Brady Corp (BRC) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2008 Brady Corporation earnings conference call. My name is Angelique; I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I will now turn the presentation over to your host for today's conference, Barb Bolens, Director of Investor Relations. Please proceed, ma'am.

Good morning, everybody. Thank you for joining us. During our call this morning, you will hear from Frank Jaehnert, CEO, and then David Mathieson, CFO, who will be presenting today's quarterly financial review as well as the regional overview. Also joining us this morning is Allan Klotsche, President of Brady Asia-Pacific and Global Die Cut, who will provide the Asia portion of the regional report. As usual, after brief presentations we will open up the floor to questions.

Please note that in the beginning of this quarter of fiscal 2008, we have changed our segments and have broken out our America's business into direct marketing and People ID Americas and Brady Americas. Asia-Pacific and Europe remain the same. This reflects our current management of the business and our segments reported today reflect the new reporting format. We encourage you to follow along on 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.Bradycorp.com. You have a couple of minutes to get to those while we go through our Safe Harbor statement and other usual information.

Please note that in this call we may make comments about forward-looking information, words such as expect, believe and anticipate are a few examples of words identifying 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 this morning and Brady's 10-K filed with the SEC in September of 2007.

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 we will be taping the call and broadcasting it over the Internet for replay. 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, Barb. Good morning. We are very pleased with the solid start to fiscal 2008 as sales and net income reached record levels. We are also pleased to see the results of our cost reduction efforts starting to pay off. In the tough comparisons to the strong start last year, when our Die Cut business was booming, I am especially happy that we were able to exceed last year's earnings. We also announced last week the acquisition of Transposafe, which was the first acquisition we have made in seven months. We have used this quieter period to work on the efficiency of our existing operations and to integrate recently acquired businesses. We know that we're not operating yet as a well oiled machine, so this seven-month period of no acquisitions has been welcome. Our efforts, for the rest of this year and into next year will be to continue to work on quality of earnings and on working capital management.

While we did have a relatively strong first quarter, we do have some questions about the economy. With rising oil prices, the continuing a weakening of the dollar and the concerns over the banking issues, we are cautious on the economic prospects. I will now turn the call over to David Mathieson, who will provide the financial review. I will be back later to talk about our priorities for fiscal 2008.

Thanks, Frank and good morning. On slide 3, sales in the first quarter were up 14%, gross margin as a percent of sales have stopped declining and were flat with last year at [14.4%]. SG&A was up 50 basis points. Operating income was up 12% in dollars, although down slightly as a percent of sales. Net income was up 6% and diluted earnings per share was up 5% at $0.66. Cash flow from operating activities at $34 million was up very strongly 174% over last year's first quarter. Now CapEx also moderated from a big spend in fiscal 2006 to $7.4 million.

On slide 4, organic growth was 2%, with strong growth in Brady Americas. The continued slide in the dollar added 5% to topline this quarter. We added 7% from acquisitions made the last fiscal year.

On slide 5, gross margin percentages stopped declining this quarter and the good news is that excluding acquisitions made in the last 12 months, gross margin is up, if only slightly. Our SG&A is up 50 basis points, mainly due to ramp up in IT cost to continue the program we have in place putting 10 states onto SAP this year on top of the 16 we did last year.

On slide 6, I believe that our efforts in new product development are starting to pay off, with the introduction of the new IP printers, products which have been enthusiastically received by the market in North America and Europe.

On slide 7, our operating income is up 12% but the [rate] down 30 basis points. With additional interest expense and the tax rate higher than last year, net income was up 6%. The tax rates at 29.7% for the quarter is now impacted by the new FIN 48 accounting which will cause quarterly variations in the rate. We expect 29% for the full year as we expect the rates in quarter three to decrease to help get it back to 29%.

On slide 8, last year's first quarter is a tough comparison for us and we are pleased to see diluted earnings per share up 20%. As EBITDA exploits interest expense and tax, this 11% increase is more in-line with the 12% increase we saw in operating income.

Slide 9, we have introduced working capital into our incentive plans this year. We identified that with so many businesses acquired in the last four years, with more attention on this aspect of business, we could improve our performance. We are now seeing inventory levels go down. We include receivables, inventory, payables, and deferred revenue in our definition of working capital and measure these as a percent of the last three month's revenue annualized. We have gotten off to a great start with cash flow up $22 million from last year, so we believe our working capital focus is paying off. And todate, CapEx is also around 50% of what we did last year.

Slide 10. Here is our balance sheet. We have $188 million of cash and equivalents with cash building since the end of the fiscal year. We have not done an acquisition since the middle of April, until last week, which was after this quarter's close. We pay the first bullet of fixed interest debt in June and that is a $21 million of short-term debt.

Slide 11, our gross debt EBITDA is 2.1 with net debt to pro forma EBITDA at 1.3. We believe we continue to remain conservatively leveraged.

On slide 12, we are pleased with the start we have made for the year; we have executed well with cost reduction activities that we undertook last year and like our positions in both mobile handsets and the smaller hard disk drive in consumer electronic businesses. But we're cautious about the year (inaudible) and to some extent European economies, and feel the current exchange rate situation could [regress]. As a result, we are not changing our guidance for the full year at this time.

Now let me cover Brady Americas, slide 13. Brady Americas sales increased $105 million, an increase of 27%. We are pleased to report strong organic sales growth of 8% in the quarter with 2% from currency and 17% from acquisitions. Organic growth of 8% within the region was driven by strong growth across most of our major markets including electrical and Wire ID, safety and industrial identification, laboratory and airspace, defense and mass transit. This growth was partially offset by a continued softness in the electrical utility market due to the recoding situation.

Brady Americas also experienced solid organic growth in all countries in the region for the quarter. We are particularly encouraged by the strength of our label and die cut business to industrial and electronic OEMs in Brazil. The acquisition of Asterisco in Brazil in December 2006 continues to yield synergies within our base business. We have recently moved the Asterisco business into an adjacent facility to the Brady business which should continue to provide productivity improvements.

We also continue to focus on the integration of SPC into a core MRO business, the initial results of selling Sorbent Products through existing Brady channels has been positive. During the quarter, as I said, we introduced the new IT principal industrial in MRO. Customers to date has been a success with sales running ahead of plan, primarily in the US.

Segment profit rose 18%, or $3.7 million to $24.5 million in the quarter, driven by increased sales volume from both base business and acquisitions. Segment profit as a percent of sales was lower than the prior year at 23.2% due mainly to the impact of acquisitions followed by business mix and a number of favorable items in last year's first quarter.

I will also cover Direct Marketing & People ID Americas. In Direct Marketing & People ID Americas to just 8% revenue growth in the first quarter driven largely by acquisitions. Organic growth was 2%, acquisitions contributed 5% and foreign currency impact was 1% in the quarter. By market, our regulatory business was strong during the quarter. The nonresidential construction market also contributed nice growth in the early part of the quarter, however softened as the quarter progressed. This was offset by softness in the manufacturing sector and a conscious shift away from less profitable sales in one business. By geography, we experienced solid organic growth in Brazil, moderate growth in the US and moderate declines in Canada.

During the quarter, we launched several new products including a visitor management system into the education market and a variety of new, innovative access control count products. In addition, we enhanced our security management offering with the launch of a access control system, Promises. We saw segment profitability expansion in the quarter with segment profits growing more than double the sales growth. Segment profit was $19.6 million, was higher than the prior year as a percent of sales by 200 basis points, at 28.3% due to the continued integration of acquisitions and cost control efforts, and effort which should continue into the future. For example, we have recently completed the consolidation of the Jam and Temtec businesses into the Brady People ID facilities in Burlington, Massachusetts and Dongguan, China. Which resulted in the closure of our Suffolk, New York and Anaheim, California facilities.

During the second quarter, Emed will be going live on SAP in December. We look forward to this SAP implementation to continue to improve the efficiency of Emed and further integrate it direct marketing America's businesses. We will also be completing the consolidation of the two China facilities acquired in the CIPI acquisition which should result in continued improvement in the profitability of our People ID businesses.

Now, let's look at Europe on slide 14. Sales for the European region were $108.9 million, increasing 18% over the same period last year. Base business was flat while currency added 10% and acquisitions added 8%. By brand, the Direct Marketing businesses showed solid growth over the first quarter last year, but as expected, sales from UK no smoking ban fell off sharply in the quarter. The Brady brand showed modest growth in the quarter as we continued to focus on selected markets, heavily concentrated in MRO. In OEM markets, the picture tends to be mixed with nice results in traditional high-performance labeling and [wide] identification where we have launched new products and are leveraging recent acquisitions. However, we continue to see a decline in the OEM die cut business.

Results across the region varied geographically. We experienced declines in the UK and Sweden, however, we saw encouraging results in the Benelux with some European and German regions' growth outperforming GDP. We continued our geographic expansion by launching our Seton business in Portugal. Our acquisition integrations continued to show positive results, both (inaudible)helped perform ahead of the local economies GDP while Scafftag has also facilitated growth in the United Arab Emirates.

Sorbent Products by our new European business based in Belgium has seen an encouraging start with SPC as we leverage our distributor basis. Segment profit for the quarter was $29.9 million, up 30% over prior year, and increasing at a faster pace than the topline. This reflects a continuing focus on more profitable productlines, the resizing of the Tradex headquarters, a function based in Sweden and other cost reduction activities. Our acquisitions were dilutive to [this rate] but still pretty profitable. As a result, their operating profit as a percent of sales rose from 24.3% to 27.5%. Whilst we don't see any immediate slowing in the economy in Europe, we are watching it closely and expect a mixed economic landscape in Europe in the future.

I will now turn the call over to Al Klotsche with the Asian regional report.

Thanks, David. I would add your attention to slide number 14. For the first quarter, in Asia, sales were $96.4 million, up slightly from last year's $93 million. Organic growth was down 3%, acquisitions had minimal impact on the quarter and currency added a positive 7%. You may recall the same quarter last year was a very strong quarter when we more than doubled our growth over the prior year, as a result of strong organic growth and the acquisitions of Tradex and Daewon. Overall, our results for the quarter were very much in line with our expectations. During the quarter, our mobile phone and consumer electronic teams focused on transferring our specification positions at the OEMs to the manufacturing locations within their supply chains. As reported last quarter, we felt good about both the number of programs and individual parts that we were involved with. Now that the volume productions are running, we are also pleased with our allocation wins throughout the supply chain.

As volumes began to ramp up during the quarter, we saw some rather significant shifts in market share within our customer base. Some of our former leading customers lost market share while some of our newer customers, namely the Korean OEMs, gained market share. We continue to benefit from having a broad reaching share across all of the major OEMs in this space. As the OEMs jockey for market share, pricing pressures remain high throughout the supply chain. While low-end phones and electronic devices are growing rapidly, we continue to see a healthy segment of the market demand feature rich devices that drive the need for more Brady products. Some high-end phone models now have twice as many Brady parts as they did just five years ago. This increase is a combination of customer needs and our ability to supply a larger portion of the customers' bill and materials. Our focus in market share is also growing with consumer electronics manufacturers ranging from MP3 players to GPS units to digital cameras. As you have likely seen, the convergence of these devices is happening at an increasing pace. And our experience with the electronic supply chain has us well-positioned for future growth.

After one year of integration with Tradex and Daewon, our sales organizations clearly understand their product and market focus and our non die cut business seems to be responding favorably to that. Our high-performance label business continues to grow on the heels of established products. And we are optimistic that with some of the new products we will be introducing in the next quarter this will provide even more of a push.

Our safety and facility identification business is also gaining some nice traction with the support of a larger and more focused group of channel partners that we have been developing over the last year. The combination of education, awareness and multiple approaches to the end customers appear to be working well in this MRO market space. While our geographic expansion has slowed in comparison to prior quarters, we are pleased with the strong business ramp up in Dongguan, southern China, and Bangalore, India. Our Dongguan facility is steadily increasing their capabilities and production volumes. Brady India is also enjoying some very strong sales growth despite the qualification of local customers taking longer than anticipated.

We have also started production at our Japanese greenfield which is located outside of Tokyo. Our focus in Japan is to provide stronger support to the Japanese design centers and then support the high-volume production as it moves outside of Japan to areas like China and parts of Southeast Asia. Elsewhere, the combination of our businesses in Thailand and business rationalization in Southeast Asia has helped focus our business and reduce operating expenses. The result of last year's cost adjustments in Southeast Asia have been very positive for our business.

Our performance in Australia continues to remain very solid both with our core business as well as the acquisitions that we have made. Some of the boosts that we have gotten from the Australian economy and specific niche markets may not be as strong throughout all of calendar 2008, but our performance should continue to track on plan.

Segment profit for the region was $19.4 million, down 12.4% from last year's segment profit of $22.1 million. Looking forward to the last three quarters of this year, we remain positive on the full year. Our year-on-year performance will now be compared to the softer quarters of last year. We continue to watch consumption patterns in the US and European markets during the holiday seasons as this will have an obvious impact on the demand of Asian manufactured goods. As we have over the past year, we will closely monitor variable expenses and quickly make adjustments if and when necessary. I will now turn the call back to Frank Jaehnert.

Thanks, Al. As I said earlier, we were very pleased to start off the year as strongly as we did, especially with the challenges we faced in the second half of fiscal 2007 and the tough comparisons to the strong first quarter last year. However, we are by no means where we want to be in the future. Brady is a much more diverse company than it was a couple of years ago, both geographically with 60% of our business outside the US, and also markets such as the diverse electronics market, a large mobile handset business, commercial buildings, retail and the newer spaces served by our People ID business to name just a few.

As we go forward into our fiscal year, we will continue to look for efficiencies. We will work on the integration of recently acquired businesses into Brady and focus on working capital management. We will look for acquisitions that fit our strategic and profit goals; similar to Transposafe and Sorbent Products, our two most recent acquisitions. We will also keep our focus on new product development with priority being given to differentiated materials and products, and we will continue to rollout SAP.

We feel good about our financial results in the first quarter; we do have concerns that some of the markets in which we operate may be facing some slower times ahead, and are watching those markets and indicators carefully. That is the end of our prepared comments and I will now start the Q&A. Angelique, please provide the instructions to our listeners.

(OPERATOR INSTRUCTIONS) Allison Poliniak of Wachovia Bank.

Hi, good morning. Question, the decline in OEM die cut business in Europe, is that part of the market share shift that Al was talking about? Is there some other reason for that?

Peter?

Well, I think maybe Al is probably better to answer that. I think it is probably more to do with a little bit of our shift, a little bit of migration over to Asia, but Al, I think you probably got a better perspective on that?

Allison, it is a little bit of market shift and it is a little bit of where the growth in mobile phones and consumer electronics are coming from. So it is really nothing significant in terms of market share gains or losses in Europe for us.

Okay, great and then second, (inaudible) results, they showed a really positive impact on some of the cost reduction initiatives that you guys have put in place. Can you talk a little bit about what we should be expecting fiscal '08, some of the initiatives that are in your pipeline?

Are you talking about cost reduction initiatives, Allison?

Exactly. You talked about a pipeline of some of the initiatives for fiscal '08, can you just go into those a little more?

Well, there is nothing. You know, we have done -- we spent something like $20 million last fiscal year in cost reduction activity and there is nothing quite like that lined up for fiscal 2008. We are always working as I said in the past, we are always working on our vast pipeline of many, many, many things. There is nothing that I would call in particular, it is just a whole range of continuing to source in China, continuing to consolidate facilities where it makes sense. Just a whole range of many things, but nothing of the same order that we completed in 2007.

Allison, this is Frank. Let me just add a couple of comments from my point of view. We have, for instance, David mentioned earlier that we are in the process of consolidating two of our CIPI facilities, that CIPI was an acquisition we made a little bit over a year ago, and they have two large facilities in China. We are in the process right now of combining them.

Then last year we had 16 SAP implementations. As you can imagine, when you implement SAP in a site, first of all you have extra work, you have overtime, people trying to get used to the system, so that is when I referred to we are not a well-oiled machine. So we have basically 16 locations who are now trying to increase efficiencies, utilizing the new system.

Also, in Al's business, we have done so many consolidations like we took three Korean operations, put it under one roof. We moved operations from California to China into Mexico, also in Al's business, and we are in the process of consolidating some of our medical businesses from Minneapolis to Dallas, Texas. When you look at all this, there is plenty of things to work on, which should -- we should see some results over the next couple of months.

But I think what David said earlier is also true, we do not foresee at this point of time unless we have some big changes in the economy, that we are going to have something similar in terms of restructuring that we had last year.

Okay, great. Thank you.

Rob Damron of 21st Century.

Good morning, everyone. Let's see, first of all, I just want to make sure that there were no onetime costs in the quarter or if there were can you quantify any of those?

No, there is nothing of significance, Rob.

Okay. And then secondly, you mentioned the kind of some of the new products, as a result of your research and development. I guess, first of all, can you quantify for us how much of your growth, your core growth has been from new products in the last quarter? And then what the expectation in terms of a pipeline of new products going forward?

Well, we are very pleased with this new product, maybe Matt can describe what the new product does but Rob, as I have said before, most of our new products -- most of it is replacing and cannibalizing older products. So we don't expect to get anything significant from -- anything significant from organic growth with these. What we do do is maintain market leadership; we maintain our high gross margin, so but nothing significantly driving organic growth.

And the product that we singled out -- this is Matt Williamson speaking, is thermal transfer printer, which is an expansion of family of printers that we have been selling for more than a decade. This particular printer, we have launched in North America and Europe in the last quarter. And, the unique thing about this is the software that really enhances the usability of this product for the end users to create a really hassle-free experience. And because of the reception of the end users, we have had a really successful launch of this particular product. And it is as I mentioned, an expansion of products that we have had that are similar to this, but this particular one is a little bit more unique in terms of its software characteristics, but not something that we would divulge the specific results for.

Okay, that's helpful. And then just the last question on SAP. You mentioned 16 implementations last year. I guess where are we in this process? How many do we expect in fiscal '08?

Yes, we expect about 10 this year. And of course, it is also driven by the number of acquisitions which we are making, because typically when we acquire a business, they are not on SAP, sometimes they are, but most of the time they are not. So we have a constant opportunity to implement our system and then get better efficiencies out of this. But, you know, we have the main facilities at Brady are now on SAP. We have a couple of large ones, at Emed for instance in this year, but you know, all the big operations in Europe and the Americas are on SAP. So we are talking more smaller ones like, you know, can it go to Australia. It's a very complex implementation because we have several businesses there but it's nothing of major magnitude. It doesn't take anything away from complexity.

Okay, that's helpful. Thank you.

(OPERATOR INSTRUCTIONS) Ajit Pai of Thomas Weisel Partners.

A couple of quick questions, the first one is just looking at your gross margins, I think it is flat year-over-year, despite sort of a shift in mix away from the die cut -- if I have got the numbers right. So does that mean that the core business actually -- the non die cut business actually saw some gross margin pressures? And then the second question on -- in terms of color for your costs, not the ones that are variable that we can get rid of in terms of infrastructure etc., or personnel, but are there any other inflationary pressures that you are seeing building up? And the cost of raw materials, as well as in wages in the countries that you are operating in, even in local currency there?

Let me start and maybe David can help me here. This is Frank. First of all, I think David said that the underlying gross margins before acquisitions went up modestly, so having said that also -- so there is -- I think it's pretty positive. The second thing is we had a pretty strong business in die cut in this quarter, because that is typically when the business ramps up. So if you compare sequentially to prior quarters, our sales in die cut was larger than it was, for instance, in the 4th and the 3rd quarter of last fiscal year. So, while we are saying that over time through acquisitions, primarily in the MRO space, we are going to see a stronger presence in MRO than in OEM and especially die cut. You know, this doesn't mean that every quarter this is the case, and the last quarter was pretty strong in die cut. David?

Yes, I would echo what Frank said, plus it's a pretty tough comparison over a strong first quarter last year.

So would you -- are you seeing any inflationary pressures as far as wages in local currency in your sort of foreign geographies and even as the United States goes -- and are you seeing any inflationary pressures in your raw material buildup right now?

Nothing that I would call -- I think the price of oil concerns us because that seeps into just about everything, things like freight, postage, but we are successful in passing quite a lot of that on through our Direct Marketing businesses. I wouldn't say there is any one particular commodity we are concerned about, but the price of oil is inflationary.

Okay, if you had to sort of broadly define how much inflation you are seeing, would it be in very low single digits or would it be in mid single digits? Or higher than that?

I would say very low single digits.

And for wages?

Yes, the same.

The same? Okay. Thank you so much.

(OPERATOR INSTRUCTIONS) Robert McCarthy of Baird.

Good morning, everybody. Let me ask you first about the new segment reporting structure. I would be interested in -- since this is the first time it is being introduced to us, maybe you could talk a little bit about how we should think about the financial profile of the two segments going forward. For example, I might hypothesize that Brady Americas without the Direct Marketing and People ID business might be a bit faster growing but perhaps a little more cyclical or volatile. But I would love to hear your comments about the way you think about the two businesses growth trajectory and profitability?

I will start again, and anybody who wants to add some comments. You know, the Direct Marketing People ID business is primarily MRO, whereas Brady Americas is a combination of MRO and OEM, and therefore, your comment that Brady Americas might be more volatile because of more OEM exposure, I think that is a correct comment. But the majority of Brady Americas is still MRO, so I am not sure if you want to see -- if you want to talk about a material difference in the volatility of the two businesses. And this does not mean that our Direct Marketing business is not volatile. If we go into a recession, all businesses typically see volatility, but I think this OEM component in Brady Americas is a little bit more subject to volatility.

Yes, I think, you are not far from where we are on that rope, I would say Brady Americas has higher growth prospects, on average, than Direct Marketing and People ID where we in Direct Marketing in particular we're at the premium price slice of the market, which I don't believe is growing as fast as the general market.

And perhaps it might be obvious, but I assume that when we see the traditional elements of segment reporting in your SEC filings we will see that the Direct Marketing and People ID business is a significantly higher return on investment business? Yes?

I am not sure that is the case because of the profile and the amount of acquisitions that we have done in that business, Rob.

Impacting good will?

Yes.

Okay. All right, and when you were talking about the Direct Marketing People ID business and the performance in the quarter, you made a specific comment about shifting away from less profitable products. Was that something you saw driven by the customer or is there something proactive happening there?

No, that is proactive on our part. That is something that we do continuously.

And then I have a couple small detail questions related to other comments that you made. For example, the CIPI consolidation in China, is that something you have already reserved for?

Yes, it is.

And now that it is the last quarter that we are going to have any of this impact on a year-to-year basis, could you share with us how much -- what would organic growth have been in Asia-Pacific absent the impact of the Maxtor loss?

I don't think we have this number handy, do we?

No, I don't think it would be materially different either.

Okay, so then if I can I will --.

In fact just to highlight something, (inaudible) disk drive business actually grew double digits in the first quarter, so very pleased with that position in hard disk drive.

Yes, I think what we see when you look at the negative growth rate, Rob, in the quarter, we just had a great first quarter last year. This was shortly after we acquired Daewon and Tradex and I think they acquired in May and June and then the first quarter ended in October. And it was just a spectacular quarter last year so we started well with the acquisitions and all of a sudden, second quarter is when we saw the slowdown. And so we are comparing ourselves to a very good quarter last year and I think Al said we grew twice, we doubled our sales in the quarter now that is a combination of acquisitions and more organic growth. But if I recall it correctly, organic growth in the first quarter last year was also very good.

And then, I understand that. So going forward in Asia-Pacific, you had a -- sure the operating margin was lower than it was last year, but of course it is significantly better than you have reported over the last three quarters. Clearly, I don't think this would be controversial, you expect to see all else equal economically, you expect to see significant year-over-year margin improvement as we go through the balance of the year in Asia-Pacific, right?

Yes, I think that is fair to say that. This is a big quarter for Asia-Pacific, just to highlight something sequentially. From the fourth quarter last year, sales in Asia are up 20%, segment profit is up 80%, so this is always a big [gasp] for this business, and we are very pleased with the outcome.

Understood. If I may and the last thing I wanted to ask about is, your discussion about working capital. I don't believe you have shared with us before any specific objectives. I don't know if you have something you can quantify on an enterprise wide basis and then within that, separate from that, I wonder if you can talk about the main levers. I assume we are talking about inventory primarily and if so, could you talk about what parts of the business where you see particular opportunity for improvement?

Well we have acquired so many businesses, Rob, in the last four years; family (inaudible) businesses, businesses that don't have their professional credit management that we have or they don't have the practices that we have in inventory, for example. They don't have the clout to deal with large suppliers. Businesses where in the publishing businesses that were bought recently have very nice business models where we asked for a three-year subscription. So we look at this and think boy, we could really improve, especially those businesses that we have acquired.

Now, there are forces against working capital coming down. You know, everybody plays the same game, so if you are not playing the game, your working capital is going to get worse, plus we have a significant business in Asia and our OEM, where our customers don't want to pay for 90 days and usually end up paying in 110 days. And that business is growing faster than the rest of the world. So our goal this year is let's stop working capital going up. Let's stabilize working capital and in future years, we will look at reducing it.

And I think, Rob, if you look at the last couple of years, I think we made 28 acquisitions in the last four years, and we have done a significantly more, we have ramped it up the last two years. Our number one priority was to get the structure right. Like I said earlier, we combined locations in factories in Korea, in China, in the US and so forth. So the first step was get the structure right, and then now since we have the structure right for the majority of our acquisitions, now we can work on efficiencies, productivity, working capital and so forth. And you know, last year when we had -- after the first quarter, the fall-off in our die cut business, again, the priority was on the structure, get the costs down and get the capacity right-sized. And now we think going forward we will spend much more time on issues like working capital.

You asked about have we quantified -- we have qualified it internally, we have not shared this with Wall Street at this point in time. We are very early in the process. We had a relatively good quarter. I wouldn't read too much in the first quarter successes because we are still early, but at point in time, David might want to think about sharing some of this growth, but it is not the time yet.

Understood. Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Robert McCarthy of Baird.

I'm sorry. I came up with one that I had overlooked. David, you probably misspoke but when you were talking about tax rate expectations and a little bit of volatility that you have quarter-to-quarter, we heard you say that you thought you would see a correction to normalize to the full year number in the third order. I assume you meant in the second quarter?

No, actually I didn't misspeak. I got it right and my finance people are nodding their heads.

Well then you are probably gratified to know that somebody is paying attention.

Thank you, Rob.

Thanks a lot.

I would now like to turn the presentation back over to Ms. Barb Bolens, Director of Investor Relations. Please proceed, ma'am.

Thank you, Angelique. 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. The replay of this taped call will be available via the phone beginning today at 11:30 Central Time. The phone number to access the call is 888-286-8010 and a pass code of 59802759. The replay will be available for one week until 11:59 PM on November 27. As always, if you have questions, please feel free to contact us, and again, thanks for your interest in Brady and have a great day. Operator, please disconnect the call.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Have a great day.