Brady Corp (BRC) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your quarter 4 2004 Brady Corporation earnings conference call. My name is Jean, I will be your conference coordinator. At this time all lines are in a listen-only mode and we will be taking questions toward the end of the conference call. If you ever need operator assistance please key star, 0 and we will be happy to assist you. At this time I'll turn the call over to your host, Barbara Bolens, Director of Investor Relations. Over to you, Ma'am.

Thanks and good morning, everybody. During the call this morning you will hear from Frank Jaehnert, CEO, who will be presenting a portion of the business review and also summarizing our discussion. David Mathieson, our Chief Financial Officer, will be presenting Brady's quarterly financial review as well as the European discussion. Joining us this morning is Tom Felmer, Vice President of Direct Marketing Americas to provide some additional commentary on the Direct Marketing Americas results and specifically our recent acquisition of Emed. As usual, after brief presentations by the team we will open up the floor to questions. Also joining us this morning, but probably not in a speaking role, is Allan Klotsche, who is the Vice President of Global Die-cut and Asia, Dave Hawke, our Executive Vice President and Matt Williamson, Vice President of Brady Americas. This quarter we've continued with our enhanced slide presentation on the Internet and we encourage you to follow along on those slides and we will be referring to the individual slides as we proceed through the presentation. The slides can be found on our Web site at www.investor.bradycorp.com. You will have a couple of minutes to get to those while we go through our Safe Harbor statement and other usual information. 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 June of 2004. 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 also that we will be taping the call and rebroadcasting it on the interest and your participation in the question and answer session will constitute your consent to being recorded. And now here's Frank Jaehnert.

Good morning and thanks for joining us. We are pleased to present another great quarterly report of Brady's results. Please refer to slide number 3. Our fourth quarter sales increased 28% to $185.5 million. We are particularly pleased that our base sales grew by 12% in the quarter and we have now seen 2 consecutive quarters with healthy base business growth. Net income for the quarter was 16.1 million, up from 1.8 million last year and it included a 3 million benefit from the result -- resolution of a tax audit. The after tax restructuring cost in the fourth quarter of fiscal 2004 was $600,000. In fiscal 2003 it was 6.3 million in the fourth quarter. For the full fiscal year sales grew by 21% to a record 671 million with net income of 50.9 million. The fourth quarter was a continuation of the positive trends we began to see throughout the year including improving sales, margins and net income. This is very rewarding given the numerous changes we implemented throughout the Company during the last year. Our success was driven by a significant reduction in structural costs just before the economy rebounded. Now our costs are down, the economy has improved and we have a focused and disciplined approach to allocate resources such as dollars, people and time, follow initiatives that will make us a market leader in our businesses. We believe that it is manifesting itself in higher core growth rate. With the addition of some strategic acquisitions and the positive effect of foreign currency this resulted in an outstanding year for Brady. Shortly I will be turning the call over to David Mathieson and after the presentations I will be back to provide you with a look to our current year. David?

Thanks, Frank and good morning, everyone. If you go to slide five I am pleased to present the results for the fourth quarter of our 2004 fiscal year. As Frank noted earlier net sales were $185.5 million, up 28% from the same quarter last year. Acquisitions, by the way, with growth of 13% followed closely by strong base growth of 12%, currency adding an additional 3%. This is the second quarter of increasing positive base growth. Base growth in Europe was solid with high single-digit growth, the Americas growth was double digit for the first time in the year. Asia continued to perform well with local currency growth of 32%. You turn to slide 6. In the Americas base sales were up 11% from the same quarter last year with growth in nearly all geographies and markets. In the Brady business we saw a continued strengthening in the industrial OEM and electronics marketplace. New products are contributing nicely to base growth which Tom Filmer will discuss in more detail later. In slide 7, in Europe base sales and local currency were up 8%, sales grew 7% in our Direct Marketing business and our Brady brand business grew 5%. Our die-cut business in Germany was up a strong 28% and our business in Central and Eastern Europe continues strong as you will hear later in the European report. You turn to slide 8. Asia continued to perform well with base growth and local currency of 32%. Our growth in China continued strong and we continue to invest in facilities and people to support the growth. As we will cover later in the call we are excited about the recent acquisition of ID Technologies giving us a strong conducting presence in the Azian(ph) region.

In slide 9, gross margin for the quarter was 50.9%, an improvement of 0.3% versus last year, mainly due to the strong margin in Europe and increased the volume. Their quarterly comparisons are getting tougher as we began -- as we begin to see benefits of the restructuring programs in the fourth quarter of last year. However, it is our intent to continue to improve margins through operational efficiencies and regular as product line reviews. In slide 10, SG&A of $66.6 million was 35.9% of sales or 2.4 points below the prior year's fourth quarter's. We are committed to maintaining our SG&A cost structured in dollars to provide us flexibility to invest in other growth initiatives such as R&D while maintaining or improving our margin. Slide 11, research and development was 3.4% of sales, due to 0.1% lower than the fourth quarter of 2004. In dollars, their spending increased $1.3 million for the quarter. During the quarter we adjusted our tax reserve due to the previously announced completion of a Federal tax audit for the years 2000 to 2002. This resulted in a positive tax impact of $3 million, excluding this one time pickup our operating tax rate for the quarter was 31.9% which is consistent with the year. Slide 12, our net income for the quarter was $16.1 million and included the $3 million tax benefit as well as $600,000 after tax of restructuring charges. This compares to fiscal 2003 4th quarter net income of $1.8 million in the prior year which included $6.3 million after tax of restructuring. Slide 13, diluted earnings per share for the quarter were 66 cents versus 8 cents last year. Fiscal 2004 includes a positive 6 cents impact of currency, a positive tax adjustment of 12 cents. Partially offsetting this is a 3 cent restructuring charge and 4 cents of interest expense. Fiscal 2003 8 cents net income included 26 cents of restructuring costs. Headcount was approximately 3,000 to 800 by the end of the quarter. Our headcount grew 500 people over the same period last year due to acquisitions and investments in an emerging market. The headcount from existing businesses in North America and Europe continued to trend down.

Slide 14. We generated a very strong $37 million of cash flow from operating activities in the fourth quarter. You can also see the large amount for purchasing businesses, mostly Emed, and we also raised $150 million from a private placement to fund the acquisition in June. In slide 15, this charts our cash flow from operating activities over the last 8 quarters and you can see how we ended fiscal 2004 with very strong cash flow from operating activities. In slide 16, our balance sheet has a new look this quarter. We have a long-term debt of $150 million used to fund the purchase of Emed and we are pleased that we continue to generate cash in the quarter resulting in cash on hand of $70 million. Slide 17 shows our quarterly balance sheet, our receivable increase is consistent with sales and inventory is slightly higher at the end of the fourth quarter due to the lower turns that we have in our Emed acquisition. The growth in other liabilities consists of increases in our wages payable for incentives and our taxes payable both a result of the strong profit generated during the fiscal year. Slide 18. Looking forward to fiscal 2005 we expect full year sales to be in the range of 770 to $790 million , a net income of 59 to $62 million which is an increase in our guidance to reflect the continued strength in our base business as well as the acquisition of ID Technologies in early August. We expect depreciation and amortization and also capital expenditures to be around $20 million in fiscal 2005. Tom

Thanks, David. I'm pleased to report that the Americas region generated its second consecutive quarter of solid base business improvement. Sales for the Americas region were $98.4 million, an increase of 33% over fiscal '03 fourth quarter. Of that total increase 11% was generated from base business growth and 22% came through the acquisition of the Brandon, Prusing(ph) and Emed businesses. Fourth quarter profits improved to $18.5 million, an increase of 73% over prior year in the Americas. The profit increase was driven by improved cost structure, base boat(ph) business volume increases and acquisitions as well as new productivity and cost savings programs that were implemented through out the year. Base sales growth was generated in nearly all geographies and market segments. Our U.S. and Canadian businesses were up 10% over last year and our Brazil and new Mexican businesses are doing extremely well with sales growth of 43% over prior year. Markets of particular strength include the industrial OEM and electronics markets. One area of business that continues to remain soft is the non-residential construction market. New products are contributing nicely to our base sales increases. Our base sales growth was fueled by the fourth quarter introduction of our new I.D. expert hand-held printers. We're also seeing continued sales increase in our global marks sign printing system and ID Pal hand-held printers which were both introduced in fiscal 2003. The ID expert launch has exceeded our original expectations for fiscal 2004 and is being well received by our customers and distributors. Integration of the 3 acquisitions made in the Americas this year is going well and all are performing at or above expected levels.

The Emed acquisition was completed in May and has performed particularly well, exceeding its financial targets in the fourth quarter. The key initiatives surrounding the Emed acquisition is to understand the high profit levers that exist in the business and transfer them to our other direct marketing units. We currently have teams from our Emed and Seton businesses benchmarking the marketing call centers and manufacturing distributions processes of each unit and are creating plans to optimize each unit -- each business. We will extend this process to our international units beginning with a global direct marketing conference which we will hold in Europe next month. We expect to see improvements in all of our North American catalog businesses in fiscal 2005 as a result of this acquisition. We have also completed the transfer of much of our high volume stock product production to our new facility in Tijuana, Mexico and expect to begin to realize cost savings through improved margins on these products in the first half of 2005. I would now like to return to David Mathieson to a report on our European business results. Thanks, Tom.

In slide 21, sales for the European region were solid, increasing $%10.4 million to 64.9 million, that's an increase of 19% over the same period last year. Base business grew 8% across the region and their acquisition of BIG contributed 4%. Currency added 7%. Operating profit increased 26% over the same period last year, 17% in local currency, to 18.4 million, driven by solid base sales growth and improvement in our gross margins. Notably for the entire fiscal year our stringent cost control measures have resulted in further operating expense improvement and regular surveys of our product mix have helped improve our gross margin and contributed to an operating profit increase for the year of 24% excluding the benefits of currency. During the fourth quarter all businesses in the region experienced solic -- solid single-digit base growth in the quarter, continuing on from a solid third quarter. Most notably our direct marketing business grew 7% in the quarter as that business continues to benefit from earlier efforts earlier in the year to expand the product offerings to our customers through additional new product and marketing strategies. Our Brady brand sales were up 5% in the region. This was driven by solid performance in the benelux, across our wire identification and high performance label line. Additionally our die-cut business in Europe and Germany grew strongly during the quarter. Business in Eastern and Central Europe was very encouraging and continues to grow expanding nearly 80% in the quarter driven primarily by our existing OEM customers. We are increasing our sales force investment in this region to take advantage of opportunities created by the new European Union member state and their need for safety compliance product offering. As we look to fiscal 2005 we expect similar base growth performance as that of the past 3 quarters. We also are not getting any help from the economy, our programs designed to offer more solutions for our existing customers appears to be working and we continue to invest in expanding markets, most notably Eastern and Central Europe, with new (inaudible) markets such as laboratory. We are also continu -- continuing efforts to drive operational excellence, further improved customer service and drive productivity across the region. Let's move on to Asia and Tom Felmer, he will report for that region.

Thanks, again, David. Performance throughout Asia remains strong across all areas of the region through the fourth quarter. Sales for the region were $22 million, up 37% over last year. Products -- profit for the region was $6 million, up 46% over last year. Leading the performance in the region was our greater China operations which delivered excellent sales and profit growth for the third consecutive year. The growth in China has continued at a pace which now necessitates expansion in both our Beijing and Wushu facilities. The expansions, which will be completed in the firth -- first quarter of 2005, will allow us to add more capabilities and expand our portfolio in support of the mobile phone and electronics markets. The addition to our focus on the electronics industry we are working to build the market for safety products. While MMC is operating in Asia and China, in particular, have adopted western safety standards, local companies are significantly behind in their efforts. We anticipate that 2008 Beijing Olympics will further accelerate China's adoption of global safety standards. In August we completed the acquisition of ID Technologies. In line with our strategy to be number 1 or number 2 in each of our market niches, this acquisition gives Brady a very strong presence in the hard disk drive industry and allows us to leverage some of our high cost analytical testing across the broader customer base. This acquisition, in addition to the Singapore operation which we acquired as part of Brandon International, gives Brady one of the strongest consert -- converting platforms in the Asian region. The Brandon United Technologies acquisitions have provided new customers lists, state-of-the-art production capabilities and a strong team of managers who will be instrumental in our future growth plans.

In fiscal '05 we expect continued strong growth prospects in the region. We continue to add resources to support both marketing and development and new products development targeted at filling the needs of the new markets that we are focusing on. I would now like to turn the call back to Frank who will summarize some key points from today's discussion.

Thanks, Tom. As you can imagine we are very pleased with our results for the quarter and our results for the year. Before we begin the Q&A I would like to spend a few minutes discussing our focus and expectations for fiscal 2005. Slide 23, during this year we will concentrate on the integration of Emed and ID Technologies. With the Emed acquisition we will focus on opportunities to leverage Emed's best practices and profit improvements throughout the entire organization. We will continue to focus on our R&D efforts and having our plans of substantial increase to our current spend. We know that providing differentiated product and material solutions to our customers is key to Brady's success. We will continue our disciplined approach for reviewing our portfolio and strategy and make achast -- adjustments as necessary. In addition the continued focus on operational efficiencies, as we grow, to our earning quality improvement will remain at the forefront. Brady's success comes from successful implementation of many different strategies as exemplified in fiscal 2004. We expect continued success in executing our strategies in fiscal 2005. We have increased our guidance today to reflect a continued growth in base business and the acquisition of ID Technologies. However, we also recognize that the global economy, upcoming U.S. elections and other world events could have a significant impact on our business. We appreciate your interest in Brady and would now like to turn over to the question and answer session. I ask our operator, Jean, to provide instructions for our listeners.

Thank you, sir. (Caller instructions) Again, thank you for standing by, your questions will be taken momentarily. And we'll take a question from Amy Younker(ph) of Robert W. Baird.

Good morning, just a couple of questions for you. You have some businesses that might not make the most sense strategically in -- in your long-term plan. Can you just give us your current thoughts on - on what some of those are and what you plan to do and, in particular, what revenues would go away should you opt to exit those businesses and what it would do to margins.

Nothing comes to mind of any material size. There might be smaller ones but I don't think would it show up in our sales or profit.

Okay. Okay, great, thanks. And, Frank, can you just talk a little bit about maybe some of the lessons that you have learned from acquiring some of the businesses that have higher margin than your own and how can you apply that knowledge to -- to Brady and when we might see that translate into operating margin improvement?

Emed. I'd like Tom Felmer to answer this question because of course the number 1 acquisition where we can leverage their skills to our -- to our companies is of course Emed and Tom Felmer is in charge of the direct marketing business in the America and Emed is part of his responsibilities. He was also very close involved in due diligence and putting an integration plan together. So here is Tom.

Okay. As I mentioned earlier, the process that we are going through is -- is we're setting up teams to look at all of the marketing functions, the call center operations, and the manufacturing distribution areas and simply relative, you know, it's the process of benchmarking one against the other and where we see there's opportunities for improvement and the businesses are very similar so if there are opportunities we will take advantage of those best practices from the -- the other unit. So, we do see those opportunities and that's what we are working on.

It's actually not rocket science, you know, it's just comparing and having discussions, can we take some of the Emed's practices and implement it to -- in Seton as in Brady. And we're going to take our time. You know, Emed is not a business which needs to be fixed, it's a very well run business. So, we're going to take our time to make sure we, first of all, don't do anything to damage the Emed business model. And, second, don't jump too fast on the major improvement initiatives. So we take the low hanging fruit first. And I give you just 1 example where we combined our 2 business, we feel into a different category, discount category, at UPS, savings us about $200,000 per year. So, these are the kind of things we are looking at first, things which are not going to impact business so much and then we then tackle the more challenging opportunities later.

Great, thank you.

We'll take your next question from Ajit Pai of Thomas Weisel Partners.

Good morning, gentlemen, and congratulations on a great quarter.

Thank you, Ajit.

A couple of quick questions. The first one is, you know, just in terms of the ID Technologies acquisition could you give us some kind of color as to whether the gross and operating margins of the Company were greater or less than Brady's consolidated margins?

Yeah, I will take that, Ajit. This is Alan K. You know, their business is in -- focused a lot on electronics and in the hard disk drive area but what we found out is that when you look deep within the hard disk drive industry we were focusing on particular applications, they were focusing on other ones. And I would say the blends are pretty similar but there are some lessons learned similar to what Tom was talking about with the Emed acquisition where there were applications that we weren't quite as focused on and so I think our greatest opportunity is are to look at the portfolio of solutions that both groups were providing and subsequently provide a broader portfolio to the existing Brady customers.

And is any potential for consolidation of facilities along with that acquisition or is it primarily just going to be, you know, the sort of cross-selling and some of the other synergies in terms of, you know, being able to use each other's facilities?

Yeah, there is a nice opportunity there. We have -- after the acquisition we have 3 facilities in Singapore and we are in the process of consolidating into 2 facilities and, again, looking at the 3 facilities and taking the best practices that we have. ID Technologies has really a very impressive facility with established clean room operations and so we will be moving a number of the Brady operations into that facility.

Okay, and then, you know, longer term merely looking at the operating margins of your Company right now compared to what you have done in the past, like in 2000, for example, I think the first quarter of the year you had a 15.7% operating margin, and currently in this quarter it's about 11.6%. So, kind of, this is like tremendous potential for operating margin improvement but what kind of time line or target are you setting for the Company as a long-term model for you to approach, could you give us some color on that and how do you expect to get there?

Yeah. We've issued long-term goals. We expect over the next 5 years to get to 10% net income being a percent of sales, 10%, which would -- which would point to operating margins of probably 16, 17%.

Okay. And then, you know, Emed -- Emed had operating margins that were, you know, almost twice that. You don't think that the rest of your businesses over time can actually train towards, you know, Emed's margins?

We don't believe all of our businesses can get to Emed's margins as yet but of course we are trying.

Okay. And then in terms of tax rate for next year, what would the tax rate for fiscal 2005 be?

We think similar to this year, around 32%.

Okay. And, you know, lastly, like within this quarter on the SG&A line, okay, what -- what any sort of one time expenses in terms of any kind of transaction fees paid to bankers or for term loan, et cetera that, would go away when you are going into the next quarter?

No. We can't recall of any one time items.

No one time items? Okay. Thank you so much and congratulations again on a great quarter.

Thank you, Ajit.

And, again, if you would like to ask a question please key star,1 on your touchtone phone We'll take your next question from Jim Kitzinger of Kitzinger Lautmann Capital.

Good morning and congratulations, also, guys and gals. I -- I have a number of questions. The first happens to be with the D&A. I -- David, I would have thought deprec and amortization would have been higher next year given the transaction of Emed. What am I -- what do I not understand there if D&A is only going to be about $20 million?

You know, D&A -- we think D&A is going to be 20 maybe $21 million in fiscal 2005. You know, if you take the run rate of our fourth quarter was 5.5 million. So -- .

Okay. But you put an enormous amount of goodwill on the books this past quarter. I just -- .

You don't amortize goodwill.

Okay, so that is a non-amortizable but it -- okay, okay.

Don't amortized goodwill, now, Jim. You amortize thinks like other intangibles.

Yeah, I thought -- I just thought that there was a sizeable amount of other intangibles inside of there, lists and those kinds of things. I will leave that.

Like customer list or something doesn't hit amortization?

Customer list hits amortization but we also have trademarks associated with Emed and that's not amortized.

Okay.

And we also had incremental amortization in ethyl 4 associated with Emed as it relates to the inventory write-up for purchase accounting. We did have one time amortization expense in '04.

Okay. When we look at Q4 how much Emed revenue actually came through in Q4? I mean, because you did the transaction in mid, if I remember, mid-May. Did we get 2 months of 3? I mean, is that how to look at it?

Well, we concluded the transaction, I think it was the 20th of May.

So we basically got 2 -- .

2.3 months, approximately.

Okay. Okay. So maybe 9, $10 million is a reasonable number for the quarter?

Maybe but of course you know that we do not give specific guidance on separate businesses. Emed is less than 10% of our total Company.

Yep. I mean, but we knew it was a $55 million run rate. I am just trying to -- trying to just get a scale idea here, Frank. David, one of the things I noticed, there's a deferred tax asset that came -- came from Emed, you know, over $40 million.

That's right.

Can you -- can you walk us through what that is and how it's going to affect both the tax rate and the cash flow that you are going to receive from that asset?

Well, it won't affect the tax rate because we have -- it's been set up as a deferred asset. It will help our cash flow by the tune of $4 million a year.

And how long will that go?

For 10 years.

10 years. So, the way I should be looking at it is that, if I want a net present value that $4 million a year, that's actually money that you did not pay for the -- for the transaction?

Yes. That's a good way to look at it, Jim.

Okay.

That's how we look at it when we came up with our purchase price.

Okay. If I try to back into next year's estimate -- if I do that I end up with an operating income number of a little over $100 million, you now, using the, kind of the tax rate you are talking about and assuming, you know, an $8 million interest expense. Emed generated, you know, 22 or $23 million of operating income, you know, last year. Should I assume that that's going to, you know, stay reasonably similar to that and, therefore, if I look at the, what I would call the old base Brady business, you end up with $80 million approximately of operating income? I mean, I don't need exact numbers, guys. I'm just trying to get a sense of -- of -- of Emed being a bolton acquisition here that you guys have said you aren't going to mess around with. So, therefore, the operating income, you know, should stay reasonably close to where it was because you've said also it's not going to be a giant growth vehicle and I am trying to look -- look at the base business prior to Emed and look at the margin structure so I can get some comparisons.

Jim, anybody is pretty uncomfortable going too much into detail. We provided guidance for next year for sales and net income and you know where we are here so somehow between now and then we need to get from our $671 million in sales to the 780 and somehow need to get from our 50.8 million net income this year to our guidance for next year, I think which is 59 to 62 and, you know, that we have -- we have said while our gross margins were relatively strong, we -- we still would like to do everything we can to improve them. And of course Emed is going to help us on the gross margin side because their gross margin is a bit higher. On the other hand we don't want to all of a sudden open the gates and go on a spending spree on SG&A but what -- what we want to do we want to spend more money in R&D because we consider this to be investment in our future. On the other hand we know that interest expenses are going to go up next year because we have a full year of our $150 million facility and maybe some additional debt. So, I mean, that's as far as I would like to go. We have forecasted for next year and, you know, many things can change like business mix and growth in different geographies. I'm really very hesitant, as much as I would love to help you here but I just would like to leave it with what I have said.

Okay. But how is this, Frank? As one of my clients always says to me, he was never very good at algebra but pretty good at third grade math. If you walk me through the -- theoretically how I'm looking at this is not incorrect.

I think in total you are very close, yeah.

Okay. But also there are 2 components with the Emed component being reasonably stable all things being equal, relatively.

Well, we -- we would like to stop calling it Emed as we go forward, you know, we may have acquired the business or managing it as partner America's business and obviously we will keep our investors updated as to how successful we are in integrating but I would like to stop calling it the impact of Emed.

Okay, terrific. One last thing I thought I heard you say on the call that you wanted to meet -- maintain SGA -- SG&A in a -- in the same dollar amount. Did I -- did I misunderstand something there?

Yeah, we are talking about percent, you know, controlling a percent not a dollar amount.

Right. That, I mean, that's what made a lot more sense. I mean, that's why I asked. Okay, congratulations on a terrific quarter and look forward to next year.

Thanks, Jim.

And we'll take your next question from Mike Whitfield of Wachovia Securities. Please go ahead.

Thanks, good morning. Dave, I wanted to ask you about looking at the balance sheet and receivables, just wanted to ask, how would -- what did this turn into DSOs and how linear was the quarter?

Do we have the numbers handy?

Hold on a minute, Mike.

Our DSO was 47.7 and it improved throughout the year.

Yeah, we've got focus on working capital. We are happy with what we have as receivables and we will continue to try and improve our DSO. Just standing still, however, is a -- speaks performance improvement because our Asia Pacific business is growing much faster than the rest of the world and their DSOs are much higher. But we are pleased with the progress we are making, Mike.

Okay, very good. And you had men -- you had mentioned comments about -- you had mentioned in China the potential that the Olympics would help -- help to drive the safety business over there. Could you -- are there any other regulatory or other significant events out there on the horizon that could, you know, be additional drivers across any given region?

Mike, this is Allen Klotsche. The -- what we are facing in China is really a dichotomy of safety interests. The multinational corporations, whether it's American or European, have brought along the inherent safety standards that they have in their home theaters. It's the local companies and the local contractors that are not adhering as much to those safety standards. There are a few national standards in China but unfortunately the further away you get from where those standards were written the adherence to those standards starts to slip a little bit and I think that big events, big global events like the Beijing Olympics, are going to have to promote -- you are going to get global and international contractors coming more into the region. WTO's giving more opportunities for multinational companies to come in for infrastructure development and it's really a combination of many of those types of things. And we are very much in an education mode as much as a sales mode right now in teaching people why this is important.

I would not put anything in my model for it.

Right, fair enough. But, I was just trying to look at things out on the horizon. And I know next year in Europe I believe the European Union is going to start requiring labeling of electronics for recycling. Could Brady been a -- be a beneficiary to that?

This is David Hawke. That regulation, I don't think that is really go to drive our business. That's a -- the total amount of labeling you're talking about is really not huge. A lot of those labels may be paper labels. We certainly will get some business but I wouldn't view it as a big factor.

Okay. Thank you very much.

Thanks, Mike.

We'll take your next question from Ajit Pai of Thomas Weisel Partners. Please go ahead.

Yeah, a couple of questions about the competitive environment and also about what you are seeing at your customers. You know, yesterday we had Celestica, one of the sort of key EMS manufacturers preannounce and there seems to be a backup of, you now, inventory backup, in the electronic supply chain. Do you expect, you know, are you seeing any slow down in some of your markets in the electronics side and then could you also give us some color on, you know, the competitive environment and pricing environment for your products?

I guess I will take a shot at that one, Ajit. We -- Celestica is one of our global strategic accounts amongst the other contract manufacturers and it's something that we are watching very closely. There's -- there are numerous reports coming out about inventory builds. We have not seen an impact yet in our business but again we are watching it very closely from our inventory levels and just-in-time manufacturing programs. But I think the -- as we build -- as the electronics industry builds up for the holiday season, which is cyclically a little bit higher for electronics, we will see after that season how much inventory is left over. We hope that the industry has learned from some of their past experiences where there has been gluts of inventory and we have seen our customers monitoring their inventory levels and customer orders a whole lot more closely. On the pricing question that you asked, it's -- I don't know that it's more competitive today than it was yesterday but it's a -- it is a challenging world out there in the electronics market and David commented about the terms that customers are look for over in Asia. Quarterly price reductions are things that customers are constantly looking for and what Brady is trying to do is really just continue to provide an innovative stream of differentiated solutions that can help customers save costs but not by doing it through a reduction of our selling prices.

Okay. Just to follow up on that, you know, on the -- on your cost of goods side a number of your raw materials do have a petroleum content. Are you seeing an increase in your cost of goods sold because of the rising petro, you know, petroleum prices?

We are not seeing a significant push at this point just because of the petroleum thing. I think what we are seeing is some pent up pricing push on the part of a number of vendors but I would just say it's broad-based but it's certainly -- people aren't pushing unrealistic price increases out there and we are doing everything that we can like all other manufacturers to resist them.

Okay. Well, thank you so much.

I just want to make a comment, a followup comment, Ajit, on what Al said. You know, he talked about the electronics and maybe there's too much inventory in the channel. You know, we had a pretty good year. Fiscal '04 was a very good year for us, much better than we expected, everything went just well and there is always something. What's happening now ,this electronics thing could certainly be something what could have a negative impact on our, you know, on our fiscal '05 year. I would not underestimate this. So I think we should not get carried away in our earnings projections for fiscal '05 just because we had a great fiscal '04. There are also things which we have to be cautious about. In electronics, as you pointed out, Celestica and so forth, is certainly an area where we're going to be cautious about.

Okay. Thank you, Frank.

And again, if you would like to ask a question you may key star,1 on your touchtone phone. We'll take a question from Matt Hereford of the Atlanta Capital Management. Please go ahead.

Hi, thank you. Frank, I wonder if you could just -- a comment on a -- you know, looking at Brady it appears that you guys have demonstrated more operating leverage, the business model has demonstrated more operating leverage than I had anticipated and I just wanted to see if -- if the model has demonstrated more leverage than you had anticipated and going forward what kind of operating leverage we can expect out of the model?

That's a very difficult question. We have -- we have worked very, very hard to make those things happen and as you probably recall when you participated at one of our earlier conference calls earlier this year, people were asking did you do too much at the same time taking 300 people in terms of our work force out and -- and then reorganizing the sales force, combining 3 divisions and so forth, and have you not over done it. And it is going to come back to haunt you. Well, it turned out everything went well, better, I would say, than expected. The Company executed very well, all 4000 employees executed extremely well. So I think it's caught us maybe a little bit by surprise how much we were able to do. Now the question is how long can you keep running at the red line. How long can you keep this going. Of course, we try to keep this going as long as we can. But, it's very, very difficult to predict. I would say I was surprised by how well the Company executed in light of all the numerous changes we made during the year.

Okay. And one last thing. We haven't heard lately about SAP implementation and Eclipse and what not. How is that going and what kind of benefits are we seeing from that?

We are very happy that you didn't hear about it.

Yeah, we've got SAP in a good propor -- proportion of our large businesses and, you know, it's a challenging system to install, as many people have commented, it's got a lot of complexity. But our businesses are now up and running with it and are comfortable with the tools that the system offers. So I would say what we've noticed is it's -- it's helped us in managing our inventory, receivables and payables, it's helped us get some visibility into some cost improvement opportunities, so. And certainly in a financial area it's helped us with getting our arms around information.

And one last one-- question. If you look at the business model now with the acquisitions that have been made this year can you give us a breakdown of end markets on -- by revenue, how much is electronics, how much of it would be in direct marketing, or wherever -- however -- however you guys look at it internally?

Well, we say that roughly one-third of our business is OEM electronics, and that's a high growth but a cyclical business, and two-thirds of our business is what we call MRO, maintenance, repair and operational supplies and that's not the high growth business, that's more a business in line with GDP or perhaps a little bit more than GDP.

Okay. That's -- then that's the mix including the ID Technologies and Emed?

Yeah, yeah, we've intend our mix, we bought Emed very much an MRO business and in August we bought ID Technologies, very much OEM electronics.

Okay. That's it. Thank you.

We'll take your next question from Jim Kitzinger of Kitzinger Lautmann Capital.

Was there any catch up incentive compensation, Frank, because you guys had such a good fourth quarter?

Was there any catch up?

Historically your -- your incentive compensation, you know, was based on an, you know, on an annual targets and you would accrue for it quarterly. Were you under accrued going into the fourth quarter and did you have to make, you know, because it was such a good year, you know, was there more expense that walked through that line than you would have expected or enough to make a difference to me?

Well, you know, we kind of accrue for bonuses as we go and, you know, I would say at the end of the second quarter we kind of realized that we're going to have -- you know, base business came back as you know in the third quarter and fourth quarter was a continuation. So it didn't really catch us by surprise. Okay. You know, so there was no -- no real material catch up. There is always something what you adjust one way or the other but I would say nothing material which you can then going forward allowed and, you know, shows up in your model.

Right. I mean, that's a -- that was kind of the question. When we look out to next year and the earnings numbers that you're -- you're giving people, does that take into consideration the expensing of any stock options?

No it does not.

Okay.

Oh, you mean, new -- new rules?

Yeah, the new rules. Does it, I mean, does that take into consideration?

The new rules are not effective.

They're effective in fiscal '05.

Yeah, well, I mean, everyone is doing this differently and that's just kind of the -- you know, it's one of the questions I had.

Absolutely, you're right.

And then finally has the MRO business -- you know, can you kind of describe that here in the U.S. and in Europe, you know, how it did. During the quarter was it, you know, good the whole quarter, did it accelerate, decelerate? I'm just -- I'm trying to get a sense on the macroeconomy from that -- from that piece of your business.

Well that picked up in the third quarter and remained solid in the fourth.

Okay.

If you do go to our web presentation there are a couple of nice slides which, you know, which have some von -- verbiage to what it's like. I think David Mathieson in his conference call presentation, I think also one of his slides talked about Seton Europe growing at a nice clip, I think 7% just at base growth in the quarter. That's an improvement over what we have seen before, worldwide, I'm talking about worldwide. And you probably recall, Jim, we always said that there's a time lag between our other businesses and the MRO business and I think we have seen this time lag now once again being confirmed.

It's finally kicked in.

Finally kicked in, yes. And I don't know, we probably need to give it a couple of more months to see if it's a trend but we certainly have seen an improvement in this sector.

Terrific. I was trying to see if there was any trends at all, you know, if it was choppy or not but it sounds like it was steady, positive and steady through the whole quarter.

It was almost like after we bought Emed it started to kind of improve in the MRO area.

Okay, terrific. Thank you.

I will pause for more questions. And again, if you would like to ask a question, please key star, 1. At this time I would like to let you know that I am showing no questions.

Thanks, Jean. We appreciate everybody's interest and participation today. The audio and slides from today's call, as you know, are available on our website and we will be posting a replay of this call which you may do starting at 1 PM Eastern time today. The phone number for that call is (888)286-8010 and a pass code of 44555514 will be needed to activate the call. The replay will be available until 11:59 on Friday, September 17th. As always if you have questions please contact us and, again, thanks for your interest in Brady and have a great day.

Ladies and gentlemen thank you for joining us on the call today. You may now disconnect your phone lines.