Mettler-Toledo International Inc. (MTD) Q1 2015 Earnings Report, Transcript and Summary

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. After the speakers' remarks, there will be a question-and-answer session. [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 am the Treasurer and responsible for Investor Relations at Mettler-Toledo. I am happy to have you join the call today. I am joined here by Olivier Filliol, our CEO and Bill Donnelly, our Executive Vice President. I need to cover just a couple of 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 one of the presentation. Statements in this presentation, which are not historical facts, constitute forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. 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 Factors Affecting Our Future Operating Results in the business and Management's 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 directly 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 lines for Q&A. The highlights for the quarter are on page two 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 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% in local currency. On a U.S. dollar basis, sales decreased by 3% as currency reduced sales by about 8% in the quarter. Turning to page three 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 and rest of world as compared to the prior year. Two areas that underperformed 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 a decline of approximately 22%. As a 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 four, we outline 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 five, 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 basis points due to currency as a percentage impact of currency on the sales line was larger than the impact on operating profit. We are very pleased with the underlying margin improvement of more than 100 basis points on a 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 cents, an increase of 13% over the prior year amount of $2.00. 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 a $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 three days to 45 days as compared to the prior year. We are pleased with this level of DSO and our IPO 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 are 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 markets and product categories. 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 in a weak 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 decline. 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 declines 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. 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 a 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 on 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 from 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 the prior year. Analytical instruments, pipettes and process analytics did particular well, but we had growth in all product lines. In terms of regions, Americas and Asia and Rest of world did very well and we had growth in Europe too. We continue to benefit from our sales and marketing programs 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 particularly 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 on 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 had 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 am 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 market position in this region. Furthermore the long-term dynamics remain very favorable. Specifically, the growth in GDP and GDP per capita will lead to more consumption of packaged foods, pharmaceutical 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 continue to increase in the number of scientists graduating. Finally, we expect overall quality related regulation to 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 have 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 through built-in applications and a weighing guide to improve productivity. Our proprietary weighing cell and expanded warning features helps to 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 market today. We expect good traction in the market with this introduction. We also had an important launched recently on the industrial side, our new multifunctional terminal. This new generation of midrange 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 services port via a secured connection in compliance with ISO standards. Particularly in the manufacturing of high-value items such as active pharmaceutical ingredients, the avoidance of down time 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 overcapacity. All these actions help to reduce expensive downtime risks or inaccurate weighing performance. These are just two examples that I felt worthwhile highlighting as they represent core products for both lab and industrial but also demonstrates 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 target and we believe we are well-positioned to continue to gain market share by capitalizing on our field turbo investments, our ongoing sales and marketing programs and strong product pipeline. We also continue to focus on margin enhancement initiatives which should continue to drive good earnings growth. I will now ask the operator to open the line for questions.

[Operator Instructions]. And your first question comes from the line of 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, the 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, is the lab business actually accelerating? And number two, Bill, maybe you could reiterate your perspective on 2016? I know you have commented before that you are 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?

So let me take maybe the first part of the question. The first thing I want to say, we, for many years, said our Chinese business is skewed toward industrial versus our global average and what we are seeing now for a while is that the lab business is doing better than industrial and accordingly the mix start also to shift to gradually to lab and we have seen now good lab momentum for quite a while. I wouldn't say that the lab, we see an acceleration in lab growth, I would say, hey, we are continuously happy with what we are seeing. I think last year we had similar results and I do expect that this goes on in that way. And 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 I will speak 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 interesting it was smaller size orders as well as larger order. So one of the takeaways 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 what people are adding individual instruments maybe it's a new instrument but it's into an existing lab. And I think we have seen in the past in Europe and 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 an improving environment next year, but that being said, I think we would acknowledge 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 Chinese New Year fell but then it became pretty clear when we saw how March was going to play out, that things have 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 we will have easier comps. But after having a the 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 follow-up for me on the buyback. Is the parameter for the year still $450 million, $475 million?

Yes.

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

You too.

Your next question comes from the line of Tycho Peterson with JPMorgan.

Hi. Thanks for taking the question. Can you quantify how much you are 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?

So it looks like it will be down in Q2, similar to what it was down in Q1. If I look at the second half of the year, it's probably going 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 out how you are thinking about managing the operating margin?

As you saw in the current number, I think if we look globally at our cost management programs and margin enhancement programs, they are really going well. I mean, the EPS growth there was, if you pull out the impact of currencies, was north of 15%. I think 17.5% or something like that. And 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 did do in China, we will continue to do this resource reallocation that we have been talking to you guys about the last couple of years where we are moving into segments that we think or 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 I am thinking about customer segments and so maybe we will have a change in the mix of resources in China, but we are committed to China. We like China for the long term. So we don't expect any overall changes in that.

Hi, Tycho. I would add that we have taken cost measures last year in China and have certainly be proactive also in terms of the portfolio and in that sense, I feel that we have the right franchise. And the second point that I would add is the Chinese business remains highly profitable for us. And so it doesn't demand the same way of cost 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 U.S.?

So pricing was up, I believe, 190 basis points and contributed about 90 bips to the gross profit margin increase. Our material costs were down about 140 bips and that contributed a little more than 30 bips to the cost of sales. In terms of the reasons for that, certainly Blue Ocean is an enabler, but I would say that it's, broadly speaking, the program that we put around it, like 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 will continue to have good price realization and continue to take down material costs, I will broadly say, at similar kind of levels for the coming quarters.

Okay. And then just one last one. Olivier, can you comment on the upper tranche 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 this will take us many years to really get to the level that we are fully satisfied. We are doing multiple things. So we have efforts to really make it much easier for the salespeople to automatically attach the service offering to any product quote that we are doing. We are helping them with new tools that we have. We help them with new service offerings. We have been upgrading all of the marketing material across all the different channels. So with that, I mean, also on our website, print materials and all these things. And then we are working on training for the sales people 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 that in terms of change management, but also kind of developing it in a country. Feel positive about the progress but there is still quite a way to go before we have fully utilized or capitalized on the opportunity.

Understood. Okay. Thank you very much.

Thank you, Tycho.

You next question comes from the line of Derik de Bruin of Bank of America.

Hi. Good afternoon.

Hi, Derik.

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

It is going to continue to do well. Let me give you some, so for the full year it will be, let's call it, somewhere approaching 200 bips, okay. And we did a little bit more in this first quarter, but that has a little bit to do with the impact of the hedges are kind of static number, the impact of the hedges and as the sales numbers, this our lowest quarter in terms of sales. So the impact of the hedges isn't as large, but yes I think we feel good about what we are doing. We actually, Olivier and I, reviewed the 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 are developing from an analytical perspective, but as 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 a good value driver for the company.

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

There is a smaller impact on 2016. If I were look at from a EPS perspective, think about we have 1% headwind to EPS for the piece of the hedge that roll 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? And maybe includes Ukraine and Belarus or something.

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

I apologize, Derik We heard most of the question, but the start of that question wasn't clear.

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

A:

Great. Very helpful. Thank you very much.

Yes. Maybe to add to Olivier, it's kind of 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.

Your next question comes from the line of 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 your hiring expectations for the back half of the year at all?

At this stage, not. 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 am actually optimistic that we are going to implement as we were actually planning. And 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 am 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 onboarded and are now in training mode. I am actually optimistic that we are going to see good impact from it. And in that sense, if things don't change, we would go on another way.

Super. And then, Bill, in terms of the outlook for the year, could you tell us what you have baked in for just 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 that no reason to change that number.

Super. Thank you.

Your next question comes from the line of Isaac Ro with Goldman Sachs.

Hi. Good morning or good afternoon, guys. Thanks. I do have a question on China. Can you talk a little bit about what you thought maybe geographically within the country over the course of the quarter? Was there any real strength difference between coastal cities and more inland China?

Maybe I think you were just asking about geographic differentiation.

Yes. Just within China.

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

Great. And then maybe I haven't spent as much time on the call here, but Japan just curious how things are looking there for the balance of the year? Obviously the currency has been a issue, but just fairly where is the [indiscernible] environment there?

Okay. So our Japan business was up, let's call it low single digits, but I wanted to highlight that was against the 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. Thanks very much. Sorry about the background noise.

It's okay.

Your next question comes from the line of Paul Knight with Janney Capital.

Hi, Paul.

Hi, Bill. Can you hear me?

Yes. We can hear you.

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

And just to be clear, Paul, you are referring to China?

No, not China.

I am sorry.

Within the portfolio of products at Mettler-Toledo. You have 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 product 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 that product category, but for the whole group it's not so important. It doesn't really move the needle that much. And 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 innovation 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 and launch pipeline, pretty much across all the different businesses. And yes, I feel good, i.e. for example, just remember last year we talked about inspection product that we launched and we were just talking here about earlier this week how they had really an impact this product launches. So I would have a hard time to single out one product for you here.

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

No. We are really very steady. We are in the market every day. We don't try to time the market at all. It's really -- Mary has a program where it actually basically buys everyday. 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 that you want to do?

I think we have accepted that currency volatility is probably something that we are going to face also for the future. We had significant in the recent past, in particular 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 also on what kind of opportunities this offers and how this relates to competition, but also can we adjust or not. So we sometimes do a 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. And these are typically not a quick hit, but things that we do over time. We have had, for example in recent years, programs in Switzerland to address things. And we have, for example, built up local country service organization and these are certainly things that we will continue to do in the coming years.

Thank you very much.

Your next question comes from the line of Ross Muken of Evercore.

Hi, Ross.

Hi guys. This is Luke, on for Ross today.

Hi.

Just basically, I wanted to know if you had to break up the industrial weakness in to the following pockets, how would you do it? And if this would be qualitative or quantitative? So the first one would be delays due to the corruption measures, second one would be the dislocated demand in heavy industrial materials and the last one would be the general macro malaise?

I think Olivier and I will take this one maybe together. I think the first one we would 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 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 and all the people around the different decision-making bodies and that probably slows down things. We certainly have concrete examples that's the case. But otherwise, I wouldn't connect it to your first point.

And the second too probably is, 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, so we have heard from a couple of players that the U.S. industrial side might be moderating. Did you guys see anything in the quarter that would give credence to that?

If I take the early indicators like leads, these quote requests and so on, I don't see supporting point. In contrary, I would say, overall it continue to be healthy.

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

Okay. Great. Thanks.

Sure.

Your next question comes from Dan Arias of Citigroup.

Good afternoon, guys. Thank you. Bill or Olivier, on China. I am 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? Or are you feeling like it's still reasonable to sort of think about some actual spending improvement?

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 are talking about?

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

Okay. Maybe just finish 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 you feeling like you are 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 still strong, particularly if I look on a two-year base that I feel particularly confident about that one. But actually also the U.S. numbers and for emerging markets like Southeast Asia, India and so on, I have also very high confidence. And for some of the markets, it's maybe a little more difficult because there I have less data point from competitors to really compare. But honestly it's really broad based across the different business lines and across the geographies.

Got it.

Your next question comes from the line of Steve Willoughby with Cleveland Research.

Hi. Good evening. Two questions for 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 are seeing from those hires you have already made and where that compares to your expectations for those hires so far? And then I have a follow-up as well.

So out of the program that we initiated last year, we are talking about roughly 200 front-end resources that we added throughout the world. Most of these resources, as mentioned before, are hired and onboarded and now kind of in training. So you can imagine that they start now to have some impact but it takes time until they really have here an impact that is significant to us. Typically it takes six to nine months to cover that cost and then from then on, actually we start to have a good payback. It increases actually more on a linear base then exponentially and we would typically expect four to five years until such an additional salesperson plateaus in terms of sales growth. I think that if you, kind of an indication and so it's a pre-investments, but we just break even rapidly and then having actually a better contribution in particular 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 are 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?

So yes, there is nothing special there, It's all a little [indiscernible] for you, but we are cash flow, I mean, you know our full-year number and you know that the first quarter is typically a period of time where we are more of a net borrower, we are anyway for the full-year a net borrower because of the extra repurchases and 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 have seen what we have done debt issuance wise.

Okay. Thanks very much.

Sure.

[Operator Instructions]. Your next question comes from the line of Jon Groberg from UBS.

Hi, guys. Congratulations on the quarter. So just 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 bips in first quarter and if we can say, somewhere in the 1.75% to 2% range, I think that that's a real 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 bips of margin expansion just doesn't have the same meaningful impact on your EPS growth as it would have at 12%, 13%, 14% and you start shifting at all how you think about maybe using your cash? And I am just curious if you start to think that M&A becomes a more useful, a more productive use of your cash in terms of what you are able to do with it maybe in two or three years?

Our view on M&A really remains unchanged, in the sense that M&A is part of our strategy. I like to do M&A cases but they need to be strategically really fit into the franchise. If there 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. And it's actually much less financially driven in the sense that I say foremost strategy needs to be right and then the financial needs 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 we seeing nicely improved profitability and so I think the nicely improved profitability gives us the opportunity to further invest in organic growth. The field turbo, for example, are good examples of that. So I don't expect a change in the strategy, but I want to reinforce even that we have only done very few M&A in the recent quarters that we are very committed to it. And we are actually constantly working on cases and we have a good pipeline on the radar screen kind of cases that we try to nurture, but it's 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.

And Jon, Olivier and I, both continue to believe that in the medium term, we can't, let's call it mid-single-digit organic local currency growth, deliver mid-teens EPS growth in a constant currency environment and we have, while the absolute margins are getting higher, we have one of our biggest programs that we have invested in to drive margin enhancement with the Blue Ocean program being an enabler. We are only roughly halfway done with that. And so there is more to come in terms of that. And then, of course, we are saying that knowing that the amortization is kicking in and 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 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 are 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 turbo are part of us to achieve the mid-single-digit growth that we always talking to you guys. So we are not suggesting here with field turbo that we are going to accelerate our growth and you are going to certainly see higher growth rates.

Okay. Thanks.

And there are no further questions.

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