Brady Corporation F4Q08 (Qtr End 07/31/08) Earnings Call Transcript

| About: Brady Corporation (BRC)

Brady Corporation (NYSE:BRC)

F4Q08 Earnings Call

September 17, 2008 10:30 am ET


Barbara Bolens – Vice President, Investor Relations

Frank M. Jaehnert – President & Chief Executive Officer

Thomas J. Felmer - Chief Financial Officer

Peter C. Sephton - President of Brady Europe

Matt O. Williamson - President of Brady Americas

Allan J. Klotsche - President of Brady Asia Pacific


Charles Brady - BMO Capital Markets

William Stein - Credit Suisse

Robert McCarthy - Robert W. Baird & Co., Inc.

Ajit Pai - Thomas Weisel Partners

Anthony Kure - KeyBanc Capital Markets


Welcome to the fourth quarter 2008 Brady Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Barbara Bolens, Vice President of Investor Relations.

Barbara Bolens

During our call this morning you will hear from Frank Jaehnert, CEO, and then Tom Felmer, CFO, presenting Brady's quarterly financial review. Also joining us this morning is Matt Williamson, President of Brady Americas; Peter Sephton, President of Brady Europe; and Allan Klotsche, President of Brady Asia Pacific, who will all be presenting in providing 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 individual slides as we proceed through the presentation. These slides can be found on our website at You have a few minutes to get to those while we go through our Safe Harbor Statements and other usual information.

Please also note that in this call we may make comments about forward-looking information. Words such as expect, believe and anticipate are a few examples of words identifying a forward-looking statement. It is important to note that this forward-looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release this morning and in Brady's 10-K filed with the SEC in October 2007.

Please also 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 we will also be taping the call and broadcasting it on the Internet for replay and your participation in the question-and-answer session will constitute your consent to being recorded.

Thank you and now here is Frank Jaehnert

Frank M. Jaehnert

We are very pleased to end fiscal 2008 with a solid quarter, especially in light of a challenging economy. During the quarter we completed a transition of management of the Americas under the leadership of Matt Williamson. As a result, we are reporting the Americas once again as one segment.

Our organic sales in the Americas and Europe have certainly been challenged by the slower economy, however, as expected, we saw organic growth in Asia at 11.5%, the first time we have seen organic growth in Eurasia since the first quarter of fiscal 2007. This growth, combined with the cost reduction activities of fiscal 2007 led to 40% growth in segment profit in the region.

We believe we have prepared ourselves well for slow economic times, reducing our cost structure, and that allowed us to meet our sales and profit projections for the year just ended. We continue to look for ways to optimize our business model to assure our business is the right size for the economy today and we have provided leverage for profit improvement when our organic growth returns to more normal levels.

As we look back on fiscal 2008 there are many accomplishments beyond our sales and early [inaudible] results, which I am very pleased with. We established targets for working capital improvement at the start of the year and had the entire organization working toward achievement of those goals. As a result of this company-wide effort our free cash flow increased 137% during the year.

Half way through the year we started down our path toward lean, which led us to the development of the Brady Business Performance System, BBPS. Today we have hundreds of BBPS activities occurring throughout the company, which is why we continue to believe we can improve the profitability of the business even in challenging economic times.

There are many other accomplishments during the year and I can say that I am truly pleased with the results. I will now turn the call over to Tom Felmer who will walk you through the first quarter financial review. I will return after regional reports to give some thought into fiscal 2009.

Thomas J. Felmer

I would like to walk you through Brady’s results, beginning on Slide 3 of our presentation. As Frank mentioned, we had many accomplishments and delivered very solid results in fiscal 2008. Our financial results for the year were highlighted by record sales of $1.523 billion, up 12% over prior year; record net income of $132.2 million, up 21% over prior year; and record cash flow from operations of $226.0 million, up 66% over fiscal 2007.

We also launched the Brady Business Performance System to align key growth and productivity initiatives across the company, to continue to invest in upgrades in all areas of our R&D and new product development functions, and we also completed eight SAP goal lines in two acquisitions throughout the year.

As you can see on Slide 4, our fourth quarter also showed significant improvement over prior year fourth quarter. Our $397.0 million in sales were 9% over prior year, gross margins of 48.4% were up 50 basis points, SG&A came in at 31.8%, down 210 basis points, net income and diluted EPS were $34.8 million and $0.64 for the quarter, both up 33% over prior year. And finally, we generated $73.0 million cash flow from operations, which was a 30% improvement over prior year.

Moving on to Slide 5, we show our quarterly growth trend over past year and break down the 9% sales growth we generated in the fourth quarter. Organic growth was flat for the company, however, as Frank mentioned earlier, we generated 11% core growth in Asia, but core growth in the Americas and Europe were down 2% and 3% respectively. Acquisition growth for the quarter was 3% and currency added 6%.

On Slide 6 you can see that the gross margin improved consistently in each of the last three quarters over prior year, ending the year at 48.4% in the fourth quarter. SG&A also improved meaningfully in the quarter at 31.8%, down 210 basis points from the prior year. Both gross margins and SG&A saw improvements from productivity efforts throughout this year and last. We continue to focus much of our BBPS efforts in these areas in order to drive more improvements in the future.

Moving to Slide 7, we continue to build our investment in R&D. In the fourth quarter we launched several new products, including new circuit board labels, new high-performance wire markers, a new thermal transfer printer, and a software program that helps companies automate lean practices that result in reduced down time and increased performance. We also accelerated spending in the quarter in several key programs which resulted in our increased spending on prior year by 18% in the quarter.

Slide 8 shows that our operating income and net income are up each quarter this year, ending with 32% operating growth in the quarter and net income of $34.8 million, up 33% over last year’s fourth quarter.

On Slide 9, diluted EPS growth for the quarter was $0.64, up 33% over last year’s $0.48. During the quarter we purchased approximately 405,000 shares under our repurchase authorization. Q4 EBITDA was up $70.8 million, up 25% over last year.

On Slide 10 we provide a summary of our cash generation and usage for the year. As you can see, we began the year with $142.8 million in cash and added $115.6 million throughout the year to end with $258.4 million. The increase was driven by generating $225.6 million in cash from operating activities, converting $19.2 million in short-term investments to cash, and adding $14.5 million cash which was generated as a result of employees exercising stock options.

These gains were partially offset by using cash to pay down $21.4 million in debt, investing $26.4 million in capital expenditures, $29.3 million in acquisition, paying $32.5 million in dividends, and repurchasing $42.2 million worth of stock throughout the year. There was also another $8.1 million that was generated through various means.

We have talked throughout the year about our focus on improving working capital and the momentum of those efforts can be seen on Slide 11. It is clear by the amount of cash that we have generated this year that these efforts have been successful and leave us in a very solid cash position. Our priorities for our use of cash remain the same, we look to fund internal growth through efforts such as new product development and geographic expansion, we continue to seek acquisition opportunities in our core spaces and adjacencies, and we continue to improve the return to our shareholders through dividends and share repurchases.

As evidenced through our announcement earlier today, we have an increase of dividends by $0.08 per share in fiscal 2009 and the repurchase of more than $42.0 million worth of shares throughout the past 12 months.

On Slide 12 we show our year-ending balance sheet for fiscal 2008 and fiscal 2007. Here you can see that we continue to increase our cash while showing reduction in inventories, even as we grow our business, by 12% for the year. Receivables grew at a slower pace within the top line.

On Slide 13 it shows our capital structure and debt balances. We finished the year with $479.0 million of gross debt and using cash to offset that we end the year with $220.0 million in net debt. Our debt-to-EBITDA ratio is 1.8x and net debt to EBITDA ratio is 0.8x. We continue to be comfortable with a net debt-to-EBITDA ratio that averages 2x over time. We are well within that level and have sufficient flexibility to add to our debt should an attractive growth opportunity present itself.

In summary, we are pleased that despite a challenging economy, we have delivered very successful results, both for the fourth quarter and for the full 2008 fiscal year.

Moving on to Slide 14, as we look ahead to our fiscal 2009, we will continue to focus on creating shareholder value by improving our operating results through the continued implementation of the Brady Business Performance System and growing through investments and new product development and value-adding acquisitions.

In June we issued guidance for fiscal 2009 that said we would generate revenues of $1.56 billion to $1.59 billion and net income of $145.0 million to $152.0 million. Over the past month or so we have seen a significant strengthening of the U.S. dollar and conversely, a weakening of currency in many of the countries in which we operate. Because these currencies have fallen below the average exchange rates that we experienced in FY2008 and because we have seen deteriorating economy that is expected through the end of calendar 2008 and the beginning of 2009, we feel that it is prudent to adjust our FY2009 guidance to reflect these changes.

Our updated guidance for fiscal 2009 is that we expect to generate revenues between $1.52 billion to $1.55 billion and net income between $140.0 million to $145.0 million, which will result in diluted earnings per share between $2.54 to $2.63. We expect the first half of FY2009 to be slower than the second half, due to the economy in the Americas and Europe and our assumptions for tax rate, cap-ex, and depreciation and amortization remain unchanged from our previous guidance.

Before I turn the discussion to our group presidents for their updates, I would like to confirm a statement that was in our press release this morning. During the fourth quarter we completed the consolidation of the Direct Marketing Americas and Brady Americas businesses under Matt Williamson. Because these businesses are now under Matt’s leadership and share much of the same infrastructure, we have combined them into one segment, similar to the way that they were reported in fiscal 2007 and similar to the way that we report our European businesses.

Beginning with this report and the 10-K that will be released with our fiscal 2008 results, we will report our results for the three regional segments, Brady Americas, Brady Europe, and Brady Asia.

With that background I would like to move on to our regional updates. Matt Williamson will begin with the Americas region.

Matt O. Williamson

Please refer to Slide 15. Americas sales in the fourth quarter were $169.0 million, which was flat versus the prior year. Organic sales declined 2% while acquisitions added less than 1% and foreign currency translation added about 2% to sales. In the U.S. our Brady business was flat for the prior year, driven by lower sales in our die-cut business and sales in the end markets such as construction and utility where we have seen softness for several quarters. These sales declines were offset by growth with key Brady U.S. distribution partners.

Additionally, we believe several of the strategic initiatives in which we have made investments have allowed us to offset soft economic conditions. Several of these market initiatives include the aerospace and defense manufacturers, where we have focused our sales efforts on specifying Brady products and the energy market, where we have been able to capitalize on a growing market through product differentiation. We have also had success in the education market, with our new Veriquest product line and laboratory markets where we again have focused our sales efforts with differentiated labels and printing systems.

We are pleased with the growth in these end markets, given the soft economic conditions in the U.S. and some increased pricing pressures in the market on our less-differentiated products.

Similarly, our strategy to grow sales to industrial and electronic manufacturers in Brazil and Mexico is continuing to yield strong results. Our acquisition of [Aster Risco] combined with our sales team’s strategic account focus, has proven successful with good market acceptance of our products and broad penetration into these customers. Growth in Canada was also strong in all markets, but especially in energy, as we say in the U.S.

In our Direct Marketing businesses organic sales were down moderately due to declines in construction, retail, utility, and manufacturing markets that we believe is a result of a softer economy. Our strategy to diversify our channels to include more e-business is beginning to pay off with stronger Internet sales.

In the people identification business we are addressing some integration difficulties which contributed to a sales decline during the quarter but we believe these challenges are mostly behind us.

Segment profit rose 4%, or $1.6 million, to $41.2 million in the quarter. As a percent of sales segment profit increased to 24.3% compared to 23.5% in the prior year and this year’s fourth quarter included a significant increase in R&D spend over last year.

Through the acquisitions of SPC and DAWG we have strategically expanded into the sorbents market adjacency. These products are mainly petroleum-based and the steep increase in raw material costs has led to a challenge to maintain margins.

Finally, our working capital as a percent of sales improved 19% in the fourth quarter versus the prior year.

To offset the slowing U.S. economy, we continue to aggressively manage our cost base with accelerated lean management across all functions, ongoing implementation of SAP, as well as manufacturing cost savings projects and facility utilization. We expect that these moves will provide cost savings to us as increases in raw materials and drive absorption of our facilities to improve gross margin.

Going forward we continue to watch the U.S. economy particularly. We are focused on numerous strategies to drive core product sales growth while continuing to drive operational improvements, sales efficiencies, and reduce our production costs.

With that I will turn the time over to Peter Sephton who will now report on our European businesses.

Peter C. Sephton

I will turn your attention to Slide 16. Sales in Europe grew by 16% in the quarter to $131.8 million compared to $114.0 million last year. Acquisitions contributed 8% and currency added a further 11%.

Organic growth was down 3% due to the benefit that we had in 2007 that you may remember from the no-smoking legislation, which effectively ended in August 2007. And we did see a little bit of general softening in our Direct Marketing business in the U.K.

Looking now at our business by brand, our overall Direct Marketing sales were down against the previous year, primarily in the U.K. However, our Direct Marketing businesses in new geographies and those that were not affected by the public smoking ban performed solidly and continued to post healthy growth figures.

Our strategy to extend our product offer, geographic reach, and refining our multi-channel science is progressing well. For instance, our two new Direct Marketing businesses in Sweden and Portugal grew strongly in the quarter. Furthermore, our success in Sweden is particularly encouraging because we drive most of our customer contact in that country via the Internet. And from this we are developing a new start-up strategy that will allow us to expand our business at a lower cost across the region.

Moving now to the Brady brand. The Brady brand was a good source of call break in the quarter. Our MRO focus in this business showed good resistance against the general economic softness. The success in MRO is its deliberate strategy to focus our proprietary product lines in industries that have good growth prospects and are typically more resilient to economic cycles.

For instance our lock-out/tag-out product lines are growing at double-digit rates across the whole of the region boosted by the acquisition of Scafftag and our market focus on process industries.

Similarly, our people ID business grew solidly and our strategy to win business with major grocery retailers has proven to be very fruitful indeed. But the majority of our business is in MRO, our OEM business continues to benefit from the shift away from thermal electronics and into more sophisticated parts of the medical industry. While this is in an early stage, initial signs are very encouraging.

Another area of focus is ensuring that all our acquisitions are successful in Europe. Scafftag in the U.K. has become one of our top performers, combining excellent profitability with healthy growth rates, both in the U.K. and in the Middle East. SPC of Belgium adds consumer spill-control products to our MRO offer and continues to grow at sales as our distributor model is being implemented across the whole of the region.

Transposafe, our security seals business, posted its best quarter so far under our ownership, reflecting the increased need for security and safety in crate and distribution.

Modernotecnica, our Italian wire identification business, continues to perform well despite a weak economy.

These businesses and brands are becoming an established part of the Brady business. All of this contributed to segment profit for Europe, showing strong improvement over last year despite a very tough comparable. We grew our profits at 17.3% to $38.2 million.

We are pleased, also, that our operating profit as a percentage of sales improved to 29% from 28.6% in last year.

Turning our attention now towards the future, as more and more indicators point towards a much tougher economic climate all over Europe in the coming months and we’ve already taken a number of cost initiatives, to safeguard our position in margins. These actions should enable us to weather a turbulent economic environment.

Our Direct Marketing business, with such a diversified customer base, is often a bellwether for general economic weakness and we expect to see some softening in the U.K. and Germany in particular. The steps we have taken to firm up our margins through mix and strong control should help us to mitigate these risks.

And with that, I will pass you on to Asia/Pacific and Al Klotsche.

Allan J. Klotsche

I would direct your attention now to Slide 17. Asia/Pacific sales for the fourth quarter were $95.8 million, up 20% from last year. Organic growth was 11% while currency added a positive 9% and acquisitions had no impact on our fourth quarter sales growth. As expected, we saw a strong quarter in terms of core growth, especially in our OEM electronics business. Our mobile handset business performed at, or slightly above, our projections for the quarter based on successful conversion of design wins to volume production.

Sales of die-cut products and labels for entry level phones serving markets such as India, Africa and parts of inland China, continue to drive a bulk of the volume. But this quarter also saw a nice up tick in the sales of higher end solutions for a newly introduced group of feature-rich mobile handsets.

We believe that our innovative solutions are valued by the industry, as OEMs strive to differentiate themselves from one another. The continued success of products like Apple’s iPhone, Nokia’s N-95 and the Samsung Instinct, combined with the roll out of 3G in China is driving demand for higher performance materials and complex converting.

With the up tick in core growth relative to what we have seen over the prior quarters, our challenge will be ensuring that we have enough capacity in the right locations to meet this fall’s upcoming demand.

China continues to be the largest area of concentration for this business but other geographies, such as India, and even Viet Nam, are starting to show signs of growth as manufacturers look beyond the borders of China for a variety of reasons.

Regionally, we will continue our increased efforts in spending around research and development to bring new and innovative solutions to this market place. Competition really hasn’t changed a lot in this market as it continues to be a mix of local and multi-national converters.

Downward pricing pressures from the market place, coupled with rising material costs, placed a premium on our ability to consistently redesign our process for efficiency. We continue to look for opportunities to streamline our infrastructure to ensure the lowest cost delivery without sacrificing the baseline service levels to our customers.

Although a much smaller of the Asia product portfolio, our hard disc drive business has delivered solid results throughout the year with demand for storage capacity continuing to rise in all forms. The need for continuous innovation is as strong as ever.

Our research and development investments focused on higher-end solutions have paid off with our North American hard disc drive customers, as well as opening some new doors to Asian hard disc drive manufacturers. We also faced aggressive competition in this market place but to date, our competitors have not been able to match our capabilities and geographic presence.

Our high-performance label business grew in line with the market, with a mix of established products as well as new solutions. Some of the products that we have successfully introduced in North America and Europe were launched in the latter half of our fourth quarter in Asia and should have a positive impact in our fiscal 2009.

Our safety and facility identification business continued to grow nicely, with the support of a larger and more focused group of channel partners that we have been developing over the last year. However, we are starting to see slower growth rates in selected geographies, including our Australian business, which is a predominantly MRO focused business. Although our business in Australia had grown organically, and with the acquisitions over the last two years, the softening economy is definitely having an impact on our overall business there.

Southeast Asia, outside of Thailand, continues to be a challenging environment for finding large sales growth opportunities. As economies such as Singapore shift their focus from manufacturing to a more service-related economy, we are adjusting our selling focus to more of our MRO products, such as plant and facility identification and wire market.

Segment profit for the region was $15.1 million, up 40% from last year’s segment profit of $10.8 million. The increased loading of our facilities has a positive impact on profitability. We were also very pleased to see the efforts around process improvement and efficiency being recognized in our financials this quarter.

Looking forward to our first quarter of fiscal 2009, we expect to see sales levels similar to our first quarter of last year. You may recall this was a strong quarter for us last year. From a profitability standpoint we also expect to grow over our prior year but more so in the latter portion of fiscal 2009 as the investments we are making in R&D and new product development begin to take hold commercially.

I will now turn the call back to Frank Jaehnert.

Frank M. Jaehnert

I am very pleased to have had a strong end to fiscal 2008 in which we had record sales, record net income and record net cash flow. As we look forward to the coming quarters we are optimistic about our opportunities, even in light of a soft economy, which we face in the Americas and Europe.

With that said, we could not have anticipated the speed at which the dollar correction occurred nor did we anticipate a further deterioration of the global economy when we issued our original fiscal 2009 guidance three months ago. As a result, we reduced our guidance today for the full year. We cannot change the economy and the direction and pace of currency moves but we can continue to make improvements to our business overall, our cost structure and our profitability.

I am very excited about the pace of our roll out of Brady Business Performance Systems throughout the company. In fiscal 2008 we saw the power and success of having the entire organization focused on improving working capital. I expect that in fiscal 2009 as we deploy the concept of lean and strategic deployments through our processes globally that we will see a similar success.

I am also excited about the progress we are making in new product development. It means that the systems, personnel, and pipeline that have been built should begin to provide meaningful results in the future. While our SAP deployment is not on as rapid a pace as it was the last two years, we continue to see the benefits of having nearly 70% of our business on a common IT platform and will continue to leverage that through shared services and common processes.

We also continue to look for acquisitions that are existing in a changing markets to continue to expand our businesses. We still believe a goal of 5% upline growth for acquisitions is a good pace, long term, but we have seen over the years that the actual pace can be quite lumpy. This doesn’t mean we have to stop looking.

Finally, we continue to look for ways to manage our cost structure in such a way that we can deliver solid earnings per share growth while we expect soft organic growth in a currency headwind. This has become sort of our culture over the last year and we continue to see opportunities ahead of us.

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

Question-and-Answer Session


(Operator Instructions) Your first question comes from Charles Brady with BMO Capital Markets.

Charles Brady - BMO Capital Markets

On your revised guidance, how much of that is currency-related and how much is broader-economy related?

Thomas J. Felmer

The majority of it is currency-related. We don’t break it out on an allocation basis, but the majority of it is currency-related.

Charles Brady - BMO Capital Markets

With regards to the European segment, the minus 3 organic growth there, how much of that is from the tough comp on the U.K. smoking legislation that’s not repeated and how much is just general kind of economic softness in the U.K. and Western Europe and maybe you could comment on specific markets, the degree of softness you’re seeing outside the U.K., such as Germany, France, Spain, and kind of Western Europe in general.

Peter C. Sephton

I think if you look at the hard numbers you could look at it both ways. You could say that all of it [inaudible] last year and the decline was in the U.K. as we pointed out, however there wasn’t enough to compensate. We expected general growth through better mailings but that gives us an indication that there is softness, certainly in the U.S. economy. And the U.K. economy is always the first to react, with a more flexible labor market.

So we’ve seen it in the U.K. You could analyze the numbers and say it boils down to that tough comp, but there wasn’t enough upside to compensate for that decline in no-smoking legislation. We would have thought that in the U.K. we would do a little bit better.

As we pointed out, going forward it’s difficult to predict, but I think your best judgment would tell you that with all the indication that we’re seeing in Europe, and with the spread of customers that we’ve got in our Direct Marketing businesses, we may start to see signs in some of the other developed economies across Europe where we have good presence, Germany in particular. That’s what we’re trying to point out.

Charles Brady - BMO Capital Markets

And Frank, with regards to your comments on acquisitions, and obviously they can be lumpy, but I wonder if maybe you can give us some more color on the pipeline, as to how it looks today and maybe pricing multiples, things of that nature.

Frank M. Jaehnert

You know, it’s interesting, I have gone through times like this but typically what happens after a while, a sense of reality sets in and all of a sudden you might say, “You know what? Maybe I cannot get the price anymore which I hoped I could get.” Or the economy turns around and their profitability comes up, at which time we can then go in the market again and buy. But it’s not like we are seeing fire sales. You know, all of a sudden you can have bargains all over the place and we have not seen this at this point in time, at all.


Your next question comes from William Stein with Credit Suisse.

William Stein - Credit Suisse

Allan, I don’t want to pick on you but I’m going to talk about the Asian growth. I am very confused, actually, as to the guidance of flat year-over-year. Unless I’m doing something wrong in my model, I think we’re going to get about 7% year-over-year growth just from [inaudible]. So, to get to flat year-over-year we’re going to need a decline in organic growth and coming off from where we saw the first quarter of substantial year-over-year growth in a while in the July quarter that you’re reporting today. Your guidance is basically suggesting that that 11.5 is going to go back down to like minus 7. Help us understand that or is there a bit of conservatism built in here?

Allan J. Klotsche

Well, I can tell you a couple of things. We saw a spike in our business in the fourth quarter and that’s typically a spike that we see in the first quarter. And there’s maybe a number of reasons for that. But most of the OEMs are building up their supply chain so that they can get inventory into the systems before the holiday rush. And so that means they’ve got to the inventory typically into the system be the end of November and December.

So typically for us, historically we’ve seen August, September, October be a busy build-up season. We actually saw that build-up happening a little bit sooner this year. When you look at the specific programs that we’ve been involved in, I guess the programs were a little bit, they were ready earlier than they have been in other years, perhaps indicating a smoother transition from engineering to production.

The other thing that could enter into this, and we honestly don’t know this yet, is the Olympics in China. There was a lot of concern about what is this going to do to the supply chain and we think that people tried to pull things ahead a little bit in terms of normal cycles to compensate for that.

So those are two sort of macro economic things and then we’re concerned about the continued pressures from a pricing standpoint. And we’re really not sure what models are going to sell the best, coming into this fall season. Our indications are coming out that it’s the lower-end phones that are going to do the best and so as we’re looking at our production mix, that’s where we’re going to be impacted by lower selling prices.

So I’m not sure as I’m answering your question as definitely as you would like, but that’s the best information that we have at this point in time. And I think when we talk at the end of next quarter, this will become a whole lot more evident to us. But we didn’t intentionally build conservatism into our comments.

Frank M. Jaehnert

Maybe I’m getting it totally wrong here. Al talked about flat first quarter. I don’t think he made a comment about the year.

William Stein - Credit Suisse

Flat year-over-year in the quarter.

Frank M. Jaehnert

I just wanted to make sure that he talked about the first quarter, he didn’t talk about the year. And I don’t think he wants to talk about the year. Because there’s a lot of uncertainty but we talked about the first quarter.

William Stein - Credit Suisse

Just digging a little deeper on that, can you remind us, in Asia, what’s kind of the split between OEM and MRO and we think OEM the split between handsets and drives? And I assume handsets and drives make up all of it, or maybe the vast majority.

Allan J. Klotsche

About 70% of our business in Asia is OEM-focused and 30% would be MRO-focused. And then within that OEM focus of the business I would say that our mobile handset business is well over 50% of that, so it’s the majority of it.

William Stein - Credit Suisse

And besides handsets and hard drives, anything else of note in the OEM business?

Allan J. Klotsche

Well, it’s a little bit hard, even as we sub-categorize it internally by our sales people, you have mobile handset, you have what we call consumer electronics and those two have really blended together. We use to call Apple the consumer electronics account and now we are not sure what you call Apple. You know, these devices as they converge on each other, that’s where it makes it really difficult to answer your question.

And even storage, to some extent, is starting to come into the mix here. So that’s why there is a little bit of ambiguity in the answer.

Frank M. Jaehnert

OEM also includes high-performance labels. It’s wire markers for data communications. And of course, hard disc drive is a portion, too. I think historically we have said, Bob correct me if I’m wrong, I think we have said handset is by far the largest, followed by high-performance identification. And all the others. So hard disc drive is smaller than high-performance identification labels.


Your next question comes from Robert McCarthy with Robert Baird.

Robert McCarthy - Robert W. Baird & Co., Inc.

I would like to try to get you to flush out your outlook just a little bit more. And I’m talking about fiscal 2009. In terms of organic growth, clearly you’re forecasting some kind of a negative number for overall organic growth. Does your current outlook include positive organic growth for the year in any?

Thomas J. Felmer

We don’t break it out that way. We’re just looking at the current state of business and the current state of the economies and we’re expecting similar things going forward.

Robert McCarthy - Robert W. Baird & Co., Inc.

For the full year can you talk about your expectations for, based around this forecast, would you expect cash from operations to increase year-to-year?

Thomas J. Felmer

I guess we would expect, as we’ve talked about the implementation of BBPS and continued emphasis [inaudible].

Robert McCarthy - Robert W. Baird & Co., Inc.

Can you talk at all about your operating margin assumptions that are embedded in the outlook? Where I’m trying to go is I’m trying to get some idea of which regions you have the most favorable outlook for and which reason you have the least favorable outlook for. It’s really that simple.

Frank M. Jaehnert

That’s a really simple question but I’m afraid the answer is not as simple. You know, there is a lot of uncertainty. We expect Europe will slow down sooner or later, maybe a year ago, and it happened. And all of a sudden of course Europe is slowing down. It’s really a difficult question to answer so I would just like to leave it at that.


Your next question comes from Ajit Pai with Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

A couple of quick questions. The first one goes back to the cash flows. I think you’ve had some pretty incredible cash flow generation over the past four quarter. You know, business has slowed and working capital, you have managed to become far more efficient. But going into next year I think there is already a question you tried to address a few minutes ago but I didn’t quite understand the answer. Do you think that you can at least sustain the cash flow levels that you had this year or do you think that there is potential that you could actually see in increase in cash flow, as you are forecasting increase in earnings for 2009?

Thomas J. Felmer

I thought I had answered it already, but as I said, with the continued focus on working capital and the implementation of BBPS, we do believe that there is still upside in the cash generation. So we would expect it to at least be equal to this year and we’re hoping that it’s even more.

Ajit Pai - Thomas Weisel Partners

And while you have provided a number for the amount that you have used to buy back shares in this quarter, could you give an update as to what your strategy in terms of uses of cash are and also what is the average price you paid for the shares you repurchased during the quarter?

Thomas J. Felmer

The uses of cash, as far as that question goes, we stated that the primary uses of cash are for internal growth, through expenditures in new product development, geographic expansion, all the organic initiatives that we have in place. Beyond that we still feel that acquisitions play a key role in our growth strategies. We continue to look for acquisitions both in our core space and our adjacencies and we have not backed off over our intentions there at all.

And we still are looking to, we increased our dividends this morning, or announced the increase of dividends this morning and the buy back of shares. We bought $42.0 million worth in the year. As far as price that we paid, it was 1.3 million shares.

Ajit Pai - Thomas Weisel Partners

And then when you’re looking at the potential acquisitions, I think you talked a little bit about the private acquisitions that you have historically made and the reluctance right now to sell. But public market valuations have come down and Brady also has become a much larger company with much more solid balance sheet, cash flow generation. Are you beginning to see acquisitions on the public market side that could potentially belong to Brady right now?

Frank M. Jaehnert

We certainly look at the public market, as well. You have a very good point. Brady has become a larger company and this provides us the opportunity to also look at the public market, so we are looking at it as well as privately held markets. Typically, historically, we have primarily played only in privately held markets. However, Veritronics was a publicly traded company. So we have done this in the past. We have tried a take-over once in the U.K. of Critchley, which is a publicly traded company. So it’s not something we have not done, or tended to do, in the past but as you pointed out, we are a larger company so it’s probably, over the next couple of years it’s probably safe to assume that we might play a larger role.

Ajit Pai - Thomas Weisel Partners

And then on the tax rate. I think you guided to a 29% tax rate for next year. Could you give us some indication, looking further out, whether that tax rate still has potential to come down over time, or whether we should look at the sort of 28% to 29% tax rate as sort of a long-term tax rate?

Frank M. Jaehnert

That’s pretty high and we would hope it could come down. But we are listening to some of the comments being made by politicians and you wonder. It is a healthy assumption that the U.S. tax rate might be the same. There are many things which play into this.


Your next question comes from Anthony Kure with KeyBanc Capital Markets.

Anthony Kure - KeyBanc Capital Markets

Just had a quick question on the rationale behind the reallocation of Direct Marketing back into the Americas. I know the management change is what drove it, but if you could just speak a little bit.

Thomas J. Felmer

We combined the management. What we’ve been doing is consolidating a lot of the organization underneath it and we’ve always run Europe that way and we see the best way to run the Americas is the same way. It’s just simpler for us to run it that way and ultimately report it that way.

Frank M. Jaehnert

And of course it’s driven by, we believe, opportunities to improve cost structures and profitability.

Anthony Kure - KeyBanc Capital Markets

So you just split it about a year ago and now it’s come back. Is that more about the cost savings then? It just seems like a pretty rapid shift within the last year or so, back and forth.

Frank M. Jaehnert

We agree. But it is driven by, we saw the opportunities for cost reduction and profit improvement. Similarly like we are in Europe and Asia, I really cannot disagree with your argument, but we just see we have more opportunities for running a stream-lined business by putting it together.


Your next question comes from Will Stein with Credit Suisse.

William Stein – Credit Suisse

I’m wondering if there is a delay in when you wind up seeing increases or decreases to your material, because clearly you’re not buying directly from the mines, right? Any comment on the trends there?

Frank M. Jaehnert

We have gotten this question over time, historically, and typically what we have said and that’s how it is, we don’t talk too much about material price increases. It has historically not been a major issue for Brady. It has become lately, in sorbents. We made two acquisitions in sorbents and they are much more dependent on resin prices. So all of a sudden we talk a little bit more about this. And certainly we have felt the pressure in material cost increases in this area and are looking forward to the reduction in the oil price, to sooner or later come back and help us.

But we are also not able to fully pass on the material cost increases to our customers because of the competitive markets. But you’re right, the pressure should hopefully go down over time.

As for the rest of our business, Tom if you have any other comments, please chime in, it has never been such a big issue for us.

Thomas J. Felmer

I think as they were going up we said it wouldn’t have a [inaudible]

William Stein – Credit Suisse

Can you comment as to the timing, I understand that you can’t pass it all on to customers so maybe eventually you pass some of it on, over time, because all the competitors are facing the same headwind, but as far as the cost, I’m curious if, for example, there’s a long-term lag, you could still see those material costs decreasing today. That’s really what I’m trying to get you to quantify.

Frank M. Jaehnert

I think you probably don’t want to waste your time in trying to put something in the model because I don’t think it’s material. What we are more looking at is postage increases for our direct marketing business. That’s something what really makes a difference for us. Printing, for our catalogue business. If something were to happen here, postage increases and so forth, I think that’s probably when we should talk. But general oil prices or anything like this or other commodities like steel, you know steel doesn’t make a difference, copper and all those other commodities, it really doesn’t make a big difference.

I wouldn’t know what to tell you to put in your model. It’s not something that we discuss a lot because there’s not too much impact on our P&L.

William Stein – Credit Suisse

We were talking a minute ago about the repurchase during the quarter. Can you remind us what the current authorization is? Is there more authorized and yet to be done?

Thomas J. Felmer

We’re working off an authorization for 1.0 million shares. There’s about 600,000 left.

William Stein – Credit Suisse

And what’s the life span of that authorization?

Thomas J. Felmer

It’s indefinite.


Your next question comes from Charles Brady with BMO capital Markets.

Charles Brady – BMO Capital Markets

I just want to make sure I understand with regards to your guidance. Your assumptions for currency in your revised 2009 guidance, are you assuming currency rates stay where they are today? Or are there other assumptions baked into that guidance.

Thomas J. Felmer

Typically we don’t forecast our currencies out in our guidance, so it’s assuming a comparable currency as to where we are today.


There are no further questions.

Barbara Bolens

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