Mettler-Toledo International Inc. (MTD) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2015 Mettler-Toledo International Earnings Conference Call. My name is Kyle 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 the presentation over to our hostess for today's call, Ms. Mary Finnegan. Please proceed ma'am.

Thanks, Kyle, and good evening, everyone. I'm Mary Finnegan. I'm the Treasurer and I am 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 administrative matters. First, the call is being webcast and is available on our Web site. A copy of the press release and the presentation we refer to are also available on the Web site. On Page 1, we have our Safe Harbor language, let me just summarize that. 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, level 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 our forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions Factors Affecting our Future Operating Results and in the Business and Management’s Discussion & Analysis in sections of 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 measures is provided in our 8-K. Let me now turn the call over to Olivier.

Thank you, Mary, and welcome to everyone on the call. I will start with a summary of the quarter, and then Bill will provide details on our financial results and guidance. I will then have some additional comments before we open the lines for Q&A. The highlights for the quarter are on Page 2 of the presentation. We ended the year with a solid fourth quarter. Market conditions throughout the world developed as we expected and I’m very pleased with our continued strong execution. Growth in the Americas was very strong and broad-based. Europe had good growth in laboratory instruments, which was somewhat hidden by a decline in retail due to strong prior year comparisons. Sales in China and Brazil declined meaningfully in the quarter, while Russia’s decline was modest. Growth in emerging market outside these countries was solid. Overall, we continue to gain share through our field turbo program, Spinnaker marketing initiatives and our exciting product offering. With strong execution on our margin enhancement and productivity improvement program we again had good margin expansion in the quarter. Despite the challenging currency environment in the quarter and for the full year 2015, we delivered 10% EPS growth, which equates to 15% before the estimated impact of currencies. We are pleased with these results, particularly given the headwinds from currency and certain emerging markets. Equally important, we continue to make investments for growth, which position us well for 2016 and beyond. Now, let me turn it to Bill to cover the numbers.

Thanks, Olivier, and hello everybody. Sales were $673.5 million in the quarter, that’s an increase of 3% in local currency and on a dollar basis sales decreased by 3% as currencies reduced sales by 6% in the quarter. If you turn now to Page 3 of the presentation, we outline sales by geography. In the quarter, local currency sales increased by 9% in the Americas, they were flat in Europe, and declined by 2% in Asia/Rest of World as compared to the prior year. China was down 8% in the quarter, which was in line with our expectations. Brazil was down 12%, while we saw some improvement in Russia as their sales decline was only 1%. Excluding these three countries, we had a growth of 5% in the quarter. Turning to the next slide, we have full year sales, which also increased 3% in local currency. By region in 2015, local currency sales increased by 8% in the Americas, 2% in Europe and were flat in Asia/Rest of World, Brazil, Russia and China were down 11% in 2015, excluding these countries, three countries we had a sales growth of 7% in local currency for the full year. Turning now to Slide Number 5, we outline sales growth by product line. Laboratory had a growth of 6% in local currency, while industrial was flat in the quarter and our Food Retailing business declined 8% in the fourth quarter. Full year sales growth is shown on the next slide, Laboratory increased by 7% in local currency, while Industrial was flat and our Food Retailing business grew by 2%. Turning to now to Slide Number 7, let me walk you through key items on the P&L for the quarter. Our gross margins reached 58%, 150 basis point increase over the prior year margin of 56.5%. We’re of course very pleased with this increase, currencies contributed about 80% to the increase and includes the benefit of the gain we have on the Swiss franc-euro hedges. In constant currency, our gross margins were up by 70 basis points. Pricing and material cost reductions contributed to the margin improvement. These improvements were offset impart by our investments in the field service organization. R&D amounted to $31.1 million, that’s a 3% increase in local currency. SG&A amounted to $177.4 million, which is constant with the prior year in local currency. Increased investments in our field service organization and employee benefit costs were offset by our cost saving program and lower variable compensation. Our adjusted operating income was $182.2 million in the quarter and that’s a 3% increase over the prior year amount of $176.3 million. Currency reduced operating profit by approximately $7.8 million in the quarter. Excluding this headwind operating profit increased by 8% in the quarter. Our operating margins were 27.1%, that’s an increase of 180 basis points over the prior year. Currencies benefited margins by 50 basis points as the percentage impact of currency and sales was larger than the impact on operating profit. The core underlying margin improvement was approximately 130 bps. Incremental OP margins reached 75% before currencies this quarter, which is particularly impressive given the meaningful investments we're making in our field turbo program. A couple of final comments on the P&L, our amortization amounted to $8.0 million in the quarter. Our interest expense was $6.8 million in the quarter. Our effective tax rate continues to be 24% it was slightly less in the fourth quarter and that added about $0.02 to our earnings in the quarter. Fully diluted shares for the quarter were $27.8 million, that's a 4.4% decline from the prior year, reflecting the impact of our share repurchase programs. Adjusted EPS was $4.65 per share and that's an increase of 10% over the prior year amount of $4.24 per share. Excluding the impact of currency, adjusted EPS increased by 15% in the quarter. On a reported basis, earnings per share were $4.44 per share as compared to $4.17 per share and reported EPS includes restructuring charges of $0.17 per share and $0.04 per share of purchased intangible amortization. The next slide provides our full year results for 2015. Our local currency sales increased by 3%, while gross margins grew by 170 basis points. Currency benefited gross margins by about 90 basis points, resulting in a strong 80 basis point improvement on a constant currency basis. Operating profits increased by 5%, and margins on a constant currency basis increased by 120 bps. Incremental margins exceeded 50% for the full year. Our adjusted EPS grew by 10% which reflects a growth of approximately 15% excluding currency. Now let's turn to cash flow. In the quarter, our free cash flow was $126.4 million, or $4.60 per share. On a per-share basis, that's a 23% increase over the prior year amount. We achieved further improvement in DSO which was reduced to 39 days at the end of the year compared to 40 days in the prior year. Our ITO was 4.6. Full year free cash flow amounted to $364.8 million or $12.90 per share which is an increase of 11%. We converted 100% of our adjusted net income to cash flow in 2015 and we're of course pleased with that. Now let's turn to guidance. Forecasting continues to be very challenging given the uncertainty in certain emerging market. We expect market conditions to remain soft in our China industrial business and we don't expect to achieve growth in China for the full year. Russia appears to at bottomed while Brazil has ways to go. For the rest of world, we expect continued growth but less than what we've achieved in 2015 given economic forecasts and some tougher comps. We expect continued share gains globally driven by our Spinnaker sales and marketing program, our field turbo programs and a strong product pipeline. Taken all these factors together, we continue to expect local currency sales growth to be between 3% and 4% in 2016 and our adjusted earnings per share to be in the range of $14.10 to $14.30. This is a growth of 9% to 11%. We expect currencies to reduce earnings growth by about a 0.5, which represents a growth of 10.5 to 12.5 excluding currencies. This guidance remains unchanged from what we reported on our last call. Now let me turn to the first quarter. In the first quarter, we expect local currency sales growth of approximately 4% while our adjusted earnings per share should be in the range of $2.40 to $2.45 per share. We expect currencies to reduce EPS growth in the quarter by about 2.5%. Excluding the impact of currency our guidance reflects an EPS growth of 9.5% to 11.5% in the quarter. A couple of additional comments on guidance, first our sales guidance for the first quarter is at the top end of the range principally due to comparisons in China, we expect China to have flattish local currency sales growth in Q1 while for the full-year we expect China sales growth to be down low single-digits. Let me cover currency, with respect to sales growth we expect currency to reduce sales growth in Q1 by about 4.5% and reduce it for the full year by about 3%. As already mentioned, we expect currencies to reduce EPS growth in 2016 by approximately 1.5% with a greater impact in the first half of year. Finally, let me comment on cash flow, we expect cash flow to be in the range of $355 million to $360 million for the full year and we would expect to repurchase shares of approximately $500 million in 2016. Okay that's it from my side and now I want to turn it back to Olivier.

Thank you, Bill. Let me start with summary comments on business conditions. Lab finished the year strong and had a year, sales growth for the quarter was 6% and for the full year was 7%. Most product lines showed good growth. As mentioned on multiple occasions, our product pipeline is Lab is very strong they were also a major beneficiary of the field turbo program. We expect continued solid growth in 2016. Industrial was flat in the quarter and for the full year. Product Inspection grew 6% in the fourth quarter and for the full year. Market dynamics for Product Inspection continue to be very good. We have strong leadership position the most comprehensive offering in the market and very strong product pipeline which positions us well for 2016 and beyond. Core industrial declined 3% in the quarter and for the full year. In the quarter, we had good growth in Americas and Europe also had growth while China declined. You can see that many peers to our core industrial business are having struggles. In this leg, we performed well and gained share. I expect more of the same in 2016, a challenging environment with us performing relatively well and gaining some share. Finally, retail declined 8% in the quarter, Americas and Asia had good growth while Europe was down due to very strong quarter in the previous year. For the year, retail had growth of 2%, we would expect retail to be up modestly in 2016 due to timing of project activity. It is worth noting that retail had record levels of profit and profit margin in 2015 so we believe our strategy for retail is sound and well executed. Now, let me make some additional comments by geography. Europe sales were flat in the quarter, in line with our expectations given the good growth in final year. I am pleased with the solid growth in lab and core industrial in Europe during the quarter. For the full year, sales growth in Europe was up 2%, overall we continued to execute well in this region and I would feel two of our investments should help us continue to gain share. Americas had another excellent quarter with sales growth of 9%. We had good growth in most product lines especially where we make field turbo investments. Our outlook for Americas remained solid and although we will have tougher comparisons this year. We expect continued solid growth. Asia and rest of the world decreased 2% in the quarter, while increased 5% excluding China. As Bill mentioned, China declined 8% in the quarter. Lab was flat in the quarter in China while industry was down 17%. The order picture was better for China lab in the quarter and we expect China labs to grow in 2016. As Bill mentioned earlier, overall we expect China sales to be down this year but not to the level we saw in 2015. Outside China, in the fourth quarter we had very good growth in India and solid growth in Southeast Asia. We expect market conditions in Asia, outside of China to remain solid in 2016. Let me make some additional comments on 2016. Last year proved more challenging that we had anticipated and it also demonstrated our resiliency and ability as we deliver solid financial results despite sizeable sales decline in Brazil, Russia and China and significant currency headwinds. Our ability to navigate the wide economic environment around the globe is a result of our long standing core strategy and our discipline in executing them. These strategies which we have talked about with you for many years are well understood and embraced within the organization. We believe that our culture has been a key differentiator for us for many years and 2015 gave us ample of opportunities to show its benefits. In 2016, you will see more of the same, that is, we are more than happy to stick to our core strategy and focus on execution when we come in everyday. Let me provide some additional details to give you a better understanding of our key priorities in 2016. And first, the field turbo program had a good start in 2015 and we expect to add another 200 front end resources in 2016. Importantly, we are funding these investments due to productivity improvement and cost measures elsewhere in the business. The investments are aimed at underpenetrated market and are yielding tangible results as evidenced by our growth in 2015 outside of Brazil, Russia and China. Adding field resources is a high leverage investment for us and particularly important given our organic growth focus. Second, our Spinnaker sales and marketing program continues to drive share and productivity gains. We are now entering the fifth wave of Spinnaker and one of the key focus areas for us in 2016 is to use data analytics to identify sales opportunities which are actionable. One example is an initiative for replacement of old products. Our installed base consisting of millions of instruments is a highly valuable asset to our franchise. Our marketing teams work diligently to clean and enrich the information stored about these instruments in our comprehensive database, called iBase. Using data analytics we can identify customers in our iBase who will benefit from having their all the products upgraded to newest generation, which can provide significantly more functionality and translate into real value for our customers. To be successful, data transparency down to the model level needs to be extracted from the iBase and targeted marketing campaigns developed. We support this initiative through Telesales Resources, we have added to our field turbo program. Key account management is another key priority for our Spinnaker marketing programs in 2015. We’re further developing our top 100 key account program with the focus on further penetrating key customer in food, pharmaceutical and chemical industry. As the market leader, we have a wide range of product and service solutions and a large direct salesforce presence has enabled us to be a true partner for our global customers with diverse needs in many locations. Third, you have a large number of new products introduced in 2015 and expect similar trends in 2016 as well. In particular, balances and analytical instruments, process analytics, automated chemistry and product infection have robust pipelines. We continue to lead the market in technology advantage that provide competitive edge to our customers and keep us at the forefront of innovation in our industry. Finally, it is a core aspect of our culture. You can even say it is part of our DNA to continue to look for ways to optimize our cost structure. This drive for continuous improvement is at the foundation of our franchise and gives us the resiliency and agility to remain successful even when market conditions are not as favorable as we might have expected. Many productivity programs and cost initiatives in various areas add-up to significant savings and efficiencies. These efforts include lean initiatives and manufacturing in back office, leveraging low cost countries for R&D, marketing support and manufacturing and utilizing shared service centers for operational activities. That covers my column on our strategy focus in 2016. Let me make some summary comments before opening it up for questions. We will remain cautious on China and some of the emerging markets. As market conditions are challenging and it will take some time for these markets to recover. Our priority in these countries is to protect margins and ensure resources are targeted to long-term growth opportunities. Our other businesses, which account for more than 80% of total sales, are performing well. Market demand is solid, and we are leveraging our excellent product pipeline, proven sales and marketing programs, and the investments in field resources to gain share. Our margin enhancement and productivity initiatives are well on track and allow us to make additional growth investments. We believe this positions us well for continued share gain in 2016 and beyond. I want to now ask the operator to open the line for questions.

[Operator Instructions] Your first question comes from the line of Tim Evans from Wells Fargo Securities. Your line is open.

Thank you. I would like to try to get a sense for some of the sensitivities in guidance. I mean we have obviously been in a challenging macro environment now for some time and you've done a great job managing through that. As you are thinking about your 2016 guidance, what are some of the downside risks that you think are the most things that are on the front of your mind at this point? Is it still kind of emerging markets, or is it more kind of global GDP that you are thinking about? Just kind of give us a sense for maybe some of the things that could go wrong in 2016?

So I would start with the global economy, right. We have certain assumptions about how the world should play out. We’re using the same data that you guys are seeing the same information that you guys are. We continue to be a little worried about some of the emerging markets. We also see some weakness in some manufacturing data, which impacts our business. I mean, I would qualify that to say, if you dig a layer deeper into that, you would see that actually some areas like food and chemical or actually there is more, those are the more positive ones for example within those are actually growth areas within the U.S. PMI number as opposed to for example the oil and gas area or metals area are much more difficult at this time. Second area would be currency, I think we’ve all experience together ourselves the peer companies the new guys. How currencies can move things around and we have an assumption based on where rates are basically today. And if those should continue, if the economy should continue, we would feel good about our guidance for 2016 and I would highlight Olivier and I both feel that the things we can control, the execution of our business plan are things that we feel very good about for 2016.

Your next question comes from the line of Paul Knight from Janney Montgomery Scott. Your line is open.

This is actually Bill March on for Paul. Thanks for taking the questions. Maybe first, could you just speak to what you're seeing in China in terms of flat Lab maybe where you could see some upside into 2016 and what you're seeing on the industrial side as well?

Okay I expect 2016 a little bit what we have also seen in 2015 we had in 2015 actually good profits of growth in the Lab area and particularly in the area that is not exposed to the industrial world. I expect that to go on. I do on the industrial piece however also expect that the challenge goes on in 2016, the challenge that we have experienced last year is that there is overcapacity in many of our end-user industries that we serve. And the overcapacity remains and the high volatility that we just see in general in China is going on. It is today probably too early to really have a good outlook for China, we want to see kind of Chinese New Year and how the business starts after that and we will certainly have a higher confidence level in our outlook when we talk next time about China and so May time is certainly giving us then better visibility, we saw that also last year the impact of how business does before and after Chinese New Year is actually quite important.

Understood and then just as a follow-up maybe what is still playing out in the food retailing segment what is the decline this quarter and then as you look out in the next to see tougher comp even though Food and Chemical seems to be an area of somewhat strength in the applied markets? Thank you.

So Food Retail I think important this is really to this -- our solution going to the big food retails’ key accounts around the world and we have seen a decline here in Q4, but that was expected actually we did talk about this happening because we had a strong previous year and particularly in Europe we had one or two big projects. And for 2016, we expect also some declines in Food Retail that's because we have talked about key accounts and they plan their rollout actually a couple of quarters in advance, so we have a certain visibility about the big project. And just the way it is coming together makes us believe that 2016 will be more difficult. But I want also to remind the way we're running this retail, my strategic standpoint is really a focus on some profitability and not just on the growth and we accept in that sense also the volatility that we have in that business, but I did highlight in my prepared remarks that I am really happy to have the profitability is developing of this business. So I feel we're on a good track and I am not irritated by the fact that we expect some sales decline for that business.

Your next question comes from the line of Jon Groberg from UBS. Your line is open.

This is actually Harris on behalf of Jon I appreciate the question, so first one is in terms of pricing what are you expecting in 2016 compared to you prior guidance was 150 basis points, so curious seeing where FX and macro are today versus when you last reported what expectations are?

So still think the 150 basis point is a good assumption here and even that macro-environment inflation and so on wouldn't necessarily suggest that it's an environment for price increases and we feel definitely comfortable with that. And our customers ban you, they ban your ad that our products are brining, we have well differentiated solutions. And this allows us also to have some pricing increases and we do that in a differentiated way across the world. We do it differentiated across the product lines and the tools that we have in place, the processes that we have in place should really enable us to increase prices independent of the macroeconomic environment. You might also recall that we did breakout price increases even in economic crises I feel we can do also price increases in low inflation environment.

Got it and then one additional question, you've mentioned in the past various initiatives to and try to sale more serious contracts at the point of product sales, can you comment on the progress here and any initiatives you're pursuing on that front through 2016?

Yes, so our focus is still very much on this topic and what maybe phrased as a more broadly of course we want to sell more service contract at the point of sales. So, we have efforts here that first we always include service in our courts. And then we train and incentivize our sales people to really also convert on that. That’s an ongoing effort and the big benefit comes when we cumulate all the contract business over many years. But in parallel we have actually very significant efforts to grow on the whole installed base and make sure that we can capture as much of the installed base on the service contract. So, I want to make sure that we emphasize really both things. We are making good progress but I would want also to strength up on that it is a journey the service business growing the service business and particular the contract business is every quarter of every year capturing a few hundreds of additional customers. It's not just a bold strategy that you can implement within one or two years.

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

Hi guys it's actually Joel in for Isaac. Just wondering if you guys have seen any improved demand from your customers you actually benefit from lower oil prices and if not when do you think we might actually see that?

It's an interesting question in the sense that I have been observing a little bit the chemical industry in particular who could be one of the beneficiary of the plastic industry as well. I don’t see strong signals yet and in that sense I don’t have much expectation that we are really going to benefit from this. And I would say that is probably a general comment, we don’t see that many consumers or industry segments that are really benefiting from the lower oil prices.

Great and then maybe just one on M&A, is the focus still on bolt ons or are you guys thinking about anything larger in the context of some of the valuations we are seeing in the market today. And then maybe any update on how the Board is thinking about the optimal leverage for the company?

So, on M&A, we very much still pursue the same strategy, strategy of looking at opportunities, we have our radar, we nurture these opportunities and sometimes some more materializing and that the timing of it is difficult, the strategic target is to go for companies where we can add value and where it's strengthening our franchise and in essence there are not that very big companies that would really fall in that category and the few ones that are bigger might not just be available. So, I think what you are going to see from us is to do more of what we have done in recent years and this focus on really being able to strengthen the franchise has generated great results actually in the past and I want to continue to pursue that. On the balance sheet, Bill you might want to quickly comment on that one?

So, as you know we've bought a little bit more in the share repurchase program and our free cash flow this past year we are going to do that again in 2016. And I think beyond that period of time I think we'll comment 12 months from now or something.

Your next question comes from the Steve Beuchaw from Morgan Stanly. Your line is open.

Yes hi guys, it's Michael Clerico on for Steve. Could you elaborate a little bit more on what's driving larger FX headwinds, are there any currencies outside the majors that are having a larger and is that expected to impact, also if you could quantify the impact to hedges on the '16 outlook and also how those hedges will lead into '17? Thanks.

Sure. So, just to clarify there has not been any change in the OpEx environment since we last talked to guys in November, I mean there have been changes but they have basically netted out. In terms of the Swiss franc hedges, they will -- we have less of them this year. I think we were protecting maybe 85% of our exposure in 2015, that dropped to about 70% this year and then falls off completely in 2017 and the impact of it falling out completely is about $5 million or so.

Okay, great thanks. And then secondly, I just want to ask about guidance again, with stronger expected growth this quarter and the 1Q guide in at the top of the range. The full year implies deceleration throughout the year as we go. We know from last quarter you baked in a level of conservatism into that guidance. So I’m wondering, what the bigger deltas are in the end markets that you saw since we last got the update and what’s giving your cause in change the outlook given the stronger than second quarter, this quarter and the top of the range outlook for Q1? Thanks.

I wouldn’t read too much into that, we gave a guidance of 3% to 4%. We said 4% for the full year, we said 4% for Q1, I think in it very much reflects our more detailed look at how comps are going to go in particularly we see China has probably got to do a little better in Q1 then we expected it to do for the full year and I think that is largely explained by some specific comp considerations that they had. So I’m careful I think the word you used to position, the question was deceleration. I think to say the, going from 4 to 3.5 deceleration is probably, I don’t think the right analytical conclusion. I think is a little bit of comp topic in Q1 that benefits us and we largely think that what we see today is playing out very much in line with what the information that we had at the time we updated you guys in November.

Your next question comes from the line of Derik de Bruin from Bank of America. Your line is open. Derik de Bruin your line is open. Your next question comes from the line of Tycho Peterson from JPMorgan. Your line is open.

Hi, thanks. Wondering if you can talk about linearity in the quarter and any commentary you can provide on trends in January both to the overall business and then in particular within emerging markets?

Tycho could you the word that you’re asking, we both missed it we couldn’t…

Yes. I’m asking about linearity in the quarter, so just the sequential monthly trends throughout the quarter and then in January. If you can provide me commentary both for the overall business as well as emerging markets?

Okay. So I think the guys both years for Chinese New Year is February. So in both periods it was February. The month of January is solid. So it’s not that we are expecting to race at the finish, we entered the year with more backlog decent order trend leads and stuff seem in line. I think it’s a realistic expectation, we had from the quarter. Maybe in terms of budget flush CapEx at the end of the year, I think ourselves and many of the peer guys felt very good about 2015’s budget flush and I think how we saw it play out in 2016 was solid, vis-à-vis a relatively stronger Q4 of last year. So the farmer guys seem to be spending some money on businesses that are most oriented towards pharma had a good finish to the year.

I think, I would also add, it’s not easy to look at a trend on the monthly basis. A month can be impacted by bigger projects and number of working days and so on, so we don’t necessarily look at monthly results to identify a trend, I think we prefer to take averages across at least three months, if not six months.

Okay. And I hate to harp on China, because I know you hit a disproportionate number of questions, but you did have flat orders there yet you’re guiding for low single-digit decline in the year. So are you expecting orders to drop off over the next couple of quarters, I’m just trying to understanding why you’re projecting a decline not flat orders this quarter?

I think so maybe similar to where Olivier finished off the answer to the previous piece. We don’t read too much into the shorter period, if we kind of look out on the China business, there is nothing that has happened let’s say positive since we talked to you guys in November about the China economic outlook. And I think we always have a little bit of a late-cycle economically in our business. So we’re impacted by investment decisions and I don’t think anybody is rushing to make positive investment decisions in China based on what they heard recently. So we think it’s prudent to be cautious and we’re happy it’s going to be off to a good start. We prefer that than trying to explain to you guys, why we’re going to catch up later in the year. But we’re not, we prefer, what we got for the first quarter versus the alternative, but we’re not still excited yet about a turnaround. And we don’t expect when the turnaround does come Tycho that it’s going to be a jump back, it’s going to be a bottoming for a while that overcapacity will take some time.

Okay. And then just lastly wondering if you could talk a little bit more Olivier on the fifth wave of Spinnaker and particularly interested on the replacement opportunity you alluded to, is there anything you can kind of guide us to as to the age of installed base or which part of the business you will see maybe disproportionate benefits?

The fifth wave will not bring big revolutions. It's like the first four waves evolution. So we are strengthening all the different dimensions that we have been working on and bringing some additional sophistication. So topics around key account management, iBase management, the installed base topic all will remain in the center. I think where we get a little bit more sophisticated is in the area of big data analytics and leveraging it for sales and marketing initiatives. And the example that I used in the prepared remarks, we're going in that direction is that we're really applying more sophisticated analytics to the information that we have on the millions of installed instruments and the analytics allows us to better recognize the potential and based on the potential also use the right go to market approach. So meaning understanding, if this is an opportunity where we use telesales or are we using a field sales person and with what kind of value proposition we approach the customers. And there is certainly an area where we bring more sophistication with this fifth wave of Spinnaker.

Your next question comes from the line of Brandon Couillard from Jefferies. Your line is open.

Bill, just a couple for you, could you give us the ASP contribution in the fourth quarter and was there any acquisition revenue contribution from the deal you did in the third quarter?

The latter one I can answer quickly, the answer is no. We didn’t catch what you're asking for the first one?

The pricing contribution to revenues in the fourth quarter?

Okay, pricing was up 220 bps in the fourth quarter.

And then I am just curious to how you're thinking about material cost for the year given what's happened in the commodity complex and how you see gross margins shaping out for the full year?

I think again we'll have a good year on material cost we are down on an apples-to-apples basis about 3% in ’15. I think we should have good year. It's important now to remember on commodity prices. We're not buying that much that is -- if you look at for example a machine part or a fabrication labor time, machine time would be a bigger cost element than the steel or the fabricating material itself. So we didn’t' get hurt by material in anyway, I don't mean to imply that, and certainly we like it going this way more than the other. But it's for example of the 3% that we saved this year I think less than 1% is directly attributable to lower material cost.

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

Hi, it's Luke in for Ross, I guess you've talked a little bit more than the returns you're seeing from your, the field turbo program, I guess what kind of inning we are in and if you guys have any plans to make any additional investments past what early goals were?

So, as we discussed it on the November call, we have done a very successful wave of field turbo in 2015 and we want to repeat that into 2016, we're on track to implement about the same amount in terms of additional resources so roughly 200 field resources. We are very encouraged by the results that we had last year and we also want to approach it in a similar way this year in terms of funding it also through cost measures that we have in other areas of the company. And the projects or the field additions are very similar to last year in terms of the business priorities, but of course and the territories might be different, but the geographic focus remains on the markets that have reasonable growth momentum. And we're adding again quite a sizable number of resources in Americas and as well as selectively in Europe and yes.

Okay great and I guess turning to emerging markets we're seeing a lot of mixed singles over there and you guys are seeing some strengths and some weaknesses, I was hoping you’d give more color into the various customer segments that you're seeing these trends in and kind of where you see any turnarounds and reversals in any of these trends?

So if we exclude China for a minute, in all the other emerging markets I wouldn't talk too much industry specific. I think actually it's more the geography than the industry. And when we talk about Brazil and Russia the challenges and the headwinds we had last year it's actually very difficult to attribute to that to a certain industry segment. We saw it actually pretty much grow across the business lines, and across industry segments. And what we are seeing is however that across the different emerging markets there are big differences, we have seen actually emerging markets that did very well for us. And we talked India, Mexico did well, Southeast Asia did actually well. And so we have multiple emerging markets that did well last year and I expect actually that this year it's also going to be mixed. We are going to have emerging markets that do well and they are going to be emerging markets that will be more challenging. Partially, I would attribute the good results that we had in certain emerging markets last year to an excellent performance by our local teams. With some highlights countries like Mexico and Southeast Asia that did really exceptionally well and that’s certainly also attributable to programs that we have in place. Some of the emerging markets, and the economic environment might be a little bit more challenging but we consciously want to invest in these markets because we believe also in the long term I would name here for example Turkey but also Indonesia, and Vietnam and so on where you can see a certain cool down from an macroeconomic environment, nonetheless, we continue to invest there because we feel we can win market share and in the long term these economies will continue to develop well.

Your next question comes from the line of Dan Arias from Citi. Your line is open.

Hi guys this is actually Brian Kipp on behalf of Dan. Well I just wanted to step back and go to 4Q last year when the Swiss National Bank removed the peg. You guys were talking about looking at your cost structure especially in light of hedging starting to roll off 2016. Now that we are seeing volatility in emerging markets currencies a little bit more than we are seeing in Europe. What are your thoughts there, have you guys gone through a plan, have you started to reallocate resources into Europe, maintained in Switzerland or move to emerging markets just want to get some color there?

Okay. I think we need to differentiate here between resources and cost base that we have that is associated with producing products and with serving local markets. When we talk about the cost base that we have in Switzerland and the currency exposure this wasn’t the cost associated with serving Switzerland and the market but actually in terms of having a cost base because we do R&D product development and production in Switzerland. And this is true for Switzerland this true for our manufacturing base in China and so on, but we don’t have this strengthening of a currency that is a headwind except in Switzerland until this was specific to Switzerland. And now, in the order markets of where we serve a country and there is currency exposure. We do a little bit cost measure specifically it's more on the pricing side that we would actually work. And with one big exception and that’s China. In China, we have taken cost measures not because of currency but because of market dynamics. And there it is very much about resource shifting, and we have business lines that have growth prospects in orders. So, probably not surprising we have done restructuring in the industrial business in China as for the lab business we continue to invest into it as we are adding resources.

I appreciate it, and piggy backing off of Tycho’s question. I know the Spinnaker fifth wave is early stages but have you guys done any best testing at all yet and when do you expect to kind a fully ramp that and if you haven't done bets testing and start to convert some of those orders?

So, the bets testing wouldn’t necessary apply to Spinnaker the way we develop things is we go out to -- on the different market organization and we study different best practices. And when we see that we have a best practice of certain sophistication in an approach and so when we qualify that as a tool box with qualified and training and then we roll it out. So, in that sense it's not beta testing, it's already reality. We have these pilots these crusaders of teams out there that have done good stuff that we are scaling up and rolling out. The scale up takes place over to about a year, and we go and normally with these more sophisticated levels to the countries that are more mature. And then we follow-up with the other countries and there a few things that we drive from the center rather than bottom up from the units, like the big data analytics things there are from the center. And there I would say yes, we start with prototypes and then we industrialize the things so there I am with you with the beta testing. I feel comfortable where we stand on that one and I know we’re going to have the results out of it.

Okay. I guess it was in context to the data analytics stuff, so you’re in kind of like a bets testing type phase evaluating what methodologies you should use in the marketing realm versus actually out in reaching out to customers on a broad-base. That’s correct?

Yes, that’s correct. In this area it is also about we really try to innovate in this area. As we try to come up with new approaches, tools, and technology tools, databases and all that stuff that we are combining. And there is a very small team that is leading the thinking process on that one. And that’s the prototype part and when we have cracked that analytics, scaling it up afterwards or industrializing is normally not the challenging part.

I appreciate it. If I can sneak one more in Bill did you see any gross margin benefit were you able to clean out any gross margin benefit from oil and freight et cetera or is that something that’s probably a little too deep?

Hi we had a good freight number savings year-on-year. But I doubt it would be big enough to move the needle good could it be 5 basis points maybe something like that.

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

Just two things, one just a follow-up to make sure I heard you correctly. Bill and Mary as it relates to FX. Just want to make sure I heard you correctly that you’re now assuming that FX is going to negatively impact your revenue by, I believe you said 4.5% and earnings by 1.5%, is that correct?

It will impact earnings by 1.5% for the full year and it will impact sales by 3%.

For the full year.

For the full year, the 4.5, I think is Q1 and the 2.5 on EPS is Q1.

That’s right.

Okay, great. Thanks for clarify that. And then just Bill, I know you guys have had a large number of different products in skews, but I was wondering if the creation or development of any new products that you guys have been adding over the past year or two worth into 2016 is anything worth discussing as it relates to the overall impact on the company?

No. In the sense that, we need to constantly come out with product innovations, upgrades to existing products and so on and that is just part of our business model and it’s typically an individual product helps us to increase pricing and have better models and keep the growth growing. But it’s not that it’s going to really change our overall number. An individual product will not really change the needle.

Okay. I was thinking more in the kind of expanding in the new types of products that you guys haven’t been offered in the past at all?

In the new product categories it typically takes multiple quarters that is adds up to millions of dollars. Yes it is actually Bill corrected me make it years. So we need to be realistic on that one. Even, yes what I have seen when we expanded new product categories after 5-10 years, it becomes really something effective, so yes that is it.

Sure. And then just one quick follow-up, I was just wondering that if we could have any thoughts on the difference in growth between the Americas and Europe. So I understand in the Americas, the pharma is driving a lot of the growth there. And is there any reason, there isn’t thoughts on, why you’re not seeing similar type of growth in Europe?

I mean first I would clearly say North America it is much more healthy in terms of economy that Europe, definitely. But I want also to say that I’m very happy with the results than we had in Europe last year. Particularly if I look at the two year phase and then if you exclude Russia and that is something that has to do in Q4 kind of a, as exclude retail. It’s actually a good performance. So nevertheless, Americas did even better and I expect 2016 to be the same Americas have more dynamic than Europe. In terms of team performance, in terms of share gain actually similar.

Your next question comes from the line of Richard Eastman from Robert W. Baird. Your line is open.

Yes, good evening. Bill could you just kind of speak real quickly. So in the fourth quarter, the service and consumables, how did that grow relative to hardware against the 3% local currency growth rate? Did we see any hardware growth?

Actually our service growth wasn't that high in Q4, I think it was 2% or so, its consumables might have 2 or 3 and the reason for that was we had about 11% growth in Q4 a year ago, so the product business modestly outgrew the service business, but I think that that's more of comp topic.

And Olivier I just -- may be you could just do just a quick deeper dive on the product inspection business and I am a little bit curious the macro trends in food inspection has been prevailingly positive here for some time and so when you look at that market what's your sense of the markets growth? And then is there some new products you spoke to there, are there any technology trends that are boosting at those content within that marketplace and just I am kind of getting at what the growth product inspection growth should be for ’16 and what your expectation is to perhaps outgrow the favorable macro there?

Okay. First on the macro, I would differentiate a little bit by geography. The long-term trends are very favorable across the world for this business segment and we're extremely well positioned. But there are temporary things happening for example China we clearly see that also the food industry is holding back. There is an overcapacity and the whole food industry is challenged right now in China also in terms of margins. So you see the big foreign companies but also local companies like MasterCom as well cutting back significant off their CapEx and that impacts our product inspection business. And while in U.S. for example we have very good data again we had very good growth for example last year. And so I would say globally and long-term very favorable, short-term we need differences by geographies. In terms of our market position, we have an excellent position because we are the leader in all the core technologies. We are a leader across the globe as typically we have competitors that are more regional and typically in one or the other technology. In terms of technology development, the check weighing and metal detection business is a relatively mature technology. The x-ray technology is still at an adoption rate that is growing meaning that not all the production lines are equipped today with x-ray technology even in western markets as part of a metal detection that is a more mature technology and has been widely applied and so we leave our supply from replacement business. And then the fourth technology is vision inspection, vision inspection has multiple applications and that's one that is more developing and it's more than early stage and also for us it's still a smaller and will hopefully develop well over the next 5-10 years.

And you would be pleased in ’16, if on a consolidated basis that product inspection grew kind of at that similar 6% rate that we saw in ’15, is that, that would be, okay, okay…

No, no, I think that's a reasonable assumption.

Yes, okay and then, I feel like I might have misheard the numbers or but in China the growth rates that you gave for Lab and the growth rate that you gave for the Industrial business kind of weighted out to 50/50 in terms of the size of those businesses, is that correct?

No.

You said significant you're talking about the fourth quarter standing alone?

Yes, you talked about and you said in the fourth quarter that Industrial was down.

Yes so, sorry, Lab was 42% sales in the quarter in China while Industrial was 49 and Retail was 9.

Okay, I got you, all right, that makes sense, and then just a -- how is the profit margin held up in China relative to the industrial declines that we've seen there, I got to believe certain pieces of the Industrial market are competitive but there is nothing visible in the margin line consolidated, so you've managed the whole margins there pretty flat despite the sales declines in China?

Yes, this is the customers that have the money are usually spending on more sophisticated applications that we make more money on. It's always the businesses that have the least amount of customer value proposition that gets hit the hardest. And it's partly a reflection of who the buyers are, partly a reflection of the nature of the application. And so you are right our margins have held up reasonably in China despite some of the sales declines and we are working hard to continue to do that going forward as well.

Okay. And then a last question from me is the restructuring charge kind of kicked up a little bit and obviously we are using that to pay for the field turbo program. But can you just give us a sense of where the cost out is coming from either by end market or by region?

Sure, I think the two biggest pieces would be China and Europe and you can assume it's more weighted to for example the industrial business in both cases.

Your next question comes from the line of Derek de Bruin from Bank of America. Your line is open.

So just one of the things I wanted to ask has already been asked but Bill what are your pricing assumptions 2016 in terms of being able to get pricing?

It is actually 150 basis points, so it's about the same that we guided over back in November. We feel comfortable with that even that the macroeconomic environment might have changed a little bit I feel comfortable that we can execute on that one.

And that is just you doing more Spinnaker and the focus on that. I mean I guess you are not seeing any of the local people sort of pickup speed like that or being pushed back on it I am just wondering if it's -- does your ability execute or does the competition just not play in?

No, it is actually it has much more to do with the customers. We have good differentiated products and as long as we do price increases every year actually we operate almost the load at radar and they accept that. And of course we differentiate significantly across the world by geography as well as the business lines. And we are going to execute it in a similar way as we did in the past. Of course every year it is getting a little bit more sophisticated but the approaches that we used to it is very similar. And it is a line that I haven’t used many times but the biggest obstacle for price increases are often not the customers but our internal organization sales people and that is something we can work on and can control, so, I feel comparable from that end.

So, one of your strategies in terms of growth outlook has been that in your China business it is more heavily industrial weighted at the moment and overtime you expect China to look like the rest of the world business and have more of a Lab focus. Given the current economic situation in China and the slowing macro economy, are you worried that it may take longer to sort of get that conversion going on right now, I guess sort of how you are looking at what's going on in China right now into your longer terms plans so your strategy as to how tap into that market?

I think that there are things kind of going both ways right Derek, so I may be give you two example so -- because our industrial has been shrinking we are moving more towards the corporate side.

Good point yeah [Multiple Speakers].

As far as the offer is that -- but then maybe to your point Olivier made this point on MasterCom cutting their CapEx levels the largest food company in China. And that certainly has slowed the move to more consumer safety in the food inspection area. So, probably both of us would say that if the economy was going better the move towards more consumer safety food inspection considerations would have had a more accelerated pace than China that it does now given the overall economic circumstances, so a little bit of both ways.

Your next quarter comes from the line of David Stratton from Great Lakes Review. Your line is open.

Thanks taking the call. I was wondering if you can give some color around CapEx expectations for 2016 and how that relates to the expansion projects that you mentioned in the last earnings call?

So, we are going to have CapEx of 120 million or so next year and that includes some significant building programs in the United States and Europe and I think a little bit in China as well. China is a little bit more a story about we will be consolidating with some other facilities there.

All right, and then lastly kind of a housekeeping, would you breakout your service in consumables revenue as a percentage of sales for the fourth and the full year?

All right, you have to give me one second we have that number it is, -- so in Q4, service was 27% of sales and if I include service and consumables. I am sorry that was service and consumables and for the full year it was 30%. And so always a little less in the fourth quarter because that’s a big quarter for product sales so it impacts the mix of it.

There are no further questions at this time. I will turn it back over to Mary Finnegan for closing remarks.

Thanks Cameron and thanks everyone for joining us. Just had one last comment as your planning your schedules for this year. We wanted to let you know that we plan to hold an Investor Meeting at our Rainin facility and Oakland California on Friday, July 29th. We will have some more details for you in the coming weeks, but just wanted to mention it now as you are starting your planning. And that is all we have for tonight. Again thanks for joining us. Any questions of course don’t hesitate to call. Take care.

Thank you. Bye, bye.