Brady Corp (BRC) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 Brady Corporation earnings conference call. My name is Michelle and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

I would now like the turn the presentation over to your host for today's call, Ms. Barbara Bolens, Vice President, treasurer and director of investor relations. Please proceed, ma'am.

Thank you. Good morning. We're glad you could join us. During our call this morning you will hear from Frank Jaehnert, CEO, and then David Mathieson, CFO will be presenting Brady's quarterly financial review. Also joining us this morning is Matt Williamson, President of Brady America, Peter Sephton, President of Brady Europe and Allen Klotsche, President of Brady Asia Pacific, who will be providing each a portion of the regional report. As usual after brief presentations by the team we will open up the floor to questions. We encourage to you follow along with the slides located on the internet, as we'll be referring to the individual slides as we proceed through the presentation. These slides can be found on our website at www.investor.bradycorp.com.

You do 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, reports -- or 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 and in 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 on the internet, and your participation in the question and answer session will constitute your consent to being recorded.

Thank you, and now here's Frank Jaehnert.

Thanks, Barb, and good morning. Thanks for joining us. Today we announced the results for our second fiscal quarter of 2007. Sales increased 39% to $321 million with continued solid organic growth in the Americas and in Europe. Net income for the quarter fell short of our expectations, which was the reason for the preannouncement on February 8th. Net income was $19.7 million for the quarter, which was down by 7% from last year. We spoke at our call earlier this month about the reasons for the short fall and subsequent reduction in guidance. Allen Klotsche will give additional insight into market conditions and the actions we are taking. We are committed to making the appropriate changes in the die-cut business to assure we're taking close to our customers, to leverage our capabilities and is have the right amount of capacity in the right locations.

We will also talk today about the rest of our business, which outside of the die-cut and Asian OEM is performing solidly. The results from the Americas and Europe are showing nice organic growth. On top of that we have added some acquisitions, which continue to support our strategy of being number one or number two in our markets. We see no reason to change course or strategy in our businesses, even while addressing our short fall in the quarter.

I will now turn the call over to David Mathieson and will return at the end of the call to make some additional concluding remarks. David?

Thanks, Frank. I will begin on slide 3. Sales for the second quarter ended January 31st were up 39%, with 5% from organic growth, 30% from acquisitions and 4% from currency. Gross margins were down 400 basis points and SG&A down 50 basis points. Operating income was up 5% and now stands at 10.2% of sales. Due to increased interest expense and our unfavorable tax rate comparison, net income was down 7% and with the increase in share count, this translated into diluted earnings per down 16% and $0.36 versus $0.43 last year. On slide 4 total growth for the quarter was 39%, with organic growth in Americas at 6%, Europe relatively strong at 7%, and 3% decline in organic growth in Asia, which for the comparable quarter last year was up 39%. Acquisitions added 21% in Americas, 12% in Europe and 82% in Asia Pacific. Currency added 4%.

On slide 5 total growth in Americas was 27% with organic growth of 6%. We saw quite strong organic growth in Brady Americas, solid growth in Direct Marketing and people ID, offset by negative growth in the smaller die-cut business and our education business. Acquisitions added 21% in Americas, and we announced two small acquisitions in the quarter with Scafftag in the U.S. and Asterisco in Brazil. Currency had no impact in the quarter. On slide 6, Europe had total growth of 30% in the quarter. Organic growth was relatively strong at 7% across all our businesses except die cut, which was slightly positive. Acquisitions added 12%, and in the quarter we added Scafftag and Modernotecnica. Currency added 11%, with the Euro and the British pound up from the same quarter last year.

Slide 7. Asia Pacific grew 84% in the quarter. with organic decline of -3% due to the loss of hard disk drive Maxtor business and the slowdown in both our mobile handset and high performance labeling business in Asia. We are continuing to grow double-digit organically in China, Australia, Malaysia and Japan. The business is flat in Thailand and down considerably in Singapore due to the Maxtor loss. We also saw our first sales in India in the quarter, which bodes well for the future. Acquisitions add 82%, as we added a small Australian Scafftag business in addition to the acquisitions announced in previous quarters. Currency added 5% to our sales growth in the quarter. In slide 8, now gross margins are down 400 basis points to 46.7%. This is driven by the results in our global die cut business as well as our recent acquisitions also adjusting our gross margin. The Americas and European operations were also negatively impacted by the die cut business in their region.

On slide 9, SG&A was 50 basis points better than last year, even while investing in a large number of projects which will pay off in the future. These include the many integration activities we have going on: The Indian shared service center; the Philippines call center; rolling out SAP this year to 18 states, eight of which have been completed; and the geographic expansions in eastern Europe, Mexico and India. On slide 10 the increase in R&D spending almost caught up with our top line. The dollar spend was up 33% from prior year, coming in at 2.8% of sales. We have a large pipeline of new product developments and had a number of launches in the second quarter, such as EMI Shielding and Dumping Label, LockOut PRO software, and Varitronics VariQuest Visual Learning Tool System for the education market, as well as upgrades to a number of our printing system. Slide 11, operating income rose 5% over the prior year down to 10.2% of sales. The profitability was negatively impacted by the die cut business. Additionally, recent acquisitions are crimping the operating income percent.

Slide 12. Net income was down 7% due to incremental interest expense. Additionally, the tax say -- the tax rate for the prior-year's quarter was an unusually low 26.5% compared to 28% this year and this affects comparisons. Slide 13. Diluted earnings per share down 16% as net income was down 7% and dilution from the additional shares created 9% reduction in earnings per share for the quarter. Slide 14. Cash flow from operations was a strong $25 million for the quarter, $37 million year to date, up 78% over this position last year. We expect to see strong cash flows in the last half of the year. Slide 15. This chart shows the year-to-date cash flows, not just the quarter's cash flows. Capital expenditures are up significantly and includes $9 million that we are spending for an SAP as we bring the number of users up from 2,300 to 6,700 in the coming two to three years. Our plan is to bring 18 sites up in SAP this year and have completed eight [goals] so far this year without any material disruption. We expect to implement another 15 next year. We've also spent $90 million in acquisitions year to date and have borrowed $71 million on a revolving credit facility to do that.

Slide 16. EBITDA is up 19% over prior year and this is presented as a convenience to our lenders and investors. Slide 17. Our balance sheet at the end of the quarter is strong, with a total debt to total cap ratio of 34%. Slide 18. This shows the last five quarters of the balance sheet -- actually the last six quarters of the balance sheet and it's good to see the increase in receivables moderating acquisitions of varied assets and liabilities to our balance sheet. Slide 19. For the remainder of the year our priorities are address the slowdown and the capacity imbalance's that we have quickly and effectively over the coming two quarters and continue to execute the strategies we have set forth across our businesses. We are reaffirm the guidance that we gave in our conference call last week and the press release dated February 8th, and that is: Revenue of $1.35 billion to $1.37 billion; net income between $113 million and $118 million; diluted earnings per share of $2.07 to $2.16; CapEx approximately $60 million; and depreciation and amortization $57 million.

Now I will hand it over to the business leaders who will handle the regional results. First is Matt Williamson who will report on the Americas.

Good morning. Thanks, David. Please refer to slide 21. The Americas continued to perform well in the second quarter, with solid revenue growth from the base business in addition to growth from recent acquisitions. The region sales increased to $140 million, an increase of 27%. Organic growth was 6% and acquisitions added 21%. Foreign currency impact on sales was minimal in the quarter. Organic growth within our Brady brand continued to be strong in the second quarter, up solidly over the prior-year second quarter. The strongest growth by market continues to be in the electrical and wire ID areas, but organic sales growth in safety and industrial identification markets was very solid as well. We also experienced solid organic growth in the Direct Marketing businesses in the quarter.

By country the Brady brand experienced double-digit organic growth in the U.S., Brazil and Mexico compared to the prior year second quarter. The Canadian business continues to be soft compared to the prior year, as we have tough comparisons due to strong sales one year ago in the oil sands project. Similar to the first quarter, the growth in the Brady and Direct Marketing brands in the second quarter was partially offset by our planned migration of die cut business to Asia. During the quarter we continued to move forward with the expansion in Mexico and also completed the consolidation of the Tradex facility in Manos, Brazil into our Brady facility there. Our Mexico business in one of our die cut locations went live on SAP in the quarter, helping us to achieve further efficiencies in the region.

We were also please to do announce the completion of two acquisitions in the region this quarter. The first is Asterisco located in Sao Paulo, Brazil. Asterisco is a leading manufacturer of industrial high performance labels in the Brazilian market. The addition of Asterisco allows us to offer a broader range of label types to existing and new Brady customers in Brazil and throughout Latin America. We also acquired Scafftag headquartered in Barry, Wales UK, which Peter Sephton will describe shortly. Scafftag has a manufacturing facility in the U.S., and their products are a nice addition to the safety and identification product portfolio in the Americas. The increased volume and profit from base business and acquisitions resulted in nice profit growth over the prior-year second quarter. Segment profit rose 15% or $3.8 million to $28.8 million in the quarter. Segment profit as a percent of sales was lower from the prior year at 20.6% due to the effect of recent acquisitions, which are expected to have an initial rate of profit that is below the average of the group. We expect that, as we integrate the newly-acquired businesses and achieve synergies, we'll enjoy increasing levels of profit going forward.

Lastly on February 1st we announced the acquisition of Clement Communications located in Concordville Pennsylvania. Clement Communications is a direct marketer of posters, newsletters, guides and handbooks that address safety quality teamwork, safety employment practices, customer service, and OSHA regulations. Clement products are designed to facilitate and enhance employee communications for business, government and scholastic markets. Together with our personnel concepts business, which we acquired last year, we'll now be able to offer a broader range of employee communication tools to customers.

Peter Sephton will now report on our European business results.

Thanks, Matt. We'll now on slide 22. Europe sales increased to $99 million, an increase of 30% over the prior year, acquisitions added 12%, organic growth was 7%, and foreign currency translation added about 11% to sales. Both the Brady brand and Direct Marketing base sales were up over the second quarter of last year. We're seeing broad-based growth in the majority of our businesses and countries. By region, France and the Benelux both continued to grow nicely over the prior year and base sales in Germany were up modestly. The UK continues to show recovery on its position last year. The expansion into new geographies, such as central Europe and Spain, also continues to go well, as we increase our MRO sales in those regions.

When we look at our business by brand, our Direct Marketing businesses have now enjoyed four consecutive quarters of solid core growth, with the last quarter being especially strong. This is a result of the very good performance in France, fueled by increased mailings and targeted mail and internet campaigns to capitalize on recent no smoking legislation enacted on February the 1st. We will continue to see short-term benefits in the next few months from France as a result of this legislation. In the quarter we also had a solid performance in Germany and the UK. We are implemented SAP in the UK Direct Marketing business during the quarter and saw no visible performance dip. Our Brady brand business across Europe contributed strong organic growth for a second consecutive quarter. The recent success of the Brady has not come out of any one single action. It is more the result in improved European collaboration amongst our businesses, success at focusing in key MRO markets and continued geographic expansion. We continue to see our position in selected MRO markets, such as petrochemical and food processing strengthen further.

In 2005 we established a manufacturing plant in Slovakia. We have continued to expand this plant and have begun to transfer some manufacturing processes from higher cost areas of Europe, such as Sweden, the UK and Germany. Also during the quarter we are pleased to contribute two acquisitions as well. Scafftag was acquired in November. It's based in the UK with businesses in the United States, the UAE, and Australia. Scafftag is a manufacturer of safety management systems for scaffolding. It complements the Brady safety and facility ID business in Europe.

In addition, the acquisition of Modernotecnica completed in December adds to our wire identification business in Europe and complements the [Texus] business we acquired in 2005. Modernotecnica also significantly enhances our position in Italy. Segment profit for the region as a whole was $23 million, a 13% increase from the second quarter of last year. Our organic segment profit continues to improve comfortably ahead of this, but as expected, in total was constrained both by integration costs and global costs of Tradex. When we put the profit improvement in the context of low-growth economy and continued investment in new geographies like Slovakia, Spain, Turkey, and our [inaudible] offer, this was a very, very encouraging quarter. This is driven by our ability to drive productivity in the base business and the success of our recent acquisitions.

We'll now continue with the Asia regional report, so over to you, Al.

Thanks, Peter. Please direct your attention to slide number 23. For the second quarter sales for the region were $82 million, up 84% over last year. Organic growth was -3%, and acquisitions added 82%. I should note that differentiating between core growth and acquisition growth is becoming increasingly difficult, as our integration plans have rapidly blended all of the newly acquired die cut companies together. Currency had an additional 5% positive impact in the region. Performance for the second quarter was quite disappointing given the strong start that we had to our fiscal year. The two main areas of our business which under performed for the quarter were our mobile handset business and our hard disk drive business. Because we have a direct selling relationship with these customers, we are comfortable with our level of understanding of both the industry trends and competitive activities. There is not one simple answer that can address why we experienced the decline that we did, but I will address each of these markets separately and share with you our observations and upcoming plans.

Our business in the mobile handset market is built around a handful of large OEMs who control the majority of the overall market share. In total, we feel that our position has not materially changed with these accounts, but there are some pockets of our business relative to geographies and customers which did not perform as well as we had anticipated. When we acquired Tradex and Daewon we spent a lot of time meeting face to face with our customer to say explain our strategy and listen to their expectations. The one area they asked for support was in flexibility for sudden shifts in capacity. At the time of acquisition we were entering the peak build cycles for the mobile phone industry and conscientiously chose not to make any adjustments until we had completed one business cycle as a combined team. Our performance in the fall of 2006 was at the levels that we had expected, and our customers were accepting of the new Brady mobile handset business.

Now we're in the slower build period when lots of design activity takes place but volume production is significantly below peak levels. We also have seen nine more months of the mobile phone supply chain develop, with shifts in OEM market share and their related supply chain. Based on this current cycle of highs and lows, we now feel prepared to make adjustments that will ensure our capacity and footprint are aligned with upcoming demand patterns. As previously mentioned these adjustments will come in the form of rebalancing some of our capacity to be closer to our customers and eliminating some levels of redundant infrastructure. In the previous conference call I commented on the integration of two of our manufacturing facility and the closing of six of our sales offices. We do have more planned integration efforts that will takes place over the remainder of this year. None of our forthcoming moves are intended to reduce our overall machine capacity, capabilities or flexibility to our customers.

In the hard disk drive market the story is less complicated. Our business volumes are down due to the industry consolidation of Maxtor being acquired by Seagate and we simply have not been able to back-fill the sales loss with an equal amount of new opportunities. The new opportunities that we have gotten in this market are a result of our continued approach to global account selling and many of the new capabilities that have been added via acquisitions like Brandon International, ID Technologies and QDP Thailand. We have been rationalizing our geographic footprint in this market over the last six months and will continue to do so in the near future.

During the same time that the hard disk drive industry has gone through some fairly major changes from an OEM and supply chain standpoint we have also seen a shift in the design and form factor of the drives themselves. The continued emergence of portable electronics with needs for large amounts of data storage continues to drive demand for the smaller form factor drives. On the other hand the larger drives are also undergoing design changes to increase storage capacity. These changes represent a constant set of opportunities or challenges, depending on how you look at them. The majority of the parts that we supplied to hard disk drive customers five years ago are no longer even part of the current designs. Fortunately, many of the new parts are requiring more engineering and nontraditional converting methods, which align well with our engineering strengths. The key for us in the hard disk drive industry is to ensure that our new product development and marketing efforts are aligned with the future design and development needs of our customers.

Finishing up my comments on a brighter note, our core business and two recent acquisitions in Australia are performing well, and integration efforts have gone quite smoothly. This business is less focused on the OEM sector and more focused on a larger MRO customer base. The strengths that we have in our Australian management team in understanding the MRO market are now being used on a consultative basis in other parts of our region to accelerate our diversification efforts. In general, our diversification efforts are going well in Asia, but unfortunately have be hindered by the recent weakness in our OEM business.

One other geography of note would be India, where our start-up operation is well under way and has been approved by the core customer base that we are counting on to deliver our F '07 sales revenue. We have expectations for strong growth in the second half of our year in India and are awaiting our customers turning up their volumes in their own production lines. Segment profit for the region was $12 million, up 6% over last year's segment profit of $11.7 million. Our next one to two quarters will be spent making some of the business adjustments that I have referred to, while at the same time keeping our eyes solidly focused on our customers and aligning our capabilities and capacity with their upcoming needs.

I will now turn the call back to Frank.

Thanks, Al. As you can tell by the previous presentations, there are two main themes in the quarter. First, we saw a steady growth in the business of selling to the MRO markets. In those markets our strategies are unchanged and priorities include new product development, integration of newly acquired businesses, and continued growth through acquisitions and expansion into adjacent markets. In the OEM electronics market we struggled in this quarter. Our near-term efforts will be focusing on rebalancing our capacity, aggressively integrating our recently acquired businesses, and above all, staying close to the customer to win back business. We continue to like the balance of the majority of our business in the slower steadier MRO business, offset by the faster-growing, more-volatile OEM business. Also at this point in time we are somewhat large in OEM in the more typical -- than the more typical two-thirds to one-third mix. This volatility in OEM has caused temporary disruption in the business, and we believe we will be successful in addressing and correcting these issues.

That is the end of our prepared comments and we will now start the Q&A. Michelle, please provide the instructions for our listeners.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Robert McCarthy of Robert W. Baird. Please proceed.

Morning, gentlemen.

Good morning, Rob.

I'm sorry, if I can ask you to recap, please, the steps that you're taking over the next couple of quarters to rationalize capacity in Asia? You were moving a little quick, and I'd particularly like if you'd help us separate what is incremental that you've decided to do as opposed to what you had already decided to do.

You know, I don't think there is much that's incremental.

Okay.

I think what we're doing here is accelerating what we plan to do, Rob, because of the slowdown.

Okay. If I understood you correctly, you don't expect to actually reduce at all part throughput capacity, machinery capacity, but rather the steps you'll be taking will be indirect -- rationalizing indirect costs?

Yes, that's exactly right. At this point in time the number of equipment and machinery that we have will remain the same. It's just rationalizing facilities and some indirect overhead costs.

And do we have the ability to put a rough number on total head count involved?

Not at this point in time. We're still working through our plans, and that's not something that we're comfortable sharing.

Okay. I'll get back in queue and let somebody else go.

Thanks, Rob.

Our next question comes from the line of Andy Young of Thomas Weisel Partners. Please proceed.

Hi. Good morning.

Good morning.

Just a couple questions. I was looking at European's margins, and it seems like it declined both on sequential and year-over-year basis. Can you help us understand how much is that due to acquisition and is how much is due to higher costs or pricing pressure?

It's impacted by acquisitions and the fact that we have the headquarters of our mobile handset business in Europe, so that's the main reason for acquisitions.

Okay. And one more question about your future acquisition strategies. You mentioned that now the handset business -- or the OEM business is about 40% of your overall sales, and a little higher than your traditional one-third/two-third ratio. Does that means in the future you will be focusing more on the MRO business acquisitions?

Well, I can tell you that in the current pipeline of acquisitions that we're looking at, the bulk of them are actually MRO.

Okay. Great. Thank you.

It's also a question of how much can we digest. You know, we went in Asia from $60 million roughly in mobile handset to say about $200 million in a short period of time. So if I look to my right where Allen Klotsche is sitting, I think he has no appetite right now to do more because it's a tremendous integration effort on all fronts whether it's customer facing, whether it's internal, whether it's manufacturing, so forth. So there's a natural bottleneck also, as far as what we can digest.

[inaudible] I'm Peter Sephton from Europe. Sequentially -- I couldn't hear all the question but sequentially our margins have improved if you exclude the Tradex headquarter costs.

Great. Thank you very much.

[OPERATOR INSTRUCTIONS] Our next question is a follow-up question from the line of Robert McCarthy. Please proceed.

I wonder if now -- you may recall, David, when we did the call last week I asked about the revision in your full-year revenue outlook, and whether any of that was organic, and you asked to defer the question until today.

Well, you can see we've got pretty solid organic growth in our -- in Americas and Europe, and we're very pleased with the results there. We don't normally give guidance, though, for organic growth, and I don't want to start today.

What we can say is in the quarter we are just talking about we did have organic growth.

Yes.

Oh, of course, but my question goes to, of the increase in your full year outlook for revenue, is any of that a positive adjustment to your organic growth outlook for the Company?

No.

Okay.

No. It's more consolidating the gains we've made and there's currency that's helping it and the acquisitions. For example, Clement. We've just completed the acquisition of Clement. It was after the quarter but it's in our guidance.

Right. And can I ask -- separate from the issues that is you have in the OE components business, I gather we also had disappointing sales of high performance labels and the business that you consider OE in Asia? Do what do we attribute this? Is this something we think is just a blip in the quarter?

At this point in time I'd say it's more cyclical related to program cycles. We've taken a look and dissected the business and there's a couple of programs that went end of life, and I'm pleased to see that we're on the next program, but there's just a gap in the ramp-up of that. That's the best answer that I can give you based on the data that we have today, Rob.

But that's -- recognizing that you can't pin it down quite that closely, it's still a relatively short-term phenomenon, not a year-long problem?

That would be our estimation right now.

I just wanted to make sure that I'd interpreted what you were saying correctly, and then I have one more question. Going to the organic growth outlook in the Americas, you had a nice step-up in organic growth in the January quarter, despite the fact that the -- that organic growth also improved sequentially in last year's January quarter. The second half of last year featured continued strong organic growth. Do you look at those as increasingly difficult comparisons or is there nothing unusual in terms of the strength last year in the last couple of quarters compared to the second quarter? You know what I am asking, right?

And you're right. I think you're right about increasingly difficult comparisons.

Okay. That's helpful. Thank you.

Our next question comes from the line of William Stein of Credit Suisse. Please proceed.

Thank you. Perhaps I missed this, but I'm wondering if you guys are talking about when you expect your position with -- let's say your print position on the [BOMs] and the AVLs of the OEMs to get back to a level where you feel you should be? In other words, maybe a level that you achieved by first quarter of fiscal '07?

Yes. Well, I would say that we're in the design cycle right now, and so I just went through a review with our OEM teams and took a look at the number of programs that they're working on. And it's interesting, as we commented in the last conference call, the OEMs right now have a wide portfolio of programs that they're developing. And I don't know what the magic number is, but probably 75% of them will actually be introduced to the market and then some smaller subset will actually be successful in terms of volume production. But I must say that I like the position that we have right now on the specs with the OEMs. There is two parts of the business that we have to win. The first part is that we have to win at the design centers, improve our capabilities and cost competitiveness. And then the second part where we have to win, which will come later in the fall, is the allocation on the ground with the supply chain.

Do you feel that that -- and I'm aware of what goes on there with the EMS companies. I'm curious as to whether you think your ability to get your fair share with them has changed at all in the last quarter?

No, I don't think that it has changed, and I hope I'm not putting too much pressure on our sales force here, but I think we are very, very well positioned in terms of our geographic footprint, the investment that we've made in technology and converting capabilities to capture every bit as much of the market share as we were approaching and looking at last year.

Okay. It's my understanding the design cycle in handsets is less than six months or so, so if you're at a good position in the design phase, we should see this flow through the income statement within two quarters. Is that fair to say?

I think that's a little bit too quickly. I think that three quarters to maybe even four quarters we'll have a pretty definitive feeling towards that. You really have to get through the major build, which is in the end of the year, the last three months of the year, and then you've got to see what happens from an inventory management standpoint, how much inventory is left into the system. So I think two quarters would be probably premature to take a look at that.

What about the hard disk drive segment? Is it a similar story there or is the design cycle slower? Is your print position with them as strong as it is with the handset guys that you outlined a minute ago?

That's a good question. The design cycles are a little bit different. The design cycles are a little bit longer there, as I commented in the prepared comments. There's some technology changes going on with the PMR technology and hard disk drives, and those are creating some new opportunities for technology-led companies to introduce new products. And we're working pretty hard on that right now, so I would say that the design cycle isn't quite as rapid, and the opportunity to really introduce some proprietary new products is perhaps even stronger in that marketplace over the next two to four quarters.

Okay. And then one final one, either for Frank or David. I'm wondering if you can talk about the net margin? We saw a big decline, which was certainly not unexpected after the preannouncement. But you guys have this 12% target out there, and maybe perhaps further out, not a this year kind of thing certainly, I'm wondering if you can talk about goals for the full year and for next year and whether you still see a 12% as achievable, given a greater portion of your revenues are coming from OEMs where there's just typically more pressure on margins?

Well, it's premature to give guidance for next year, though. We'd like to see how this year pans out and watch all our -- carefully focus on all the actions that were put in place. We're confident at this point we can make 12%. I think the major challenge for us in the nex -- the $64,000 question isn't the cost base and we're confident we can fix the cost base. The major challenge for us is the top line. We can get 12% margin in a few years, as the major challenge for us in the coming four quarters is the top line.

Thank you.

Our next question comes from the line of Matt McGeary of Sentinel Asset Management. Please proceed.

Good morning. Your balance sheet still looks pretty good at 34% debt to cap, but do you have -- is there a level that you target or feel comfortable taking that up to in terms of debt load?

Yes, we see that we can get very good cost of financing at somewhere below two times EBITDA, so that's one of the measures. We also look at debt to total cap, depending on what the outlook is for further acquisitions. When we went above 35% significantly -- and last year we did an equity offering because we felt with the current pipeline and the acquisitions that we were doing, we would want to get comfortable again with our debt to total cap and EBITDA multiples, if that helps.

Well, you're pretty close to that. That's why I asked, because you're pretty close to that 35% again.

Yes, but it depends on the outlook. We don't have the -- we had a significant pipeline when we did the equity offering. And if you look back, we raised $157 million, and we probably sent approximately that in the coming six to nine months. We don't have that same significant pipeline like before [inaudible].

Okay, great. How much of the -- how much of this volatility in the Asian business took you guys by surprise a little bit, if at all? I only ask because I just wonder does that business still -- does it still look okay to you guys in terms of your expected returns on capital when you decided to aggressively attack that market opportunity?

I would say that the volatility in the OEM business did not surprise us at all. That's something that we've known about. We've knew about it going into it and even increasing our share in that area. The timing surprised us, and I think as a Company we looked at it. We recognized that there is more volatility in the OEM business than the MRO business. But if there was a surprise, it's that we came out of the first quarter so strong and then the second quarter was a real disappointment to us.

Thanks.

Our next question is a follow-up question from the line of Robert McCarthy. Please proceed.

I wanted to follow up and -- on a comment made. And again, I'm still trying to get good understanding of how you see this migration winding down. I believe that we've heard previously that you think most of the migration of die cut demand out of Europe to Asia has effectively been accomplished. Where do we think we are in the Americas and how soon in terms of quarters do we think that becomes a non-issue in terms of year-to-year comparisons?

I would say that -- well, this is a little bit of a crystal ball question, but we're further along in this transfer in Americas than in Europe. Both of them are pretty far along. This has been going on for awhile now. But they're just -- when you look at high-volume mobile electronics production, there just is not a lot left in the Americas, specifically in the United States. There's some in Mexico or South America. In Europe there is -- a couple of our major customers are headquartered in Europe, and so I would say that they still have somewhat of a base of production there, although they're even starting to shift that around within Europe, if you look at the difference between western and eastern Europe. I guess to summarize, the big, big shifts are behind us. There's probably not a lot more shifting in the Americas, and maybe another year's worth of shift in Europe.

Rob, the proportion of OEM business in the whole mix of Europe is really quite small.

Thanks, gentlemen, helpful.

[OPERATOR INSTRUCTIONS] And I'm currently showing we have no audio questions at this time.

Thank you very much. We appreciate your participation today and would like to remind you that the audio and slides from this call today are available on our website. The replay of this taped 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 passcode is 16632143. The replay will be available until 11:59 on February 28th. As always, if you have further questions, please contact us. Thanks for your interest in Brady, and have a great day. Please disconnect the call, operator.

Thank you, ma'am. Ladies and gentlemen, thank you for your participation in today's call. This does conclude the presentation. You may now disconnect.