3rd Quarter, 2016

We are pleased that the post-election 6.5% rise in our stock market, as measured by the S&P, lifted the prices of most of the stocks held in your portfolio. The notable exceptions are the shares of companies based in Switzerland. We have less invested in stocks now than we think is appropriate because we were apprehensive about the outcome of the election and the reaction of the financial markets to the results. The rise in our stock market has lifted the prices of the shares of companies that meet our criteria. We shall continue to evaluate them to buy when their stock prices offer us good value. A market selloff is not a precondition for our getting our prices.


Mettler-Toledo’s third quarter revenue of $650.6 million grew 9% in local currencies over the third quarter of 2015. Sales from the recent Troemner acquisition accounted for 1% of the growth. Revenue growth was strong across all regions and businesses, rising 10% in the Americas, 8% in Europe and 11% in Asia. Revenue in China, which accounts for half of sales in Asia, grew 8%. Laboratory sales grew 9% over the same period a year ago while double-digit sales growth in Product Inspection lifted Industrial revenue by 8%. Earnings per share grew 19% to $3.89 from $3.26 a year ago.

Product Inspection’s third quarter revenue grew 8% because multi-national food companies are standardizing their global manufacturing processes with Mettler’s equipment. With $450 million in annual sales, Mettler-Toledo’s product inspection business is the largest in the world. More than 80% of sales come from checkweighers, metal detection, x-ray and vision inspection units that are used on packaged goods manufacturing lines to weigh each package and to check for contaminants such as glass or metal. The rest comes from service. Pharmaceutical companies use checkweighers to weigh each bottle of pills to ensure it contains the correct number of pills and the package insert. Food companies are Product Inspection’s largest customers. They check the weight of the food in each package to ensure that it is correctly filled, use X-ray detectors to ensure that there is no glass in a jar of baby food, and use metal detectors to look for specks of metal in a bag of potato chips. Although Mettler has a leading market share in all markets, their average share is 25% with a relative share that is twice the size of the second largest supplier. Because the company invests more in R&D than its competitors do, its businesses have a strong pipeline of new products that cement the company’s reputation as the provider of the highest-end products. The company’s global field service force can quickly fix the equipment to ensure continuous operation of the packaging lines. Thermo Fischer Scientific is the second largest supplier of product inspection equipment with $65 million in annual sales. While Thermo is a much larger company, this business is small and has a field service team that is one-fourth the size of Mettler’s. Mettler-Toledo’s stock price has risen 26% year-to-date.

IDEXX Laboratories

IDEXX Laboratories’ unique offering of innovative in-clinic diagnostic instruments and diagnostic tests for companion animal vets continues to deliver outstanding results. Third quarter revenue of $448 million rose 10% over the third quarter of 2015 and earnings per share jumped 17% to 63¢. Sales of instrument consumables sold to vet practices increased 15%, driven by a larger global premium instrument base. There are 23,000 Catalyst chemistry analyzers in vet clinics around the globe and IDEXX has placed over 1,000 Sedivue Dx urinalysis analyzers in the two quarters since its launch. Sedivue sales contributed 2% to overall revenue growth during the quarter. IDEXX’s SDMA test for early kidney disease contributed to the 13% revenue growth in the global reference lab business. Chemistry panels, which account for about half of the test volume in IDEXX’s reference labs, grew 5 percentage points over the same period a year ago, accounting for 2% to 3% of the total volume growth during the quarter. IDEXX plans to introduce the SDMA test for the Catalyst during the fourth quarter of 2017. Adding this test to in-clinic instruments increases their value to a vet practice. Armed with innovative products that improve medical care and vet practice economics, the U.S. sales force has raised the number of practices that use IDEXX’s instruments and lab services from 36% in 2012 to 45% today. IDEXX Laboratories’ stock price is up 66% since January 1.

Express Scripts

Express Scripts reported good third quarter results. Increased use of generic drugs rose to 85.3% from 84.5% a year ago and good supply chain management contributed to an increase of 2.5% in the quarter’s gross profit to $2.27 billion from $2.21 billion reported a year ago. Improved fulfillment processes in its highly-automated pharmacies and increased use of the company’s web site and digital tools reduced administrative costs. The new web site tools reduced member calls about home delivery prescriptions by 37% from 400 to 250 calls per thousand prescriptions filled. Operating earnings per adjusted claim grew 13% to $6.24 and earnings per share of $1.28 are up 20% over the third quarter of 2015. Higher net income accounted for 11% of the growth and a lower share count accounted for the rest.

The company’s Safeguard Rx programs, which provide value to health plan clients in addition to lower drug costs, contributed to the strong selling season. Express Scripts expects to retain 97% to 98% of its existing clients and new client wins will increase this core business by about 2.5% next year. On September 8, 2016, Express Scripts announced its newest program, the Inflammatory Conditions Care Value Program, which will be available to clients on January 1. Express Scripts addresses a key client issue that as many as 36% of patients with inflammatory conditions who start treatment discontinue it within 90 days. By offering to reimburse plan sponsors up to two months of treatment if a patient discontinues a medicine on the formulary during this time period, Express Scripts increases patient access. This program also creates formularies for specific conditions such as rheumatoid arthritis, psoriasis or Crohn’s Disease which allows more-targeted drugs to compete head-to-head with the two major non-specific anti-inflammatory medicines which account for 73% of the U.S. market share of these drugs. More precise formularies will both improve health outcomes and lower the cost of these very expensive drugs. Express Scripts’ stock price is down 16% since the beginning of the year.

CME Group Inc.

CME’s total return this year is 39%. During the quarter, average daily volume of 14.3 million contracts were flat compared to the strong year ago period. CME generated $841.7 million in revenue, a 1% decline from a year ago. Operating expenses of $288 million also declined 1%, resulting in operating income of $553 million and adjusted earnings of $1.05 per share. CME once again demonstrated expense discipline as it remains focused on operating efficiency. Revenues of $2.7 billion during the first three quarters of the year are up 7% while operating expenses of $791 million are flat with the same period a year ago, enabling earnings per share growth of 10% to $3.39 per share. During the first nine months of the year, trading volume for interest rate, equities, energy and agricultural commodity contracts rose 5%, 15%, 22% and 6% respectively from the same period a year ago despite this year’s decline in market volatility.

Energy contract volume was particularly strong during the quarter with average daily volume of 2.3 million contracts up 17%. Structural shifts taking place in crude and natural gas markets benefit CME’s benchmark West Texas Intermediate crude and Henry Hub natural gas contracts. Widespread adoption of fracking technology is making the U.S. the swing producer and last December, Congress lifted the oil export ban imposed following the 1973 Arab oil embargo. WTI and Henry Hub are now water-borne global benchmarks, which has led to consistent increases in their global market share. During September, the volume of energy contracts traded from customers in Asia rose 104%! A single day record high energy contract volume of 4.5 million was reached on November 30, the day OPEC announced its decision to cut production. CME’s investment in its Globex electronic trading platform functionality and technology is leading to continued growth of electronically traded options volumes especially for more complex spread trades. A record 50% of all options spreads were traded electronically in September up from less than 20% in 2012. On December 7, CME declared their annual variable dividend of $3.25 per share to be paid in January. This is in addition to the regular quarterly dividend payments which total $2.40 per share annually. With the stock price at $120 per share, the total dividend payments provide a 4.7% annual yield.

Automatic Data Processing

ADP’s fiscal first quarter revenues of $2.9 billion rose 7% and earnings of 86¢ per share on an adjusted basis surged 26% from the same period a year ago as strong operating results were helped by a lower tax rate and fewer shares outstanding. During the quarter, ADP acquired 4 million shares of its stock, nearly 1% of its shares outstanding, for $352 million. The Company’s Employer Services revenue rose 6% to $2.3 billion and operating earnings of $656 million increased 15%. The number of employees on existing client payrolls rose 2.7% during the quarter. New customers and the sale of additional services to existing customers boosted the results. Its PEO (Professional Employer Organization) produced $795 million in revenues, up 13%, and $107 million of operating profit, an increase of 21% from the same period a year ago. The number of employees paid by the PEO rose 13% during the quarter to 439,000. Margin expansion was primarily driven by operating efficiencies and slower growth in selling expenses. Interest earned on client funds balances rose 2% to $89 million as funds balances increased 4% to $20.0 billion. On November 1, ADP announced the sale of its CHSA (Consumer Health Savings Account) and COBRA (Consolidated Omnibus Reconciliation Act) business to WageWorks for $235 million. ADP expects to record a gain on the sale of $200 million during the quarter ending December 31. The two companies formed a partnership allowing ADP to profit from its salesforce’s ability to sell WageWorks’ full suite of benefits offerings to ADP customers. ADP’s total return is 19% since the beginning of the year.


Visa’s fiscal fourth quarter revenue and earnings per share, which includes Visa Europe for the first time, grew 19% and 27% respectively to $4.3 billion and $0.78. Earnings per share exclude two one-time items. Payments volume rose 47% to $1.9 trillion and grew 10% excluding Visa Europe. Visa’s exclusive contracts with Costco, the second largest U.S. retailer, and USAA, the tenth largest credit card issuer helped propel payments volume on credit cards up 19% over last year’s fourth quarter and contributed to overall U.S. payments volume growth of 11%. International transaction revenues grew 36% largely because of Visa’s new European cross-border business. The integration of Visa Europe and harmonization of the two technology platforms will take approximately four years to complete.

For the fiscal year, Visa’s revenue grew 12% in constant currency to $15.1 billion and adjusted earnings per share increased 8% to $2.84. Without Visa Europe, annual earnings per share increased 10% or 14% in constant currency. Operating expenses excluding Visa Europe increased just 1% for the year as management successfully controlled operating expenses while still investing in key growth areas. Increasing secure access to the network and providing clients with digital tools to enhance engagement with their own customers helps Visa increase the value and demand for its network. Built steadily and efficiently for nearly six decades, Visa’s network has achieved unmatched scale with over 3 billion cards in circulation and acceptance at more than 44 million locations worldwide. Visa processed 83 billion transactions and $8.2 trillion in total payments volume last year. The network processes 65,000 transactions per second. Al Kelly succeeded Charlie Scharf as CEO on December 1. Kelly, a Visa Director since 2014, is the former president of American Express where he also led the Global Consumer and Consumer Card Services groups. Visa’s total return year-to-date is 3%.


Wabtec’s third quarter earnings of 94¢ per share were 7.8% below earnings of $1.02 per share achieved by the company a year ago. The 94¢ is before a 3¢ per share charge for Faiveley merger expenses. The earning’s decline during the quarter is slight when compared to the 16.5% decrease in sales from $809.5 million last year to $675.6 million. Rigorous application of the Wabtec Performance System enabled the company to cut its cost of sales 16.1%. The sizeable sales drop is largely attributable to enactment of legislation at the end of last year deferring the deadline for full installation of Positive Train Control Systems (PTC) until the end of 2018. That along with shrinking profits from a 6% reduction in freight carloads encouraged U.S. freight railroads to defer expenditure for PTC. The postponed sales of specialty products and electronics for PTC amounted to $109 million during the quarter. Wabtec remains the only company with a PTC system approved by the Federal Railroad Administration.

On December 1, Wabtec announced that it had purchased over 50% of the ownership of Faiveley Transport from the Faiveley family and commenced a tender offer to acquire the remaining outstanding publicly owned shares trading on the Paris Bourse. The total purchase price is $1.7 billion. Wabtec’s acquisition of Faiveley adds $1.1 billion of revenues from sales of original equipment and services to transit systems. Over 80% of its sales are in Europe and Asia. Its products for transit systems and passenger train operators include high speed train brakes, pantographs, third rail connectors as well as air conditioning, heat and exhaust systems. It also provides passenger information systems for transit and railroad stations. Under the leadership of Stéphane Rambaud-Measson, Faiveley has increased its operating margin to 9.8% by contracting with transit operators to service, repair or replace their equipment. Services now constitute 45% of Faiveley’s revenues and it is gaining customers throughout Europe as well as in India and China. The acquisition of Faiveley comes at an opportune time for Wabtec because transit revenues are less cyclical than those for freight cars and locomotives. After consummation of the merger, transit customers will constitute 55% of Wabtec’s combined revenues. Wabtec’s management, during a public discussion of the merger with analysts and investors, forecast that Wabtec’s revenues would exceed $4 billion and earnings would reach $4.30 per share next year. Wabtec’s stock price is up 14% since the start of the year.

Ecolab, Inc.

Ecolab’s third quarter revenue of $3.39 billion was 2% lower than its revenue of $3.45 million a year ago. Adjusted earnings per share of $1.28 were unchanged and exclude special gains and charges and discrete tax items. Unfavorable foreign currency translation reduced revenue growth by 3% and earnings growth by 7%. Revenue from the Global Industrial, Global Institutional and Other businesses grew 1%, 4% and 8% respectively and accounted for 77% of the company’s revenue. This growth was offset by an 8% revenue decline in the Energy business. Adjusted fixed currency operating profit for the company rose 5% to $567.2 million because of strong product innovation, lower delivered product costs and ongoing cost efficiency projects in supply chain management and in the use of information technology. Reformulated products and lower operating costs held Energy’s operating margin at 13.2%, unchanged from the operating margin a year ago. Ecolab’s Healthcare business, which accounts for about 5% of sales, achieved revenue growth of 6% during the quarter as more hospitals use its products and programs to reduce hospital acquired infections in its rooms and operating theaters. With the right management team in place and a new focus on solutions rather than products, Ecolab expects this business to become a larger contributor to the Global Institutional business over time. The return on Ecolab stock is 8% year-to-date.

Core Laboratories

Core Laboratories’ third quarter revenues were 3% less than its second quarter revenues while its earnings of 38¢ per share were unchanged. The company’s largest and most profitable business, Reservoir Description, which generates 70% of Core’s revenues, increased its sequential operating profit 6% even though revenues declined 2% below its second quarter. Production Enhancement’s profit rose 50% to 26% of its quarterly revenues which amounted to less than 60% of its quarterly revenues a year ago. This division thrives from providing powerful charges and water soluble chemicals that identify precisely where and hence how successfully the formation has been fracked. The absence of any revenue upturn during the quarter in this business results from a deferral of completions on over 4,000 shale oil wells drilled in the U.S. during the quarter when the U.S. onshore active rig count stabilized. During the quarter, Apache Corp. engaged Core to help it evaluate the best way to develop 356,000 acres it has assembled at an average lease cost of $1,700 an acre in the Alpine High Zone of the Permian Basin. Exploratory drilling in the past had led to this geologic zone being considered unproductive. Apache in its most recent investor presentation identified its Alpine High acreage as containing more potential production than its productive acreage in either the North Sea or its existing Permian Basin acreage. The wells in these two producing areas provide 21% and 22% of Apache’s current production. Occidental Petroleum’s development team earlier this year engaged Core to use its proprietary water and high frequency NMR technology to evaluate its reserves. Core also has been engaged by Exxon to help determine the best way to develop its offshore oil discovery near Guyana. Core’s total return is 15% since that beginning of the year.

Red Hat

Red Hat’s revenues rose 19% to $600 million during its fiscal second quarter. Non-GAAP earnings of 55¢ per share rose 17% from the same period a year ago. Red Hat’s total deferred revenue, a measure of cash received from customers but not yet recognized as revenue, rose 19% from a year ago to $1.7 billion. Recurring subscription revenues, which comprise 89% of total revenue, rose 20% to $531 million while training and service revenue of $69 million increased 10%. Within subscription revenue, infrastructure related product revenue rose 18% to $427 million while application development and emerging technology revenue rose 33% to $104 million from a year ago. During the quarter, Red Hat closed 55 deals valued greater than $1 million each, up from 35 deals greater than $1 million a year ago. Multiple products were included in 70% of those deals of which five were over $5 million. Red Hat’s stock price is down 3% since the beginning of the year. The company, the world’s largest provider of open source software, has become a strategic partner to its customers who are modernizing their infrastructure and application development platforms to become more efficient by continuously making small changes to their software. Red Hat enables its customers to adopt a hybrid cloud computing environment which uses on-premise, private cloud and third-party public cloud providers such as Amazon Web Services or Microsoft’s Azure with orchestration between the platforms.

Varian Medical Systems

Varian Medical Systems’ fourth quarter and fiscal year 2016 revenues of $912 million and $3.2 billion grew 12% and 4% respectively over the same periods a year ago. Foreign currency translation reduced the quarter’s constant currency growth to 11% but increased full year growth to 5%. Continuous efforts to reduce the costs of manufacturing and installing Varian’s TrueBeam system along with higher software sales contributed to increases in gross margin of four percentage points to 42.7% in the fourth quarter and to 42.5% for the full year. Adjusted earnings per share of $1.38 and $4.68 for the quarter and for the year rose 33% and 9% over the same periods a year ago. Adjusted earnings exclude amortization of intangible assets from purchases and non-recurring charges.

Oncology Systems’ fourth quarter sales rose 6% in constant currency to $678 million and orders declined 4%. Orders in North America declined 4% after a 15% increase in orders during the previous quarter and orders in EMEA fell 17% after rising 25% during the fourth quarter last year, when the company received orders for over 100 radiation systems. High margin software and service revenue of about $1.25 billion accounted for 46% of Oncology Systems’ annual revenue of $2.7 billion. Fiscal year 2016 orders in North America rose 5% which exceeded management’s expectations. Varian won a large three-year agreement with McKesson’s Specialty Health to supply its U.S. Oncology Vantage cancer treatment networks with equipment, software and services, which include seven TrueBeam and five VitalBeam radiation sources. VitalBeam systems are lower cost radiation sources based on TrueBeam’s all-digital systems, but are designed to perform radiation therapy treatments only. They cannot perform radiosurgery treatments. Varian also replaced more than 40 radiation sources and 100 software installations of their competitors during the year. The company expects to complete the spin-out of Varex Imaging, its Imaging Components business, by the end of January 2017. Varian’s stock price has risen 14% year-to-date.

Air Lease Corporation

Air Lease’s revenues of $355 million and earnings of $0.86 per share rose 13% and 21% respectively over the third quarter of 2015. Its operating margin expanded 2.5 percentage points to 40.7% as interest expense increased 7.8% and administrative expenses rose only 2.9% from last year’s third quarter. During the quarter, the company took delivery of six aircraft and sold seven aircraft for a gain of $10 million. Global passenger traffic growth continues to outpace its long-run historical average of 5%, rising 6% this year through September. Passenger traffic growth is even higher on Asia-Pacific airlines where Air Lease has placed 47% of its planes. Air Lease’s fleet of 244 leased aircraft with an average age of 3.7 years have an average remaining lease term of 6.9 years. Future contracted lease cash flows exceed company debt by 15%. Despite owning a small percentage of the global aircraft fleet, Air Lease is one of the largest Boeing and Airbus customers with 369 aircraft on order. It has already signed long-term leases for 143 of these undelivered aircraft, including 91% of those that will be delivered in 2018 and 82% in 2019. This order book makes Air Lease an attractive partner to airlines who replace their aging fleets with efficient next-generation planes like Airbus’ A320/321neo and Boeing’s 737-8/9 MAX as current manufacturer waitlists for these in-demand aircraft surpass eight years. Leased aircraft as a percentage of the global fleet have increased steadily to 40% from 25% in 2000 and 15% in 1990 as airlines choose the fleet flexibility, access to new aircraft programs and cash management advantages that leasing provides. In November, Air Lease increased its annual shareholder dividend 50% to $0.30 per share. Air Lease’s total return is 8% since the beginning of the year.


Roche’s nine month revenue of CHF 37.5 billion rose 4% in constant currencies and 6% in Swiss francs. The Pharmaceutical Division’s revenue rose 4% in constant currencies to CHF 29.1 billion with growing demand in the U.S., E.U., and China lifting sales of Roche’s three breast cancer drugs by 9% to CHF 7.1 billion or 24% of the division’s sales. Revenue of Perjeta, Roche’s newest breast cancer drug, grew 31% to CHF 1.4 billion with increased use before surgery and in metastatic cancers. Combined revenue for Roche’s three large immunology drugs, Actemra (rheumatoid arthritis), Xolair (moderate to severe asthma and hives) and Esbriet (idiopathic pulmonary fibrosis) was CHF 2.9 billion, up 21% over sales of CHF 2.4 billion for the same period a year ago.

Sales of Tecentriq, Roche’s first cancer immunotherapy treatment, were CHF 77 million after three months on the market. Tecentriq blocks the PD-L1 protein receptor on tumor cells and on immune cells that have infiltrated a tumor and enables a patient’s immune system to identify and then destroy the tumor cells. More than 3,500 patients with metastatic bladder cancer that has worsened within 12 months of receiving chemotherapy are being treated with the drug, or 40% of eligible patients. On October 19, 2016, the FDA approved Tecentriq to treat all patients with non-small cell lung cancer whose disease has returned after one round of chemotherapy regardless of their PD-L1 levels. Treatment with Tecentriq prolonged survival for many patient sub-groups including non-smokers and patients with brain metastases.

The Diagnostic Division posted nine month sales of CHF 8.4 billion, up 7% from the same period a year ago. The successful launch of the Cobas e801 immunoassay module for high throughput clinical testing labs contributed to 9% revenue growth of the Professional Diagnostics business to CHF 4.9 billion. Sales of immunoassay tests rose 14%. Roche has placed 80 modules in the first three months after launch. This instrument offers the fastest turn-around times for the company’s full menu of over 100 immunoassays, tests that use antibodies to quantify the amount of proteins, viruses, hormones and other substances in blood samples, as well as requiring only one operator to monitor the instrument to ensure that it has the reagents and consumables that it needs to operate continuously. The total return on Roche ADRs is minus 16%.


Nestlé’s nine month sales of CHF 65.5 billion grew 3.3% operationally. Unfavorable foreign currency translation and divestments reduced sales growth in Swiss francs by 1.7% and 0.6% respectively. Volume growth contributed 2.5% to overall revenue growth, while growth from pricing was a weak 0.8%. Revenue in developed countries was CHF 38.0 billion or 58% of the total. Volume growth accounted for 2.5% of revenue growth in both developed and developing countries, but prices declined 0.6% in the developed countries. They rose 2.8% in developing countries primarily from price increases in Brazil. Nestlé’s markets remain challenging with price deflation and volume declines in the U.S., its largest market, and very low volume growth in China, its second largest market. Nestlé continues to see good growth in CoffeMate, Frozen Food and Pet Care in the U.S. The challenges with Yinlu peanut milk in China overshadow the growth of its ready-to-drink Nescafé coffee drinks and its Milo fortified milk drinks for children that are distributed through the Yinlu network. While Nestlé has to restructure the traditional distribution networks it uses to reach mom and pop stores in small towns in China, e-commerce accounts for more than 10% of sales of all products and is growing quickly. On-line sales of Pet Care products exceed 25%. The company’s powdered and liquid beverages (mostly coffee), water and pet care businesses continue to perform well. They have combined nine-month sales of CHF 28.9 billion or 44% of total sales. Volume growth for all three product groups was above 4%.

The company continues to introduce products with improved nutrition to the U.S. market. In October, Nestlé launched its ProNourish line of drinks for people who have trouble digesting specific types of sugars. These drinks include 25 essential nutrients and three grams of digestible fiber for people with sensitivity to gluten or who have celiac disease. The company has also found a way to change the structure of sugar but not its composition that will allow Nestlé to reduce the total sugar in its confectionery products by 40% without changing the taste. They expect to launch the first products with this sugar next spring. The total return on Nestlé ADRs is minus 1% since the beginning of the year.


SGS does not report third quarter results, but the company did provide an in-depth update at its investor days in late October. SGS is one year into a five-year plan to improve the quality and profitability of its nine businesses and to centralize back office operations. SGS now has an on-going review of the company’s 50 sub-businesses such as Softlines or Hardlines in its Consumer Goods and Retail business. Each business must have positive cash flow and strategic significance. The goal is to increase the number of “fast-growing profitable businesses” which have revenue growth above 5% and operating margins above 10%. Businesses with “stable growth” (revenue above 5% and operating margin below 10%) must be restructured to become more profitable or they become candidates for sale or closure. Fast-growing profitable businesses accounted for 53% of revenue in the first half of 2016. Businesses with stable growth accounted for 46% of sales. The company has identified 30 projects that will be sold or closed. They have taken action on three so far this year.

SGS has also begun to improve its operating efficiency through better procurement and supply chain management. The company has reduced the number of suppliers by 18% and has identified CHF 185 million in procurement savings by 2018 from reducing and standardizing the number of products used across its businesses. SGS has opened shared service centers in Poland to service Europe and in the Philippines to service Asia. It will add a center in Costa Rica for North and South America and China will have its own. Certification and Business Enhancement, which conducts audits and certifies that businesses comply with ISO quality standards, is one of the first users of these centers. Having one view of business transacted in several countries improves the speed of data and expense report collection from its auditors. Their submissions are tracked in one office and a small team ensures that the information is submitted promptly rather than weeks after an audit. Obtaining this information more quickly reduces the time required to generate an invoice and the time for the customer to receive its certificates of compliance. Eliminating back office staff in each country has reduced back office personnel costs by at least 40% and has improved customer satisfaction by reducing the time between the audit and receiving the certification by two to eight days.

SGS’ non-energy based businesses continue to develop interesting new services, including a new service from Environment, Health and Safety that audits hotels who apply for TripAdvisor’s Green Leader sustainability program on seven criteria. While these businesses account for 56% of revenue and have operating margins close to 15%, the energy-related businesses, Oil, Gas and Chemicals, Mining and Industrial, which account for 44% of sales, remain weak with little prospect for recovery until 2018. SGS continues to reduce exposure to coal mining and oil exploration in North America and Australia, but will have to restructure these businesses because they account for 60% and 70% of the revenues in these countries respectively. The total return of SGS ADRs is 9% since the beginning of the year.

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Capital Counsel’s investment strategy combines disciplined fundamental analysis with patient execution. We hope this letter helps you understand that stock selection is at the core of our investment strategy. We seek to invest in profitable well-managed companies that generate recurring free cash flow. These companies should possess strong balance sheets and earn attractive rates of return on shareholders’ capital. We know the companies and their proven execution focused managers well. They deal with problems openly and effectively, and have incentives aligned with shareholders. We evaluate the company, as an informed private buyer might, to determine the value of the business based upon its ability to generate free cash flow. We manage concentrated portfolios which have provided our clients with good long-term results. The financial strength of the companies held in client portfolios has lessened the drop experienced when markets decline.

Client portfolio holdings may change, and stocks of companies noted may or may not be held by one or more client portfolios from time to time. Investors should not consider references to individual securities as an endorsement or recommendation to purchase or sell such securities. Transactions in such securities may be made which seemingly contradict the references to them for a variety of reasons, including but not limited to, liquidity to meet redemptions or overall client portfolio rebalancing. Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate.