Brady Corp (BRC) 2004 Q1 法說會逐字稿

Good morning. My name is Tamara, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Brady Corporation first-quarter fiscal 2004 earnings release conference call. (OPERATOR INSTRUCTIONS). You may begin your conference.

Good morning everybody. Welcome to our fiscal 2004 first-quarter conference call. We are glad you could join us today. We will be reporting for the first time today on our regional structure. Accompanying our press release this morning was comparative segment information for our last two years in our regional structure.

For today, those of you who have participated in the past will see that we have changed the structure of the call slightly.

Frank Jaehnert, CEO, will be presenting a portion of the business review, and Dave Schroeder, CFO, will be presenting the financial review, as well as another part of the business review. Additionally, Matt Williamson, Vice President of Brady America, joins us during this particular call to provide some additional insights on the operations in the Americas. As usual, after brief presentations by the team, we will open up the floor to questions.

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 is important to note that forward-looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release this morning and the 10-K filed with the SEC in October of 2003.

Second, please note this teleconference is copyrighted by Brady Corporation, and there may be no rebroadcasting of this without express written consent of Brady. Note also that Brady will be taping the call and rebroadcasting it on our Internet, and your participation in the question-and-answer will constitute your consent to be recorded.

Thank you and now here is Frank Jaehnert.

Good morning and thanks for joining us. We are pleased to provide you today with the review of our first-quarter fiscal 2004 results. Sales for the quarter were 151.9 million, a 9.6 percent increase over first quarter last year. Our net income increased to 10.4 million, a 26 percent increase. These numbers include a 1.2 million after-tax restructuring charge. Earnings per share in the quarter were 44 cents.

Our topline grew due to strong base business growth in Asia, currently impacting the recent acquisitions we have made. We continue to see weakness in our base business in both the Americas and Europe. Dave Schroeder will provide the complete financial report shortly.

Our restructuring efforts continue this quarter as anticipated, but more importantly, we have begun to see the benefits of previous restructuring activities. Our (inaudible) cost structure contributed to the increase in profits in the quarter. We certainly are encouraged by these results, and we will continue to look for opportunities to further improve our cost structure.

Growth remains a focus for us. Our dedicated team of individuals focused on acquisitions had a number of successes as we acquired two U.S. companies during the quarter. Additionally, we already announced another acquisition at the beginning of the second quarter, a company called B.I.G., a manufacturer if identification and security badges in the UK.

Base business in the Americas and Europe remains a concern as we continue to see declines in both regions, and the manufacturing economies in both of these regions are growing at slower pace than overall GDP. (inaudible) we have in place to jumpstart growth in base business, but it continues to be an area of concern.

I would now like to turn the call over to David Schroeder who present the financial overview. After that, Matt Williamson, Vice President of Brady America, will present the highlights of the Americas regions for the quarter.

Thanks, Frank, and good morning everyone. I am pleased to present the results for the first quarter of our 2004 fiscal year.

As Frank noted earlier, net sales were $151.9 million, up 9.6 percent from the same quarter last year. Base business fell 2.6 percent, while foreign exchange rates added 6.1 percent and acquisitions brought another 6.1 percent to the topline.

In the Americas, sales were essentially flat when last year. Base business fell 6.3 percent for the quarter. This was offset by the acquisitions of TISCOR and Brandon, which added 5.1 percent. Currency aided the region sales by 1.4 percent. The softness in our base business was experienced primarily in our U.S. MRO and direct marketing businesses.

In Europe, sales were up 18.2 percent over the prior year. Currency translations continued to significantly benefit our results in the region, adding 13.2 percent to sales in the quarter. Base sales were down 4.7 percent. The acquisition of Etimark and Clear Advantage added 9.7 percent to sales.

In Asia, sales were up 35.9 percent over the prior year first quarter. Base sales growth contributed 26 percent to the topline in the region as our past investments and facilities in China and Malaysia began to pay off. Currency also aided the region adding 9.9 percent to sales. Gross margin as a percent of sales increased to 51.8 percent in the quarter, up from 50.6 percent in the first quarter of the prior year. All regions experienced improvements in gross margins over the prior year.

SG&A expenses of $56.4 million ran at 37.1 percent of sales, about 1.7 points below the prior year first quarter. In U.S. dollars, SG&A expenses were up $2.6 million above the same quarter of last year. Foreign currency translation increased expenses by $3.5 million. SG&A administrative expenses associated with acquired businesses added another $3 million. Savings from our restructuring program and additional cost controls served to partially offset these increases.

As I just mentioned, we are continuing to see the savings of our restructuring activities. We aligned the Company into our new regional structure while combining sales and marketing resources in North America and Europe and consolidated facilities in the U.S.. Through attrition and job eliminations, these actions will result in a total workforce reduction of about 10 percent globally. The majority of these efforts to place in the fourth quarter resulted in a pretax restructuring charge of $10 million.

In the current quarter, we made further progress on this restructuring program, resulting in additional charges of $1.8 million. Our restructuring program will be completed during the remainder of fiscal 2004. We expect to incur charges of between $2 million and $3 million in fiscal '04 for these actions.

We anticipate annualized savings to be approximately equal to the full restructuring charge of $10 to $13 million. Additional cost savings opportunities will be pursued as they are identified. Beginning with this quarter, we are reporting our results under the new regional structure. We have provided historical results for the Americas, Europe and Asia segments along with our financial press release.

Research and development was 3.2 percent of sales for the quarter, .2 percent higher than the first quarter of 2003 due in part to the R&D activity associated with one of our recent acquisitions. Operating income in the fourth quarter was $15.8 million, up 27.4 percent from last year's first quarter. The benefit of higher sales, improved gross margin percentages, and lower SG&A expenses as a percent of sales were offset partially by the pretax restructuring charge of $1.8 million. As a result, operating income was $3.4 million better than prior year. Our defective income tax rate was 33.5 percent for the first quarter, down from 34 percent in fiscal 2003 due to a change in the mix of profits and long-term tax planning.

Net income for the quarter was $10.4 million versus $8.2 million in the prior year. Diluted earnings per share for the quarter were 44 cents versus 35 cents last year. The 44 cents included an after-tax restructuring charge of 5 cents per diluted share.

Looking at the cash flow, cash at the end of the quarter was $60 million, down 16 million from the end of fiscal 2003. During the quarter, we spent $22 million for the acquisitions of Brandon and Prinzing, $3.6 million on capital expenditures, and paid $5 million in dividends. These expenditures compared to operating cash flows of $10 million for the period.

From a balance sheet prospective, our Accounts Receivable balances increased as a result of acquisitions, foreign currency and heavier sales volume, particularly in the latter portion of the quarter. The majority of our inventory balance increase was due to acquisitions and foreign currency translation. Looking forward to the remainder of fiscal 2004, we expect full year sales to be in the range of 600 million to $630 million and net income of $36 to $40 million after restructuring charges, up from our previous guidance due to the favorable currency conditions and early success in our acquisition program.

I will now turn the call to Matt Williamson to discuss the results for the Americas.

Thanks, Dave, and good morning everyone. As Frank mentioned earlier, I will report on the Americas region, a region for which I have partial responsibility.

For the quarter, sales in the Americas region were $50.1 million, up slightly from October 2002 sales of 49.9 million. Profit for the quarter was 11.7 million, down 5 percent from 2002 results of 12.3 million. Base business in the Americas region continues to be weak throughout many of our major channels and markets, most specifically in the U.S., MRO and direct marketing businesses. We have seen a continuation to the trend of declines in base business that has been consistent throughout the recession.

We have recently seen positive trends in some markets; however, the indicators we watch and typically lag also seem positive. The markets included in these trends are nonresidential construction, electronics and electrical end markets, specifically with our high-performance labels and wire marking products. Combined with the positive news we hear about growth in the U.S., we are hopeful that the trends will continue and provide us some tailwind as we progress into our year. Base business in Brazil and Mexico particularly showed positive growth in electronics, telecommunications and consumer products markets.

As you recall from our last conference call, we spoke of the fourth quarter restructuring effort combining three divisions into one. That effort is complete with our sales and marketing teams working as one to sell our broad product line through as a single point of contact.

This quarter we rolled out our new combined distributor policy. This policy synchronizes policies and discounts to our distributors, as well as incentivizes and rewards distributors for their efforts and successes in selling the complete Brady product line. While it has been received mostly positively, there are still risks associated with the changes.

To offset the lingering sluggishness in some markets, we have been proactively dedicating resources toward growth initiatives. Our Lab Identification Initiative, where we have launched a variety of proprietary new products within the last year, had a solid quarter. Our high-performance labels and systems are ideal for conditions that lab samples are often exposed to in liquid nitrogen long-term storage. Our brand protection initiative assists customers in preventing product counterfeiting, diversion and tampering, and the increasing interest is being driven by black markets for counterfeiting products and product security. These are just two examples of how Brady is utilizing our existing expertise in materials and solution development to excel in faster growing markets.

Within direct marketing, we are testing several growth initiatives to increase our customer base and sell more to our existing customers. We are adding many new many new products and increasing our overall product offering throughout the Americas.

At TemTec (ph), we introduced a new visitor management software product. This product allows us to provide a complete solution -- software, printers and labels -- to assist facility managers to more productively and securely manage visitor access. We also increased our catalog size in Brazil along with an expanded and more cost-effective contact strategy.

We closed our Chino, California direct marketing facility during the quarter as part of our restructuring initiative. This was well-managed with no service disruption to our customers.

I will now turn the time back to Dave Schroeder who will discuss Europe.

Thank you, Matt. In Europe, sales in the quarter increased by $8.2 million to $53.3 million, an increase of 18.2 percent over the same period last year, including acquisitions and the benefit of currency translation. Day sales declined 4.7 percent, most notably in the UK and Germany. Acquisitions added 9.7 percent, reflecting the first full quarter of Etimark in Germany and Clear Advantage and Aztec Limited in the UK. These acquisitions are performing well.

Currency added 13 percent to the top line. Profit increased 29.1 percent over the same period last year, 13 percent in local currency, driven both by the benefits from our restructuring and improvement in gross margins. By geography, we experienced mixed results throughout the region, consistent with the trends experienced in the Americas by market and channel.

In the UK, our businesses were affected by poor demand from the manufacturing sector, specifically in the MRO market. In Germany, we have seen some early signs of recovery in October within the Seton business, but this was offset by the known loss of a large die-cut customer.

Within Benelux, our business was slightly lower than last year due to weak end markets. However, from Belgium, we export to the Middle East where we have seen continued strength. Similarly our business in Poland and Hungary experienced strong growth as we successfully tracked the manufacturing migration of our electronic assembly customers.

By channel,our Seton direct marketing businesses started the quarter very weakly, primarily due to the exceptionally hot August in the region. But daily sales improved sharply in September and continued in October. The business finished up slightly over the prior year. These businesses will benefit from our initiative to add catalog pages as we leveraged the 22,000 products we offer across the region. We enjoyed encouraging new sales from this initiative in the quarter.

Our Brady branded sales declined slightly as we saw flat or weakening business in our HPI, PCI and Stein-Mart (ph) businesses across the region. Some of this was planned as we exited low profit businesses, but we also saw continued to be impacted by a slower recovery of the manufacturing sectors in the regions.

As with the case in the U.S. restructuring, we brought two sales teams and businesses together. As part of that reorganization, we conducted intensive cross products and skill training across the region. Our customers and distributors have responded well to this change.

We took the opportunity to bring 74 of our distributors together at a conference in September where we introduced a new common distributor policy that broadens the product offering for many distributors which extends our reach in the marketplace. We are confident that a combination of our sales teams, a strong focus on productivity, making ourselves easier to do business with, and leveraging our product lines and reach across the region will drive growth in the coming months. We continue to manage our portfolio of products, brands and businesses across the region to focus on areas with higher sustainable returns.

The outlook in all economies in Europe is improving but continues to be soft in the manufacturing sectors, which drives the main part of our business. With a strong brand franchises and a more disciplined approach to customer segmentation, we feel our prospect of strategies are working well. We remain cautious about the second quarter; however, our forecast remains on plan.

Now Frank Jaehnert will return to discuss Asia.

Thanks, Dave. For the quarter, sales for the Asia-Pacific region were 18.5 million, up 36 percent from the previous year. Base growth was up a strong 26 percent and currency added 10 percent. Sales in China are ahead of plan and about twice as high as last year. Gross margins are very strong, and profit for the APEC region was 5.4 million, up 47 percent from the previous year.

Brady's business in the Asia-Pacific region continues delivering very strong results and showing impressive growth over the previous fiscal year. Our investment in infrastructure over the last two years are really beginning to pay dividends. Our nine local manufacturing locations in Beijing, (inaudible), Panang, Brady Singapore, Brandon Singapore, City of Melbourne and (inaudible) enabled us provide not only local design and product development assistance, but also seamless customer service and delivery.

Our facility in Panang, Malaysia is also very busy. This core business and the addition of (inaudible), which we have transferred over from the U.S. to recognize cost savings. Competition remains tough in Asia, but Brady continues to differentiate (inaudible) materials, design expertise and local manufacturing capabilities. Our new startup operations have ramped up to levels at or near capacity and are now providing positive return on investments to support additional expansion.

Australia, while not growing at the same pace as the rest of Asia-Pacific, was working off a larger base of business and is doing very well to continue growing the base business over last year. By leveraging on design expertise (inaudible) accounts, we have been able to gain a nice marketshare with some of the local Chinese (inaudible) of four manufactures. Our strategic account program where we served global accounts looking for consistent design, constant production is paying off as well.

We have recently won business where the product was designed and launched in the U.S., and then production was shifted to Malaysia and China. Our greatest challenge in the Asia-Pacific region going forward is sustaining the pace of growth and ensuring our infrastructure is ready for the next phase. These are all great problems to have.

Let me now summarize the call. As you have heard today, many of our investments we have made throughout the last several years had begun to pay off. We have built our global infrastructure and are leveraging that structure to be near our customers, produce more cost effectively and acquire customers more efficiently. Our first quarter income results certainly reflect the efforts of our restructuring and cost control initiatives. We are poised and positioned for growth with a dedicated acquisition team and a stronger focus on the new product development and market expansion faster growing markets.

We believe we are at the historic point that given some positive health in the economy, we can get back on the growth path. There are still risks and concerns to the business, however, more specifically related to base manufacturing business in the Americas and Western Europe. Faced with the continued positive impact of foreign currency, the increased acquisition activity we have demonstrated and the ongoing benefits from our restructuring initiatives, we are increasing our guidance for fiscal 2004 of 600 to 630 million in sales, net income of $36 to $40 million after restructuring charges.

We appreciate your interest in Brady, and we would now like to start the question-and-answer session. Tamara?

(OPERATOR INSTRUCTIONS). Jim Kissinger, Kissinger Loftman.

First of all, thanks for the expanded reporting. It is very helpful on the P&L.

Frank, I have got a couple of questions. As I look at the revenue growth estimate, between 600 and 630, that is 8 to 13 percent approximately. How should I look at this in base currency and acquisitions and just get generalizations between the two for revenue growth?

I was just looking over to David Schroeder to see if he had some kind of bridge in the meeting, which we don't have in the meeting. However, I can tell you we don't expect too much from the gross business. We don't expect too much growth in the base business. They have been down this first quarter; we certainly hope it is going to change as we move forward, but we have not -- we don't expect a major turnaround in base business. So we still continue to assume that currency is going to stay where it is, and, of course, we have some acquisitions which we added to the sales numbers.

Okay. And the second issue is, as we look at the margin structure, gross margins were very strong and the SG&A line held well, and I guess offline I have got some other questions, but how should we be looking at this from a modeling standpoint, not just for next year but going forward?

You know to get to the operating numbers you are talking about, you don't have to do a whole lot with the numbers this year. But as base business starts getting better or hopefully whenever it does get better, how should we be looking at that the trends of those margins?

Well, Jim, you have seen that we have taken quite a few actions last year and continue to take actions to reduce our cost structure. We have (inaudible) SAP and people have always asked, when do we see the benefits? I think we are starting to see some of the benefits now. We are committed to further improve both our SG&A as a percentage of sale and all gross margins.

You know my opinion here on gross margins, Brady is a premium priced brand because we provide quality products to our customers and broad solutions, and we are not going to give up on our gross margin. We are trying to push the gross margin higher as well. I do not want to give any specific guidance, but we are certainly committed to an increase in earnings quality of Brady.

That is terrific. One last thing then on the gross margins, Frank. With all the acquisitions you have made, in general lots of them over the years have been software-driven, and my assumption is they would have higher gross margins. Is there a mix shift that is happening here that is also benefiting the gross margin line, or is it really the cost reduction efforts that you have had with the plant closings and bringing Eclipse through?

I think the latter is true. We did not made too many software acquisitions like TISCOR was probably the only one, but then we have heavy markets in all of the labor companies; we have Brandon at the die-cut Company, which the die-cut business typically has lower margins. And then on Aztec, I don't think you can call them software acquisitions. So I think it's the effect of some of the cost reduction efforts which we have turned through the bottom line.

Thank you.

Mike Whitfield, Wachovia Securities.

I wanted to inquire a little bit further about the distributor policy that you mentioned and if you could clarify exactly what transpired? I think you characterize it as mostly well accepted. What was not well accepted?

Let me ask you a question first. When you say what transpired, are you looking for a clarification as to what changed in our distributor policy, or what transpired in (multiple speakers) the field?

Maybe you can characterize both.

I will touch on two things -- first of all, what we actually did. We essentially had two different distributor policies, one from the former Stein-Mart division and one from the former ISST Group, of which there were different businesses but on the same distributor policy.

So what changed was the fact that all elements of the distributor policy, as you look at those two different policies, needed to be brought together so that they were the same in all respects. Returned goods policy, discount policy on different products, the different buckets that we put distributors into in which they earn discounts -- that sort of thing. So all of those things had to change.

And so, there are a number of things as you would look at that that impact distributors. Their overall discount could have changed or their discount on a specific product could have changed just as a result of bringing all those things together, which is fairly complicated. So what transpired in the field is that the salespeople went out, and our sales managers went out to all of the distributors and informed them of their overall distributor policy change, and then over the course of the next 30 to 60 days, the distributors then had to implement the changes in our pricing and distributor policy which were launched at the same time into their computer system.

So that is what transpired after the fact was communication to high-level managers, managers translating that into their business and implementing it so they could buy product from Brady at the designated time with the right prices and right discounts. Any time you change prices, there is always a certain reaction to that, pro or con depending on what happens with a specific product's price.

Thank you. If you could briefly touch on -- I have not done the calculation here -- but inventory turns or Days Sales Outstanding and outlook for those two figures?

About 52 days of DSO.

Outlook we should see it starting to come down because as I mentioned we had some additional sales, particularly of acquired businesses, and an increase in sales towards the end of the quarter. So from an overall systemwide viewpoint, those should come down some.

As we start to see a mix shift toward some of the more out of the U.S. and into some of the international regions, those typically have higher days sales outstanding in total, so we could see some mix shift, which starts to increase Days Sales Outstanding.

This has been a very interesting signing over the last couple of years. As we move business overseas, the Days Sales Outstanding is longer, and inventory, of course, also because you have now gotten product shipping over the ocean. But we have been doing very well in the cost-cutting field, kind of offsetting these effects and consolidation of certain facilities and closing down a factory here or a distribution center there certainly helps taking inventory levels down. So I think we are going to continue to work very hard to make sure that DSO and inventory turns stay where they are and hopefully even improve beyond where they are today.

Reik Read, Robert Baird & Company.

I wanted to follow-up if I could on the last question with respect to the changes you're making within the distribution network. As you make those and you change discount structures, typically you are going to make somebody unhappy. What is the level of pushback from your customers that you have seen and what disruptions potentially do you still have to fight through?

The level of pushback I would say given the magnitude of what we changed, the level of pushback was pretty modest actually. The biggest area of concern was bringing together custom products and putting custom products in this particular policy and our ability to service products in the custom area, and that was probably be biggest area of pushback.

But overall considering the magnitude of what we changed, it was very positively received, particularly with respect to the fact that you have to remember that many of these distributors have been longtime Brady distributors, buying off of two totally different policies over the years, different minimums, different return goods policies, different pricing structures, different discount structures. So one of the key messages was that they no longer have to deal with these differences anymore. So that is one of the major positives. But whenever you change pricing policy, it is hard to keep everybody happy. Somebody is going to have a different price on this product and so on and so forth, so we have got some individual pushback on those sorts of things. But in aggregate, I would have to repeat, given the magnitude of this, this was very positively received.

And it sounds like from what you're saying is that you really don't expect too many hurdles still to overcome. You are through probably the most challenging part. Is that a fair way to characterize it?

Very fair.

Frank, I wanted to go back to just the gross margin questions that Jim was asking, and maybe if we can talk about this quarter and the results that you have -- up sequentially pretty strongly, better than we were expecting. Can you just characterize the components of why you're seeing the gross margin move up? How much has to do with pricing; how much has to do with mix, how much has to do with the restructuring -- things of that nature?

That is a difficult question. I would say a little bit of each. I cannot give you 25 percent restructuring and this much from pricing and so forth. We have increased some of our prices at the end of September, October was one month of pricing. And the distributor policy also has been changed at this point in time, which probably is going to lead to some increase in the bottom margin. We certainly have seen some benefits from restructuring. We think about 2 million, but the 2 million is probably in SG&A, and in cost of goods sold, we have not pulled apart.

As far as mix is concerned, it is always difficult. I would not get too excited about one month, one quarter of significant improvement of our gross margins. Let's see how this goes over the quarter, the next couple of quarters. But we certainly have a couple of things which are not going to go away, and one is the price increase and distributor discount policy changes. They should stick with us, especially since we believe that our distributors have received them well. We don't get too much pushback. And the second one is the restructuring savings. They should go on as well.

Mix can always change as we make acquisitions, and if one region is going to grow faster than the other, let's say Seton grows faster than some of the other businesses, we cannot say too much about this, especially as we do not know how far the MRO segment is going to return to growth. But I think the underlying factors are going to stick with us going forward.

Can you give us a quick sense with respect to gross margins, the two acquisitions that you did in the quarter, did they make a positive contribution to your gross margin or where they still a drag or how would you characterize that?

We acquired Prinzing, and we acquired Brandon. I think without going into specific details, one of those businesses -- the die-cut business -- typically has lower gross margins in general, whereas the (inaudible) product lines have higher gross margins. So I think on average they are - I am taking a guess -- on average they probably did not do much to change the gross margin significantly.

Prinzing was at the last day of the quarter, so I guess it did not do much.

Right. Last question from me. In Dave's remarks, he had mentioned there was a loss of die-cut business in Europe. Can you guys put a little bit more color on that?

That was one account. That happened about nine months ago, so it is in the year-over-year comparison. One of the customers that we had over there brought some production in-house, and we in turn picked up some additional different business, but the volume of what they brought in-house was larger than what we picked up in the additional business.

It was also not something where they could do it the same technique or technology at a lower-price. They changed the technology, the way they do it. And also what sometimes -- what is happening when you look at our core growth rate and it is negative, on the one hand, it is (inaudible). It is partly due to the economy and manufacturing, so it is startling. But we also have done some pooling of our product lines in the U.S. and in Europe.

Where some of this pruning was done by our customers like Dave just described, but some of it was also conscious decisions where we just focused more on faster growing or higher profit generating product lines. So we have some of this in there, in our business. It is not purely an economic impact, and as we said earlier, we don't think we are losing share on this side.

Of course, partly what you also see in the U.S. and in Europe is business moving from here over to Asia. So I think all this activity needs to be taken into consideration as we look at our core business growth rate, especially in the U.S. and the Americas and in Europe.

Thank you very much.

(OPERATOR INSTRUCTIONS). Bob Bridges, Sterling Capital Management.

Sticking with the questioning on the gross margins, as we go forward this year, you have obviously put through a lot of cost improvement actions that will begin to take hold. But given the fact that you've got the base business which is struggling, what would your expectations be for your SG&A margin and your gross margins as we roll through the year? Are they going to be somewhat volatile? Are you expecting them to continue to trend positive? What is your take on that?

Well, over time we hope that flows are going to improve. SG&A is going to come down and gross margin going up, but I am not specifically talking about this year. I am talking about mid-term over the time. Because we have efforts going in our company to increase gross margin and to reduce SG&A as a percent of sales.

From a quarter to quarter point of view, it's very very difficult to say, especially on the gross margin because mix issues play a big role. But over time, we certainly want to increase the quality of our earnings, and we cannot do this without attacking the two largest components, which is margin and our cost of goods sold and SG&A.

Concerning the acquisitions, the two in the quarter and the one you just did recently, you typically don't disclose terms. I notice that there is a good amount of goodwill that got recorded for the two that you did in the quarter.

What can you tell us about the environment as you're looking at these companies, at these deals? Have you been in competitive situations with anyone? What kind of assurances can you give us that you are adhering to some good valuation parameters as you go about looking at these acquisitions?

You know we have always been a conservative company when it comes to paying a price. You might say we (inaudible) came with a higher offer. I don't think anything has changed in our conservative approach to acquisitions. We still look at shareholder value enhancement or EVA, and we're not going to pay a price which is not going to provide us an equal return. I think we did not deviate in any way from our previous policy.

The reason that we are making more acquisitions now is not that we are paying more and paying healthier premiums, I think it is a combination of two things. Number one, you know around 2000 when we had the fever of the IPOs and high margins being paid for companies, that is when we are not successful in acquiring companies because we had financial buyers coming or companies like Tyco who were willing to pay high prices. We just did not match this.

And in the first one or two years after this when the recession started, people were holding on and saying you know what, why would I want to sell to you now because our earnings have come down and they are going to come back up in six months or so. Guess what? They did not come up. It is now the third year that earnings have not come up.

In addition, many of those companies we acquired have faced the fact that if they don't go to China, they will not be around, probably not ever have the chance to increase their earnings. So take all this together and here comes the company along, Brady, and says you know what? We can take your products to China, and we are willing to pay you a reasonable price, not expensive, but a reasonable price. That I think is why we have more activity because they have realized early they are not going to come back anytime soon. If they don't go to China, it's not going to get better. So I think these two factors are really helping us, but it definitely is not that they are trying to buy growth, so we are paying for acquisitions.

Okay. Can you just refresh my memory what your CapEx and D&A for the year are planning to be?

CapEx will be around $15 million, and depreciation and amortization will be a very similar number.

Thanks a lot.

Jim Kissinger, Kissinger Loftman Capital Management Inc..

I am trying to understand how you guys are now on a quarterly basis defining profit/loss by division or by operating in the Americas, Europe and Asia? And then on an annualized basis, you have given us some help now on the administrative side. Could you give us some more help understanding how you define profit and loss on a quarterly basis by division? Then help us -- it is great that we've got the administrative cost and some of the corporate eliminations for the annual stuff, but it is not in the quarterly stuff. Can you shed some light on those issues?

The measure of profit or loss for the segment is what we use internally to measure those businesses. It basically excludes the corporate costs or administrative expenses like finance, HR, IT, etc.. We typically include the reconciliation between that number and our pretax income and our 10-Q. So you will see that come out in a couple of weeks.

Obviously we have here -- we control our IT budget globally. We want to make sure all our IT systems can talk to each other. So we do not want a local business leader in China to buy some low-cost hardware, which might be doing a job for China, but then we have problems communicating. We spend a lot of money then to make up for this. So we are controlling our IT investment globally. So we say -- that you don't even get tempted to worry about this. That's not your responsibility.

Naturally you are on a profit level which is before all those things. The same is true for finance, for HR, and for a couple of other corporate kind of type expenditures. But that is basically how it works. It has worked well for us in the past. I do understand there is a big gap between this and our total pretax profit for the company. (inaudible).

I guess, Frank, I almost look at it is if this is a holding company situation with three geographic operating units and then corporate overhead here in Milwaukee. Is that how in general to look at it from my prospective?

I think it is probably pushing it a little bit too far. We do not consider ourselves a holding company. We work very close together with those people. The finance people are basically sitting in those locations, so the HR people are sitting there, the IT people and so forth. But they are just not in their cost structure because we are controlling the budgets globally.

David Hawke, our Executive Vice President, has responsibility for many of those units where he just sets global standards and then controls these expenses expenses globally. It's just a question of how much do we want the people who run the local businesses to worry about these topics. We want them to worry about how I can increase sales and how can I decrease costs which I can control in my local unit. But I would say it is far away from looking at this like a holding company. It might feel like it, but it is --

I think calling it a holding company does not really recognize how well integrated the various regions are. When we put in a computer system and Frank is talking about that investment, when I think of a holding company, I think of standardized financial system, and we have really put in standardized business systems in all the regions that are integrated. I would not call it a holding company.

Then let's back it up a second then and Matt is on the line. As I look at it, I assuming is you are measuring one of your metrics as you made $15 million on about $80 million of revenues. How was Matt going to be compensated, and what are his goals and objectives and the people who run these different operating units? That is the real driver. That is what they can effect. And at corporate level, you guys affect the IT budget, the HR budget.

Explain to me what Matt's goals should be and how I should be looking at this from a P&L standpoint on profitability between the different geographies? Are they going to be significantly different because of mixes?

First of all, Matt's goals are very ambitious, and that is true for everybody else. They are the numbers you are seeing there. I generalize here a little bit because you know for Europe and Asia, it is pretty clear because we have one person for the Americas and we at this point in time have two people trying to cover here for the direct marketing brands and then Matt for the Brady brand.

But they are basically being compensated on sales and profit growth, and the profit is a profit which we are showing here on this attachment. Whereas some of the corporate people, like David Hawke and the people who report to him, have goals for their, say, particular area. Let's say the CIO has certain components in the CIO budget which he has to reach. Then our acquisition person has certain acquisition numbers to reach. So we try to be as close to what people can influence, and that is exactly one of the reasons, Jim, I think you hit the nail on the head.

If we were to give a person in China -- to stick with our previous example -- a profit goal, which includes global IT which is being controlled out of Dave Hawke's group, and we tell them you have to have these kind of laptops and these kind of Internet access structures, then we have discussion going back and forth on non value-added things. Then the Chinese all of a sudden tries to tell Dave Hawke he would like a lower grade laptop so that he can increase his profit. Whereas we would like this person to focus on how to grow the topline and how to reduce the costs which are under his control.

Just a quick follow-up. I just did it quickly, Frank. When you look at the margins that the Americas are generating this quarter, it is close to 19 percent. Europe is close to 25, and Asia is close to 30. Is there something in the mix that is going to dramatically affect those types of margins, or is it just that the Americas business is behind the curve in revenue growth and that those margins are going to get better? Are is Asia's margins too high and they are coming down?

And then the follow-on is, on the administrative cost side, it looks like it has been about $14 million a quarter as you guys have reported. Is that a number we should be looking at going forward here as we model these businesses?

Again, a very good question, Jim. Well, the Americas had higher profits a couple of years ago before the recession started, and then, of course, they have suffered the most from a decline in business and then, of course, moving business from here to Asia. Here are the ones where we have suffered.

We also have a lot of our infrastructure -- let's say our coating plan -- a lot of our equipment, R&D, we have here. We have a couple of things -- I just would say we have here two, but they are not in these numbers like IT. But a lot of infrastructure is still here, and certainly we try certain things out but not all of it. I think it is the underutilization of the Americas, and, of course, when we saw that we would go into the recession, you always have to ask yourself two questions. Can we cut back expenses to maintain our profit margins, or do we try to shift some of those resources to newer areas?

So we have done a combination. We have cut some of it back. Like we have combined three divisions into one. We have closed some of our plants here in the United States, but on the other hand, we have also taken some of those people and have said you can now concentrate on brand protection, on excess control, on laboratory initiatives, basically new areas for us that we see growth.

Of course, now we have the structure and people are probably not as productive as they were in the old areas. So it's a combination of this, but over time, I think there is nothing fundamentally wrong with the United States. The economy is going to pickup. I think the Americas are going to come up in profitability.

As far is Asia is concerned, you saw and you mentioned we have already the high profit. I think it is because we are relatively ahead a little bit of some of our competitors. We have the infrastructure there. We are providing a value to our customers, and they are willing to pay for this. As competition increases, especially from local Chinese companies over time, they are going to become more sophisticated. We might get a little bit more challenge over there. But at this point in time, we don't see this yet.

Okay. If you want to comment on the administrative costs, then I will let somebody else jump back in queue.

The question was 14 million, is this what we should be looking for? We always try to find out how we can put something in a model to come up with your own estimates. Here exactly is the same (inaudible) I can give you to in all other areas. We are trying to increase earnings quality. We are looking at those administrative costs very very closely.

Every year they are going to go off and (inaudible) going to have November 1st, we are going to have a salary increase going in for most of our businesses. So there is a pressure on the healthcare situation and so forth, but we still tried to find ways that we can keep those costs under control or reduce it or what have you to compensate for other. So I cannot give you a guidance.

I can just tell you one thing. We're trying to increase earnings quality for the Company, and administrative is certainly one area I would like to put money out over time as a percent of sales (inaudible) administrative as a percent of sales. Hopefully, it should go down. I would like to take some of this money and put into other areas like R&D, which I consider more of an investment into our future than administration.

Well --

We continue to work on the administration in trying to write down, as Frank says, a percentage of sales. A couple of things going against that would be any administration expenses that come in with acquisitions that we are doing or any currently translation impact as the administrative expenses from outside the U.S. get brought back to U.S. dollars.

I will let you guys go. Congratulations on a nice quarter and a good trend, and Frank Dale Elliott told me to give you an atta boy and congratulations.

Thank you.

At this time, there are no further questions. Ms. Bolens, are there any closing remarks?

Thank you. We appreciate everybody's participation in the call today. The audio on slides from this call today are available on our Website at 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 PM Eastern time today. The number for that is 1-800-642-1687. International callers can dial 706-645-9291. A pass code of 350-0032 will be needed to activate the call. The phone replay will be available until 11:59 PM on Friday, November 21st.

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