Brady Corp (BRC) 2004 Q2 法說會逐字稿

Good morning. My name is Elizabeth and I'll be your conference facilitator today. At this time I would like to welcome everyone to the Brady Corporation fiscal 2004 4 earnings release conference call. All lines are placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Bolens, you may begin your conference.

Thanks. Good morning, everybody and we are glad you could join us.

Today, you'll hear from Frank Jaehnert, CEO, who will be presenting the Americas portion of the business review and will also be summarizing the discussion. David Mathieson, Brady's new CFO, will be presenting Brady's quarterly financial review as well as the Europe overview. Joining us this morning is Allan Klotsche, Vice President of Brady Asia Pacific and Global Die Cut Operations, to provide some additional insights on operations in the Asia Pacific region. As usual, after brief presentations by the team, we will open up the floor to questions.

Please note that in this call, we may make comments about forward-looking information. Words such as expect, believe, and anticipate are a few examples of words identifying a forward-looking statement. It's important to note that forward-looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release this morning and in the 10-Q filed with the S.E.C. in November of 2003.

Second, please note that this teleconference is copyrighted by Brady Corporation and there may be no rebroadcasting of this without expressed written consent of Brady. Note, also, that Brady will be taping the call and rebroadcasting it on the Internet and your participation in the question and answer session will constitute your consent to being recorded.

Thank you, and now, here's Frank Jaehnert.

Thanks, Barb. Good morning and thanks for joining us. Today, we announced that for the second quarter for fiscal 2004, sales were up 18% and net income was up 183%. While second quarter is always a challenge for us due to a seasonally shortened number of working days, we are pleased to see that the measures taken over the last couple quarters are starting to pay off. Day sales for the quarter were still down slightly, however, we saw an improvement sequentially over the first quarter.

The reorganization of our sales force continues to make progress as our phase teams are leveraging their relationship to sell the complete Brady product line. We also have more activity in our R&D pipeline. We have several new products being prepared for launch later this year. This activity could lead to a higher level of R&D spending in the future which we expect to offset through lower spending in SG&A.

The integration of our acquisitions continued as expected. Our acquisitions pipeline continues to be strong as the development team finds new and exciting opportunities to pursue. You will hear from our regional reports that we will continue to see some of our key markets recover, including the electronics and telecom markets. At the same time, some of our larger markets, namely, MRO and new non residential construction, which have historically led economic recoveries, are still somewhat sluggish . As the economic recovery goes forward we expect that these markets will recover as well, as we've seen in earlier recessions.

As we've done since reporting our regional structure we have had different regional executives provide additional insight to his or her region. This quarter, Allan Klotsche, Vice President of Asia Pacific and Global Die Cut Operations, will report on Asia and give a more detailed report on the strategies and success in that region. Now, I would like to introduce, David Mathieson, Brady's new CFO, who will review our quarterly financials in more depth. David?

Thanks, Frank, and good morning everyone. I'm pleased to present the results from the second quarter of our 2004 fiscal year and personally, I'm very pleased to be presenting such nice numbers in my first quarter as CFO. I will first comment on the results for the quarter and then, for the full year.

As Frank noted earlier, net sales were $152.9 million, up 18%. This business was essentially flat, while foreign exchange rates, added 8.2%, and acquisitions brought in 10.5% to the topline. In the Americas, sales were up 8.4%, base business fell 4.2% more than offset by the acquisitions of TISCOR, Brandon and Prinzing which added 10.5%. Currency aided the regional sales by 2.1% and our businesses within the U.S. remain soft during the quarter, particularly in the MRO and direct marketing business.

In Europe, sales were up 26.1%. Currency translation continues to significantly benefit the results in the region, adding 16%. Base sales were down 3.3%. The acquisitions of B.I.G, Etimark and Cleere Advantage added 13.4% to sales. This business was strong within our direct marketing business. but this was more than offset by continued softness within portions of our MRO business and the impact of the loss of a die-cut customer in fiscal 2003, which will not impact comparisons after this quarter.

In Asia, sales were up 38.8% over the prior year second quarter. Base sales growth contributed 26.6% to the topline, as our past investments and facilities in China and Malaysia, continue to pay off. Currency, also aided the region, adding 12.2% to sales. A good portion of the base growth is coming from sales of high-performance identification and die-cut products within the telecommunications and the electronics market.

Gross margins as a percentage of sales increased 2 full percentage points to 51.1% in the quarter, up from 49.1% in the second quarter of the prior year. All regions experienced improvements in gross margins over the prior year but were slightly down, as expected, from the first quarter of fiscal 2004, due to volume seasonality and the holidays. Gross margins in the second quarter of the prior year were low, due to the impact on sales over eClipse Wave 3 Goal line in our direct marketing businesses.

SG&A expenses of $60.5 million run at 13.86% of sales, about 2.6 points below the prior year's second quarter. In U.S. dollars, SG&A expenses were up $6 million above the same quarter of last year. Foreign currency translation increased expenses by $4.7 million, SG&A expenses associated with acquired business, added $4.1 million. Savings from our restructuring program and additional cost controls partially offset these increases.

We expect to continue to see SG&A lower than the prior year over the remainder of the fiscal, 2004, due to benefits from our restructuring and cost control programs. We also expect this decline will improve further with any increase in core growth over the remainder of the year. Research and development was 3.7% of sales, .2% higher than the second quarter 2003 due mostly to the R&D activity associated with new acquisitions.

Operating income in the second quarter was $12.1 million, up $7.5 million or 165% from last year's second quarter. The impact of higher sales stemming from foreign currency translation and acquisitions, higher gross margin percentages and lower SG&A expenses, as a percent of sales, all contributed to the positive comparisons to the prior year second quarter. The effective income tax rate was 33.5% from the second quarter, down from 34% in fiscal 2003 due to a change in the mix of profits and long-term tax planning.

Net income for the quarter was $8 million versus $2.8 million in the prior year. Diluted earnings per share for the quarter were 34 cents versus 12 cent last year.

Now, I'll comment on the results for the first six months of fiscal 2004. Sales were $304.9 million, up 13.7%. Base business was 31.6% while foreign currency adding 7.1% and acquisitions brought another 8.2% to the topline.

In total, the Americas sales were up 4% from last year. Base business fell 5.4%, year-to-date. This was offset by the acquisitions of TISCOR, Brandon and Prinzing, which added 7.6%. This added to region sales by 1.8%. The softness in our base business was experienced primarily in our U.S. MRO and direct marketing businesses.

In Europe, sales were up 22.2% over the prior year. Foreign currency translation added 14.4% to sales in the first six months. Base sales were down 3.8%. The acquisitions of B.I.G, Etimark and Cleere Advantage added 11.6% to sales. Base business was down within portions of our MRO business and was also impacted by the loss of a die-cut customer in fiscal 2003, as mentioned earlier.

In Asia, sales were up 37.3% for the first six months, compared to the same period of the prior year. Base sales growth contributed 26.3%, this was aided by the impact of foreign currency on sales of 11%. As mentioned for the quarter, a good portion of the base growth is coming from the sales of high-performance identification and die-cut products within the telecommunications and electronics market. Gross margin as a percentage of sales increased 1.6 percentage points to 51.5% in the first six months, up from 14.8% in the prior year.

All regions experienced improvements in gross margins over the prior year. Favorable product mix and cost control activities in the current year, combined with lower margins in the prior year, related to our eClipse Phase 3 Goal Line in our direct marketing businesses and the higher cost of goods sold associated with the initial production of two new Prinzing products all contributed to the positive gross margin comparisons to the prior year.

SG&A expenses for the first half of fiscal 2004, were $106.9 million or 38.3% of sales, about 2.1 points below the prior year. In U.S. dollars, SG&A expenses were up $8.6 million above the same quarter of last year. Foreign currency translation increased expenses by $8.3 million, SG&A expenses, associated with acquired businesses added another $6.5 million. Savings from our restructuring program and additional cost controls, partially offset these increases.

As I just mentioned, we are continuing to see the savings of our restructuring, primary restructuring activities. We aligned the company into a new regional structure, we are combining sales and marketing resources in North America and Europe and consolidating facilities in the U.S. and Europe. Through attrition and job eliminations, these actions will result in a total work force reduction of about 10%, globally. The majority of these efforts took place in the fourth quarter of fiscal 2003, resulting in a pre-tax restructuring charge of $10.2 million.

In the first quarter of fiscal 2004, we made further progress on the restructuring program resulting in additional charges of $1.8 million. The restructuring program will be completed during the remainder of fiscal 2004. We are expecting total charges of 2 to $3 million within fiscal 2004 for these actions and anticipate annualized savings to be, approximately, equal to the full restructuring charge of 10 to $13 million. Additional cost savings opportunities will be pursued as they are identified.

Research and development was 3.4% of sales, .2% higher than the first half of 2003, due to the R&D activity associated with new acquisitions. Operating income in the first six months, was $27.8 million, up $10.9 million or 64% from last year's first half. The impact of higher sales stemming from foreign currency translation and acquisitions, higher gross margin percentages and lower SG&A expense as a percent of sales, all contributed to the positive comparisons to the prior year second quarter. The effective income tax rate was 33.5% for the first six months, down from 34% in fiscal 2003, due to a change in mix of profits and long term tax planning.

Net income for the first six months was $18.4 million, versus $11 million in the prior year, up 67%. Diluted earnings per share for the six months were 77 cents versus 47 cents last year. Net income for the first six months, including an after-tax restructuring charge of $1.2 million are 5 cents per diluted share.

Looking at the balance sheet, cash, $58.2 million, down $17.9 million from the end of fiscal 2003. During the first six months fiscal 2004, we spent $30.6 million for the acquisitions of Brandon, Prinzing and B.I.G, $6.6 million on capitol expenditures and $10 million in dividends. Operating cash flows of $22.1 million were up $1.5 million from the same period last year due to net income being higher by $7.4 million, which was offset by higher working capital. From a balance sheet perspective, our accounts receivable balances increased as a result of acquisitions and foreign currency. The majority of our industry balance increase was due to acquisitions and foreign currency translation.

Looking forward to the remainder of fiscal 2004, we expect full year sales to be in the range of 615 to $645 million and net income of 37 to $41 million, after restructuring charges, up from our previous guidance due to favorable currency conditions and further success in out acquisition programs.

I will now turn the call to Frank Jaehnert to discuss the results for the Americas. Frank?

Thanks, David. For the quarter, in the Americas regions, we are $74.2 million up 8.4% from our second quarter 2003. Profit for the quarter was $9.5 million up 62% from last year, as we continue to see the benefit of an improved cross margin due to increased sales of higher margin products and numerous cost controls.

Additionally, comparisons are somewhat easier due to last year's weak second quarter caused by unfavorable mix issues and the temporary disruption due to our SAP goal realized in our direct marketing business. Business in the Americas continues to show mixed results, both by margin and by general. In our Brady brand business, base business in the electrical, MRO and construction markets continues to be weak [INAUDIBLE]. We saw some improvement sequentially in the industrial and electronic markets. Safe of Keep proprietary assistance products are on the rise, while older, more traditional IT products, sales have been weak.

As a result, in the Americas continues to be strong in the industrial electronic markets. In the U.S. direct marketing business we're beginning to see growth with our manufacturing segment customers. Also, we typically experience a two quarter lag to external economic indicators for the manufacturing sector and we're beginning to see improvement in the market segment in the U.S., but continue to experience soft sales to manufacturing customers in Canada.

Sales to the health care segment in North America also improved during the quarter and we continue to see softness in our construction segment in North America, as compared to prior year. External indicators show that non residential construction continues to decline and this segment was further impacted by the bad weather in January. Several of our key core growth initiatives continue to make progress. In the laboratory identification market, our products are being positively accepted and sales are accelerating. In the brand protection, or anti counterfeiting market, we have many projects in the pipeline but the brand off is slow as large brand owners have long sales cycles.

We are pleased that our secure production facility in Milwaukee is up and running. We have been certified by the North American Security Products Organization to declare two security standards, the first and only label company in North America. We have wrote out or page-up initiative and have increased our page count with the key catalogues in America businesses.

We have had good successes in Europe. We mailed our new hard cover source book to our seasoned U.S. customers in mid January. The catalogue included over 3,500 new products while the page count was expanded 29% to 660 pages. As part of this new catalogue we made major expansions to security products and we continue to see nice safe growth from this focus. The same is true in Brazil, where the customer catalogue page count grew 23% as we added more than 650 new products.

Finally as it relates to acquisitions, our recently acquired businesses, Brandon International and Prinzing, are performing as expected, as are the scheduled integration activities. Now let's move on to Europe, David, again?

Thanks, Frank. In Europe, sales in the quarter increased by $20.5 million to $60.4 million, an increase of 26.1% over the same period last year, including acquisitions and the benefits of currency translation. Acquisitions are accepting by 13.4%, reflecting Etimark in Germany and Cleere Advantage, Aztec and B.I.G, in the U.K. Currency added 16%.

Base sales declined by 3.3% primarily due to the loss of one large but lower margin die-cut account in Germany in fiscal 2003. Excluding that, underlying base sales increased by 1%. Profits increased 41.1% over the same period last year, 21.1% in local currency, driven both by the benefits from our restructuring and improvements in gross margins.

Overall by geography, our business was pretty consistent. Except for the loss of one die die-cut customer in Germany fiscal 2003, this business across the region was up 1%. Germany, France and Belgium had modest single digit growth on a per day basis, while our business in the U.K. continues to be affected by [INAUDIBLE] from the manufacturing sector, specifically, in the MRO market and remains relatively flat with the prior year. We continue to see double digit growth in our Italian business.

The Seton Direct marketing business saw encouraging trends in the quarter, experiencing solid growth on a per day basis through the quarter. This reflects the benefit from our recent initiatives to increase the number of new products we offer to our customers through this channel. We also continue to benefit from geographic expansion into Spain and Italy.

Our Brady brand sales were flat against prior year. Within the brand, we see some strengthening in our high-performance legal business, which grew by 6% as customers in the electronics sector, such as Ericsson saw improvement in demand. In particular, our business in central Europe continues its high double digits growth rates. In the telecom sector, where we supply cable marking products, we're seeing signs of recovery, however, we continue to see weakness in our business net sales into the MRO markets. Typically, these markets lag economic downturns and recovery by about six months.

During this quarter, the newly acquired business, London-based B.I.G, performed well. B.I.G, or BIG., is the U.K.'s leading provider of business count solutions and makes a way for Brady to establish a market leading possession in the identification of personnel as well as products.

Our focus this fiscal year has been to return to higher profitability levels, given the moderate growth we see in our end markets. We continue to see the benefits from the F '03, fiscal '03, restructuring efforts which has made us much more competitive. In addition we have a much more simplified and focused business, which is well-positioned to take advantage of new and emerging markets and economic recovery in existing markets.

Now, Allan Klotsche will discuss Asia. Allan?

Thanks, David.

For the quarter, sales for the Asia Pacific region were $18.4 million up 39% from the previous rear. Base growth was up a strong 27% and currency added and additional 12%. Sales in China and Malaysia are both more than double what they were the previous year. Gross margins continue to be strong and profit for the region was $4.9 million, up 59% from the previous year.

We continue to see the value of our investment in the infrastructure in Asia. Companies today, especially those in the electronics market, are very concerned with time to market. With product life cycles shortening to less than a year, one or two week delays in product launch can be the difference between success and failure.

Brady currently has over 550 employees throughout the region, with solid expertise in mechanical engineering, chemical engineering, manufacturing, sales and marketing. Equally impressively to our size and scope in the region, is our global connectivity with our sales and engineering resources calling on U.S. and European design centers. In 1999, Brady pioneered a global account selling program who's purpose was to build a global sales and engineering team that could support the U.S. and European design centers, as well as the high volume overseas production facilities. Feedback from our customers reinforces that our strategic account team is very unique among other competitors in the industry.

China not only continues to be an engine for sales and profit growth, but also a source for purchased materials cost savings. Through our network of local contacts and sourcing, Brady has been able to identify and qualify local sources of components and materials at significantly lower cost than we were paying elsewhere in the world. Brady's early presence in the region, relative to other suppliers of similar products, has given us interesting opportunities to supply more adjacent components in the value chain.

On a frequent basis, we are challenged to think outside of the box and use our core competencies to provide innovative new solutions. The combination of speed to market with solutions and flexibility is what will ensure a winning strategy for us going forward. While core growth and new market growth continued at a pace we are very pleased with, we've begun to develop a process and focus of identifying acquisition candidates which will provide us access to new vertical markets, technologies and customers. We are pleased with the pipeline activity in this area and look forward to even greater growth when the right opportunities surface.

In addition to our label and die-cut production in our Penang, Malaysia facility, Brady has also successfully begun production and assembly of some of our portable printing units. Local production of these printers takes advantage of our access to a lower cost, highly skilled workforce, as well as tightening our supply chain with many of our component suppliers being located in the Asia Pacific region. Well connected systems allow our design engineers in the United States to work closely with our production team 6,000 miles away.

Brady's investment in new market initiatives, to add core growth in the United States, has proven to be equally as valuable in Asia. Over the last quarter, the Asia Pacific region has made much progress in the area of laboratory identification and also providing anti counterfeiting solutions for some of the world's most prestigious brand owners. Our focus in the coming quarter will be on refining a long term strategic plan for the region that will include the appropriate balance between continued growth within our core markets and existing customers, as well as the new market initiatives, focused on diversifying our concentration in the electronics industry.

I'd now like to turn the call back to Frank who will summarize some key points from today's discussion.

Thanks, Al. We appreciate your participation today.

During the regional reports you heard the many different actions and strategies we have implemented over the past months are beginning to pay off. Our reorganization activities to create a leaner, more focused sales and marketing organization including less profitable businesses are contributing to a higher quantity of earnings, even in a quarter traditionally, a weaker for us. Our topline growth initiatives to jump start core growth and augment growth through strategic acquisitions, are also contributing positively. For the second half our fiscal year, we expect the growth and profitability initiatives to be put in place to continue to accelerate our top and bottom line and, at the same time, we continue to receive help from the weaker dollar.

Therefore, we are, again, increasing our guidance for fiscal 2004 to 615 to $645 million in sales and net income in the range of 37 million to $41 million after restructuring charges.

We appreciate your interest in Brady and would now like to start the question and answer session. Elizabeth, could you please take over?

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Mark Roberts, of Wachovia Capital Markets.

Thank you, good morning. Couple of questions for Dave. Dave, if we look at revenues in the die-cut and high-performance label business, can you give us a sense of how that business has grown, either sequentially, year-over-year, you know, either as a percentage of revenues or in the hard dollars?

Do we have anything here? I think we changed from a product line structure to a regional structure, we basically don't capture those data anymore. Do you have a feel for this, Al, in your area?

Our sales, as we tried to accumulate, that's on a global basis, are doing very well in the high-performance and die-cut markets. I don't know that I could give a specific figure in terms of growth, but we feel confident as we try to aggregate globally that we're performing equal to or above the growth in the market.

I could tell you, Mark, if you look at North America, for instance, and we had a negative core growth, if you were to take electronic and telecom, we certainly would be growing. I can tell you this much.

Okay. So, would it be fair to say that relative to this time last year, is the percentage of revenues coming from die-cut and high-performance labels higher than last year?

Yes. Both of the growth from Asia is from high-performance identification business and the die-cut, although, I should point out also, that the decline in business that we see in North America, is partially caused by the die-cut business leaving North American and going to Asia-Pacific. We also lost a low margin business, a die-cut business in Germany last year. So, yes, it is growing. It's HPI and die-cut is the source of our very strong growth in Asia-Pacific but it's also one of the reason that is we're declining in Europe and North America

Okay. And, Dave, I was a little confused about your discussion on overhead SG&A. It was up about 4 million, sequentially, and up about 11% year-over-year. I thought I heard -- did I understand you to say you expect to be down year-over-year, the remainder of the year?

Not in real terms, as a percent of sales, we forecast that we'll continue to be lower than last year. But not in real terms, Mark.

All right. That's where I was getting confused. Last question, on currency, if there were -- can you give us a ratio to use, kind of going-forward, if we were to see a, for example, a 5% appreciation in the dollar relative to the Euro, could you give us a sense of what type of impact that would have on revenue and earnings?

Well, Europe, accounts for about 35% of our business and probably the same in terms of, slightly more in terms of net income. So, does that help? .

Well, okay. But, what's the sensitivity to earnings of an appreciation in the dollar, have you quantified that?

It really depends on the quarter that you're comparing it to from the prior year. You know, last year, we experienced some volatility in currency and so when we compare it to the previous year, it really depends on what we're comparing it to. So if you compare it to quarters now, it's not going to be a sensitive than if you're just looking sequentially because it's such a high rate now. But when you compare it to last year, we're up, just in total, about 1.5 million, year-to-date at the net income line from currency translation.

Okay. That's helpful. All right, thank you.

Your next question comes from Reik Read of Robert W. Baird.

Good morning. Dave, can you, maybe, just talk a little bit about, I think, as you talked about the SG&A you were comparing that, year-over-year, do you talk about why it accelerated on a sequential basis?

Okay. Could you repeat the question? I didn't get it.

Sure. Can you hear me?

Sure, yeah.

Can you guys talk about, when you were talking about the SG&A and it popping up, I think you were talking about it on a comparable basis, but it's also accelerated here on a sequential basis, you know, by about 4 1/2 million bucks, can you talk about why it happened on a sequential basis, as well?

Yeah. I mean, well, David looked at the numbers, I can give you a pretty simple explanation. First of all, we add acquisitions as SG&A in absolute dollars. So just by adding a couple of companies, we added SG&A and I think David said something like, $4 million?

Yeah.

For acquisitions?

Yeah.

And the translation of SG&A in Europe had a weaker dollar. Also, I think, added about $4 million.

But, you said that was on a comparable basis, is that correct?

If you look at first quarter to second quarter, our acquisitions are up 1.5 million at SG&A line. So we were fairly active in acquisitions in of the first quarter and also had one in the second quarter. So just comparing those two is 1.5 million for acquisitions.

Okay.

And then 2 million is currency, when you look at first quarter versus second quarter that is just the delta there.

Okay. And what would be the balance that the remaining, say, 500,000?

It could be a mix of things.

Pay increase. We had a pay increase, November 1 and the first quarter had no pay increase. I think our pay increase was about 3%.

Okay.

And if you say, all phases about $600 million roughly, payroll of about $200 million and a 3% pay raise is about 6 million, 3% of about $200 million is about $6 million, for 4 quarters, it is about 1.5 million.

And can you guys give us the head count for the most recent quarter and what it was, the quarter prior to that?

Yes, we can, just one second.

One moment.

Maybe I'll ask this while you guys are looking that up. Dave, can you also talk about, with SAP continuing to go in, would you expect the amortization related to ERP projects will continue to increase in the next couple of quarters or has it leveled out?

That's leveled out. And we paused in our SAP implementation because we want to get more benefits from the implementation and people are working on that.

We think that, you know, in 2005, the first year, we're going to see a small drop off of our SG&A, of our SAP am amortization.

Okay.

Not in fiscal '04 by fiscal '05, talking somewhere around a million in pre-tax in expenses.

Do we have an answer for the head count?

Yeah, the head count, this quarter, is 3,600, up from 3,500, in the last quarter, due mainly to acquisitions.

Okay. And just so I understand where you are on talking about the 10% reduction in heads and I think it's mostly through attrition, that is not completely done at this point? That's something that would happen throughout the year, is that correct?

It's substantially done.

It's substantially done. Okay, so, just kind of getting back to the SG&A if it's at the level of 60.5 million right now, is that something in terms of absolute dollars, we'd expect to see slight increases as the year goes on?

Yeah.

Okay. And, just last question from me, you guys had made some distribution changes within your structure and I know that those were things that had gone reasonably well for you, have they continued to go well or are you seeing any disruptions as a result of those changes? .

No. They've continued to go well. Our customers are happy with the changes. There's no disruption. Things are going well.

Okay. Great. Thank you.

Your next question comes from Ajit Pai of Thomas, Weisel Partners.

Good morning.

Good morning.

Good morning.

Just a few quick questions. First is, looking at raw materials and components costs you talk about sources from China, et cetera, overall, from the current sources that you have, can you give us some color, whether the pricing is going up or down or staying flat? .

We're holding our material costs, actually, as a percent of sales. It's neither going up nor is going down very much. We're beginning to source more from Asia, we're beginning to use our own production facility in Asia to purchase some of our products. So, our prospects were there but there wasn't any significant change in the quarter.

Okay. Second question is about currency. Can you give us sort of some color as to whether you have a hedging policy in place and what the horizon is, whether the rolling quarter, or any color over there?

Our current hedging policy is that we hedge a portion of our inter company purchases and sales. we hedge only a portion of that so that we can take advantage of situations like this when the dollar weakens. So that it's done fairly consistently when we establish our budget rates so that we can hedge to that budget rate. So, bottom line, though, we only hedge a portion of it so that we can take advantage of positive fluctuations when they occur.

Right. And is that -- is the hedge, what is the horizon, is it a one quarter hedge, is it a six month or a one year hedge?

It's approximately, it's done at various stages but it is approximately, at this particular year, we hedged, approximately a year but that was done some time ago.

Okay. And, then, my next question is about ERP and the SAP. After the implementation is done are you considering using the Internet more actively for selling your products in all of your geographies and could you give us some color there?

Yes, we already are pretty active in using the Internet but as we're fully deployed with SAP, that will actually become simpler because we can end up with one Internet front end hooked into SAP. What we do now where we're not on SAP is, we have, in a sense, a separate Internet based system and then we either manually or, you know, in a little bit more clumsy fashion, transfer the information into our computer system.

Right. And, the Internet, do you think that at some point, it would start to replace some of your capital costs?

That's an interesting thing. Our hypothesis when the Internet became very big a number of years ago, was that the conversion of people from catalogue to Internet would be very rapid and, in fact, it's proven to be much slower than that. There appears to be a pretty natural adoption rate of people who want to buy over the the Internet and, in our catalogue businesses, we tend to run in about the 10 to 12% range of people who like to buy over the Internet and that's been increasing, every year, but it is not growing dramatically.

Okay. And then the last question would be, looking at your acquisition strategy, you talked about Asia but could you give us some color as to whether you intend to use the current weakness in the U.S. markets as an opportunity to acquire businesses in the U.S. and what kind of businesses would you be looking at?

Yes, in our acquisition program, we are actively looking in all of our three regions. And in fact, I would say, probably, in terms of hours spent, we do spend the most of our time, actually, in the U.S. market. The types of businesses we look at, we look at people who are in our space, people that can add to our market share and we also look for people that can get us an entry into an interesting market, a new market, or people that can bring technology to the table. So, we tend to take what I would consider to be a pretty standard view of technology, looking at our current and new markets and our current and new technology and trying to balance our view across those grids.

Okay. Well, congratulations on a good quarter and thank you.

You're welcome.

Ladies and gentlemen, at this time I would like to remind everyone, in order to ask a question, please press press star and then the number 1 on your telephone keypad. Your next question comes from Wilmont Kidd of Central Securities.

Hi. Congratulations on a nice quarter. I see you provided a lot of information here about profitability by segment; Americas, Europe and Asia and I couldn't help but noticing that Europe and Asia have much higher profit margins than the Americas. Can you tell me a little bit about that and, maybe, give me a feel for what kind of segment profit margins we can get?

WIll, it's Frank here. Yeah. If you would have looked at this two or three years ago, I think, it would have been looked different, Americas would have been much higher. As a matter of fact, that the recession of Americas was harder and deeper and more businesses left -- more of our businesses left from the Americas into Asia, so, we were left here with a structure. For instance, many of the coding machines are big assets are here in the United States are now at a lower absorption also, the decline of some of the businesses was much harder in the United States. So, we will try everything, the profitability in Americas are going to come up to a a higher level this quarter to reach our targets, for everybody, we see no systemic region why America should be lower than Europe, they should all be about the same. The competitive environment, we don't see any big differences there. It's -- I think it's a reflection of the recession in the United States and we're still crawling out of it, you know, our core business is still negative in North America as in Europe, we just fell in a deeper hole in the Americas.

Well, if I am a "glass half-full" guy, it looks like there's a big opportunity here, if that's what you think, because it's a big sales base, for you, and there's a huge margin differential?

I just want to add one comment to that. While Frank's comment is correct, we do carry some cost in the U.S., I think that we don't carry around the rest of the world. For example, we really carry most of our global R&D cost in the U.S. Frank commented on our coating assets and we have a large asset base that we don't have other places and we also do have some corporate costs here that wouldn't exist elsewhere. I just don't have a handle on what those numbers are off the top of my head.

Can I ask another question?

Absolutely.

Sure.

When are you going to talk about you're next fiscal year and, you know, potential margins for that year?

We typically, start our planning process around April, May, for the next year.

Uh-huh.

I think at this period would be a good time for us to talk about next year.

Okay.

And we gather information from all over the world and have a better hands on next year.

Well, thank you very much.

Ladies and gentlemen, we have reached the end of the allotted time for question and answers. Are there any closing remarks?

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