Brady Corp (BRC) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2005 Brady Corporation's earnings conference call. My name is Candace and I will be your coordinator. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. At that time if you wish to ask a question, please press star followed by one on your touch-tone telephone. If at any time during the call you require audio assistance, please press star followed by zero and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's conference, Director of Investor Relations, Ms. Barbara Bolens. Please proceed, ma'am.

Thank you, Candace. 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 then David Mathieson, CFO, presenting Brady's quarterly financial review. Also joining us this morning is Matt Williamson, VP of Brady Americas, Peter Sephton, VP of Brady's European region, and Allan Klotsche, VP of Brady's Asia-Pacific region, who will all provide a portion of the regional report. As usual, after brief presentations by the team, we will open for questions. We encourage you to follow along with the slides located on the Internet as we will be referring to the individual slide numbers as we proceed through the presentation. These slides can be found on our website at www.investor.bradycorp.com. You have a few minutes to get to those 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 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 Brady's 10-Q filed with the SEC in June 2005. Second, please note that this teleconference is copyrighted by Brady Corporation and there may be no rebroadcasting of this without express 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. And now here's Frank Jaehnert.

Good morning, everyone. Thank you for joining us as we review our fourth quarter and year-end results. This morning we reported a good fourth quarter with sales of $210 million, which is up 13% over last year. We saw a return to base growth this quarter as our core sales increased 3% over last year. Acquisitions added 8% to the top-line and currency continues to help us at 2%. Net income was flat with last year at $16.1 million. However, last year included a $3 million benefit from a tax audit. Looking at fiscal 2005 in total, it was a great year for Brady. I would like to mention several significant highlights for the full year. First, our financial results were outstanding. Sales for the year were up 22% and net income was up 61%. Margin improvement was significant during the year with 160 basis points improvement in gross margin, a 440 basis point improvement in operating margin, and a 240 basis point improvement in our net margin.

We achieved our five-year goal, which was to reach net income as a percent of sales of 10% by 2008, in less than two years, and ended the year with a net margin of 10%. Second, we acquired four companies during the year funded out of $80 million of Brady's cash flow. Each of these companies work towards our goal of being the market leader in the markets we serve. It is also significant to note that the acquisitions we have made in the last 18 months have contributed significantly to the profitability increases we have seen. Third, we have ramped up our investment in new geographies, new markets and new products. Finally, we just announced yesterday both a sizable increase to our dividend as well as our first ever share repurchase program. These initiatives, combined with a growth plan implemented, will certainly support our goal of maximizing long-term sustainable shareholder value. In all we are very pleased with the year. We realize that we still have work to do. We have provide an outlook for the current fiscal year at the end of the call. I now would like to turn the call over to David Mathieson for a review of the financials.

Thanks, Frank. Good morning, everyone. Going to slide four, we are pleased with another quarter of great results with sales up 13%. This was comprised of 3% base, 8% from acquisitions with currency still helping at 2%. Gross margins at 51.9% were up 110 basis points over prior year. SG&A at 36.9% of sales, up 100 bais points from prior year, operating income at 11.5%, up 60 basis points from prior year, and net income of $16.1 million. Net income was flat with fiscal '04, but excluding a one-time tax benefit in fiscal '04, net income improved 23%. Going to slide five, base growth in the fourth quarter was 3%, a nice pickup from the prior flat quarter. Asia Pacific base growth was 26%. Growth in the Americas was flat and Europe's base declined 1%. Acquisitions added 8% and included EMED and Electromark in Americas, Signs and Labels in Europe and ID Technologies in Asia Pacific. Currency added 2% to the top-line.

On slide six, Americas sales grew 10%, acquisitions added 8%, currency 2%, and base business was flat. In North America we are seeing softness in our direct marketing business that is being offset by modest growth in our Brady brand. The quarter is also a tough comparison to last year when we saw strong sales from the introduction of our new portable printer. Slide seven, the European growth was 4% over last year, base business declined 1%. This is an improvement over the prior quarter decline of 3%, as we saw good overall growth in our direct marketing business. The additions of signs and labels added 4% and the currency benefit was 1%. Slide eight. Our Asia Pacific business showed total growth of 55% with base business up 26%, currency adding 4%, and the acquisition of ID Technologies adding 25%. Our Asia Pacific business continues to grow in importance. We saw strong base growth in all countries. We continue to make acquisitions and other investments in that region.

In slide nine, we had nice gross margin improvement in the quarter with gross margins up 110 basis points driven by a cost control and the continued benefits of synergies from acquisitions. We continued to experience cost pressure from our suppliers. SG&A was 36.9%, up 100 basis points from prior year. Beyond a number of small items in the quarter, we did have a larger than normal expense for performance-based stock options due to the share price at the end of the quarter. In fiscal 2006 the stock option expense will be spread more evenly through the year as we adopt the new rules for stock option expensing. Our SG&A cost controls remain in place and are operating effectively. Slide 11, we are pleased to see R&D increasing to 3.5% of sales, an increase in spending of $1 million. As mentioned in prior quarters, we are seeing the ramp up in investment and new product development.

Slide 12, net income was 16 million, flat with the prior year. Excluding a one-time tax benefit last year, net income improved 23%. Our tax rate remains at 29%. Slide 13, diluted earnings per share at $0.32, down from $0.33 in the prior year, although up 19% excluding last year's $3 million tax benefit. Our diluted share count was 50.2 million shares versus prior year of 48.6 million. Our headcount was approximately 4,400 people at the end of the quarter. That's up about 600 people from the same period last year due to acquisitions and investments in emerging markets. The headcount in mature businesses continues to trend down. Slide 14. We produced strong cash flow from operating activities of 36 million, down 10% from the prior year's strong fourth quarter. Our strong acquisition activity in the quarter resulted in a modest decline in our cash balance of $1 million. This chart shows the cash flow from the last 12 quarters. You can see the last six quarters have been very strong. Year-to-date our capital expenditures is $22 million, up $7 million from the same period last year.

Slide 15, this is a summary balance sheet for the quarter. You can see our debt at the end of the quarter remains at $150 million, which is 23% of our debt to total cap, or debt plus equity. We have cash and equivalents of $80 million, so there's a lot of financial flexibility for the Company. Slide 16. This is our summary balance sheet over the last eight quarters. As mentioned in prior quarters, I am very pleased with the receivables. We have kept them under control as we have grown even while lots of our finance efforts have been dedicated to Sarbanes-Oxley. We are deliberately adding inventory as we improve our customer service levels and delivery performance is at a very high level, indeed. Now the business leaders will review the regional results for the quarter, then I will return to make a few comments on the year. Over to you, Matt.

Thanks, David. The Americas continued to perform well in the fourth quarter due to revenue growth from acquisitions, with profit up nicely over the prior year fourth quarter. The region's sales increased to 108 million, an increase of 10%. Acquisitions of EMED in late May of 2004 and Electromark in February 2005 added 8%. Our overall base business was flat with the prior year fourth quarter while foreign currency added about 2% to sales. Base sales of the Brady brand business were up modestly with continued strong growth in Mexico, Canada, and Brazil. Base sales within our Americas direct marketing businesses were down just slightly in the quarter. Base sales in the U.S. were down slightly due to softness in our direct marketing business. Our Brady brand business grew nicely in the U.S. considering a tough comparable to the fourth quarter of the prior year, which included revenue from the shipment of our distributor stocking packages for the introduction of our IDEXPERT printer.

Our North American die-cut business also grew nicely in the quarter over the prior year fourth quarter. We also continue to have positive results in expanding our external customer sales volume through our coding facility. We continue to be very pleased with the acquisition of Electromark which made Brady a leader in the utility market for identification products. Our integration of the business is progressing nicely. We are beginning to realize some cost synergies. In addition, plans are in place to sell products across the Brady business and consolidate some duplicate manufacturing capabilities to the Electromark plant in Wolcott, New York. We acquired STOPware, Incorporated, in San Jose, California, just after the quarter end.

STOPware is the market leader in visitor badging and lobby security software to identify and track visitors in a variety of settings including Fortune 1000 businesses, healthcare facilities, multi-tenant dwellings and government facilities. STOPware had annual sales of approximately $2 million. This is a perfect fit with Brady's current visitor management product offering such as TEMPbadge self-expiring name badges. We are encouraged by an opportunity in the New York City market for our BradyGlo egress products. A law has recently been put into place requiring certain buildings in New York to mark stair wells with photo luminescent materials. We have dedicated resources to take advantage of the opportunity and have developed several new products which have recently been certified as compliant to the required standard. We hope to see results, or begin to see results, late in the second quarter of fiscal 2006. Segment profit rose 33%, or $6 million, to $24.2 million in the quarter. As a percent of sales profit rose from 18.5% in the prior year fourth quarter to 22.4% in the current quarter.

The majority of 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 report on our European business results.

Thanks, Matt, and good morning, everyone. We're now on slide 18. Sales for the European region were at $67.8 million, increasing 4% over the same period last year. Base business declined 1%, as we compare our base business with the period last year that generated 8% growth. Currency added 1%. The acquisition of Signs & Labels Ltd. in late June added another 4%. Results across the region varied. We experienced declines in the Benelux and Germany. However, we saw some encouraging results in both our southern European and Nordic regions with growth outperforming GDP levels once again. Our business in the U.K. saw some recovery as well.

Looking at our business by brand, the direct marketing business showed modest growth over the fourth quarter last year and improved sequentially over the third quarter. Both Germany and France had solid growth in the quarter while the U.K. faced a decline in the fourth quarter. These results are encouraging in light of economic indicators across Europe. The Brady brand declined in the quarter. This decline was a result of our German and Benelux die-cut and label business, which continues to see business migrate to Asia. Due to our investment in that region, we're well placed to pick up this business. We experienced modest growth in France and the U.K. driven by new products. Elsewhere we had some excellent results, especially in the Nordic region where our sales grew strongly driven by our success with major OEMs. In June Brady acquired Signs & Labels Ltd. based in Stockport in the U.K.

Signs & Labels is a leading provider of stock and custom signage, custom safety signs, architectural signs and modular signage systems for business offices, schools, and hospitals throughout the U.K. The operation sells through its Safety Shop Catalog and through various distribution channels generating annual sales of about $26 million. With a well established customer base, a solid core of distributors, and a number of recognized brands in the U.K., this acquisition extends our reach into that market and further strengthens our position as a leader in visual identification and safety signage across Europe. Segment profit for the quarter is $18.5 million, an increase of 2% over the prior year. During the year we continued to make improvements in segment profit, expanding from 26.7% in F '05 to 29% as a percentage of sales, finishing another year of solid profit growth for the region. We'll now continue with the Asian report and I'll pass over to Al.

Thanks, Peter. If we turn to slide 19, performance for the quarter was very solid and showed a gradual ramp-up in volume ahead of the typical production in inventory builds associated with the consumer electronics market. For the fourth quarter, sales for the region were 34.2 million, up 55% over last year. Base sales were up 26%. Our acquisition of ID Technologies added 25% and currency added 4%. Regionally, China continues to grow at impressive levels. End user demands in the consumer electronics industry are very strong, as prototype designs are turning into volume production. In order to meet the demand forecast, we continue to increase our machine and plant capacity. Our capacity expansions are done with a close eye on forecast accuracy, as there is still a tremendous jockeying for market share which could lead to over forecasting. We're also pleased to see the development of our MRO business, which is focusing on providing consultative solutions to large scale multinational companies who need to comply with either corporate or local safety standards.

Pricing pressures continue in Asia and our fourth quarter was no exception. As volumes go up customers are demanding price decreases to help them win the market share battles they are in. The rising oil prices continue to have an impact on our raw material pricing. We continue to try and combat these pricing and supply pressures by investing in local sourcing opportunities as well as developing our own proprietary solutions. As we expand our focus on specifying and designing die-cut parts in Japan, we have been pleased with the reception that we have received from the electronics industry. We will continue to expand our focus in this area by leveraging our knowledge and processes from elsewhere in Asia. Our Australian business and direct marketing group, in particular, finished with a very solid year. Now I will turn the call back over to David Mathieson.

Thanks, Al. Let's spend a few minutes on the year. Go to slide 20. This slide shows the make-up of the last three years' sales growth. You can see there in the last two years we've achieved solid base business growth of 5% and 6% and that we have picked up the pace on acquisition with double-digit returns in the last two years. Currency has also helped our top-line. Slide 21. This slide shows our profitability metrics over the last three years. On the top left you can see that we have improved our gross margin and bottom left you can see SG&A as a percent of sales leading to a record level of operating income for the year of 15%. We continue to focus on driving gross margins and SG&A improvement. Slide 21 -- slide 22, rather. The combination of focus on gross margins and SG&A combined with solid base business growth and synergistic acquisitions has driven our financial results. Fiscal 2005 net income was up 61% from what was a record year for the Company in fiscal '04.

In slide 23, the Company has generated tremendous cash flow from operating activities. This slide is a summary of the last three years and I would point out the acquisition spend topped 300 million in the last two years. Slide 24. We have recently announced a shelf registration. As we have picked up the pace in acquisitions, we feel it's prudent to do that. Yesterday we announced a significant dividend increase, which recognizes a new level of profitability, and also announced our first ever share repurchase program to limit dilution from stock options. Slide 25. For this fiscal year we are targeting our sales to be in the range of 870 to 880 million. We expect net income to be in the range of 89 to 91 million, and earnings per share to be 1.78 to 1.82. This guidance assumes base business growth of between 4% and 5%, with currency having a 33% negative impact. In this guidance we have also included the acquisitions we've made to date. For depreciation and amortization we expect $28 million and for capital expenditures we expect approximately $25 million.

We do not give guidance for the quarters, however, I would expect tough comparisons for the first half of this fiscal year giving way to better comparisons in the last half. In slide 26, about 18 months ago we devised a long-term guidance to achieve 10% per year top-line growth with roughly half coming from base business growth and half from acquisition. The bottom-line target we gave then was to achieve 10% net income as a percentage of sales within five years. We surprised ourselves with how quickly we achieved those levels of profitability and today we'd like to update those long-term goals. We continue to target top-line growth of 10% per year on average. For the bottom-line, we will work to gradually improve our earnings quality from today's 10% net margin to 12% over the next five years. These targets are both assumed to be over the cycle and do not address fluctuations in currency. Now I will turn it back to Frank to wrap up the call.

Thanks, David. We are very encouraged by the great results of our fiscal 2005. As David discussed, our fiscal '06 guidance that we have given today offers a solid continued growth story for the Company with further focus on profitability. We are continuing our growth strategy in fiscal '06 by focusing on the following four items. First, investment in R&D and proprietary products. We will look to develop proprietary materials, printers and software. This is a major priority for us as we know this will differentiate us in our market. Second, investment in geographic expansion opportunities. Our growth plans into countries such as India, eastern Europe, and Thailand will allow us to continue to service our customers as they expand into new economies. Third, investment in new markets. Markets such as medical die-cut and laboratory will allow Brady to tap into higher growth markets while diversifying our portfolio. Fourth, investment in acquisitions. We will continue to invest in businesses that support our strategy of being the market leader.

As we look long-term, we believe our top-line growth goal of 10% per year on average is realistic and achievable. We will look to grow our core business by 5% on average and will add about 5% to the top-line through acquisitions. Our new long-term profitability goal, which will be revised today, are to continue to improve our earliest quality from our present 10% net margin to 12% net margin within the next five years. We will continue to have initiatives that improve our gross margins, reduce our SG&A as a percent of sales, and further control and optimize our working cap. We appreciate your interest in Brady and would now like to start the question-and-answer session. Could I please ask the operator to give instructions.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. Again, that's star, one to ask a question. Our first question comes from Reik Read of Robert W. Baird and Company. Please proceed.

Good morning. David, in your remarks you talked about the base business has been growing kind of 5% to 6% in the past couple of years. The forecast that you've given kind of suggests that the internal growth would be more like 2% to 3%. Can you talk about what you're seeing in the overall trends that would suggest things are slowing down? You talked about tough comps in the first half of the year. Would we see that start to re-accelerate in the back half?

Yes, in the commentary I gave, Reik, I gave guidance of base business growth between 4% and 5% for fiscal 2006. What we'll face this year, if currency levels remain as they are, is some headwind. And I pointed out that would give us 2% to 3% negative. You are correct, we'll have very tough comparisons in the first half and that will slacken off in the second half.

And can you guys talk a little bit more about the margins, particularly in the Americas region, where you did see the improvement? How much came from as a result of the acquisitions and then how much came from internal, either changes or improvements, and can you talk about what those improvements are and how they'll drive this kind of new target of the 12% net margin?

The bulk of the margin improvement in Americas is actually coming from our base business. We had a little bit of EMED in there but only for like ten days in May last quarter. So the bulk of our margin improvement is actually coming from our core business. We're improving our profitability in just about all the businesses in Brady Americas.

What are the -- can you give a little bit more detail on what's driving that internal profit improvement at this point?

Well, it's taking the EMED model and applying it to our North American Seton businesses, for example. So we're improving the profitability of our businesses in America by applying some of the things we learned from EMED. For example, we're now not so focused on inventory turns, we're focused on profitability. So we're doing longer runs of material. We're holding more material. We're improving our service metrics. And it's not lost when it's -- we've never been -- our service metrics have never been higher, our profitability has never been higher, too, so it's a war on many, many fronts.

Reik, this is Frank Jaehnert. Actually, not much has changed over the last couple of quarters in our focus. We are very focused and disciplined on trying to improve our profit area where we can, whether it's in gross margins, or whether it's SG&A, whether it's headcount control, whether it's trying to source in lower cost countries. It's an across-the-board effort which we have embarked on for quite some time now and it is just continuing. I think what you're seeing, and what you saw in the fourth quarter as well, is just the result of a Company-wide effort to increase the quality of earnings. And this is going to continue. I cannot say there's one particular area which was especially strong. It's just happening everywhere. There's a tremendous focus on increasing our quality of earnings.

And then just last question from me. Can you guys talk a little bit more about Europe? There are some signs that Europe is starting to see more and more improvement. One, I wanted to know to what extent are you seeing it? What's kind of incorporated in your guidance that you've given today in terms of the European thought process? And with respect to the European margins in the quarter, it looks like they declined a little bit. What are the opportunities in Europe that you've applied to North America that could see some decent margin expansion in the next year or so?

If you look at actual results for the year, you'll see the growth -- the base business growth, Americas was 4.4%, Europe was 2.5%, and Asia Pacific was 21.4%. That's over a year. That's the average over the year. And really that reflects -- I think that's a better reflection than just the quarter of the capability of the Company. It reflects the kind of GDP differences there are. It reflects where our OEM electronics businesses, which is largely Asia-Pacific. So I think that's a more true reflection of our capability. If you factor that kind of base business growth into next year you wouldn't go far wrong. Now, margins declined, sales were up 4%. Segment profit was up 2%, but, you know, that prior quarter was pretty spectacular with Europe's base business growing at 8%, which is something like four or five times GDP, and segment profit for that quarter was up 26%. So, we had a pretty tough comparison. One of the problems of having so many record quarters is it gets more and more difficult, guys.

Sure. Thanks much for the comments, guys.

Our next question comes from Ajit Pai of Thomas Weisel. Please proceed.

Hi, this is actually Andy Young standing in for Ajit. Quick question regarding the core growth and then a couple more on margins. Your core growth seems to be driven mostly from Asia this quarter. Question is how sustainable that is. Can you give a little bit more color on that?

I'm sorry, I missed the second part of the question. Could you repeat that?

Yes. So the core growth for the quarter seems to be coming from Asia-Pacific regions. How sustainable is that and if you can pull out more information on that?

We feel pretty good about the sustainability of our growth in Asia. There's a continual shift of business, as we discussed, from the Americas and Europe over to Asia. Our investment in infrastructure up-front is paying dividends. We're ready for this business to come over. There's always challenges that are associated with maintaining that growth and there's a lot of pricing pressures right now in Asia and so we're trying to work on operational efficiencies to be able to yield, perhaps not as far as our customers would like, but somewhat. But we do see sustainability of the growth that we've had in the past year in Asia.

In Europe and Americas, do you see the business stabilizing in the core business, or are you seeing rebounding in the core end markets in manufacturing?

Yes, this is Matt Williamson. The base business should be very stable over the course of the next year for the U.S. and in Latin America continuing to be very solid as it has been.

And in Europe, sequentially we showed an improvement in quarter four over quarter three. So we're experiencing some stabilization. And we've been seeing good growth in various parts of Europe, especially in the direct marketing businesses.

Okay. And you mentioned something about pricing pressures. Is that due to your product mix in Asia, or is that some other factor that's causing the pricing pressures?

I think specifically in Asia it's not a new story, it's the continuation of a story that's gone on for years and it's really driven by the consumer price expectations in other parts of the world. When you can go out and buy state-of-the-art disk drives for $150 today, you can buy high-speed computers for under $1,000, the pressures are getting squeezed all the way through the supply chain.

And are you able to pass along the pricing increase, for example, in your cost from, say, rising oil prices, to your customer, or that's not possible at this point?

We do our best. Everybody's well aware of the environmental conditions and the market conditions that we're in. It's tough. A lot of the programs that we supply are short-lived. Maybe they have a product lifecycle of nine months. And so if you're in the tail end of a program it's very difficult to push that price increase across. But what we do is try to recommend alternative solutions that may have equal performance but a lower cost structure to them.

So you do see some inflationary pressure in your costs, right?

Yes.

Let me just add an additional comment to this. This is Frank. If you look at our gross margin in the fourth quarter, we actually had improvement of 110 basis points in the gross margin, in spite of price pressure from suppliers, in spite of price reduction requests from our customers. So we are trying our best to offset it with productivity increases, with trying to source and from different suppliers at lower costs, trying to increase productivity in our manufacturing operations. We try our best and so far we have been able to hold our own. And that's our intention also going forward. Of course you can never tell what the future will bring. But so far, including the fourth quarter -- actually when you look at the one slide, about across margin, what David showed, in every quarter so far this year we have had -- increased our gross margins.

Right, right. And that's very impressive, given the inflationary pressure at this time.

Thank you.

Thank you.

And one more question regarding SG&A. You mentioned that option expenses part of your SG&A expenses. Is that correct?

Yes, there's some -- accounting is changing, so the -- in fiscal 2005 we had performance options, share options, which had a different -- which had a special treatment which give us additional costs in the fourth quarter because our share price popped towards the end of the quarter and that give us additional expense. As we go forward, the accounting is a bit simpler and it will be smoother over the year, so we shouldn't see that.

Right, right. And that SG&A expense seems to be popped quite a bit this quarter. Can you quantify how much that is due to option -- ?

No, we don't want to point out any particular amount. We're just giving you a clue that we don't believe this is a reversal of a trend of SG&A.

Okay. And then for your EPS guidance, is the option expensing already included in part of the guidance?

Yes, that's all inclusive.

Great. Thank you.

Again, ladies and gentlemen, that's star, one to ask a question. Our next question comes from Rob Damron of 21st Century Research. Please proceed.

Good morning. Frank, you mentioned one of your key areas of focus going forward is new product development and we saw R&D spending up a bit this quarter. Can you give us a little bit on what was behind that increase this quarter and what the Company is doing differently to drive new product development going forward?

Yes. There's only so much you can do in a certain time and, of course, as everybody can see we have put a tremendous amount of pressure on cranking up the acquisition machine. We have been very successful in the last two years. You have seen a continuous increase in the amount of acquisitions we have been able to execute. Actually, I think we did almost like one a month in the last couple of months. And with R&D on new product development, we have started this process later. We have decided, now in the last, I would say, six to nine months, to make a similar effort in the new product development as we have made in acquisitions. Now, of course, you cannot just turn it on like a switch. It will take some time. Idea generation has to take place in marketing and new product development and R&D, you have to talk to customers, have to go to trade show, have to look at research papers and so forth. But we are really making an effort.

Now, because our R&D went up as a percent of sales in the fourth quarter, I wouldn't read too much into this. You would say this is already an indication of what's going on. We don't like to look quarter to quarter, because it could be very much driven by a specific project which just was expensed in this quarter. From a trend, I have made several times the comments what I would like to see cost of goods sold as a percent of sales to go down and SG&A as a percent of sales to go down. I would like to see R&D as a percent of sales to go up. We are committed to this because we consider it's investment in the future. So I would say as we go along through fiscal '06, just keep watching this line and we are really confident that over the time, not from today or tomorrow, we can see some nice new product launches.

Okay, excellent. One other question. You mentioned the acquisitions and certainly there have been a number of acquisitions announced and integrated over the last 12 months. Maybe you could just give us some indication of what the acquisition pipeline looks like currently. And also, in your guidance have you assumed only the acquisitions announced or have you assumed any non-announced acquisitions in that guidance?

I give you the first -- the second question I give you an answer to, then I will ask Dave Hawke, who is our Executive Vice President in charge of, among many other things, acquisitions, to give you some color on our pipeline. What we have included in our guidance for fiscal '06 is basically acquisitions we have already made. Is that right?

That's correct.

So that's Signs and Labels, the small Company we bought in Thailand, STOPware in Texas. So they are all included. And this basically results in this core growth that we talked about before, % to 5% minus some headwind from currency. However, in our mid-term guidance we say we'd like to grow 10% and about 5% would come from acquisitions. So this gives you an idea if we have about 800 million sales, about 40 million per year is what we target for acquisitions. And, you know, of course, it's lump. It could be more in one year. Could be less in another year, but we certainly have an effort going on in the area. And how does the pipeline look like, Dave?

I would say just a couple of comments on the pipeline. First of all, we never get into talking about what kind of companies and so forth are in our pipeline. But we have a very disciplined process that's grounded in the strategies of our business. We start with the business strategies, what markets we want to expand into, where we want to strengthen ourselves, and we're aggressively out in the market looking for companies that fit those profiles. What I will tell you is the pipeline is very robust and there's a very good velocity of companies that go through that pipeline.

Excellent. Thank you.

Again, ladies and gentlemen, that's star, one to ask a question. Our next question comes from Mark Roberts of Robinson Company. Please proceed.

The first question I have is are you anticipating -- you talked about slowing growth in North America. There's going to be a lot of infrastructure rebuilding in manufacturing capacity in the south where it would seem to me that you might see an increase in demand for signage as well as lockout/tagout in the southeast area that was destroyed by the hurricane. Are you expecting that to be a net positive or a net negative for your North American business?

On that part of the business, the types of products that you just brought up, I would say that that would be a positive. However, that's offset by a number of other businesses there that in the short run will be buying less from us because they're not functioning right. So what the net impact of that is going to be is hard to say as these businesses come back on line. Certainly in the construction area and that sort of thing, we would see a bit of a pop here. But that's going to be offset by this other business.

Okay. And also, I know you look at the valuation of your acquisitions from a number of different angles, but generally speaking, are the valuations that you're paying for your acquisitions are they generally going up?

Not very much, Mark. We still do acquisitions. Most of the recent acquisitions we've done, all except one ten years ago, we negotiate on a private basis. And -- so I wouldn't say it's going up perceptibly.

I would say on each, this is David Hawke, on each acquisition really the price that we negotiate is based on the value we see in the business. Really we look on each deal as an individual thing and don't really try to conclude any trends out of that.

What we do do sometimes, Mark, is we might improve our price to encourage the seller to sell now and not wait for another year or 15 months.

But we see nothing like we have seen a couple of years ago at the height of the Internet bubble, dot-com boom, where everybody was sitting there holding out for -- maybe either be doing IPO or we're going to get a multiple like a $5 million company. We don't see anything like this happening now.

Okay. And Dave, can you be a little more specific? I missed the percentage there that you were expecting the negative currency impact to have on the '06 guidance.

Yes. Let me clarify that. We are expecting core growth, base business growth, between 4% and 5%, and we're expecting headwind from currency between 2% and 3%.

That's what I thought you said, but then I wasn't sure you didn't say 33, and I just wanted to make sure I got that right.

No, no, no.

Nice to hear from you again, Mark.

Nice to talk to you all, good quarter. And all my other questions have been answered. Thank you.

Thank you.

Ladies and gentlemen, this concludes the question and answer portion of today's conference. I will turn it back to management for closing remarks.

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