Brady Corp (BRC) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2006 Brady Corporation earnings conference call. We will conduct a question-and-answer session towards the end of the conference. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Ms. Barbara Bolens, Vice President and Treasurer, Director of Investor Relations. Please proceed Mam.

Thank you and good morning everybody. Welcome to our fiscal 2006 second quarter conference call. We're glad you could join us this morning. During our call will you hear from Frank Jaehnert, Brady's Chief Executive Officer, and then David Mathieson, Chief Financial Officer, who will be presenting Brady's quarterly financial review. Also joining us this morning is Tom Felmer, Vice President of Direct Marketing Americas, Peter Sephton, Vice President of Brady's European region, and Allen Klotsche, Vice President of Asia Pacific and Global Die-cut, who will all provide a portion of the regional report.

As usual after brief presentations by the team we will open up the floor to questions. We encourage you to follow along with the slide located on Brady's Internet site as we will be referring to those individual slides as we proceed through the presentation. These slides can be found on our website at www.investor.bradycorp.com. You will 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 examples of words identifying the forward-looking statements. 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 10Q filed with the SEC last quarter.

Second, please note that this teleconference is copyrighted by Brady Corporation and there may be no rebroadcasting of this without express written consent. 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.

Good morning everyone and thanks for joining us as we review our second quarter results. Days for the quarter were 231 million, and net income 21.3 million. This was the best second quarter ever both in terms of sales and net income. We were very pleased with the solid base business growth of almost 10% especially in light of acquiring two companies this quarter and seven companies this fiscal year including our latest acquisition, GE IDenticard and GE IDenticam. This is very rewarding, it has shows that they are not only executing our acquisition strategy but we are also succeeding in our base business growth strategies.

Our net income for the quarter exceeded last year's, a quarter that was extraordinarily strong. During the second quarter we continued our investment in our core businesses and geographic expansion. We began production in Slovakia, continued to increase our R&D spending and have completed our new distribution center here in Milwaukee. I will now turn the call over to David Mathieson for more detailed review of the financials and of our revised increased guidance. As usual after the regional report I will be back to summarize our outlook for the rest of the year. David.

Thanks, Frank, and good morning, everyone. On slide three, as Frank said, these are record sales in net income for our second quarter. Sales are up 18% but base business up 10%, acquisitions 11%, and currencies negative at 3%. Gross margins at 50.7%, down 280 basis points from the prior year, and we will take you through the detail of that in later slides. SG&A at 34.2%, down 40 basis points from prior year, operating income was 13.5%, down 230 basis points from the prior year. Net income up 3.3% from the prior year. The prior year, as Frank said, was exceptional. I know I will also go through that in some detail. Earnings per share of 5%, to $0.43 from $0.41 last year.

Slide four. Let me spend some time explaining our second quarter. This chart shows the net income results for the last four quarters -- four years second quarter. And you can see that the second quarter in fiscal 2005 was exceptional. For the full fiscal year in 2005, we grew our net income 61% while in quarter two, earned net income growth was 156%. We had a number of favorable timing of items last year which helped the quarter, and we had a number of unfavorable timing of items this quarter, which brought the net income down. I'm not going to call out any individual items since none of the individual items are significant. I also want to say that this quarter's numbers are on the path we have to reaching again.

Slide five. This shows the year-to-date net income. So that's the first six months of the year, of the last four years. And you can see that earned net income year-to-date is up 25% from last year. And as I said earlier, quarter two results are on our path to our guidance.

Our gross margin for the second quarter has declined for several reasons. The major reason for the change in gross margin is actually our business mix, more OEM Electronics business which also has lower SG&A. Our acquisitions have also impacted gross margins, as as usual during the early stages of integration, and as we have pointed out in previous quarters, we have some cost pressures in OEM Electronics in Asia which we're working hard to mitigate and stabilize.

Slide six. This slide shows the total net income for the last three years plus our latest annual guidance for fiscal 2006. The guidance that we are giving today is that we anticipate our net income for the year to be up 22 to 26%, consistent with where we are for the first six months. Since we are nearly six and a half months into the year we have better visibility now with the business environment, completed acquisitions, and a recent favorable financing package. And I hope those slides put our quarter into the context of our total year.

Slide seven. It's nice to see the base business up again this quarter growing at 10%. The Americas were up 5%, Europe up 3% and Asia Pacific up 39%. All these are against tough comparisons last year. Currency is negative this quarter, as expected, and acquisition growth in double-digits again with all the acquisitions we have made recently, and since the end of the quarter we closed or completed the acquisition of IDenticard.

Slide eight. Americas had base sales growth of 5%, which showed a nice progression and again on a tough comparison. Acquisitions of Electromark, TruMed,STOPware or J.A.M. plastics and Personnel Concepts kicked in 9% and currency added 1%.

Slide nine. In Europe, base business grew 3% versus a tough comparison last year. The acquisitions of Signs & Labels in Texas added 14%. Currency reduced those sales by 9%. And we have opened a new plant in Bratislava in Eastern Europe and it's operating ahead of schedule.

Slide ten. You can see the tremendous growth we are sustaining in Asia Pacific with base business up 39%, and our Chinese business specifically up 83% for the quarter. Acquisitions added 10%. We continued to see strong growth in consumer electronics. And our Indian expansion plans are underway and we've hired a number of managers there.

Slide 11. Gross margins declined for the quarter, and there are a number of reasons for that. The major one is our product mix is changing with faster growing OEM Electronics business, reducing gross margin. That's not a bad thing as this also reduces SG&A. You can see that the Asia Pacific business is now 19% of our sales and is highly concentrated in OEM Electronics. Our acquisitions take time, also to get up to our levels of profitability. We are also investing in Bratislava, which is ahead of plan, but as an investment in gross margin and SG&A. As we said we did feel pressure on our OEM Electronics business in Asia, specifically China, and we have focused plans to stabilize our margins there.

Slide 12. SG&A continues to improve year-over-year with our business mix, although this quarter was hit with the timing of option expenses, deferred compensation, and some [inaudible] items. And the previous year had some favorable timing.

Slide 13. R&D spending dollars is up, and new product development continues to be a major focus of the senior management team here at Brady Corporation.

Slide 14. Net income up 3%, operating profit fell driven by timing of expenses. Our tax rate has improved as our profit grows in Asia where we have lower tax rate. Net income as a percent of sales are very respectable 9.2% for the second quarter.

Slide 15. Currency impact. This slide shows the Euro versus the dollar for the quarters in fiscal 2005 and so far in fiscal 2006. And you can see that quarter two and quarter three last year are real tough comparisons when the Euro was a lot stronger.

Slide 16. Diluted earnings per share up 5%. We completed our limited $800,000--800,000 share buyback, which has done the job of limiting dilution caused by options.

Slide 17. Cash flow from operations. We are below where we were last year for several reasons. We are paying out large sums on tax charges last year and our working capital is growing as the business in Asia grows. We generate most of our cash in the last half of the year.

Slide 18. Here's the cash flow walk. We start with 73 million in cash, notable items are we generate 21 million in cash flow, we borrowed 100 million from a revolver, we paid 100 million for our acquisitions, we completed our stock repurchase program for 27 million, we spent 17 million on capital expenditures, including completing the expenditures on a new centralized warehouse here in Milwaukee. We have a nice dividend which is up 18% over the last year, and end up with 51 million in cash which is probably near the minimum of what we need to operate globally. After the quarter, we completed the acquisition of IDenticard and we used our revolver to do that. Then earlier this week we completed a private placement raising 200 million at 10-year fixed rate of 5.3%, this is earmarked for repaying the revolver and completing small acquisitions which are in the works.

Slide 19. Here's our balance sheet for the end of the quarter. You can see our long-term debt has grown to 250 million, up by 100 million from the beginning of the year. We're still relatively conservatively leveraged at 32% debt to total cap.

Slide 20. Here's a summary balance sheet for the last six quarters. There's nothing too notable as our balance sheet is growing with our base growth and the acquisitions we are making.

Slide 21. Here's a summary of our guidance for the year. We are raising revenue guidance to 980 to 990 million, up from 910 to 920 million as we have completed some of our recent acquisitions. We're also raising our net income projections as we build in the results from our new acquisitions and the recent financing that we completed this week. Earnings per share we expect to be $2 to $2.06, up from previous guidance of $1.96 to $2.00 As we look at projections for the rest of the year, our projections show that quarter three and quarter four are roughly similar for both sales and net income. Last year, our Q3 was helped by a weak dollar, and Q4 was soft last year, due to the timing of a number of costs. Now I will hand the call over to Tom Felmer.

Thank you, David. Good morning, everyone. My comments will refer to slide 22. The Americas continue to perform well in the second quarter with continued revenue growth coming from both base business as well as acquisitions. The increased volume resulted in strong profit growth over the prior year's second quarter. The region sales increase to $110 million, an increase of 15%, acquisitions of Electromark in February 2005, STOPware in August 2005, TruMed in October 2005, J.A.M. Plastics and Personnel Concepts both in January 2006 added 9%.

Overall base business was up 5%, and foreign currency translation added about 1% to sales. Both the Brady brand and the Direct Marketing base business were up over the second quarter of the prior year. We are seeing broad-based growth in the majority of our businesses and countries. Canada and Brazil both continued to grow nicely over the prior year. Base sales in the U.S. were up modestly due to growth in the Brady brand business, with sales to the Electrical and OEM markets particularly strong. The Direct Marketing brand grew this quarter in the low single-digits.

Construction of our new central distribution center in Milwaukee was completed in the quarter and we are shipping many of our finished issued goods from the new facility. We are currently consolidating inventories to this location from other warehouses and this facility will provide more error free and single shipments to our distributors. Electromark celebrated its one-year anniversary with Brady at the end of the second quarter. We have been very pleased with the acquisition which has made Brady a clear leader in the utility identification market. The integration of the business is progressing nicely. We consolidated some duplicate manufacturing capabilities from Florida to the Electromark site in Walcott New York during the quarter and we are beginning to cross market their products across the Brady businesses.

This quarter we were pleased to complete two acquisitions in the region with a third coming shortly after the quarter ended. Personnel Concepts was acquired in early January. Personnel Concepts was a direct marketer of labor law compliance posters and related products. The Company also offers consultative expertise on required communication of federal and state minimum wages, HIPAA privacy regulations, and EEO compliance, among other regulatory areas. Founded in1986 Personnel Concepts employs about 160 people and had sales of about $29 million in 2005. Personnel Concepts compliments our Seton and EMED businesses with its regulatory focus and extensive use of direct mail to market its products.

Brady also completed the acquisition of J.A.M. Plastics in early January and GE IDenticard and GE IDenticam just last week. These acquisitions add to a growing offering in our people ID strategy which also includes [Temptech] visitor badges, and [BIG] employee badges, and STOPware visitor management software. Brady can now begin to leverage a broad line of leading people identification products and an extensive network of channel partners. In 2005 J.A.M. Plastics generated $10 million in revenue while GE IDenticard and GE IDenticam combined to generate approximately $33 million in revenue. These acquisitions accompanied two other Americas acquisitions that we completed in the first quarter, TruMed, Inc., and STOPware, Inc.

Segment profits rose 22% or $4.5 million to $25 million in the quarter. Profit as a percent of sales rose from 21% in the prior year's second quarter to 22.7% in the current quarter. While we continue to experience cost increases on many of our materials and utility costs, the impact to our increase in volume is more than offsetting our cost increases. We are also enjoying leverage of our operating expenses in both our Brady brand and Direct Marketing businesses as base 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 the European business results.

Thanks Tom and good morning everyone. We're now on slide 23. Sales for the European region were $76.3 million, increasing 8% over the same period last year. Base business was up 3%. Acquisitions contributed 14%. On the currency impact was negative this quarter by 9% as the Euro weakened against the dollar versus the second quarter of fiscal '05.

Looking at our business by brand, then, the direct marketing business showed modest growth over the second quarter of last year, both Germany and France had growth in excess of country GDP as a result of continuing to add new customers and product expansion. Growth in the U.K. was supported by the acquisition of Signs & Labels. However, base business in the U.K. declined slightly as the U.K. manufacturing sector continued to decline.

Within the Brady brand, we made a decision earlier this year to exit some unprofitable business in Germany. We see the impact of this on our base growth rate but accept this in the short term as profitability improved. We also saw further business migrate from the Benelux to Asia where I'm glad to say we retained the business. Outside of this our core Brady business strengthened in our core focus market. Geographically we started to see some encouraging signs in Germany where activity is picking up. In Spain, and the Nordic region, results continue to be encouraging offsetting some base weakness in the U.K. In particular, we're encouraged by our recent acquisitions where we continue to drive growth in line with expectation.

Our Slovakia operation started manufacturing this quarter supplying our subcontract customers in the mobile phone industry. Production capacity will be increased over the next two quarters. The integration of our most recent acquisition, Signs & Labels in Texas is going well. At Signs & Labels integration activities continue and early results are encouraging with a solid launch in redesign to the most recent capital mailing. The integration of Texit also continues well and we're particularly pleased with the high growth we're achieving in the oil exploration and process industries in the Nordic region.

For the region as a whole segment profit for the quarter was $20 million, a decrease of 7% from the prior year. This decrease is a result of the impact to the stronger dollar. In addition our start-up of Slovakia diluted profit by 4%. Our base business profitability for the quarter however was up 4%, and I would add that that was against a tough comparable last year where our base profitability increased by 30%.

As we look ahead we continue to see the success of our strategy of changing our business mix, geographically positioning the strategic acquisition in high-growth areas. All of these are driving profitable growth. We'll now continue with the Asian region reports, so over to you, Allen. Thank you.

Thanks, Peter. I would turn the audience attention to slide 24. Performance for the second quarter in Asia was very solid as we benefited from strong demand from consumer electronics around the holiday season. For the second quarter sales for the region were 44.7 million, up 49% over last year. Base sales were up 39%, and acquisitions added another 10%. Sales across the region were solid with growth in nearly every country. Sales from greater China as David mentioned earlier were very strong as expected in response to the cyclical buildup of consumer electronics. As we closed out the quarter with Chinese new year we were pleased to hear little if any rumblings of excess inventory in the pipeline after the holidays.

Elsewhere in the region our Australian Direct Marketing and Safety business continued their strong performance and showed healthy growth over the prior year. Our move to the new Australian facility and enhanced automation systems have led to these increased results and a positive uptick in customer service levels. The big news in our markets this quarter was the announcement of Seagate Technologies to acquire Maxtor Corporation. Both of these companies are leading accounts for Brady as well as many of their competitors are. While the industry waits to see what the ultimate impact will be, we continue to see strong demand across the entire hard-disk drive industry, especially for some of the smaller format storage applications.

In partnership with the hard-disk drive design centers, our recently acquired companies, Brandon International, ID Technologies, QDPT, and TPS are continuing to add new products and solutions to support the growth of their new platforms. Capacity is an important aspect of supply-chain management for the hard-disk drive industry, and our multiple facilities in China are very well positioned to support future growth across the hard-disk drive industry. Our Brady India team continues to make progress with the business registrations, licensing site selection and customer qualification. There appears to be a longer lag time between announcements by multinational companies where there are large scale and volume production, than what we have seen in other areas, most notably China. We have received positive signals from our key customers that our presence in India is important to their growth plans.

Segment profit for the region was 11.7 million or 26% of sales, up 35% over last year's segment profit of 8.7 million or 29% of sales. Across the region we continue to face significant pressure on gross profit margins. Through detailed analysis there are a number of contributors to this margin pressure, including increases in raw material prices from our suppliers, expectations of quarterly price reductions from our customers, increased levels of inventories to support our multiple manufacturing sites, and the impact of third-party inventory hubs.

Looking forward we anticipate continued sales growth in most areas of the region. We are pleased that the electronics industry is not poised for a readjustment period to access inventory and there are many new programs ramping up for mid-year production. At the same time we do not expect the margin pressures to let up. We have increased our focus on the contributing factors of margin degradation and are working to reverse this trend going forward. Now I will turn the call back to Frank.

Thanks, Allen. We are very pleased with the solid base business growth in the second quarter at a time when our acquisition and integration activities were at a high level. We continue to focus on growing both sides of our business and it is showing. The investments we are making in the business are to further grow our existing markets with continued efforts in new product development. We are developing adjacent markets such as medical Die-cut. And we are investing in new geographies such as India and Slovakia. Our acquisition pipeline continues to be robust even after the acquisitions we have made this year. Integration of newly acquired businesses begins immediately after the acquisition is complete, and ultimately involves bench marking exercises with existing Brady businesses. We believe we have built a competent in integrating businesses and achieving the synergies we set out to achieve.

David walked through a very thorough review of financials including analysis of the several drivers of the charge-- of the change in margin from last quarter to this. We have again increased guidance for the year to reflect our results to date, acquisitions closed and the financing we just completed this week. We now expect sales of 980 to 990 million with net income between 100 and 103 million, and diluted earnings per share of $2 to $2.06. We continue to be very excited about the opportunities that lie ahead of us. This concludes our prepared comments, and we will now start the Q and A. Shakira, please provide the instructions to our listeners.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Ajit Pai with Thomas Weisel Partners. Please proceed.

Yes, good morning.

Good morning, Ajit.

A couple of quick questions. The first one would be, just looking at your expense line and the timing of expenses that you talked about, in the last quarter you had a sort of 19% operating margin, and this quarter it's 13.5. Is it timing of expenses pushed out from the first quarter into the second quarter or pulled in from the third quarter into the second quarter?

We, for example, the Slovakian investment was mainly in the second quarter, and we planned that in the first quarter. But a more valid comparison is the prior quarter last year, Ajit. Things like working days impact our business, so we like to look at the prior year second quarter. And what I would say there is that in terms of operating expenses, the biggest impact on our business is actually our business mix. And if we take the impact of timing of expenses, if we take care of the impact of acquisitions, our operating profit, our base business operating profit actually went up 20 basis points. So we are pretty pleased about that. Then a big impact on our businesses--our business mix, we're doing a lot more in OEM Electronics, and our margins are lower. Our SG&A is much lower. You don't see that this quarter because we had some unfavorable timing in SG&A.

Right. And so on the margin front, on the gross margin front, we can see why the margins will go down if the Die-cut business or the OEM Electronics business is the one that's driving a lot of the growth. But the impact on the operating income line should become more evident when some of those -- could you quantify broadly how much those one-time kind of expenses, like the Slovakia start-up, et cetera, if it's one-time or whether it's an ongoing amount, how much that impacted things? Is it fair--like I think last year you add 15.8% operating margin for this quarter.

Yes.

Did you mention it running 200 basis points higher than last year, ex all those expenses?

Did you say 20?

20 basis points.

20 basis points.

Got it. Okay.

Ajit, I would like to make a general comment. You know, I feel it is coming for ten years. And if I've learned one thing regarding our quarterly earnings, I never take the second quarter and extrapolate. Let me just give an example. Last year we had 82 million net income for the full year. We had about 30 million, is this right, in the second quarter, right. So had we quadrupled this, we would have ended up with 120 million, not 82 million. Same is true this year. If you look at our earnings guidance, it's somewhere between 100 to 103 million, right? Our earnings in the second quarter, if you quadruple it, would have caused the short of the-- So the second quarter is extremely difficult for us to forecast to predict because you have your holidays in there, depends--

Right, right.

When it's a holiday in the week, even let's say in Germany, January 6 is a holiday. If January 6 on a Monday or a Tuesday has a different impact then if it's on a Thursday or Friday. Same is true for Christmas. It's extremely difficult to predict. So the same is for organic growth. We had organic growth of almost 10%. That's pretty fantastic, right? Now, we caution everybody, 10% is not normally what we have. We guide mid-term to about 5% plus. So, don't take a second quarter, whether it's extraordinarily good or whether it's a little bit less than what you expected and draw too many conclusions of it. I've tried to do this before myself and I've always failed doing this. So that's why we would like to draw your attention to the full-year guidance.

Okay. And then when you're looking at the business mix, as -- do you expect going forward the sort of OEM Electronics business to become a larger percentage of your overall mix?

Yes, we do, because we're growing.

Faster over there.

Yes.

And so that would mean that from a gross margin perspective, even though the second quarter seasonally is very strong for that business, and the third quarter we'd expect a seasonal rebound in margins, not because that business is typically, somewhat of seasonality out there on the downward side. Do we expect to see that this year as well?

I'm not sure of your---

Of the question--the question is that the second quarter typically seasonally has very strong OEM Electronics business is seasonally strong, so you have a decline in gross margins partially because of that? Because it's a greater part of your business mix?

Yes, yes.

Going into the third quarter, it's usually seasonally relative to the second quarter, it's a little -- it's seasonally down. So do we expect a bounce back in gross margins because of that?

Well, third quarter is probably the softest for OEM Electronics, and it ramps up again in the fourth quarter. And I wouldn't like to give--or start giving guidance for gross margin.

Yes, especially because, Ajit, you just picked one particular item. If you are an economist, you'll always say [inaudible] I think your statement would be correct. However, there're many other things. For instance, we have a lot of acquisition activity. Typically acquisitions don't contribute as much to the operating income in the first couple of months or quarters than they would do maybe after one year.

So that's another thing, what you want to take into consideration. Start-up the facilities. We are trying to grow into India, Bratislava, all this--all impact all across margins and our operating income. So it's very, very difficult to just pick one, let's say Global Die-cut and say based on this, because you might have a seasonally weaker quarter, had--do we expect gross margins to improve? Without taking into consideration all the other things which play into it.

Got it. Then looking at your tax rate, your tax rate has declined from the first quarter going into the second quarter. For the rest of the year, what kind of tax rate would you like to us assume?

28%. So year-to-date tax rate 28%. We expect that going forward.

You expect that? Okay. And then lastly, when you're looking at rev er in the cycle, the economic cycle, you talked about some cost pressures. Are you seeing like your ability to price also becoming more -- like are you able to pass on some of those to your customers, or will you be able to going forward?

You know, we are working hard to stabilize our margins. There is continuing cost pressure. We see it. The price of oil is seeping into everything. And we're working hard to mitigate that.

And it's also different, again, from product line to product line, Ajit. We feel if we have a proprietary product, we have more opportunity to increase prices than if we have a more me, too product. And also especially in Die-cut it's very much a timing game. Lifecycles are short in this kind of business. So, it's very much depends on timing. You might not be able on an existing product line to increase growth margins, where as in the new product you might be able to do this, especially if it's proprietary. So it's also very much a timing issue.

Right. And then the last question would be the debt that you sort of just took on. What is the primary driving factor and what are the uses--the primary uses of cash for that?

It's acquisitions.

It's acquisitions. Okay. Thank you.

Thank you, Ajit.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Amy] [inaudible] with Robert Baird. Please proceed.

Good morning. Frank, I just have a question about some of your--if you can talk a little bit about your growth, and if you could put it in the context of near term, meaning the fiscal '06 guidance, as well as longer term. Let me just tell you a little bit what I'm hoping you can speak to. In terms of the base business, can you give us kind of a ballpark for how much you think will come from new products versus new markets. And a little detail on both of those, what you're working on right now? And then in terms of is acquisitions can you talk about the pipeline? Does your guidance assume just the acquisitions you've announced, or is there more baked in there, and kind of your strategy on the acquisitions as well.

I'll start. Often I look around desperately into the room for others to give me help on how much of the base growth comes from new products, new initiatives, and so forth, because there's so much going on in this Company. At the same time, I've always maintained in the past that we don't have any major things going on, a major new product launch, or major geographic initiative, which is easy to put your finger on and say, out of our core growth 5% is from a new product launch, and it's this product it's very difficult. There's a lot of things going on at the same time. However, I can give you a very clear answer I think with acquisitions.

Our guidance for sales growth for this fiscal year includes only acquisitions, which we have consummated, completed. So I think it's safe to say that the GE IDenticard and IDenticam can make acquisitions, which we made after the quarter was ended, has been included in our guidance because of the timing we gave guidance we have closed this acquisition. Any future acquisitions which might--may or may not happen based on negotiations we feel better not to include in our guidance. So this is why acquisitions--it's not in there. We never include prospective acquisitions in our guidance.

Okay. And if you can just--if you could maybe talk about just what you're seeing in terms of the pipeline. Are you looking to do more smaller kind of steady-state acquisitions, or are you looking at some larger opportunities as well? And if you can just give some broad-brush strokes on what areas you're targeting besides what you've already announced.

I think our--well our pipeline varies obviously as companies become available. And our key focus is to make value adding acquisitions. So we are out in the market aggressively, and if we find opportunities that can add value, we make them, but--and I think that's simply our guidance.

We like to make large acquisitions if possible. We are in a fragmented market. It's not always possible. But certainly we have a bias to make acquisitions which are between 10 and 50 million. But the question of--are they become, do they become available, can we reach agreement with the seller on price, and so forth. But our bias clearly is for large acquisitions.

That's helpful. Thank you. Also just on the margins with the acquisitions being kind of below your Company average. How long do you think it will take before you can get those up to, your Company average, and is there an opportunity to even drive those further beyond at this point?

Typically it takes two years to get where we want to be with acquisitions.

We are lucky. Some acquisitions, like EMED, where the company had a significantly higher operating income than us, so you would hit the ground running in the first quarter with a material impact on our earnings. Now, that's normally not the case. EMED's profitability is certainly extraordinary, and the average company buys certainly does not have this kind of profitability.

Unfortunately.

Yes, we'd love it. If we could find more and get it at a reasonable multiple.

Okay, last question from me. Last quarter you talked about striving to achieve a 12% net margin kind of in the long term. Any change to your thought process there?

No, we are on the path and our guidance is like between 10.2 and 10.4%, so we are on a path to do that.

Great. Thank you so much.

[OPERATOR INSTRUCTIONS] There are no further questions in the queue at this time. I would now like to turn the call over to Ms. Barbara Bolens.

Thank you. We thank you for your participation today and would like to remind you that the audio for the slides--the audio and the slides from this call today are available on our website. The replay of this taped conference call will be available via the phone beginning at noon central today. The phone number to access the call is 888-286-8010, and the password -- passcode is 50772323. The phone replay will be available until 11:59 p.m. on February 22nd. As always, if you have questions, please contact us. Thanks for your interest, and have a great day. Operator, please disconnect the call.

Thank you for your participation in today's conference. This concludes the presentation. [OPERATOR INSTRUCTIONS]