Brady Corp (BRC) 2007 Q1 法說會逐字稿

Welcome to the first-quarter 2007 Brady Corporation earnings conference call. My name is Nicole and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to Barb Bolens, Treasurer and Director of Investor Relations. Please proceed.

Good morning everybody. We're glad you could join us this morning. During our call this morning you will hear from Frank Jaehnert, CEO and then David Mathieson, CFO, who will be presenting Brady's quarterly financial review. Also joining us this morning is Tom Felmer, President of Direct Marketing Americas; Peter Sephton, President of Brady's European region; Allan Klotsche, President of Asia Pacific, who will all be providing 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 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 website at www.investor.bradycourt.com. You have a few minutes to get to those while we go through our Safe Harbor statement and usual information.

Please note that in this call we may make comments about forward-looking information. Words such as expect, believe and anticipate are a few examples of words identifying a forward-looking statement. It is important to note that forward-looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release last evening and Brady's 10-K filed with the SEC in October 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 over 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.

Thanks, Barbara, and good morning. I'm pleased to announce that we had another strong quarter with solid organic growth and very strong growth from acquisitions. Our first-quarter sales increased 43% to $332 million. Our organic growth was solid again this year at just under 6%. Net income increased 14% to $34.4 million over a very strong first quarter in fiscal 2006.

I continue to be impressed by the level of activity that is happening throughout the organization. We have recently had a large number of grand openings of new or expanded facilities. We are starting greenfield plans in Japan and Mexico and further expanding our presence in China and Slovakia.

Our pipeline of profit improvement initiatives continues to be strong. We are ramping up new product development and have recently announced the hiring of Bob Tatterson, our new Chief Technology Officer. Bob comes to us from GE Plastics. In the quarter we closed two acquisitions and continue to see a robust pipeline of acquisition candidates. This all took place while we continue to integrate the companies acquired throughout the last year. I am encouraged with the opportunities that I see in front of us both for top-line growth as well as for profit improvement.

I will now turn the call over to David Mathieson for a more detailed review of the financials and of our increased guidance of fiscal 2007. After the regional report, I will be back to summarize our key initiatives for the year. David?

Thanks, Frank. I will begin on slide three. We posted a quarterly growth rate of 43% with organic growth at 6% with 75% coming from acquisitions and 3% in currency. Gross margins continued to be healthy at 49.4%; however, they are (indiscernible) 380 basis points from prior year largely as a result of acquisitions made in the last 12 months.

Gross margins excluding acquisitions in the last 12 months have actually improved by an estimated 30 basis points on prior year. SG&A is down 30 basis points over last year to 31.2% with a very tough comparison with the first quarter last year where we saw some favorable expense comparisons and low spend levels for the quarter.

Operating income is up 18% and is 15.6% of sales. Net income is up 14% or 18% -- income increase was reduced by an increase in interest expense while tax rate of 28% was 1% better than last year's 29% for the first quarter. Diluted earnings per share posted 5% growth. As our recent equity offering diluted our 14% net income increase to 5% diluted earnings per share.

On slide four, this slide addresses the impact of the business mix change that we have undergone in the last two years. Our business mix was significantly more businesses through acquisition and decision die cuts has reduced our gross margins and reduced SG&A and has changed the shape of our P&L as you can see.

On slide five, in our first quarter we have posted record sales growth of 43% with the region businesses more than doubling and now comparable in size to Europe. We now have 50% of our employees in Asia and approximately 2,500 employees in China. America's solid organic growth was impacted by the continued migration of business to Asia. Europe posted relatively strong organic numbers and Asia continued to benefit from the migration of business from the Western world to that low-cost region of the world.

Slide six, the Americas had total growth of 27%. Organic growth in the Americas was 3% with the Brady brand up strongly and the direct marketing continuing at a steady pace. The continued migration of the North American die cut business to Asia has somewhat offset the organic growth.

We are pleased to see the continued success of our acquisition program with 23% growth from the recent acquisitions of CIPI and Precision Converters as well as the others acquired during the last year. We want a significant presence here in the Americas and we do have a robust acquisition pipeline here.

On slide seven, Europe had relatively strong organic growth of 7%. Considering their economic backdrop, this is very good especially since our [mainly] MRO business tends to track the economy. The strength of the euro has also helped our top-line in Europe 5% and acquisitions are added 13%.

On slide eight, our business in Asia-Pacific grew 117% and has more than doubled from the prior year. As I have mentioned before, Asia-Pacific is now comparable in size to our European business. Our organic growth of 11% has been helped by the migration we have seen from die cut business from the Americas and negatively impacted by the loss of the Maxtor programs. We continue to expand and are now producing in our new plant in India and we will soon be producing our new facility in Dongguan in China. We've also recently approved the plan to start a greenfield production space in Japan.

On slide nine, as we expected gross margin showed a decline in the quarter largely as a result of the acquisitions made in the last 12 months. Our current business mix has a larger than historic content from precision die cut due to the recent acquisitions. All things being equal if we kept our current business mix, we would continue to see a lower gross margin and lower SG&A. So far this year we acquired CIPI which has $31 million of sales in MRO and Precision Converting, which is a $10 million business in OEM. Both of these acquisitions are diversifications. CIPI continues to build our People ID business and Precision Converting doubles our medical converting business.

Slide 10. SG&A improved 30 basis points versus a tough comparison plus lots of acquisition activity, lots of initiatives but no surprises.

Slide 11. Our R&D spending is up 31% but still not keeping up with our top-line growth so it declined as a percent of sales. We have a large pipeline of new product developments to be introduced soon and are excited about that. And as Frank mentioned since the last quarter, Bob Tatterson has joined Brady as Chief Technology Officer and comes from GE Plastics.

Slide 12. Operating income in absolute dollars was up 18%. That's below last year's profit as a percent of sales because of the impact of acquisitions and because our first quarter last year was really spectacular and it was up 39% from the prior year.

Slide 13. Net income was up 14%. The increase was below the pace of operating income as we have higher interest expense. The tax rate for this quarter was 28% which is 1 point below the prior year's quarter.

If you look at slide 14, diluted earnings per share was up 5% as increased share count due to our recent equity offering had an approximately 9% dilution for the quarter.

Slide 15. In cash flow from operations as in previous years, we expect the bulk of our cash flows to be in the second half. With the growth of our mainly OEM business in Asia, this is even more pronounced as our working capital builds with the seasonal buildup of inventory and receivables in their first quarter and second quarter. We essentially cashed this in during the second half. And for example last year, we produced 80% of our cash flows in the second half and expect similar results this year.

Slide 16. Here's our cash balance walk for the quarter. We borrowed $25 million from our revolver in the quarter to fund acquisitions. As I mentioned, the buildup of our OEM business in Asia has reduced cash flow from operations for the first quarter. We also had $15 million in CapEx which includes $9 million for expansions in China, Canada, India, Slovakia and others; SAP investment of $1 million; and $3 million for cost reduction projects. We don't expect this rate of CapEx each quarter and estimate approximately $55 million for the year. Acquisitions made in the quarter were for CIPI and Precision Converting.

Slide 17. Our EBITDA for the quarter was $65.5 million, up 26% from the prior year. The reconciliation of this non-GAAP measure is in the appendix at the back of this presentation.

Slide 18. We ended the quarter with a balance sheet in good shape. Total debt of $375 million and 32.5% of total capitalization and cash of $88 million.

Slide 19. This shows the balance sheet for the last five quarters. You can see that our assets have grown considerably and in that same period we've spent over $390 million in acquisitions. Our receivables are to a lesser extent, inventory have increased organically this quarter from the last quarter due to the seasonal buildup of our OEM business in Asia.

Slide 20. We are raising our guidance incorporating Precision Converting into the numbers and the results for the first quarter. For fiscal 2007 year ended July 31st, 2007, we anticipate revenues between $[1,250] million and $[1,275] million. Net income between 122 and $126 million and diluted earnings per share of $2.22 to $2.29 per share. We also expect CapEx and depreciation and amortization of approximately $55 million each.

As we look ahead for the remainder of the year we see our toughest comparison over last year in the second quarter. It is traditionally our softest quarter in the MRO business due to the number of holidays that occur. Additionally, our [larger] OEM electronics business is expected to be strong up to the weeks before Christmas and then ramp down through the rest of the quarter. At the same time our work in integration is at its peak and efforts toward achieving acquisition synergies are moving fast.

We expect our efforts to intensify on the many growth initiatives we are working on. We also have greater interest expense over last year. In the second half we expect we will see a traditionally strong third quarter and a solid fourth quarter and expect that both will benefit from synergies that should kick in as a result of the projects we are working on now.

Now I will hand over to the business leaders who will hand over regional results. First is Tom Felmer, who will report on the Americas.

Thanks David. My comments refer to slide 21. The Americas performed well in the first quarter with revenue growth coming from both base business and acquisitions. The region sales increased to $147 million, an increase of 27%. Our base business was up 3% and acquisitions of TruMed in October 2005; J.A.M. Plastics and Personnel Concepts both in January 2006; IDenticard Systems in February 2006; Comprehensive Identification Products Inc. in August 2006; and Precision Converters in October of 2006 added 23%. Foreign currency translation added about 1% to sales.

Organic growth within our Brady brand continued strong in the first quarter, up solidly over the prior year first quarter. This was driven primarily in the electrical and wire ID areas. In addition, business in our safety and industrial identification markets were very solid.

We had excellent growth in Brazil and Mexico across various industrial markets. We also experienced steady organic growth in the direct marketing businesses. Offsetting the growth in these two areas was a continued and expected migration of die cut customers to Asia. The Canadian business was soft compared to one year ago as we have tough comparisons due to strong sales a year ago in the oil sands projects.

To better serve our industrial customers in Mexico with local support, we have expanded our capabilities in Tijuana and Reynosa and are in the process of adding a facility in central Mexico. Our Mexico City operation is being consolidated into these facilities.

We were also pleased to complete two acquisitions in the region this quarter. The first is Comprehensive Identification Products Inc., headquartered in Burlington Massachusetts. CIPI is a leading manufacturer and distributor of badging products and accessories used to identify and track employees and visitors. Adding CIPI to Brady's People ID businesses including Temtec, STOPware, J.A.M. Plastics, IDenticard, IdentiCam and BIG positions Brady as a leader in this market space.

We also acquired Precision Converters in Dallas Texas during the quarter. Precision Converters is a supplier of die cut products to the medical market with a specific focus on disposable advanced wound care products. The acquisition of Precision Converters adds significant breadth and strength to Brady's medical die cut business capabilities and diversifies our die cut business.

The increased volume in profit from base business and acquisition resulted in a nice profit growth over the prior year first quarter. Segment profit rose 15% to $4.7 million to $36.9 million in the quarter. Segment profit as a percent of sales was slightly lower than the prior year at 25.1% due to the effect of recent acquisitions. 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.

Although we continue to experienced cost increases in utilities and materials, the impact of our increase in volume is offsetting our cost increases.

Peter Sephton will now report on the European business results.

Thanks, Tom, and I'd refer you to slide 22 for Europe. Europe performed well in the first quarter with strong revenue growth coming from both the base business as well as from our acquisitions. Europe sales increased 25% to $92 million. Organic growth continued to be strong at 7%. The acquisitions of Texit in September 2005, Tradex in May 2006 together with the addition of the European subsidiary CIPI in August 2006 added a further 13%. The recent strength of the European currency versus the dollar resulted in a positive currency impact in the quarter of 5%.

Europe enjoyed organic sales growth in all our main countries. France continues to show strong growth in both our Brady business and our direct marketing businesses. The UK continued its recovery and Germany's process continued to due to the strength of its Brady business. We are encouraged with our business in Slovakia. The plant we established there in the first quarter of 2006 strengthens our position in central Europe while providing cost reduction opportunities for some of our more established European businesses. Our developing geographies of central Europe, Spain, Turkey, Norway and Denmark have enjoyed double-digit growth supporting our expansion into these regions.

Looking now at our business by brand, the Brady brand delivered strong growth for a second quarter in succession. This is being driven by continued growth in central Europe, underpinned by a more focused market strategy in our more mature geographies. We are particularly pleased with the growth in Denmark and Norway. The Texit business in these countries have been successfully rebranded as Brady and so a full range of Brady products whilst also leveraging growth into new high growth sectors such as offshore gas extraction and shipbuilding.

The direct marketing businesses enjoyed a third quarter of improving profit growth. France performed particularly well as a result of continuing to add new customers and product expansion. The UK business performed well driving growth for its Seton brand and leveraging acquisition synergies to grow the [Safety Shop] brand acquired assigned labels in June 2005.

We are particularly pleased with our growth in new geographies in Spain enjoying double-digit improvement and the launch of a new Seton Internet catalog in Sweden. Segment profit for the region as a whole was $23 million, an 11% increase from quarter one of last year. Our organic segment profit continues to improve ahead this but as expected in total was constrained by integration costs and headquarters cost at Tradex. When we put this into the context of low growth economies and continued investment in new geographies like Slovakia, Spain, Turkey and Sweden, this is very encouraging. This is driven by our ability to drive productivity in our base business as well as our recent acquisitions.

Continued organic growth coupled with our successful ongoing acquisition activity should deliver continued GDP beating performance in Europe.

We will now continue with the Asian report so I will hand over to Allan.

Thanks Peter. I would direct the audience's attention to slide number 24. For the first quarter, sales in Asia were $93 million, up 117% over last year. Organic growth was 12% and acquisitions added 103%. Currency had a positive impact of 2%.

Performance for the first quarter was quite strong. Not only did we meet our sales and profit expectations, we did it while successfully opening new factories, integrating major acquisitions and implementing a new ERP system.

Looking at our mobile handset business, we are upholding our promise to our customers that the combination of Brady, Tradex and Daewon would bring them advantages. The most immediate impact we have seen and provided is the ability to balance our combined resources both human and physical to meet the ever-changing demands of this marketplace. While this increased capacity and resource flexibility is important, our customers are also optimistic there may be future cost synergies an area that we continue to focus on.

The integration of both Tradex and Daewon Industries is proceeding as expected. The management of our combined mobile handset business comes largely from these recent acquisitions and they are doing a great job in integrating cultures and benchmarking best practices. During the second quarter we will be focusing on harmonizing our business systems, accelerating new product development and delivering anticipated synergies.

In this sector of our business, we benefit from increases in volumes which leverage our combined cost structure. Early signals from the Korean marketplace would indicate there are lots of opportunities across the broader electronic sector. Korean OEMs seem to value the breadth of the product portfolio that we are now bringing to the marketplace.

We have found with a number of our acquisitions because they were in the same space as we focused on, that we had some overlapping new product development programs. We were also excited to learn that some of the development hurdles that are acquiring partner space had already been solved within Brady and vice versa. We are looking forward to bringing some of these new products largely possible through a combination of mechanical engineering breakthroughs to the market over the coming quarters.

Our hard disk drive business remains largely unchanged over the past few quarters. We are still feeling some of the impact from Seagate's acquisition of Maxtor and some of the corresponding program cancellations. We have been pleased with the market's reaction and acceptance to our strategy of broadening out our product offering to include things such as precision stamped parts and filtration products. The long-term strengths of our customer relationships help with their receptivity toward our new product launches.

We are very pleased with our continued solid growth and development of our Australian business. The two new acquisitions are both performing well and have caused little to no distraction to our core business.

For those of you understand the importance of formal celebrations in Asia, we certainly had our recent share of Kodak moments. Just in the last two months, we have opened a new facility in Penang, Malaysia, twice the size of our prior one. We have welcomed in two new CIPI facilities in China which brings us to 10 facilities in the mainland and the 11th facility in Dongguan, China will begin production within the next few weeks. We have officially opened and begin production in Bangalore India, begun processing global transactions from our Bangalore business process center, moved and enlarged our operations in Bangkok Thailand and in Australia; we've moved our accidental business to our Sydney headquarters.

Segment profit for the region was $22.1 million, up 70% over last year's segment profit of $13 million. We do continue to feel price pressures from our customers but pricing and cost pressures is a characteristic of the business that we serve in the OEM marketplace. Our strategy has been and will continue to be to offset pricing pressures through manufacturing efficiencies, new product development and strategic material alliances.

Having just returned from Asia, I left a management team that is invigorated by the past year's accomplishments and very excited with the prospects that lie ahead. Our M&A engine in Asia continues to work hard prospecting new opportunities that will continue to support our vision with an added emphasis on business diversification.

I will now turn the call back to Frank.

Thanks, Al. We are very pleased with our start to fiscal 2007. Our regions and businesses are running at or above our plan for the year and for that reason have increased our guidance as David Mathieson outlined earlier. Looking forward to the rest of our fiscal year, we have many growth and profit improvement opportunities in progress. Our integration initiatives are progressing well and will continue to be a key priority for us.

Brady's success continues to be not dependent on one big thing but rather the successful implementation of many individual initiatives throughout the world. Some of those initiatives include a continued ramp up in R&D to generate more new products into our pipeline; new plants and development and Mexico and Japan; new factories going online in China and India; further expansion in Slovakia and many more.

I'd like to invite you to join us at 9 Central time today as we address our shareholders in our annual shareholder meeting. You can find the dial-in information posted on our website.

That is the end of our prepared comments and we will now start the Q&A.

(OPERATOR INSTRUCTIONS) Wendy Caplan with Wachovia.

Good morning. A couple of mixed questions please. Given the issue of Q2 being soft in part because of the holidays, and given the current mix, when should we next anticipate positive year-over-year margin comparisons in the business?

And a follow-on to that, if we were to look at the pipeline of potential acquisitions, do they continue to be more OE related or MRO related?

On the mix margins, we would expect to see better margins than the first quarter in the third and fourth quarter. We will see synergies from these recent acquisitions in the last half. And as I said earlier in our conference call, we think, we believe the second quarter will be our toughest comparison because of all the things we explained with the holiday season and with the ramp down of our OEM business. Plus the fact that our integration activities probably at its peak in that particular quarter, so our spend is up. So that it is our toughest comparison and thereafter it should get better for us.

In terms of the acquisition pipeline, I would say our first two acquisitions this year, $31 million is MRO, the acquisition of Comprehensive Identification Products, or CIPI; and $10 million is OEM. But the OEM is a diversified OEM play. We've been talking for quite some time about diversifying, building a business in People ID which is mainly an MRO or MRO-ish and we've doubled our business now in medical converting. And that's a business which doesn't face the intensity of competition or the intensity of price reductions that our mobile handset or our hard disk drive business.

So we are intent on building that out, Wendy. And I would say the majority of our pipeline is actually MRO. But you know, you can't always time when these things happen. Third biggest competitor in mobile handset came on the market last year, and we are very pleased to have acquired that. We have the senior management team here at our headquarters this week. They presented their strategy to the senior business leadership, and we were so impressed we gave them a round of applause. They will also present [Borks] later today, and we are very, very happy that we've acquired significant talent and leadership in that business.

Thanks. And a question about for Peter, the increased VAT tax in Germany, does that have any impact on your business?

This is the increase in the value added tax?

Yes.

I don't think so. Actually, I don't believe it will affect.

No, I don't think it will.

Thank you. One last question, our new head of technology, what are some of the first actions that you'd expect he will be involved with and strategically kind of where will he be focusing?

Wendy, this is Frank. Let me just tee this up real quick, and then I'll ask Bob Tatterson to chime in. Bob has not been with us for too long. He just started a couple of weeks ago. The idea was 3.5 years ago when I became CEO, we sat together as a team and we said we want to accelerate a couple of things. We would like to accelerate organic growth, which we have done, like to accelerate acquisitions, which we have done, and we would like to accelerate new product development, which we have done but not at the same -- we didn't reach the targets which we set for ourselves internally.

And because of this, we said we have to change our team. We exchanged all directors of all our different product categories reporting to Bob, and we just recently exchanged the Chief Technology Officer, who by the way is now going to report directly to me.

And let me just add one more thing before I hand over to Bob. It was also very special this time to see the caliber of candidates we could attract and one of the reasons Bob was interested in Brady was because he looked at our financial performance, our growth and he just said I want to be with a great company. And a couple of years ago we were really, really struggling to attract top talent. So we are very pleased to have Bob Tatterson join us.

But let me hand over to Bob and share with Wendy your initial impressions and your plans.

I think my plans really are completely tied with the strategy of the business. Essentially I want to focus on growth of this business through new product development and quality of our products as we serve our customers. And really to do that we need to focus then on our people and our processes. So that is really where my initial tension is is looking at the processes we use to develop quality products and our processes and personnel that we have in place to grow through new products.

So really I'm taking a broad look at the entire business process but the R&D organization as well as the other parts of the organization such as manufacturing and marketing that we need to have working together in lock step to deliver the growth that we want.

Thanks very much.

Reik Read with Robert Baird & Co.

Good morning. You guys saw some very good strength in Europe and I was just wondering if you could give us a little bit more color in terms of how much of that is market related? How much of that is company specific? And then can you just talk a little bit about that die cut transition there? Is that largely complete in terms of moving business to Asia?

I think not much of it is market related. I mean most of it comes from our productivity in (indiscernible). And the thing we're most encouraged about is we are seeing universal growth across most of our geographies, very encouraging growth in our direct marketing business. Very encouraging growth in our newly acquired businesses as well in Texit and Safety Shop brand. So we are very happy with that.

You noticed that we didn't comment about migrating business to Asia and we have done I would say in pretty well every quarter up till now we have seen perhaps a little bit of migration but frankly I think most of it is over now. Most of the business in Europe that is going to migrate has migrated to Europe.

One additional thing, when we say that we've been focusing on some new market segments, I will give you one example. For our Brady business, we've been focusing on segments that tend not to migrate, for instance the processing industries, food processing and various process industries, refineries, etc. And that is where we've seen a lot of our growth and they are very nontransient businesses, very solid businesses. So that's what is driving our growth.

And then Peter, would the emerging markets that you mentioned and you are seeing double-digit growth is that double-digit growth that you see continuing and can you give us a sense for the size of those emerging markets relative the overall European business?

Yes, they are really quite small. When you look at our business in Spain, Portugal, in Turkey, they are very small. So that high rate of growth should continue into the foreseeable future. Our business likewise in central Europe is really quite small in comparison to some of the more developed economies. So I see that growth continuing.

Then just a quick question on Asia. Al, as part of your comments you had mentioned that pricing continues but last quarter you had kind of suggested that pricing was a little bit above what you would normally see. Is that abated somewhat and can you comment as to why that might be?

I think it fluctuates and it's hard for us to understand exactly what's going on within the Board rooms of all of our customers. But they may have initiatives which from time to time would place more pressure on us. This is a fact of life and not something we want to share with our investment community but we deal with this on a day-to-day basis. It is nothing new for us. I'm very optimistic with the combination of Brady Tradex and Daewon that this helps us to kind of smooth some of that out because of the synergies that are taking place between the three businesses and some of the initiatives for new product development.

And you had suggested I think last quarter that some of that may have been induced by marketshare losses by some of your key customers. Is that something where you see that having stopped and therefore that driver has gone away for pricing?

Probably temporarily but again, I think this will continue. Everybody in the mobile electronics industry, everybody is jockeying for position with new product developments and launches and pricing strategies before the holidays. So now everybody is in the delivery and execution stage rather than positioning.

Reik, this is Frank. This is obviously a very difficult question. How much do you share with investors and how much don't you? And on the one hand you want to make sure that investors understand the dynamics of the business; on the other hand you don't want to spook them. It is a fine line because to us it's normal. We always price pressure coming from one customer that you don't hear anything for a year and then they start again.

But I think the key, the long-term key to success is new products, proprietary new products, not commodities. And that is why we have placed so much emphasis on new product development. That is why we have so much confidence in Bob and his team that over time we will be able to withstand pricing pressures because we just have something more unique, more innovative, more proprietary to offer than maybe some of our competitors. So it is really key to us to boost new product development in this area.

And I think that relative to the new product development, one of the things I commented on is that because we are in similar spaces as Tradex and Daewon, we'd all been working on similar type of solutions and now putting this together we're going to be able to accelerate bringing those solutions to the marketplace. And as recently as last night we had a conversation with a very major customer that is quite excited about our ability to accelerate the delivery of these products.

Great, thank you for the comments.

Charlie Brady with BMO Capital Markets.

Thanks. Good morning. When you look at the base growth in the Americas in this quarter, it's done at 3%, relative to what it's been running for the past few quarters a couple of percentage points higher. Is there anything to read into the base growth in Americas or is it just -- help me understand is there seasonality to the Americas in this quarter versus other quarters? Or what are you seeing on a base level growth out of Americas?

Well, don't read too much into any one quarter. Because we're not a good proxy for economic activity or anything because we -- our MRO business tends to lag activity. Plus we pointed out that we had some migration of die cut, so if you added that back to Americas you would see a normal trend basically. So it was not in itself which caused it to trend down somewhat. Last year we did 5% organic in Americas. The year before that we did something like 4.4%. And the first quarter if you normalize it was really no change on that, Charlie.

Okay, thanks. And with the acquisition of Precision into the medical market, could you just comment on what exactly is the size of your medical market now relative to the overall business? Is that really more of an area of focused moving more into healthcare medical markets when you look at acquisitions? And specific to that market, how does that pipeline look to you?

I'm going to kick this off very quick and then Al maybe you can chime in. Charlie, the strategy of Brady to grow is to grow in our base businesses and our existing business and level our competencies into adjacencies. We have identified a couple of adjacencies to our business wins with people identification, identification of people. We already identify products and premises and now we say we are going to identify people.

Same in die cut. We have found that the medical converting industry, die cut industry has similar requirements than we have in our hard disk drive or in our mobile phone industries, (indiscernible) high-volume production and so forth. So it's only natural for us to diversify. Also it's had a different seasonality to it which appeals to us. So we're going to continue to look for this. This has been going on for about a year. I'm not sure if I left anything for Al to say. Sorry. I've already given the answer but Al?

Let me ask a clarification on your question. You asked about pipeline. Do you mean the pipeline of projects that we have within this company or the pipeline of future growth in acquisitions in the industry?

I guess I was speaking more to the acquisition pipeline as you build out this particular segment of your business. But if you want to speak also to the other part of the question, I'd be happy to hear your comments.

Okay. Let me start with the industry in general. One of the things that we really like about the medical converting industry is an upfront challenge is a longer qualification cycle and higher standards in terms of quality and good manufacturing practices. That plays very well into Brady's strong suits. Some of our customers that we talked in mobile electronics and hard disk drive are some of the most demanding customers in the world. So we are able to transfer some of our expertise in those industries over to medical.

And the benefit of medical then is once you are into a program there is a very high cost of switching for the manufactures and so there is a real strategic partnership with our customers. So that's what we like about the industry in general. The group that we just acquired has a great pipeline of some new products that they will be launching and have recently launched. So we feel very good that they will be in an upswing with their growth patterns.

This is still a fragmented industry in terms of who is out there converting for medical solutions and so there are other candidates we are looking at. We have them in our pipeline. But as we are very rigorous and disciplined in our acquisition approach so we want to make sure that we properly integrate this one and make sure that if look at other candidates that they bring incremental advantages to us as a company.

Great. Thanks and just one more question. Getting back to new product development and some of your comments there. Obviously accelerating some of that and looking (technical difficulty) at some of the programs but matching that up with -- looking at what was already going on with your acquisitions and the existing Brady business, is when we look at the cost for new product development over the next say 12, 24 months, would we expect a meaningful ramp up? Or is it that when you look at what was already going on in other programs at the businesses you acquired there is kind of a -- you' are able to sort of not spend as much as those businesses would so there is an offset to developing that business out?

Yes, that's a good catch there, Charlie. We're ramping up our spend. In fact I think the last quarter our spend went up 31%. Our top-line went up 43%, so we are not catching up with the top-line. And you are right, the businesses we acquire tend not to have the same effort in new product development that we do. So yes, that is a dynamic that we are watching but we will be spending more dollars in R&D, no question.

And, Charlie, I have said at numerous occasions the only two line items in the (technical difficulty) the profit and loss statement I would like to see go up as a percent of sales is R&D spending or I would say new development spending which could include marketing and profit. These are the only two line items that should go up as a percent of sales.

Now, if you look at our last couple of quarters, you can see that costs of goods sold did not go down as a percent of sales. Right? These are not quarter-to-quarter predictions. These are long-term targets for us. But we hope if everything goes well and before acquisitions which you can never time that R&D as a percent of sales should go up, SG&A should go down and cost of goods sold would also down and profits should go up. That is our guidance.

Thanks very much.

(OPERATOR INSTRUCTIONS) Ajit Pai with Thomas Weisel Partners.

I have a quick question. Just wanted to follow up in terms of that margin trends in segments -- I mean in geographies. Could you tell us how much of that margin performance in Europe and Asia was impacted by foreign currency exchange rates?

Very little, Ajit. We tend to manufacture locally and in Europe and in Asia. So the margin percent itself is not impacted. We get a benefit when we try and [split] the results because the dollar has weakened this quarter over last quarter versus the euro and the Asia-Pacific currencies. But the percent margin itself isn't highly impacted.

Great, thank you.

Rob Damron of 21st Century Research.

Good morning. I wanted to ask a question about your 12% net margin goal. I think you provided that a few quarters ago. And back then your mix of business was a little bit more MRO versus OEM. So given the new mix of business in the current environment is that 12% net margin goal still attainable?

Yes, we haven't changed. That's a goal, that is not for last quarter or next quarter, that is through 2010 and we're not going to change that. We see that as possible.

But even with I guess a greater mix of OEM business versus MRO --?

Yes, what you see, Rob, a year, this where we are absorbing -- in the first quarter 35% of our revenue growth came from acquisitions. That is a lot to absorb. And in the first year, first maybe three years compresses our margin. But then after -- just Peter Sephton just mentioned to me -- there's a couple of acquisitions that we made in the last two years in Europe, Safety Shop and Texit, and we've doubled the profitability of those over the last couple of years.

So we are confident we can improve on the first year or first couple of years of results with the acquisitions. So, yes, don't look at that as being normal -- this is heavy amount of acquisitions to absorb.

In addition we have a heavy amount of new startups, new facilities. We just went live in Bangalore India with a manufacturing plant, half year ago went live in Slovakia with a manufacturing plant. Now of course they are by no means highly productive here at this point in time. In a couple of weeks, we're going to have a grand opening in Dongguan, China for another manufacturing plant. And then we are consolidating some of the factories or some of the offices of our recent acquisitions with existing Brady locations.

So there is a tremendous amount of activity. I think the last course of maybe six months, I think we had six or seven grand openings, one a month almost. A large plant in Malaysia, an opening in Reynosa, Mexico. It is just a lot of activity going on at the same time which thoroughly depresses our earnings and a comment Dave had made in an earlier conference call, when we were a 5% after-tax profit company and we would acquire businesses, chances were that their profitability was us higher. Now since had profit 10% last year, chances are they are equal or less profitable than we are.

However of course, if you want to get to 12%, you better figure out a way to get there otherwise we shouldn't buy them. So we have low profitability businesses in addition to integration expenses but we are confident over the next couple of years we're going to get the profitability of their companies up and operate as a whole. So we're not going to change our guidance through 2010 or I don't think you call it call guidance, you call it goal or target.

That is all I have. Thank you.

You know I just got to compliment everybody for asking so many questions. We should have our conference call always at 7:00 in the morning. This is a great amount of questions.

And we apologize to those of you on the West Coast.

(OPERATOR INSTRUCTIONS)

I guess I shouldn't have said it. And let me welcome our new analysts, Wendy Caplan and Charlie Brady.

There are no further questions at this time. I would now just like to turn the call back over to Barb Bolens.

Thank you very much. We thank you for your participation today and would like to remind you that the audio and slides from this call today are available on our website. A replay of this taped call will be available beginning noon Central time today. The phone number to access the call is 888-286-8010 and the pass code is 11679903. The phone replay will be available until 11:59 on November 27th.

As always if you have questions, please contact us. And again, thanks for your interest in Brady and have a great day. Operator, please disconnect the call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.