Mettler-Toledo International Inc (MTD) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

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

Thanks Ronnie, and good evening everyone. I am Mary Finnegan. I'm the Treasurer and responsible for Investor Relations at Mettler-Toledo and happy that you're joining us this evening. I'm joined by Olivier Filliol, our CEO, and Bill Donnelly, our Executive Vice President. I need to cover just a couple of administrative matters. First, this call is being webcast and available on our website. A copy of the press release and the presentation we'll refer to is also available on the website.

On page 1, we have our Safe Harbor language. Let me summarize it quickly. 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 factors affecting our future operating results and in the business and management discussion analysis in sections of our Form 10-K. One last item, on today's call 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 the 8-K. I will turn the call over to Olivia.

Thank you Mary, and welcome to everyone on the call. I will start with a summary of the quarter and 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. We continue to execute very well. Spinnaker and Field Turbo programs are allowing us to leverage our strong product portfolio to gain share. The Americas have particular strong growth, and Europe came in as expected. We also had very good growth in certain emerging markets. However, these strong results are marked by weak demand in BRC. That is Brazil, Russia, and China.

While our overall local currency sales growth was 3% in the quarter, excluding BRC, we achieved local currency sales growth of 7%. A level which reflects a bulk market growth, and one were very pleased with. We also had excellent margin expansion in the quarter. Despite the challenging currency environment, we delivered 11% EPS growth which equates to 16% before the estimated impact of currencies. We are pleased with these results, particularly given the headwinds from currency and BRC. Most importantly, our margin enhancement and productivity initiatives are allowing us to continue to make investments in field resources which further position us for growth in 2016 and beyond. Now, let me turn it to Bill to cover the numbers.

Thanks Olivier, and hello, everybody. Sales were $604.2 million in the quarter, that's an increase of 3% in local currency. On a US dollar basis, our sales decreased by 4%, as currencies reduced sales by approximately 7% in the quarter.

Turning to page 3 of the presentation, we outline sales by geography. In the third quarter, local currency sales increased by 10% in the Americas, 1% in Europe and declined by 1% in Asia rest of world. All of these are compared to the prior-year. Overall, the BRC countries continue to underperform in the quarter, and reduced sales growth by about 4%. BRC was specifically down 12% in the quarter with China down 9%, which is slightly better than we expected.

Turning to the next slide, our year-to-date sales increased by 4% in local currency. By region for the nine-month period, local currency sales increased by 7% in the Americas, 3% in Europe and 1% in Asia rest of world. Our growth, excluding BRC, is 8% year-to-date. Please turn to slide number 5. There we outlined sales growth by product line. Laboratory had growth of 7% in local currency. Industrial declined by 1%. While food retailing increased by 7% in the quarter. On a year-to-date basis, as shown on the next slide, laboratory increased by 7% in local currency. Industrial was flat, and food retailing grew by 6%.

Now turn to slide number 7 please. Let me walk you through the key items in the P&L. Gross margins were 56.2%. That is 160 basis point improvement over the prior year margin of 54.6%. We're very pleased with that increase. Currencies contributed approximately 100 basis points to the increase and includes the benefit of the gain on the Swiss franc euro hedges. In constant currency, our margins were up about 60 basis points.

Pricing and material cost reductions further contributed to our margin improvement. These improvements were offset by our investments in our field service organization. Research and development expenses were $29.7 million. That is a 3% increase in local currency. SG&A was $175.5 million. That is 1% increase in local currency and includes increased investment in our field service organization, as well as some employee benefit costs, offset by our cost savings program and lower variable compensation. Adjusted operating income was $134.3 million in the quarter. That is a 6% increase over the prior-year amount of $126.7 million. Currencies reduced operating profit by approximately $6 million. Excluding this headwind, our operating profit increased by 10% in the quarter.

Our operating margins were at 22.2%. That is an increase of 210 basis points over the prior-year. Margins benefited by 70 basis points due to currency as the percentage impact on currency on the sales line was larger than the impact on operating profit. The core underlining margin improvement was a very strong 140 basis points. Our incremental OP margins reached 60% in the quarter on a constant currency basis, which is particularly impressive given the meaningful investments we're making via our Field Turbo program.

A couple of final comments on the P&L. Our amortization was $7.8 million, while our interest expense was $7 million in the quarter. Our effective tax rate continued to be at 24%. Fully diluted shares for the quarter were $28.1 million, that is a 4.4% decline from the prior-year, reflecting the impact of our share repurchase program. Adjusted EPS was $3.26 per share. That's an increase of 11% over the prior year amount of $2.95 per share. Excluding the impact of currency, adjusted EPS increased by 16% in the quarter. On a reported basis, EPS was $3.16 as compared to $2.89 per share in the prior-year. Reported EPS includes $0.07 of restructuring charges, and $0.03 of purchase intangible amortization.

The next slide gives you our year-to-date results. Our local currency sales have increased by 4%, while gross margins are up by 190 bips. Currency benefits gross margin by approximately 100 basis points, resulting in a strong 90 basis point core improvement. Our operating profit increased by 6%, while adjusted EPS grew by 11%. Excluding currency, operating profit has increased by 10% while our adjusted EPS has increased by 15%. Both on a year-to-date basis.

Now, turning to cash flow. In the quarter, free cash flow was $107.1 million or $3.81 per share. On a per-share basis, this is a 6% increase over the prior-year amount. We had continued improvements in our DSO with 41 days as compared to 42 to last year. Our ITO was 4.8. Year-to-date our cash flow amounts to $238.4 million, and that's an increase of 6% on a per-share basis.

Now, let's turn to guidance. Forecasting continues to be very challenging, particularly given the uncertainty in Brazil, Russia, and China. The timing of a recovery in these countries is uncertain. Another negative factor is currency, which continues to be headwind to EPS growth for us in both Q4 as well as next year, but particularly the first half of next year. Offsetting these factors is our ability to execute. As you see in our year-to-date results, our various initiatives to drive share gain and expand margins are doing very well. We expect these trends to continue.

With this as a backdrop, let me cover some specifics. We expect local currency sales growth in the fourth quarter to be approximately 2%. Based on this sales growth, we expect adjusted EPS to be in the range of $4.58 per share to $4.63 per share. Currency will reduce EPS growth by approximately 5% in the fourth quarter. Absent currencies, adjusted EPS growth in the fourth quarter is expected to be in the 13% to 14% range. Incorporating fourth-quarter guidance, we would expect full-year local currency sales growth to be about 3%. Adjusted EPS for 2015 is expected to be in the range of $12.85 to $12.90 per share. Currencies are expected to reduce our full-year earnings growth by 5%. Absent the currency headwind, we had EPS growth of 15% into 2015.

As we look to 2016, we expect market conditions in Brazil, Russia and China to remain challenging. Particularly in the early part of the year. We're not yet forecasting a recovery in these markets. Hopefully some stabilization. Outside of these three countries, we expect sales growth to be solid. Our product pipeline looks strong and we continue to see tangible results for our Spinnaker sales and marketing and Field Turbo programs. We will also make further investments in our front end resources in 2016.

Taking all these factors together, we expect local currency sales growth to be in the 3% to 4% range in 2016. This should result in adjusted EPS in the range of $14.10 to $14.30 per share, which is a growth of 9% to11%. We expect currency to reduce earnings next year by approximately 1.5%. Adjusting for this currency headwind, and using the midpoint of guidance, this represents a growth of 10.5% to 12.5%.

A couple of items I think are worth highlighting with respect to our guidance. First, our productivity and lean initiative programs are well on track and yielding very good results. This will allow us to make additional investments in front end resources in 2016 while maintaining our expense base at a reasonable level. We are very pleased with our ability to make these important investments, which are helping to drive share gains. Olivier will have some additional comments on our Field Turbo program shortly. The second comment is currencies. With respect to sales growth, we expect currencies to reduce sales in Q4 by 6% which would result in an 8% reduction for the full year of 2015. In 2016, we expect currencies to reduce sales growth by about 1% for the full year.

One other item related to currency. I already mentioned that we expect currency to reduce earnings-per-share growth in 2016 by approximately 1.5%. I want to point out that headwind will be greater in the first half of the year, as compared to the second half. I realize some of you are updating your models and thought this would be worthwhile to point out.

The third topic about next year, is cash flow. We expect cash flow generation to continue to be solid and expect free cash flow per share to increase by 6% in 2016. This will result in a free cash flow amounting to $353 million. We expect to continue to make progress in working capital improvements but will have higher capital expenditures in 2016, due to some manufacturing expansions we'll have underway. In terms of share repurchase, you saw in the press release that the Board has authorized an increase in our authorization as it will be exhausted shortly. We would expect to repurchase shares of approximately $500 million in 2016.

One final item with respect to guidance. Looking at the current quarterly consensus estimates for 2016, they reflect an adjusted EPS growth in the first half of more than 15%. Given our expectations for continued challenging market conditions in the BRC in early part of the year, combined with greater currency headwinds in the first part of the year, I would not expect such a level of earnings growth. Similar to what we have done in the past, we will update you on our quarterly basis with regard to our 2016 estimates. But I thought it was worthwhile to mention, as you are updating your models. 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 increased 7% in the quarter with good growth in almost all product categories. We are executing quite well in our laboratory business, the combination of strong product pipeline, Spinnaker sales and marketing initiatives, and our Field Turbo investments. Our lab business does very well and I expect results in the fourth quarter and into 2016 to continue to be solid.

Industrial declined 1% in the quarter. Product inspection had growth of 3%, and our outlook for this business continues to be very favorable. As we discussed last quarter in some detail, we're well-positioned in this business with strong relative market share, the most expensive product portfolio, and the largest service network in the industry. We expect product inspection to have strong growth in the fourth quarter. And while they will face tougher comparisons as we get into 2016, I expect solid growth in 2016.

Core industrial declined 3% in the third quarter. We had good growth in the Americas and a decline in China. Europe was flat. We expect conditions in core industrial to remain challenging in fourth quarter, and into the first half of 2016, principally due to China. We may see some growth in later part of next year, as we will benefit from easier comparisons. Finally, retail was up 7% in the quarter with particular good growth in the Americas due to project activity. Retail will be down in the fourth quarter due to timing of activity and I would expect moderate growth in 2016.

Now, let me make some additional comments by geography. As mentioned earlier, Europe sales growth came in as expected. We had growth in Western Europe and most Eastern European countries outside of Russian centric countries. We do not expect much growth in fourth quarter due to prior-year's comparisons, but expect to continue to execute well and further capitalize on our Spinnaker sales and marketing initiatives, Field Turbo investments, and strong product pipeline in this region. We expect moderate growth in 2016 in Europe.

America's had an excellent quarter, with sales growth of 10%. We had good growth in all product lines. While I don't expect another 10% growth quarter, our outlook for Americas is good. Asia rest of the world decreased 1% in the quarter, and increased 9%, excluding China.

As Bill mentioned, China declined 9% in the quarter. We had growth in our laboratory business in China, while industrial was down 18%. I would expect industrial in China to be down a similar level in the fourth quarter. Looking to 2016, we expect sales will decline, but not to the level we saw in this year. Outside China, in the third quarter we had very good growth in Australia and Korea and good growth in India and Southeast Asia. We expect market conditions in Asia, outside of China, to remain solid for the remainder of this year and into 2016. Service had good growth in the quarter with local currency revenue up 5%, as compared to prior year. We had good growth in all geographic regions and in most product lines.

Let me update you on our Field Turbo program. We're very pleased with our progress and results to date. The growth opportunities we identified are yielding tangible results, and the additional field resources are allowing greater attention and focus to our high priority accounts. At the same time, we're executing very well on our productivity and cost initiatives throughout the organization. These initiatives focus on lean manufacturing and values productivity enhancement programs, which allow us to continue our field resource investments in 2016. We've identified targeted growth opportunities and will make a portion of the investments early in the year, with additional investing as the year progresses, assuming market conditions remain favorable. Despite the challenging market conditions, we are executing very well which is allowing us to make these front-end investments which position us well for future growth. That's about all I want to cover on this topic.

One additional update I want to provide today is on the process analytics business, which has a great track record for technology innovation, and sophisticated marketing. It has a sizable percentage of its revenue from consumables and services, approximately 40%, and has achieved the bulk market growth for numerous years if we present a little less than 10% of total sales, and I wanted to update you on some recent developments.

Process analytics provides in-line and real-time measurement of key analytical parameters for industrial liquids which helps pharma, biotech and chemical companies to monitor and optimize their production processes. While the total market is large, we're a leader for pH TOC conductivity and dissolved oxygen measurement in each applications, including ultra-pure water monitoring. Our solutions combined sense of technologies with transmitters to measure specific analytical parameters. The sensors must be calibrated, maintained, and replaced on a timely basis which creates an attractive consumable stream. We are highly regarded as the technology leaders, due to our unique sensor design and our intelligent sensor management software. We have the most complete product offering, and most extensive field force of our direct competitors.

We're also cost effective in terms of manufacturing with the vast majority of transmitters produced in China. We have recently expanded our reach with an entry into gas analytics through a unique laser-based sensor technology. This technology, combined with our deep knowledge of industrial processes, offers cost-effective in situ installations and chemical processes applications for existing customers. We're adding gas capabilities, as well as unique installation solutions to complement our product range.

Power generation is another expansion market for process analytics. We've extended our offering for this attractive market, including multi-point transmitters, conductivity, TOC, and optical dissolved oxygen sensors, as well as panel mount analyzer solutions for monitoring of power plant water quality. Extensive targeted market campaigns to end-users and panel fabricators in power and chemical markets are driving good results.

We are also have success with expansion of our TOC, or total organic carbon portfolio. TOC is important to ensure the integrity of ultra-pure water and is especially important to regulated industries such as pharma and biotech. We now have solutions in the value, mid-tier, and high end of the TOC market. We've added a portable version as quality engineers continue to gain acceptance of online analytical measurements in pharma. In the coming weeks, we will launch a rinse verification system which leverages our TOC and conductivity expertise, to broaden our applications in pharma.

Finally, we recently completed a small technology acquisition which further enhances our expertise in ultra-pure water analysis. We will now have a laser-based technology that can detect bacteria in real-time, which makes us the one company to offer all three regulated ultra-pure water measurements. Conductivity, TOC, and bacteria. It is sold to the same pharma customers as our TOC offerings, and the ability of customers to analyze bacterial contamination in real-time is a game changer. We have seen a similar development in TOC where the alternative is to take samples offline and analyze in the lab with meaningful time differentials. For bacteria measurements, the time differential is typically five to seven days, which offer significant cost savings opportunities for our customers.

I have covered a lot of the technology developments within process analytics, but want remind you that this business was the incubator for our Spinnaker methodology for sales and marketing initiatives. Process analytics continues to make great progress in furthering the marketing and [lead] generation campaigns. This marketing focus, combined to additional Field Turbo resource an excellent product portfolio is contributing to nice share gains for this business.

Let me make some concluding comments and then open it up for questions. We remain cautious on China, Brazil and Russia as market conditions are challenging, and the turnaround is not yet visible. We're working to protect margins in these countries, and ensure resources are targeted to long-term growth opportunities. Our auto businesses, which encompass more than 80% of total sales, are performing quite well. Market demand is solid, and we're leveraging our excellent product pipeline, strong sales and marketing programs, and investment field resources to gain share. Our margin enhancement and productivity initiatives are well on track, and allow us to make the additional investments in field resources, despite weakness in China, Brazil, and Russia and negative currency headwinds on operating profit and earnings. I want to now ask the operator to open the line for questions.

(Operator Instructions)

Brandon Couillard, Jefferies

Thanks, good afternoon. Bill or Olivier I was curious if you could elaborate on some of the productivity and lean initiatives you plan to tackle next year? Just in more detail, give us a few examples. And how much runway do you see on that front to be able to still fund growth investments elsewhere in the business?

Let me say that we have these programs in place now, for quite a while. And it's a continuation of what we have been doing already this year.

We have lean initiatives on factory floor where we are optimizing layouts, where we are optimizing planning processes. We are optimizing the logistics parts between suppliers and ourselves, but also the logistics between different factories. These all help us to expand the margins.

On top of that, we always have selective restructuring projects that are helping us. For example, last year we consolidated the plant in the US. And there is certainly also things that we continue to do in terms of leveraging low-cost countries. We have moved one product category, or actually the low end part of the product category, from Switzerland to China. That will help us also next year.

These are continuous things that we do. Sometimes project specific, and sometimes global initiatives. And then of course, we continue also to do things on the supply chain, management, optimizing our logistics throughs, optimizing our purchasing. We have a very good material price index, and I expect this to go on also next year.

I would add to what Olivier said, Brandon. One of the things we're leveraging more with Blue Ocean is that having most of our plans now on the Blue Ocean system allows us to have common measures and keep the eyes around productivity. Things that get measured get done. We're able to drive productivity improvements in solving to the best-in-class standards within the group.

I would add on top of that, -- and these are now more back office costs. We see opportunities for shared service centers. We have certainly done some of our initial shared service centers, coming out of Blue Ocean we see continued opportunities there.

In general, we gain productivity, let's say 10% or 15% when we do a shared service center, just within the Western world. And more than that if you could we low-cost country, and those should be good runways.

We actually had a review together with the rest of GMC colleagues this week as part of our GMC meeting. And one of the comments I made to the guys relates to the question investors often asked of me. And that's, how much more opportunity to we have?

The whole review of this productivity and shared service center activities, I drew the conclusion preparing for that, that we still have a long run way to go. We have a lot of good ideas to continue to enhance our margins in the coming years.

Thanks. That's helpful. And then one more for you Bill.

Two things. What have you baked in for net pricing next year? And then what is your EPS outlook contemplate for local currency incremental margin?

In the first question, we are building in think about 150 basis points based on we see today. In terms of the incremental margins, they are going to be in the mid-40s on a constant currency basis.

Thank you.

Operator do we have other questions?

Richard Eastman, Robert W Baird

Good afternoon. Olivier, could you expand a little bit on the strength in the lab business? Really just speaking maybe a little bit to the verticals. Pharmaceutical, food, -- where the strength was and are there any laggards in the verticals there?

Actually absent the BRCs, I would say we experienced good growth across all product lines. And actually also across [bips] end-user segments. I think there's really good momentum.

I attribute that demand is healthy. But then programs we have in place are actually relatively broad-based, and yields good results.

I wouldn't single out a particular segment. As we look at the US markets, it has been really broad-based. And typically, when we are -- when we have good results across all the product lines, that's a signal that it's not a segment specific topic

Maybe the one area would be some of the lab side. In particular, Life Sciences look good.

Okay. And then Bill, on the gross margin, looking at the drivers on the incrementals quarter-to-quarter, it was pretty substantial. 75% gross margin incremental from Q2 to Q3.

I'm just going to surmise that might be a mix issue with lab as strong as it was? Is there a way you could give us a feel for that?

I think Rick, this is a classic you're looking at it slightly different than how we look at it. Actually, the way we look at it's always Q3 on Q3, Q2 on Q2. If I look in Q2 actually, our year-on-year margin expansion was a little bit less in Q3 than it was on a year-to-date basis.

I think the absolute sales volume is partly explaining that. If I look at the growth comparisons, the two-year growth rates are relatively similar. Maybe slightly more in Q3 which could contribute a little bit to what you're talking about.

Okay.

But, overall I would say on a constant currency basis, the margins were very good. Good expansion in Q3. But probably a little less than what we had seen earlier in the year.

Okay. Fair enough. One last question.

Given the outlook in China, certainly for China industrial and maybe the trailing performance there. No quick fix there from an end-market perspective when you're talking about the industrial business and potentially a pretty long cycle downturn. But, is any of your restructuring actions targeted at China?

We've talked about moving assets around a little bit. What are you doing with the asset base on the industrial side in China? Is that stable? Are you taking that down or --?

We have been working on resource shifting in China for quite a while. When I say resource shifting, there is parts of restructuring, headcount adjustments. Reflecting the pockets of future growth that we are anticipating.

We are adjusting. We are assessing the difficulty that we have in industrial business. And you have seen us already in the last couple of months, still adding people. For example for laboratory business, and for certain territories that we see a good future prospect. As for industrial, we have been reducing headcount.

We are proactive on that. We have started last year, and this is still ongoing.

Rick, because you used the word asset. In terms of thinking about plans, maybe the one thing I'd remind you too is, we have our manufacturing for the Chinese domestic business which clearly has been hurt on the industrial side. But we continue to leverage those factories, in terms of moving new products there. So things that were previously manufactured in the west.

The picture inclusive of inter-company sales would maybe show up better leveraging that you might expect just looking at the industrial piece of the business. I would add to that, that we see some facility consolidation opportunities in China, because we didn't own all of our office space. We have some office space and things we can take advantage of there -- rental spaces.

Okay. Very good.

And again, given your primary global competition on the lab side, more than industrial. Do you have a sense of -- is more of your product sold in China manufactured in China vis-a-vis say Sartorius on the lab side? Do have a sense of that?

I would say, in general, I think of all of our competitors, we are very advanced in leveraging low-cost countries. In that sense, China as a production base is certainly significant larger for us that for our key competitors.

I see. Okay. Very good. Thank you much.

Steve Willoughby, Cleveland Research

Good evening. A couple of quick questions.

First, you made a comment about some lower variable comp here. Was that for the third quarter? And if so why did that happen?

Because a year ago we raised our bonus achievement expectations in Q3 -- a year ago. This year, we had about the same expectation as we did a quarter ago.

Okay, that makes sense. Bill, is there any way to start quantifying the impact from Field Turbo? As of yet, I know it still rolling out you guys are expanding, but is readily to quantify the revenue contribution or anything like that?

We struggle to be precise there, because of course, we are often -- the Field Turbo can often be splitting territories and things like that. I think for us, what's that expression of the pudding? Sorry the proof in the pudding is the growth in non-BRC.

I think given global economic, we don't think our markets are growing that fast. It's very much -- the outsized growth very much ties to geographies and product categories. Where we have made Field Turbo investment. So, I think our success is in those markets is very much explained by the investments we've made in 2015, but as well the ones we started in 2014.

Okay and then one follow-up on that. Even in the BRC markets, is there a way to gauge how your growth compares to what you would consider the market would be? Are you seeing -- even though the business is declining, would you say you are seeing similar type of out performance versus the market?

Let's maybe exclude Brazil and Russia. We're talking in those two cases, $30 million, $40 million of sales spread across 20 product categories. It would be wrong for me to imply we have that level of visibility vis-a-vis competition, because you are talking about really small slices.

In the case in China, we certainly listen to what direct competitors that would have conference calls I.e. Sartorius. And we feel good about what they do as well as our local market intelligence. We see on the industrial side, a couple of our industrial competitors have gone away in China. We think we do reasonably well on a competitive basis there as well.

Thanks. Thanks for the color.

Ross Muken, Evercore ISI.

I was hoping that you could go through your expectations for margins in 2016? If you give us like your ideal of what the pacing will be like. With the core expansion, any FX impact you guys are expecting.

First of all, maybe if you pick the -- we're saying 3% to 4% top line growth, with about a 1% impact due to currency with that weighted towards the first part of the year. A little more than 2% headwind in the first quarter. And about 2% in the second, and about 1% in Q3 and flat in Q4.

Our margin expansion should be pretty well paced with maybe the fourth quarter being slightly more than the earlier quarters. Overall, for 2016 we are looking at 50 bips.

In terms of our incremental operating margins, we're looking at a number in the mid-40s for the full-year. If I look at the pieces, the only one that, only quarter we do not see a number in that kind of range would be a little less than that in the second quarter. That has to do with your end year mix topics. As well as some currency topics.

Thanks that was helpful. I will hop back in the queue.

Derik de Bruin, Bank of America, ML.

Hello, good afternoon. Thank you for the call.

China came in a little better than expected, declining only 9% versus the 22% declines that we saw in last two quarters. I was wondering if you could share with us some of the dynamics, has that improved in China?

Maybe the first comment, just to clarify some things. Our industrial business was down in the low 20%s in China earlier in the year. It was down a little less than that in the high teens. And, correspondingly, our overall business in China was down a little bit. 2% less this quarter than it was last quarter. You can see that if we are down high teens in industrial, but only down 9% overall that reflects growth in areas like our laboratory business largely.

In terms of the areas of our laboratory business, I think overall, we have pretty solid growth. Probably the only area we did not have good growth in lab was AutoChem. And frankly, that's driven by Europe 135%, one year ago in lab in AutoChem.

We feel that business, the lab side goes reasonably well. I think I largely answered your question.

Yes you did. Thank you.

Tycho Peterson, JPMorgan.

Thanks. Olivier, could you give more color on growth price segment expectations on 2016? If you are going get to 4% local currency, or better on the top line, best case, would that be driven more by lab or where do you see as some factors?

Let me have Bill comment, because of course we modeled that thing.

First hello, Tycho. We should be doing mid singles in our laboratory business. We have a, relatively speaking, a somewhat tougher comp in Q1. But the rest of the quarter it should be all in that range.

Our PI business, product inspection will continue to do well. We should get high single digit growths out of that.

Our industrial business will probably be flat -ish. We would expect China, to again be down in industrial. But we will have some growth in the other parts of the world.

And I would guess that will be a little bit better in the second half of the year, than the first half of the year. Largely due to comps in China.

And our retail business is lumpy due to large projects. But we are not building in a lot of growth overall. Maybe a low single-digit growth or that business.

Okay. Then, the bacterial contamination business that you picked up. How large is the opportunity? I mean it seems it could be pretty large for pharma.

We bought mainly, a technology here. That we are now improving and then bringing to the market.

As always, when you launch a product with a new technology it's going to take a while. Until customers will really adapt to it. Especially because you need to address your quality systems. You need to address standard operating procedures and so on.

So, while in the long-term, we see it's a very nice product category. Very similar to the TOC, we do expect that it will take a couple of years.

But as mentioned in the prepared remarks, it's very synergistic and we feel we have a really great customer access. We have the right team. And so, from a competitive standpoint we feel like we have a really unique position here to leverage.

Okay. And then last one. Capital deployment.

It was good to see the buy back step up. If you could comment on what you're seeing from an M&A perspective, given the market volatility. Are you looking at more opportunities and appetite to do something a little bit large than some of the smaller bolt-ons.

Our M&A strategy really remains very constant on that. As a reminder, we feel that from a strategic standpoint, there is no need at all for us to do something big. But we're very committed and very interested in doing these bolt on acquisitions because we feel we can have a franchise that we can really leverage if we have synergistic technology. Or if there are opportunities to develop a certain market access.

Very committed to that. Constantly looking at opportunities to have our own radar with a lot of targets on it. Many of these cases are not available or don't materialize in the time lines we want. I think this recent technology acquisition that we did is a perfect example how we are committed and we are doing these cases.

When you refer to bigger deals, we don't say no to it. But there are not that many targets out there that would really fit the franchise. In essence, I'm not expecting just around the corner something big.

Okay. Thank you.

Paul Knight, Janney Montgomery Scott.

Hi this is Bill March on behalf of Paul. How are you guys doing tonight?

Good how are you sir?

Doing well. I was hoping you could speak to the potential for growth in the food retail segment? In light of the potential food safety modernization rules coming online?

To clarify a little, the food safety modernization act has more impact for us in our product inspection business. I would describe it as an indirect impact.

There is already -- the principal driver of our product inspection business relates to brand protection and food safety topics. We certainly view the act as positive, but for most of the guys, this is a little bit catch up for maybe 20% of the market and probably 80% of it was largely covered already. In people's standard practices. The food retailing business itself won't really have any impact due to this.

Great, thank you. And a follow-up on China.

In terms of lab, what are you seeing between the first-half and the second half of the year in terms of has there been a pickup in spending? And if so, if you think that continues into 2016. Thank you.

Could I clarify your question? You're asking about lab in China?

Correct.

Our Chinese business, the first quarter was our strongest quarter of the year. We would have grown a little more the last couple of quarters, except for some tough comps on our AutoChem business. But we see no reason we can't grow high single digits in our lab business based on what I see out there.

Thank you.

Isaac Ro, Goldman Sachs.

Good afternoon. Thank you.

Bill, I was wondering if you could give us an update on pricing? It's obviously been a successful area for you year-to-date. Could you maybe give us a year-to-date view on what that has been and what's embedded in your guidance for next year? Thank you.

On a year-to-date basis, we're up approximately 200 basis points. Very much the lab business leading the way there with numbers actually north of that. And our industrial business is somehow being somewhat laggards to that in retail. We struggle to have global price realization in the retail business.

In terms of next year, I think that we should be able to get something in the 150 basis point range. If you're wondering why a little bit less, we did make some extra moves this year, particularly driven in countries where we wanted to push through a little bit of extra pricing because of the strong dollar. For example, in places like Southeast Asia, we pushed through a little extra price increases there to try to make up for some of the currency impacts.

Great. And a second question would be on the China point. You guys have a little color on that and I appreciate.

Wondering If you could maybe talk a little more about which end markets were not the weakest but the strongest? I'm curious within that 9% number how wide the range is between your various -- either end markets or product areas? I have to imagine there are some bright spots, but curious about the dispersion on what you're seeing in China. Thank you.

Sure. I would describe, first of all, a bright spot would be the lab business overall. And of course, our lab business has a slightly different mix then some of the other guys. We have a little bit less healthcare, a little bit more industrial within our product portfolio. But overall, as mentioned I think pulling out the impact of some large AutoChem orders last year, we think that can be a high single-digit business in the coming quarters.

If I look at other parts of the portfolio, actually retail would be an area that has been growing there. And of course that is being driven by the increasing GDP per capita increasing consumer spending.

Our industrial businesses continue to be weak overall, but we do see pockets of growth there in some specific product categories where we are trying to push product categories. But probably, they're small enough it is not so helpful for us to mention. At this point.

Understood. Thank you for the color. I appreciate it.

Jason Rogers, Great Lakes Review.

Hello everyone. Looking at your forecast for 2016, what is your assumption on material costs?

Material costs should be down, let's say somewhere in the 1% range to 1.5% range. You can multiply that number by 0.3 or 0.4 to get a sense for what kind of impact that would have on the gross profit margin.

Looking at China overall, did you say it was going to be off around 9% in the fourth quarter? Or is that just the industrial side?

I think I'd like to give it a range, but I would certainly say high single digits.

And how about 2016?

2016 it's going to do better than that. If you look at our industrial business, we would expect, because the levels of decline are still large that it is going to take a few more quarters to stabilize that business.

So, I think the beginning of the year you'll continue to see declines in our Chinese business overall. Whether we get to a flat business or modest growth business in the second half of the year I'm not quite sure yet.

And then looking at the percentage of your products manufactured in China, do you expect that to change materially next year?

Definitely not materially. We have, to a certain extent, because such a high percentage of our Chinese business is Chinese manufactured products, clearly that piece will again, at least decline in the first half of the year. We have, of course, always every year a handful of products that we are transferring there, activities that we are transferring there. But I would not expect the overall percentage to move materially.

And finally, what was the number of shares repurchased in the quarter?

Give me a second. We repurchased 390,548 shares.

Thank you very much

Steve Beuchaw, Morgan Stanley.

Good evening. It's actually Michael Clerico on for Steve.

You drove some good acceleration in the Americas sequentially this quarter. I'm wondering what's behind that growth rate? And more specifically, are you seeing any drag from weaker industrial trends, specifically in the US?

In terms of our industrial business overall, I think the Q3 is in line with our year-to-date numbers. We would expect to have, maybe some slowing in some of core industrial areas. But maybe some acceleration in terms of our food safety product inspection related businesses.

Our lab businesses in the Americas did very well in the quarter. And we expect continued good performance in the fourth quarter as well.

Okay. Second question, it seems like Field Turbo is going well. Are there any updated thoughts on deploying a second wave of reps? And also, could you give us an idea of how long it will take the current wave to be fully ramped up in terms of productivity?

This year we added about 200 field resources. This -- typically they take a few quarters to ramp up in terms of the first quarter you have training, onboarding, and so on. And then, it takes them a few quarters to build up the pipeline.

I would say, after two years they should actually be really profitable, contributing to the overall situation. We prioritize, of course, on product categories that have the highest profitability. And so they're going to certainly have above group average contribution.

For next year, I expect, if things continue to go as expected in terms of market demand, to add about the same amount as we did this year.

Great thanks guys.

Jonathan Groberg, UBS.

Hey guys. I will just follow up with you off-line. Thanks.

John you're on the line.

Can you hear me? I said it's a (workover) I'll just follow up with you guys off line. Thanks.

Okay. Thank you.

(Operator Instructions)

Richard Eastman, Robert W Baird.

Is this bacteria contamination detection technology that you purchased, is there any application or cross application there with your product inspection business?

No. They're very different. This is really pure water analytics.

Right.

Totally different. The synergy is, with our [fountain] business that you might know. Particularly, related to TOC and conductivity measurements.

These are the three measurement points that you would find ultra-pure water. For example, an application is water for injection. And when you have water for injections in pharma, you need to be USP compliant. And that's the [fate] parameters that are relevant here.

Okay. I was hoping you would say yes. It seems to be a big opportunity in bacterial detection on the food side. But maybe that is still to come.

And Olivier I was curious, during the third quarter, we had noticed a flurry of new product introductions from [Ohl] House. I'm curious, maybe that is not atypical, But is there any strategic rationale for that? Was there any window open on the US dollar creating any opportunity? Is there any soft spot in the competition?

No. You shouldn't read anything into it.

Okay.

It wasn't unusual for us at all. We have a certain strategy to expand the product portfolio, in terms of leveraging the access to the channel for Life Science applications and so on. But that is something we have been done over a couple of years. And what you've seen more recently was product launches for retail industrial, as well as for the last product introduction.

And there is no bump in your lab growth? That wasn't big enough any channel fills since Sethco's two distribution?

No. Certainly not related to Ohl House, no.

No. Okay.

I don't. Everything is as usual.

Okay. Great. Thank you.

Dan Arias, Citigroup.

Good afternoon guys. Thanks. Bill, just one for me -- and apologies if you touched on it when I dropped off the line there.

On the outlook for next year, what are you assuming in terms of the payoff from some of the efforts that you have going on in service? Increasing the attach rates on service contracts et cetera? Is that something that is built into guidance or is that more of the quote on quote upside case so to speak?

We built in some additional service growth over product growth. And maybe that would be the short answer, Dan.

Got it. Thanks very much.

There are no more questions at this time.

Thanks Ronnie. And thanks everyone for joining us tonight.

Of course, as usual, if you have any questions please don't hesitate to give us a call or send us an email. Take care. Thanks everybody.

This does conclude today's conference call. You may now disconnect.