Brady Corp (BRC) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter Brady Corporation earnings conference call. My name is Jen and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. If at any time during the call you require assistance please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to hand the presentation over to your host for today's conference, Ms. Barbara Bolens, Vice President, Treasurer, Director of Investor Relations. Please proceed, ma'am.

Thank you. Good morning everyone. We're happy you could join us. During our call this morning you'll hear from Frank Jaehnert, CEO; and then David Mathieson, CFO, presenting Brady's quarterly financial review. Also joining us this morning is Matt Williamson, Vice President of Brady America; Peter Sephton, Vice President of Brady's European Region; and Allan Klotsche , Vice President of Asia-Pacific who will provide a portion of the regional reports. As usual after brief presentations by the team we will open up the floor to questions. We encourage to you follow along with the slides located on the Internet as we will be referring to the individual slides as we proceed through the presentation. These slides can be found on our web site at www.investor.bradycorp.com. You'll 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 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 yesterday and Brady's 10-K filed with the SEC in October of 2005. Second, please note that this teleconference is copyrighted by Brady Corporation and there may -- 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. Thank you and now here's Frank Jaehnert.

Thanks, Barb. Good morning everyone and thanks for joining us. We are very pleased to report another record quarter both in sales and net income. Sales for the quarter were 232.6 million and net income a very strong 30.2 million. We had solid growth in North America and Asia -- and North America and Asia continues to deliver exceptional results. Our growth in developing regions such as Brazil, China, Malaysia, continue to be very strong in the quarter and on this core brought you success in penetrating these markets. I'm particularly pleased to see the continued profit improvement as is on -- as is on increase of our prior years first quarter of almost 50% in net income. Our goals for this year are ambitious and exceeded our own expectations for this quarter. I will now turn the call over to David Mathieson for a more detailed review of the financials of our revised guidance. As usual after the duration of the reports I will be back to summarize our outlook for the rest of the year. David?

Thanks, Frank, and good morning, everyone. On slide three, another record quarter for Brady with sales up 16% from prior year, 7% from base business 8% from acquisitions, and currencies still helping at 1%. Gross margins were up 60 basis points and SG&A was down 240 basis points. Operating income was at a record rate of 19% of sales, that's up 310 basis points. Net income was a record $30.2 million, up 48%. Our earnings quality, or net income as a percent of sales, was 13% which was up 280 basis points and earnings per share was at $0.60, up 46%.

In slide four we look at total company growth. And we were pleased to see base business growth of 7% on top of last year where our base business grew 10%. Regionally, the Americas base was 4%, Europe was flat and Asia at 32%. Currency was still positive at 1% and the acquisitions of Stopware, Electromark, Signs & Labels, Texit, TruMed and the two small acquisitions in Thailand added 8%. Slide five shows Americas growth. Americas grew in total 10%, 4% from base, 4% from the acquisition of Electromark, Stopware and TruMed, and currency rate 2%.

On slide six, Europe growth. Europe overall grew 14%, base business was flat, currency was a negative 1% and the acq -- acquisition of Texit in Scandinavia and Signs & Labels in the U.K. added 15%. On slide seven, Asia-Pacific growth -- base growth was very strong in the quarter at 32% on top of our prior year quarter base growth of 28%. Currency added 4% and acquisitions added 5%. We also made two small acquisitions in Thailand in the quarter. Asia continues to grow in importance to Brady. Three years ago the first quarter sales were 13.6%, this quarter they are 42.8%. That's three times the size they were three years ago. Asia for this quarter now accounts for 18.4% of our total sales versus just under 10% three years ago.

On slide eight overall gross margins improved 60 basis points with strong improvement in productivity partially offset by suppliers price increases and acquisitions with lower gross margins. Our Asian business growth puts pressure on our gross margins have they -- as they have lower gross margins than average but also lower SG&A. On slide nine you can see our SG&A. Careful control of headcount and expenses has given us significant leverage in SG&A. We improved this measure by 240 basis points. Growth in Asia also helps this measure since we go to market with much less G -- SG&A in this region.

In slide 10, R&D spending. We are actually making progress on hiring more talent into R&D and have recently hired two new directors, one for our systems and another for materials. Our dollar spend is increasing but not quite matching our sales growth and we have challenged our teams in marketing and R&D to increase the number of new product ideas generated. Slide 11, net income. Our net income grew 48% in the quarter, operating income went up 39% and the operating profit rate reached 19% for the quarter. That's a new record and we've never been as profitable as a public company. Tax rate is 29%, which is lower than the prior year quarter of 32%. Net income as a percent of sales was 13%. Earnings per share, diluted, on slide 12. Diluted earnings per share for the quarter increased 46% versus a net income increase of 48%. During the quarter we bought back approximately 300,000 shares at an average price of just over $29 a share. Also this quarter we began expensing stock options as required by the new accounting rules. In fiscal 2005 we were required to expense performance options. Now in fiscal 2006 we are expensing all options. We estimate that this years impact will be the same as last year and therefore no earnings per share impact for the 2 -- for the full year.

And slide 13 shows our cash flow from operations over the last nine quarters. Our first quarter cash flow has traditionally been the lowest quarter of the year for cash flow generation. As you see the prior years. As we tend to generate the bulk of our cash in the last half of the year. This year our growth in Asia has required high levels of receivables and inventory which accounts for the increase in those two areas. And slide 14 shows the first quarter cash flow walk. This slide shows our cash flow walk from the opening balance sheet. You can see capital expenditures were high for the quarter as we continued our investment in the [INAUDIBLE - heavy accent] in Milwaukee and also continue to expand in Asia-Pacific. This quarter, as I mentioned, we bought back shares for the first time, spending $9.4 million. And you can see we spent $20 million in acquisitions.

In slide 15 shows our balance sheet. It's still strong -- very strong with long-term debt of $161 million giving a total debt to total capitalization of 24%. We have lots of flexibility in our balance sheet. Slide 16 shows our balance sheet for the last five quarters. You can see our balance sheet has grown as we have grown both organically and by acquisitions. Our receivables are growing faster as we grow our business in Asia where our terms are longer. Our inventories are growing faster in Asia as we have hit our seasonal peak with our electronics business and as our customers continue to transition to China. We're also adding inventory selectively to make sure we meet demand for sales initiatives in North America.

Slide 17 is our guidance. And as a result of a strong first quarter and the acquisitions that we have made this year since the last guidance we are revising our outlook for the year. We have seen over the last two years that the strength and seasonality of the OEM electronics business has somewhat shifted the total Company seasonality trends and we have factored that into this new guidance. For fiscal 2006 we anticipate sales of between $910 and $920 million, net income of between 98 to 100 million, and earnings per share of between $1.96 and $2.00. We also anticipate depreciation and amortization of 30 million, and capital expenditures of 26 million. I will now hand the call over to Matt Williamson who will cover the Americas.

Thanks, David. Please refer to slide 18. The Americas continue to perform well in the first quarter with nice revenue growth coming from both base business as well as acquisitions. The increased volume resulted in strong profit growth over the prior year first quarter. The region sales increased to $116 million, an increase of 10%. Acquisitions of Electromark in February 2005, and Stopware in August 2005, added 4%. Our overall base business was up 4% and foreign currency translation added about 2% to sales. Both the Brady brand and direct marketing base business sales were up over the first quarter of the prior year. We are seeing broad based growth in the majority of our businesses and countries. Canada and Brazil both continue to grow rapidly over the prior year. Base sales in the United States were up modestly, largely due to the growth in the Brady brand business while the direct marketing brand remains flat. We continue to have positive results in expanding our external customer sales through our coating business.

We are encouraged by an opportunity in the New York City market for our BradyGlo bugris (ph) identification products. A law has recently been put into place requiring certain buildings in that market to mark their stairwells with photoluminescent materials. We have a dedicated team of resources to take advantage of the opportunity and have developed several new products which have been certified to the New York City standard. Although the marketplace for these products is very competitive we expect to see results in the second half of this year as property owners enter their 2006 budget years and compliance deadline of July draws closer. Construction of our new central distribution center in Milwaukee was completed and we are now beginning to move the movement of storage systems in inventory so we can been -- begin shipping to distributors this winter. This facility will provide more error-free single shipments to our distributors.

From an acquisition perspective we continue to be very pleased with Electromark which has made Brady a leader in the utility identification market. The integration of the business is progressing nicely and we are beginning to realize some cost synergies with actions in place to sell products across the Brady business and to consolidate some duplicate manufacturing capabilities from Florida to the Electromark's Wolcott, New York, facility.

This quarter we were pleased to complete two acquisitions in the region. The first is TruMed, a converter of disposable products for the medical, diagnostic and personal care markets which had sales of approximately $5 million in fiscal 2005. The addition of TruMed's converting capabilities and market presence are a great complement to the efforts that have been underway with Brandon's medical business strategy. We also acquired Stopware Incorporated in San Jose, California during the quarter. Stopware is a market leader in visiting -- visitor badging and lobby security software used to identify and track visitors in a variety of settings. Stopware had annual sales of approximately $2 million and is a great fit with Brady's current visitor management product offerings such as temp badge self expiring name badges.

Segment profit rose 27%, or $7 million, to 32.2 million in the quarter. As a percent of sales profit rose from 24% in the prior year first quarter to 28% in the current quarter. While we were experiencing cost increases on many of our materials and utilities costs, our increase in volume is driving the majority of our margin improvements as we spread our fixed costs over a larger sales volume. Additionally, our prior year first quarter included a higher level of logistics costs as we are ramping up production in our Tijuana, Mexico, and Panang, Malaysia facilities. We are also enjoying leverage of our operating expenses in both our Brady brand and direct marketing businesses as profit volume growth has outpaced our operating cost increases. As a result, 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 everybody. We're now on slide 19. Sales for the European region were $73.8 million, increasing 14% over the same period last year. Our base business was nearly flat. Acquisitions contributed 15% and the currency impact was negative this quarter by 1% as the Euro weakened against the dollar versus the first quarter of fiscal '05. Our base business across the region varied. We are encouraged with our business in the Nordic region that continued to benefit from strong demand in from the telecom markets. In Germany, the U.K. and Belgium, base business was below prior year levels as we continued to see migration of OEM business to lower cost regions and we deliberately migrate away from lower margin business. In all of these areas we had double-digit profit growth as a result of our focus on more profitable and sustainable products and applications. Our business in Southern Europe, which is France, Italy and Spain, continued to perform well, reflecting our strategy of geographic growth in markets where we are under penetrated.

Looking now at our business by brand, the direct marketing business showed modest growth over the first quarter of last year. Both Germany and France had solid growth as a result of continuing to add new customers and product expansion. The U.K. however, declined modestly which is a reflection of economic decline in the manufacturing sector. But our overall U.K. results were supported by the acquisition of Signs & Labels. Here, integration activities are well underway and we expect to see the benefits of synergies in the second half of this fiscal year.

Our Brady brand business declined slightly primarily driven by a decline in our biped (ph) business as a result of continued and expected migration of major OEMs to Asia and central Europe. The other elements that make up the Brady offer showed modest growth and with most of our product launches and initiatives yet to come we're confident of continued success. During the quarter we're pleased to acquire the business of Texit AS in Denmark. Texit, founded in 1992, develops, manufacturers and distributes cable management products including wire markers, cable ties and accessories, insulation and connectivity products for the mass transit market. Their customers and technical solutions extend our capability in wire identification and fit our strategy to be the market leader in the region. Texit, headquartered in Odense in Denmark had sales of about 9 million U.S. dollars in 2004.

For the region as a whole segment profit for the quarter was $20.8 million, an increase of 16% over the prior year. Gross margin and operating expenses as a percent of sales are consistent with the first quarter of fiscal '05. We are pleased with the productivity improvements in our base business in the region that's still economically challenged. In summary, then, as we aggressively integrate our new acquisitions and find new ones to strengthen market leadership in our preferred spaces we are confident that our track record of sales growth ahead of GDP will be maintained and that further productivity can be achieved. I'll now pass it over to Al Klotsche who will read the Asian report. Over to you, Al. Thank you.

Thanks, Peter. We're on slide 20 now. Performance for the quarter was very solid as our large OEM customers throughout the region begin their production ramp up for the holidays. For first quarter, sales for the region were up -- were $42.8 million, up 41% over last year. Base sales were up 32%, acquisitions added 5%, and currency added 4%. Sales across the region were solid with growth in nearly every country. North Asia and China in particular continued strong as demand for custom -- consumer electronics, such as mobile phones and MP3 players, is growing and inventories are built for the holidays. We continue to update our facilities, especially in the area of clean room converting to keep up with increasing quality expectations driven by product miniaturization and higher performance.

In line with our strategy to be the market leader in the business segments we focus on we were pleased to announce two very strategic acquisitions which accelerated our presence into Thailand, diversified our hard disk drive customer base and brought significant new capabilities to our existing customers. At the end of July we acquired Technology Print Supply, a high performance label converter. Besides a comprehensive converting operation a majority of TPSs sales efforts were focused on Japanese hard disk drive manufacturers, a segment of the market that previously we had little presence in. TPS customers appear to be very receptive to the breadth of other products in the Brady die-cut portfolio. Later in the quarter we acquired QDP Thailand, a precision metal stamping company supplying vibration damping solutions to the electronics and hard disk drive industries. QDP Thailand's customers were looking for support outside of Thailand, which we will now be able to serve through Brady's facilities in China, Singapore and California.

As the electronics industry appears to be placing larger and more consistent bets on their future in India we will need to develop a strategy to support them. We have expanded our management team and sales teams in India with a goal of establishing a manufacturing presence in 2006. While there are similarities to our other start-ups in Asia, India will undoubtedly offer a completely new set of challenges for us.

Segment profit for Asia was 13 million, or 30.4% of sales, up 46% over last year's segment profit of 8.9 million which was 29% of sales. We continue to see significant price pressure in the region and are working on sourcing strategies and new product development to compete in the future. Looking forward we anticipate continued strong demand in the first part of our second quarter with a drop off in the middle of December and carrying through the Chinese new year. The anticipated slow down will give us an opportunity to ensure that solid engineering and manufacturing processes are in place to support the growth in 2006. We will be focusing on integrating and expanding our two new acquisitions and continuing our emphasis on business diversification. Now I will turn the call back to Frank.

Thanks, Al. As you have heard us say several times in this call we are very pleased with the result of this quarter, specifically with the core growth from many of our businesses and regions. The contributions of acquisitions and the substantial profit growth over the same period last year. We know we are not immune to cost and pricing pressures in our markets or challenging economic conditions in certain geographies. However, we believe Brady's ability to acquire companies and execute our integration plans, execute operational improvement in core growth initiatives and penetrate new markets will allow to us continue to create shareholder value.

As a result of our very strong first quarter, the four acquisitions made in the quarter and our outlook for the remainder of the year we are increasing our guidance for the year as David Mathieson covered earlier. We expect revenue to be in the range of 910 to 920 million, net income between 98 and 100 million, and earnings per share between $1.96 and $2.00. To do this we will focus on further developing our new product pipeline bringing our existing product into new markets and developing our expanding new geographies. We will continue to drive operational efficiencies across our businesses. And we will continue to look at acquiring companies that can help us become arguably or solidify our position as the market leader. Our acquisition pipeline is healthy. However we are seeing upward pressure on prices and intend to remain diligent in our evaluation. That is the end of our prepared comments and we will now start the Q&A. Operator, could you please provide the instructions for our listeners?

Yes, sir. [OPERATOR INSTRUCTIONS] Your first question comes from Reik Read with Robert Baird & Company.

Good morning. Co -- could you guys talk a little bit more about the -- the Asia seasonality? Obviously you're seeing some strength now in the first part of the quarter. It -- it erodes later on due -- due to the -- the holiday factors. But -- but how does the second quarter wind up looking seasonality-wise to the first quarter now with -- with that increased OEM business?

Well when you look at -- this is Al Klotsche, when you look at our Asian business what's happening in our first quarter is that the OEMs are building their supply chains for the holidays with all the consumer electronics and this typically will continue through the month of -- heavy in October, pretty heavy in November and then it starts to tail off in December. And then depending on when Chinese New Year falls, this year it's at the end of January, there's a slow down as people digest what the consumption was actually like during the holiday season versus the demand that was built. And typically we don't see a pick up until after Chinese New Year. So this year we anticipate the pick up to come in probably mid to late February.

Okay. So does the -- does that mean that the second quarter would -- would be somewhat seasonally flat when it's all kind of netted together?

Yes, it wouldn't be as strong as this quarter, that's what we reckon, because December and January will be softer.

Okay. Okay. That -- that -- great. And --

We -- we want to point out because what's happening here is with the growth of our OEM electronics, with the growth of our business in Asia, as I pointed out in my script it's actually strengthened our first quarter and kind of flattened our second quarter because of that.

And -- and -- so when -- when you look at the really strong margin performance i -- in that region it's probably going to take a little bit of a step backwards as well due to less leverage and a little bit of -- of additional pricing pressure. Is that a fair statement or is there -- are there other factors at work there?

Well, we -- we don't give guidance to that level of detail but we don't expect our margins to continue at the levels that we're at right now. We're at 19% and that's considerably higher than we've ever been.

Okay. And -- and -- and with respect to -- to some of the new product focus that you guys have, Frank, had you recently suggested that you are a little bit disappointed in the -- in the -- the rate of new product development. Can you give a little bit better understanding of -- of what the source of that disappointment is and -- and maybe how that's being addressed at this point?

Yes, I would like to have more new product coming out on a quarterly basis. And we have set high expectations for ourselves. As you know two and a half years ago when I started as CEO we said we would like to take the net income from 5% to 10% as a percent of sales. And actually we have done this after two years already. So it was pretty high expectations when we set them but we -- we did it, we made this happen and we made this happen by consolidating, by reorganizing and this all goes very well. We also said we would like to be more focused on acquisitions, would like to do more acquisitions. I think we've been extremely successful at doing more acquisitions. But there was one area which I was not as happy with. This was new product development. Of course to grow organically we need a constant stream of geographic expansion which we have also done very well but we also need a constant stream of new products. And it turned out it took us longer to get this engine started and I think we are still in the process of ramping up. I would not say we have achieved it by any stretch of imagination. So it probably takes a little bit longer to get the engine going but we are very confident that maybe at the end of this year, beginning next year, we will see some -- some benefits from this. That's -- that was the source of my -- of my comment.

Okay. And -- and just last question for me, with -- with respect to the guidance, just trying to understand this a little bit more. I mean it sounds like you guys are suggesting that you've got some good expense control right now and that with an additional revenue you're getting some pretty good leverage. You -- you've guided the year numbers up by the same amount that you -- you basically beat the -- the number in the first quarter, suggesting that -- that the remaining third quarter should remain relatively stable versus previous guidance. Wouldn't we expect to see a lint better profitability given that you had that leverage understanding that -- that you can't sustain -- you -- you suggested you can't sustain the current rate, but shouldn't it be a -- wouldn't you suggest it would be a little bit better or there's some offsetting factors there?

Yes, we -- we are not expecting to continue to improve our profit by 48% rate. So, I think it would be a bit more realistic about what we can achieve in the -- in the remainder of the year. We are expanding or continuing to ramp up R&D. We are expanding geographically. We are expanding in Eastern Europe. Al talked about expanding in India and most of our expense is in front of us.

Okay. Great. Thank you.

Your next question is from Rob Damron from Midwest Invest.

Good morning and excellent quarter. Wanted to ask you -- well first of all if we go back two months to your last conference call you were much more cautious about the business and here we have two -- two months later and clearly business has improved dramatically at least relative to those expectations a couple months ago. What were the major drivers or the difference in the variance between two months ago and -- and today in terms of the business?

Rob, let me first find out something what we have said earlier. At many occasions and we always struggle with people understanding us. We say our -- our organic growth is about 5%. That's what we think we can do based on the mix of our products and industry's we are serving. Now we had a couple of quarters, I think four quarters, where we had 10% organic growth. And everybody assumed that this is the new Brady level, a new bond that we cannot sustain this kind of -- of rate. And then all of a sudden we had minus 3% and flat. And then everybody panicked and said, oh, now we are really not performing any more. And we maintained that a normal rate for us is 5%. Now if you look at last year -- the year before last year we had 5% organic growth. This year -- the last year we had 6% organic growth. Our guidance mid-term is 5% organic growth. So I would like to -- our -- our investors and -- or analysts to recognize that we believe this business can grow about 5% organically per year. This doesn't mean that every quarter has to be 5%. We could have a 0 quarter, we could have a 10% quarter but on average we think 5% is pretty -- is pretty reasonable. David?

I would agree with that, Frank. That's exactly right.

Okay. That -- that's helpful. Just a second question. It was mentioned that the new distribution center is completed. Maybe you could just take us through when the consolidation will take place and ultimately what the cost savings could be once -- once the consolidation is completed.

We are -- we're done with the building. We've actually installed software and got it up and running in our Good Hope location. We -- and we're putting the software -- just put the software into one of the other locations that we're going to be consolidating in so that our sites get -- get up and running on our new con -- inventory control software before we conso -- physically consolidate the inventory. So we're looking for all of the work to be done in the April time frame and all the consolidation of inventory. We're going to have a whole new layout of the distribution center to -- to maximize the efficiency. I'm not going to get into the specific savings but we will see definite savings and they'll come in productivity in the pick pack operation and also in error reduction. Our -- our customers and distributors are going to see a nice improvement because in the past they might have placed an order and gotten products from three different locations and from April on we're -- they'll get one shipment from one location.

And, Rob, I'm not sure if you -- if you will be at our shareholders meeting today but we will -- if you -- if you come you can take a look into our new distribution center because we just took the curtains down, you can actually look into this and if you look in there you'll see that racks are being put up and -- when are we going to be operational there?

We should be fully operational with all three facilities put in in April.

Yes, this might be good time also for a visit.

Okay. Excellent. And David, the last question just on the tax rate, 29% this quarter, is that something that we should anticipate for the remainder of the year?

Yes, Rob.

Okay. All right. Thank you very much.

Thank you.

Your next question is from Ajit Pai with Thomas Weisel Partners.

Yes, good morning and congratulations on a very solid quarter.

Thank you, Ajit.

A few quick questions. The first is on cash flows, for your first quarter, this is probably the lowest cash flow and if you look at the past three years, last -- the year before and the year before that. So I think you mentioned that the Asian business, high growth over there and the longer cycle over there but it's just still a very small percentage of your business. So could you give us some color as to whether you've actually changed any of your payment terms or in the second quarter when you see the seasonal slowdown in Asia we can actually expect better cash flows on an absolute level than the second quarter of the previous two years?

Yes, Ajit. We have added inventory to -- to China because of increasing demand, because of the growth in the business and because our philosophy has changed in inventory, really. We have seen where we have more inventory in hand and can react faster to the customer, get better service metrics, we get bet -- we get more business. So we've actually -- and there's also some customers still transitioning from say Singapore to -- to China. So we've added inventory. We've also added inventory here in North America because of initiatives like for example the New York BradyGlo opportunity. So we've consciously added inventory to improve our service metrics. Our service metrics have never been better and our profitability has never been as high. So we see that actually working. Also receivables, because we're growing so fast in China in particular, terms are much higher there than on average. And in terms of cash flow we expect to see, and you can see in the charts that I provided, we get very strong cash flows in the last half. So I wouldn't give a -- a forecast for the second quarter in particular but -- but the bulk of our cash flows come from the last half.

I think it's almost classical, Ajit. I know you are a very -- very astute in economics and we have talked about this many times before. If you have an expanding and accelerating business that's a cash consumer and if you have a contracting business it sheds out cash just because your receivables and inventory and so forth. So, I think you see a little bit of this because we have really accelerated our business. When receivables go up, inventory goes up, and so I would not necessarily say first -- first half of the year, second half of the year. I would say it also depends very much on -- on our core growth rate. If our core growth rate continues to up and this would be great, I think it would continue to consume cash. If it slows down, what we think is going to happen based on our guidance we should see more cash coming -- coming our way.

Okay. Then second question is about China versus India. You talked a lot about India on today's call. Could you give us -- you mention electronics in India is becoming key, et cetera. Could you give some color as to where these opportunities are? Because most of the typical die-cut customer that you've had in the past, you talked about the shift out of Europe, most of that has been to other parts of Asia and not necessarily to India. So what's driving, what industries, what verticals, what applications are driving what you're seeing as demand in India?

Ajit, this is Al Klotsche again. The -- we -- we've been serving India out of Singapore. We've a couple of sales people in India and we've really been sitting on the sidelines for the last two years waiting to see when the major rush of investment from our customers was going to take place and I would say that we've seen a very, very significant spike in FDI, or foreign direct investment,in India by our core customers, the likes of Nokia, Samsung, Motorola, Intel, et cetera, and this has happened over in the last six months. I think to our benefit the investments have been geogra -- excuse me, geographically clustered. And so right now we're focusing our efforts on southern India and so that's really it. It's not a new customer base, it's our existing customer base that's shifting and we see many of our larger OEMs having developing what they call a China plus one strategy and as they sit around their board rooms they're concerned about having too many eggs in one basket, in other words, all their business in Asia in China and so they're looking for other geographies that might give them some balance to their portfolio.

So when you're looking at the overall Brady Corporation at some of these transitions with the same customers you are split the way we see it from the outside is by end market geography. There's the Americas, there's Europe and there's Asia. Now when these transitions happen, does -- does the responsibility for the customer change? How is it structured on the sales side of your organization?

Well we have -- you're correct in the way that we're structured as an organization but I think one of the things that's an extreme strength in our mind and often reiterated by our customers is a program that we call our SAM program, or our global strategic account management program, and although we do have a regional structure, our SAM program is very global and we have one manager responsible for each of our large global strategic accounts and then this manager coordinates the activities regionally. And it's a very, very tightly coordinated approach from a sales, marketing, engineering and production standpoint. So we feel very confident that we offer a consistent level of service and support to these customers anywhere they choose to go in the world.

Okay. And when you're looking at the [INAUDIBLE - heavy accent] business and just looking at some of the business moving out what are you trying to substitute the traditional set of die-cut business that had you there with? Are you looking at other die-cut opportunities? Are you looking at growing the other -- the direct marketing business more there?

Well, I can approach that from a -- I'll approach it from a die-cut standpoint and then Peter can approach it from an overall standpoint. In die-cut, yes, it is true that some of our traditional customers in the telecom industry are shifting over to Asia. We see that shift slowing down. I think the majority of companies that are investing in China have already done so but in the die-cut world what we're trying to do is diversify the portfolio into really two areas, automotive electronics and medical electronics. We had a nice presence in automotive electronics with Balkhausen and that continues in Germany. And recently through the acquisitions of Brandon a couple of years ago and TruMed, as Matt mentioned here in the states, we feel very comfortable that this medical converting initiative is something that has a definite opportunities in Europe and we began resourcing that within the last quarter. We also --customers are shifting but it's not all totally outside of Europe. We have started a new operation in Bratislava and I think I'll turn it over to Peter and he can talk a little bit more about that.

Yes, thanks Al. Ajit, yes, I think -- I think the key thing is we are shifting some of that focus to -- not just our [INAUDIBLE - accent and poor quality] marketing but also we acquired Texit. We see opportunities for growth in wire identification, somewhat mature markets but immature for us, geographic expansion and as Al mentioned, it's -- it's not all moving out of Europe. Our plants in Bratisalva comes on line this month. So we are picking this business up in other parts of -- of the region. But just to give you some perspective I guess my overall comment is that the business we want to grow are actually growing in the region. So we're -- we're somewhat encouraged by the results in the quarter.

Right. And from a brand management perspective you've acquired several significant brands in different verticals and the Brady brand has been historically you have integrated some of your acquisitions into the Brady brand. Do you plan to continue to maintain -- what's your strategy in terms of that? Do you plan to sustain spending and maintaining all these brands or rationalizing the portfolio of brands?

Ajit, that's an excellent question. That's a question actually ask ourselves. Every time you make an acquisition and there's no one size fits all answer. Typically we sit together with the acquired company, we ask what the value in the brand and if we believe there is a value in the brand we will maintain the brand. Now over time this might change. Our view might change or Peter might want to -- to migrate to the Brady brand. But it -- it's really a question based on every single acquisition. For instance when we bought EMED, a prime example, we didn't switch them over to Seton because we felt it was a strong,strong value in the brand of EMED and the -- the same is true for many of our other acquisitions but it's always a question, what is the value of the brand and are we better off, can we create more shareholder value by combining brands or by leaving them separate.

All right. And then the last question would be about the Internet, like I think about a year ago or prior to that two years ago you revisited the subject about whether your customer buying behavior right now is also sufficiently for you to be using the Internet much more in servicing them to have sort of full based -- just off the Internet product purchases? Is that something that you have any initiatives on? What percentage of your revenue today if at all is -- is being ordered over the Internet and in the future do you see that as something that is going to change in the near term?

Ajit, this is Dave Hawke. I'll give you a general overview of that. We've been pretty aggressive over the past several years of offering our customers the opportunity to buy over the Internet or in the case of distributors with repetitive orders through EDI ordering and it depends very much on generally the migration of the customer base to that form of ordering. So, for example, our distribution business in the U.S. has far more than 50% of the orders are done electronically either in a combination of EDI or on -- over the Internet. In our direct marketing businesses we tend to run in the 10 to 15 to 18% range which is consistent with other companies selling these types of products. So we're finding there's a natural adoption curve. And customers by the way they want to buy. So we're making sure that we have the availability of the customer through the Internet.

But these are with dedicated customers that already have an account set up. If someone with a credit card just wants to go to your web site and by a product today can they do it?

Yes, they can.

Okay.

Yes. Please try that.

As much as you want.

Okay. Thank you so much and congratulations on a very solid quarter.

Thank you Ajit.

[OPERATOR INSTRUCTIONS] Your next question is from Earl Gullett with Nicholas Fund.

Morning, guys, next quarter.

Thank you.

Dave, on the $0.60 EPS number, is that pure operational? There's no extraordinary gains from real estate or something in there?

No, there's nothing extraordinary in there. The real stuff, yes.

Real good stuff.

Real things.

That's good. And is that -- would you say there's evidence in there that the small acquisitions you guys have done over the last couple of years on balance have been nicely accretive?

Yes, I would say that. There's evidence of that. Don't -- don't carry the ones that were just recently done this year [INAUDIBLE] but certainly the acquisitions that were made in the last couple of years I would say have been very successful.

Okay. And then on the -- the gross margin line I'm curious what you guys are doing right. Most of corporate America is complaining about raw material costs and insurance and transportation. Are you guys getting price, number one, number two, what are you doing on the COG side to keep the gross margins up where they're at?

Well, there's -- there's lots of moving parts in there. In our MRO businesses in Europe and in North America we can get price. I wouldn't say it was tremendous but we -- we can get some price. Against our OEM electronics business it's always a cost in pressure and that's -- that's no change from what it's ever been. In terms of raw materials, what we've done, whenever we get base business growth with margins above 50% that really helps -- really helps our bottom line, it really helps our capacity utilization.

It's a relentless effort. We have over the last couple of years we have outsourced production to other lower cost countries in the world. We are constantly trying to combine purchasing volume like we bought EMED, we combined purchasing volume between EMED and -- and Seton, went to all our suppliers of goods and services to try to get the costs down. So, to a certain extent I think adding acquisition helps us because we have a -- a larger -- larger volume which we are buying. But it's -- it's really it's a -- it's an uphill battle, it's a constant stream and we also see where we have proprietary product. We have more flexibility on the pricing where we have more commodity products it's more difficult to increase prices. So that's why we also are so keen on increasing our new product pipeline with proprietary new products and you have heard me say probably before the only two line items in the income statement which I would like to go up, one is R&D on new product development, the other one is profit and that's how we are running this Company. You try to get everything down, cost of goods sold, SG&A, but new product development as a percent of sales should go up because it's important to inc -- to maintain our premium pricing and our high margins.

Yes, I'd also say,don't -- and I'd like to point out and say let's not get too fixated on gross margin. Our OEM electronics business which is large in Asia has on average lower gross margins but much lower SG&A. So as our business grows it will put pressure on our gross margin but it will help our SG&A line because the -- the business model's difference. But we don't get too fixated on the gross margin line. We -- we are focused on improving operating profit.

Even beyond we look at the tax rate, too.

Yes, one last quick one, too. What's the -- what's left in the share repurchase program?

We announced 800,000. So we've got 500,000 to do. We bought 300,000 shares in the first quarter.

Great. Thanks.

Your next question is from Richard Lane with Broadview Advisors.

Morning, guys.

Morning, Rick.

Fantastic quarter. No one will ever accuse you guys of managing earnings, that's for sure. I have two questions. One for Matt Williamson. My business partner was in Houston yesterday for Graingers analyst day and as part of that they toured one of their facilities. And to his surprise he found a dedicated part of the new Grainger store to Brady sign making products, mostly from what he could tell they were customers coming in and -- and making their own signs in a dedicated area of that store as I think is opposed to -- to buying your equipment to make it for themselves. He was quite astounded at how busy it was. I'm just -- given the fact that there are a lot of Grainger stores across the country, I -- I hadn't heard anything about that initiative. I wonder if you might comment on that.

Well, that's not a nationwide initiative, that Grainger. That's just something that -- that they're trying in that particular store and maybe in a couple of other stores. So Grainger's been very dedicated to displaying Brady products at their stores in their -- in their walk-in trade area. And -- and that's in -- in all of their stores. But this particular thing is -- is just something that's -- that's a trial. So it's good to hear that it's -- that it's cooking.

Great. Secondly, with respect to the -- the die-cut acquisition opportunity, I personally think it's a terrific idea to try to diversify outside of the pure electronics business, it's a -- just a tough business. I'm wondering out loud how big the opportunities are within auto, medical or perhaps other verticals such that you could envision three or four years down the road that being a -- a much bigger part of the overall mix and thus perhaps dampening just that -- what I would characterize as the volatility of the -- that, of the electronics end market and -- and, of course, the -- the possibility of carving out better niche businesses where there's perhaps a little bit less fundamental pressure on margins, [INAUDIBLE - phone breaking up] what the opportunities are in the other verticals and how big that could potentially become?

One of the things, Rick, that is real difficult to quantify market size with die-cut is what do you consider a die-cut and how broad do you make the definition. But very generally speaking we see the medical market plus the automotive electronics market, both of those being of similar size to hard disk drive and telecom where we're currently playing and that's why we've been focusing so much on our diversification. If you go back to our die-cut business five years ago we really had two primary customers, one in hard disk drive and one in telecom. So our first diversification efforts were to diversify within the markets that we really understood and had a product offering for and I'm very pleased to say now that we have a strong market position with each of the major hard disk drive manufacturers and all of the major telecommunications manufacturers.

You're correct in saying that the electronics market is a tough one to play. But there's a couple of positives with that. First of all it really keeps us on our toes. And we believe and we talk oftentimes as a management team that the pressures that we face in those industries make us a better Company overall. Supply chain reduction, quarterly cost downs, et cetera, are things that we take those learnings and -- and deploy it in other parts of our business. The other thing is that we're a highly leveraged business in our die-cut area and volumes are very important to us and when you look at hand-held electronics, the numbers are staggering. 800 million cellphones manufactured around the world, et cetera. These are very, very attractive numbers despite some of the pressures that exist in the marketplace.

Where we're excited about the new markets that you talked about, specifically medical and automotive, are the opportunity for us not only to take our converting capabilities but also product development. These are industries that don't move quite as quickly, the cycle times, the product life cycles are a lot longer and that gives us an opportunity to seed in some proprietary developed materials by Brady and so we share your excitement and we think that our strategy is -- is clearly moving in that direction.

Is -- is it true that though there are -- is -- is that a particularly fragmented industry in the various different regions of the world such that there are indeed lots of small niche acquisition opportunities? I -- I -- again I don't have much of a feel for -- or knowledge of that.

Are you referring to the medical industry?

Yes, exactly.

Yes, it's -- it's very fragmented. There is not one or two large players that dominate that industry. And it's not even a global industry yet. I think the thing that we're excited about that is that manufacturers that are largely in North America and Europe are also starting to expand and spread their wings to other parts of Eastern Europe and Asia and we're already there with the presence to service them so this is a -- a growing industry. I wouldn't put it in the mature category yet and it's very fragmented in terms of the number of players that are serving that market.

Great. Thank you for the update.

Thank you.

As there are no further questions in queue, I would like to hand the presentation back to Ms. Barbara Bolens for closing remarks.

Thank you very much. We thank -- thank you for your participation today and would like to remind you that the audio and slides from this call today are also available on our web site. The replay of this taped conference call will be available via the phone beginning today at noon central and will be available until November 21st. The call in number is 888-286-8010 with a passcode of 96016468. As always, if you have questions, please feel free to contact us. Thanks for your interest in Brady and have a great day. Operator, could you please dini -- disconnect the call.

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.