Brady Corp (BRC) 2003 Q3 法說會逐字稿

Good morning. My name is Keala, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Brady Corporation 2003 earnings 3rd quarter financial results conference call. All lines have been placed on mute to prevent any background noise. Afterward the speakers' remarks there will be a question-and-answer period. If you would like to ask a question at this time, simply press star and then number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. Miss Bolens, you may begin your conference.

Thank you and good morning, everybody. Welcome to our fiscal 2003 3rd quarter conference call. We're glad you could join us. In the call today you'll hear from Frank Jaehnert, President and CEO, Dave Schroeder CFO, and also Dave Hawke Executive Vice President of Brady corporation. After brief presentations by the team, we will open up the floor to questions. As a note joining us in the room today is Kathy Hudson, our new Chairman of the Board. Please note that in this call we may make comments about forward looking information. Words such as expect, believe and anticipate are a few examples of words identifying a forward-looking statement.

It's important to note that forward looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release this morning and in the 10 Q filed with the SEC in March of 2003. Second, please note that this teleconference is copyrighted by Brady Corporation and there may be no rebroadcasting of this without express written consent of Brady. Note that Brady will be taping the call and rebroadcasting it on the Internet. And your participation in the questions and answer session will constitute our consent to being recorded. Thank you. And now here is Frank Jaehnert.

Good morning. Thank you for joining us today. I've been in many conference calls before. This is my first time as President and CEO of Brady Corporation. Many of you I've met in person during my 5 1/2 years as CFO. For those of you I haven't met I've been with Brady since the end of 1995 and come to the position of CEO with the background not only as former CFO and Financial Director but also President of Operations. The economic situation is very challenging, but I'm confident Brady has the right ingredients for a bright future and we're planning some swift action to return Brady to higher level of sales and profit.

Today we announce results from our third quarter as well as further details about our reorganization, and with associated restructuring charges. First our third quarter results. Sales for the quarter were $142 million up 8.8% from last year's first quarter of $130.5 million. Acquisitions in the strong Euro generated most of that sales growth. Our net income for the quarter was up slightly from last year, at 8.6 million or 37 cents a share versus 8.5 million or 36 cents a share last year.

During the quarter we made two acquisitions and announced new regional customer focus structure allowing us to better rationalize our resources and serve our customers. Since April we have been working toward quantifying the cost and benefits of that structure which we also know today. While those short-term costs and restructuring efforts are painful we believe this will allow our customer focused strategies and expense structure to provide space for future growth. I would like to turn the call over to Dave Schroeder to discuss the details of the quarter's financials and the restructuring costs and benefits. I will be back later to discuss ISST results as well as to conclude our discussion today. Dave?

Thanks, Frank, and good morning everyone. Last month we announced the reorganization of the company into a regionally based structure to better meet the needs of our customers. We're working to align the company into the new structure through combining sales and marketing resources in North America and in Europe and consolidating facilities in the U.S. and overseas. With focus on maximizing profitability and increasing efficiency and productive. Through attrition and job elimination these efforts will result in a workforce reduction of about 10% globally. Related to these efforts, we expect pre-tax restructuring charges of $10 million to $13 million with $7to $10 million occurring in the fourth quarter of fiscal 2003. We anticipate fiscal 2004 savings to be approximately equal to the full restructuring charge.

Most of our efforts to date have been focused on the details of the reorganization to drive profit improvements and increase efficiency and productivity. Therefore, we will continue to assess our performance for the remainder of fiscal 2003 under the existing group structure. We will begin to report our results under the regional structure in the first quarter of fiscal 2004. Shortly after the release of fiscal 2003 fourth quarter results, we will provide historical segment information for the Americas, Europe, and Asia under the new regional structure. Moving on to the results for our third quarter of fiscal 2003, net sales were $142 million, up 8.8% from the same quarter last year.

Base business fell 6/10 of 1%. The exchange rate impact was a positive 6.7% and acquisitions added 2.6%. In the U.S. quarterly sales dropped 1/2 of 1% versus last year. Base business fell 4.9% for the quarter while the acquisitions of Temtec and Tiscor added 4.4%. International sales increased by 18.7% in U.S. dollars and 4% expressed in local currencies, excluding acquisitions. Europe benefited by 19.8% from foreign currency translation while Asia Pacific was aided by 7.3%. Latin American sales results were reduced by 34% as a result of currency weakness in Brazil and Mexico.

Base business increased in each international theater with Europe up 2.1%, Asia Pacific up 4.7% and Latin America up 28.5%. From a group perspective, graphic and workplace solutions generated quarterly sales growth of 13.5% as foreign currency added 7.6%, the Temtec and TISCOR acquisitions added 4.5% and base business increased 1.3%. Identification solutions and specialty tape sales increased 2.2% for the quarter, a base business decline of 3.3% was more than offset by a foreign currency translation boost of 5.5%. Gross margin as a percent of sales increased to 51.5 % in the quarter up from 51.3% in the third quarter of the prior year.

The increase was due to the growth in the higher margin graphics and workplace solutions group outpacing the growth in the identification solutions and specialty tapes group. Both group's margins for the quarter were essentially flat with the prior year's third quarter. North American margins improved to more historical level as operations in our North American direct marketing unit returned to more normal service levels following second quarter Eclipse golive on our new business system. SG&A expenses of 55.9% ran at 39.4% of sales, about 1.2 points or $6.1 million above the same quarter of last year. About 50% of the increase in dollars can be attributed to foreign currency translation increasing our expenses in Europe and Asia. Additional SG&A expenses associated with acquired businesses and increased spending in our European direct marketing operation added the remainder.

Research and development was 3.6% of sales, a level consistent with the prior year. Operating income in the third quarter was $12.1 million, down 5% from last year's third quarter. As a percent of sales, operating income declined about 1.2 percentage points to 8.5% of sales because of the higher rate of SG&A discussed previously. Investment and other income rose $700,000 from the third quarter of fiscal 2002 due to the net impact of intercompany foreign currency transactions in the quarter. Net income for the quarter was $8.6 million versus $8.5 million in the prior year. Earnings per share on a diluted basis for the current quarter were 37 cents versus 36 cents last year.

Turning to the results for the nine months ended April 30th, 2003. Sales were $410.2 million, up 7.6% from last year's figure of $381.1 million. Base business was up 8/10th of 1%, foreign currency contributed 4.6% to the increase and acquisitions added 2.2%. U.S. sales, excluding acquisitions were down 2.6% through the first nine months. International sales and local currencies were up 4.5% in Europe, 0.2% in Asia Pacific and 32.4% in late in America. By group, ISST base sales were down 1% year to date while graphic and workplace solutions base sales rose 2.2%.

The gross margin for the first nine months of fiscal 2003 was 50.5%, down 3/10 of 1% for the same period of fiscal 2002. Due mostly to the lower margins experienced in the second quarter this year, this decrease was a result of temporary disruption of service levels in our North American direct marketing operation as we brought our new business system on line. Production ramp up costs incurred in the first quarter for the global mark and busy mate product introduction within the graphics and workplace solutions group also had an unfavorable impact on fiscal 2003 margins. Year to date SG&A expenses of $164.2 million were $17.6 million higher than the prior year. SG&A was 40% of sales in the first nine months of fiscal 2003 versus 38.5% for the same period of fiscal 2002.

The increase in dollars is due to the same factors mentioned for the quarter. 40% of the increase is attributable to foreign currency translation increasing our expenses in Europe and Asia. Additional administrative expenses associated with acquired businesses, temporary expenses related to wave 3 golive and additional spending and direct marketing accounted for another 35 percent. The remainder comes from general cost increases including advertising cost increases in the graphics group and pay and benefit cost increases throughout the organization. Operating income for the nine months ended April 30th was $29 million, down 4.8 million from fiscal 2002. As a percent of sales, operating income was 7.1% in the first nine months of fiscal 2003 versus 8.9% in the same period of last year. Investment and other income was flat last year.

Net income for the nine months ended April 30th was $19.6 million or 83 cents per share compared to $22.6 million or 96 cents per share for the same period of fiscal 2002. Looking at the balance sheet, cash at the end of the third quarter was $68.6 million, about $3 million higher than the end of last quarter. In addition to our strong operating cash flow, significant cash flow items for the quarter included the acquisitions of Etimark and Cleere Advantage for approximately $10 million, payment of dividends for $4.5 million and $4 million in additional investments in plant and equipment. Accounts receivable are about $5 million higher than the end of last quarter due to higher sales in the quarter and the addition of receivables balances of Etimark and Cleere Advantage. Inventory is roughly unchanged and in line with our expectations.

Looking forward to the fourth quarter and the full fiscal year, we expect full year sales to be in the range of $550 million to $560 million, with fourth quarter sale estimated between $140 million and $150 million. In light of my earlier statement regarding the fiscal 2003 restructuring charge of $7 million to $10 million or 20 to 28 cents per share our expectations for the fourth quarter for net income of 7 cents per share to 17 cents per share. For the full year we expect net income per share to be in the range of 90 cents per share to $1 per share including restructuring charges. I'll now turn the call over to Frank to discuss the results of ISST.

Thanks, Dave. Net sales for the quarter were $55.9 million, up 2.2% from same quarter last year. Base business declined 3.3% and currency added 5.5% to top line results. By reaching the North American business [INAUDIBLE] 8.5% over prior year. Europe's growth was 22% in U.S. dollars and flat in local currency. Asia grew 9% in U.S. dollars, local currency growth was 5%. Latin America grew 2% adjusting for the weak [INAUDIBLE] their growth was strong at 39% in local currency. Let me be more specific about our businesses by region. North America states declined 5%. Approximately half of the decline from last year's third quarter was due to a strong launch of the IDhealth in fiscal '02 third quarter. Last years states reflected a bump due to the initial stocking packages for the IDHealth. The remaining states decline was in electronics, investor and telecommunications markets,their production continued to move outside the United States. We've responded to this by the planned consolidation of our domestic die cut facility with our main facility in Milwaukee, Milwaukee. Our base electrical business remained flat. Europe continued to be a [INAUDIBLE] by country and by industry. We continued to experience good sales growth in Belgium, have seen improvement in the UK. France continued significantly down versus last year. [INAUDIBLE] gross in our die cut business at the peak of new business in telecommunication market. [INAUDIBLE] IN Asia grew 9% versus last year. Continue to see increased sales in China as we continue to grow our local presence. Our Beijing facility opened in the second quarter is ramping up quickly. They have received initial production approval from major customers allowing them to secure new business. Machines are running near capacity and additional capacity is being transferred from the U.S. In southern China we're in the initial stage of filling key positions and starting equipment are beginning to run customer prototypes. In Latin America, Brazil continues strong in local currency and gaining in momentum in the electronic and electrical markets. We continue to invest in growth initiative. Highlights for the quarter include acquisition of Etimark and our partnership to further penetrate the security market. Etimark, located in Bad Nauheim, Germany is annual base of $14 million is a leading provider of complete bar-code solutions including labels, printers, applicators and software for the German markets. It's one of the largest label converters in Germany, Etimark brings greatly increased market presence and product ranges in addition to entry into new markets for Brady such as healthcare, logistics and retail. Etimark adds another dimension to our strategic account offering, one our customers have been asking for. The security initiative we announced our partnership Genuone, a leading provider of brand protection software, technologies and services. Brady and Genuone will team together to provide counterfeiting and a diverse new protection solutions for brand protection. Brady's chemical and mechanical R&D, material coating and converting capabilities coupled with Genuone software and technologies provide a worldwide approach to brand protection. Our profit for the quarter declined 1% over the third quarter of last year. As anticipated we saw a margin improvement from the second quarter fiscal '03. Price increases, cost reduction activities and also an improved product mix. As evidenced by the quarterly activity we continue to invest in key initiative and acquisitions that will drive growth in the near term. However, any improvement in the general economy is impossible to predict. We have not yet seen a significant impact from the [INAUDIBLE] to date however we're uncertain what we will see in the next few quarters. Next, Dave Hawke will present the graphic results.

Thanks, Frank. Third quarter sales for the Graphic and Workplace Solutions Group were $86.1 million up 13 1/2% from last year's third quarter. Currency translation had a 7.6% positive affect and acquisitions added 4.5% to our results for the quarter. The underlying business was up 1.3%. Our North American business was up 7% over last year's third quarter. Acquisitions of Temtec and TISCOR contributed 6.9% growth for the region in the quarter while the base business was basically flat. During the second quarter I reported that sales in two of our North American units were significantly affected by their conversion to SAP. Both businesses suffered a performance dip that cost service disruptions leading to lost sales and higher than normal expenses. The units made considerable progress in the third quarter, recovering nearly to their previous service levels. We would expect the final bit of service recovery to take an additional one to two quarters. This is consistent with our previous conversion Our Canada unit sales have bounced back showing solid growth over last year's third quarter. Sales in our U.S. direct marketing business have improved substantially over the second quarter but are still down compared to last year. This unit feels that the current service levels will not negatively impact their customers going forward. However, they do believe that there is some residual impact from the previous service issue on customer retention . We are doing customer reactivation campaigns to stimulate these accounts. The U.S. business has seen a disproportionate drop in sales to the manufacturing and construction sectors that are likely unrelated to this residual service issue. Sales in Europe were up 23.7% in U.S. dollars, 5% in local currency. France and Italy led the way with double digit base growth with the UK even with prior year. Germany and Belgium declined slightly. The general economic environment in Europe remains weak with particular weakness in the manufacturing sector. Economic signals seem to point to some additional weakening. During the quarter we purchased clear advantage Limited, a small printing system distributor in the UK. This acquisition contributed about 2% to the region's growth. Sales in Asia Pacific were up 17.8% in U.S. dollars, 4% in local currency. Australia's growth for the quarter counter balanced the decline in Japan due to the exit of our direct market business earlier this year. In South America, business grew double digit in local currency. Strength in our Mexican business offset a Brazilian business decline due to affects of turmoil in the economy. Profit for the group was $20.8 million for the quarter, up 3.9% from last year's third quarter. Profit in local currency was off 1.9% from prior year. Simply put, we had two profitability issues in the quarter. The U.S. direct marketing business had residual issues from the SAP conversion and some additional weaknesses in two core markets. The second issue was our acquisitions that have lower net margins than our base business due to integration cost. We expect U.S. direct marketing business to continue to improve quarterly as they reactivate customers lost in the service step. Profitability of the acquisitions will improve over time as acquisition synergies start outpacing integration cost. I'd like to turn it over to Frank Jaehnert again for the conclusion.

Thanks, Dave. We'd like to get to questions from those participating on the line. But before we do, I would like to summarize several key points to take away from the call. First, Brady has made two additional acquisitions in the quarter to further strengthen our European presence and round out our product offering to our strategic accounts. We also know the partnership to improve our position in the security market. Additionally our startup prices in Asia continue to grow at a quick pace.

Majority of our wave 3 Eclipse issues seem to be behind us as service levels continue to improve at our facilities in Connecticut and Canada. Most importantly we have almost 3/4 of business operating on a common IT platform giving us visibility throughout the organization and opportunities to leverage resource. Finally the global economy still doesn't show any signs of a robust recovery. Even in the fast growing Asian economy, questions about SARS will affect the region have come up. In order to better serve our customers, leverage our global resources and improve profitability in this low growth period, if announced more details of our restructuring as Dave Schroeder detailed earlier. We believe that this restructuring, while painful to go through, we've positioned Brady very well for profitable growth in the future. Now let's begin the question-and-answer session. I ask the operator to provide the instructions to our listeners.

At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. The first question comes from Reik Read of Robert W. Baird

Good morning. Frank, with the incremental restructuring that you're doing, it sounds like it's about 300 people. Can you give us an idea of when that will occur in terms of those people finally going away and what the total expected savings would be just out of that?

Yeah, the restructuring charts as I said earlier was 10 to 13 million, this year we can have about 7 to 10 million. As far as head count is concerned, it's about the same relationship, maybe a little bit less people than what the restructuring charge anticipates right now or suggests right now. The remainder in early fiscal '04.

Frank this seems to be a little bit more aggressive in terms of the cost cutting that you guys had done previously. As you kind of ramp up in your job, do you have a different target than the one that you guys have been articulating in terms of getting the 500 basis points worth of operating expense improvement? I think it's by '05?

Let me put it this way. I have not been in the shop for 100 days. I would like to get back to you on what exactly my targets are. But you're right, this is very aggressive. Last time we restructured we had about 3% of the workforce leave the company before it was about 4.7%, and this time we're talking about 10%. I think what I'd like everybody to understand, it's a little bit different this time. Now we are all on SAP, all the majority of the company is on SAP, which allows us now to leverage our IT infrastructure. We also have reorganized the company by going away from two groups and in addition by combining three divisions into one. The three divisions which are in one division is about 200 million in sales. Which is a significant size. We're not only talking about adjusting to weak economy and adjusting to business which has shifted to Asia, we're also talking about a true new structure for the organization, a more simple and more streamlined structure which we can now do because we have the means of having an infrastructure which we didn't have a couple of years ago.

If I can ask about the acquisition in Germany. You had commented that it was $14 million in the previous year. Given that the German economy is as weak as it is, would you expect that $14 million to stay reasonably stable, or would it go down in the next year? I guess the follow-up question on that is would the 90 people that you have over there, how fully are they being utilized, because my assumption would be that it would be difficult to downsize that operation.

We're not going to touch the operation in the same way we are touching the rest of the organization. We just acquired the company. We don't want to go in and cut out expenses right away. First we'd like to understand it. I think there's probably a combination of the weak economy in Germany, on the one hand, which suggests lower sales, but I think there's an opportunity also of selling some of their products to our customers and vice versa. I think you probably see the benefits and the benefits of the acquisition of synergies at least compensating for the weak economy in Germany.

Okay. Great. Thank you very much.

Your next question comes from Jim Kissinger of Kissinger.

Good morning, everyone.

Good morning, Jim.

Could you give us some idea kind of where the restructuring charges are going to come, Frank? I mean, and the consolidation. Is it planned consolidation? Can you give us a little more color on that side on what's going to happen, then kind of to follow up on that, does this mostly affect the SG&A line for next fiscal year, if you said it's going to be $10 to $13 million, how much of that savings actually walks through the costs of goods sold line and how much through the SG&A line.

I cannot give you any specifics regarding cost of goods sold and SG&A, I can tell you one thing it's all going to hit the bottom line. We are still in the final stages of putting the plans together. I don't want -- also in light of our employees who just have received this day, I don't want to give too much specifics. I can give you general observations which might help you understand this better. First of all, I don't think we're going to see much in Asia. Asia is still growing, we're investing in Asia. I don't think Asia is going to be too much impacted by it. The impact we're going to see where our major businesses are is in the U.S. and in Europe. Also I think you're not going to see so much on the worker level. We have over the last couple of years with the economy being weak, we've adjusted our cost structure on the people who actually do the work who are standing at a machine pretty well, but what we have done now or what we're going to do now is we can through our restructuring, also getting rid of two groups, combining three divisions into one, we can now take more staff positions or management positions. Then were going to have some limitation of facility, this might be facility with no operation, might be facility with operation, manufacturing operations. Here is a rule of thumb I can tell you. The further away this facility is -- let's say we bring something into Milwaukee, if it's just Cedarburg, which is just a couple of miles from here, what will happen is the people probably will continue to work for us. However, if it's further away, chances are that people there will lose their job and we might have to rehire, at least the worker portion here and we might be able to leverage some of the management. I can't give you more details. I hope you trust me. I think in the next couple of weeks we'll have much more to report on this one as we finalize our plans.

Okay. I guess maybe that's a question, Frank. When you have your meeting here in Milwaukee, I think approximately a month from now, will there be a fair amount of detail around both this restructuring and then some thoughts in the way the Reik was asking. Would it be reasonable to have more detail at this point in time?

I can tell you as far as the restructuring is concerned we certainly can give you more detail by then. That's a given. As far as guidance, how much sales growth can be generated by the company, what kind of SG&A level we'll be targeting, what kind of margin levels we're looking for. We're right now in the middle of our budgeting for fiscal '04 and for the following year. I think I'll also be able to provide more details and shed some more light on what I think is possible going forward.

Okay. Thanks and best of luck.

Thank you .

Again, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Bob Bridges with Sterling Capital.

Sorry I got on the call late. I was wondering if you could run through again the areas of product strength and weakness and ISST, maybe more on a nine month basis than on a quarter, you said sales are beginning to pick up early in the quarter. I was curious how it ran through the rest of the quarter and specifically if you could highlight on the year how things are looking as far as contributors and detractors.

Sure. We have -- I'm still speaking for ISST till the end of the year. The economy just continues to be weak in the United States. We don't see any major rebound, we don't see any major rebound in the telecom, what we're seeing is a shift to Asia, nothing as significant anymore as we have seen over the last one or two years. On the one hand we have U.S. business flat to declining, and business in Asia ramping up just because of the shift of our customers. Electrical industry is still kind of flatish, just nothing new to report from our last quarter conference call. Kathy is sitting here with me and we just talked about this question before. Anything new compared to what we have in the last quart?

No. Basically our run rates are very comparable the last quarter.

Okay. Then on accounts receivable, any comment on the quality of the book in terms of aging and delinquency? Is it in line with what's it's been tracking?

Yes it is in line with what it's been tracking. We haven't seen any deterioration in the quality of the accounts receivable. So no real issues in that area.

Are you also seeing that a $600 million top line target within two years is within reach, as we talked about last quart?

Can you repeat the question?

In last quarter's call, there was a discussion on how you all perceive the top line can redevelop to the $600 million level. I think the time horizon was within two years. I just wanted to assess your comfort level with that, with whatever assumption of a macro environment that you would choose. If we were to have a similar environment today persist for say the next year to two years, given acquisition opportunities, given any new product opportunities, just wanted to gauge your comfort level with reestablishing sales back to 600.

Thanks for the clarification. Yeah, we feel comfortable with $600 million. I have to say I have no idea what the SARS virus is going to do to Asia, I have no idea what the economy in Europe is going to look like. It looks like it's deteriorating. Right now the U.S. seems to be at the bottom, I hope it's going to pick up. With all caveats I can possible put into this, we feel comfortable with $600 million based on where we are today.

Great. Okay, that' it. Thanks.

Your next question comes from Mark Roberts from Wachovia Securities.

Thank you. Good morning. Dave, given the volatility that you're seeing from currency fluctuations have you looked at potential hedging operations to smooth out some of the variances that you're seeing?

We do. We hedge about half of our intercompany purchases so that is an area that we look at and take care of about half of what we expect the activity to be from one of our operations to our international operations.

Okay. Thank .

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

Yes. With that now it's time to end the call. The audio and slides from this call today are available on our website which is www.investor.BradyCorp.com. If you would like to listen to a replay of this call via the phone you may do so starting at 1:00 p.m. eastern time today. The phone number for that replay is 1-800-642-1687. For international callers the phone number is 706-645-9291. A pass code of 9748801 will be needed to activate the call. The replay will be available until 11:59 p.m. on Tuesday May 20th. As always, if you have questions please call me at 414-438-6940. On behalf of everybody at Brady, thanks for your interest and have a great day .

This concludes today's Brady Corporation 2003 third quarter financial results conference call. You may now disconnect.