Brady Corp (BRC) 2002 Q4 法說會逐字稿

Good morning, my name is Shileta and I will be your conference coordinator today. I would like to welcome everyone to the Brady 2002 fourth quarter conference call. All lines have been placed on mute to avoid any background noise. There will be a question and answer period. If you would like to ask a question during this time, simply press star one on your telephone keypad. If would you like to withdraw your question, please press the pound key. Thank you. I will now turn the call over to Director of Investors Relations, Barb Bolens. Ms. Bolens, you may begin your conference.

Good morning. Welcome to our fourth quarter conference call. You will hear from Katherine Hudson, President and CEO, Dave Schroeder, CFO, also Dave Hawke, President of the Graphic and Workplace Solutions Group and Frank Gaines, President of the Identifications and Presentations Group. After presentations by the team, we will open the call up for questions. Please note in this call we may make comments about forward-looking information. Words such as expect, belief and anticipate are a few words identifying forward-looking statements. It is important to know that forward-looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release this morning and the April 2002 10Q filed by the SEC. Second, please note that this teleconference is copyrighted by the Brady Corporation and there may nobody rebroadcasting of this without the express permission of Brady. Brady will be taping the call and rebroadcasting it on the internet and your participation in the question and answer session will constitute your permission to be recorded. Now here is Katherine Hudson.

Good morning. Today we announced results for our fiscal 2002 fourth quarter and year end. For our fourth quarter, our reported sales were $135.8 million, which is 7.6% greater than our fiscal '01 fourth quarter this is our third straight quarter of sequential increases in sales revenue. Which gives us some hope we are seeing more of our market segments returning to more normal business patterns. The continued effect of the stalled recovery was certainly the story for Brady throughout our fiscal 2002. As our sales for the fiscal year were 5% less than fiscal 2001 at $517 million. Looking at net income on an apples-to-apples basis that is after excluding both restructuring charges and amortization of goodwill for the quarter, our net income was $7.4 million versus $4.7 million in fiscal '01. For the year, our net income was $30 million versus $39.4 million in fiscal '01. Dave Schroeder will be with us shortly to provide the specifics on all of the finances.

Throughout our fiscal 2002, Brady continued to pursue its customer focus strategies of acquisition, process improvement and new product development. We selectively continued to invest in all three of these areas despite tough market conditions. These investments are beginning to pay some dividends, such as our strategic acquisition of Temtech, where we will be able to marry Temtech, new to Brady, with our global distribution channel. The launches of two exciting new products that are being broadly markets and being distributed globally. Our Eclipse initiative, which has yielded exciting working capital benefits in our order to cash processes, such as strong improvements in day sales outstanding, inventory and payables.

Global expansion allowed us to keep pace with the dramatic shift we are seeing in our electronic and telecom customer base as they rapidly move their production to Asia. We are moving to stay close to our customers but many times due to prior expansion efforts, we are already there. We announced in July that we were taking additional cost control measures to assure continued financial strength as we endure this prolonged recession. Both Dave and Frank will give you details of restructuring but the effort has gone as planned and we fully expect to see the benefits which we outlined in July. As we compare fiscal 2002 to 2001, one positive trend that stands out is reduction in SG&A expenses. We experienced as $9 million reduction from fiscal '01 and pre-fiscal 2002 lefts. When we head into a full recovery this adherence to cost control should provide us with a return to earnings quality more representative of past levels. We have all read the published news about whether we are in full recovery or no indicators continue to be mixed in our markets as well.

Frank will talk shortly about some sporadic signs of life in the telecom and electrical sectors but we don't know whether these will be prolonged recovery or are the result of less inventory overhang in those markets. As we continue full steam ahead in fiscal 2003, we are excited about our growth opportunities, our strong balance sheet and our team of dedicated professionals who are implementing our strategy. For now I will turn the call over to Dave Schroeder. I will be back just before the Q and A to summarize our message today. Dave?

Thanks, Kathy, good morning, everyone. I'm happy to share with you fiscal 2002 fourth quarter and year end results. First, I will comment on the financial results for the fourth quarter of our fiscal year 2002 in comparison to last year's fourth quarter. In the fourth quarter we began to see favorable sale and earnings comparison against the prior year, the first favorable comparison since our business turned down in the winter of 2001. Net sales for the quarter were $135.8 million, up 7.6% from the same quarter last year. Our base business was up 3%, exchange rates added another 3% and acquisitions add 2% to sales. U.S.based sales declined 1%, but the acquisitions of Temtech and Strandwear added 3%. International sales rose 14%, 6% of which was due to the positive exchange impact. Latin America continued to be hit hard by the exchange rate impact with translation reducing quarterly sales by 13%. Europe and Asia Pacific translated sales were aided by the weakening dollar. Europe sales were increased by 8% and Asia by 4%. These sales comparisons in local currencies for those regions show Europe up 7%, Asia Pacific up 10% and Latin America up 22%. The acquisitions of Safety Sign and Germany and Safety Science Service in Australia contributed 1% to international sales comparisons in the quarter.

By segment, comparisons were slightly stronger within our Graphic and Workplace Solutions segment as sales were up 10% over the prior fourth quarter. The acquisitions of Temtech and Safety Science Service added 3% to Graphic and Workplace Solution sales with a positive effect of foreign currency translation adding another 3%. Our Identification Solutions and Specialties groups saw sales rise 4% compared to the fourth quarter of last year. The acquisitions of SS and Strandwear added 1% to ISST sales and foreign currency translation added another 2%. You will hear more specific information about group performances in David and Frank's segments later in the call.

As we discussed in our last conference call, Brady adopted the provisions of FAS 142 on August 1 of 2001 and therefore ceased amortization of goodwill as of that date. As a result, the following financials exclude goodwill amortization in both fiscal 2002 and 2001 for comparability purposes this reduces last year's SG&A expenses by about $1.5 million dollars per quarter. You will also recall our announcement at the end of July that we initiated additional cost reduction measures. These measures included a rebalancing of operations in Asia-Pacific, consolidation of resources and facilities in some European and U.S. operations and a work force reduction of approximately 3% or about 100 positions across our global operations. The income statement reflects a nonrecurring charge of $3 million, pretax, related to these cost reduction measures. This charge was partially offset by a non-recurring credit of $300,000 recorded in the fourth quarter of 2002 relate to the adjustments and severance cost associated with the our fiscal 2001 restructuring.

The net impact of the nonrecurring items is approximately $2.7 million pretax or 7 cents per share on an after tax basis. For comparability purposes, in the following comment, I will refer to income before any nonrecurring items. Quarterly operating income was $7.7 million dollars, excluding nonrecurring charges in both years, operating income was $10.5 million, up 57% from the prior year fourth quarter. As a percent of sales, operating income increased by 2.4% damage points to 7.7% of sales. Gross margins increased to 50.4%, up .9 of a percentage point compared to last year's 49.5%. The increase is due to the increased -- increased manufacturing volume resulting in lower unabsorbed overhead costs.

SG&A expenses of 38.8% of sales are 2.8 points below last year due to increased sales volume in dollars, SG&A was flat with the same period of fiscal 2001 as we begun to realize the benefits of our cost-cutting mesh stphurts third quarter of last year. Research and development stands at 3 percentage points of sales, .5 percentage points lower than the prior year fourth quarter. Investments and other income compare favorably to last year because of the positive impact of the foreign exchange environment. Net income for the quarter was $8.6 million dollars or 31 cents per diluted share compared to $4.7 million or 21 cents for the same quarter of last year, excluding nonrecurring items and goodwill amortization in both quarters. For the full fiscal year ended July 31, 2002, sales were $517 million, down 5% from the $545.9 million last year. Base was down 7.7% while acquisitions added 3%.

The effect of foreign currency for the year it was reduce sales by .2 of a percentage point. Base sales and local currencies for the year were down 14% in the U.S. and 2% in Europe. Asia Pacific and Latin America were both up 9%. Looking at the segments, ISST's base sales for the year were down 17%, offset by the positive effect of acquisitions of 4%. Graphic and Workplace Solutions based sales were flat with the prior year, however, acquisitions added 1% for the group. Gross margin for the fiscal 2002 was 50.4%, down 2.4% from fiscal 2001. The majority of the margin decline is due to the effect of unabsorbed overhead coming as a result of reduced manufacturing volume.

The acquisition of Balkhausen reduced gross margin as its products are lower than our other business because they have a higher portion of add-through items in their sales mix. For the year, SG&A expenses were $8.8 million less than last year, excluding goodwill amortization and nonrecurring items in both years. SG&A was 38.6% of sales in fiscal 2002, versus 28.1 in fiscal 2001. Again, due to the lower sales base. The decline in dollars due to cost reduction efforts primarily due to cost-savings actions taken during our July 2001 restructuring activity. Operating income for the year was $44.2 million, down $16 million from fiscal 2001. Investment and other income reflects a favorable comparison to the prior year of $1 million.

Foreign exchange gains were favorable to the prior year by $2.1 million, which was offset by lower levels of interest income of $800,000. Net income for the year was $30 million or $1.28 per share compared to $39.4 million and $1.70 per share for the same period of fiscal 2001. Brady's balance sheet continues to be very strong. Cash at the end of the year was $76 million, up $13 million from July of 2001. During fiscal 2002, we completed three acquisitions for approximately $12.7 million, funded the purchase of additional properties, plants and equipment of $13.1 million dollars and paid $17.4 million in dividends to our shareholders. Our cash balance continues to reflect our strong operating cash flow and strict management of working capital.

Accounts receivable is up $4.6 million from July 31st, partially due to lower sales volume in the fourth quarter of fiscal 2001 and the effect of the weaker dollar on the translation of foreign balances. We are also realizing the benefits of our eclipse process initiative domestically where day sales outstanding have been reduced by over 25%. Inventories were down $2.5 million from July 31st2001. This was due in part to lower inventory requirements as a result of our facilities consolidations, which were part of our restructuring activity. Inventory terms improved from 4.8 turns per year in fiscal 2001 to 5.7 turns in fiscal 2002. Accounts payable increased from $20.7 million to $26.3 million dollars at July 31, 2002. Again this reflects improvement in our processes domestically where we have realize the benefits of our eclipse initiative the full year. Domestic day payable outstanding has nearly doubled in fiscal 2002. One other balance sheet item you will see going forward is on August 1, 2002, Brady redeemed its preferred shares outstanding. Redemption was done at a 6% call premium with a total cash outlay of just over $3 million the transaction was accretive by 1 cent per share as we will no longer pay the preferred share dividend. Looking forward to our fiscal year 2003, we did not anticipate significant economic growth in the first half of our fiscal 2003. We anticipate mid-single digit growth with sales of $535 million to $545 million dollars for the full year. We expect net income to return to more traditional levels of around 7% of sales. I will now turn the discussion over to Dave Hawke to discuss the results of the workplace solutions group. Dave?

Thanks, Dave. Fourth quarter sales for the Workplace Solutions group was $79.6 million dollars up 10.2% from last year's fourth quarter. Currency translation had nearly a 3% positive impact and acquisition added about 3% to our results for the quarter. Sales per day on the fourth quarter were the highest of the year at 3% over the third quarter's daily rate. Our North American business was up 6% over last year's fourth quarter. All though we continue to be impacted by the low manufacturing economy notice U.S. and Canada, we are starting to show favorable comparisons on the strength of sales of our new printer product the Global Mark. The acquisition of Temtech Inc. contributed 4% of growth for the region and the quarter. Sales were Europe were up 6% in local currency and we showed growth in all countries except Germany where the weak general economy affected us. We showed double digit growth in the Netherlands, France and Italy. Europe continues to be a solid performer for us with growth throughout the year.

In Asia-Pacific our business and local currency grew 17% with continued strength in our Australian business, more than offsetting weakness on the Asian continent. Underlying base sales in Australia with were very strong with the safety science services Australia contributing less than one-third of the total growth. Our sales to our multinational corporation customers on the Asian continent were down substantially as they continued extremely tight controls on their spending. In South America, business grew 46% in local currency. This continues the strong trend we have seen for the last several quarters. We are having strong results in Brazil with both our seasoned stein mark brands despite the economic turmoil. We have also increased our efforts in Mexico. Throughout the year, we have been doing fairly well in all regions but North America which is, of course, our largest region. The shift to growth in North America to the fourth quarter is a great sign we play is bottomed out. We are also finally seeing reasonable positive currency impact on our results after three years of seeing the reverse. Profit for the group for the quarter was $19 million, ahead 2.2% from last year's fourth quarter. Profit and local currency was up less than 1%.

Our gross margin a percentage of sales was 55.8% versus prior year of 57.1%. This decline in margin primarily isolated to the U.S., where we have experienced ramped up manufacturing costs associate with the launch of Global Mark, in addition to the reduced margin oeupbs the machine as we full filled our distributor's stocking orders. Product accounts for the rest of the decline. Our expenses for the quarter were up 7% due to the launch support of Global Mark. Selling expenses were up 12% for the quarter 10% in local currency. This was driven by the catalog in addition to the marketing activities associated with the launch of Global Mark. For the full year, sales were up 1.4% to $295.3 million. Down for the year slightly at $73.1 million. Give opinion the standard economy the last year we were pleased that our sales or profit were relatively stable from fiscal '01.

Looking forward, we are very excited about the the reception for our Global Mark printer. We have shipped more than our original plan in North America with a large backlog. Production ramp up has been a challenge and we will be working off our backlog over the next few months. We will begin shipping in Europe in the first fiscal quarter after we firm up software changes for the European market. We have launched a version of the product for the school market in United States. Reception by our dealer network in schools has been excellent. We are currently planning to begin shipping this unit at the beginning of our second fiscal quarter -- year -- fiscal quarter. The crystal ball -- particularly for the manufacturing sector which makes up about 50% of our business. Despite the weakness in that sector, our results have remind fairly stable all year. We finished the year very slightly up on sales and very slightly down on profit. We feel good about our prospects for the upcoming year. We feel confident we are not losing market share.

We enter the year with a strong new product position, including Global Mark, VIZY maid and other products. We have excellent on demand production processes linked with strong e-business capabilities, our team is very motivated. We are well positioned to take advantage of any economic upturn. I will now turn the call over to Frank who will comment on the ISST group.

Thanks, Dave. The Identifications Solutions and Specialty group generated fourth quarter sales of $66.2 million dollars increase of 4% from the fourth quarter fiscal '01. Acquisitions generated growth of 1% of base business improved by 1% as well and the strong euro 2% to top plan results. With the exception of North America, all regions improved in local currency. The fourth quarter of last year was the first full quarter of the economic downturn. They have seen minimal changes in our quarterly -- since that time. The modest improve in base business this quarter is mainly attributed to its light uptick in the telecommunication market. Sales in North America dropped 3% from the fourth quarter fiscal '01. An improvement in the -- business was -- high performance business at -- fragile state. U.S. was flat and IT spending slowed suggesting any recovering in U.S. is several quarters out. In -- modest growth. Activity appears to be slowly creeping back. -- ahead of plan and we continue to add -- partner.

European quotes -- prior year or 9% in local currency is the -- Germany in our -- product line. We have been successful -- in the automotive market. You will remember Balkhausen company in Germany we acquired about one and a half years ago. Next largest gain informs Sweden where we have seen increased activity in the telecom market. -- 9% of the fourth quarter of last year or 6% in local currency with the majority of growth coming from China. China is growing rapidly. Doubled the growth of last year. During the quarter we secured a printing license and in the process of setting up -- in China in Beijing in order to service customers in the northern region. We anticipate this facility to be up and running the end of the calendar year. As you know, we have been manufacturing in Shanghai for almost two years now. In addition, we just opened a new facility in Panhang in, Malaysia, which service local disk drive and electronic customers. We are in the process of setting up manufacturing equipment and hiring staff. We are expect to be in full operations by the end of the current year. Our materials group a new product. The first is targeted to for our growing laboratory market, a need for labor that was -- liquid nitrogen freezes and hot water bath. In addition to meeting these needs this new labor is nonglossy so easy to read in the lab lighting environment. The other material is a new polyester label targeting a -- segment. This new product allows us to -- materials into three performance categories giving -- braid day bigger share of the labeling business.

Now software business. We launched a professional service capability for -- in the United States and Europe. In order, we helped companies streamline their printing need buys supplying network software versus PC-based software. Additional two-dimensional barcode. Overall, we are starting to see a -- of life in our market,. The market appears to be inching back. The telecom market -- supply chain as -- up almost across-the-board with -- customers. The global electronics market -- stabilized as well. On the other hand, the most -- the telecom industry do not indicate any material output trend in this industry.

Income for operations for the quarter was $7.7 million and [ inaudible ] from the prior year. Conjunction of the impact of cost reductions put in place during the year and at the end of last year account for this improvement. As mentioned by Dave Schroeder before, due to the continued uncertainty as to the telecom any significant [ inaudible ] We chose to take additional actions to eliminate cost by restructuring operations. Restructuring programs will generate about nearly $4 million pretax annual savings for ISST.

A brief description of the major cost reduction iniatives as follows. First in Europe or -- realigned -- to focus on specific markets and streamline processes resulting in over reduction in employees -- attrition. Graphicings location in Germany. -- downsized our operations -- We continue with Seoul, Korea and -- Singapore. Domestically, we continued our Austin, Texas, data collection -- staff, north American high performance team resulting in better -- coverage and increased product offering. Additional domestic activities include moving our repair service operation from Plano, Texas, to existing Austin location, retiring -- [ inaudible ] To newer state-of-the-art equipment.

In summary, fiscal 2002 was a disappointing year for the ISST group. We saved $222 million, decline of 13% of the prior year. Acquisition contributed revenue of $10.9 million, a growth of 4.3%. The currency impact for the year was a minimal negative impact of 0.4%. For the year was $29.8 million, a drop of 41% from fiscal '01. Significant profit decline primarily due to the lower sales was partially offset by continued cost reduction effort. Looking forward, we are seeing a slight improvement in the telecommunication and electrical marketplace and hope this is the first sign of recovery, however, the expected the low-level of business confidence, accounting scandal and fluctuating stock market, we continue to contribute -- for next couple of quarters.

Thanks, frank. Before we move on to the question and answer session, I would like to just make a couple of summary points. First, while some of our business units have been sputtering with the etpoefblgts a he recession, we have now had three successive increases in quarterly revenues. More of our business segments are showing some short-term signs of life. Where weather these will be prolonged or not, it is still too early to tell. Second, our investments, which we have continued to make even in these difficult market conditions are starting to pay some dividends. We have seen positive results from our eclipse initiative through significant improvements in working capital measurements and SG&A dollar reductions. Additionally, our global expansion strategy that we have executed for some time now is also proving successful as many of our customers are shifting to areas such as China and Malaysia. Third, Brady has an extremely strong balance sheet and outstanding cash flow. We increased our cash balances $13 million and that is something that we are very proud of, especially since this was done in a difficult manufacturing environment. We also announced earlier this week that we have increased our dividend to shareholders for the 17th consecutive year. Fourth, we have reity rated our guidance that we gave in July for fiscal 2003. Our business plan for fiscal '03 is based on continued recovery in the economy, you we believe it to be achievable. Finally, we are excited about Brady's prospects for the future and will go forward operating by our guiding values of team work, customer focus, growth, value and above all, absolute honesty. Now we are going to ask our operator to help us begin the question and answer session. Shileta, will you please provide instructions for our listeners? [ inaudible ]

At this time, we will pause in order to assemble the Q&A roster. Our first question comes from Rich Reed, please state your company's name.

Good morning. Kathy, can you just maybe provide us a little more color on one of the summary comments you gave us, talking about some signs of life in certain business and maybe give us a little bit more of a macroview in terms of what areas look promise and why you see that and then what areas seem to still be lagging?

Just from an overview point of view, I think that you have to kind of roll us back about five years ago when what we did, especially ISST, fastest growing market segments, which included the electronics market and telecommunication market. Those are the two that have been the most concern and have had the greatest volatility in Frank's comments, we can see that volatility. The areas of have interest from a macropoint of view are what I would call general industrial or broadening activity. As Dave Hawke mentioned in his comment, the Graphics group manufacturing is about 50% of their business and what we are starting to see manufacturing, the pwraold old-fashioned except for the high-tech stuff seems to be coming back, motoring along. And those are the areas I think give us the greatest confidence. We will continue to see as the comments were made in the script here, sporadic or sputtering situations, I think is the tech sector.

Okay. And then can you just give us a little bit more color on what happened with margins in the quarter. And guess here is the way I'm trying to understand it. You did have your best sales quarter of the year but I -- the operating margins were closest to the lower end of the year. Can you just give us some color in terms of -- what has gone on during the year that has caused those operating margins to stay at those low-levels?

Yeah, I'm going to actually turn this over to Dave Schroeder to give you some summary there.

I think what we saw in the fourth quarter was a combination of some timing issues and potentially some -- some nonrecurring things that will occur but generally speaking, tough remember that we are a company that is -- has a certain degree of fixed overhead and our business is down. I mean, the thing what is depressing to me is while you look at things quarter by quarter and kind of getting better, we haven't gone very far for about three years. I mean, we are looking at -- at -- if we are able to execute our plan and confident, we are looking at next year, fiscal '03 sales taking us back to where we were a couple of years ago so, what we have been doing basically absorbing ongoing cost increase in wages, benefits, et cetera, while trying to restructure and keep -- our by-in is very low. We have certain fixed assets in place, hanging out there waiting for the recovery. I thank you has been some of the margin pressure we have seen. I think the other sing stheupbg that for the last several years now, we look at the general type of escalation of cost you might get around wages and benefits, we have had zero opportunity to get price. This is just not an environment where price is there. So there has been a all right of pressure on margin for the specifics, 'cause we were talking about this before the call, I'm going to shoot it back to the rest of the group and they can give you a little more flavor.

Yeah, I will pick up a little bit. Kathy touched on the fact that some of the reorganization or restructuring expenses did flow through the operational expense lines and frank had mentioned, some of the -- the rebalancing of the manufacturing operations, particularly if the ISST group. The other thing during the quarter is we did have the launch of the global mark in the graphic and workplace solutions group and there were some expenses associated with both the manufacturing scale-up of that product in the quarter as well as some one-time marketing expenses that hit. And so those were two things that might go beyond just the overall level of manufacturing absorption that we have with -- sales were up sequentially with the relative low-level of sales that we have.

Make just a comment, kind of an umbrella comment, again goes back historically. If you look at where we were prior to the big boom in the late 1990s, our margins, gross margins traditionally ran in the 52 to 55% level. It was as the boom was crashing that we hit some really powerful 57, 58% gross margins, which we kept telling people we are not going to last. Lo and behold, they did not last. We are below our historical averages of the 52 to 55. Our hope is going forward the next year or so gives us a return to those more historical averages.

I can add one or two comments as well if I may. Those of you that have followed us for quite some time, you have known us as a company which is not short-term oriented that we do what is necessary in order to be successful going forward. Just give you a couple of examples. -- electronic manufacturing going to Asia. We have expanded our facility in shanghai and wooshy, going full steam ahead in Beijing with -- operation. Also investing in pan hang in, Malaysia, for operation and just opened about a year ago and we are still building up all facility in Brazil. And these things are a historic opportunity, whenever times are like they are now, weak, I think Brady is strong financial ever historical opportunity to increase our competitive advantage and make no doubt, we are taking advantage of this. This short-term might be a local -- unusual when Luke at -- going up and profit maybe not going up sequentially, but I think it is also a fact of our con conscious effort to invest for the future.

That is all very helpful, thank you. Just one last question from me if I could. Just Kathy you also mentioned Eclipse and some of the progress you have seen there. Can you give us an overview on where eclipse is from an implementation point and what those expectations are going forward?

Eclipse is something that has been casting its shadow on a phased basis and we have the next movement of Eclipse will occur in the -- in the second fiscal quarter of this year when we go live our Seton units Connecticut and Canada. That particular wave will be the first implementation of Eclipse for a direct marketing unit and for those of you who have any familiarity with SAP, you know that SAP really came out of a financial and manufacturing orientation not a direct marketing orientation. So, we have had to make a few adjustments but we have learned a lot from the first two waves that we have and our very -- are very confident and enthusiast that this wave three activity which will occur the end of this calendar year is going to be, again, an excellent execution for us. What this gives us shall the other thing tough think about and we commented in the remarks earlier, that we are starting to see this wonderful working capital improvement from Eclipse. We believe that our ability to drive down SG&A in absolute dollars partially associated with the our eclipse efforts as well as some restructuring we have had to do. It takes, once you have got SAP in takes about a year to actually start to see the benefits. So this fall marks two years for some of our units. And this is really where we are starting to see this stuff build. I think the position we are at with eclipse is not quite where we wanted to be because the recession but in terms of a mechanics of implementation and overall benefits that we are seeing, very positive. So got wave three that will be happening in the rest of this calendar year, then probably take a little bit of a breather and then go forward with wave four, which will probably happen in our fiscal '04, which would kind of finish the rest of the world, if you will, on the sap platform.

Probably worth noting too that wave two happened for all the nondirect marketing businesses in Europe at the end of the past year and that implementation went well, minimal business dips and performance dips and so through the fourth quarter, that wave was operating right up to expectation and gone smoothly for us.

Great, thanks a lot, guys.

Thank you. Your next question comes from George Bevel, please state your company's name for asking your question.

Salomon Smith Barney, Hi, guys, congrats on the quarter, good luck in the upcoming year. I had a question in terms of the run rate of business. If you mention it had on the call, I miss it had. The line dropped a couple of times. Have you continued into the fiscal first quarter with the recovery, realize it is not a huge ramp up but no less progressively better performance that you are seeing in the fiscal fourth quarter?

I thank you what I will do is I will ask both frank and Dave to comment on August. We have really had one month of the new fiscal year. I'm not sure, George, we have Pa hole lot to go on. My observation is, and again month to month, we have variability there is that we are continuing to see what I would call slow recovery. If you step back a minute, we have a couple quarters, everything being kind of flat and now we started to see in four fourth quarter what we would say was slow recovery and think the groups will look at that. We only had a month and a couple weeks of September, so don't hold us to it.

Understand, thanks.

Dave do you want to make a comment?

Sure. For the Graphics Business, our sales in August were about what they were last year in August it is hard to look at August and compare it had to the fourth quarter because August is pretty much a notoriously weak month with very slow business and particularly in Europe. So, I feel like we are reasoning about what we were running last year no real trend one way or the other.

We are also about flat with July and August, of course, as Dave said is a very unusual month, vacation time and what have you. But we are on plan so far in the year because that is our before cost. So not much khaeug here changes either way.

What is the tone of your customers been in term of their outlook? Again I realize that is build into your guidance, have they been progressively getting more optimistic? And in particular, you know, Kathy, you were right earlier in the year when you were speaking about you know, cautious, caution about everyone else getting excited about the recould have reut first quarter, second quarter that dipped. Here you are announcing progressively better signs, yet some of the major economic data points that we look at show some retrenchment of manufacturing. How do you -- how does one reconcile that?

You know if you go back and listen -- I had to chuckle at the word of the script because we had these wonderful words like sputtering and sporadic. Basically if we go out and talk to customers, which we do all the time, you got -- it like every other person you at a you can to every other day you have got good news and in between you get kind of like blah. And so it is sporadic and it is sputtering, but what I think we are starting to see is just, again, a very slow almost return to normalcy. And that would be very good for us. The reason for the world are interesting too, Asia continues to grow. Europe has been okay for us and yet we are seeing differences by country in terms of some of their economics. So, you know, we wish we could basically sit there and have a crystal ball that said, October 17th, everything is going to start rocking and rolling. Instead what, we are seeing is kind of this bumpy road to what we sheep going to be a sustain reed could have. I think the other thing that is interesting is this ain't the '90s, so when we talk about recovery, we are talking about more normal business growth and I think more normal business growth is not a GNP of 4 or 5% for the U.S.

Yep. All right, guys, fair enough, thanks very much.

Thank you, George.

Thanks, George.

Thank you. Your next question from Wilmont Kidd, please state your company's name before asking your question.

Central Securities Corporation. I understand there is some changes going on in the barcoding business, not sure exactly what they are, but anything going on there affecting you either negatively or positively in terms of transitions?

I'm not sure will, whether you are talking about technology or what have you. I thank you if we look at the basically what's going on, we are continuing to see the ongoing use of barcoding for productivity reasons and we continue to see that as bag long-term trend. What did happen and Frank had comment in more specifics in a minute, but what really did happen is there was a significant amount of investment in the industry associated with the Y2K and because of some of these investments are technology related, what's happened during this recession has been that many projects that have been delayed or postponed in some way. So, it hasn't been the kind of life and growth that has been there this year as there -- I mean, past fiscal '02 as there might have been in the past tpwufpl is a long-term moving toward ongoing productivity. On the technology side what you are seeing is -- is moving to wireless device and other things, some of the radio frequency technology, Brady is certainly flight with our capability to us complete in that market. Frank, are you seeing any specific changes?

Surprised by the comment. But there is always -- you always read in magazines of the industry major change. People say barcode is going to go away, be replaced by RIFD or other technology. It hasn't happened over the past it is still a very competitive market and it is still growing in normal time so I don't see anything major, material impacting at this point in time but you can rest assured that we are watching this very, very closely as -- one-third of our business, at least in the barcode industry.

I think one of the articles came out, one page thing in "business week" a few weeks ago that said barcode was dead. It was a typical headline thing, they were talking about radio frequency, what we are in and have capabilities N what you are likely see in terms of adoption, continued expansion of bar codes and even an acceleration of barcode growth with the new technology. So we feel this is, again, a long-term positive trend for playeddy.

The thing that makes it positive for Brady, very high penetration rates for barcodes is in the retail segment, the industrial segment hasn't been nearly as well penetrated by barcode technology. So, there is -- there is more opportune knit that segment and that is the segment where Brady focuses our business.

Thank you guys very much.

You're welcome.

Thank you. Our next question comes from Jim KipSinger. Please state your company's name before asking your question.

Good morning, everyone, Jim Kipsinger Louden Capital Management. I have a couple of goes kind of follow up on Wright's question. The operating margins looked a little thin to me also but you -- when you said there was some restructuring expenses that really walk through the operating line, could you define what they were and kind of the magnitude so I can -- in my own mind look at the model a little differently?

Specifically ones that were relating to the restructuring expenses, Jim, we would have to go back and break those out specifically.

Okay.

They wouldn't nearly be what are broken out in terms of nonrecurring charges that are listed separately. They would be minor relative to those.

I mean, is it 500 thought or a million bucks or something like that through the gross margin line?

Pretty fair. That is all I'm looking for. Um, can you give me an idea what you expect D&A to be in the new fiscal year and also kind of CAPEX, and what the cap EX projects will be like?

We are shuffling papers here.

Depreciation and amortization I think will be back to more traditional levels the 15 to $16 million rate. And capital, I think pretty similar numbers, number for next year.

That is what I was looking at.

Nothing that's popping up higher or abnormally low on either one of them.

Okay. Um, what are Eclipse expenses kind of -- last year and what would you expect in the next couple of years?

Expenses rolling through the income statement were around $8 million in total.

In fiscal '02?

In fiscal '02.

Okay.

What do you expect in '03?

A similar number.

So, where are we now in total Eclipse expenses, approximately? Wasn't this going to be like as 30 number total?

$30 million. Come out in total in expense and capitalized items very close to the budget.

Okay.

But after '03, this number rolls down pretty dramatically, if I'm -- if my memory serves me.

Correct.

It does, but I think one of the things, information technology is the basic bottomless pit. Once Eclipse is done, something else will come along. I hope it wouldn't be the magnitude of the Eclipse. Looking to go, gee, O'50 -- [ Overlapping Speakers ] I don't think that will be the case. I think we will not be spending in investments as much but I think we will be investing in information technology. I haven't looked at -- I have been away -- for a while. I have to be believe that -- expenses in general as a percentage of most industrial activity actually has to be continuing to stay the same. If not, it expands just the opportunities for the technology or whatever is going to continue to go forward and it provides some really cool eventual savings, but you just keep investing T is unbelievable.

the Eclipse provides a great backbone or infrastructure to start doing different things from an e-commerce standpoint and additional things front end related or interfacing with your customers.

mm-hmm. Yeah, I mean to me this sets up the opportunity to really dramatically drive your SG&A lower at a time when your business could ramp up pretty, you know, I mean this is whether you're going to incremental margins if and when it shows up.

Yes, absolutely that is the plan.

Okay, kind of finally, Kathy if we look to the '90s, you know, as a very growth in the early part of the '90s, not a whole lot different than we have a coming right now, seems like and then kind of a blowoff in the latter part of the '90s, if GDP growth is significantly different than that in the next five years, do you need -- do you four or 5% internal growth just to kind of keep the operating margins on an even keel here, just given the -- the ongoing cost of keeping good employees? I'm trying figure out where the balance point is here and when we will see some operating leverage, not on a cyclical basis but kind of on a secular basis.

I think your comment is correct. Generally speaking for us to continue operating that middle or single digit growth is kind of what you need to continue to have a company that has the appropriate quality of life for the employees and quality of earnings for the shareholders. Now the good news is that we have been working very much on what do we need to do over the long-term to not only sustain that level of growth but -- which we think is more related to what happens with the economy. But the things that we can do that allow us to accelerate our growth beyond that are very positive. If you step back for a minute and you remember that while the '90s was a booming time, we had some really good years in the '90s.

Mm-hmm.

We had a couple of things where we were low on the top-out because we were getting both sales growth and earnings growth and a couple of times where the quality of earnings was way off the top, you know, 8.5% and that is why we were still doing the good will thing. We were really doing great. As you look at, this the key what we were talking about right now, and think we focused on that in the recession, the key going forward is balance. How do you get balance for making sure you can grow your core business and then add toe it the pieces you need to get additional growth. And we will be talking more about that as we -- as we continue to refine our planning but we are very confident that we can maintain core growth and putting in place the specialty sales force product teuflt operation, Knute product pipeline and also supplementing with acquisitions, move forward with growth even in what is not the boom times that we had in the middle '90s. I think the key we have to look at is patience with quarter to quarter how does it look. As I said it is sporadic and sputtering, but over the long haul, which is Brady's focus, we remain very confident about our future and we have actually identified ways in which we can continue to keep the core growth going while adding on the pieces that we need to get to that, you know, hopefully double digit level of growth.

I will follow up with just one more if you don't mind. If we are kind of at cyclical trough in revenue or revenue growth, okay, from an ongoing basis if you look out over the next five years, Cathy what would be your expectations of core growth defined as unit, price and geographic expansion kind of and don't bolt on any acquisitions?

I think we are back, again, just take 2001 and 2002 and just take them off the table for a minute, recession. Go back to where we were in the '94 through '99 or 2000 time frame. We would expect to be back at level where we say our markets grow 3 to 4%. We grow 6 to 8% because we take share and expand geographically and do those organic things. The growth beyond that, the 5 to 7% that you might need beyond that to get to a 13 to 15% growth level that is against your acquisitions and we have actually gone through and it is kind of -- whether it is a natural law or what, so the last nine months, we have had a lot of -- a team of folks looking at this all over again and at the end of the day it came out that we believe that going forward is going to be kind of similar. We have done a couple of things to give us a greater degree of assurance in how we do this. Because what we are doing, part of eclipse, a significant focus on what's called market planning. That's what's helping us look much more methodical, filling our product pipeline. We have been fortunate that we have two good new product launches right now in global mark and the I.D. pal. Those are things that happened actually before the market planning process took hold. Now, with the market planning process, our hope is to go forward and supplement that product pipeline which again goes back to adding to the kind of normal growth you would get in the industrial marketplace before 3, 4% with the kind of things we can do with our business through geographic expansion, new products and serving our existing customers.

Okay, well, congrats and best of luck. Thanks.

Thank you, again, in order ask a question, please press star followed by one on your telephone key pad. We are pausing now to continue to get the roster.

I think we are all set.

At this time there are no further questions. Are there any closing remarks?

Yes, thanks very much. Thanks for participating today. If you have further questions, please call me at area code 414-438-6940. The audio and file from this call today are available at our website at WWW.investor.Brady corps.com. If you would like to listen to a replay of this call, you may do so starting at 1:00 p.m. eastern time today and the phone number for that is 1-800-642-1678. A pass code of 5449682 will be needed to activate the call. Again if you have any questions, please feel free to call us, otherwise, thanks for your interest and have a great day.

This concludes today's Brady Corporation fiscal four 2002 conference call. You may now disconnect.