Brady Corp (BRC) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 3 2005 Brady Corporation earnings conference call. My name is John and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Ms. Barb Bolens, Director of Investor Relations. Please proceed, ma'am.

Good morning everybody. We're glad you could join us. During our call this morning you will hear from Frank Jaehnert, Brady's CEO; and David Mathieson, CFO, who will be presenting Brady's quarterly financial review. Also joining us this morning is Dave Hawke, our Executive Vice President; and Peter Sephton, Vice President of Brady's European Region, who'll be both providing a portion of the regional reports. As usual, after a brief presentation by the team we will open up the floor to questions. We encourage you to again follow along on our slides located on the Internet, as we will be referring to the individuals slides as we proceed through the presentation. These slides can be found on our website at www.investor.bradycorp.com. You do have a few minutes to get the slides while we go through our Safe Harbor statement and other usual information.

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 is 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 Brady's 10-K filed with the SEC in March of 2005.

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 that Brady will also be taping the call and broadcasting it on the Internet, and your participation in the question-and-answer session will constitute your consent to be being recorded. Thank you. And now here's Frank Jaehnert.

Good morning, and thanks for joining us. This morning we have reported another great quarter, with sales of 209.8 million, up 16% for the quarter. Net income of 25 million, up from 16.4 million last year. We're very pleased with these results.

While our core business seems to have stabilized at a high level, our earnings quality continued to improve substantially. This net income improvement -- this net income now -- excuse me -- at 11.9% of sales. We attribute this improvement (indiscernible) cost control, increased profitability of our core business, and successful integration of our recent acquisitions.

I would like to move right into the details of the financials and regional results. So we now turn the call over to David Mathieson. After the regional overviews I will be back to provide you with our key initiatives and outlook for the fourth quarter.

Good morning everyone. On slide 3 we are pleased with another quarter of record results with sales up 16%. This was comprised of flat base results, 13% from the acquisitions of EMED, ID Technologies, and Electromark, with currency still helping at 3%.

Gross margins are at 54% were up 200 basis points over prior year. SG&A at 34.5% of sales, up 120 basis points from prior year. Our operating income up at record highs of 16.9%, up 400 basis points from prior year. And net income of $25 million, up 52%, also a record high percent of sales. Our diluted earnings per share at $0.50, up 47%.

On slide 4, our third quarter started sluggishly, but finished with modest growth in the Americas and Europe, and strong growth in Asia-Pacific. In total for the quarter the base growth was flat with 1% growth in the Americas, down 3% in Europe, and Asia-Pacific up 7%. Our last three acquisitions are at 13%, and included EMED and Electromark in America's, and ID Technologies in Asia-Pacific. Currency added 3% to the top line.

On slide 5 Americas' base growth slowed to 1%, although finished the quarter with modest growth. Acquisitions are at 20% with currency adding 1%. The North American die-cut business was soft.

On slide 6, the European business had a tough quarter against some very tough comparisons in the prior year with base business down 3%. Although the European business finished the quarter with modest growth, our businesses in Europe are facing economic headwinds.

Slide 7. Our Asia-Pacific business showed total growth of 33% with base business up 7%, currency adding 2%, and the acquisition of ID Technologies adding 24%. Our Asia-Pacific business continues to grow in importance. This third quarter for them is seasonally the weakest as this is the post Christmas season for OEM/electronics.

On slide 8, we had a nice gross margin improvement in the quarter with gross margins up 200 basis points, driven by our cost control efforts and the positive impact of the EMED acquisition. There are continued frustrations from suppliers and customers, especially on end of life programs in OEM/electronics.

Side 9. We had continued SG&A improvements in the quarter with SG&A at 34.5%, growing 120 basis points from prior year. That reduction is coming from synergies, cost controls, offset somewhat by Sarbanes-Oxley compliance costs.

On slide 10, R&D actually declined over prior year, as we did a number of new product launches this quarter last year. Our spending is in line with the second quarter, and we are ramping up going forward.

Slide 11. We posted record net income of $25 million in the quarter, which includes a favorable tax adjustment of $1.2 million as we bring our tax rate down for the year to 29%, due to the mix of profits and favorable settlements. We are pleased to see our operating income at 16.9% of sales due to gross margin and SG&A improvements.

Slide 12. Diluted earnings per share is at $0.50, up 47% over last year. Our headcount was approximately 4,300 people at the end of the quarter. That is up about 700 people from the same period last year due to acquisition and investment in emerging markets. The headcount in mature businesses continues to trend down.

Slide 13. We produced strong cash flow from operating activities of $37.4 million, up 47% over last year. We have an explanation on the right hand part of the chart of what we do with our cash. And in the quarter the cash flow was more than sufficient to cover our dividends, capital expenditures and acquisitions.

Slide 14. Here is a slide on cash flow for the last seven quarters. You can see that the last five quarters have been very strong. Year-to-date our capital expenditures is $14.4 million, up $3.8 million from the same period last year.

Slide 15. This is a chart of our cash flow from operating activities. And as I mentioned, before the last five quarters have been very strong.

Slide 16. This is our summary balance sheet for the quarter. You can see our debt at the end of the quarter was $150 million, Which is 23% of our debt plus equity. We have cash and equivalents totaling $87 million. So there is a lot of financial flexibility for the Company.

Slide 17 is our summary balance sheet over the last seven quarters. I am very pleased with the receivables. We have kept them under control as we have grown a lot. And our finance efforts have been dedicated to Sarbanes-Oxley. We are deliberately adding inventory as we improve our customer service levels. And our delivery performance and service metrics are at very high levels indeed. You can see that we introduced our $150 million long-term debt in quarter 4 of last year as this coming Friday is the one year anniversary of our purchase of EMED.

Slide 18. As we draw closer to the fiscal year end and consolidate a new tax rate of 29%, we are increasing our guidance on net income from previously announced 78 to $80 million, upward to 80 to $82 million, and diluted earnings per share from previous guidance of 1.55 to 1.60 per diluted share, to 1.61 to 1.64 per diluted share. We are narrowing the range on revenue guidance to the top of our previously announced range of 790 to $810 million to a new guidance of 805 to $810 million.

We're confident of a return to base business growth in the Americans and Asia-Pacific, but cautious on Europe due to the economy, plus we do have very soft comparisons there. We're also cautious as we see the recent strengthening of the dollar. And we continue to face pressure from vendors, and are working all the time to mitigate those effects and to improve our productivity. I'll now pass over to Dave Hawke, who will talk about the Americas.

I am on slide 19. The Americas continued to perform well in the third quarter due to strong revenue growth from acquisitions, with profit up nicely over the prior year's third quarter. The region sales increased to 109.1 million, an increase of 22% in the third quarter, over the same quarter of fiscal 2004.

Acquisitions of EMED in May 2004 and Electromark in February of 2005 added 20% to our sales in the quarter. Our overall base business growth and foreign currency translation each added about 1% to sales. Base sales within our direct marketing businesses were flat in the quarter. Brady brand-based sales were up slightly with continued strong growth in Mexico, Canada, and Brazil. Base sales in the U.S. were up only slightly due to softness in our North American die-cut business and the flat MRO business.

We continue to have positive results in expanding our external volume through our coating facility. While the quarter began slowly in North America, we were encouraged by a strong finish to the quarter. This came from solid growth in high-performance label sales to OEMs, and Wire ID sales to the electrical and telecom markets, as well as strong volume in external coating business.

We're very pleased with the acquisition of Electromark, which makes Brady a leader in the utility identification market. Our integration of the business is progressing nicely, and we're beginning to realize some cost synergies. In addition, plans are in place to sell cross-market products across the Brady business.

EMED continues to perform above expected levels, and we continue to be successful in benchmarking best practices across our direct marketing operations, which has helped improved profitability across the board. Segment profit rose 59%, or $10.5 million, to $28.2 million in the quarter. As a percent of sales, profit rose from 19.8% in the prior year's third quarter to 25.8% in the current quarter. The majority at our profit growth came from the acquisition of EMED and cost control in both our direct marketing and Brady businesses. Profit growth continues to outpace sales growth in the Americas. Peter Sephton will now record on our European business results.

Good morning everyone. We're now on slide 20. Sales for the European region were $71.5 million, increasing 2.5% over the same period last year. Base business declined 2.9%, while currency added 5.4%. We did experience a general slowdown in the incoming orders across some of the major economies we serve. Germany and Belgium declined relative to the third quarter last year, but southern Europe continues to experience solid double-digit growth as these markets continue to develop for us. Our French direct marketing businesses showed modest growth in the quarter. And our software business showed double-digit growth and continues to have a very strong year.

Looking at our business by brand, the direct marketing business declined modestly. This is isolated to our UK operation that faced an especially challenging economic climate, and against a particularly strong third quarter last year. Our other direct marketing businesses experienced single digit growth in the quarter. A poor start to the quarter was offset by a strong rate quarter recovery in France and Germany, both businesses recording solid growth over April of last year.

The Brady brand was also down modestly. Softer sales in Germany from our labeling and die-cut businesses accounting for much of this decline, and reflect the continued economic weakness in this country.

Segment profit increased 10.8% to 21.6 million. This is especially encouraging given the modest decline in base business in the quarter, and the fact that we compare this quarter to the previous year, which generated a 66% increase in operating profit. Profit as a percent of sales rose from 27.9% to 30.2% this year, as we continue to drive improved gross margins and leveraging operating expenses across the region.

During this quarter we launched two new niche market catalogs, one in Germany aimed at the electrical market, and one in France in the janitorial market. Both of these initiatives are designed to leverage our existing infrastructure, and have allowed us to add new customers and products to our existing offering.

We also announced we will begin a sales and production office in Bratislava, Slovakia, targeted for opening in the first quarter of fiscal '06. This operation will primarily serve our OEM label and die-cut customers and supports our strategy of following our OEM customer migration to emerging and lower labor cost markets.

All of our businesses continue to outpace economic indicators. We expect Q4 base growth to be roughly flat as we are cautious for the remainder of the fiscal year due to an uncertain economic climate in the region.

While our return to core growth later in quarter 3 was encouraging, we continue to focus on productivity improvements in our base business. This, combined with continuing investment in European product development, and on new initiatives, will ensure that we're well-positioned for long-term growth and continue to generate solid income growth.

We will now continue with the Asian report which will be read out by Dave Hawke.

I am now on slide 21. Performance for the quarter started out a bit slowly with the impact of Chinese New Year, and some seasonality associated with the consumer electronics industry. As the quarter progressed, however, core business resumed to projected levels. For the third quarter, sales for the region were $29.3 million, up 33% over last year. Base sales were up 7%. Our acquisition of ID Technologies added 24%, and currency added 2%. Regionally China continues to grow at impressive levels. Customer demand has grown to fill the increased space we added to our Beijing plant earlier this year. Our Wuchu facility has now completed their space addition and clean room upgrades. And our Shenzhen factory is now at capacity and in need of expansion.

Southeast Asia continued to perform on plan, despite some challenges with business transferring to other parts of the region. Our core business in Singapore and Thailand continues to perform very well. Our plans for business expansion into Thailand are on track. And the enhanced local capabilities in Thailand will offer us continued growth in our core markets, as well as some new market potential such as automotive.

Japan and Korea continue to perform well above of plan, with growth coming from major OEMs in the electronics industry who are attracted by our ability to support them locally with design engineering and later support their volume production facilities in China.

We are pleased with our business performance in Australia relative to the local economy, and have recently completed a move into a new facility Australia -- a new Sydney, Australia facility, which offers us much needed room for expansion.

We're looking beyond Australia for other geographies to export our direct mail business in Asia. Additionally, we're beginning to see some nice growth coming in the areas of safety, facility and wire identification as a result of our initiative to grow this business in the region.

Segment profit for the region was $7.8 million, or 26.6% of sales, up 19.3% over last year's segment profit of $6.5 million, which is 29.9% of sales. We continue to face pressure on pricing and gross profit margins. While our topline customer growth remains consistent we continue to face demand for price reductions. Our investment in manufacturing process improvements has helped us meet some of these demands in the short term. We believe the long-term response to pricing pressures is the development of a continued stream of proprietary new products. To this end we're in the final stages of expanding our research and development team in Asia, as well as enhancing the capabilities of our regional laboratories.

As we look forward to the final quarter of fiscal 2005, we will be accelerating our focus on understanding front-end customer requirements and subsequent new product development. Our geographic and business expansion efforts will be focused on Thailand and China, with a growing eye towards the increased activities from electronics OEMs in India.

Now I will turn the call back to Frank to wrap it up.

As we see some topline pressure from the economies that are struggling, such as Europe, it reinforces our growth strategy that calls for a mix of acquisitions and initiatives to strengthen our core business growth to provide a balanced (indiscernible) cycle. Our growth this quarter came from acquisitions we have made earlier this year.

In the fourth quarter we see the Americas poised for modest base business growth, but continued opportunities for custom and margin leverage due to our recent acquisitions. In Europe, where we have been defying economic gravity in recent quarters, our challenge is base growth in an economically challenged region.

We continue our new product development and share profit (ph) expansion initiatives. We will try to counteract the economic effect. Our profit expansion continues nicely as we drive towards operational excellence.

Asia's growth continues, and we look for expansion through new geographies such as Thailand in the near future, and India later; expansion for our MRO business into parts of Asia not yet penetrated; and averaging our infrastructure into new markets.

As a result of continued strength in our bottom line, as well as our income tax benefit we recognized this quarter, and lower tax rate going forward, the increased guidance today to net income between 80 million and 82 million, and earnings per share of 161 to 165. We also narrowed our topline guidance to 805 to 810 million as we come to the end of our fiscal quarter.

We appreciate your interest in Brady -- the interest in Brady, and we would like to start the question-and-answer session. But before we do this, I think David Mathieson wants to -- (multiple speakers).

Yes, just to clarify, our guidance is 161 to 164.

Operator, we are ready to start the question and answers.

Did he say, touch star zero?

We appear to be having some technical difficulties, so hopefully we will have those results shortly for those of you that would like and ask a question.

I'm not sure if the investors can hear us, but we're still here. The Brady team is still here waiting for the operator to give us help with the Q&A. (Waiting for Operator).

(OPERATOR INSTRUCTIONS). Ajit Pai of Thomas Weisel Partners.

A couple of quick questions. The first is that the core growth of almost 0% this quarter relative to what you have seen over the past four years, the comps are not going to be getting any easier going through the rest of year. So is there anything that we should be looking at which would give us some encouragement in terms of that beginning to reaccelerate at some point in the near future? You talked about towards the end of the quarter seeing some strength. Could you tell us where that was, and whether you see that continuing in this month?

Yes. We're not expecting a strong base back in our forecast going forward, Ajit, although we are very encouraged. We (indiscernible) just about everywhere. Business was going just about everywhere which -- but April bounced back. What we see so far in May is encouraging, but it is only the first ten working days, so it is just too soon to tell if the business is improving, or getting back to where it has been in the past.

I would point out we have had four -- prior to this quarter we have had four quarters of 10 to 12% base business growth. That has been surprisingly strong. Now we don't expect to see that through the cycle.

But you have been talking about 5% growth through acquisitions and 5% core growth for the next couple of years. Is that still the target?

Absolutely, Ajit. What we did in fiscal '04 was 15%, excluding currency, 5% from core, 10% from acquisitions. What we are on course to do this year is actually our guidance is 20 to 21%. If you take out roughly 4% in currency, it is roughly 5% core business growth, 5 -- perhaps a little bit more than 5% -- and 12% from acquisitions. So we are confident we can keep that up.

Looking at the last quarter, which is the guidance for the last quarter, the implied guidance would be about 199 million to 204 million in the doll plan (ph) which is showing sort of greater than normal seasonal -- the midpoint of that then seasonal slowdown than you have seen in the past five or six years. And then on the EPS side the implied guidance would be $0.28 to $0.31. So is this actually what the implied guidance is, or are you more optimistic than that? And if it is the implied guidance on the EPS line, what would be resulting in the margins dropping so much going into the fourth quarter?

There is seasonality in the fourth quarter, Ajit. The comparisons actually get a bit tougher in the fourth quarter, first of all. So we are projecting 7 to 10% growth in the quarter because a major acquisition falls out, so we don't get the benefits of the EMED that we've got for the last three quarters. That is one thing. In terms of the margins going -- margins traditionally dropped from the third quarter, which is the most profitable quarter of the business, to the fourth quarter.

But on a sequential basis, means third -- fourth quarter relative to third quarter when you have the seasonal slowdown, if you just ignore the year-over-year for now because there have been acquisitions, what is the typical seasonality that you see in the fourth quarter in terms of topline growth on a sequential basis?

It is different in each region actually. This is the soft quarter for Europe. We don't expect substantial growth in Americas.

But there shouldn't be a difference between the seasonality this year relative to prior years, or is there anything that you are seeing that would make the seasonality this year in terms of both your margin structure, as well as your revenues, different this year relative to other years, if you look at the long-term average historically?

We do see our die-cut business bouncing back. It should be quite a strong business in the last quarter for a die-cut. We are very profitable in Europe. And they are really facing a tough economic conditions in Europe. So there is a little bit of a mix change.

And, Ajit, I'm not sure what you are seeing. When I look at the last couple of years, I am not sure if I can determine any pattern which would help us to forecast. For instance, our last second quarter was just phenomenal. It was great. And normally our second quarter is weak. And the question was asked for us last time, why is your second quarter so strong? We all said we were surprised by a strong second quarter, because normally our second quarter is weak because of Christmas and Chinese New Year.

So maybe we had some buying ahead because of price increases which we had in the third quarter. This could have shifted some business from the second -- from the third quarter into the second quarter. But of course that is speculation on our part. We do not know this. We will see by the fourth quarter and then going forward if that is actually was the case.

Got it. And then in terms of your expansion of manufacturing facility, what is the progress over there?

We are on track. We are planning to expand in Eastern Europe. And this is going fine. We are also putting more resources into Thailand. And we are in the early stages of expanding in India. (multiple speakers).

What about close to headquarters, the expansion that you're seeing over there? Is that complete and you know --?

No, it is still in progress, but it is on schedule. And the bricks and mortar are in fact rising today. I'm noticing the walls are getting taller. We are also working internally on putting the software that we are going to use to run that facility into the two of the three distribution centers that will be folded in so that we are fully up and running on the software prior to actually moving the product into the new distribution center.

And what is the timeline for completion for that?

We should be completely up with the building in October, and completely functioning by I think the tail end of the third quarter next year -- third fiscal quarter.

And could give us some color in terms of the acquisition pipeline?

The acquisition pipeline I think is decent, although I would say acquisition pipeline always goes up and down, as you would imagine. We are pretty rigorous about not keeping things in our pipeline that are pipe dreams. The companies we would like to acquire, we really have a pretty rigid definition about what fits in the pipeline. We have to be in some kind of active discussion. And while that moves up and down, I would say we're having two good things. One is good velocity through the pipelines, meaning we're having discussions with a number of companies. And I would say the other positive is that we've got activity in all regions.

Greg Kazinski (ph) Robert W. Baird.

Just to clarify, I also heard the whole conference call, so that was good. My first question. Just the tax right now -- your guidance does that assume a 29% tax rate in the fourth quarter?

Yes, it does, Greg.

And just given the implied decline sequentially in margins, how much of that is the seasonality, and how much of the margin decline would you attribute to these cost pressures that you're talking about?

We don't have much in for cost pressures. We are alerting to you that we are facing all the kinds (ph) to mitigate that. It is mostly due to seasonality, plus we're ramping up spending in R&D. We're ramping up some initiatives. We are entering Thailand. We are spending money in Eastern Europe -- adding additional sales force, and really timing some of our growth initiatives.

On the SG&A side, when you say that you're ramping it, will it be increasing just on a percentage basis, or will it actually be increasing on a dollar basis as well, just given that revenue is going to be down seasonally versus like say the 72 million you reported in fiscal 3Q?

Normally we don't give specific quarterly guidance on gross margins or SG&A, and we're not going to deviate from this here. We gave pretty good guidance as far as sales and net income for the quarter, and we would like to leave it at that. And the reason for this is we have a business, our direct marketing business -- it had much higher gross margin than the rest of the business, but also higher SG&A. So depending on which business has more growth, we can see a shift in gross margins and SG&A from quarter to quarter. And that is why we shy away from giving guidance on this one. It is not because we don't want to give it to you, we just -- it is just very difficult to do this because of mix issues.

That was a great explanation. Thank you. And then just a little bit more on the margin side. How much opportunity remains to Benchmark -- to EMED? It is something you talked about the last several quarters. Is that still a significant contributor to future margin potential?

We still seeing some opportunity going into next fiscal year. I think it would take us roughly two years to get the maximum opportunity of that. So we're still certain that we will get some more synergies from what we can learn from EMED in the next fiscal year too. (multiple speakers).

Not all of our business is direct marketing. Direct marketing is probably about 40%, 35, 40% of our business. So it is only applicable to that piece of the business.

Now that ID Tech -- EMED -- it sounds like they had been fully integrated. Are you guys ready to do another sizable acquisition, or will you be focusing on smaller deals like Electromark?

We're actually looking at a broad range of companies. So if a good acquisition candidate became available, it was substantive, we would be more than happy to do it. But we have to do the deals we can do, I guess.

And also just referencing some of the past commentary, you mentioned that EMED continues and ID Tech continue to perform better than expected in terms of integration. I was curious if you could maybe provide an EPS accretion contribution from those businesses. I guess I have in my notes that you were talking $0.25 to $0.30 perhaps from the EMED, and ID Tech of maybe $0.05 in '05. I'm just curious if those would still be roughly correct, or if that is even higher now?

It is very difficult to say because I would say they are roughly correct. But what we of course also have seen -- I think we have seen a little bit faster than expected benefit from applying best practices from EMED to the rest of our business.

And know how much can you directly attribute to EMED? For instance, people at Seton they are very, very motivated to increase their profitability based on what they are seeing at EMED. Now how much of this would have come without EMED just because we have higher expectations of our sales, is very difficult to do. So we do not track this anymore. After one year -- it is still one year now we stopped tracking it. But I can assure you that we have at least reached the numbers we have given out when we acquired the company.

And then my final question, just regarding -- (multiple speakers).

In ID Tech we have actually merged that operation in Singapore. So we are acting as one business now in Singapore with the Brady and ID Tech -- they are in single premises.

Okay. It is a little hard to strip the effects out exactly. I understand.

We like to look at our net income increase. It was 52% over prior year. And we look at this for the total Company as a good indication that things are going in the right direction, even at a flat core growth rate.

And then my final question is just on the inventory turns. It looks like it was about flat in the quarter. Is there anything that we should expect going forward on that number?

As I mentioned, we have been adding -- we have deliberately been adding inventory to make sure we improve our service levels. That is one of the things that we learned from EMED. EMED has a lot lower ton (ph) than we have, and a lot better service levels. And you know, we don't think it is a coincidence that our service levels have really never been higher and our profitability has never been higher. We would expect that going forward, Greg.

That's helpful. Thank you very much for the time.

(OPERATOR INSTRUCTIONS). Stephen Wyse (ph) of Misel Capital Investments (ph).

No problem with the hold. You guys are well worth waiting for. A couple of questions regarding your quarter. Congratulations on a great quarter. Over the past year I have noticed a lot of your competitors have recently been implementing some new strategic initiatives. They work to reduce their raw material costs at the suppliers by opening up a better line of communication with their suppliers, and establishing better collaboration. If you could just provide some color as to what you guys are planning on doing to ease raw material costs by opening up better lines of communication with suppliers and just collaborating better with the suppliers to reduce those costs overall?

We are including that. We have a pretty broad program to keep a lid on the pressures that we're feeling in our raw materials. Some of it is just working with the suppliers, as you are describing. Although, frankly, the environment out there is one where I think a lot of suppliers are seeing the opportunity to put through price increases and are less willing to work with us as they have been in the past. We're also looking at some reformulation and redesign of products to use lower cost components. So sometimes we can get it out of working with the supplier, alleviating the pressure, sometimes slightly changing the performance attributes or the specification of the material that we're using.

Are you guys planning on consolidating your supplier base, or are you sticking with the same supplier base right now, and you are happy with the mix you have?

We have no formal program to change that. I would say we do that on a situational basis. We will occasionally take a product line and consolidate supplier base. Occasionally we will also add a supplier if we feel that we need to add something in the mix. So we're just going to continue to do that on an ongoing basis.

We look at insourcing rather than outsourcing all the time. You know just sticking with where you are doesn't do the job anymore nowadays. We look at consolidation suppliers. We look suppliers in other geographies such as Asia. We look at maybe we can do it cheaper in house or we can do it cheaper outside. We look at everything on a continuous basis.

We have not necessarily ramped up our efforts because of higher raw material costs lately because we have obviously been doing this. And I would say over the last two years we probably have intensified our efforts. But not as a response of the recent raw material price increases, just as a general management setting higher expectations of the Company in total.

You guys are always seen as doing a good job with that. To keep your costs low with your suppliers, are you guys right running any type of optimal allocation scenarios to make sure you have the right vend (ph), or you really attempt to supply a scorecard and you make sure each supplier is providing the right service to your Company at any one time?

Yes, we do that on an ongoing basis, evaluation of suppliers. So we know how they are performing for us. I think I will just amplify on the comment Frank said, which I think is real important. We really look situationally at each operation, each country in our supplier base. And it is possible that we could have one aspect of our business, we could be outsourcing in one place and in sourcing at some place else, because we look very situationally at that particular circumstance. So we're just doing it all the time, and the evaluation of suppliers is part of it.

What is in your supplier feedback. Have they been pretty excited about what you guys had been doing the last couple of years?

Our supplier base is pretty varied. We get raw materials, chemicals literally. We get base materials. We get electronic components. So I don't know that I have felt any particular emotion out of the supplier base. I think they have said, I'm elated to be working with you in this fashion. But I would say our relationships with our suppliers are pretty good.

Yes, and I think we don't want our suppliers to love us or to like us, we want them to respect us.

That's definitely another point. Are you guys feeling any type of pricing pressure right now, or you pretty much have your raw materials price under control since you have such a good relationship with your supplier?

We're definitely feeling price pressure. We're feeling it based on the basic commodity price pressures in petrochemical products, steel and so forth. So yes, we're definitely feeling the pressure. We're working with our suppliers to mitigate that as much as we can. And as I said, using either techniques to reduce the impact on our income statement.

Great. I really like what I'm hearing. I think you guys are going to perform wonderfully throughout the next four years. Good job.

Ajit Pai.

I just wanted to ask about the tax rate going forward. What the major drivers for that would be next year and the year after? Is it just geography? And could you actually sustain the 29% tax rate in '06 and '07?

We haven't completed our planning yet. What has driven the tax rate has been the mix of our business. We're doing more business in Asia. Our business is growing faster in Asia, and the Asian tax rates are less. And, Ajit, I think the U.S. has got the second-highest corporate tax rate in the world, so the more business we do abroad the lower our tax rate will be. But we will be updating our guidance once we complete the plans in late July.

But there's no reason why the tax statement -- when Asia is growing faster than the U.S., there's no reason why your tax rate should go up from the current year. It has come down from 38% in 2000 all the way down to about 29% right now. So going forward is that sort of fair to assume that it will be flat to down rather than up?

If you don't mind, we will do that once we complete our filings.

The second question would be the pricing environment, you have sort of given us some color as to what you are seeing from your suppliers. But your customers, are you able to pass on some of those pricing increases to your customers? Have you tried to settle for increased prices in certain categories, particularly on the supply side? And could you give us with the reaction has been from your customers?

Pressure in OEM/electronics, it is very difficult to pass on price increases. It is very difficult indeed. You know, we are dealing with large OEMs, and trying to get increased prices is a difficult task. MROs are a little bit different. In our great (ph) marketing businesses we think we can pass on price increases. But it is pretty competitive out there, and the best course of action for us is really to do our best to mitigate the price increase either by consolidating or changing supplier.

And a more long-term rate mitigated (ph) we have recognized this quite some time ago is proprietary products. And we have seen (indiscernible) proprietary where we have a product which is superior to our competitors, we can increase prices. So when we go to our customers and we increase prices, you'll see higher increases on proprietary materials of products, and lower increases, or decreases, if you talk about a large OEM/electronics, depending on the proprietariness of the product.

Ladies and gentlemen, this concludes today's question-and-answer session. I will now turn the call back over to management for closing remarks.

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