a number of cost-savings initiatives, productivity initiatives inside the organization that just allowed us to be able to save in other areas of the business and be able to field these additional resources in what I would describe as a normal operating expense budget, as compared to our 4% to 5% topline target that we described to you.

Super, thanks.

Richard Eastman, Robert W. Baird.

Could you, Olivier, maybe just expand a little bit on Europe? That was the upside to plan in the quarter. Which of the product lines in particular surprised?

It was pretty much across all the product lines that we did well and that we exceeded expectations. I really feel it's the teams that execute very well on the Spinnaker approaches that we talked about. We had also the benefit of, for example, leads growth programs that continue to yield very well.

At the end of the day, I do feel like we are winning nicely share in Europe in this environment, and this is pretty much true across all the business lines.

Okay. And in China, Bill, you referenced two large projects in the comp period, Q3 of 2013. Was that in industrial?

Just to clarify, we had two large industrial projects. The 4% included us having delivered on two larger industrial projects within Q3 of this year.

Okay.

One was a large -- they are both infrastructure related. One was a grain project, grain depot project, and the other was -- some kind of a highway project, I think.

I understand, okay. Would it have been 1 point or 2 of the growth?

It would have been, I think, between 2% and 3% of the growth in China, maybe 2%.

Okay, okay. Olivier, the field turbo program, is it targeted at -- you said basically there's a lot of opportunities there. So basically, you're allocating to the highest return, but is that focused on lab or industrial or product inspection? Is there a piece of the business that we can zero in on and look for maybe 1 point of contribution to the growth rate next year to just see the results?

The last business gets most of all the businesses, but we do actually also field [to] both for industrial, and within industrial, for example, for core industrial, as well as for product inspection.

It is so that we give most to the businesses with the highest profitability, but of course, there are also some geographies where we are underrepresented or are building up. I would, for example, name here Turkey. In Turkey, we're building up our presence in industrial business. As for the lab business, we have already done that in the past, or we are building up also resources in Indonesia and Philippines. And so, when we do such dedicated efforts for a full country, typically we do it across business lines.

But when it's in more mature markets, then it really goes to the business lines with the highest profitability.

Okay, I see. Just -- maybe just as an offshoot of that and then I will jump off here, but when you think about new product spend, new product introductions, and you are looking out into 2015, could you take a guess at perhaps what the 4% to 5% might include from new products? I guess possibly it's less about volume growth and more about price pickup from the new products.

Yes, the new products are really important to us because they are driving the replacement cycle. We need to make sure that we have new value proposition so that our customers are -- have good reasons to upgrade their products, replace their products.

Of course, it is also important to differentiate ourselves versus competition. That's a key reason why we continuously launch and upgrade our product lines, and we have an excellent pipeline for next year.

But I don't want to overstate and suggest that these new product launches will accelerate our growth. It is really more like I just described it.

The pricing power that we have is not particularly coming from new product launches. The pricing power that we have is the total solution. It is our application specialists that we have. It is the product, but it is also the service capabilities.

And when you look at our price increases that we do, it is pretty much across all the business lines. Of course, we differentiate. There are business lines where we have more pricing power than others, but it is not so much related to new product.

Now, of course, when we launch new product, we want to make sure that we have better differentiated value proposition, and often we want also to make sure that we have lower cost. And so, new products help us to expand margins.

Is there a price component in that 4% to 5%? Does it trend at maybe the current 2%?

Say it again. I don't --

Is there a price component in the 4% to 5% growth for 2015? Does it trend-line out at, say, 2% or (multiple speakers)

Yes, I think we think it could be 150 basis points, hopefully more.

Which is --

Approaching 2%, somewhere in that range.

Which is about what we have this year, so next year, not a big change.

Maybe one additional comment. When you asked before if there is particular product lines also that are more impacted than others from these product launches, if I -- there are two business lines that got a lot of new products launched recently or will have in the next two quarters. One is our lab balance business, where we have the high end, as well as an entry line that will have new products and very, very good products, and the other one is product inspection.

In product inspection, we have across all the business units actually new products. This is true for truck weighing. This is true for metal detection, and late last year, we launched also new platforms for x-ray. So we're going to have a very up-to-date product line in this business.

For others -- for example, core industrial, it's more coming in the next few quarters where we have promising products and, in that sense, differentiation in the market.

Understand, great. Thank you very much.

Isaac Ro, Goldman Sachs.

I know you gave some commentary on China in the prepared remarks and thus far in Q&A, but was hoping to maybe get a little more granularity on why exactly the region did better this quarter than your expectations. Reason for asking is if we look towards next year, I think your prior-quarter commentary had suggested you were anticipating a better year in 2015 and, as a result, planning to invest there. So I just want to confirm that that is all the case and maybe get a sense of what you saw on the ground this quarter.

Maybe a couple of comments. So if we divide the business up into the different components, if we continue to have a very good year in our pure laboratory instruments -- so as you guys know with the laboratory instrument category, we have our traditional benchtop stuff, as well as our process analytics business. Our benchtop type instrumentations have grown by -- in double digits in this quarter, and on a year-to-date basis, we continue to think that should do well.

We are very well positioned competitively there and make great strides in terms of distribution. And we don't run into maybe some of the same hurdles that some of the peer group companies have because maybe -- in part, I am sure, because our ASPs are a little bit below theirs.

The process analytics business faces some tough comps the last few quarters because of some regulatory benefits that they had last year that have now expired, and we would expect that business to grow better next year.

If we look at our core industrial, that -- where Olivier made some mentions of infrastructure concerns in certain segments with regard to overcapacity, but if we looked, the percentage of our business related to those markets does get smaller and we see good growth in certain segments, like food related, for example, there and we would expect to have marginally better business in that sector.

Then our product inspection business does quite good in China.

So I think this year, we are going to end up finishing the year on an apples-to-apples basis with low single-digit growth in China, and we would be surprised if it wasn't somewhere in the mid-single digits to high single-digit growth rates for next year.

That's very helpful. Thanks, Bill. One follow-up would be on the service business. You obviously had a nice year there as well so far and just trying to get a sense of how we should think about the service contribution to growth in 2015 versus 2014. Thank you.

You are right. We did have good growth. I think it was 8% in the third quarter, and on a year-to-date basis, a little less than that.

We have been investing a lot in our -- in globalizing our service business in recent years and in productizing it, that we can market it and sell it better at the point of sale and throughout the product's lifecycle. And I think we are really in many ways just scratching the surface in terms of the benefits of those programs, so we think we have a lot of years to run in that regard.

And we have a lot of what I would describe operational excellence momentum within that business. I don't mean it just from a margin enhancement point of view, but the way we sell and market the products as well. So I would again expect that the service business will grow faster than the product business in 2015.

Great, thanks very much.

[James Clark], Evercore ISI.

This is James filling in for Ross Muken. Guys, I was just wondering if you could give a sense for pricing during the quarter. And then, I think you had talked about coming into the year about 150 basis points and it looks like you did 200 and 240 in the first and second quarter. Maybe you can give a sense if pricing is generally coming in better than you had expected and how that is impacting gross margins.

Just to clarify, the reference to 150 to 200 basis points was with regard to what our assumption is for 2015.

With regard to Q3 this year, we realized about 240 basis points of price increases and that puts us slightly north of 200 basis points on a year-to-date basis. There was a couple of areas in the product groups where we tried to push a little bit or push a little bit more price, but not via list price increases, but rather via reduced discounting in a couple product categories midyear where we felt that things were going well. And so that's -- we continue to think the fourth quarter will also be a good quarter pricing-wise.

Okay, and then one more on China, if you could just call out how orders were during the quarter. I know you talked about some orders converting to revs and how that contributed to the 4% growth, but maybe you could talk about how orders tracked relative to revenue growth. Thanks.

Back to the delivery of those two large products. I'm embarrassed. I keep forgetting the second one. One is grain related and whatever the second project is. Those two were order entry in earlier periods and sales in this period. So order entry growth was slightly less than sales growth in Q3, and we would expect sales growth in Q4 to be in line with the order entry growth that we saw in Q3.

Okay, thanks very much.

Low single digits.

Tycho Peterson, JPMorgan.

This is actually Patrick Donnelly filling in for Tycho. Just looking at guidance for 2015, can you talk through geographies a little, particular Europe? You were strong this quarter, but had some cautious commentary based on the data and headlines that are out there, so maybe just talk through your expectations there for 2015.

Okay. So we would expect Europe to grow a little bit less in 2015 than in 2014, at least that's our assumption at this stage. We are assuming low single-digit, 2% to 4%, growth coming out of Europe within that guidance.

There is one or the other large job that we have in the comps, and in general, we built a little bit of caution in, given the economic environment.

Okay, and then just on gross margin. Obviously, you called out price's impact this quarter. Can you also maybe just break out the raw materials and then how much of headwind was FX, and then do the same thing for 2015? You talked about 150 bps tailwind from pricing in 2015. Maybe just talk about what kind of headwind FX will be and also the tailwind from raw materials.

Okay, so with regard to material costs, material costs were down, let's call it, 150 bps in the quarter and for the full year. We are happy with that number. I don't think we can do something like that again next year, but we should have raw material costs flat to down, let's call it, 1%, somewhere in that range, for 2015.

So that would give you those components for 2014 and 2015.

With regard to foreign exchange on the operating profit level, which is maybe, I think, the easiest way to communicate about it, if you take the rates as of beginning of this week, so including that yen move at the end of last week, we would have had a headwind of $10 million on our P&L in 2014 for the full year and we would expect a $4 million headwind in 2015, again all based on current rates.

So the main drivers there is the yen, the Aussie dollar, and the Canadian, and I feel like I've hardly ever said this on a conference call, but I think we even get a modest benefit from the Swiss franc, so thank you, Switzerland. Thank you, Olivier. Yes, I think I answered your questions, Patrick.

You did, yes, thanks, Bill.

Derik de Bruin, Bank of America Merrill Lynch.

Thank you for the question. It's Rafael in for Derik. Actually, just a couple more clarification questions on the guidance. For the 2015 outlook, I think you just mentioned that Europe, you are anticipating about a 2% to 4% growth. Apologies if I missed it, but what are you anticipating for Americas and Asia-Pac?

Probably in Americas, we will do a little bit better than that, I think mid-single digits. Then Asia-Pac should be mid-single to high single digits.

Okay, and the same goes for the product segments? Just trying to get a better sense of what you are anticipating for Q4 and 2015?

Okay, so just to be clear, the comments I made on geographies were 2015 comments.

Right.

If I make the same comments in terms of the business categories, the lab business should grow mid-single digit, with the PI business growing better than that, high single digits, and probably the core industrial business slightly under that mid -- let's call it that 3%, 4% range. That should get the industrial business also up to the mid single-digit level.

And then, food retailing is probably going to -- at this point, a large job could make a difference, but we're assuming low single-digit growth for that business next year. But as Olivier and myself have said on many occasions, we are not trying to trigger growth in that business. If it happens, it happens, and the key is that they continue to enhance their margins and minimize their invested capital, and they did an excellent job on that this past quarter and we're expecting continued progress again next year.

Okay, and a few other on gross margin. Just wondering -- so we talked about some of the headwinds and tailwinds, but just wondering what other levers the Company has to offset the volatility in currencies.

We have a lot of ongoing margin enhancement and cost-savings initiatives. I make a couple of specific comments here. We should get more progress again on pricing, and material cost I commented on. We expect them to be flat to down next year.

I think one of the most interesting areas of productivity is if you look at the operating expenses we're assuming in the sales growth targets we have provided, it is really quite efficient if you take into account the 200 people being added via the field turbo program that Olivier has mentioned earlier.

Both of us have been here a long time and we have never added so many people in the front end, particularly in the western part of the business, and to be able to do that within the confines of the sales budget we described show you that there is a lot of cost productivity being gained in other parts of the business that allow us to fund that efficiently, fund that type of growth opportunity efficiently.

One other comment to reiterate that, maybe elaborate on something Olivier said during his prepared remarks, is that in the first year of a salesman, that is probably their least productive year. The people that we're adding as part of this program are going to help us down the road as well and naturally become more productive themselves. So that's one of the reasons you maybe sense the excitement we have with what we started here.

Got it, and just one final one on western Europe. You cited good growth there, with France being the exception. Can you just expand on what's going on there and whether you are anticipating a rebound?

Okay. In terms of France, they had a relatively weaker third quarter, but I would highlight it was against a plus 7 in the prior year, so I wouldn't overdo it there.

Our general view is that right now, the economic condition is maybe uncertain, but if you look at it, it's -- as compared to maybe 2009 or 2012 where you had real buttoning down the hatches in Europe, we just need our customers in Europe to continue on their normal replacement cycles. That's generally the read we have.

If they do that, we're going to get our own share of the business, we are going to get some pricing, and we're likely to get a little bit of our competitors' share as well, and that should position us well in Europe. We feel that's maybe one part of the world -- probably the part of the world that we are best executing on our Spinnaker initiatives and feel really great about their ability to take what the market gives and probably a little more.

Specifically also on France, if I look at year-to-date numbers, it's more reasonable. And in France, we have a situation where the retail business suffers because the retailers in France overall are under quite some pressure, and we see it. But the core business for us actually does quite reasonably in France. This is actually just proving again that the execution of the team on all the Spinnaker programs is going actually really well.

Just one final one. With the 4% to 5% outlook for 2015, I'm just trying to get a better sense of what you think the underlying markets are growing, just getting a better sense of how much the components of market-share gains are contributing to the Company's growth? Thank you.

That's always a tough number for us to quantify, but within the 4% to 5%, we think that every year we are gaining some amount of basis points, whether it's 25 basis points up to 100 basis points of market-share gain. Then the rest, I guess, would be, in your words, the growth in the market.

Okay, great. I will jump back in the queue.

Reggie Miller, Citi.

Thanks for taking my question. Just one question for me. Maybe Bill, could you update us on where you see the plan to optimize the capital structure, where you are, what inning, I guess, at this point, and maybe the steps that we can expect to see from you guys heading -- I guess, going forward?

So I think maybe the first comment would be is that we have always felt that there was a lot of cash flow generation in the business and that it was stable, stable cash flow, highly predictable cash flow.

We feel that underlying our model and the almost promise to shareholders is that we can continue the share repurchase program and invest our full free cash flow back and return that back to them.

Recently, we have updated that model to say that we have room to have some extra leverage in the business, even if we -- even beyond what we would need to continue to do bolt-on acquisitions here and there. In the course of 2014, we are going to have extra repurchases in the $50 million to $75 million range.

I mentioned earlier on the call that we will probably do $75 million to $100 million next year, and sitting here today, it's tough to predict, but I think we have to -- it's one of these things we look at regularly, we review with our Board of Directors regularly, but I think we certainly would have room, absent a more sizable acquisition, to continue to do that for some period going forward.

We would tend to think that we would be very comfortable with a net debt to EBITDA ratio of 1 times. That compares to today -- or north of 1 times, sorry. Today, it's about 0.7.

Okay, great, and maybe your thoughts on adding leverage in the near term.

I guess the leverage we would add would just be these incremental repurchases.

Okay. Great, thanks so much.

(Operator Instructions). Paul Knight, Janney Montgomery.

Hi, Olivier, could you talk about the service business? You brought that up a little more, I think, than usual on this earnings call. Is service giving you a little more pricing leverage, customer retention, and higher growth than perhaps where you were in past years?

Service is going up in our total mix. Today, we have service and consumables together with about 30% of our total revenue. Service has above group average profitability, so it is certainly, from a financial standpoint, very attractive for us.

Then there is these additional strategic benefits that you alluded to, which is we get excellent customer access. It is a great tool for us to understand when customers are thinking about new projects or thinking about replacing and upgrading their instruments. So it is a driver also for our product sales.

In that sense, we very much like to expand our penetration for -- with service of our installed base and selectively actually also of competitive installed base.

However, to grow service really needs many different efforts. It is not just adding service technicians. It is really understanding the installed base, developing additional value proposition for our customers on service, and then going after these opportunities through different channels. Point of sales, we need to sell service contracts, but we need also to activate telesales to go back to the installed base that is not yet under contract, and we have also quite a few dedicated sales service specialists that go visit big accounts to sell bigger service contracts.

I feel really good about all these programs that we have around the world, and the results over the last few years actually confirm that we are on the right track.

In parallel, what we're also doing is harmonizing our service offering across the world. In the past, every country have their own service product, their own service pricing, and their own value propositions. We are more and more harmonizing that, also in the context of our Blue Ocean program and the many other benefits that it has to do so. So it is also a pre-investment for the future that we are in the middle in.

Also, I would just conclude, on 2015 guidance, could you -- did you mention what growth rates would be, and added to that, service would be above that level? Is that correct?

Yes, we expect service to grow above the group average in that, and it's also above the products growth rates. Yes.

Thank you.

There are no further questions at this time. I turn the call back over to management.

Thanks, Kyle, and thanks, everyone, for joining us tonight. As always, if you have any questions, please don't hesitate to give us a call. Take care. Good night.

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