Brady Corp (BRC) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2006 Brady Corporation earnings conference call. My name is Chanel and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to our host for today's call, Ms. Barbara Bolens, Vice President and Treasurer, Director of Investor Relations. Please proceed, ma'am.

Thank you and good morning, everybody. We're happy you could join us today. During our call this morning, you will hear from Frank Jaehnert, Brady's CEO; and then David Mathieson, our CFO, will be presenting Brady's quarterly financial review.

Also joining us this morning is Matt Williamson, Vice President of Brady Americas, Peter Sephton, Vice President of Brady's European region; and Allan Klotsche, Vice President of Asia-Pacific, will be providing a portion of the regional reports. Frank, David and Peter are all traveling in Europe this week, so if you hear a slight change in the communications, that is why.

As usual, after brief presentations by the team, we will be opening up the floor to questions. We encourage you to follow along with the slides located on the Internet, as we will be referring to the individual slides as we proceed through the presentation. The slides can be found on our website at www.investor.bradycorp.com. You do have a few minutes to get to those (technical difficulty) and other usual information.

Please note that in this call we may make comments about forward-looking information. Words such as expect, believe and anticipate are a few examples of words identifying a forward-looking statement. It'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, are located in our slides on the Internet, and also on Brady's 10-Q, filed with the SEC in March of 2006.

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.

Thank you. And now here is Frank Jaehnert.

Good morning. We had a record third quarter, both in sales and profits, with sales up 27% over last year and net income up 21%. Our net margin was a strong 11.3%.

In the quarter, we announced the completion of two acquisitions and the signing of two additional acquisitions. Newly-acquired companies continue to fuel our growth. However, acquisitions are not the whole story, as we also experienced healthy growth in our base business by a rate more than twice our target. The Americas and Europe had very solid growth, exceeding GDP growth in each of those regions. Asia continued its outstanding performance.

During the period, we also completed the (indiscernible) of our North American warehouses, continued our development of production capabilities in India, ramped up production in Slovakia and continued integration of our completed acquisitions. These are just a few of the initiatives that have been in place during the quarter.

David will now give you more details on the quarter and on our new increased guidance. David?

Thanks, Frank, and good morning, everyone. On slide 3, we are pleased to announce another record quarter here at Brady. Sales were $266 million in the quarter, up 27%, with robust base business growth of 12%, 17% coming from our acquisitions and currency at 2% negative.

Gross margins were 52.8%, down 150 basis points. SG&A was 33.5%, also down 100 basis points. Operating income at $44 million increased 24%, and at 16.6% of sales, was down 30 basis points off a very strong quarter last year.

Net income was a record of $30.2 million, up 23% (sic--see press release) from the prior year, and EPS up [22%] to $0.61 in the quarter.

Slide 4. Base business growth was 12%, with solid growth of 6% both in Americas and Europe. Asia-Pacific had outstanding base business growth of 49%, with China doing particularly well.

Acquisitions drove 17% of our growth in the quarter. We completed the acquisitions of Accidental First Aid in Australia, IDenticam in the USA and IDenticam in Canada in the quarter. We are particularly pleased that we achieved double-digit growth from acquisitions in all regions. Our strong country and regional structure gives Brady considerable capacity to execute acquisitions across the globe, and we are taking advantage of that.

Currency had a negative impact for the second quarter in a row. However, given the euro's recent strength, we expect easier currency comparisons in the last quarter.

On slide 5, we saw solid base business growth from Americas. The Brady brand business is strong across most product lines, with the direct marketing Americas business softer. However, we believe we have a number of exciting initiatives going on to improve that situation going forward.

Slide 6, base business growth for Europe at 6% is very good, and our direct marketing businesses are generally doing very well. The Brady brand is also doing well, and the Texit business we acquired in September 2005 is growing strongly.

On slide 7, we saw outstanding base business growth in Asia-Pacific, led by our Chinese operations. We have now located both manufacturing and shared service space in India. We're looking forward to the integration of both Tradex and Daewon, which will add more capacity and capabilities to this region.

On slide 8, gross margins at 52.8% is down 150 basis points from prior year. Quarter three last year was a great quarter for gross margins and a very tough comparison. Our Global Die Cut business continues to outpace the growth in the rest of the business. This will compress gross margins, but also compress SG&A. That is particularly true of the announced acquisitions of Tradex and Daewon.

As in the last several quarters, there have been a number of initiatives which reduced our gross margins in the short-term, but will pay off in the near future, such as the central warehouse and the plant in Slovakia.

On slide 9, our SG&A costs continue to inch downwards as the business mix in Die Cut continues to grow. As a reminder, our Die Cut business model is one in which we see lower gross margins, but also lower SG&A.

In slide 10, R&D spending is up 23%, and as R&D is a key priority, you will see continued investment to build out our capabilities in both the technical marketing side of new product development as well as the R&D side.

Slide 11. Our operating income was up 24% over the prior-year quarter. As a percent of sales, the operating margin was 16.6%, and was down slightly over last year, with the major reason for the decline being the acquisitions made in the last 12 months. Excluding the companies we have acquired in the last year, our operating margins would be higher. It takes two years or so to fully integrate acquisitions, and in fact, we are still gaining synergies from companies we acquired more than three years ago.

In slide 11, our quarterly net income shows great results again. You can see we have had two quarters this year with net income of over $30 million. During the quarter, we had a gain on a currency option we purchased to hedge the Tradex acquisition. The impact of that gain was approximately $1 million after-tax.

Slide 13, diluted earnings per share was up 22%. This year we set about repurchasing shares to limit dilution on our share count (indiscernible).

On slide 14, looking closely at this slide, you will note that cash flow from operation activity is very much stronger in the second half of the year. And you can see that we have confirmed that trend again this year with our cash flow in Quarter 3 very much stronger than Quarter 1 and Quarter 2 put together.

On slide 15, highlights from this cash flow walk. So far this year, we [raised] $200 million of debt, 10-year fixed notes at 5.3%. We have made acquisitions of $155 million. Our dividend is up 18% over last year, and capital expenditures are also up, as we continue to expand the business in China, India and Slovakia.

We repurchased shares for the first time, as I mentioned, and at the end of the quarter we have cash of $90 million. In addition, we have $50 million in short-term investments.

In slide 16, this quarter, we have begun to provide EBITDA calculations with our news release. We will continue to include them in this presentation as well. While we do not use EBITDA as an operational metric, we know that it's a calculation used by our investors and lenders, and we are providing that for their convenience. Now for the full fiscal year, we expect both CapEx and D&A to be approximately $32 million for the year.

Slide 17. This summary balance sheet shows total assets of $1.1 billion. Total debt is now at $350 million, as we raised $150 million of 10-year debt in 2004 at 5.14%, and this past quarter, we raised $200 million of 10-year debt at 5.3%. [FX] debt as a percent of our total capitalization is (indiscernible) percent, although we have cash and short-term investments totaling $120 million.

Slide 18. This shows the evolution of our balance sheet over the last seven quarters. Our working capital has gone up as we have grown our business. We have also added inventory as we extend our supply chain to lower-cost locations. The business we do in Asia generally has longer terms than in the rest of the world, but we are focused on controlling our working capital.

Slide 19. We are increasing our guidance for the year based on our results so far this year, including the $1 million after-tax gain on the currency option, and we have now narrowed our expectations for the quarter to the top of the range.

We expect revenues of $985 million to $995 million, up from $980 million to $990 million; net income of $103 million to $104 million, which is up from $100 million to $103 million; and earnings per share of $2.06 to $2.08, which is up from $2 to $2.06. Note that this guidance does not include the recently announced agreement to acquire Tradex and Daewon, as we have not completed these transactions.

On slide 20, this shows our net income for the last three years for our fourth quarter and our guidance for this year, which in total -- I'm sorry -- this shows our net income from the last full three years and our guidance for this year, which in total will be up 26 to 27% from the last year, if achieved.

Slide 21. This slide shows the expected guidance for the fourth quarter, and you can see we are anticipating net income of $21 million to $22 million, which would be an increase of 30 to 37% from the prior-year fourth quarter, which we are very pleased about.

Fiscal 2005 looks flat with fiscal 2004, but we had a $3 million tax credit in fiscal 2004. I'd also point out that in fiscal 2003 in that quarter, we had $6.8 million due to the restructuring that year.

Now I'll turn the call over to Matt Williamson.

Thanks, David. Please refer to slide 22. The Americas continued to perform well in the third quarter, with strong revenue growth coming from our base business and recent acquisitions. The increased volume resulted in strong profit growth over the prior-year third quarter.

The region's sales increased to $137 million, an increase of 26%. Our base business was up 6% and the acquisitions of STOPware in August 2005, TruMed in October 2005, JAM Plastics and Personnel Concepts, both in January 2006, and IDenticard Systems in February 2006 added 19%. Foreign currency translation added about 1% to sales.

Base growth within our Brady brand business was up very strong for the third quarter, up 10% over the prior-year third quarter. This was driven primarily in the U.S. with 30% growth within the electric utility market and solid gains of approximately 15% in both our safety and electrical markets. Our direct marketing businesses, excluding acquisitions, were up slightly over the prior year.

Regionally, Brazil and the U.S. contributed the majority of the growth in the quarter, while Canada and Mexico experienced modest growth.

During the quarter, we completed the consolidation of the Brady and Seton-Brazil businesses into a new facility in Sao Paulo. In addition, Brady was recognized as an outstanding supplier by Grainger for 2005, recognizing our strong service to their business. Grainger is the leading broadline supplier of facility maintenance products serving businesses and institutions throughout North America, and presents this award annually to a select group of suppliers for outstanding performance.

We are pleased to complete the acquisitions of IDenticard and IDenticam Systems during the quarter. These acquisitions add to a growing offering in our People ID space, which already includes TemTech visitor badges, BIG employee badges, STOPware visitor management software and JAM Plastics. In 2005, IDenticard and IDenticam combined to generate approximately $33 million in sales.

Segment profit rose 24%, or $6.9 million, to $35 million in the quarter. Segment profit as a percent of sales was level with the prior year at 26%. While we continue to experience cost increases in utilities and materials, the impact of our increase in volume is offsetting our cost increases. We are also enjoying leverage in our operating expenses in both our Brady brand and direct marketing businesses, as base volume growth has outpaced our operating cost increases.

However, as expected, our recent acquisitions have an initial rate of profit that is below the average of the Group, and we expect that as we integrate and achieve synergies, we will enjoy increasing levels of profit going forward.

Peter Sephton will now report on our European business results.

Thanks, Matt, and good morning, everyone. We are now on slide 23. Europe performed well in the third quarter, with revenue growth coming from both base businesses, as well as from acquisitions. The region's sales increased to $80 million, an increase of 13%. There was continued improvement in base growth, with our overall base business up 6%. The acquisitions of Signs & Labels in June 2005 and Texit in September 2005 added 15%.

The weakening of the European currencies versus the dollar caused a negative currency impact in the quarter of 8%.

Sales across the region were solid, with base sales increases in every country except the UK, although here, there were encouraging signs of growth in the direct marketing business. Most encouraging has been the performance of Germany, which is seeing strong performance in both the Brady and Seton businesses. We're encouraged that our business in the Nordic regions continues to benefit from the strong demand from telecom and offshore markets.

Our Belgian base sales were below prior-year levels as we continue to see migration of OEM business to lower-cost regions, although this as is more than compensated by new business set up in Slovakia to penetrate the East and Central European businesses. Our businesses in Southern Europe, France, Italy and Spain, continued to perform well, reflecting our strategy of geographic growth in markets where we are underpenetrated.

Looking at our business by brands, the direct marketing business showed a return to growth with encouraging sales against both the third quarter last year and the second quarter of this year. Both Germany and France have solid growth as a result of continuing to add new customers and product expansions. The UK business improved modestly, and positive synergies were reflected in double-digit growth in the newly acquired Safetyshop brand.

Our Brady brand base sales declined slightly, primarily driven by a decline in our Die Cut 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. With most of our product launches and initiatives yet to come, we are confident of continued success.

For the region as a whole, segment profit for the quarter was $21.3 million. This is a decrease of 1% from Quarter 3 of last year, but an increase of 7% excluding currency. Expected start-up costs from our operation in Slovakia continued in the quarter. We are pleased with the productivity improvements in our base business in a region that is still economically challenged.

We are encouraged by an improving core growth rate. As we aggressively integrate our new acquisitions and find new ones to strengthen the market leadership in our preferred spaces, we are confident that our track record of sales growth ahead of GDP growth will be maintained and that further productivity can be achieved.

We will now continue with the Asian regional report, so I will turn over to Al.

Thanks, Peter, and good morning. I'm referring to slide number 24. Performance for the third quarter was very solid, as our business throughout the region benefited from continued strong demand for consumer electronics. For the third quarter, sales for the region were $48.6 million, up 66% over the prior year. Base sales were up 49%; acquisitions added another 17%; and currency had a minimal impact.

Sales throughout the region remained quite strong, and we have committed to adding a fourth manufacturing plant in South China, as this is the area where we have seen the most rapid growth in our OEM electronics business. Rather than continue to increase the size of our existing Shenzhen facility, we have chosen to establish this second facility in neighboring Dongguan. While close in proximity, there is a different customer base that values truly local suppliers.

Southeast Asia continues to be in a state of fluctuation, with business transferring within the region and oftentimes, the larger volumes transferring out to lower-cost areas such as China. We are still awaiting the impact of the consolidation announced in the hard disk drive industry with Seagate's impending acquisition of Maxtor, which is expected to be complete in the next several weeks.

Our acquisition of QDPT in Thailand with the support of [Brandon International] has really added some unique and differentiated products and capabilities, which have been very well received by our customers across the hard disk drive industry.

Down under, our base business in Australia continues to perform very well and is well poised to handle the growth associated with our recent acquisition of Accidental Health & Safety. This business is focused on providing first aid kits to businesses and revisiting those businesses on a regularly scheduled basis to replace supplies that have been used.

This quarter, we announced the signing of agreements to purchase Tradex Converting and Daewon Industries. We are very excited about both of these acquisitions and the capabilities and personnel that come with them.

Tradex is a Swedish company, which is clearly seen as a leader in providing die-cut solutions to the mobile phone industry. While headquartered in Sweden, the vast majority of their sales are located in Asia. Tradex has developed a very customer-focused, engineering-oriented business model that has been very well received by customers. Besides world-class facilities and converting expertise, Tradex has a wealth of management talent, which we are in the process of assigning to key management roles within Brady.

Daewon is a South Korean company which is also focused on providing die-cut parts to the mobile phone and electronics industry. Daewon provides Brady much-needed entrance to the important consumer electronics market in Korea. Over the last few years, we have seen Samsung and LG capture up to 25% of the total market share for mobile phones. Daewon has been very innovative in both product design and material development over the past few years, and the combination of their efforts, combined with the Brady R&D resources, will help accelerate these solutions in the marketplace.

The combination of Brady, Tradex and Daewon provides the marketplace with a comprehensive solution to production capabilities, products and a geographic footprint.

In the region elsewhere, we continue to push forward with our greenfield investment in India, and expect to be producing labels and die-cut parts in the later part of this calendar year. While our customer demand in India is far less than areas like China, our customers are starting to establish a larger base of operations in and around Bangalore.

The segment profit for the Asia-Pacific region was $12.4 million, up 59% over last year's segment profit of $7.8 million. As our business mix shifts a little more towards our die-cut business, we see a shift in our income statement, with lower gross profit margins but also a lower cost of selling with our key account focus.

Raw material price increases and cost reduction demands from our customers continue to necessitate our push for continued efficiency and operations and the development of proprietary new solutions.

Looking forward, we have a lot of work ahead of us to integrate these three acquisitions. We have assigned a senior level Brady manager to oversee these acquisitions, the integrations, and have also retained most of the management teams of both Tradex and Daewon. This summer, we will work on ensuring our readiness for the ramp-up in production that we typically experience in late summer and early fall for the OEM electronics business.

Now I will turn the call back to Frank.

Thanks, Al. The strong base business growth in the quarter continues the trend seen throughout this fiscal year. Year-to-date, our base business growth has been 9.5%, a number we are extremely pleased about.

The partnership performance award with Grainger recognizes strong service levels in our core business. Additionally, we have been recognized by Business Ethics Magazine for a seventh straight year in the list of most ethical companies. These are achievements we are very proud of.

As we move further into the fourth quarter of our fiscal year and begin our plans for fiscal '07, we are excited and challenged by our growth opportunities ahead of us. We had increased our focus on new product development. Geographic expansion into India and further into China will provide additional opportunities for our products, as our customers move or expand into those geographies.

Finally, we continue to focus on integration of newly-acquired companies to assure that we are realizing the saves in cost synergies we set out to achieve. We continue to believe that having acquisitions as part of our growth strategy will be key to continued success in the future.

Our acquisition pipeline remains robust, as we are seeing new opportunities for companies that will help us achieve our goal of becoming number one or number two in our markets.

That is the end of our prepared comments. And I would like to start now the Q&A. Operator?

Thank you. (OPERATOR INSTRUCTIONS) Reik Read from Robert Baird & Company.

Good morning. Just a question on the guidance that you guys had given for the fourth quarter. If I look at the EPS, that kind of translates into something along the lines of a 12 or 13% operating margin, which is a fairly significant kind of 350, 400 basis point sequential decline.

Can you guys talk a little bit about the factors that will cause the operating margin to decline like that in the fourth quarter, and then what are the things that might unwind as we get into the first quarter of next year?

Well, as we pointed out in our presentation, Reik, our fourth quarter last year was pretty -- I think the net margin was 7.6. We are forecasting (indiscernible) which is 8.4%, which in terms of dollars, is a 30 to 37% increase. So we're expecting -- just seasonally, the fourth quarter is usually our best (indiscernible) in itself.

Right. And David, I went and looked at last year, and one of the things that you guys had indicated was that you were expecting some increases in R&D and things of that nature. I guess that is what I was getting at -- is there a similar increase that you are expecting this year in either R&D or sales and marketing?

Yes, we are continuing to ramp up R&D. We are looking for more people in technical marketing. And we will try a number of other initiatives. For example, Slovakia expanding, and Dongguan, for example. We are continuing with geographic expansion in India. We've now got some of the top management in place for our Indian operation, so we will be further expanding there. You know, there is a number of things going on which help drive that.

Okay. And then with respect to you guys had alluded to this as part of your prepared remarks, the new product development. Can you talk a little bit about, given that this is now a major focus, what are some of the key components of infrastructure that you would like to put in place?

And then can you also characterize where the new product pipeline is today and what are your goals for that new product pipeline 12 to 18 months out?

Can I ask Dave in Milwaukee to respond to that?

Sure.

Generally, the areas that we're going to continue to expand are the areas we currently work in, which our materials, base materials; also printing systems and software. So we are not really changing the general nature of our focus; we're going to continue to expand in all areas.

And I wouldn't want to talk about what our pipeline looks like at this point in time; we tend not to do that. We will talk about products once we bring them into the market.

Okay, fair enough. And then Al, as part of your prepared remarks, you had mentioned the Seagate Maxtor acquisition. Can you give us a sense for what you think -- as that comes together, what you think some of the impact might be?

I wish I had a crystal ball on that one. There are announcements that will be coming out later this month. And clearly, the two organizations are figuring out where they have duplicity in terms of platform design. From what we have been told, there are elements of the Maxtor designs that Seagate likes and will continue to hold onto. There is certainly going to be some duplicity in terms of key personnel within the region. And so we're all kind of on the sidelines just waiting to see exactly how that is going to shake out.

I think what -- if there is something that gives us comfort in all this is that through the new acquisitions, we've added a lot of capabilities. And areas in the past week we would go to the HDD industry with three or four solutions, today we're taking six or seven solutions to these same customers.

So the feedback that we are hearing directly from our customers is that we value you as a supplier, you've done a great job for us in the past, and stay tuned and we will let you know what programs and parts you will be working on in the future.

Okay. And then just last quick question on the CapEx front. I think, David, you had said that $32 million I think was the CapEx for this year. As you expand into India and South China, what would you look at for '07?

We haven't completed our budgeting for '07 yet. We'll complete that at the end of June. So we are continuing to expand. I wouldn't expect it to be any less than that number.

Can you give us a sense for what just the Indian and South China expansions would be? I mean is that something in the order of 10 plus million?

No, no. These are modest. We can open a plant for something like $2 million in CapEx.

Okay. Great. Thanks so much.

Ajit Pai with Thomas Weisel Partners.

Good morning and congratulations on a very solid quarter. A couple of quick questions. The first is, you know, you have talked about your long-term model of growth rate of about 5% coming organically and 5% coming through acquisitions. The past couple of years, you've grown much more rapidly than that. And this year, as you pointed out, you are on track for about a 9% organic growth rate.

Do you see that growth rate -- do you see yourself shifting that target that you provided higher, now that you have demonstrated substantially higher growth rates in recent times? And the fastest-growing part of your business is also becoming more material as a percentage of your business?

That is a great point, Ajit. We will be looking at our data in submitting guidance as we go forward. You're right to say that marketplace cell phones and hard disk drives are growing somewhat faster than our guidance. But we haven't figured out -- we haven't come up with new long-range guidance. But it is something that we are looking at.

Okay. And then --

Now, I will say on the acquisition front, what we see going forward or what we hypothesize is that the market right now is very good. The market right now is very good and for some time into the future, we can see that continuing to be good.

But at the moment, let's say in two years or three years a downturn, that will dry up. So we are cautious about raising that part of it, because that can be very cyclical. We noticed the last time there was a downturn, lots of targets came off the market because they weren't going to get the prices that they wanted. So we are cautious on that front.

Right. And then when you are looking at the global economy right now, especially when you are looking at Asia, where your growth was so tremendous, what do you think are your biggest worries out there when you are expanding in Asia?

Al?

Well, I would say one of the -- it's not really a worry; it's a concern that we focus on, and it is really making sure that we have enough talent to drive the growth initiatives that we have going on in the region. And when you look at how quickly we have grown in the region, it's not just in sales, but also in people. And after the Tradex acquisition, we will be over 1500 people in the region.

And we have managerial and development programs and place. But it is difficult -- quite honestly, our sales growth is outstripping the development of our managers in the region. And so it is important that our HR team is active in supporting us in finding good talent. So I would say that would be the first thing that we are focused on.

And the second thing is that the industries that we have been focusing on, OEM electronics, have done very well from a market growth rate standpoint. And we've grown with the markets and we've growth in advance of those, taking out market share gains. But we really need to make sure that as this industry tightens down from a cost control standpoint, from a vendor consolidation standpoint, that we are bringing an increased bucket of solutions to our customers.

And Dave Hawke alluded to the expansion in R&D. And that is one of the areas that we are really focusing on, is bringing more solutions to our customer base.

Right. And then just moving on to just looking at the geographies from a higher level, in terms of sales and then in terms of costs. What has been your strategy -- your international operations are coming pretty close in terms of sales to your Americas operation now.

When you're looking at that, how are your operations and costs balancing against the revenues? Will a falling dollar impact your earnings per share positively or negatively?

A falling dollar, all things being equal, will impact us positively, because of the translation effect.

Right. On both the top line as well has the EPS line? Is that a natural hedge between your sales and your costs? So will it just be a translation effect or will you also see expanding margins, because your costs are greater in the U.S. and lower abroad?

That's an interesting question, Ajit. We try to manufacture as much locally as we can. So we actually do not transfer too much between geography. Having said this, we still have our coating facility in the United States. So everything that is being coded is being exported out of the United States into Europe or Asia. But it certainly would be a positive effect from a weakening dollar in this regard.

But the overwhelming factor what's really driving earnings is the translation effect. Because as I've said, we are trying to do everything we can to be close to our customers. And because of this, we are manufacturing a lot overseas, and don't have too much going across the borders.

Okay. And then you've seen a 1000 basis point reduction in your tax rate over the past several years. You are down at 28% now from about 38% just a few years ago. With the increasing international mix of business, can you give us some indication as in '07 and 08 what you expect your tax rate to be? Can we expect it to drop even further into sort of the 20s?

No. We are not looking at that. We haven't rolled out our plan yet -- that will be towards the end of June. We are looking at similar tax rate going forward. And I really expect -- we'll certainly reduce the tax rate, but you're talking about 1000 basis points. If we managed to reduce a full 100 basis points, I'd be delighted. But we don't see that. I would say for fiscal 2007, I would not be surprised if it remained at 28%.

And actually, there also -- at this point of time, it looks like we are expanding more rapidly in countries such as China, because all the acquisitions which we have now in (indiscernible), or the majority of them, are in electronics, die cut, mobile phones, hard disk drives, and many of those products are being manufactured in Asia.

However, we have also stated that we do not intentionally move our business further into die cut or away from MRO. We like both of our businesses. We like to have two-thirds in MRO and one-third in die cut. Now what this will be in one particular year very much depends on the rate of (indiscernible) acquisitions.

So it is not a conscious decision of management to move more into die cut or to move into another area. So we like the mix which we are having. It's dependent on availability and the time of acquisitions.

Right. But let's say that you are even looking at core growth, organic growth. When you look at Asia, you saw sort of 49% growth, right?

Yes.

So when you see rapid growth like that -- and it is not all companies that have run out of tax credits -- when you start a new expansion like the one that you just talked about outside of Shenzhen, don't you get a tax holiday for a certain period of time?

Yes, we do. But we don't make money immediately. And we do not plan for tax reasons. We want to be number one or number two market leader in all our businesses. And if we can become number one or market leader MRO in a certain segment, we will make acquisitions in that area, and this might very well be a European or an American acquisition, which might have a slower growth rate than a die cut acquisition. And it might also be in a geography with a higher tax rate.

So I think -- see, I don't want to -- you are talking about 2007, 2008. I do not want to make long-term projections based on a trend which we are seeing maybe over the last one year.

Okay.

And I think there's also something about harmonizing taxes, normalizing taxes. So we don't expect those benefits to last well into the future.

Okay. And then just moving over and having a look at what the pricing environment is like. We are about three to four years into an expansion cycle. Do you think that we are finally seeing commodity prices beginning to rise materially and starting to impact -- you are ready to get better prices because it is clear with your suppliers?

And are you able to pass on all of those cost increases that you're seeing then to your customers?

That is a very difficult question. We can never predict the future in commodity prices. What we typically do, we adjust to it. We try to pass on to our customers what we can pass on. It is easier in proprietary product, where we have something what nobody else has.

If it is not a commodity kind of product, it is harder. And then we just need to look for cost savings all over the world. And we are working basically on both fronts.

But to predict what commodity price are going to go do and how well we can respond to it, that is something I feel uncomfortable with.

And we are not too exposed to particular commodities. copper, for example, we don't -- I don't think we buy much, if anything, of copper. What does impact us is of course is the oil price; it feeds into everything. It feeds into postage, it feeds into freight. And we need to be very active, making sure that we can, where possible, pass that on.

But right now you are not seeing any material increase from your suppliers?

Dave, Al, is there anything specifically you would know?

Yes. We certainly have been seeing increases in either petroleum-based products, raw materials, and in freight, which has a heavy fuel component, which is petroleum-based. And as Frank commented, I think the answer -- our answer to that is as we can, we pass that on to customers. And when we can't, we look at a number of tactics.

For example, we look at perhaps doing some insourcing of currently purchased products to get a lower cost. We look at combining business from two suppliers to one to get a better cost. But we also look at completely unrelated projects, because at the end of the day, if we're getting an extra dollar cost, if we can offset it with a dollar saved somewhere else, we are neutral. And we have been very effective over the past few years at covering all our cost increases.

Got it. Thank you so much, and congratulations again on a very solid quarter.

Thank you, Ajit.

(OPERATOR INSTRUCTIONS) Rob Damron from Midwest Investment.

Good morning, and congratulations on a great quarter. I wanted to talk to you a little bit about the seasonality of the business. You alluded to it a little bit earlier. But could you just give us some color on what are the seasonal factors that made Q4 a bit slower than Q3?

Summer. Summer vacation. End of June, July, that is very simple. And there are certain countries where people have 30 days vacation; actually I come from one of those countries, it is great. So you go on vacation for three weeks, and when you are on vacation, you don't order anything as a customer.

So I think it is as simple as this. Our fourth quarter has usually -- that is not true in all years, because you might have specific situations going on in one year or the other. But typically, our third quarter has always been strong because it appears that you only have Easter. And then you have summer, June, July, which is where people just take more time off.

And I tell you what, if you lived in Milwaukee, you would do the same thing.

(multiple speakers)

Okay. And then just a question about the two new acquisitions that have not yet closed. When do you expect them to close? And then could you talk a little bit about the margin structure of those businesses? Are they also, given that they are in the electronics business, are they also a lower gross margin and also a lower SG&A business?

Well, the Tradex, we have heard from the German government that they have given approval. So that will be closing in a matter of a week or so. And we are still awaiting approvals from the Daewon acquisition, but we are expecting that would then three or four weeks. So we should be closing both of them -- we hope to close both of them before the year end.

As far as the margins are concerned, both of these businesses are heavily into the global handset business, the global die-cut business, and they will have skinnier gross margins and skinnier SG&A than your average business. And this is something I've been talking about for the last three or four quarters, that this business model is different on average from the rest of the business.

But we are happy with it. So you would expect our gross margins to come down and our SG&A to come down as well.

Would the operating margin also come down a bit? Is the operating margin a bit lower on that business?

Well, let us give some guidance on that as we close the year, as we integrate these acquisitions, as we develop guidance for fiscal '07. But I would say that initially with process accounting, we sometimes see [they are hitting] their results. These are non-cash things, but they impact the margins initially. And it also takes out, as we pointed out, a couple of years to really get most of the synergy from these things. So give us some time, Rob, and we will provide guidance for fiscal 2007.

Yes. I think the first thing we want to do is close on the two acquisitions that we have announced. And you don't want to give guidance assuming we're going to close acquisitions. We're going to give guidance once we have made the acquisitions. And I think that is more appropriate.

Okay. And then just a last question. You talked a bit over the last six months or so about this new New York Sign and Exit Ordinance. How is that playing out? Are you seeing some incremental business yet from that opportunity?

This might be a question for Matt Williamson.

Yes, we've seen some incremental business, but not nearly what we had anticipated. A couple of factors there. Number one, there is lower compliance within the market there than we had anticipated. And it has been extremely price competitive. A number of new companies have entered the market and driven down the margins, which obviously then drive down the overall sales. So there are two of the primary reasons that it has not been as good as we had hoped.

However, that application is one that is getting a lot of interest across the country. So we remain very hopeful about that product as a part of our commercial building market strategy.

Okay, that is helpful. Thank you.

(OPERATOR INSTRUCTIONS) Ajit Pai.

Yes, could you give us some color as to whether even today what the mix is between MRO and die cut? And after the two acquisitions that you announced, if they do complete, what the mix would be then.

Well, roughly today, it is probably just under (indiscernible) MRO and just over (indiscernible) OEM electronics. And that will change obviously with the acquisition of Tradex. Yes, that will change.

But again, we will continue to make acquisitions, Ajit. And we have a robust pipeline also in MRO. So you know, I wouldn't get hung up too much on what the mix is at any one point in time, because we are still acquisitive across all of our businesses.

If he could find another (indiscernible), he'd buy it tomorrow.

Yes.

Okay, got it. But I didn't get those numbers you just mentioned. Can you just repeat them?

Well, I would say as we speak, right now we've got just under two-thirds of our business in MRO and just over a third in OEM electronics.

Got it. Okay, thank you.

And at this time, there are no more audio questions. I would like to turn the call over to management for closing remarks. Please proceed.

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