Brady Corp (BRC) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to the third quarter 2008 Brady Corporation earnings conference call. My name is Carmen, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Barbara Bolens, Vice President of Investor Relations. Please proceed.

Thank you, and good morning everybody. We are glad you could join us.

During our call this morning you will hear from Frank Jaehnert, CEO, and then Tom Felmer, CFO, who will be presenting Brady's quarterly financial review. Also joining us this morning is Matt Williamson, President of Brady Americas, and Peter Sephton, President of Brady Europe, who will be presenting the regional reports. 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 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 Statements and other 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 identified in the forward-looking statements. 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 October 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 that Brady will be taping the call and rebroadcasting it, and your participation in the question and answer session will constitute your consent to being recorded.

Thank you, and now here is Frank Jaehnert.

Good morning and thanks for joining us. We are very pleased for the results of our third quarter. While our organic sales were down 1%, we increased our EPS by 19%. We have talked over the last year about the efforts we have made to proactively improve our cost structure, and we are seeing the benefits of those initiatives.

We have taken advantage of this quieter period of acquisition activity to work through integrations, and believe that the vast majority of the heavy lifting integration is behind us. We can now focus on operational efficiency and productivity in our businesses. We know we are not as efficient as we can be in many of our businesses, and have efforts going on throughout the Company to leverage Best Practices in infrastructure to become more efficient. As we communicated at the beginning of the fiscal year, working capital improvement is a priority for our entire Company.

I am pleased that year-to-date, we have improved operating cash flow by more than 90% over last year, which is a clear sign that our efforts are paying off. We have seen the momentum of improvements built each month, as common processes for improvement in working capital are rolled out through all of our businesses. We believe we can make improvements in operational efficiencies, with similar efforts as well.

We certainly see evidence of economic weakness in many of our key end markets, especially in the U.S. but recently in Europe as well. We believe that we have and will continue to make the necessary adjustments to our cost structure, to adopt to a slower growth cycle. We are committed to above average returns to our shareholders in growth periods, as well as in slow economic times.

I will now turn the call over to Tom Felmer, who will walk us through the third quarter financial review. Tom?

Thank you Frank, and good morning everyone. I would like to walk you through Brady's third quarter results beginning on Slide 3 of our presentation. As Frank said despite the challenging economic environment we delivered a solid quarter.

Sales for Brady's third quarter were $382 million, up 10% over prior year. Margins continue to improve as we generated 49.6% in gross margin, up 80 basis points from fiscal '07 third quarter. SG&A was also up slightly at 33.2% of sales. Operating income came in at $52.6 million, up 14% over last year, and up 40 basis points at 13.8% of sales.

Net income for the quarter was $34.4 million, up 19% compared to prior year, and net margin was 9%, up 60 basis compared with last year. We generated diluted EPS of $0.63, a 19% increase over prior year. In addition to our solid operating results, we continue to see improvements in our cash generation, as we generated $64 million in cash flow from Operations, up 51% over last year's third quarter.

Moving on to Slide 4, you'll see a break down of our sales growth. Our 10% growth in the quarter was made up of 5% acquisition growth, and 6% growth from currency, while our core business declined 1%. Our business leaders will provide more details on growth by segment in a few minutes.

On Slide 5, you can see that we had our second quarter in a row with nice margin improvements over prior year. While we do see increases in some of our raw material costs, we have been able to improve our margins by moving our sales mix towards higher margin products, and maintaining a focused and disciplined approach to holding costs in check and improving productivity throughout all of our operations. We believe that even if we continue to see soft sales growth in the next quarter, we will continue to see improvements in our gross margin line.

On the bottom of Slide 5, you can see that we did have a slight increase in our SG&A as a percent of sales over fiscal '07. We are working hard to keep our SG&A flat with prior year, as we make our way through the soft economic cycle, and even it is a challenge to generate top line growth right now, we continue to invest in areas that will give us long term benefits, such as further SAP implementations.

We had four businesses go live on SAP in the third quarter, and we will have one more unit go live in the fourth quarter. By the end of the fiscal year, we will have had 24 SAP deployments in the last 24 months. By holding discretionary spending in check and continuing to improve productivity and infrastructure, we hope to generate leverage from our SG&A line as the economy improves.

On Slide 6, you can see that we are beginning to accelerate our R&D investments. While fiscal '07 third quarter was a soft comparable, we are looking to increase R&D spending in proprietary products, in order to generate incremental new sales and increased margin. Examples of new products introduced in the quarter include a new visitor management software program from our software business, and extreme RFID high performance labels, which were introduced by our Brady businesses around the world.

Moving on to Slide 7, you can see that we have is generated nice improvements in operating income, and in net income in each of our first three quarters this year, with operating income and net income improving 14% and 19% respectively over Q3 of FY'07. As expected we did see a lower tax rate in the quarter, the FY'08 Q3 tax rate was 26.2%, which brings our year-to-date tax rate down to 28.5%.

On Slide 8, you can see that we continue to deliver solid EPS improvement each quarter, as Q3 EPS was up 19% over prior year. I also want to point out here that we did repurchase approximately 944,000 shares in the quarter. This added about $0.01 to our EPS in the quarter. Also on Slide 8, we show our EBITDA for the quarter, and you can see this tracking very closely to our operating income results.

Slide 9 walks us through our cash changes since the beginning of the fiscal year. Our strong cash flow from operating activities over fiscal '07 is in large part as a result of our efforts in Accounts Receivable and inventory improvements, of $24 million in Receivables and $33 million in inventory.

Slide 10 is a new slide we are presenting this quarter showing free cash flow as quarterly comparison since fiscal '05. We define free cash flow as cash flow from operating activities less CapEx. You can see that our current year's trends are significantly above prior years.

On Slide 11, there were no changes in our debt in the third quarter. We continue to carry $500 million in long term debt at 5.26% interest. During the fourth quarter, we will be making our first principal payment against that debt of about $21 million. Our quarter end cash balance of $227 million, and our net debt dropped to $273 million.

On Slide 12, our debt to EBITDA, and net debt to pro forma EBITDA have dropped to 1.9 times and 1 times respectively. Leaving us conservatively leveraged along with flexibility, should we identify attractive acquisition opportunities in the near future.

And finally on Slide 13, I would like to explain some changes in our FY'08 guidance. First we are raising our sales guidance to between $1.50 billion and $1.52 billion, which is up from our original guidance of $1.43 billion to $1.46 billion. The increased guidance reflects the current sales trends, exchange rates, and impact from the two acquisitions we made earlier this year.

Our net income guidance remains unchanged, as we expect to generate between 129 and $135 million of net income. Even with the expectations of a soft economy, we believe we have made, and will continue to make enough operational improvements, to allow us to maintain our net income guidance. Also our diluted EPS is expected to be between $2.33 and $2.44 per share for the year, as we adjust for the new share count following our share repurchase in the third quarter. We expect our diluted share count for the year to be about 55 million shares. Other assumptions that we are making for the year, include a full year tax rate of 29%, CapEx of $30 million, which is down from the $45 million we originally projected, and depreciation and amortization consistent with original projections of $65 million.

Now we will now move on to our regional updates, and I will provide the update for the Asian region, as Allen Klotsche cannot be with us today. After the Asia presentation, Peter Sephton and Matt Williamson will cover the rest of our businesses.

Moving on to Slide 14, Asia Pacific sales for the third quarter were $82.1 million, up 1.1% from last year. Organic growth was down 7.4%. Acquisitions added 0.6 of a percent, and currency added a positive 7.9%. While this quarter's revenues were below expectations, we do believe that given our current pipeline, we will have positive organic growth in the fourth quarter, and we expect that momentum to continue into FY'09.

Our third quarter performance in the mobile handset market was very similar to what we saw in the first half of the year. We were able to grow our sales and market share with a subset of our customers, who value our design engineering and advanced production capabilities. Our sales to these companies were up between 5 and 20%, despite the fact that there continues to be pricing pressures and declining average selling prices with these customers. With growth rates at or exceeding market growth rates, we are pleased that our efforts to design in high value parts at the design centers are appearing to pay off.

At the same time, our sales were increasing to this segment, our sales decreased by an even greater amount to two discrete groups of customers, 1) a group of customers who are moving large chunks of market share themselves, and 2) customers that we have chosen to deemphasize, based on the ranking of price as overriding innovation and quality. With the latter group we have decided not to chase some of the lower margin commodity parts. Although our relationship with this group of customers remains strong, we have chosen not to dedicate as many resources to support them. As we look at the net impact of these ups and downs for the remainder of the year, we expect to see core growth increases over the same period sales of last year.

From a competitive perspective, we have seen local agent competitors predominate, versus some of the multi-national companies, which we have historically competed with. Our approach to these changes in the market conditions, will be to continue to streamline our infrastructure to insure the lowest cost delivery without sacrificing baseline service levels, as well as further investment in R&D, focused on proprietary new products which will enhance the performance of newer models of mobile electronics.

We believe that these innovative solutions will be valued by the industry, as they strive to differentiate themselves with higher feature phones, the continued success of products like the iPhone, in addition to the upcoming rollout of 3G in China, will drive demand for feature-rich mobile devices, in which we are well-positioned to win. We are presently in development of some innovative and differentiated new products targeted toward the feature-rich fall production models.

Additionally we expect a realignment of resources to result in an uptick in our overall profitability in this sector. The adjustments we plan and need to make, will take place throughout the upcoming fiscal year.

Looking at the rest of the Asian product portfolio, our business is performing as expected with moderate growth. Although a much smaller portion of the Asia business, our hard disk drive business has seen an improvement in results. We have combined a more efficient geographic footprint, with proprietary differentiated product offerings, into a successful and growing business. With the rapid changes in technology in the electronics market, the key to our success with this strategy, will be to continue a stream of innovation, which is recognized by our customers as a value adding part of the overall design.

Our high performance label business grew in-line with the market. Some of the products that we have successfully introduced into North America and Europe will be launched in the upcoming quarter in Asia. Our safety and facility ID business continues to grow, with the support of a larger and more focused group of channel partners that we have been developing.

During the quarter we successfully launched SAP in Australia, where we have our largest base of MRO business in the region. Short of a few small implementation bumps, we were pleased not have any major disruptions in Customer Service levels. Segment profit for the region was $11.1 million, down 6.8% from last year's segment profit of $11.9 million.

Looking forward to the fourth quarter of our fiscal year, we continue to balance our portfolio in the region, in a way that will position us for profitable future growth. We do not see conditions worsening as we make these adjustments for the future.

Next is the Europe report with Peter Sephton.

Thanks, Tom. Good morning, everyone. I will continue on Slide 14. Sales in Europe grew by 20% in the quarter to $133.4 million compared to $111.3 million last year. Acquisitions contributed 9% of this, and the further strengthening of the European currency against the U.S. Dollar added a further 11%.

Organic growth was flat against a very tough comparable last year, where our Direct Marketing businesses in the U.K. and France in particular, benefited from outstanding growth from the No Smoking legislation, which as you remember was a one-off. When we look at our business by brand, our Direct Marketing businesses in Germany and Italy, which were not affected by the same legislation last year, performed well with solid growth. As indeed did our start-ups which include Spain, Portugal, and Sweden.

Additionally by benchmarking Best Practices, our Direct Marketing businesses continued to improve operating margins, while continuing to invest in new initiatives to add new customers to our customer database.

Another area that we have been driving hard and I would like to point out is is our multi-channel approach. Our internet sales across the region grew by 21%, as we continue to leverage our eCommerce platforms and our E- Marketing capability right across the region.

We will move on to the Brady Brand, the main source of growth has been our Brady MRO offer. Most notably, the product range supporting the Telecom market, and lock-out tag-out products for the processing industries. We also launched aggressive promotions on selected printers, and continue to see above expected results with our new IP printer. Growth rates remain healthy in most countries.

Moving on to our die cut business, this benefited from an increased focus on higher margin businesses, on the cost reduction measures that we put in place last year. We enjoyed some early success with our medical die cut initiatives in Germany, and are planning a similar initiative in Sweden. This initiative diversifies our customer base, with unique products with longer life cycles and more sustainable margins.

We also continued to leverage the acquisitions that we made recently. We merged our Italian businesses, following the acquisition of ModernoTecnica, which has resulted in the solid increase in profitability for the combined business. Similarly the acquisition of SPC in Belgium has performed very well with double-digit sales growth, by signing up new distributors. In the U.K., our business benefited from the success of Scafftag, which experienced substantial growth, and has enhanced our offer for lock-out tag-out products right across Europe, and also in the Middle East.

In total, Europe generated a segment profit of $36.2 million, an increase of $6.9 million, or 23% up on last year. Profit as a percent of sales increased to 27.2%, up from 26.4% last year. We are pleased with this improvement over an outstanding third quarter last year. We anticipate a tough economic headwind in quarter four, and continued tough comparables due to the No Smoking legislation.

We are, however, well-positioned in all geographies with a leaner cost base, robust marketing programs, and continued excellence in Customer Service. Our focus in the region on MRO products and markets, should help us be more resilient to any negative economic cycle.

I will now turn the call over to Matt will Williamson who will report on the Americas. Over to you, Matt.

Thank you, Peter, and good morning. Please refer to Slide 15. Brady America sales in the quarter were $100 million, an increase of 14%. Organic sales growth was 3%, while currency added 3%, and acquisitions 8%. The organic growth of 3% within the region was driven by strong results in the industrial OEM and education markets, offset by slowing in the electrical and utility markets. We are pleased with the results from our IP printing systems sold for industrial labeling applications, and our new line of ViraQuest visual products designed for the education market. The ViraQuest products provide a comprehensive system to improve student achievement, and is a nice addition to our proprietary systems products.

By geography, the Americas or the Brady Americas growth was slightly negative in the U.S. and Mexico, but we continue to see strengthen our label and die cut business to industrial and electronic OEMs in Brazil. In addition we experienced strong growth in our Canadian business.

We continue the integration of SPC into our core U.S. MRO business, by completing the SAP implementation at SPC in quarter three, which will help continue to drive efficiencies and synergies within the business. We continue to take advantage of cost reduction opportunities within all of our businesses, and as a result, we have realized a reduction in workforce over the past year of over 6% in the region. This also includes some movement of products to lower cost plants within the region, and new equipment to automate manufacturing processes.

During the quarter, we completed the consolidation of our two medical die cut businesses into a new plant in Dallas. Combining these two smaller businesses helps us leverage our resources, and drive improvements in profitability. We have also invested in clean room manufacturing and automated packaging in this business, to help secure a new contract medical business.

In addition, in an effort to offset rising costs, we moved up by several months a U.S. price increase that goes into effect on June 1 in the core Brady brand businesses, as well as in other businesses. Segment profit for Brady Americas rose 12%, or 2.5 million to $22.7 million in the quarter, driven by increased sales volume from both base business and acquisitions.

Segment profit as a percent of sales was just slightly below the prior year at 22.6%, due mainly to unplanned costs related to the combination of the medical die cut businesses and investment in new product development. During the quarter we also experienced a 15% decrease in working capital versus prior year quarter, which is attributable to specific efforts which began earlier in the fiscal year.

In Direct Marketing and People ID, sales in the Americas region were $66 million for the quarter, which is flat compared to last year. Acquisitions contributed 1%, and foreign currency impact was a positive 2% in the quarter. Organic growth was negative 3%, negatively impacted by a softening in the construction and manufacturing markets, which particularly affected our EMED Co. business. Our Seton business showed stronger results and moderate organic growth for the quarter, due to it's focus on the broader MRO market. We also experienced a slowing in our Clement and personnel concept businesses, as response rates to mail campaigns have come in below expectations.

By geography, we experienced solid organic growth in Brazil and moderate declines in both the U.S. And Canada. During the quarter we launched passage point global software, which is a new enterprise level visitor management solution in our STOPware People ID business. The software is designed to be compatible with most access control systems, and can be integrated with a host of other applications, to make it the most comprehensive visitor management solution in the market today.

In an effort to continue to drive efficiencies and synergies within our recent acquisitions, we completed the successful SAP implementation in our Identicard business during the quarter. As I mentioned with the Brady Americas business, we look to take advantage of cost reduction opportunities within all of our businesses, and as a result, have realized a reduction in workforce over the past year of over 8% in the region.

Early in the quarter we completed the acquisition of DAWG, a $4.5 million direct marketer of sorbent spill container products and safety storage cabinets, that help keep facilities safe and clean. This Company is headquartered in Terryville, Connecticut, and allows us to increase our share of the absorbent and spill containment market, which we added to our portfolio through the acquisition of Sorbent Products Corporation one year ago.

Segment profit for the quarter was $17.5 million, a decline of 2%. As a percent of sales segment profit was slightly lower than the prior year of 26.5%, due to the decline in the base business. Finally, during the quarter we experienced a 9% decrease in working capital, which is attributable to specific efforts which also began earlier in the fiscal year.

I will now turn the time back to Frank.

Thanks, Matt. As we conclude our fiscal year, it is clear we are on an economic slowdown in the U.S. and we see certain markets in Europe following as well. We cannot change the external forces that affect our markets. However, we can impact how we react, and how we adopt our businesses to slower conditions.

Over the last year we have made substantial changes to our cost structure to adjust for market and economic conditions. Our major integration efforts have been completed as planned, and we have combined production facilities, leveraged investments such as SAP, and look for opportunities to increase our efficiency in our facilities, but we are not done yet. We know we have many other ways to leverage Best Practices throughout our organization, and that is what we are focused on today.

I believe we have responded quickly, to assure we can weather this period of slower growth in the best possible way. We are continuing to invest in our business and at the same time are creating a cost structure, that we will be able to build from when our markets return to a more normal growth period. We have begun our annual planning process, and are excited about the opportunities we see for our Company long term.

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

Ladies and gentlemen, (OPERATOR INSTRUCTIONS). The first question comes from the line of [Matt McCartney] from Robert W. Baird. Please proceed.

Good morning.

Good morning.

Do you expect your free cash flow generation for the year to follow the normal seasonal pattern, meaning I guess just a little under half of the annual free cash flow in the fourth quarter?

I would say that it will continue at the similar trends, obviously we have seen an uptick throughout this year, but we expect the solid cash flow returns to continue.

Okay. And then I assume acquisitions are still the primary use of cash. Could you talk about the pipeline and whether there are immediate opportunities, or what geographies or products are of the most interest right now?

Yes. We continue to look for acquisitions is our #1 priority to spend our cash, to invest our cash, and we have communicated earlier and this is still correct, our focus is primarily in MRO as we have done so many acquisitions in OEM in the last two years, and we are still in the process, in the final process of digesting this, but MRO is our focus.

We look in all geographies. We look not only in our core space, but we also look at adjacencies, for instance having acquired SPC and Transposafe in the last year, is where kind of a little bit adjacent, not exactly our core growth, so we can look at this.

As far as the health of the pipeline, the pipeline used to be larger, but this is always a, at a certain point in time, the pipeline goes up and goes down, but I hear sometimes people suggesting that the economy slows down, and there is not as much money and private equity, and this should provide good opportunities for companies, such as us for industrial, and we have not seen this yet, this impact, but prices are still high and private equity at least in our segment is still pretty healthy.

Okay. And so then the repurchases in the quarter, was that under the September '07 authorization? So I am trying to figure out if the March authorization is still unused?

That is correct.

Okay. Any idea what pace that would be used?

Still our #1 priority is acquisitions, and we have an authorization out there, and if we feel the time is right, and it depends on many, many different factors, it depends on the acquisition pipeline, it depends on the price of our stock, it depends on our cash level, we can execute.

Okay, thank you.

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

Thank you. Good morning. I am trying to make sure I understand the CapEx requirements of the Company. It seems as though CapEx as a percent of sales has declined pretty steadily over the last few quarters, and I think you might have mentioned guidance for this for the full year. Can you repeat that, and can you give us an idea for what we can, what we should be thinking about as a normal CapEx spending level as a percent of sales going forward?

I think if you look historically, the last two years we had some pretty aggressive investments in Asia, and in SAP and what we are seeing is that we are dropping back down to our historical CapEx levels, which run in the mid 2% to 2.5% range. Now I would expect that going forward. We don't see massive expansion, and certainly at the levels we were, and the bulk of the heavy expenditures, and the big unit implementations of SAP are behind us now.

And what was the guidance for Fiscal '08 or the fourth quarter?

The full year CapEx guidance is at about $30 million.

Okay, and then just a clarification as well. On the business in Asia, we have seen organic sales declines and you talked about the reasoning behind that. Did I hear you right that you said that you would expect positive organic growth in that business in the upcoming quarter?

Yes, we did cover that and that is what we said. When we look at the pipeline of activities, we feel very good about our pipeline looks better where we are today compared to one year ago, and again there will still always be the issue of allocation once you get down to actually getting the orders from the various companies, but right now going into the fourth quarter, we feel good about the pipeline.

I think variability I assume is on the handset side, not the hard disk side?

Certainly more volatile on the handset side, yes.

Okay, great. Thanks very much.

Okay.

The next question comes from the line of Charlie Brady from BMO Capital Markets. Please proceed.

Hi, thanks, good morning.

Good morning.

With respect to your revised top line revenue assumption, how much of that is organic growth versus acquisition or FX? I am assuming you are factoring some of that the price increase that you just talked about hitting in June? Can you give a sense of the magnitude of the price increase in the Americas?

I don't know that we have it broken out there. In looking at the organic growth, we are still looking at relatively flat organic growth for the next quarter.

Yes, it is primarily currency and acquisitions. I think last quarter we did adjust our guidance at all. We did not adjust our phase guidance, and we did not adjust our earnings guidance, and of course, we have made the acquisition of Transposafe, which typically the first year an acquisition doesn't contribute much to earnings, but of course it contributes to sales, and maybe we would have been better off to adjust our sales guidance to include the acquisition of Transposafe, but it was not material enough in our minds to adjust the guidance, and maybe in hindsight, it would have been better to do this.

So it is acquisitions and currency primarily, and if you have a price increase in June, our year is over in July, and so I wouldn't count too much on this. The impact of this on the top line especially.

Can you give us some additional detail on how much is that price increase, because that doesn't need much for '08, but it certainly has an impact on '09?

Do you want to answer, Matt?

Sure. Well, there are a variety of different businesses in the Americas, but if you look at the core Brady business, we will have a price increase on average is 5%. Now that varies based on individual products.

We have a little higher price increase with our SPC business, which reflects the increase in the cost of resin, so it is a little higher increase than 5, and then if you go down to Brady Brazil we are having a price increase there in the range of 5 to 10%, based on the types of materials that we are selling, we feel that we can give a little bit more there based on our position in the market, but that gives you a flavor for it, but it varies by business and by product.

This wouldn't be across-the-board, Matt. Would it be across-the-board?

What's that?

The 5%.

No.

It would not be across the board. So I wouldn't want anybody to take the 5% price increase and put it in their model across-the-board. That is only on specific product lines, especially where we have something proprietary, where we have something that nobody else can offer, when it comes more to the commodity products, we talk about lower numbers. Also, Matt pointed out and it is very important that in some of our businesses, we have other material price increases like solvents, which is oil based, and so part of this is passing on the material price increases which we are getting to our customers.

The other thing to point out is that we have contractual arrangements with customers and distributors, and we honor those contractual arrangements, so we can't reflect an immediate price increase with a large portion of our business.

That is helpful, thanks. On the R&D spend, if I heard you correctly, it sounds as though you are going to be spending more on R&D. Should we in terms of dollar amounts, should we expect the continuation kind of at the same run rate we have seen in the past couple of quarters, or looking more so in '09, should we really expect that to ramp up in a meaningful amount?

With R&D, it is always very project specific, so we might have a launch with a couple of new printers in one particular time, and this might mean that our R&D expense ramps up in preparation for this, and then you might have maybe a period of less of those introductions, and so R&D fluctuates a little bit.

However, so I don't want to give a number for the fourth quarter, or even for our fiscal '09 because we're still in the middle of our business plan for fiscal '09, and hopefully in the next couple of weeks we can give you a flavor of how we think fiscal '09 will look like.

Certainly before the earnings for the full year we want to get back to you, and provide you some guidance for '09, and we can probably be more specific on R&D, but I have said before to investors and I want to repeat this, there are only two line items in the P&L which I would like as a percent of sales, one is profit and the other is new Product Development, which is R&D and marketing related efforts, where as I would like to see the cost of goods sold and SG&A as a percent of sales like to go down, so this gives you a little bit of an indication of where we are pushing for, and the reason we are pushing for this, is in order for us to get our organic growth to higher levels than what we had historically, we believe our new products are meaningful, and a good way to get there.

Also, proprietary new products are a way to defend our gross margins, or even improve it so that is why we are pushing so hard on new products, and are willing also to support it financially.

Okay, that is fair enough. I guess the point I was trying to get to is without obviously getting to a point estimate, you have been running 2.5 to 3% of sales for the past few years. Are we kind of in that sort of range, or would you contemplate a significant step-up say going to for instance a 4.5 or 5%, a real meaningful step-up?

I would say that it would not be easily accomplished to the kind of magnitude you are talking about, because you are going to spend on R&D and get the people involved, get the projects going, so I would say the numbers you mentioned is not what we are looking at, at least not short-term.

Thanks very much.

Okay.

The next question comes from the line of Anthony Kure from KeyBanc. Please proceed.

Good morning. Just had a question, for the 2007 we announced the operational savings of about 14 million for '08. Do you think you are probably going to finish the year ahead of schedule there? As far as dollar amount?

The operations, I would just say they are savings related to our restructuring activity, are we ahead or behind, I would say we are on plan and on track. And it is not, we always refer to 2007 restructuring and our cost reduction initiatives, because it was something we called out.

We had a restructuring charge, and it was significant because we made so many acquisitions we started equating it, but we keep going with activities to reduce all costs, and it might not be leading to significant restructuring activities, so that we don't have to put it on our Income Statement, but with a company our size there is always something going on.

For instance, Matt talked about in the third quarter, we combined our two medical facilities. One was in Minneapolis and the other one was in Dallas, and we moved both of them to a larger operation in Dallas, Texas, and things like this are always going on, and might not necessarily be big, so it is hard to say. We don't drag necessarily against our 14 million.

We know that there is nothing material one way or the other, so I would say we are on-track, but there is additional stuff that we have been doing, because we obviously like to improve as a Company, and like to increase our earnings quality.

Okay, and given that you are kind of planning '09, or given the stage had I know you don't want to talk about particular numbers here, but do you think that you may have some more opportunity then through '09, to at least have a more pronounced savings schedule than you maybe thought at the beginning of this fiscal year? Is that something that you can maybe talk about?

It is difficult for me to remember what I thought at the beginning of the fiscal year.

Okay.

So I think in general, the concept that we have been talking about is over, with all of the acquisitions we made in the last five years, about 30 of them, we have done probably the majority of the big physical restructuring, and now what we are doing is working a lot of the operational improvement and operational excellence activities within those businesses, so you won't see the big structure changes, but we are doing a better job of managing product portfolios within each business, so the improvements will be coming along those lines rather than one-time restructuring.

Okay. And then on to the price increase discussion. Maybe I missed it but I know there was a price increase announced for the Americas. Do you think that there was some pre-buy associated with that, or is it not something that was given enough leeway on the announcement?

No, we give good leeway, our distributors demand that. In fact we give a 60 day leeway to our distributors, and at this point, there has not been any pre-buy.

Okay. And since the context of the price increase was around the Americas, and maybe I missed it but is there a similar dynamic that can take place then in Europe, obviously Asia is not going to happen, but in Europe can you see similar type opportunity there?

Peter?

Yes, there are some opportunities. We have already taken the opportunity to increase prices. We had a fairly hefty price increase at the beginning of the year, but a good proportion of our business in Europe is Direct Marketing, and obviously we are constraining that through a catalog cycle.

Okay.

So I don't see any significant impact.

Okay, thank you.

(OPERATOR INSTRUCTIONS). The next question comes from the line of Rob Damron from 21st Century Equity. Please proceed.

Good morning. Wanted to try to get my arms a little bit more around the gross margin and the cost of goods sold. Could you give us a little bit more color on raw material prices, how that has impacted your cost of goods sold over the last 12 months, and then to see the gross margin improvement, what have been the main factors driving the gross margin? Has it been more product mix or price increases? Maybe just give us a little more color from that perspective?

It has really been, when you look at a Company like ours, we have so many operating units and hundreds of thousands of SKUs, it is hard to track the raw material impact in all of those, but when we look at gross margin, it has really been a mix of things. It's been some shift in mix and we are focusing very much on either pruning or moving up prices on low margin products, and our sales forces are putting more emphasis on the higher margin product lines, which we have had success with.

A lot of operational improvement activities across really every business unit in the Company, and we are also, we are seeing some of the benefit of the structural changes that we have made over the past year, flowing through to the margin lines, so a lot of it is dependent on the region and the business but it is really a mix of all three of those areas.

Definitely we have the philosophy to pass on price increases which we get from our suppliers, there is no question, and if you can even anticipate what the price increases might be, because sometimes if you own a catalog of a big distributor, you might not be able to increase your prices during the year so you have to anticipate.

Now that is not always possible, and it is again possible when we have some differentiating and proprietary in some other cases where we are more towards the commodity end, it's not difficult, but at certainly one would be important, and of course we always go beyond what has not helped our organic growth especially in the handset market, has been moving the mix to a more higher, but we are trying to pull all of the levers we can, but I totally agree with you. We cannot tell. We don't know this.

Okay, and then just one other unrelated question on the Balance Sheet. Inventory and receivable management looks like you have made a lot of progress there. Do you have goals for inventory turns if we look out into fiscal '09, or maybe how much incremental improvement do you see from these levels?

I would just say it is continual improvement. We weren't happy with where we were a year ago. We have put working capital goals as part of everyone's comp plan throughout the organization, from Frank all the way down the organization, just to find out how important it was to get our arms back around this, so people are working on inventory models, working on shortening our cycle times in operations, so it is a lot of activity and a lot of areas, so we are are certainly not done, but I don't have any numbers that I am able to share right now, that would give you a target as to where we would end up.

Okay. That is all I have. Thank you.

All right.

The next question comes from the line of [Andy Young] from Thomas Weisel Partners.

Hi, this is Andy Young, Thomas Weisel Partners. Good morning. Just a couple of quick questions. Back to the pricing environment, can you give us some insight into your customers attitude to price increase, and also what are your competitors doing in terms of pricing? Can you pass most of your cost increase to your customers in Asia and Europe?

Let me preface it, and then maybe Matt, you can be more specific. Nobody likes price increases, the attitude of our customers towards price increase is not positive, there is no question about it, so we have to convince them that we are providing a value which they may be, if a distributor, they might be able to pass it on to their customers because we have something that nobody else has, so it is certainly easier there, as I said earlier, if it is more commodity-like, it is more difficult because then there is competition, and then you obviously are a little bit dependent on what the competition does.

However, we are the market leader, and as the market leader you have certain responsibilities as far as pricing is concerned, and we are certainly trying to go as far as we can, but Matt said earlier 5% in some cases. It is by no means guaranteed that this will stick. Because there are discounts and so forth, and I will let Matt be a little more specific.

Yes, I will comment on the Americas, and I have to say that and preface my comments that we have a variety of different products, different markets, and it is different in a lot of places relative to the answer to your question, will they accept price increases. For example, in the area of our sorbent products, we found strong resistance to increase in prices, because it tends to be more of a commodity product, and our competitors have just not been raising prices, so we have had strong resistance there.

Other areas where you have larger distributors, where they make selections in broad categories of product lines, they will put products out for product line reviews in some cases, and therefore are looking for product decrease, pricing decreases, and then as I mentioned, there are some things where distributors just cannot take price increases, really for the same reason Peter brought up, they have catalogs in the marketplace where they put prices on the products.

And so they will price, they maintain their prices and we honor our commitments in that regard, and then we have contracts with end users, where we have negotiated a price for a certain volume and a certain time period, and there are restrictions in terms of what we can pass on to end users in those circumstances. And we want to honor those contracts as well, so there are a variety of things that we have to look at, but we are being passed on price increases, and so we have to do that.

We have to do that as much as we possibly can. And we also believe that more new proprietary differentiated products will give us a better opportunity to pass on price increase.

That is why we are pushing so hard in R&D and new product development and marketing, so we think that is the key to sustainable improvement in gross margins. Always try to move away from a commodity, Matt mentioned solvents, more commodity-like, but this doesn't mean that it has to be like this all the time.

Same with the electronics industry. Mobile handsets, hard disk drives, which are more commodities, we are focusing more where we can add value, where we can have an advantage over our competition, we try to move away from commodity by always leveraging our R&D capability, about 200 people in our R&D department, and we have adhesive compounding and our own coating, so we are trying to leverage all of those competencies, to differentiate ourselves from our customers so that we can increase prices, and that we are not being treated a commodity player.

Just to add to that, Frank, and this is Peter speaking, certainly from a European perspective, but most of our regions around the world, we really are a niche player, and most of our products aren't commoditized, and also worth bearing in mind, that of all of those many many thousands of SKUs, the average order value to the customer is really quite low, so when you look at a price increase in absolute terms, it is not that great. So in many instances we are able to pass on some of the cost increases that we have experienced through raw material prices.

Great.

I think we have really exhausted all we know about price increases.

Right. That is helpful, thank you. So a couple more questions then. Back to SAP, you have implemented quite a few projects in the past 24 months. Where are we in the process and are we expecting all of this can be done in the next 6 to 12 months?

I think right now we have about 70% of our revenues covered by SAP right now, and sort of the majority of it is done, I think all of our large business units are done, and now it is a matter of every year picking up a handful of the bigger businesses that are left, and implementing them really on a, it is almost a maintenance basis now.

And our goal for next year is 80% and of course this very much depends, if you didn't make any acquisitions next year, we should be at 80% of our phase covered by SAP, but then of course, we hope to make acquisitions, and this changes the picture then, and drags the percentage down.

Okay, great. Thanks. Finally I don't think you have any facility in China, but do you see any impact from the large earthquake in China recently on your operation tariff?

Well, yes, we checked with [inaudible], we have seven or eight facilities in China, and we have nothing in this province, and we didn't have any people hurt or injured, or any of our facilities being impacted. So we were lucky in that regard. Thanks for asking.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). There are no further questions. I would like to turn the call back over to Ms. Bolens. Please proceed.

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