Brady Corp (BRC) 2005 Q1 法說會逐字稿

Welcome to the quarter one Brady Corporation earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Barbara Bolens, Director of Investor Relations. Please proceed, ma'am.

Thank you and good morning. We are glad you could join us. During our call this morning you'll hear from Frank Jaehnert, CEO, who will be presenting a portion of the business review and will also be summarizing our discussion; David Mathieson, CFO, will be presenting Brady's quarterly financial review. Also joining us this morning is Dave Hawke, Brady's Executive Vice President, to provide us some additional commentary on Brady's operational efficiencies, as well as a portion of the regional report. As usual, after brief presentations by the team we will open up the floor up to questions.

You will again find this quarter our enhanced slide presentation on the Internet, and again, we encourage you to follow along on those slides. We will be referring to the individual slide numbers as we proceed through the presentation. You can find these slides on our Website at www.investor.Bradycorp.com. You do have a few minutes to get to those while we go through our Safe Harbor statement and opening remarks.

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 Brady's 10-K filed with the SEC in October of 2004.

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 the Internet, and your participation in the question-and-answer session will constitute your consent to being recorded.

Thank you. And now, here's Frank Jaehnert.

Thanks, Barb. Good morning and thanks for joining us. We are very pleased with our first quarter, which marked the third quarter in a row of strong results for both our corporate (indiscernible) and recent acquisitions.

Please turn to slide number three. Sales for the first quarter fiscal 2005 rose to a record 200 million, up 32 percent over fiscal 2004. Net income reached a record 20 million, up 97 percent from prior year. Also, last year's net income included a 1.2 million after-tax restructuring charge.

We attribute three factors to the continued strength in our business. First, our initiatives in new product development, better market penetration and expansion into new markets have led to three successive quarters of strong base business growth. Second, our acquisitions, especially our most recent one, are contributing positively to growth and profitability. Finally, we do think we are experiencing some help from the economy, especially in the U.S. and Asia.

I will now turn the call over to David Mathieson and then Dave Hawke, who will provide you with more details on the financials and the business. I will be back later in the call to provide you with our outlook and a discussion of our priorities for the remainder of the year. David?

Thanks, Frank, and good morning everyone. On slide four, I'm pleased to present the results for the first quarter of our 2005 fiscal year. As Frank noted earlier, net sales were $200.4 million, up 32 percent from the same quarter last year. Acquisitions led the way with growth of 18 percent, followed closely by a strong base growth of 10 percent. Currency added an additional 4 percent.

This is the third consecutive quarter of double-digit base growth. Asia continued their strong growth of 28 (ph) percent in local currency, the Americas base growth was solid at 9 percent, and also base growth in Europe was solid as well with 7 percent growth.

On slide five, in the Americas our 9 percent base sales increase came from a combination of strong sales on recently introduced products and a continued solid performance in our Brady core markets. The Emed acquisition continued to perform ahead of expectations.

On slide six, in Europe, base sales in local currency were up 7 percent. Our direct marketing business continued strong, due to the expansion of our customer base and expanded product offerings. The Brady business grew 6 percent, driven by our wire, identification and die-cut business.

Slide seven -- Asia continued to perform well with base growth in local currency of 28 percent. China is the main growth engine with base sales growth of over 75 percent. We are pleased with solid growth in Japan and Australia, too.

In August we acquired ID Technologies, a die-cut converter in Singapore with annual sales of 24 million, and so far we are pleased with the integration of that business with Brady. For example, this month we moved our Brady business in Singapore into the ID Tech premises, (indiscernible) our facilities in Singapore from three to two.

On slide eight, gross margin for the quarter was 52.7 percent, an improvement of 0.9 percent versus last year. Although the comparison is tougher this year, our improvement is due to the positive contribution of Emed on our financials.

Slide nine -- SG&A of $58 million was 33.9 percent of sales, or 3.2 points below the prior year first quarter. We are committed to leverage our SG&A cost structure to provide us flexibility to turn up the spending on R&D and in pushing forward selectively key growth initiatives.

On slide 10, research and development was 2.8 percent of sales, 0.4 percent lower than the first quarter of 2004. However, in dollars, our spending increased $0.8 million, or a 17 percent increase for the quarter.

Slides 11 and 12 -- net income for the quarter was $20.4 million. This compares to last fiscal year of $10.4 (ph) million, which includes a 1.2 million after-tax restructuring charge. Diluted earnings per share for the quarter were 83 cents versus 44 cents last year. Headcount was approximately 4,000 at the end of the quarter. Headcount grew about 540 people over the same period last year, due to acquisitions and investment in emerging markets. The headcount from existing businesses in North America and Europe continued to trend down.

Slides 13 and 14, (indiscernible) cash provided by operating activities for the quarter was $18.7 million. We've seen an increase in amortization due to the recent acquisition of ID Technologies. For the full year, we expect capital expenditures to be approximately $25 million, up due to the previously announced warehouse expansion project, and depreciation and amortization to be approximately $27 million.

On slides 15 and 16, our on-hand cash is $52 million. We've maintained our debt level at $150 million. We are pleased that during the quarter we were able to fund the acquisition of ID Technologies through cash from operations and cash-on-hand. Our receivable increase is consistent with sales, and inventory is slightly higher due to the (indiscernible) that we have in Emed and other initiatives. The growth in other liabilities consists of increased taxes and retention payments from our core acquisitions.

Slide 17 -- looking forward, we continue to expect sales to be in the range of 780 to 800 million, and net income to be in the range of 66 to 69 million. Earnings per share is expected in the range of $2.69 to $2.82 per share. At this point we are not increasing our guidance again, even though we have gotten off to a very strong start. It's still early in our fiscal year, and we are committed to spend more on growth initiatives. We have begun to hear that some of our contract manufacturers are somewhat cautious about 2005, and are being careful with their inventories. Additionally, we are hearing more and more from suppliers about their plans to increase prices. We will do our best to avoid and mitigate those increases, but we may see some cost pressure as a result.

I will now turn the call to Dave Hawke.

Thanks, David.

Slide 18 -- the Americas are off to a great start in fiscal 2005. The region's sales increased to 105.4 million, an increase of 32 percent in the first quarter over the same quarter of the fiscal 2004. Base business rose 9 percent and acquisitions added 23 percent to the top line.

We are pleased with the performance of all of our fiscal 2004 acquisitions, including Emed in May of 2004, Frensing (ph) in October of 2003, and Brandon in September of 2003, as they together added 23 percent to the first-quarter top-line sales. Specifically, the Emed acquisition has performed above expected levels in the first quarter. As we move forward in our integration of Emed, we are having success in benchmarking best practices across our Emed and Seton businesses, which has helped improve profitability in our direct marketing operations.

Base business grew nine percent. This growth came from our Brady brand business, which continued strong during the quarter and posted the third consecutive quarter of strong base growth within that brand. The growth was fueled by a number of sources, including recent new product introductions and proprietary systems products.

Aside from our new product growth, we also continued seeing solid growth in our core electronic and industrial OEM markets, a pattern from previous quarters that is continuing. Additionally, our Canadian direct marketing business performed strongly this quarter, due to a mix of successful initiatives. Regionally, all countries in the Americas experienced base growth during the first quarter. We continued to see strong improvements in Brazil and Mexico.

Segment profit rose to $25.4 million, a 68 percent increase over the prior year's first quarter, due to the higher sales volume and lower selling and administrative cost as a percentage of sales. Our base growth within the Brady brand, the acquisition of Emed, and cost control within our base direct marketing operations, drove the majority of our profit improvements. We are very pleased to see that segment profit improved from 19 percent of sales in the prior year's first quarter to 24 percent in the current quarter.

Slide 19 -- during the quarter we announced and began the planning of a 60,000-square-foot expansion of one of our Milwaukee, Wisconsin facilities. The $10 million project will consolidate warehousing and distribution services from several Brady U.S. locations, providing increased distribution efficiency as well as improved logistics for our customers. We expect the entire project to take about 12 to 18 months to complete.

I'd like to return to David Mathieson, who will report on our European business results.

Thanks, Dave.

On slide 20, sales for the European region were strong, increasing 11.3 million to $64.5 million, an increase of 21 percent over the same period last year. This is against the backdrop of a generally lackluster economy. Our base business grew 7 percent across the region. The acquisition of BIG contributed 5 percent and currency added 9 percent.

During the first quarter all businesses in the region experienced solid single-digit base sales growth. Our direct marketing business continued its growth across all countries. This is due both to the continued expansion of our customer base and a greater product offering in our catalogs. In addition, our geographic expansions into Italy and Spain, while still relatively small businesses, continued to grow at double-digit rates.

Our Brady brand sales were up 6 percent in the region, driven by double-digit growth in our wire identification and die-cut businesses in Europe. (indiscernible) in Eastern and Central Europe and laboratory identification lead to solid double-digit growth. We continued to expand the number of new distributors or those carrying our full line in the region. Segment profit increased to $18 million, a 35 percent increase over the same period last year, driven by base sales growth and increased productivity from our expense base.

As we look ahead, we remain cautious about the economic situation across the region, especially in some of the key OEM markets where we have seen solid growth over the past five quarters. That focus continues to strengthen our position in less cyclical, regulatory-driven markets which make up the majority of our sales in the region.

Let's move on to Asia and Dave Hawke who will report for that region.

Slide 21 -- performance throughout Asia remained strong across all areas of the region during the first quarter. Sales for the region were $30.4 million, up 64 percent over last year. Days sales were up 28 percent, our acquisition of ID Technologies added 32 percent, and currency added 4 percent. Segment profit for the region was 9 million, up 64 percent over last year.

Our Greater China operations continued to lead the performance in the region. We continued to invest in our China facilities, capacity and personnel, in support of increased demand coming from the electronics and specifically the telecommunications industry. Brady's continued growth in the industry can be attributed to several factors.

As the complexity of mobile phones increases, the need for more die-cut parts increases, and Brady's local presence, engineering and materials expertise provide the added value customers require. Also, sales to Japanese and Korean multinational companies continue to grow both domestically and abroad, where we can serve as design centers in Japan, in Korea, and then large-scale production in China. Our growing presence in these markets is also giving us visibility to a new set of suppliers who offer competitively priced, yet high-performance materials.

We have been busy integrating the acquisition of ID Technologies with the Brady and Brandon operations in Singapore. As expected, we are finding some synergies at the customer level in terms of being able to offer a wider array of products through the ID Technologies sales force. This quarter, we will also complete the physical move of Brady operations into ID Technology facilities to take advantage of the increased space for growth and state-of-the-art clean rooms and printing equipment.

Our safety and facility business continues to grow nicely within niche segments that we are focusing on. Brady's proprietary printing systems and high-performance materials, combined with the use of seminars and our expanded network of distributor partners, are building awareness for these solutions.

As we continue through our second quarter, we look forward with cautious optimism for further growth in our core markets. As we build capacity, we will focus on supply chain management to assure that our supply is in line with current and future demand. We will, however, watch carefully our end markets.

For the first time this year we did see a slight softening of business to contract manufacturers. As manufacturers complete their rush to fill supply chains with holiday merchandise, contract manufacturers are closely watching their inventory levels to make sure major corrections are not needed after the holiday season.

I'd like to turn the call back to Frank who will summarize some key points from today's discussion.

Thanks, Dave. As you have heard, it really was another great quarter. Before we begin the Q&A, I would like to briefly discuss our focus and expectations for the quarters ahead.

We continue to focus our efforts on the execution of multiple projects to ensure continued growth and improve profitability. We are working hard to contain SG&A to free up money for several growth initiatives. We are also increasing investments to develop proprietary materials and printer solutions through our R&D efforts.

The integration of our recent acquisitions continues to move forward at or better than original plan. Our integration teams are committed to achieving our synergies, and often are doing it sooner than expected. We continue to look for acquisitions that support our goal to remain or become market leader in our businesses.

Looking ahead, we are optimistic about our abilities to execute our strategies and continue the growth in our top line. We will, however, watch carefully for cautionary signals in the marketplace.

Based on our outlook today, we have kept our guidance for the rest of the year consistent with our recently increased guidance, specifically the expected (ph) pace of 780 to 800 million, net income of 66 to 69 million, and EPS of $2.69 to $2.82.

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

(OPERATOR INSTRUCTIONS). Reik Read, Robert W. Baird & Co.

Can you guys talk a little bit more about the margins? They are coming in this quarter better than expected, and obviously the operating margins -- good improvement both sequentially and year-over-year. Can you maybe give us a sense for where that incremental improvement is coming from? Is it volume-driven? Is it more Emed, or is there anything else in there that might be helping out the margins?

Okay, Reik, there's lots of puts and takes in there, but the biggest impact has been the acquisition of Emed, basically. That has been the biggest positive impact. Emed has helped our margins improve.

Is that saying, David, though that the integration is maybe going a little bit faster than expected and some of the benchmarking opportunities that you have with Emed are going better than expected? Because it's kind of popping up a little bit faster than we might have anticipated.

Yes. The integration of Emed is going very well indeed, and we are beginning to benchmark best practices across all of the direct-marketing businesses. Early in October we held our global meeting of all the direct marketers, the general managers, the marketing directors and the finance people, and the first day was spent benchmarking all the line items in the P&L. So we are excited about the acquisition and our integration efforts.

Is there anything within the operating margins that you guys would attribute to a onetime boost that is not sustainable?

No.

(multiple speakers)

And then, with the R&D numbers, if I look at it on a sequential basis it came down about 10 percent; usually in this quarter you're down about 4 or 5 percent. Was there anything unusual that happened there? And given that in your presentation you talked about wanting to increase your focus on R&D, should we expect that to start popping back up throughout the rest of the year?

The R&D number will in fact go up over the year. We've got expanded plans for R&D, but the nature of product development is the spending on those projects doesn't come in evenly throughout the year; you might have a larger purchase of outside contracted services or something over the course of the year. So we are expecting our R&D number to go up in future quarters.

I would like to add something to David Mathieson's comments earlier regarding the quarter. Certainly Emed and synergies from Emed helped (indiscernible) greater than we originally expected, but the matter of fact is also we just had a great quarter. We had a great quarter in the Americas, the rest of the Americas, in Europe and in Asia. Everything just seemed to have clicked. We had a very strong August. Normally August is a weaker month. We were really surprised by how strong August was, and it continued in September. So, you know, we were surprised ourselves about the strength of the first quarter. So you'll probably hear between the lines a little bit more cautionary outlook for the rest of the year. We hope this continues, but it was just a fantastic quarter.

Is there anything in particular, Frank, that occurred in August and September that surprised you? I mean, what where the areas that really seemed to be very positive in that regard?

I think sales, number one. Sales in August were just very strong. Normally August is a vacation month. You see sales coming in weaker. But we just had great sales in August, and it's always difficult to say where this comes from.

And just one last question on the revenue side. We seemed to get some signs that nonresidential construction is showing signs of life. How significant could this be for you guys if this market kicks in?

It will actually be a positive for particularly our direct-marketing businesses, so it is a positive. It's a smaller segment for us, of course, than manufacturing.

Ajit Pai, Thomas Weisel Partners.

This is Andy Jung (ph) filling in for Ajit. A couple of questions. One is, can you talk a little bit more about your electronics and telecom segments? And we do see some weakness in those areas in Asia; do you see the same things over there? If you can give some comments, that would be great.

This is Al Klotsche. In the segment on Asia, we reported some early signs at the end of this quarter of some of our contract manufacturing business slowing down a little bit. But we see it with our customer base as not necessarily that they are building less product today, but they are cutting back on their inventories. Everybody is kind of looking at the same charts for 2005, and there's a projection for a slowdown in the electronics business, and I think they are tightening their belt on inventory levels right now to make sure they are not caught in the same situation that they were in the last downturn. So we haven't seen it so much from a build schedule, but I think everybody's watching this extremely closely, including Brady, in terms of forecasting our future demand patterns.

Can you actually break out the electronics impact on segments in terms of revenues?

We can, but we don't share (multiple speakers). You wouldn't believe how many competitors we have on this conference call that would love to hear this information.

Also, can you also comment a little bit on the European markets? It seems Europe is going pretty strong for you guys, but we also see some pretty sluggish economic growth in Europe. Can you give a little bit more color in terms of why your growth is higher than, say, GDP (ph) growth in Europe?

The economy -- the European economy isn't very strong; it's pretty weak. The last few years it has been half the growth of the USA, but we are executing very well in Europe in our direct marketing business (indiscernible) we have a couple of big growth initiatives (indiscernible) expanding the product offering. We're still expanding geographically. I believe it's execution.

Mike Whitfield, Wachovia Securities.

Dave, I wanted to go back to your comments earlier about Emed, and is Emed driving it because of their product mix and their level of proprietary product, or is there something in addition to volume?

Emed's gross margins are higher than Brady's, so the impact of adding both of them together, plus getting some synergies -- early synergies -- has been positive.

So given the -- your (indiscernible) -- given on the outlook, can gross margins stay at relatively close to where you just reported for the first quarter?

(indiscernible) gross margins affected by seasonality, so you need to be careful there, because the second -- the same quarter is normally the down quarter, the smallest quarter for our net income. So there is a seasonality aspect. We don't give guidance for individual lines on the P&L, but we are hopeful that Emed's impact will continue.

And then, just quickly on inventory, I noticed that finished goods and work in progress were flat, but raw materials were up; is that due to ID Tech or something else that's going on?

Our inventories have gone up because of ID Tech, because of currency, and because we are stocking up on some stuff that we've had trouble getting, really. So we're making sure that we don't have any shortages.

Can you say what kind of items that they supply (indiscernible)?

Critical items. I think that's another area which I would like to point out is, you know, we just started out in Mexico a new operation where we have about 200 people. And whenever we do something like this, or when, for instance, we combined our two facilities in Singapore -- the Brady and the Brandon facilities -- whenever you do something like this you put on extra inventory so that you can react fast when -- you know, while you are transitional, while people are trying (indiscernible) to productivity. And this, in combination with some raw materials which I said earlier are critical, some raw materials -- it's mainly materials; it's not so much printer (ph) components (technical difficulty) some of our suppliers are not having enough capacity. When we can get our hands on it, we put it on our shelves. You know, it's a wide range of products.

(OPERATOR INSTRUCTIONS). Gentlemen, at this time there are no further questions.

Well, thank you very much. We appreciate your participation today and would like to remind you that the audio and slides today from this call are on our Website, and a replay of this call will be available starting at 1 PM Eastern time today. The phone number for that replay is 800-901-5241. International callers may dial 617-801-6888. A passcode of 37307087# will be needed to activate the call. And that replay will be available until 11:59 PM on Tuesday, November 23rd.

As always, if you have questions please feel free to contact us. Thanks for your interest in Brady, and have a great day. Operator, please disconnect the call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.