斑馬技術公司 (ZBRA) 2012 Q2 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to the Zebra Technologies 2012 second quarter earnings release conference call. Joining us today from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; Mike Terzich, Senior Vice President, Global Sales and Marketing; and Doug Fox, Vice President, Investor Relations.

All lines will be on listen-only mode until after today's presentation. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect your line at this time. And now, I would like introduce Mr. Doug Fox of Zebra Technologies. Doug, please go ahead.

Thank you. Good morning. Thank you for joining us today.

Certain statements made on this call will relate to future events or circumstances, and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe and anticipate are a few examples of words identifying a forward-looking statement. Forward-looking information is subject to various risks and uncertainties, which could significantly affect expected results. Risk factors were noted in the news release issued this morning and are also described in Zebra's 10-K for the year ended December 31, 2011, which is on file with the SEC.

Now, let me turn the call over to Anders Gustafsson for some brief opening remarks.

Thank you, Doug, and good morning, everyone.

For the second quarter, Zebra reported sales of $247 million and earnings from continuing operations of $0.58 per share. Second quarter revenues reflect the constraints of the business environment in Europe, where parts of Western Europe were more challenged than had been expected. At the same time, the execution of our strategies to take share, penetrate key industries more deeply, and build stronger ties with strategic accounts resulted in our delivering year-over-year and sequential sales growth, including strong growth in several emerging regions, 10% sales growth in North America, and a new record for printer shipments. The operational resilience of our business helped sustain a high gross margin of nearly 49%. We also maintained operating expenses in line with guidance, with some anticipated expenditures for M&A and other meaningful investments that position Zebra for long-term success and improving investment returns. We generated a strong $45.2 million in free cash flow, reflecting continued effective management of working capital. During the quarterly return $14.9 million to shareholders through the buyback of 409,000 shares.

Shortly after the end of the quarter, we announced the acquisition of LaserBand, which substantially enhances Zebra's position in healthcare, an attractive area for growth, with industry-leading patient identification solutions. Even with the current economic challenges all companies face, we continue to have great confidence in Zebra's future. As our accomplishments in the second quarter demonstrate, we continue to build greater value for our customers and shareholders. Over the past year, we have sharpened our focus on key industries with significant opportunity, such as retail, healthcare and manufacturing. Our performance in North America and emerging regions demonstrates the effectiveness of these strategies.

Zebra, together with our partners, is working to create a smarter, more connected business community. We are pursuing this mission through five strategic pillars. First, intensify innovation. Second, expand into new markets. Third, maximize operational effectiveness. Fourth, penetrate existing markets further. And lastly, inspire our people and culture. During the second quarter, we made progress in many of these areas. Let me highlight three of our recent successes. First, innovation remains the cornerstone in all aspects of our business at Zebra. Our enabling technologies and range of services are helping customers address real business needs and improve visibility within their supply chains.

Our commitment to innovation is perhaps most visible in product development. During the second quarter, we were very excited to introduce the ZT200 series of tabletop printers. This new platform highlights how we are delivering greater value to our customers, while also leveraging our enhanced R&D process to significantly increase the cadence of new product introductions. The ZT200 is the second Zebra printer family using a common platform from which we now offer five printer models to meet the range of customer performance and value needs. Engineered for easy maintenance, setup, and operation, the new design is optimized for use in constrained spaces, another important customer benefit.

This new platform also incorporates Zebra's latest electronic architecture, which enables customers to more easily integrate, manage, and maintain the printers. Our new operating system, Link OS, is a significant advancement that enables Zebra to more efficiently design and develop new products. With minimal modification, we will incorporate this system in future printer products to drive greater efficiencies in engineering and improve performance across our product line. Customers have responded enthusiastically to the ZT200, and orders have well exceeded initial build plans. This series of printers is part of a total eight printer products introduced in the first half of this year, and we remain on track to introduce at least 12 new printer products in 2012.

Second, our expansion into high-growth markets took a major leap forward with the LaserBand acquisition. LaserBand provides Zebra an outstanding position in healthcare, with a broad range of industry-leading, high-margin laser and thermal wrist banding products. It makes Zebra more relevant to hospitals, regardless of their preference for wristband printing technology. LaserBand adds to the already positive momentum we had built with our Zebra HC 100 wristband printer, and other labeling solutions. Going forward, we are building a dedicated global healthcare team to accelerate sales in this attractive industry, as hospitals around the world implement policies and procedures to improve patient safety with more effective identification of patients, personnel and assets.

Third, in our drive for operational effectiveness, we recently implemented a new subsidiary structure. By consolidating ownership of Zebra's significant foreign affiliates under a new single holding company, we gain greater flexibility managing these operations while enhancing profitability. Mike will provide additional detail in his remarks.

The successful execution of our strategies is evident in our regional performances as well. In North America, broad-based strength across the region led to near record sales. With the growing power of the Zebra brand, we captured even greater share through distribution partners. Further, our progress in generating more business with targeted strategic accounts, which began last year, maintained favorable momentum. We saw sales of personal identification solutions using Zebra card printers increase with improvements in our card reseller program and the addition of card-focused sales resources.

Similarly, in international regions, investments have expanded Zebra's presence in emerging economies, continue to generate good returns. During the quarter, we maintained favorable sales growth in the Middle East, Russia and Turkey. In Asia-Pacific, a more diversified pipeline led to a number of large deals during the quarter. And in Latin America, our investments to expand and upgrade sales coverage led to record sales in Mexico and strong growth in Central and South America.

Zebra's second quarter results demonstrate the strength of a well-defined business strategy that continues to distance Zebra from its competitors. We have proven our ability to manage through downturns by remaining nimble in our investment approach. As we enter the second half of the year, we are mindful of the need to balance near-term realities with investments in long-term opportunities. We remain confident in Zebra's ability to extend leadership, improve growth and deliver attractive capital returns. The fundamental driver of our business is firmly intact, but companies seek greater visibility into their extended supply chains for improved business performance. Zebra is well-positioned to capture these many opportunities with innovative products and solutions that deliver great value to an increasing number of customers in attractive, targeted industries.

I would now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of second quarter results and guidance for the third quarter of 2012. After Mike's remarks, I will return for some brief closing comments.

Thank you, Anders.

Let me highlight some of the key components of Zebra's results for the second quarter. My comments will principally focus on year-over-year changes in the performance of Zebra's operations. First, weakness in EMEA and the impact of the strong US dollar against the Euro were offset by strong sales growth in North America. Second, gross margin, which was within guidance, declined from the very high level a year ago, principally because of mix and foreign exchange. Third, operating expenses include certain expenditures that we expect to moderate in the second half of the year. And fourth, the income tax rate reflects the implementation of a new European holding company structure for our major non-US affiliate operations.

Let's review sales. For the quarter, sales increased 0.6%, from $245.5 million last year to $247.1 million this year. The impact of foreign exchange, net of hedges, reduced sales by $4.8 million, or $0.05 per share. Sales for North America, up 10%, advanced $5 million on a sequential basis. During the quarter, we saw continued strength in our run rate business, and we have broad base sales into retail, manufacturing and transportation logistics customers. The impact of our growth strategies is evident, as we achieved this growth despite a significant decline in sales to our largest retail customer.

In EMEA, with sales down 9%, sales growth in France, Spain, Turkey, Russia and the Middle East partially offset the weakness in other subregions. On a Euro basis, sales declined 1.5%. Notable sales included shipments of mobile printers to customers in rail, retail and utilities. Asia-Pacific was down 6% in year-over-year sales and up 8% sequentially. Strength in Japan, greater China and India support the sequential improvement. This activity offset a continued slowdown in Korea and other areas that were affected by reduced exports to Europe.

In Latin America, up 5%, shipments of wireless mobile printers to beverage distributors supporting mobile workforce route accounting applications were notable throughout the region. This strength more than offset moderating sales in Brazil, which was affected by a weak Brazilian Real and delays in large deals moving through the proposal process.

Turning to products, record printer volume, up 19% from a year ago, included record sales of mobile and desktop printers and continued growth in card printer sales. The relative strength of these product groups was the primary reason for the decline in average unit prices from $558 a unit a year ago to $471 a printer this quarter. Within sales -- within supply, sales of Zebra's wristbands, serving primarily the healthcare market, were particularly strong in several geographic regions.

Location solutions also had a favorable quarter, with notably strong shipments to automotive manufacturers to improve tracking of vehicles, parts and tools. During the quarter, high precision ultra wide band systems were also deployed to track firefighting personnel in China. The quarter included a significant order from a large aerospace manufacturer for better tool management. Overall, the number of engagements for discussions with potential customers around how location solutions can improve asset visibility was up significantly.

Gross margin for the second quarter of 48.7% compares with 49.6% a year ago. Product mix and foreign exchange were the primary factors behind the decline. Operating expenses increased 8% from a year ago, as expected, and include certain expenditures, such as $1.3 million in M&A costs. Quarterly operating income of $39 million delivered a 16% margin. Adding $6 million in depreciation and amortization to the operating income totaled $45 million of cash earnings, or $0.87 per share of cash EPS.

The effective income tax rate for the second quarter of 23.6% reflects the completion of our new legal entity structure that Anders mentioned, and a reduction in the statutory rate for the UK. This new structure enables us to manage our non-US cash resources more efficiently, as well as meaningfully lower the Company's effective income tax rate. For the second quarter, the new structure lowered income taxes by $2 million, and added $0.04 per share to earnings. For the second half of this year, we expect the consolidated income tax rate between 24% and 25%.

Earnings per share were $0.58 per share, or $0.60 per share excluding M&A costs, on 52 million average shares outstanding. At the end of the second quarter, we had 51.9 million shares outstanding. In the second quarter, we repurchased 409,000 shares of Zebra stock. The weighted average price of the purchases was $36.33 per share. The days sales outstanding declined from 49 days for the first quarter of 2012 to 48 days. Inventories declined $9 million from the first quarter and $17 million from the end of 2011. The reduction in inventories contributed to quarterly free cash flow of $45 million. For the first half of 2012, Zebra generated $87 million in free cash flow.

Now let's look at our third quarter forecast. We are forecasting 2012 third quarter sales of $245 million to $255 million. The forecast reflects a more cautious outlook, related primarily to the European economic environment, some summer seasonality and less favorable foreign exchange. Earnings are expected at $0.60 to $0.69 per share. Our forecast assumes a consolidated gross margin in the range of 48.5% to 49.5%. Operating expenses are forecast between $78 million and $80 million. As mentioned previously, the tax rate is estimated to be 24%, and we are assuming a US dollar/Euro exchange rate of $1.23. The rate compares with an average rate of $1.41 for last year's third quarter, and $1.28 for this 2012 second quarter.

That concludes my formal remarks. Thank you for your attention. Now here is Anders for some concluding comments.

Thank you, Mike.

Within the uncertainty of the broader economic landscape, Zebra continues to extend its industry leadership. Our multiple competitive advantages, including our range of innovative products and services, global scale and financial strength, are driving more business with more customers worldwide. The strategies we have implemented are resulting in deeper, more strategic engagements with companies seeking to improve their operations. And the increasing diversity of our business across products, geographies and customers enables Zebra to effectively manage the business through good times and bad.

As we look to the second half of 2012, we will continue to execute on those strategies to deliver profitable revenue growth. We have proven our ability to manage the business effectively through challenging times. This period is no different. We will remain agile and responsive in the current business climate, as we continue to invest prudently for future success. Zebra is well positioned to drive growth and improved profitability. The success of our investments enhances our confidence in Zebra's future, and in our capacity for shareholder value creation.

The ongoing expansion of Zebra's geographic footprint and sales organization continues to pay off. In emerging regions, improved sales coverage has generated high growth in underserved areas. Since the end of 2009, we have increased the number of sales and marketing personnel outside of North America by approximately 45% off a low base, with the vast majority in emerging markets. This greater presence offers considerable opportunities for increasing business over time. In North America and Western Europe, our sales growth with strategic accounts and share gain through distribution also demonstrates the growing success of our strategies to penetrate existing markets more deeply with our core thermal printing, passive RFID and real time location solutions.

We are also optimistic about our future business in healthcare. LaserBand offers Zebra an outstanding platform for profitable growth in attractive market segment, as hospitals push to improved patient safety with implementation of more effective patient ID systems. The LaserBand acquisition also enhances Zebra's position in supplies, which we have identified and articulated as an area of intended growth.

Finally, driving innovation is creating value for our customers and increasing investment returns for Zebra. We have increased the cadence of new product development, as well as the efficiency of the product development process. New development models and processes are enabling Zebra to introduce products with unique features that truly differentiate us from the competition. Our new table top printers and our increasingly successful line of card printers are two examples of how superior products are enabling us to capture even more business opportunity.

This concludes our prepared remarks, and I thank you for your attention this morning. I would now like to turn the call back to Doug for Q&A.

Thank you, Anders. Before we open the call to your questions, let me ask that you limit yourself to one question and one follow-up. In addition, Mike and I will be available after the call for any further discussions. In addition, our next call is currently scheduled for November 1.

Thank you very much, ladies and gentlemen.

(Operator Instructions)

Michael Holt, Morningstar Equity.

Good morning.

Good morning.

I wanted to follow-up on your comments about the product mix shift. The ASPs fell pretty dramatically, down 16%. But of course, as you mentioned, the unit shipments up 19%. Seems pretty clear that there is a product mix shift going on here. But I was wondering if you could elaborate, are there any other dynamics at work? Are we seeing weakness in the table top printers? Do you still fell like you have pricing power in the emerging markets relative to some of the other competitors? Any color you could provide.

First, with respect to the AUP decline that you saw, that is almost exclusively driven by mix shift and foreign exchange. So, substantial impact by foreign exchange, but also mix. We had both -- record quarters of both our desktop and mobile printers this quarter, and that really drives -- they have lower price points than our other products and really drove a big part of that mix shift.

Okay. And for my follow-up, I guess if we continue down the path of this mix shift, at least in the current direction, how should we think about the impact to gross margin over the long-term?

All our products have gross margins that are fairly similar, more similar than most of our investors believe. And as you look at this quarter, where we had substantial growth in our desktop and mobile printers, we still maintained very strong gross margins, in the high 40% range. And, that was also in the face of a fairly substantial reduction in the Euro exchange rate.

Actually, if you look at the gross margin adjusted for FX, we reported 48.7% for the second quarter. If we restated it for FX, it would be 49.4%, compared with 49.6% a year ago. So in reality, FX really is a major contributor to our margins.

We've worked very hard to make sure we continue to cost reduce our products and take advantage of the scale we have to protect that gross margin. That's something that's sacrosanct for the Company, and we see that as very, very important to make sure we maintain that.

Great. Thank you.

Keith Housum, Northcoast Research.

Hello. This is actually John Barta on the line for Keith.

A little bit of a follow-up, with the pricing. Is that more the older products coming off line, and maybe more -- a little steeper discount in the international region than just the newer products selling?

You mean why our desktop --

Yes, with the average selling price coming down?

The average -- no, there was really -- if you look at the average selling price within each product family, it was very stable. So there was really a mix issue, from that perspective. And we just had more larger deals in the mobile and desktop space this quarter, and the tabletop space was not quite as robust as had been historically.

Anders mentioned earlier the introduction of the ZT200 has been very attractive in the market. So I think we're not expecting sort of a long-term negative reflection on our high-end products. We think that continues a very attractive market for us.

Okay. And just one follow-up. Do you disclose the percent of sales with your largest distributor?

Yes, we do. And that -- every quarter, you guys ask me the same dang question, and I don't have my fingers on it. I'll get -- I'll pull that out while we're talking and get back to you on that. I don't think it's changed that much.

Okay. Thank you.

Yes.

Tim Mulrooney, William Blair.

Good morning, guys.

Good morning.

Just looking at sales by region a little bit. North America came in stronger than we expected. Europe was pretty much as expected. But the Asia-Pacific region was a little weaker than expected. We know you guys are investing pretty heavily over there in sales and marketing. Was there a specific region that was weaker there, or can you tell us a little bit more about that region?

First, I would say for emerging markets as a whole, we've talked quite a lot about that. We've had great growth in emerging markets since we started investing in those, and we continue to see very nice opportunities for additional growth. And here this quarter, we highlighted some of the EMEA emerging market regions, like Russia, Turkey and the Middle East, which grew about 15%, as a group. Turkey has been a great market for us over the last several years and growing very nicely. We actually had an event in Turkey a few weeks back, where both Mike Terzich and myself were there, and we hosted 50 of our closet reseller partners there. And they were certainly very enthusiastic about what was going on in Turkey from an economy perspective, but also from what we are doing to help them. And they certainly seem to have great confidence around their future.

If you look at more specifically, say in Asia, China had great growth in 2010 and '11. It was good, sequential growth this quarter, but the year-over-year growth was more modest. Here I would say we're really seeing how our strategy is expected to work. We start by entering their country with manufacturing. And I think we still have lots of good manufacturing opportunities to pursue, although the manufacturing sector is a little softer today, based on a reduction of exports, primarily to Europe, but also to the US. But we are seeing now the benefits of the growing middle class in China. And how we are expanding into more retail opportunities, healthcare opportunities, and more government opportunities, too.

So we are expanding our base of business in these countries quite substantially. So we feel good about the growth opportunities we have, and we will continue to drive those strategies. But a substantial part of the investments we made --for those markets have already made, so now I see that we have great opportunities for earnings leverage in these markets as they start growing faster.

By the way, just to get back to the question that was asked before, our largest customer at the end of June was 20.8%, compared to 18.9% for the prior -- year ago quarter. And our second largest customer is 10.6%, compared to 10.5% for the year ago quarter. Keep in mind, both of these are distributors, so as a result, it really isn't an indication of end demand, it's just really sort of what channel our products are selling through.

Okay. Great. And if I could just have one follow-up question. Doug, I think you mentioned that gross margin would have been 49.4%. Was that by excluding foreign currency? In other words, if gross margin contracted 90 basis points year-over-year, with 70 of those basis points related to FX and only 20 basis points related to mix?

Yes. So, effectively, if I restated -- this is Mike Smiley. If I restated Q2, using the same FX rate that would have been affected -- was in place last year, our gross margin would've gone from 48.7% to 49.4%. Now keep in mind, that's adjusting our revenue and also the impact of our hedges. So the full FX impact really puts us right back in the ballpark of where we were a year ago. So, this is where -- when you really think about the business, you realize that although Europe was tough, a lot of that was just exchange rates. So fundamentally, the business was not off that much in Europe. And given the economy, I think we feel good about that.

Okay. Thank you.

Yes.

Jason Rodgers, Great Lakes Review.

Good morning, guys.

Good morning.

Looking at G&A up 18% from a year ago, could you discuss the reason for that, and what you expect from that going forward?

Yes, it was up for a couple of reasons. The first thing is, we did spend a meaningful amount in helping put in this new legal entity structure. Again, as our facts and circumstances changed, it required us to re-examine that structure. And we had to work with some tax professional to help us put that in place.

We also -- one of the things I think you recall, we implemented our new ERP system. And we spent a little bit more in this quarter, I like to use the term stabilizing or enhancing the system, to make sure it's meeting our needs. I will let you know, this quarter, it worked extremely well. We had more throughput at the end of the quarter than I think we've ever had in the Company. So it is working well. But we spend money to make sure that went well.

We also had -- I think we pointed out M&A expenses that went through. And then lastly, we also had a little bit more depreciation on the software maintenance costs associated with the new ERP system. So, with that, that went up. Now the point is, going forward, we don't expect to have as much spending on our stabilization of the ERP system, so that should neutralize. We will also have -- we are not projecting the same amount of M&A spend next quarter. And so all those things are sort of leading towards a more neutralized spend in the third quarter.

Okay. And looking at CapEx, if you could share your thoughts on 2012 as well as next year? And then finally, the tax rate, early guesses for next year? Thanks.

Yes. I think what we have, actually for our CapEx, is -- I think we're pretty consistent quarter to quarter. We're spending roughly around, I think about $5 million a quarter. I don't expect that -- I expect that to go down a little bit next year, because we won't be -- I don't see us capitalizing quite as much for IT going forward.

Now, as far as the tax rate, I think we talked about what we expect the tax rate to be for the rest of this year. I really don't want to give out next year, because -- and by the way, that requires me to sort of guesstimate what profits are going to be by country and stuff like that. It's very sensitive to that. But my sense is if -- for your model, I would just use what we are projecting for the second half of the year, use that for next year, also.

Thanks a lot.

Yes.

Vincent Tang, Lockwell Investments.

Hello, guys. Good morning.

Good morning, Vincent.

Mike, can you share your thoughts on future buybacks and a potential dividend program? I'd just love to get your thoughts there. Thanks.

Yes. By the way, I think one of the things is, we continue to buy back stock. I think we see great value in the Company. We look at everything from a risk adjusted basis. I will let you know that we spent a fair amount of capital, beginning in the third quarter, buying LaserBand, roughly $58 million. I don't see us stopping doing buybacks, but we will evaluate all of our alternatives and compare doing acquisitions with M&A and our buybacks, and also investing in the Company. I -- so at this point, I would say we will continue to do buybacks, likely.

Okay. How do dividends fit into that equation?

At this point, we are not paying a dividend. We talk about that a lot, because we think returning capital to our shareholders is important. We feel like we've returned a lot of capital through share buybacks, and we expect will continue to. But at this point, we haven't decided to implement a dividend for the Company.

Okay. My follow-up question is, what are you seeing in terms of the M&A? How does the pipeline look?

Well, our M&A strategy hasn't changed from what it was previously. We first start by looking at -- making sure we use our resources in those activities that has the potential of generating the highest risk adjusted returns. And specifically with M&A, the first filter any deal has to go through is some restrictive filter and make sure it fits our strategy, that it enhances our ability to execute on our strategy and accelerate the execution of our strategy.

But I would say at this stage that we are interested in continuing to do modest sized deals. It looks like asset prices might be more attractive as we go forward, based on the economic outlook. And we have the financial resources to be able to be somewhat opportunistic and pick up good acquisitions as they come along, for reasonable prices.

Got it. Thank you.

Tony Kure, KeyBanc.

Good morning, guys.

Good morning.

Just wanted to ask about LaserBand a little bit. Obviously, the healthcare push is the strategy there. If you could provide a little color on the operating margin, profile of LaserBand. I know you talked about it being immediately accretive. I am sure you didn't take on debt to do this. So could you talk about what kind of accretion we are talking about, or at least maybe give some color as far as the margin profile, relative to Zebra overall?

We did state it was going to be immediately accretive, but I will let you know that was not the only hurdle we used for buying that company. We also mentioned that sales for LaserBand was running around $24 million a year. And the gross margin and operating margin is similar to Zebra. I would say it's probably better than our regular label business, but not as good as certainly the overall business. But for what we invested in, we felt we had an attractive -- a very attractive return on capital for that investment.

So if this is closed, is there a couple of pennies of accretion then factored into your third quarter? And then obviously, it will be in the fourth quarter also then?

Yes. We do plan on holding onto LaserBand through the fourth quarter -- no, that was not your question. Obviously, given it's got margins similar to Zebra, and we're running at $24 million annual sales, obviously that would be naturally accretive. And naturally, we bake that into our forecast.

Okay. Great. And then just one quick follow-up, on the strength. In North America, it was pretty strong. And I think the comment was made, despite weakness with the largest retail customer. Was that just a second quarter event and that maybe pushes some volume out to the second half? Or, if you could just provide a little color? Is there something else going on as far as that customer?

I'll answer the overall North America question first, and then we can see how deep we go into the specific question about customers.

We saw very broad-based strength in North America, across all verticals, basically. But we had a normal large deal flow in the quarter. We started to see nice momentum from the strategic accounts sales initiative we put in place last year. And we mentioned that on the last call, and we'll also say in this call that the customers that we have identified for our high-touch sales organization, when you exclude our largest customer, are growing very nicely. Very nicely. And they're giving us nice insights into their requirements and better understanding their needs. So we have some ancillary benefits, from that perspective. And this is, I think, has been a good story for us over the last year now. We've had four consecutively stronger quarters in North America, with 10% growth. And it's been a long time since we had 10% growth in North America, so we feel very good about that. And manufacturing was a vertical that did well. Retail is the second tier. Retail has started to invest more in technology to help enhance both the customer experience, but also to improve operational efficiencies in their stores.

So the outlook for North America, I would say, there's still some uncertainty as to what the economy is going to do, but we are optimistic about our position, and we feel good that the investments we've made in strategic sales and strengthening our vertical marketing activities is going to drive good growth for us in retail and government and in healthcare. I don't know, Mike, if you want to add anything?

Tony, just a couple other points. I think Anders covered most of what's really taking place in North America. But we had a solid -- in the prepared comments, we noted a very solid run rate business in North America, that was principally driven from the manufacturing, warehousing distribution segment of our business. Tier two retail is, as Anders noted, was very strong, and this is particularly encouraging because our tier one retailer was significantly down on a year-over-year basis. And so the offset was very positive. We had roughly 30% growth in the healthcare space in North America, which was fueled by a lot of the wristband applications. And this further cements the attractiveness of the LaserBand acquisition. And so, it's been a pretty diverse mix. It is the second best quarter ever. It is the strongest quarter since the fourth quarter of 2006 in North America.

Okay. Thank you.

(Operator Instructions)

Tavis McCourt, Raymond James.

Hello, guys. Thanks for taking my question. Anders, I wonder if you could talk a little bit about where the LaserBand acquisition brings you in the healthcare vertical? Are there distribution synergies or cross-selling potential with that product line?

And then a follow-up for Mike on the cash question. How much of your cash is usable in the US, and how much is potentially stranded overseas at this point? Thanks.

Okay. Yes, so first on LaserBand. Healthcare has been a strategic vertical market for us for some time. It has been our fastest growing vertical market for probably the last five years. It still doesn't have the same prominence as manufacturing or retail, but it's been a very attractive market for us. And Q2 had great growth in our wristband sales globally. North America specifically, but also globally.

So when we looked at LaserBand, we saw a great fit with a company that can really help to strengthen the Zebra platform. We've been exclusively dealing with thermal printing solutions. And LaserBand has both thermal and laser printed wristbands. So we saw a great opportunity to offer broader solutions, be more neutral when we talk to our customers. And whatever preference they have, we could supply. And it give us a greater platform that we can continue to expand off. So we felt that was very attractive. And they have a very strong position in North America. Their position outside of North America is nowhere near as strong. So we felt we have great opportunities to leverage our strong international distribution capability to take them into Europe first, but also to Asia and Latin America.

And then, to your question. At the end of the quarter, we have about $388 million of cash investments, and roughly $140 million of that is held overseas. I would argue, we don't view the cash completely trapped. We really think we have some attractive investments overseas that we plan on utilizing. And that's one of the reasons we invested in restructuring our legal entity structure overseas, to build investments in some of that stuff. We've talked about supplies and stuff overseas, trying to build it. So we expect to be able to utilize some of that cash overseas. But specifically, we have about $140 million overseas right now.

Travis, this is Mike Terzich. I want to add a little bit of color to Anders' comments, because I think the wristband space in the healthcare market for us is very exciting, and I want to share with you what we see from a mandate perspective.

There is a number of mandates centered in the United States around the electronic health record. This has requirements for computerized physician order entry and closed loop medication administration. When you look at the mandates and the result of that, it drives a lot of opportunity for bar coding and for wrist banding. And in the United States, approximately 30% of those hospitals have started to deploy, 70% have not. In those 30% that have deployed, they've really just deployed at a single application layer. So the combination of a thermal portfolio from Zebra and a laser portfolio from LaserBand really introduces a wider range of opportunity to us.

You go outside the United States, and some of the phenomenon we are seen in the emerging markets, we've talked a lot about the rise of the middle-class. What's happening in those marketplaces is the demand for improved healthcare, healthcare safety, healthcare services is on the increase. What LaserBand brings us in those markets, we can leverage the Zebra international infrastructure, but it gives us an opportunity to introduce wrist banding where they don't have to purchase capital equipment. This effectively works off of the already installed laser printers that they have in their hospital organization. Some it's a low cost of entry, introduces wrist banding into those hospitals. We think we're going to be able to follow up with thermal solutions, where they are appropriate. So the sum of the two is a really exciting proposition for us.

Maybe the last thing to say on LaserBand also is that we're very excited about the team that we got from LaserBand. They are a small team, but they're fully dedicated to the healthcare space, so they are experts in that. And we think we can build a nice organization around them and really take advantage of their vertical expertise.

Just to throw in there -- the other thing, too, I would say is, these wristbands are patented, which you really wouldn't expect in this market. But it is something that's a real competitive advantage that we felt was worthwhile.

Thanks. That's helpful. And Mike, in terms of the -- follow up on the cash question, does the new organizational structure change at all where the incremental free cash flow ends up landing, US versus international?

No. It really doesn't -- not really that. It really sort of allows us, within our international organization, to more freely move capital around outside North America and cost-effectively invest it overseas.

Thanks. That's very helpful. Thanks.

Greg Halter, Great Lakes Review.

Good morning, guys.

Good morning.

Back on the wristband market, wondered if you could discuss the total size of that market, and maybe what share you guys have currently and what it is growing at?

It's really hard to talk about the size of the market in that respect. I would be comfortable saying that between LaserBand and Zebra, we have a very, very, very strong position when it comes to the printed wristbands. But there is also other wristbands that are handwritten, and they're not quite yet part of the electronic health record mandate. So I think we believe it is a very large market and growing at a very healthy clip, but I don't want to talk about what market share we have.

I would say, Greg, the other piece of that is -- to Anders' point, there is a good portion of that market is unprinted today. And when you look at the significant amount of population that resides outside of the United States, there is a tremendous amount of opportunity.

And would you anticipate working in conjunction with the thermal and laser, or do you expect any cannibalization of your product with theirs, or does it really not matter?

No, it's actually -- we see them being very complimentary. There are certain applications within a hospital that thermal may be a better solution. The laser solution, Mike Smiley mentioned, we have a lot of patents around that solution that we've acquired. One of the interesting applications is, it's a laminated band, so it has a very high durability content, so it will resist a lot of what happens in a hospital environment. But the two solutions in combination will find themselves in the same hospital in different applications suites. But what we want to leverage is the fact that on a combined basis, we become a much more significant brand in the wrist banding space, and we are going to leverage the sales infrastructure that we have acquired through LaserBand to drive a lot of the sales forward.

And one other quick one, if I could sneak it in. Are there other things that you are doing in the hospital environment that you could lever off of your own products as well as LaserBand's?

Yes. And when you think about the portfolio that we have, when you think about -- from a hospital supply chain perspective, hospitals offer an enormous possibility for us and tremendous potential, from just simple bar coding at various stages of critical assets, all the way through real-time location of those assets. So one of the other ultimate opportunities is, when you look at all the capital equipment that's deployed in a hospital, the hospitals are very challenged on the ability to find it. Ultimately locating it quickly and understanding the condition that that piece of equipment is in, is it available for use, becomes another longer-term opportunity play for us. So there are a number of places for us to go.

We can extend other cartridge-like thermal applications in non-wrist banding solutions. So when think about medical specimen labeling, laboratories, things of that nature. So we see the hospital ecosystem as very underpenetrated, very underserved, and this is really our first foray in establishing a broader position.

Thank you.

Rich Glass, [Lockwell] Investments.

Hello, guys. Can you maybe help us understand what would -- what confluence of events maybe it would take to get you guys to be more active on the buyback? Kind of what is the impediment here? Unless you are picking up acquisitions in a big way, in terms of doing meaningful sizable acquisitions, which I think was the old strategy and not the more recent strategy, given what's gone on with your valuation, how can you justify sitting on the pile of cash that we've been sitting on for quite a while as the stock's performance has not been so great for a while as well. And it would seem to be very accretive to put the cash to work, as we've seen, in any manner, given that it is earning nothing. So doing an acquisition here is accretive. But buying back your own stock is certainly lower risk than doing an acquisition of an outside company. So what would it take to get more aggressive on the buy back, or maybe do something meaningful like a Dutch tender? Thanks.

If you look at our performance with buybacks over the last, I would say, five years, I think we bought back about $750 million worth of equity. That's a pretty substantial commitment from our side. At least, I thought of it as that. And we've been able to step up and down our buybacks, based on what we see in the markets. Very substantially, right? You look at Q3 of last year, we actually bought back 1.8 million shares in one quarter. We stepped down a little bit after that, because our share price was performing very nicely in Q4 and Q1. In Q2, we were a bit more cautious as we were working on the LaserBand acquisition. But we're still committed to buying back shares. And I don't think we would say anything has changed with our strategy today.

Thanks.

Marty Moser, Northwestern Mutual.

I guess kind of along those same lines, cash flow -- free cash flow has been really good the first two quarters. Maybe talk a little bit about the second half and then the FX hit that you are assuming in your guide for next quarter.

Yes. (Inaudible) on the FX, we are assuming, again, just for the third quarter, $1.23. We don't know exactly how much -- what that will -- I don't even know if it's going to be up there, but we are assuming $1.23, which obviously has an impact on us there. As far as deploying cash flow, again, we've invested $58 million in LaserBand. We realize we still have a fair amount of capital, and we plan on putting it to work, and doing share buy backs. It's not that we're not doing that. So I see ourselves continuing to do that. But I will argue that we have talked about some attractive ways to continue to build the business and we evaluate those on a risk-adjusted basis to sort of see how we look at those. We do feel the LaserBand business definitely is an attractive investment relative to buying back the Company's stock. But I don't see us stopping buying back Company stock going forward.

I guess the question really was, you had $85 million in free cash flow in the first half. I assume that goes down somewhat in the second half? I am just asking how much.

I don't know that -- by the way, a good chunk of that was -- a meaningful portion of that was inventory reductions. And by the way, I think we still have the opportunity to continue to optimize our inventory. So my sense is we will have a good second half. It may not be quite as strong as the first half, but it will probably be pretty close to that.

Historically, our cash flow in the first half tends to be weaker than the second half, as we have a number of tax payments that come due. So we still expect good cash flow for the remainder of the year.

Great.

The other thing I forgot to mention is we also had a settlement of an escrow fund for the sale of Navis in the first quarter, but also the second quarter --

But also in the second half.

Yes, we will have it in the second half.

Okay. Then if I could, just maybe talk about Asia and Latin America trends as you see them? Latin America held up pretty good, but it sounds like you didn't get big projects, and Asia has just been overwhelmed with the contract manufacturer side. I'm wondering when that might change.

So, I think back to what I talked a little bit earlier, we've had very attractive growth rates from our emerging market investments. And in Asia, we've seen great performers out of China, India and other countries over the last three years. But the economic situation in Europe is putting a bit of a damper on the export oriented business. So that's impacting China to some degree and it's impacting Korea for us.

But the other parts I would highlight here would be FX, which is an important factor in many of these countries. So we sell in dollars to them and they sell in the local currency to their customers. So two countries that tend to be particularly sensitive to FX is Brazil and India. Both the Real and the Rupee have weakened substantially against the dollar over the last three years -- three months this year. So that means that our customers are a little more cautious about how to engage with building inventory or going after deals. They want to make sure they protect their margins.

Thank you.

I would certainly say that we feel very good about our overall strategy and our ability to continue to grow profitably and extend our leadership in the industry. And I think, even in the last quarter, where life was a bit harder, we feel confident that we've continued to extend our leadership and gain share in the industry. And it's obviously, in absolute terms, it hasn't been quite as attractive. But I think on relative terms, we've been performing very well.

That was our final question, ladies and gentlemen. I will now turn the conference over to Doug for closing comments.

Again, thank you everybody for joining us today. And as I mentioned to previously, our next call is currently scheduled for November 1, and Mike and I will be available for questions afterwards. Have a good day. Thank you.

Thank you very much. Today's conference is now concluded.