Mettler-Toledo International Inc (MTD) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our first-quarter 2015 Mettler-Toledo International earnings conference call. My name is Leanna, and I will be your audio coordinator for today.

(Operator Instructions)

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

Thanks, Leanna, and good evening, everyone. I am Mary Finnegan. I'm the Treasurer and responsible for Investor Relations at Mettler-Toledo. I'm happy to have you join the call today. I'm joined here by Olivier Filliol, our CEO, and Bill Donnelly, our Executive Vice President.

I need to cover just a couple administrative matters. First, the call is being webcast and is available for replay on our website. A copy of the press release and the presentation that we will refer to is also available on the 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 our recent Form 8-K. All of the forward-looking statements are qualified in their entirety by references to the factors discussed under factors affecting our future operating results in the business and management discussion and analysis of financial condition and results of operation 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 and the most correctly comparable GAAP measure is provided in the 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 have some additional comments before we open the line for Q&A.

The highlights for the quarter are on Page 2 of the presentation. We had local currency sales growth of 5% in the quarter with strong results in the Americas. We also performed well in Europe and are very pleased with the growth in this region, particularly given the strong comparisons from the previous year.

Our industrial business in China has proven more challenging than expected, but our lab and retail business in China did quite well, as did most of the other regions in Asia and rest of world. With the continued benefit of our margin enhancement and cost control initiatives, we again generated good growth in EPS of 13% in the quarter, and this despite currency headwinds. While economic uncertainty exists and currency will continue to be a headwind for us, we feel good about our growth prospects for 2015 and beyond.

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

Okay. Thanks, Olivier, and hello, everybody. Sales were $535.7 million in the quarter, an increase of 5% local currency. On a US dollar basis, sales decreased by 3% as currency reduced sales by about 8% in the quarter.

Turning to Page 3 of the presentation, we outline sales by geography. In the quarter, local currency sales increased by 7% in the Americas, 2% in Europe, and 5% in Asia rest of world as compared to the prior year. Two areas that under performed in the quarter were our industrial business in China and our Russian business overall.

In China, our laboratory business did very well in the quarter but our industrial business was weaker than expected with the decline of approximately 22%. As result, local currency sales growth in China declined by 7% in the quarter. Russia was down by 40% in the quarter which impacted our growth rate in Europe. Looking at Europe excluding Russia, we had a growth of about 4.5% in the quarter.

Turning to Slide number 4, we outlined sales growth by product area for the quarter. Laboratory was strong with an 8% increase in local currency sales, industrial increased by 1%, and food retailing increased by 5% in the quarter.

Turning now to Slide number 5, let me walk you through the key P&L items in the quarter. Gross margins were 55.8%, a 270 basis point increase over the prior-year margin of 53.1%. We are very pleased with this increase. Currency contributed approximately 100 basis points of the increase, including the benefit of the gain on the Swiss franc euro hedges that we discussed earlier this year. Pricing, volume, material cost reduction and mix all contributed positively to the margin improvement. These improvements were offset by investments in our field service organization.

R&D was $28.5 million and that was a 2% increase in local currency. SG&A amounted to $173 million, which is an increase of 8% in local currency. Increased investments in our field sales organization, as well as higher variable compensation and employee benefit costs, were the primary contributors to the increase. Adjusted operating income amounted to $97.3 million in the quarter, and that's a 7% increase over the prior-year of $91 million.

We estimate that currency reduced operating income by $3.5 million and that was a 4% headwind to our operating profit growth. Our operating margins were 18.2%; that's a 170 basis-point increase over the prior year. Margins benefited by 70 points due to currency -- 70 basis points, I'm sorry, as the percentage impact of currency and the sales line was larger than impact on operating profit. We are very pleased with the underlying margin improvement of more than 100 basis points on an apples to apples basis.

A couple of final comments on the P&L. Amortization was $7.5 million in the quarter, while interest expense was $6.7 million. Other income was $817,000, and that includes currency gains. Our effective tax rate continues to be 24%.

Fully diluted shares for the quarter were $28.8 million, which is a 4.4% decline from the prior year reflecting the impact of our share repurchase program. Adjusted earnings per share was $2.25, an increase of 13% over the prior-year amount of $2 even.

Currency reduced earnings-per-share growth by approximately 4.5%, on track with what we outlined to you last quarter. On a reported basis, earnings-per-share was $2.19 per share as compared to $1.93 in the prior year. Reported EPS includes restructuring charges of $0.02 per share and $0.04 of purchased intangible amortization.

Now turning to cash flow, free cash flow in the quarter amounted to $41.3 million, a 27% increase on a per-share basis as compared to the prior year. We continue to benefit from good working capital management. In particular, DSO improved 3 days to 45 days as compared to the prior year. We are pleased with this level of DSO and our ITO also, which remained at 5.0. Let me now turn to guidance.

Forecasting continues to be challenging as we have several factors to take under consideration. First, we're very pleased with our continued strong performance in both the Americas and Europe. We believe we are operating well in both of those regions and are continuing to gain share. Second, we are well on track with our field Turbo program that we discussed with you last quarter. As a reminder, this is a program which will meaningfully increase our field resources during 2015.

Offsetting these positives, however, is caution regarding certain emerging market countries, but especially our Chinese industrial business. Demand in our industrial business in China declined 22%, as I mentioned, this quarter. Weakness was seen in most end market categories -- end product categories, I'm sorry. We were disappointed in the results and now believe industrial sales in China will be lower in 2015 than we discussed with you last quarter.

The factors facing this business, which we have been talking to you about, namely overcapacity in certain sectors, reduced level of government projects and foreign direct investment, and a week export market are taking longer to resolve than we had originally anticipated. It is clear that demand pulled back meaningfully to begin this year. We now believe China will be down for the full year with good growth in lab offset by industrial declines. We would expect some improvement in the second half, but it will not be enough to turn around our slow start to the year.

Let me elaborate on two items in particular. One, this decline came relatively quickly and was broad-based. There was clearly a pullback in CapEx for our type of products in recent months. Q2 will not be better, and we expect the clients in our Chinese industrial business to continue into the second half of the year. The second point we want to make is that we see no evidence that the competitive dynamics have changed. We have studied international and Chinese competitors and see no signs of different performance.

On the one hand we take some comfort in this, but we are also disappointed in our Chinese results and are seeking to return to our above market growth (inaudible). Olivier will have some additional comments on China in a second.

With that backdrop, let me cover some of the specifics. Principally due to the weaker-than-expected results in our industrial business in China, as well as our Russian operations, we now expect local currency sales growth for the full-year will be at the lower end of our previously provided sales guidance of 4% to 5%.

At the same time we are raising the bottom end of our range by $0.05 and now expect adjusted EPS to be in the range of $12.75 to $12.90, which is a growth of between 9% and 10%. Adjusting for currency it represents the growth of 13% to 14%. We are incorporating our Q1 beat into our updated guidance, but this is offset to some degree by the reduction in the midpoint of our sales guidance.

Now turning to the second quarter, we would expect local currency sales growth to be approximately 4%. We expect adjusted EPS to be in the range of between $2.75 and $2.80, a growth rate of 7% to 9%. Currency will reduce EPS growth by approximately 3.5% in this quarter.

One additional comment in currency for your models. We expect currency to reduce sales growth for the full year by approximately 7%, and for the second quarter we would expect currency to reduce sales growth by approximately 9%.

Okay. That's it for my side and I want to turn it back to Olivier.

Thanks, Bill.

Let me start with summary comments on business conditions. Lab did very well in the quarter with local currency sales growth of 8%, which was on the top of good growth in prior year. Analytical instruments, pipettes, and process analytics did particularly well, but we had growth in all product lines.

In terms of regions, Americas and Asia/rest of world did very well and we had growth in Europe, too. We continue to benefit from our sales and marketing program and strong product pipeline. Our industrial business was up 1% in the quarter, with product inspection up mid-single digits and core industrial down low single digits. We had particular strong growth in industrial in the Americas. Retail came in a little better than expected with growth in the mid-single digits.

Now let me make some additional comments by geography. Americas continues to perform very well. We had very strong growth in lab and industrial. Growth reflects the strong economy in the United States, as well as good performance by our team. As mentioned earlier, we are very pleased with our growth in Europe, particularly given the strong comparisons from a year ago and headwinds due to the downturn in Russia.

We have good growth in most regions in Western Europe. Eastern Europe was down, driven by Russia. We expect Russia to continue to be a drag on sales growth in the near term.

With respect to China, I'm very pleased with our lab business, which was up double digits. We are well positioned in this business and market demand appears robust. You heard from Bill, the weakness we are currently seeing in our industrial and the outlook for China for the remainder of this year.

I think it's worth mentioning that we continue to feel very good about China overall, and our Chinese industrial business specifically, in the medium to long term. We are competing well and maintain solid marks position in this region.

Furthermore, the long-term dynamics remain very favorable. Specifically, growth in GDP and GDP per capita will lead to more consumption of packaged foods, pharmaceuticals, and cosmetics, as well as greater attention to consumer safety. Furthermore, the government's determination to transform the economy and focus on quality of growth is driving more commitment to science and continues to increase in the number of scientists graduating.

Finally, we expect overall quality related regulations continue to increase. All these factors are positive for our China business, particularly our lab business, but our industrial business as well. We expect China to be a source of above-average growth in the future.

We have talked a lot about China, but let me also comment on the rest of Asia. We had very strong performance in India, Southeast Asia, Korea, and Australia, and that strong performance will continue. Our Asian franchise and Asian teams are strong and we see the good long-term opportunities.

One final comment on the quarter. We are pleased with growth in service and consumables, which grew 6% for the quarter. I mentioned last quarter that our product pipeline is more robust than ever. I have a couple of additional examples to share with you this quarter. Last month we launched our new generation of mid range balance portfolio. These instruments are used daily in research labs, quality control, and manufacturing for a wide variety of daily applications and tasks.

The new generation of balances focuses on simplifying daily weighing tasks to build in applications and a weighing guide to improve productivity. Our proprietary weighing cell and expanded warning features helps ensure accurate results, and is also fully traceable.

The instrument is intuitive to operate and has a unique user-friendly touch screen, which is almost twice the size of anything in the markets today. We expect good traction in the market with this introduction.

We also have an important launch recently on the industrial side, our new multi functional terminal. This new generation of mid range terminals has a larger higher resolution display with enhanced user interface. It helps improve productivity through a more powerful workflow, improved connectivity, and enhanced data management. Unique in the industry it also has the capability for remote server support via a secured collection in compliance with [Eisel] standards. Particularly in the manufacturing of high-value items such as active pharmaceutical ingredients, the avoidance of downtime and proactive notification of potential weighing system inaccuracy is critical.

[Monitoring] sensors and our remote capability allows managers to be notified when something in the weighing process needs attention, or they can establish alert for certain events such as expired calibration, or if the scale weight is over capacity. All these actions help to reduce expensive downtime risk or inaccurate weighing performance. These are just two examples, but I thought worthwhile, highlighting as we present core products for both lab and industrial, but also demonstrate our ability to continue to innovate in these product areas.

Let me make some concluding comments and then open it up for your questions. We are cautious on the global economy, particularly the timing of the recovery in our Chinese core industrial business. Despite some weakness here, we remain confident about our full-year sales growth targets, and we believe we are well-positioned to continue to gain market share by capitalizing on our (inaudible) investments, our ongoing sales and marketing programs, and strong product pipeline. We also continue to focus on margin enhancement initiatives, which continues to drive good earnings growth.

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

(Operator Instructions)

Steve Beuchaw of Morgan Stanley.

Hi, good afternoon. Thanks for taking the questions and bringing the new guy on the call.

First, I might actually start with let's say are brighter side of the China market, China lab. I wonder if you think about the balance of industrial and lab in China?

So, number one, is the lab business actually accelerating and, number two, Bill, maybe you could reiterate your perspective on 2016? I know you commented before that you're more optimistic about China industrial, but if China industrial is down this year, how do we think about China industrial's relative contribution in 2016 versus 2015, just thinking about the scale of those businesses. And then I have a follow-up?

Let me take maybe the first part of the question. The first thing that I want to say.

We for many years said our Chinese business is skewed toward industrial versus our global average. And what we're seeing now for a while is that the lab business is doing better than industrial and accordingly the mix starts also to shift gradually to lab and we have seen now good lab momentum for quite a while.

I wouldn't say that we see an acceleration in lab growth. I would say we are continuously happy with what we are seeing. I think last year we had kind of similar results and I do expect that this goes on in that way. I am happy when I see kind of high single digit, low double-digit growth for lab. I think that's a very healthy number and if it continues that way, we are happy.

So maybe a couple of more granular comments on the China industrial and then that will feed to your comments maybe about 2016. So, when we look at the numbers in our Chinese industrial business it was interesting for us that it was pretty consistent across pretty much every customer segment, pretty much all the industrial product categories. And as well, it was smaller sized orders as well as larger orders.

So one of the take-aways from us on that last point is that there appears to be a pullback not just in new projects but in what you would call typical replacement cycle stuff in China as well as to a certain extent when people are adding individual instruments, maybe it's a new instrument but it's sent to an existing lab. And I think we have seen in the past in Europe in North America what happens when people are kind of delaying their replacement cycles we do usually get that back up.

So that in theory should make us feel pretty good about in improving environment next year, but that being said, I think we would knowledge both Olivier and I were surprised with how this year started. I think we were all a little bit thinking how to look at their business with the change in how the new year fell -- Chinese new year fell. But then it became pretty clear when we saw how March was going to play out that things had changed in the industrial market, so we are feeling that competitively things are in good shape.

We should continue to be able to gain share there and the market will improve in part because the replacement cycle will come back a little bit and will have easier comps. But after having a quarter like that it's tough to make great statements about 2016 at this stage, Steve.

That's incredibly helpful granularity, I appreciate that. Just one housekeeping followup for me on the buyback. Is the parameter for the year still 450, 475?

Yes.

Great. I appreciate it. You guys have a great evening.

You to.

Tycho Pearson with JPMorgan.

Thanks for taking the question. Can you quantify how much you're now expecting China to be down? I don't know if we heard that. I heard you say down. Are you thinking mid single digits or more?

Yes, so it looks like it will be down in Q2 similar to what it was down in Q1. If I look at second half of the year it is probably got to be a few points better, but still down, Tycho.

Okay. And any thoughts on whether you use this as a means to kind of pull forward some cost actions? Just trying to figure how you're thinking about managing the operating margin?

As you guys saw in the current number, I think if we look globally at our cost management programs and margin enhancement programs, they're really going well. The EPS growth there was, if you pull out the impact of currencies, was north of 15%, I think 17.5%, something like that. So we feel like we have a cost structure that makes sense.

If we look at our Chinese business and our Asian business overall, we see no reason to really do pullbacks. What we do do in China will continue to do this resource reallocation that we've been talking to you guys about the last couple years where we're moving into segments that we think -- we're moving resources into segments that we think will grow for the long term, the lab business, the product inspection business, the process analytics business as well as thinking about customer segments.

And so maybe we'll have a change in the mix of resources in China, but we're committed to China. We like China for the long-term, so we don't expect any overall changes in that.

Tycho, we have taken cost measures last year in China and have been proactive in terms of the portfolio and in that sense I feel like we have the right franchise. And the second point I would add is the Chinese business remains highly profitable for us. So it doesn't demand the same way of cross measures as we might have in other situations when we have such sharp declines.

And then, Bill, can you quantify the pricing, volume, and cost reduction contributions on margins? And are you at the point now where Blue Ocean is really starting to give you better pricing traction here in the US?

Pricing was up, I believe, 190 basis points and contributed about 90 bps to the gross profit margin increase. Our material costs were down about 140 bps and that contributed a little more than 30 bps to the cost of sales.

In terms of the reasons for that, certainly Blue Ocean is an enabler, but I would say that broadly speaking the program that we put around it. Blue Ocean is a tool that gives us certain opportunities and then we have within the organization pricing specialists, the front-end people working towards that on the pricing side. And similarly in our manufacturing operations we have global procurement teams working with the unit procurement guys and they have some new tools with Blue Ocean to do better in category management and other ways.

So, I do expect that we'll continue to have good price realization and continue to take down material costs, broadly say similar kind of levels for the coming quarters.

Okay. And then just one last one. Olivier, can you comment on the upper (inaudible) service attachment where you are, increasing the attachment rate for service?

This is something that has been ongoing for a while and it's a journey. So, it will take us many years to really get to the levels that we are fully satisfied.

We are doing multiple things, so we have efforts to really make it much easier for the sales people to automatically attach the service offering to any product that we are doing. We are helping them with new tools that we have. We help them with the new service offerings.

We have been upgrading the marketing materials across all the different channels. With that I mean also on our website, printed materials, and all these things.

Then we are working on training for the salespeople and we are working on the incentives around that. And we are making progress across the world on the topic, but there are still very big differences by country in terms of this is a journey in terms of change management but also kind of developing it in a country. Feel positive about progress but there's still quite a ways to go before we have to fully utilized or capitalized on the opportunity.

Understood. Okay, thank you very much.

Derik De Bruin of Bank of America.

Hi, good afternoon.

Hey, Derik.

Bill, superb gross margin improved strong in the quarter. I realize some of that was currency based, but how should we think about progression for the rest of year?

It's going to continue to do well. Let me give you some -- for the full year will be up let's call it somewhere approaching 200 bps, okay?

And we did a little bit more in this first quarter, but that has a little bit to do with the impact of like the hedges are kind of a static number, the impact of the hedges. And as the sales numbers this is our lowest quarter in terms of sales. The impact of the hedges is it as large. But I think we feel good about what we're doing.

We actually, Olivier and I reviewed a presentation with some of our front-end leaders earlier this week on the whole topic of pricing, looking at some of the new tools that we're developing from an analytical perspective but is well as tools for the front end. And we continue to come up with good ideas and reasons to think that pricing will continue to be a sustainable advantage for us and good value driver for the Company.

I guess as we think about when the hedges, when they sort of roll off, is there any impact in 2016?

There's a smaller impact on 2016. If I were to look at from an EPS perspective, think about we have a $0.01 -- 1% headwind to EPS, not $0.01, a 1% headwind for the piece of the hedge that rolls off in 2016 and then an additional 2% for the piece in 2017.

Great. How big is Russia for you?

A couple of percentage points, Mary? Maybe that includes Ukraine and Belarus or something.

Great. Also staying with Europe and some of the other emerging markets -- you had really good results. Have you have seen anything to suggest that people are delaying purchases because they don't have enough purchasing power with this currency to come in?

I apologize, Derik. We heard most of the question but there was a noise.

Basically, when you look at the currency changes going on, like have people not bought things or bought less because they don't have enough purchasing power? Have you seen anybody slowing purchases because of the currencies?

Actually, not really because we price in local currency and the majority of the world this is not a topic. It can be a topic in countries where we have pricing that is also linked to US dollar or euro and that would be for example the case in Brazil or this would be the case in Russia. Of course we saw two countries that we have significant drop and I would make a link to the currency in that sense, but for the majority of all the markets around the world, that wouldn't apply.

Great. Very helpful. Thank you very much.

Maybe to add to Olivier's comments probably to Brazil and Russia we would both say the impact of energy prices has probably been as big on purchasing behavior as the impact of the currencies themselves.

Got it, thank you.

Brandon Couillard of Jefferies.

To follow up on Tycho's question there, just to be clear. Have your plans changed around the field turbo program and sort of your hiring expectations for the back half of the year at all?

Actually, we are working already on additional plans, but of course we will see a little bit how things will play out in the coming weeks and months. But I'm actually optimistic that we are going to implement as we were actually planning. We have really great ideas. The teams have further expanded their analysis to identify new opportunities and I have multiple projects that were already submitted and I'm excited in that context.

Maybe also want to say that the ones that we initiated late last year are progressing very well. The big majority have been recruited and are on boarded and now in training mode. I'm actually optimistic that we are going to see a good impact from it and in that sense if things don't change, we would go in another way.

Super. And then, Bill, in terms of the outlook for the year, could you tell us what you baked in for service per versus product growth?

China is disproportionate and Russia are both disproportionately low on service. So our service growth is basically the same assumption that we started the year with which is kind of a mid single-digit kind of number and we would expect no reason to change that number.

Super, thank you.

Isaac Ro with Goldman Sachs.

Hi, good morning guys -- or good afternoon, guys. A question on China.

Can you talk a little bit about what you thought (technical difficulty) over the course of the quarter? Was there any real strength difference between (technical difficulty) and more inland China?

Maybe I think you were just asking about geographic differentiation?

Yes, within China.

We did see some improved growth in the -- there was better growth maybe in the Western part of the country, but still proportionately that's a smaller piece compared to the traditional, the manufacturing markets of China, Shanghai for example. We opened up our Chengdu plant this quarter. That certainly is a nice addition but still proportionally the west is relatively small compared to those traditional areas, but there was better growth to your question.

Great. And then maybe haven't spent as much time on the call here, but Japan just curious how things are looking up through balance of the year. Obviously (technical difficulty - distorted audio)?

Okay. So our Japan business was up let's call it low single digits. But I wanted to highlight that against plus mid teens number a year ago because of a project, so I would expect that number to be modestly improving as the year progressed.

Got it, sorry about the background noise.

That's okay.

Paul Knight with Janney Capital.

Hi, Bill, can you hear me?

We can hear you.

In the past you've had cycles like pipettes, scale business in China. Is there a couple of product lines that bear mentioning and us digging into to kind of see -- engage incremental growth for the future?

And just to be clear, Paul, you're referring to China?

No not China, within the portfolio products at Mettler-Toledo. You've always been able to produce some exciting products that really contribute to incremental growth. What would you want us to look at going forward?

I want to highlight maybe that we need to have continuous product innovation and come up with new products in all the different product categories. They are important to expand our lead versus competition and it's critical also to drive the replacement business. But typically when we introduce a new product it benefits the product category, but for the whole group it is not so important. It doesn't really move the needle that much.

I am excited about the two products that I just mentioned on the call, no question. But they are not going to make a huge difference, but they are important for the next couple of years.

So I think every time on every quarter's call I highlight two or three product innovations that we have to show to you guys how broad our innovation is and we are going to continue. Actually for the full year we have a very nice product pipeline pretty much across all the different businesses and. Yes, I feel good.

For example, just remember last year we talked about product inspection products that we launched and we're talking about earlier this week how that had really an impact, these product launches. I would have a hard time to single out one product for you here.

Olivier, has your philosophy on share buybacks changed? I know you're still an aggressive share repurchaser, but are you exercising opportunistic purchases or is it a regular repurchase program? Have you I guess changed your tactics on share repurchase?

No, we are really being steady. We are in the market every day. We don't try to time the market at all. It is really -- Mary has the program where she basically buys every day and we have in that sense a very consistent policy.

And then lastly, what steps are left for you do you think regarding mitigating currency volatility going forward? Is there anything left you want to do?

I think we have accepted currency volatility is probably something we're going to face also for the future. We have significant ones in the recent past, particularly around the Swiss franc, but of course the dollar appreciation is also very real and we expect that to go on.

The key measures that we take against it is first on the pricing side. We always look what kind of opportunities this offers and how this relates to competition, but also can we adjust and also we sometimes do very targeted mid year price increases to mitigate a currency impact.

And then currency changes can also have an impact on where we locate resources and we take measures around that one. This typically not quick hit, but things that we do all the time we have had, for example, in recent years programs in Switzerland to address things. We have, for example, built up low cost country service organizations and these are certainly things that we will continue to do in the coming years

Thank you very much.

Ross Muken of Evercore.

This is [Luke] on for Ross today. Basically want to know, if you had to break up the industrial weakness into the following buckets, how would you do it? This could be qualitative or quantitative.

The first one would be delayed due to the corruption measures. Second one would be the dislocated demand in heavy industry or materials. The last one would be the general macro in Malise.

I think Olivier and I will take this when maybe together. I think the first one we will probably on the industrial side say it's the smallest one. We do see that lead times on bigger projects that the government is behind directly or through state-owned companies maybe take a little bit longer. But it is not -- I don't think of that as the biggest one and probably the other two --

Actually, we see some delays but this can also be related to the leadership. The new leadership team really putting in place all their people around the different decision-making bodies and that probably slows down things. We certainly have concrete examples if that's the case, but otherwise I wouldn't connect it to your first point.

The second two probably -- it's tough to judge. Maybe I would lean to the second one being a little bit more because of what I commented on with regard to the replacement cycle, but it would be tough to quantify it.

Okay, great. And then I guess for the second one, we heard from a couple players that the US industrial side might be moderating and as you guys see anything in the quarter that would give credence to that?

If I take early indicators like leads, (inaudible) I don't see supporting points. On the contrary, I would say overall it continues to be healthy and, yes.

And our second quarter looks good which is the place where we had the most visibility.

Okay, great, thanks.

Sure.

Dan Arias of Citigroup.

Thank you. Bill or Olivier on China. I'm not try to put too fine of a point on it, but is the improvement that you think you might see in the back half strictly due to comps at this point? Are you feeling like it's still reasonable to sort of think about actual spending improvement?

Yes, probably mostly the former.

Okay. And then maybe just within the quarter do you feel like there was any China new year effect at all or was that just not even a relevant factor given the magnitude that we're talking about?

Initially, we were seeing this January/February thing and we were kind of explaining it with that, but when we had actual results of March and visibility also about Q2 we wouldn't connect it to that. I think no, that's not the explanation.

Okay. Maybe just finished with share gains. You guys have been talking about this for several quarters now, so I guess maybe in which product areas or geographies are feeling like you're having the most success with the competitive win dynamic?

I think it's very broad-based. I really feel that way.

Of course the European numbers are so strong, particularly if I look on a two-year base that I feel in particular confident about that one. But actually also the US numbers and for emerging markets like southeast Asia, India and so on have also very high confidence. For some of the other markets it may be a little more difficult because I have less data points from competitors to really compare. But honestly it's really broad-based across the different business lines and across the geography.

Got it, okay, very good. Thanks a lot.

Steve Willoughby with Cleveland Research.

Good evening. Two questions or you.

First I know you started to touch and discuss a bit about the field turbo program. I was just wondering if you could provide any more color on either the returns or the production you're seeing from those hires you've already made and where that compares to your expectations for those hires so far, and then I have a followup as well.

So, out of the program that we initiated last year, we're talking about roughly 200 resources that we added throughout the world. Most of these resources as we've mentioned before are hired, onboarded, and now kind of in training. So you can imagine that the start now to have some impact, but it takes time until they really have an impact that is significant to us.

Typically, it takes six to nine months to cover the cost and from then on actually we start to have a good payback. It increases actually more on a linear base than exponentially and I would typically expect four to five years until additional sales person plateaus in terms of a sales cost. I think that's an indication so it is a pre-investment which is to break even rapidly and actually a better contribution particularly in the second year.

I might add, Steve, that as a reminder we had a smaller field turbo program including in Europe in 2013 and clearly we think part of our success in Europe and in the Americas, but particularly Europe, is partly related to that.

Okay, great. Thank you for all that color.

And then just secondly, and I realize this could be partly due to timing but in the quarter I see that your debt outstanding stepped up quarter-over-quarter but you're interest expense declined. So I don't know, Bill or Mary, if you could just talk about what's going on with the debt that you are taking on and the timing of it?

Yes, there's nothing special there. (Inaudible) interest rate analysis for you, but we're cash flow kind of -- you know our full-year number and you know that the first quarter is typically a period of time where we're more of a net borrower -- we're anyway for a full year a net borrower because of the extra repurchases, but in the first quarter is the weakest quarter cash flow wise.

So, with regard to its relationship to interest expense, I can't think of anything that's changing or that has changed. You've seen what we have done debt issuance wise.

Okay, thanks for much.

(Operator Instructions)

Jon Groberg with UBS.

Congratulations on the quarter. Two quick questions for me. First, I may have missed it, Bill, but what are you expecting for pricing for the year?

So we did 190 bps in the first quarter and if we can say somewhere in the 1.75 to 2 range I think that's a realistic expectation.

Okay. And this quarter you hit 18% margin. Olivier, do you kind of think about the next two years or so, do you start thinking at all in terms of an additional -- as your margins get higher an additional 100 bps of margin expansion this doesn't have the same meaningful impact on your EPS growth as it would have 12%, 13%, 14%?

And you start shifting at all how you think about maybe using your cash. And I'm just curious if you start to think that M&A becomes a more useful -- more productive use of your cash in terms of what your able to do with it maybe an two, three years?

Our view on M&A really remains unchanged in the sense that M&A is part of our strategy. I'd like to do M&A cases, but they need to strategically really fit into the franchise. If they are close adjacencies, if they add from a technology standpoint or gives us an opportunity to consolidate our market position in certain country, we are going to pursue it. It's actually much less financially driven in the sense that I say foremost strategy needs to be right and then the financials need to be right in terms of business case and we remain very disciplined on that one.

I do not foresee a change in that one even with what you alluded to about the nicely improved profitability. I think the nicely improved profitability gives us the opportunity to further invest in organic growth and the field turbo is a good example of that.

So, I don't expect a change in the strategy, but I want to reinforce even that we have wanted on very few M&A's in the recent quarters that we are very committed to it and we are actually constantly working on cases. We have a good pipeline and (inaudible) screen kind of cases that we try to nurture. Also, we are now in an environment where people are willing to pay premiums for acquisitions and here we stay disciplined and so we will see how it plays.

Jon, Olivier and I both continue to believe that in the medium term we can't off of let's call it mid single-digit organic growth or currency growth deliver mid teens EPS growth in a constant currency environment. And while the absolute margins are getting higher, we have one of our biggest programs that we've invested in to drive margin enhancement with the Blue Ocean program being an enabler. We're only roughly halfway done with that so there is more to come in terms of that.

And then of course we're saying that knowing that the amortization is kicking in on that intangible asset and that will mean even better free cash flow yield in terms of our EPS numbers as well. So we think the organic -- there will be nice acquisition opportunities, but we believe that the organic financial story has many years to run.

Okay. And so just to be clear, on the field, on the field turbo initiative that you talked about, Olivier, in year two or year three would you be expecting to be growing 100-, 200-basis points faster than you are today? Is that how you're going to measure the success of the program?

Your numbers are high. And the way I want you to look at it is the field turbos are part of us to achieve the mid single-digit growth that we are always talking to you guys. So we are not suggesting here with field turbos that we got to accelerate our growth and you're going to suddenly see higher growth rates.

Okay. Thanks.

And there are no further questions.

Thanks, Leanna, and thanks, everyone, for joining us tonight. As always, if you have any questions or any followup, please don't hesitate to call us. Good night.

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