艾利丹尼森 (AVY) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Paxar Corporation second quarter 2004 earnings conference call. At this time all parties are in a listen-only mode, and a brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Bob Powers, Vice President of Investor Relations for Paxar Corporation.

Thank you Megan. Good morning and welcome to Paxar's second quarter 2004 conference call. And in the line from management will be Arthur Hershaft, Chairman and Chief Executive Officer and Larry Segall, Vice President and Controller. This morning before the market opened Paxar reported second quarter 2004 results. Management will now provide additional commentary on those results as well as a look to the future. At conclusion of that commentary any questions you have may be addressed to the management. Please be wise that certain statements about the future outlook related to Paxar Corporation involve a number of factors affecting the Company's businesses and operations that can cause actual future results to differ materially from those contemplated by forward-looking statements. Those factors include general economic conditions, the performance of the Company's operations within its prevailing business markets around the world as well as other factors set forth in Paxar's 2003 annual report on form 10-K. For further explanation, participants are asked to refer to the final paragraph of Paxar's earnings release. Arthur Hershaft will now begin our management presentation. Arthur?

Thanks Bob. Good morning and thank you so much for joining us this morning on our conference call. I -- as usual I am going to ask Larry Segall to review the financial results for the second quarter and then I will provide some overview on the operations of the business. So, with that I'd like to turn it over to Larry.

Thank you Arthur, and good morning everyone. As Arthur said I will begin with the review of the income statement. In the quarter, sales reached $214m, which by the way I am very proud to say is the strongest sales quarter in Paxar's history. These sales represented a 16% increase over 2003's $184m level and we're also higher than the $202m to $207m range that we previously gave as second quarter guidance. As you may have all seen in the press release this morning, the 16% sales increase in the quarter was composed of strong 9% organic growth, 5% growth from our Alkahn acquisition and 2% attributable to foreign exchange.

On a geographic basis, our Asia pacific region reported very strong 35% sales growth, our Americas region contributed 10% growth and India, Europe, Middle East, African region increased 9%. Gross margin was 39.3% in the quarter and that compares with 38.2% in the previous year and translates to a 110 basis point improvement. The higher gross margin is directly attributable to two things. One, our efforts of reducing manufacturing costs and improving operating efficiencies in our existing facilities as well as to our consolidation of capacity in a number of our US and UK manufacturing facilities. SG&A expenses of $60.7m in the quarter or 28.4% of sales. That compares to $54.8m or 29.8% of sales a year ago. Of the $5.9m increase in SG&A, sales and growth related increases added $4.2m, Alkahn added $2.1m and exchange accounted for $1.3m. Once we factor in these elements, our actual base level of spending fell by $1.7m in 2004 and that reflects the impact of the Company's cost reduction initiatives, which began in 2003.

Our operating income was $23.3m or 10.9% of sales. In 2003 our operating income before this $3.6m restructure charge was $15.3m or 8.3% of sales. Net income in the quarter was $15.8m or $0.39 per share compared with $9.7m or $0.25 per share on a pro forma basis in 2003, and this represents a 56% year-over-year increase in earnings per share. Incidentally, these results similar to sales, represent record quarterly earnings for Paxar from regular operations and they exceeded our per share guidance for the quarter, which was $0.29 to $0.32 per share. In the quarter, we provided income tax at a rate of 23% and based on our full year forecasted earnings by business unit and the resulting global rate mix after taxes, we continued to hold 23% as a representative rate for our 2004 income taxes. Now turning to the topic of guidance, we have updated our guidance for the third quarter and full year. We are now estimating sales to be in the range of $186m to $191m and that earnings per share will be in the range of $0.20 to $0.23. These sales levels reflect the typical third quarter seasonality of Paxar's business. The 2003 sales were $171m with earnings per share of $0.18 on a pro forma basis. Similarly, for the full year we have upwardly adjusted both the bottom and the top of the guidance range by $0.10 and $0.07 respectively. So, these revisions now provide us with a range of $1.08 to $1.15 on full year sales of $784m to $794m. In 2003 this compares to $712m, with an earnings per share of $0.78 on a pro forma basis. And to reiterate, we do not anticipate taking any restructure or integration charges in 2004.

Turning our attention to the balance sheet, we finished the quarter with $69m of cash and cash equivalents, up from $50m at March 31, [Inaudible] our cash position today is $74m. The increase for the second quarter is primarily attributable to the $25m of cash that we generate from operations, offset by nearly $7m of capital expenditures in the quarter. Once again, there have been no outstanding borrowings under our revolving credit facility, since we completely [Inaudible] down the first quarter of this year and as such, our total debt remained at $167m with total debt to total capital at 29.5%, coming in slightly lower than the levels of March 31. Accounts receivable was $138m at June 30, that was up from the $129m level at March 31 and that reflects higher sales levels in the quarter, which were laded towards the latter half of the quarter. Inventories were $95m at June 30 and that compares to $96m at the end of the first quarter.

Since the beginning of this year, inventories have remained essentially unchanged, even though we have experienced significantly higher sales levels in 2004. This improvement comes as a direct result of focused efforts by our global management team around the world to better manage our inventories, and the global team sees this as a process of continuous monitoring and improvement. Focusing now on cash flow, we generated operating cash flow of $25.4m in the quarter and that compares to $6.5m in 2003. The increase of $18.9m results primarily from two items, the increase in net income and from positive changes in working capital. Depreciation and amortization were $7.5m in the second quarter of this year and $7.1m last year. Our capital expenditures were $6.8m in the second quarter. For the full year, we now expect capital expenditures to be in the range of $37m to $39m with depreciation of $34m. And finally, the increase in expected full year capital expenditures over what we reported last quarter responds directly to the continued strong growth that we've seen in our Asia-Pacific region. Arthur, that completes my remarks.

Well, I have to say great remarks Larry. With a quarter like this, I'm not sure I really need to add anything. But, we are absolutely delighted to report this really exceptionally good quarter for Paxar. Let me just reiterate something that we've been talking about almost on every conference call, for the last four conference calls, and that is program that we initiated about a year ago called back to basics. And I know you've all heard the term, I want to go back and kind of look at that and maybe just track what that has meant to the company and how that really helped us at the second quarter quite a bit.

First, of all back to basics is a program that focused Paxar on topline growth, margin improvement, fixed cost control, cash flow improvement, and those were the basic areas. Within those areas of course there are many things that need to happen in each of these categories, but now historically we are going to go back over the last three quarters and look at the topline growth. These percentages include acquisitions as well as the exchange, but just on a total basis quarter four of last year was a 13% increase, quarter one of this year is 16% increase, and quarter two this year is 16% increase. So, basically from an organic point of view that would have been 3%, 6%, 9%, but on an overall basis those are the numbers. Now, what's driving a lot of these numbers is everybody's focus on new geographic areas that we have continually been opening up and a lot of pressure on developing a lot of new products throughout the organization. As we get into the gross margin improvement, which is really important. Quarter four of last year at 36.6, quarter one 38.3, and at fourth quarter 239.3. So, a lot of improvement has taken place again with the focus on consolidation and a more effective productivity controls. A lot of our people around the world have worked really, really hard on that back to basics program and I think we are really seeing the results click in here.

Cost containment that is really been important for us. As you can see the SG&A percentages show that but at the same time as Larry said over the last four or three quarters our SG&A expenses have been reduced $2.1m in the quarter four, of $1.3m in quarter one, and $1.70m in quarter two. And the cash flow as Larry pointed out has followed along the same lines. A lot of good hard work on the inventory and accounts receivable side of the business a much better control than we have ever had and that's showing up in our cash aspect of it. I just want to briefly go through the regions; again for the same three quarters if we look at the America's, we are showing a 6%, 8%, and 10% topline growth. European region 14%, 23%, 9%; and of course Asia is at 27%, 24%, and 35%.

So, on an overall basis, the company is handling a much higher level of sales due to this growth over the last three quarters, and we are sort of on track for continuing that on the balance of the year. Let me just quickly say a few words about RFID, which has been in I guess every newspaper and every article. Lots of activity going on in the RFID areas both for supply chain as well as item marking. We have been involved with EPC Global we continue to do that and we are involved in developing printers and supplies and integration services that would feed into this field. I think we are particularly suited, well suited to be a supplier in this area because of our global positioning as well as our exposure to and distribution to the apparel in retail field. So, that is ongoing as we spend more and more of time talking to our customers, talking to alliance partners, and this is going forward. It is slow but it is moving and we believe that RFID will have a real impact in our business in the future. So, with that I'd like to turn it over to any questions that you may have.

Thank you sir. Ladies and gentlemen at this time, we will be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two, if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Please hold one moment while we pause for questions. Commencing Bob Lebick (ph) of CJS Securities.

Good morning.

Good morning.

Hi, first question. Just wanted to ask, could you give us a little more color on the Asian CapEx, I know you had pumped up your spending this year in Asia, is that part of the reason sales were so strong at 35%, and what are you spending on and should we expect to see more growth like that going forward?

Bob, in Asia, its certainly one of our highest growth in our regions, because of the migration of European and US manufacturing to that area. We don't know that we will sort of repeat 35%, but we are definitely been up there in a high-growth rate. So, in order to meet that sort of demand, we are expanding our capacity without any question and we will continue to do that, you know, on going into the future.

Okay great. And then switching gears to RFID, which you just spoke about. One of your, I guess, competitors had spoken about spending tens of millions of dollars for RFID, could you give us an idea of how much you've invested so far, and what you expect to invest for the rest of this year?

I don't think our level of investment is anything near that. We have -- this year, we will spend about $1m to $1.5m on development. And in the future, I would imagine it would be a possibly a $2m. We are in a quite a different position because we are really applying other peoples technology and distributing that technology to our customer base. So we are not in the technical development side of the business, in terms of the technology. That's required same sort of capital levels.

Got it, great. Last question, can you just give us any thoughts on your uses of cash, your balance sheet is getting pretty strong and you keep generating more cash. What's your priorities for uses of cash?

Well, I think our priorities are to grow the business, continue to grow the business and continue to build that our infrastructure. We are certainly going to expand geographically and continue to do that either through greenfield or acquisitions. And I think between growing the business, our working capital need and expanding, I think will be just fine. And some of that will probably be used for acquisition as we go forward as you know we have been in exquisite company for a very long time and, u know, my guess is that some of that money will be used to acquire businesses that will help us expand geographically.

Great, I will be back in queue. Thanks very much.

Our next question is coming form Michael Sluey (ph) of Global Partners (ph) .

Hey gentlemen, congratulations on a spectacular quarter. I was wondering if you could break out EBIT by segment, I mean not EBIT by segment, but EBIT by geography for the quarter?

I don't know if I have that, lets see you have that?

Or just maybe if you could just talk about, you know, any kind of margin input?

I don't know that we have that information at hand right at this moment, we could get it for you.

Okay, what about, do you just have -- do you have a general idea of how margins might have increased in Asia and [Inaudible] 23% EBIT margin last year?

I would say its generally in the same neighborhood and may have dropped a bit, may be by a point or two.

Okay, and then what about European and American margins?

We will have to pull that up.

Okay, okay. Fair enough, and have you guys, I don't know if I missed this earlier, what were day's sales outstanding for the quarter?

I don't think we pulled that up; we will get that for you as well, if you wanted.

Okay, I can just do, I can just do it enough. And then what about printer shipments?

I think we placed about 50 printers [Inaudible] RFID?

Correct.

Yeah, about 50 printers we placed in the second quarter.

And that was up from, I think, 5 or 6 in the first quarter?

Yes.

Okay, that's tremendous. And I guess that's really about it, I will get back in queue.

Thank you.

Thank you.

Thank you.

Our next question is coming from Rob Hilf of FMI.

Good morning guys.

Good morning Rob.

Very good quarter.

Thank you.

Couple of questions. I wanted to see -- I hope that if you could maybe take one poke at this one here is that in terms of the CapEx in Asia Pacific, I guess is this -- will this be for a new facility or expansion to existing facilities and specifically are you talking about China here and maybe if you can go into a longer discussion a little bit, Arthur, and there has been a lot of discussions out there about obviously code elimination to give place in '05, and how do you feel from you mix standpoint? Are you prepared to sort of meet what potentially could be -- where -- I guess 50% to 60% of all apparels being made. How do you feel about that mix? Maybe, I will start with that and ask a few more things.

I think our CapEx expenditures are not only expanding existing facilities but opening up new regions in the area and then expanding them. So, it's really a mix of a lot of things. The elimination of quotas in January, we think it's going to have a pretty big impact. We don't think it's day one, all of a sudden everything explodes but we do think that China will wind up with -- what everybody is saying they will wind up with over time and that is high percentage of over selling. It is going to take place there. That's where our biggest facilities are and between Hong Kong and China, we have something like 75% of what we do this in that region and that is an area that we see with absolute tremendous growth. So, a lot of our CapEx is used to making sure that we have the capacity to meet that growth as we roll into '05.

Great and if you look at your growth in the United States, did you guys grow organically or was most of that due to the acquisition? Just curious to see if there is maybe some renewed growth here from the existing customers? How is that recurring?

We grew organically here in the Americas 3%.

Okay.

In the second quarter. So, that was the first time in a couple of quarters that we've actually seen some growth in this region and we think we can -- I don't think we can have huge growth in the Americas but I think we can grow our business in the Americas.

I guess this is the round about way of discussing EPO for '05 and beyond that year. Your mix, I guess which last year you were probably sort of scrambling to get kind of back into where you need to be geographically -- now you feel, you are kind of an -- have really been in front of that so to speak?

I think so. I think we are fairly well balanced. There is more of our business in the Americas and in the European and Asian markets but both are expanding and so, I think we are where we need to be. We are expanding in the Americas in terms of Latin

America and South America. We are doing some contracting in terms of the US but our supply chain business is primarily focused here in the US and that's growing. Still, there is a good mixture that's taking place right now.

Wonderful. Thanks Arthur.

Welcome.

Our next question will be coming from Chris Kapsch of Black Diamond Research.

Just had a question about the topline. It seems you talked about the contribution of volume acquisition in foreign currency that was, I guess, that implied there was no price mix contribution and it seems like in recent quarters, there is a slight drag on the topline from price mix. So, that would suggest an improvement. I am wondering if that's the case and can you speak to some of the things that might be contributing to positive price mix on the topline and how do you see that going forward?

You are talking about price compression?

Well, it looks like there was none in this quarter which would have been a sequential improvement, right? I am just wondering if that was the case, whether it is price or the mix of -- on the topline?

I think -- I am not sure what you mean by mix, Chris, but there has been quite a lot of price compression taking place over the last, I would say, four quarters. At some point, it needs to flatten out a little bit. I think we are beginning to see it flatten. It's not certainly improving but it is flattening a little bit and so, maybe that is a valuable -- maybe that part of the answer. The other part of the answer is that we are seeing more and more of the business growth taking place in the Asian markets I think that's helping. I'm not sure that the mix of products has really often alerted that all that much.

Okay. And then in the comments about accounts receivable, you suggested the, I guess an acceleration sequentially within the quarter with some of the sales becoming stronger towards the end. I'm just wondering if you could extrapolate and let us know how -- if that pattern has sustained thus far into the third quarter although it had a July orders in sales look at this point.

I think that our third quarter is basically a seasonal quarter for us. Usually, we windup with a stronger second and a slower third quarter. I think in general, our European business has historically slowdown fairly rapidly. I think that's pretty much the way we see it so far, at least for the first three weeks in July. Our US business has remained pretty good. So, our Asian and the Americas business has kind of remained little bit slower, but still with a good headed steam.

Okay. And then, I also had a follow up on the RFID discussion in the press release earlier this month you've talked about the successful launch and ramp up of a RFID service bureau for selected customers and it sound (ph) like that it was successful. Just, I'm wondering if the read/write accuracy is still added nearly 100% and if any other customers other than the one blue chip alluded to in the press release has been involved in that?

We really established -- we have paid a large group of service bureaus around the world, as you will know. We established this particular one as I recall somewhat of a temporary service bureau to really help customers over the next six months comply with whatever their customers are requiring. So, we've got a few customers that are beginning to use this service right now. My guess is that, as we move through the third quarter we are going to see that ramp up quite a bit as people need to be in a position to actually ship product coming (ph) January 1st. But it's still little bit early, but it's something that we think is going to be very important for our customers to have a backup to be able to say there is somebody else they can make it happen for you without any second thoughts about it.

Yes. Just following up on that thought. I'm just -- it sounds like you have dialogs ongoing with a larger number of suppliers to the -- of the top 137 suppliers to Wall-Mart, and I'm just wondering if you have a feel based on those preliminary or advanced discussions how receptive they are to say the service bureau concept with RFID as opposed to just doing it in-house? And I suppose it depends on the customers, but any sense for how comfortable they are, in other words, how important a concept or a source of competitive end (ph) would the service bureau concept be for you?

I think about it, I think in general it depends upon the timing. I think everybody that is pretty significant is going to find a way of doing it themselves. I think that maybe some of the smaller Companies may find that the service bureau activity is going to be just perfect for their need. I think on a longer term basis, the service bureaus may very well be very, very important as the people begin to move the RFID implementation to the source of manufacturing, which -- as that becomes more and more global that will become more and more important. So, this is an industry that's going though a lot of change. And everybody has got a different thought at it. So, that's just an opinion from Paxar, but it could go anywhere. I think the next six months, it's going to be pretty interesting to watch this spiel begin to unfold and people begin to commit.

Great. Thanks.

Chris, if I can just follow up on one of your earlier question. Relative to your question on sales waving towards the end of the second quarter and its impact on subsequent quarters, it's not a typical for our sales to occur towards the end of the quarter. It is more or so in the second, but did not negatively impact the AR days, in fact our AR days at the end of June were two days better than they were a year ago, and our inventory days similarly were six days better than they were a year ago. So, working capital as a percentage of net sales actually improved almost 2.5 points at about 21.3% at the end of June.

Okay. Thanks.

Our next question will be coming from Todd Gowen of MTCA. (ph) .

Good morning and great quarter. Just a few questions. Going back to one of the questions most recently asked, as it relates to the service bureau, it's a kind of my understanding that the service bureau was really set up for those customers that really didn't have an interest yet in aligning their own printers, as it relates to the fact that the standards have not really have been set yet. So, it 's kind of a - just kind of a fill-in until you are able to do that later when the standards have been established. Is that what am I seeing, is that the right way?

Yes, I think the answer is yes and no. It's hard to know, but there is no question that this, we call it potentially a temporary service center, to be able to do exactly what you just said, provide the product, because people are not willing to commit yet for variety of reasons; maybe technology reasons; maybe other reasons. And I think overtime, it is hard to know whether the service bureau is going to be a hugely competitive advantage or just a competitive advantage. I think on an international basis, it's definitely competitive advantage, and that is a kind of what we are focused on. The service bureau that we talked about in the release is really here in the United States to help our customers who have yet to commit one way or another.

Alright, okay. And then another question would be, you indicated I think that you've upped your CAPEX guidance for the year, where was it before?

It was at $34m in the first quarter.

[Inaudible] between $3m and $5m?

Yes.

And again most of that's in Asia?

Yes.

Also and then just two other questions. What you guys think of this Matrix acquisition by Symbol? And was Matrix a supplier to you in any way? And how are the new executive search is going?

The Matrix was not a supplier to Paxar. However, we are working with them currently. I think that in the RFID market, as time goes on, we will see like in any other business consolidations taking place, and so this doesn't surprise us. I read the release as well as you did, I guess yesterday. I think it's a good thing for Paxar. We have a very strong relationship with Symbol for a very long period of time. We sell each other's products, and we are OEM (ph) partners with each other. So I think we see that is a great acquisition for Symbol and it would be positive for us. The searches are ongoing. I think I reported at the last conference call that we expected to try to conclude these searches in the next 90 days. That has extended out a bit. It's ongoing and we are, I would say, more than 75% down the road, but right now that has not been concluded, but it is ongoing.

Thank you.

Thank you. Our next question is coming from Keith Curtis of Brentpoint Capital (ph) .

Yes. Hi guys, great quarter. Just wanted to ask about the organic growth, you've shown some nice acceleration there the past couple of quarters sequentially. What do you think is -- is this 9% sustainable now, does it go higher? What should we think about there on organic growth on a blended basis?

I think that - I think 9%, we had a very, very strong second quarter. We don't particularly see that that kind of growth is, if you could see from our guidance, is going to continue in the third, in the fourth quarter necessarily. But we are sort of looking at the sort of 5% number. I think we've said historically we'd like to be at 3% to 5%. We are probably going to be thinking now about a 5% organic growth, is what we are sort of geared to. So, 9% is terrific, but I don't think that that is something that we can look for necessarily every single quarter. A lot of the things that, a lot of the initiatives we took to drive topline growth are beginning to kick in and I would expect over time to see that improve, but right now as we speak, I would say 5% is a pretty good number.

And you see that continuing into '05.

Yes, we do.

Okay.

All that.

And could you talk about, just in terms of your guidance, what sort of margin assumptions go into that I guess for the third quarter and also the year, I mean, you have shown some really nice margin expansion on all the lines and what sort of margin improvement is assumed going forward?

That's the big question. I am not so sure (ph) to give you that answer right now.

I mean, just a slowdown in the rate of improvement -- similar rates of improvement that we've been seeing on the gross margin.

I think in general, a lot of the things that have begun to improve productivity and lower cost, we are beginning to see in the margins. Margins also have -- are controlled to some degree by volume as well. So, but I think in general, we are on a sort of move to sequentially, not sequentially, but quarter -- year-to-year to see some margin improvement, but it's hard for me to put my finger on how I sort of attach that to the guidance.

Okay.

At this moment.

And you guys have talked about a kind of 10% operating margin target in the past. I think you have said for '05, you had 10% this quarter, I mean, which you carry -- does that get bumped up some or what -- do we stay at 10% from here or how should we think about that?

I think historically our second quarter is always showing a better operating margin. We have done extremely well here. We are still kind of sticking to that double digit, return to double-digit operating income as we move into '05.

Okay.

Keith, if I can just augment what Arthur said. As you might tell with regard to guidance, the kinds of gross margin levels or gross margin rates that we are experiencing north of 39% are beginning to push up against gross margins that may have some additional room, but not substantial room and while we talk about SG&A rates, the company likes to look at sub 30% SG&A rates and of course what Arthur just talked about in terms of OI targets. So, that's sort of the general framework around which our guidance was build.

Okay. Great. Continue with the good work, I appreciate it.

Thank you.

Thanks.

Our next question will be coming from Eric Swills (ph) of Ruber McLain (ph) .

Good morning. It's is Eric Forgo (ph) from Ruber McLain.

Hi Eric.

Hi. Congratulations, it looks like you are on track to almost do the estimate I had for 2005 for you guys. I guess a couple of questions for you. Arthur, I know you have spend a lot time traveling to China, I assume that's where you are looking at acquisitions?

I think, we are kind of looking at a whole variety of areas including Europe by the way, but I was in China and I was in some other Asian countries, three or four of them. So, yes, I would say in general, China is an area that we are expanding pretty fast and spending a lot of money to do that. We are also looking at a couple of acquisitions in that area.

Okay. Second question is, did you breakout your business in terms of business mix between consumable and non-consumable product revenues?

We probably could break that out for you. I don't have that here, but I would say we are probably 80% of consumables.

Now, is that because they did have because I think it would show the recurring revenue nature of your business and the utility (ph) of the business?

We can get that for you Eric.

Okay. And then lastly in terms of free cash flow, I know you mentioned acquisitions, obviously, need some working capital for growth, but it appears that given your current structure you are generating significant free cash flow beyond that and I assume you could pass some debt although your debt is not very expensive. Has the Board given consideration to initiating a dividend as well?

I think that comes up almost in every Board meeting. Our next Board meeting is in August. I am sure it will come up at that particular point. So far there hasn't been something that the Board believes is the right but that's ever changing, believe me.

All right.

As we -- as our cash position continues to change.

Thanks very much, and congrats again.

Eric, just one last comment as well on paydown of debt. Our senior debt has some restrictive elements that would penalize us for an early repayment. So, that's not a current consideration.

Thanks very much.

You are very welcome.

Our next question will be coming from Peter Read of C. L. King & Associates.

Good morning. A couple of questions. Did you guys see any of the slowdown of retail in June impact your business? And, obviously could have big number of it, was there any kind of following that results?

We did not, but we wouldn't be that closely high to within a week or two.

Right. How well are you seeing now then?

We are not at this particular time, other than what we might consider to be of seasonal adjustments. I think in general, as we look at retail, we are not seeing either from a capital expenditure point of view where retail was then stepping up and improving their operations from the point of view of buying new equipments, we see that remaining strong and we see our overall retail business pretty good.

Okay, and on the RFID front, could you give us an idea of the customer or the potential customers you are talking to or those that had already taken printers? How that compares your traditional customer base and then obviously that seems to me your kind of opening in huge new potential market up, beyond your traditional apparel?

Hard to put, you know, my finger on right at this particular moment. We are very definitely talking to almost all of our apparel customers, and lot's of our retailers, but you are absolutely right. Our ability right now to talk to people who we haven't spoken to before is greatly enhanced, but it still very, very early to really kind of put some numbers on it, but some names to catch to it. I think that will change over next six months, but right now, it's a little bit early. We are definitely talking to the people we have never spoken to before when it comes to supply chain equipment and to our supplies.

Okay. And this might be too early to say, but once you guess to some threshold level in RFID, where would you expect margins to be compared to your other businesses as far as [Inaudible] label something like that. Should it be similar or?

Hard to know really at this point. It's so early. I don't think there would be -- I would hope that with greater responsibility assumed by the manufacturer, I wanted to provide of the whole solution that would be better margins in order to assume that liability, but it's too early to tell frankly.

Okay. Well, keep up the good work.

Thank you.

Our next question will be coming form David Tuck of Hawki Capital.

Asked and answered, thank you.

Our next question is a followup question from Chris Kapsch of Black Diamond Research.

Yes, I'm just curious about the potential acquisitions that might be on the radar screen. Can you give us in order of magnitude of how big day those targets might be in terms of sales, just like $5m to $10m in sales, hyper (ph) target or $30m to $40m, and what sort of multiples those sort of targets might tend to go for?

That's really hard to put my finger on right at this moment, Chris. It's way too premature, I mean, we're interested in Companies that will need our strategic footprint and strategic goals and that could be all over the place (ph) . So, it's a really a kind of early -- too early to really [Inaudible] parameter on that.

Okay that's enough. And, then I had a followup on -- trying to clarify a comment you made about your role in terms of development of RFID. I understand obviously you are not in RFID chip manufacturer and certainly not a role label stock manufacturer, but my understanding was that you would have an in-house capability of manufacturing inlays and therefore be sort of an integrated producer of RFID labels. Is that an accurate perception and in fact that my recollection is that you may have that capability in-house this year. So, just wondering what the current thinking along those lines if

I don't -- I guess my comment was based upon of course we're not manufacturing chips nor designing chips. And we're not particularly designing antennas, we do have the capability of taking the chip in the antenna, and incorporating it into the label or the tag. And we also have the capability of producing potentially our own antenna. Although, that's something that is we haven't decided to want to actually pursue that. It's a little bit early to know and as time goes by, we will have to see how the market shapes out, and to see whether doing in-house manufacturing is still a huge advantage.

That's helpful, thank you.

Our next question is coming from Todd Gowen of MTC Advisors.

Just a couple of quick follow-ups, on the debt side when is that debt due or mature?

2008.

2008. Okay, and then Arthur earlier you indicated again your involvement in RFID arenas, as it relates to supply chain and then some did you say ID marking or individual marking?

Item marking.

And what -- Could you talk a little bit about the kinds of prices that are being paid currently work for labels? And where you see these individual markings going first or ID markings.

Item marking is really defined as RFID chips and antennas probably place some labels or tags that are attached to individual products. And which is different than what is currently being thought about in terms of RFID placed bonds.

On basis of -- okay.

Follows those products can be sold today at $0.25, may be $0.30 a piece.

That's for cases and pallets?

No, that's item marking.

Okay.

And cases in pallets again could be somewhat similar to that. There isn't going to be an awful lot of difference you still need a chip and an antenna that's most of the cost -- they're about the same.

Okay, in what areas are you seeing item marking potentially going into first.

Apparel. We see item marking in apparel, because I think apparel has the most gain has more SKU's than any other consumer product, more changes than any other consumer product, more complexity than any other consumer products. So, we kind of think that we'll see it more of a first to appear in the apparel market, and may be -- but then might go into other market. But since we're focused on apparel that's kind of what we see.

Great, thank you.

Gentlemen, there are no further questions at this time. Do you have any closing comments?

Just want to thank everybody for joining us today. We appreciate your time, and we look forward to seeing, talking -- seeing and or talking with you next quarter.

This does conclude today's teleconference, you may disconnect your lines at this time, and have a wonderful day.