Brady Corp (BRC) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q2 2005 Brady Corporation Earnings Conference Call. My name is Angela, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of this conference. If at any time during the call you require assistance please press star, followed by zero, and a coordinator will be happy to assist you. 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. Barb Bolens, Director of Investor Relations. Please proceed, ma’am.

Thank you. Good morning, everybody. We’re glad you could join us. During this call, you’ll hear from Frank Jaehnert, our CEO, who will be presenting the introduction and summary; and David Mathieson, Chief Financial Officer, who will be presenting Brady’s quarterly financial review. Joining us, as well, this morning is the Regional Leadership from our Executive Management Team, who will be providing full reports for their region. For the Americas, Tom Felmer will be reporting; for Europe, Peter Sephton will be reporting; and for Asia, Allen Klotsche. As usual, after brief presentations by the Team we will open up the floor to questions.

As we have been doing, this quarter we will have our enhanced slide presentation on the internet, and we encourage you to follow along on those slides. We’ll be referring to the individual slides as we proceed through the presentation. These slides can be found on our web site at www.investor.bradycorp.com. You do have a couple of minutes to get to those while we go through our Safe Harbor Statement and other information.

Please note that in this call we may make comments about forward-looking information. Words such as ‘expects, believe, and anticipate’ are a few examples of words identifying our forward-looking statements. 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 Brady’s 10-Q filed with the SEC in December 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 that Brady will be taking 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.

Good morning, and thanks for joining us. We are very pleased to report another great quarter. We had sales of 196.2m, up 28 percent for the quarter. And net income of $20.6m, up from 8m last year. We are particularly pleased to see our [base sales] growth up in double digits for the fourth consecutive quarter. This [inaudible] in respect of our recent acquisition has contributed to our strong net income increases over last year. This quarter’s success factors are very similar to those we [reported to you] last quarter. Namely, effective implementation of growth initiatives to improve our core business and the contribution of recent acquisitions against the backdrop of a strong economy. We continue to see strength across all regions in most of our markets.

I would like to move right into the details of the financials and regional results. So, I will now turn the call over to David Mathieson. After the regional overviews I will be back to provide you with some further comments. David.

Thanks, Frank. And good morning, everyone. On slide three, it was another great quarter for Brady Corporation with sales up 20 percent, [inaudible] growth at 11 percent, 13 percent from acquisitions, and 4 percent from currency.

This is the fourth straight quarter of double-digit growth. Gross margins were up 260 basis points over last year. SG&A was down 500 basis points from last year. Resulting in recording net income at $20.6m, up 156 percent from last year and the second successive quarter with our net income is about 10 percent of sales. Diluted EPS was 41 cents, up 141 percent from last year.

On slide four, as I reported, this is the fourth consecutive quarter of double-digit base growth. The base growth is broadbased with all regions growing well. [inaudible] by 4 percent, and the acquisitions, EMED and IB Tech adding 13 percent.

On slide five, in the Americas we saw big growth of 10 percent with acquisitions adding 17 percent, mainly EMED and [inaudible] adding 1 percent. We saw solid results from both the Brady and direct marketing businesses.

Slide six, in Europe we had base business growth of 8 percent which was broad based across Europe, both in direct marketing and from strong sales in electrical and telecom markets.

Slide seven, Asia continues to perform very strongly with total sales growth of 64 percent, base growth added 26 percent, the acquisition of IB Tech adding 35 percent, and currency 3 percent. The base business growth is broad based, with China leading at 70 percent growth this quarter, and we are successfully integrating IB Technologies.

Slide eight, gross margins improved 260 basis points with the largest improvements coming as a result of the EMED acquisition and continued base business strength. We do see continued cost pressure but so far [inaudible] contain that in fact, have been successful.

Slide nine, our SG&A for this quarter was 500 basis points lower than last year as we grew our business and held down our cost base. There was weaker spending in the second quarter which we expect to change in the remaining quarters as we have a number of sales growth initiatives which will increase our SG&A levels for the coming quarters.

Slide 10, R&D in dollars went up 9 percent in the second quarter, although the spend as a percent of sale came down. We are committed to ramping up R&D in the second half.

Slide 11, second quarter net income at $20.6m was a record, and resulting in a nice operating profit rate of 15.8 percent. Note that we took a tax rate [down] [ph] in the quarter to 30 percent, and are estimating 31 percent for the year as our geographic mix of business helps our tax rate.

Slide 12, diluted EPS for the quarter was 41 cents, up from 17 cents the year before, [inaudible] added 2 cents for the quarter versus the prior year.

Our headcount was approximately 4,200 people at the end of the quarter. That’s up about 600 people from the same period last year due to acquisition and investments in emerging markets. The headcount and existing businesses in North America and Europe continues to trend down.

Slide 13, net cash from operating activities for the quarter was $26.8m, up from $12m the year before. Capital expenditures has jumped as we begin the construction of the expansion of our Milwaukee Facility. For the full year we expect to earn $25m for capital expenditures. We anticipate depreciation and amortization of approximately $28m for the full year.

Slide 14, this slide [shows] [ph] cash flow from operating activities. And you can see that the last four quarters have been very strong, indeed.

Slide 15, cash on hand at the end of the quarter was $72.6m. We have maintained our debt level at the $150m. During the quarter our cash balance increased by approximately $20m. Our balance sheet remains conservatively leveraged with debt as a percent of total capitalization at 25 percent.

Slide 16, this shows our summary balance sheet by quarter for the last six quarters. I am pleased with our receivables performance through this growth period and the last four quarters. We have also deliberately increased inventory levels to avoid shortages and improve our service levels, which has been successful. Our other assets are growing with the goodwill and intangible assets of the acquisitions we’ve been making.

Slide 17, as a result of improving profitability we are increasing our guidance for fiscal 2005. We anticipate sales of $780 to $810m, with net income between $78 to $80m, and earnings per diluted share of $1.55 to $1.60. This is up from previous statements of sales $780m to $800m, net income of $66 to $69m, and earnings per diluted share of $1.25 to $1.41.

As we look ahead for the remainder of the year I would like to point your attention to the following items which we have considered as we developed our guidance for the remainder of the year.

Firstly, the last four quarters have been strong. Base business has been up double digit and we have posted record net income in three out of the last four quarters. As we move into our second half of the year we are now facing much tougher comparisons in both sales and net income growth.

Secondly, we are ramping up spend on R&D focused on new proprietary systems and sales in software, and are making sure that [inaudible] is truly global and thinking. For example, to that end, we have just appointed a Director for New Product Development in Europe.

Thirdly, we are also spending more on selected growth initiatives. As an example, our Board has recently approved the plan to expand our operations into Thailand. This is not [inaudible], but one of many organic growth initiatives that will strengthen our business.

And lastly, for the last three years we have issued a limit of performance based options to senior management that are tied to the performance of the Company. As these options vest they must be mark-to-market based on the stock [inaudible]. These included an estimate for [inaudible], so the actual expense is subject to stock based and that can introduce some volatility. So, [inaudible] only as the [inaudible] changes [inaudible] and becomes [inaudible].

Now, I will hand over to Tom Felmer for the Americas report.

Thank you, David. My comments will refer to slide 18.

The Americas continued to perform very well in the second quarter, with strong revenue growth and profit more than double in the prior year’s second quarter. As region sales increased to $95.3m, an increase of 28 percent in the second quarter over the same quarter of fiscal 2004, base business rose 10 percent which we saw across both the Brady and Seton brand, as well as within all countries. The Brady brand posted its fourth consecutive quarters of strong sales, base sales growth. Acquisitions added 17 percent to the top line. Currency added 1 percent to the top line.

In our end markets we continue to see strength in the U.S. direct marketing business to our manufacturing customers, and saw a nice rebound in the construction market within the quarter. Within the Brady brand we continued to see solid sales growth in our core industrial OEM market, but have started to see a softening in the electronics and telecommunications market which we expect to continue in the third quarter.

New products have continued to fuel top line growth and come from proprietary printing systems with related consumables. We’ve also had positive results in expanding our external volumes through our coating facility.

EMED continues to perform above expected levels, added 17 percent growth to the second quarter sales. We continue to have success in benchmarking best practices across our direct marketing operations, which has helped improve profitability.

Segment profits rose 115 percent to $20.4m, from 12.8 percent of sales in the prior year’s second quarter to 21.4 percent in the current quarter. Base growth within the Brady brand, the acquisition of EMED, and cost controls throughout our businesses drove the majority of our profit improvement.

Moving on to slide 19, earlier in February we announced the acquisition of Electromark. We area very pleased to welcome Electromark to our Team, and this will give us strong position in the safety and facility identification within the utility market. Electromark had annual sales of $11m in fiscal 2004. Electromark employs 125 people in its 80,000 s.f. facility in Walcott, New York. We plan to continue to operate Electromark in that facility.

I would now like to turn to Peter Sephton, who will report on the European results. Peter.

Thanks, Tom. And good morning, everyone.

You can go now to slide 20, sales for European region continued to be very strong, increasing 17 percent to $70.9m over the same period last year. Base business grew 8 percent across the region, whilst currency added 9 percent.

Our business in Southern Europe and the Nordic Regions performed exceptionally well, whilst Germany and the U.K. both had solid single digit base growth.

Looking at our business by brand, the direct marketing businesses continued growth across all regions, greatly exceeding GDP growth. This is due both to continued expansion of our customer base and a greater product offering in our catalogs. For example, our accounting and SETON business grew strongly in the quarter as we were able to meet the need for new regulations preventing smoking in public places.

The Brady brand also grew in the quarter despite some slight softening in the OEM electronic markets. Our growth was largely driven by the electrical and telecom markets in the region, and the general pickup in the [Amerow] [ph] market. Our personal batching business in the U.K., BIG, had very strong growth during the quarter, and our software business, [inaudible], had a record quarter for both sales and profits.

Profits for the Region increased by 41 percent to $22m. Profit as a percent of sales rose from 25 percent last year to 30 percent this year. We enjoyed this growth across the whole Region and across all product segments and brands as we continued to gain productivity from our expense base.

As we look ahead to the balance of the year, we expect to increase our investment in marketing across the region as we launched several new initiatives, especially in our Seton offer. We are also ramping up our investment in regional research and development and, as David said, we recently appointed the Director for Europe. Additionally, we are launching our new customer loyalty service program across the whole region which will give us a clear and objective view of what we need to do to move our customers from loyalty to advocacy for all of our brands.

The remainder of the fiscal year we expect our base growth to remain at single digit levels, conscious that economies in the [Euro zone] [ph] are not showing as robust growth as that of other regions. However, with the initiatives I have mentioned above we expect to stay ahead of the GDP curve and still drive further operational productivity.

I’ll now hand over to Allen Klotsche, who will report on our Asian business results.

Thanks, Peter. My comments relate to slide number 21.

Performance throughout Asia remained strong across all areas of the region during the second quarter. Sales for the region were 30.1m, up 64 percent over last year. Base sales were up 26 percent. Our acquisition of IB Technologies added 35 percent, and currency added 3 percent.

By country, growth in China continues to lead the region with strong results coming across all of our product lines. We have recently finished the expansion of our facilities in Beijing, China, and WuJi, China, to meet upcoming customer forecasts. Japan and Korea showed a nice sign of growth, despite a smaller base by specifying die cut and labeling solutions at local design centers that ultimately are transferred to China and Southeast Asia. Southeast Asia remained consistent with previous quarters.

We did experience some softening in Malaysia as some of our customers have shifted their business to China. Australia continues to perform well in both our core Brady business and our direct marketing operations. By market we see that in mobile phones, computers, and handheld electronics the emergence of local Asian brands are clearly having an impact on global market shares. While these companies often compete on price they do have a growing need for the products and services that we can offer.

In the contract manufacturing sector, which is heavily focused on electronics, we saw some inconsistent results across our key customers which mirrored the overall picture in the industry. Original equipment manufacturers are still awarding new business to these contract manufacturers but orders have begun to slowdown and market visibility is poor. Fortunately, it does not appear as if inventory levels got out of hand as they had in the early 2000s. While many of our customers built inventory for the holidays their January ordering patterns indicate there will not be a prolonged work-down period. We are assuming normal ordering patterns will resume midway through our third quarter.

The integration of IB Technologies is complete with most of the synergies that we were anticipating being realized. Brady’s expanded portfolio has gained the interest of IB Technologies’ customers, and our strategy of being a broader solution provider appears to be well grounded with customer needs.

Segment profit for the region was 8.7m, up 78 percent over last year. Profit as a percent of sales increased to 29 percent, versus 27 percent for the same quarter last year. While production volumes of our electronics customers remain pretty strong in Asia the pressure on their profit margins and bottom line performance is clearly present. Our customers have turned to their suppliers, looking for cost reductions anywhere between 5 to 8 percent per quarter.

These increases have impacted the cost of our raw materials. In the short term we are forced to look for manufacturing efficiencies to support these cost reduction requests. Long term, we must continue to offer differentiated products in bundled solutions. We continue to make investments in research and development to make sure that we stay ahead of these technology curves.

Looking forward to our third quarter, we will likely start slowly with most of the region celebrating Chinese New Year during the middle of February. Our focus will be to continue to develop innovative, value added solutions for our customers as well as expand our presence geographically into areas such as Thailand and India.

Now, I would like to turn the call back to Frank to wrap-up the meeting.

Thanks, Al.

As you have heard today, we are very happy with the quarter’s results. Our priorities for the remainder of the year are consistent with previous quarters. We will continue to invest in R&D to provide differentiated solutions to our customers. We look to market expansion by [inaudible] in the market, which are product expansion to be where our customers are. We have already announced the acquisition of Electromark this quarter. We will continue with acquisitions that support our goal to become a market leader in our markets.

As a result of continuous strength in our bottom line we increased guidance for [inaudible] sales for the third year of $790m to $810m, with net income between $78m and $80m, and EPS of $1.55 to $1.60.

We appreciate your interest in Brady, and would now like to start the question and answer session. Angela, please provide the instructions for our listeners.

[Caller instructions.]

And your first question comes from Ajit Pai of Thomas Weisel Partners.

Yes, good morning, gentlemen. And congratulations on a great quarter.

Thank you.

A couple of quick questions. The first one is about Europe. You’re seeing in Northern Europe, you know, some surprising strength in the U.K. and Germany. Could you give us some indication of where that strength is coming from, particularly since the economy in Germany is still so weak?

Yes, I think in the U.K. it’s coming from the service sector. You’re talking our business, not just any in those two countries?

Yes.

Yes, we’re growing well ahead of GDP. In the U.K. we’ve got reasonably robust growth, but essentially all of our growth is coming from new product introductions and just generally smarter mail programs. We’ve just got much better leverage from our customer databases. We’ve added several thousands SKUs over the past nine months. And that’s really driving some fairly robust growth.

Thank you. The second question would be about this new gentlemen that you’ve, you know, hired on the product development side in Europe. Just want to try and understand what your R&D development strategy is going forward? Do you intend to have, you know, in every geography someone on the R&D side?

And also, like cost acquisitions, like the BIG acquisition last year, I think the revenue for that business was I think in the $90m level when you acquired it, but part of the thinking was that you might be able to distribute those products in other geographies and, you know, potentially even in the United States. Could you give us some color as to the progress over there, as well?

Two questions. And I would ask Peter to answer the second part of the question, and then I would like Sanwal, our Vice President of Research and Development, who has joined us about a year ago, to take the second question regarding the R&D.

Yeah, I mean the second part of your question referred to spreading BIG geographically. BIG is essentially a U.K. business, and we’ve focused primarily in the first instance on getting that business up to expected levels. And we’ve successfully done that. At the point we acquired it it had already had a relatively small business in France. And we’ve seen very strong growth from that. It had taken a very limited position in the U.S., and that continues to grow modestly. Beyond that, we haven’t done an awful lot, until we really see the results that we want to see from the U.K. We’re starting to see that now, and I guess in our next fiscal year we’ll start to make plans to explore that model.

This is Sanwal Sarraf. To answer the question about [inaudible] in Europe and our focus on the growth in Europe. Let me back up slightly, and Frank mentioned that we are taking a global R&D view. And at the same time we realize that there are market specifities [inaudible] with our customers. We are listening ourselves so that we can get better voice of customers, we can leverage the product across the region, and therefore we can be targeted with cost effective, innovative, [inaudible] solutions for our customers.

And, therefore, we are increasing our effort in all the groups in terms of R&D, in terms of quality, in terms of voice of customers, in terms of capturing markets, and [inaudible]. Currently, we will also be doing it very judiciously to make sure that we take a platform approach so that, as you pointed out, there are different regions, there are different countries in Europe, and they have different market needs and customer needs. And we will take it [inaudible] approach to making sure that we have levered our products cost effectively, and [inaudible]. So, therefore, we want to have local [inaudible] of R&D, and we want to make sure that we connect to our customers [inaudible].

From my point of view, Ajit, we just want Europe to have a stronger voice in new development of product which fit the requirements of European customers. And this was not a hire from the outside, it was a promotion from the inside.

Okay. And the last question would be about your gross margins. Right now at 53.5 percent, they’re still about, you know, 250 basis points below last cycle’s peak. This cycle do you think that your potential gross margins could be higher than last cycle’s? And how many quarters do you think it’s going to take before you get there?

Thank you, Ajit. That’s a good question. You know, we see continued cost pressure. I think Al gave a good explanation of the kind of challenges that our customers are giving us in Asia-Pacific. We don’t give guidance specifically on gross margin. You know, we’re doing our best to hold our gross margins. I’m not sure we’ll ever get back to the previous cycle, because really in retrospect that was a bubble. And, hopefully, you know, we definitely don’t see a bubble this time.

Okay. Well, thank you so much, and congratulations, again, on a great quarter.

Thank you.

[Caller instructions.]

Your next question comes from [Greg Kazinski] [ph] of RW Baird. Please proceed.

Good morning. My question is regarding the guidance. What geographies and specific end markets are most responsible for driving the improved revenue earnings guidance?

Well, happily, all of our regions are doing very well right now. What’s making the results are very broad based. Europe is growing four or five times GDP. America is growing very nicely. Emerging markets, like Brazil, Mexico, China, Eastern Europe are all growing. It’s all of the above.

Are there any end markets that you’ve seen particular strength in, better than say the last quarter?

Nothing that would call out.

Okay.

As I said, it’s very broad based.

And in terms of any end markets where you see, you continue to have some concerns, is that broader than the EMS sector in Asia? Or could you discuss that?

There’s nothing that we see that is of any special concern right now.

Okay. And then looking forward at the tax rate, can we continue to expect something lower in the 30 percent range going forward? Or does that mix in revenue shift back at all? What would be your expectations over the course of the year?

Our estimate that we will hold our tax rate at exactly 1 percent.

Okay. That’s it. Thank you.

Gentlemen, you have no further questions at this time.

Thank you very much, Angela.

We thank you for your participation today, and I’d like to remind you that the audio and slides from this call, today, are available on our web site.

A replay of this call will be available starting at 1:00 p.m. Eastern Time today, and the phone number for that is 800-801-6888, with international callers able to dial at 617-801-6888. The pass code for the call is 723-33018# which will be needed to activate the call. The replay will be available until 11:59 p.m. on Wednesday, February 23rd. As always, if you have questions please contact us, and thanks for your interest in Brady.

Angela, please disconnect the call.

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Everyone, have a good day. And thank you.