Mary T. Finnegan - Mettler-Toledo International, Inc. Olivier A. Filliol - Mettler-Toledo International, Inc. William P. Donnelly - Mettler-Toledo International, Inc..

Steven Reiman - JPMorgan Securities LLC Tim C. Evans - Wells Fargo Securities LLC Derik de Bruin - Bank of America Merrill Lynch Matthew John Nicolai - Evercore Group LLC Dan Leonard - Deutsche Bank Securities, Inc. Isaac Ro - Goldman Sachs & Co. Bryan A. Kipp - Citigroup Global Markets, Inc. (Broker) Rick C. Eastman - Robert W. Baird & Co., Inc.

(Broker) Brandon Couillard - Jefferies LLC Robert Sohngen Cottrell - Cleveland Research Co. LLC.

Good day, ladies and gentlemen, and welcome to our Fourth Quarter 2016 Mettler-Toledo International Earnings Conference Call. My name is Jesse, and I will be your audio coordinator for today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

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

Thanks, Jesse, and good evening, everyone. I am Mary Finnegan. I'm the Treasurer and I'm responsible for Investor Relations at Mettler-Toledo. Happy that you're joining us tonight. I'm joined by Olivier Filliol, our CEO, and Bill Donnelly, our Executive Vice President. I need to cover just a couple of administrative matters.

The call is being webcast and is available on our website. Copy of the press release and the presentation is also available on our website. On page two, we have the safe harbor language. Let me summarize this quickly. Statements in the 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 discussion in our recent Form 8-K.

All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Factors Affecting our Future Operating Results and in the Business and Management Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K.

Just one last item; on today's call, we may use non-GAAP financial measures. More detailed information with respect to the use of and differences between the non-GAAP financial measures and the most directly comparable GAAP measure is provided in the 8-K. I'm going to 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 three of the presentation.

We had a strong end to the year, reflecting solid market conditions and good execution. Local currency sales growth was 8% in the quarter, better than expected with very good results in Europe and Asia / Rest of the World. Americas came in pretty much as expected. We are very pleased with these results and the performance of our teams around the world.

Continued strong margin expansion led to very good growth in EPS in the fourth quarter. As a result of the strong finish, we achieved a 7% local currency sales growth and a 15% EPS growth for the full year. We are very happy with this performance as well our outlook for 2017. Let me now hand over to Bill to cover the financials..

Thanks, Olivier, and hello, everyone. Sales were $709.7 million in the quarter, and that's an increase of 8% in local currency. The Troemner acquisition contributed approximately 1% to local currency sales growth in the quarter, and on a dollar basis, our sales increased by 5% as currencies reduced sales by 3% in the quarter.

One slide number four, we show local currency sales growth for the quarter. You can see here that sales grew by 7% in Europe, 15% in Asia / Rest of World and 3% in the Americas. The Americas growth, excluding Troemner, was flat with the prior year.

As Olivier mentioned, this is pretty much on track with what we expected and was impacted by strong results last year. You guys often ask us about budget flush. I would say that for us, it was a little less than last year, largely related to what we saw with U.S. biopharma.

On the next slide, we provide local currency sales growth for the full year 2016, which was 7%. By region, Europe and the Americas each grew by 5%, while Asia / Rest of World increased 10% for the full year. On slide number six we outline sales growth by product line for the quarter.

Laboratory had good growth with local currency sales growth of 8%, of which approximately 2% was from Troemner. Our Industrial business increased by 7% and Food Retailing also increased by 7%. All these comparisons are versus the prior year. The next slide summarizes full year results. Our Lab business had local currency sales growth of 8%.

Industrial increased by 5%, while Food Retailing increased by 6%. Now I'd like to turn to slide number eight, and let me walk you through the key P&L items for the quarter. Our gross margins were a record 59%, 100 basis points improvement over the prior year amount of 58%.

Pricing, material costs decreases and currencies contributed to the increase, which was offset in part by additional targeted investments, particularly in our Service business. R&D amounted to $30.2 million, which represents a 1% decline in local currency, driven by the timing of new product launches. Our SG&A was $188.2 million.

That's an increase of 8% in local currency. Variable comp and investments in our Field Turbo contributed to the increase. Adjusted operating income was $200.2 million in the quarter, and that's an increase of 10% over the prior-year amount of $182.2 million. Currency reduced operating profit by $1.2 million in the quarter.

We had expected currencies to be neutral the last time we spoke. Adjusted operating margins were 28.2%, a 110 basis point increase over the prior year. A couple of final comments on the P&L; our amortization amounted to $9.9 million in the quarter, while our interest expense was $7.4 million in the quarter. Our effective tax rate was 24%.

Fully diluted shares for the quarter were 26.6 million, and that's a 4% decline from the prior year, reflecting the impact of our share repurchase program. Adjusted earnings per share was $5.28 per share. That's a 14% increase over the prior year amount of $4.65 per share. Currencies reduced EPS growth by approximately 1%.

On a reported basis, our earnings per share was $5.17 per share. That compares to $4.44 per share in the prior year. Reported EPS includes $0.05 of restructuring expenses and $0.06 of purchased intangible amortization. The next slide shows the year-to-date P&L.

We had local currency sales growth of 7%, while our operating income increased by 10% and our adjusted earnings per share by 15%. As Olivier mentioned, we're very pleased with these results, and they reflect solid market conditions and strong execution.

Now turning to cash flow, in the quarter free cash flow was $82.9 million, and that compares to $126.4 million in the prior year. Cash flow in the quarter was impacted by our $37 million purchase of our previously leased pipette manufacturing facility in California. Absent this purchase, our full year cash flow amounted to $384 million.

And that's on target with what we discussed with you last quarter. We remain pleased with our working capital management and achieved further improvements in DSO, which was reduced by one day to 37 days as compared to the prior year, while our ITO was 4.6, which was consistent with last quarter.

As a reminder, we have some facility expansions underway, which increased our CapEx in 2016 and will also impact 2017. Excluding the pipette facility acquisition and these facility expansions that I just referred to, our free cash flow per share grew by 15% over the prior year. Now let's turn to our guidance.

We're coming off a very strong finish to the year, and our outlook for the first quarter is also strong. We believe we're executing very well, and the foundation is built on a robust product pipeline, our innovative Spinnaker sales and marketing programs, the investments we've made in Field Turbos, and they're all paying dividends.

These factors are within our control, and we feel confident about capitalizing on them. However, we remain cautious on the global economy, as we see continued uncertainties, for example in the Chinese end markets, industrial end markets, some questions on Europe, and in general, we face tougher comps, particularly in the second half of the year.

That provides you with some of the background on our assumptions. Now let me cover the specifics, as we see some moving pieces this quarter.

First, taking into account the strong finish to the year, and with the assumption that market conditions remain stable, we're increasing our organic, local currency sales growth assumption for 2017 from 4.5% to 5%. We expect local currency sales growth to approximate 5.5%, as Troemner should contribute about 50 basis points to our growth in 2017.

Second, we will implement the new accounting standard associated with the tax impact of stock option deductions. While we're still finalizing our calculation, our current estimate is that this will lower our effective tax rate for the full year from 24% to 22%, but there will also be an increase in fully diluted shares.

The option exercises are steady and somewhat predictable on an annual basis, but there will be variability by quarter. When we report our quarterly numbers for 2017, we will reflect a 22% effective tax rate in reporting our quarterly adjusted earnings per share. We think this will be easier for you to understand.

The actual tax rate on a quarterly basis will vary depending on actual exercise, but we expect to be at 22% by the end of the year. We believe this will make comparisons against the prior year and guidance easier for everyone. As always, we will include a reconciliation in our quarterly press release so it'll be transparent for you.

Overall, we expect the impact of the new accounting standard will add approximately $0.31 to earnings per share. This reflects the reduction in the tax rate to 22%, which is offset somewhat by a higher share count as the tax benefit of option exercise is no longer reflected as a reduction to dilution.

While the tax accounting is a nice benefit to earnings, it is somewhat offset by currency. The strengthening of the dollar since November has created a greater headwind than we provided in our initial guidance in November.

Rates as of November would have reduced 2017 earnings versus 2016 by about 1% while current rates would be a headwind of approximately 2% versus 2016 actuals. Okay. Taking all these things together, we now expect adjusted EPS in 2017 to be in the range of $16.55 per share to $16.75 per share. That's a growth rate of 12% to 13%.

As mentioned already, we expect currency to reduce earnings growth by 2% in 2017 with a greater impact in the second, third and fourth quarters. Now turning to quarterly guidance, we have a few factors impacting the first quarter. First, we're coming off a strong finish to the year. Second, we'll have our easiest comparison in the first quarter.

And third, we expect a benefit in terms of the timing of the Easter holidays. If you'll remember, they were in Q1 last year, but they'll be in Q2 this year, and this impacts mostly our European business.

Taking all these factors together, we expect local currency sales growth in Q1 to be approximately 8%, and this would include a 1% contribution from Troemner. This will result in adjusted earnings per share of $3.05 to $3.10 per share, something in that range, and that's approximately a growth rate of 24% to 26%.

We expect currency to reduce EPS growth in the first quarter by about 1%. As we typically do, we'll provide updated quarterly guidance on future calls. As you update your models, please keep in mind the tougher comparisons in the second half of the year.

We've reviewed current quarterly consensus estimates for Q2 through Q4, and we believe that low-double-digit EPS growth in Q2 and Q4 are realistic, while probably a high-single-digit EPS growth in Q3 is our best estimate at this point in time. We thought you would find that information helpful.

One additional comment, the impact of currency on sales growth, we expect currencies to reduce sales by about 2.5% in Q1 of 2017 and also for the full year. Finally, in terms of cash flow this year, as we communicated last quarter, we expect free cash flow to be in the $390 million range this year.

Our CapEx will be at a higher level in 2017 due to certain facility expansions related to our Product Inspection businesses, as well as the facility consolidation we're doing in Switzerland. These expansions will amount to approximately $55 million in 2017.

Excluding these projects from both 2016 and 2017, this would give us a 15% growth in free cash flow per share. Okay. As a reminder, we will continue to assume we'll repurchase about $500 million worth of shares in 2017, and that's it from my side. And I'd like to turn it back to Olivier..

Thank you, Bill. Let me start with summary comments on business conditions. The Lab had very good growth in the quarter. All product lines performed well. We continue to benefit from our strong product pipeline, Field Turbo investments and innovative sales and marketing programs.

Spending by our biopharma customers continues to be solid, but we acknowledge we will face tougher comparisons in 2017. Industrial had good growth in the quarter. As expected, Product Inspection had very good growth in quarter.

The market dynamics for this business are favorable, and we have a unique competitive position that allows us to capitalize on the growth potential of this market. We expect to start the year with another good quarter in Product Inspection.

Core Industrial did better than we expected, with growth in low single-digits, driven by strong growth in Asia, including China. Finally, Retail increased 7% in the quarter. This was better than expected and was driven by strong results in Europe and Asia. Now let me make some additional comments by geography.

Sales growth in Europe was strong, driven by Product Inspection and Retail. Lab also had growth, while Core Industrial was down. Sales growth in the Americas came in pretty much as expected. Lab had growth in most product lines, with the exception of AutoChem, which had very strong comparisons from prior year.

Product inspection had modest growth against a very strong quarter in the prior year. Core Industrial and Retail were down in the quarter. Asia and Rest of the World grew double-digits in the quarter. All product lines had very good growth. China did better than expected with 15% growth in the quarter.

Lab in China continued to do very well, and we were very pleased to see strong growth in Industrial in the quarter. One final comment on the business, Service grew 6% in the quarter. With the strong finish to 2016, we are well positioned to start the new year.

We remain cautious on the global economy, and we'll continue to monitor it for risks that could impact customer spending plans. In the meantime, we are focused on those factors within our control and feel confident about them.

Our investments in Field Turbos, Spinnaker sales and marketing programs and new products are yielding tangible results, and we believe we continue to drive share gains. Furthermore, our initiatives surrounding Big Data Analytics for sales growth are doing very well and contributing to share gains.

We have made great progress in developing Big Data tools, such as sales project alerts and iBase analytics, and I see Big Data analytics developing into a unique competitive advantage. In addition to continued share gains, the other part of our strategy is our focus on productivity, which is a core part of our culture and is fundamental to our story.

It is these gains in productivity and efficiency which provide resources to fund our growth initiatives. Let me give you a couple of examples. We are launching a new program to improve the productivity and efficiency in our producing organizations and supply chains.

We refer to this program as Stern Drive, which is a form of marine propulsion, which combines inboard power with outboard drive. Stern Drive focuses on operations and the three pillars for its foundation, material cost reductions, shop floor productivity and back office productivity.

Our initial priorities are to further challenge material costs as well as variable manufacturing and fixed labor costs. This program is just getting underway and will complement our Spinnaker and Blue Ocean programs. Similar to those programs, I think we will be talking to you about Stern Drive for many years to come.

We have achieved great results over many years in increasing the efficiency of our supply chain and manufacturing operations, but with this program we intend to build on those successes and move to another, higher level of performance.

We have a variety of productivity measures around the company, including a number which leverage our Blue Ocean platform. The platform has allowed us to develop global and regional shared service centers for a variety of activities, which help us better leverage scale and technology.

Blue Ocean has also enabled us to enhance our e-commerce capabilities. We are improving transaction efficiency via integrated end-to-end processing across a variety of different channels and their specific needs. These are just some examples of various productivity and efficiency initiatives we have in place throughout the organization.

This productivity focus is part of our DNA and reflects our culture of continuous improvement, which is at the core of all we do. That concludes our prepared remarks. In summary, we believe that if market conditions remain stable, we are well positioned for sales and earnings growth in 2017 and beyond.

We will remain focused on execution of our core strategies, which remain central to our success. I want to now ask the operator to open the line for questions..

Your first question comes from Tycho Peterson with JPMorgan. Your line is open..

Hey, guys. This is Steve Reiman on for Tycho. Thanks for taking my question.

Maybe just to start off, regarding 2017 guidance, can you talk through what your current growth assumptions are by product area? And then are you expecting to see any meaningful pickup in core industrial, because you mentioned it came in a little bit better than expected?.

Okay. So maybe I start with how we see things for the lab business. So our lab business should be able to, including with Troemner grow mid-single-digits, a little bit better.

And we'll get a similar growth rate from industrial, but with the mix coming, PI actually growing faster than lab, our product inspection business and we expect a little less growth in our industrial business. And then we would expect low single-digit kind of growth coming from our food retailing business..

Got it.

And then just in terms of pricing, is 150 bps still the right way to think about it for 2017?.

I think so. I think we'll know a little bit more in the quarter. We're taking a close look at some of these currency moves. They were a little stronger a while back. There are some parts of the world that maybe we need to go looking at that.

I think that's probably an evaluation point for the next couple of months to see if we should push, but that would be largely aimed at maybe trying to offset any more foreign exchange that comes..

Got it. That's all for me. Thanks, guys..

Your next question comes from Tim Evans from Wells Fargo. Your line is open..

Thanks. One quick clarification first.

The comment that you made early on about the biopharma budget flush, did you – were you saying that there was less budget flush this year than last year?.

I think with regard to our stuff, and the way we say it, so if you think about our – the comment was specific to U.S. You can see our European numbers were a little bit better.

And if we look at our two businesses that have the biggest exposure, they were AutoChem, which had a tough comp, but still their sales were down in North America in the fourth quarter. And in our pipette business, it was the lowest growth rate of the year, still a healthy number, but it was the lowest growth rate of the year that we had.

And we think actually both of those guys are going to do a little bit better growth rate in the first quarter, but for AutoChem, the fourth quarter is a more important quarter than the first one..

Okay.

And then if you think about the upside surprise relative to your core revenue growth, would you attribute that more to the macro picture? Or do you think that would be more attributable to company-specific things like share gains?.

I think actually we really executed very well. Our programs materialized well, but we also enjoyed good market environment. We were talking about retail surprised us in Europe. We did execute well, but there was also the markets, how projects came together that we benefited from. So it's a combination.

But I certainly also feel that all these growth programs really have good momentum. And that's also why we remain optimistic also in Q1..

Great. Thank you..

Your next question comes from Derik De Bruin from Bank of America Merrill Lynch. Your line is open..

Hi. Good afternoon..

Hi, Derik..

Hi..

Hey, there's a lot of moving parts in terms of the global economy, and obviously, there's a lot of proposed tax changes in Washington going on.

Bill, can you just sort of give us a thought on what you're looking at in terms of what's been currently proposed? And how Mettler fits in, given your global infrastructure and everything? Do you have any sort of initial thoughts on what this can mean for the business?.

Okay. So we evaluate it a lot, and I would maybe start with we, for example, reviewed some of it with our board today. And one of the things that we highlighted to them was that from – there's a lot of uncertainty on what might happen and when.

I think that the repatriation topic is certainly one that most people think could come because there could be broad consensus with that. That's not a big deal for us in terms of being a benefit. We maybe even would have some one-time taxes to pay there, but if I think about topics like a lower tax rate overall, that can't hurt us. But the U.S.

isn't the biggest source of our tax earnings – or our pre-tax income. And if I go to topics like border adjustability, which I think generally most people think that would be hard to get through in the short-term, I think that our initial reaction would be, hey, we're a net importer overall.

So we would have to do some adjustments in areas like pricing or supply chain strategies. I think that we're a company that understands that we would need to do some things, and we would be able to execute on it. But at this point, it seems so premature from our perspective, Derik, that we're not getting ourselves tied in a knot thinking about that.

I would also highlight that, and you would recognize this from when we talked in the past about when biopharma, for example, or other companies move their facilities, our instruments don't move very good.

And so if there was other – if there were companies bringing things back to the United States, that would create demand beyond our normal share of the replacement market. It would create new demand, and we would win disproportionately to what we would lose in the markets because of the nature of our product categories.

So there could be a positive in that side on an indirect basis. But I think in that area, it's pretty premature at this time to say much more..

Great.

And as the growth starts to pick up on the industrial business, do you need to add any incremental sales costs to it, to basically drive the – any sales support or salesforce behind it? Any cost back to the business?.

I think, Derik, whether the growth comes from industrial or lab, I would say our incremental margins would not be materially different. Maybe they're slightly better on the lab side because of higher gross profit overall, but we do have slightly higher selling costs in the lab side of the business.

So I think you could assume in a constant currency environment every extra 1% of sales growth has got to drop something north of $0.30 on a dollar to the bottom line, hopefully a little bit more..

Great. Thank you very much..

Your next question comes from Ross Muken with Evercore ISI. Your line is open. Ross Muken, your line is open..

Hi. Yes. Hi. This is Matt Nicolai on for Ross. Thanks for taking the question. Just had a question about your assumptions for 2017 guidance. Just asking if you could provide a little color on the pacing of growth in the U.S.

in early January after a mixed fourth quarter?.

Hey, I – if we look at our outlook for Q1 in the Americas, it'll be solid. Better growth rate on a single-year basis than what we saw in the third quarter, to maybe be slightly more specific..

Okay. Thanks.

And then also was wondering if you could give some color on emerging market demand, excluding China, and whether FX settling down a bit is helping demand?.

So overall, very pleased about how all Asia did. Also, outside of China we had, for example, Southeast Asia that did very well. We had India that continues, actually to do well. I'm very happy about that performance. I expect that momentum will stay on, and at this stage I don't expect that currency has a significant impact.

Of course, if currency would move even more so, it can, but at this stage we see good momentum in the market. And as I did talk in previous calls, we have made important investments also in certain parts of Asia like Philippines, Indonesia and so on, and we see the paybacks on that. So happy about how they are doing..

Got it. Thanks..

Your next question comes from Dan Leonard from Deutsche Bank. Your line is open..

Thank you. Just trying to reconcile some of the moving parts in the guidance.

So the $0.50 EPS guide uptick at the mid-point, you said $0.31 of that is the stock comp, offset by how much in foreign currency?.

$0.21, I think..

Okay. So something in the $0.20s, so most of the uptick is organic.

And, Bill, can you remind me how much EBIT margin expansion you're assuming year-over-year in your 2017 guide?.

So let me answer that in a couple of different ways. So our – sorry, getting the right columns here in front of me. So on a full year basis, our margins will expand about 100 basis points, on a constant currency basis. Not too much different..

Okay. And it does seem, my final question; it does seem like you were trying to hold back a little bit in the guidance from I don't know if exuberance is the right word, but you had a good fourth quarter.

If you were to be surprised on the upside in 2017, where do you think the big piece of variability is going to come from market-wise? Or product line-wise?.

I would start with we're always – Olivier has been pushing a lot of investments on sales and marketing topics and some of the investments in Field Turbos. And I think that there could be upside to that. I think that it's clearly providing some upside right now.

And because of, as Olivier mentioned this call and on others, is the product categories such as lab and product inspection, process analytics benefit disproportionately from those investments, as well as certain geographies. And he just mentioned a little while ago Southeast Asia to name one.

If I look in even places like Eastern Europe, which was a little bit of a struggle for us when Russia was having its struggles, bounced back for decent growth recently..

Okay. Thank you..

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

Yeah. Hi. Good afternoon, guys. Thank you.

Want to spend a minute on emerging markets, specifically if you could just kind of compare and contrast what you're seeing in South America versus China? I know you have a much bigger business in China, but we don't have a lot of visibility, I think in the last couple of weeks here, in terms of other companies in the space talking about how the year closed out between emerging markets versus – I mean in China versus South America.

I'd appreciate any comparisons you could make..

Two very different situations in the sense that China, the microenvironment and the macro trends are very favorable for us. We have seen, for example, labs doing very well for us now many quarters. In Q4 we have seen that the industrial business started to pick up also for us in China.

Still against easier comparisons, but we see some momentum coming back. So all in all, actually we feel good about it. When I look at South America, particular actually Brazil, it's still challenging.

Brazil, I don't see that the market is really sustainably recovering and in essence, I feel we still are going to have challenges there and I don't see a strong rebound in Brazil coming. At China, it seems to be a more steady opportunity to build.

And again, I want to specify that we had different product categories in China that continue to do very well across many quarters. We did not have that situation in Brazil, for example..

Great. And then I know it's small, but the retail business, if I look at the full year performance there, it was a pretty solid year, above trend if we go back several years.

To what extent do you think that's market share and can you talk about the plan this year to try and repeat that performance?.

Absolutely. We are very happy about how retail performed last year, particular Q4 performed better than expected. There were some effects that will not repeat themselves. We had, for example, a change in legislation in Germany that required different labels for customers and that drove some upgrade business that was beneficial and will not repeat.

But overall, if I look at the full year, retail did well, and particular also profitability. You might recall in a couple of years ago, we said retail it's not about growth, it's about profitability. I have seen very steady progress over the last years and last year in particular was another big step.

In the meantime, retail has reasonable profitability for us and I do expect that they will have a reasonable year this year. But I want also to specify, retail is a lumpy business, has big projects and so predicting it is more difficult and that's maybe also reflected in our Q4 numbers.

We did expect things differently and then somewhat project did materialize. So, of course, that could turn out the other way around this year..

Got it. Thanks so much, guys..

Your next question comes from Dan Arias from Citibank. Your line is open..

Hi, guys. This is actually Bryan Kipp on behalf of Dan. Just wanted to get some color on the pipette transaction. You guys showed that facility middle of last year and talked about the robotics investments that you guys were doing.

In light of the purchase of the facility, does that change anything? Are you guys able to pull forward some investments, expand faster? Just want to get some color there..

It was – we – the property has a bit of a history. It was actually owned by Ken Rainin, the person we bought the business from and we kind of had a right of first refusal in perpetuity.

And we felt that there was a unique bargain in the market, based on the company was selling a broader portfolio of assets and valuation-wise we felt like our right of first refusal gave us a good price.

And so it was to give you a feeling, the only, at least of significance, I think the only manufacturing facility we had globally that was not owned, again because the history with Ken. And so we saw that it was a good value and we decided to buy it..

Helpful. And then on China. I was just surprised by the strength in 4Q, yet your tepid view going into 2017.

Can you talk through the backlog or give us some color on in core industrial in China, where you're continuing to potentially see weakness despite the strong 4Q?.

So in terms of our industrial business in China, I think that you very much see this just the impact of comps getting easier and some of the really difficult markets related to infrastructure have just shrunk as a percentage of total sales for us.

And so if you were to, I'm kind of oversimplifying now, if you were to bifurcate our performance the last couple years in China, you would say we had some good markets that were growing mid to high-single-digits and we had some bad markets that in many cases were down more than double-digits.

And so what's happened is the good markets have gotten to be, I don't know, probably I could almost say bigger than the bad markets in terms of our mix and that was different than 2012. And so we feel a little bit better positioned.

I would highlight that it's also those are markets that even the good markets are sensitive to credit availability in that part of the world.

We probably see more than any other market how when credit availability changes in China, it has a little faster impact on – it can be more volatile itself, availability, and it tends to have a pretty fast impact in the market.

So when you hear us sometimes talk cautiously about the future in China, it's probably less about our competitive position or what we think can happen long term for China, but more about some of these shorter-term topics..

Helpful. Thanks..

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

Hi, good afternoon..

Rick..

Bill, just on the back of that last response to the core China strength, you did touch on credit there and the sensitivity of the core industrial in China to credit.

But what's conclusion there? We're hearing the credit is actually tightening at this point in time, but how do you see that as we roll into 2017?.

We in our business don't see credit tightening.

And I would say that for example, like there's, help me out, Mary, the notes that are there, what do they call those?.

Bank notes..

There's something called bank notes, and level of use – usually bank notes are one of the first steps when credit gets tight there, and it's very low. When, I think what you might be referring to a little bit, Rick, is the idea of getting cash out of China. And I think that's a fair statement.

But at least to date, that's not tended to trigger changes in how our market activity goes. Even for ourselves, I think we see it that we aren't changing things because they're a little tighter than they were two years ago.

In fact, I would describe the credit tightening that people are talking about now for us, we see this environment as similar to what it was three or four years ago before they did some easing. So it's not, it's really a tightening versus some loosening they did two years ago.

It's not much different than what we've had in China for a long period of time. So we could get the cash out of there..

I see.

So but against the China industrial comps then as we roll into 2017, again, a high-single-digit growth, maybe even double-digit, with that credit background would be a decent assumption?.

Yes. I think we think a mid-single-digit number is realistic. And I would say that we do put a little bit of a discount factor. We probably internally our guys would think they can do better than that, but we think it's prudent to discount it for these things you hear me constantly bringing up, the risk around overcapacity and credit in China..

Sure.

And is the product inspection business in China – where does that stand as a percentage of your China sales?.

More than 5%, less than 10%..

Oh, it is. Okay..

Yes..

Okay. Okay. Then just one other question on the core industrial business, I noticed again the weakness here in the U.S., we saw the same thing in the third quarter. And I'm curious, the second half of 2016 for core industrial in the U.S. was pretty soft.

Is there a message there? I mean it's maybe a little bit surprising, but how do you feel about that business? And maybe what are the dynamics there that have caused that business to have a negative number in front of it?.

Okay. So, Mary, just to make sure I'm looking at the right....

Let me, first of all, we also have different comparisons in this business. And there were some bigger project activities that impacted the numbers too. So I wouldn't read too much just into two quarters..

Okay. Okay. That's fine because I....

Maybe I'd add too, Rick, and you know how we are sometimes. Even though it only looks like the comp was a plus 7%, the comp a plus 7% in Q4 2015, there was actually a plus 9% in Q4 2014. So on a kind of, a multi-year basis it was....

Kind of doing the triple stack there. Yeah. Okay. And then just a last question. Around the product inspection business, just maybe a couple quick questions. Is that business – what is the end market exposure there? I know we talk all the time about packaged foods, but I know you have some pharmaceutical exposure there.

Are there any other end markets that are driving the business? And then maybe the second question is around the service side of product inspection, is there still the growth opportunity in service? Or is that market fairly penetrated from a service, I guess, call it attachment rate?.

Let me start with service. Actually, great momentum that we have there. There is definitely further opportunities. Our customer base is more and more appreciating the value of service up-time, but also making sure that their instrument is really performing up to expectations. It's also about selling spare-part kits, service contracts and so on.

So we have a lot of opportunities, we are proactively going after it. The product inspection service business is one of the faster growing service businesses that we have, including in the very mature markets like in U.S. where we have a great installed base. We are growing it very nicely.

To the first part of the questions, in terms of industry segments that we serve, you are right, we serve most of the pharma markets, we serve also the cosmetics market. We have some markets in the chemical, but food is the biggest piece and the food is the one that is particularly going well at this stage.

It is really about protecting the brands, and we see many global accounts that are becoming very serious about rolling out standards across the globe, across multiple sites.

So it's not just about going after individual sites; it becomes increasingly about upgrading or installing instruments across an account in a country, but sometimes even across whole regions..

I see. Okay. Thank you..

Thank you..

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

Thanks. Good afternoon. Most of my questions have been answered, but a quick one, Bill. It looks like I think you said free cash flow guidance for the year is unchanged, about $390 million.

For some particular reason, that's the case relative to the better, I guess, EPS outlook?.

So sorry, I just want to make sure I followed the question. So your question was, EPS guidance went up and but we didn't raise our....

The free cash flow was the same. Right..

So one piece is that the tax one doesn't change taxes paid. There is some higher guidance number, but I think there's also a revision in our detailed CapEx assumption, slightly. So at this stage, too, Brandon, I acknowledge that the estimates on free cash flow and the timing there can be fluid..

Gotcha. Makes sense.

And then could you give us the pricing contribution in the fourth quarter?.

Prices were up for the full year 230 bps and it was up close to 3% in the fourth quarter..

Super. Thank you..

The next question comes from Jonathan Groberg with UBS. Your line is open..

Jonathan?.

Jonathan Groberg, your line is open. Your next question comes from Steve Willoughby with Cleveland Research. Your line is open..

Hi. This is actually Rob Cottrell on for Steve. Just wondering if you can update us on the Troemner acquisition? We hear you that that it's added 100 bps to the quarter, but now that you've owned it for six months, just interested on how it's performing relative to your expectations and any additional synergies you see coming from the acquisition..

Yes. Actually, integration continues to progress well from an employee standpoint, but as well as from a customer viewpoint, so happy about that. Our current focus is introducing our sales and marketing activities, initiatives and Spinnaker approaches. So we, for example, work on improving leads generation, bringing database marketing to them.

So really good and in that sense, I remain enthusiastic and very positive about the potential from the whole combination. So yes, really happy about it..

Great. Thanks..

There are no further questions. I will now turn the call back to Ms. Finnegan..

Thanks, Jesse, and hey, thanks, everyone, for joining us this evening. As usual, of course, if you have any questions, please don't hesitate to give us a call or shoot us an e-mail. Take care and good night, everyone..

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