Brady Corp (BRC) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2007 Brady Corporation earnings conference call. My name is Torlicia and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate 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 call over to your host for today, Ms. Barbara Bolens, Vice President, Treasurer, and Director of Investor Relations. Please proceed.

Good morning, everybody, and thank you for joining us. Welcome to our 2007 third-quarter conference call. During our call this morning you will hear from Frank Jaehnert, CEO, and then David Mathieson, CFO, who will be presenting Brady's quarterly financial review. Also joining us this morning is Tom Felmer, President of Direct Marketing Americas; Peter Sephton, President of Brady Europe; and Allan Klotsche, President of Brady Asia-Pacific and Global Die Cut, who will all provide a portion of the regional report.

As usual after brief presentations by the team, we will open up the floor to questions. We encourage you to follow along with the slides located on the Internet as we will be referring to the individual slides as we proceed through the presentation. These slides can be found on our website, www.investor.bradycorp.com.

Please note that in this call we may make a few comments about forward-looking information. Words such as expect, believe, anticipate are a few words -- examples of words identifying a forward-looking statement. It is important to note that forward-looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release this morning and in Brady's 10-K filed with the SEC in October of 2006.

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 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 here is Frank Jaehnert.

Good morning and thank you for joining us. Last night in our third-quarter 2007 earnings release, we recorded sales at $346 million, which was up 30% over last year. Net income was in line with our expectations at $29 million or $0.53 a share.

As David Mathieson will review later on the call, a large part of our focus during the third quarter was implementing the cost reduction activities we discussed during our last conference call. These activities, they are primarily focused on our die cut business, but we also continue to make smaller moves to improve the structure of our business in general. The discipline we have regularly practiced, but it is still too early to see the impact of the restructuring activities. We are pleased with the swift action taken to assure our cost structure is appropriate for both current and future levels of activity.

We expect to see the effect of our restructuring activities in the first quarter of fiscal 2008. Also during the quarter, we closed the acquisitions of SPC and Clement Communications both in the MRO space.

David Mathieson will now review the financial picture of the third quarter and I will be back after the regional presentation to provide closing comments. David?

Thanks Frank. I will begin at slide 3. Sales were up 30% in the quarter to a record $346 million with 1% organic growth, 24% from acquisitions, and 5% from currency. Gross margins at 48.8% were down 400 basis points from last year. SG&A at 32.9% of sales was down 60 basis points from last year. Operating income of $46.3 million was up 5% from last year at 13.4% of sales. Net income was down 4% from last year at 8.4% of sales. Diluted earnings per share was down 13% and this includes the dilutive effect of our equity offering last year.

On slide 4, this slide details the cost reduction activities that we mentioned in the earnings press release. Now as you can see, there has been a significant amount of activity. This is something that we have regularly done to improve our cost structure and productivity, but this time is significant enough to point out.

Many of these actions we have taken were contemplated at the time of the acquisition, so accounting rules required us to take those contemplated actions and reflect them in the balance sheet and goodwill. You can see that we estimate that these actions will save $10 million annually, most of which will improve the gross margin line.

On slide 5, organic growth slowed in the quarter to just over 1%. We believe we saw the impact of a slowing economy in the USA and our American numbers, and we are still negatively impacted by the loss of our Maxtor hard disk drive business in Asia. These factors were offset by a strong performance of our European business, which is capitalizing on the no smoking legislation both in France and the UK plus the positive economy in Europe. Acquisitions contributed 24% and our currency contributed 5% with the dollar weak against most currencies. (inaudible) our third-quarter last year organically was a tough comparison with organic growth of 12%.

On slide 6 in the Americas, organic growth was below 1%. Our business in the USA was definitely impacted by the slowing economy, although we finished the quarter stronger in April. Nice growth in the electrical and wire ID was offset by weaker utility markets. We also have tough comparables in our safety and industrial ID markets. In the quarter, we made two acquisitions, Clement Communications and Sorbent Products.

On slide 7, we saw tremendous organic growth for our business in Europe and as I mentioned earlier, are helped by no smoking legislation in France and the UK and a strong European economy, as well as our strong position in Europe.

On Slide 8, our business in Asia is down due to the loss of the profitable Maxtor business. We also saw slower growth in our high-performance labeling business. The mobile handset business seems to have stabilized.

On slide 9, the biggest impact on gross margins is the acquisitions we've made in the last 12 months. The actions we have taken year-to-date will help our gross margins going forward. Looking forward, we expect there will be softer comparisons starting with the next quarter's results.

On slide 10, SG&A continues to improve despite a flat top line and a significant level of investment we presently have in the company. In the quarter SG&A improved 60 basis points over last year. This is significant considering the (inaudible) $2.7 million of restructuring charges for the quarter is in our admin costs.

On slide 11, R&D dollar spend increased 20% and we're encouraged by the process improvements being made in this area to assure that we are delivering the right products in the future.

On slide 12, operating income is up 5% year-over-year and the cost reduction activities that we have year-to-date will improve our cost structure going forward.

On slide 13, net income is down as a result of additional interest expense and last year we had an option gain of $1.5 million in investment and other income related to the Tradex transaction.

On slide 14, diluted earnings per share is down 13%. Our equity offering increased the share count in the fourth quarter last year. We will have easier comparisons beginning in the first quarter of next fiscal year.

On slide 15, our year-to-date cash flow from operating activities is up 26 from last year.

Slide 16, here is the cash flow walk on a year-to-date basis. We started with $113 million in cash. We raised $150 million fixed interest loan for ten years at 5.33%. We had strong cash flows of $80 million; CapEx of $42 million including $9 million for SAP; nice dividend of $22 million; and made $158 million of acquisitions. This brings us to the ending balance of $119 million.

On slide 17, we continue to have a strong balance sheet and our debt to total capital including cash is 37%, taking out our cash balances, our net debt to total capital is 31%. On slide 18, acquisitions make it difficult to see trends, but our additions to working capital are moderating. On slide 19, EBITDA is up 9% in the quarter and up 18% year-to-date.

On slide 20, our priorities remain unchanged and include continuing to address the capacity and balances that we have, although the bulk of that work has been done year-to-date. We expect to execute the pipeline of profitability initiatives that we have. As I mentioned earlier, we have made progress in improving our processes in new product development and we are also pleased at the progress of our geographic expansions; Dongguan in Southern China, Bangalore in India, Bratislava in Slovakia are some of the examples.

Our mainly MRO acquisitions this year are doing well and we expect to continue on a slower pace for acquisitions than last year. We expect to complete 18 SAP go lives this year, which bode well for the future as we can make productivity improvements using SAP once installed.

On slide 21, for the remainder of the fiscal year, we have reiterated our guidance provided at the second-quarter conference call of $1.35 billion to $1.37 billion in revenue, $113 million to $118 million in net income, and diluted EPS between $2.06 and $2.15.

Now I will hand over to the business leaders who will handle the regional results. First is Tom Felmer who will report on the Americas.

Thank you, David. The Americas produced strong revenue growth in the third quarter driven by recent acquisitions in the region. Base growth was flat in the quarter due to continued shift of mobile handset business to Asia and tough comparables year-over-year in the Brady brand business. Strong segment profit growth in the quarter was also driven by acquisition.

The region sales increased to $154 million, an increase of 12%. The entire increase is attributable to acquisitions, organic growth, and foreign currency impact on sales were minimal in the quarter.

Organic growth within both our Brady and direct marketing brands was flat in the third quarter compared to the third quarter of the prior year. We continue to see strong growth by market in the electrical and wire ID areas offset by softer than anticipated business in electrical utility market due to soft housing starts.

By country, the Brady brand experienced strong organic growth in both Brazil and Canada. The U.S. was flat due to the factors mentioned above. Growth in the region was also slowed by the continuation of our planned migration of the mobile handset business to Asia.

During the quarter we opened a new Brady owned call center in the Philippines which will provide low-cost outbound telesales support for our direct marketing businesses throughout the world. We are also pleased to announce the completion of two acquisitions in the region for the quarter. The first was Clement Communications, located in Concordville, Pennsylvania. Clement Communications, acquired in February, is a direct marketer of posters, newsletters, guides, and handbooks that address safety, quality, teamwork, sales, employment practice, customer service, and OSHA regulations.

The second is Sorbent Products Company or SPC, which is headquartered in Somerset, New Jersey with additional operations in Belgium and Hong Kong. Acquired in April, SPC is a leading manufacturer and marketer of synthetic absorbent materials used in a variety of industrial maintenance and environmental applications for spill cleanup, containment, and control. The addition of SPC increases our offering of safety and facility products sold through our distribution partners and adds a consumable product to our portfolio.

Segment profits rose 7% or $2.4 million to $37.5 million for the quarter. Segment profit as a percent of sales was lower than prior year at 24.3% due to the continued effective recent acquisitions, which are expected to have an initial rate of profit that is below the average of the group. We expect that as we integrate the newly acquired companies and achieve synergies, we will enjoy increasing levels of segment profit going forward.

Peter Sephton will now report on our European business results.

Thanks, Tom. We are now on slide 23. Europe performed very well in the third quarter with revenue growth coming from both the base business as well as from acquisitions. The region sales increased to $111 million, an increase of 38%. There is continued improvement in organic growth with our overall base business up 10%. Acquisitions added a further 16% and the strengthening of the European currencies versus the dollar caused a positive currency impact in the quarter of 12%.

Sales right across the region were strong with organic sales increases in every region. Most encouraging has been the performance of France, which has seen a great performance from its direct marketing business. We're encouraged with our business in the UK that has started to benefit from the upcoming no smoking legislation. Benelux continues to perform well as its migration of OEM business stabilizes and we've made headway in our MRO markets. And the strategies we've set out to developing in Europe geographically in peripheral regions, Northern Spain in Italy, continues to go well as well.

Looking at our business by brand, the direct marketing business experienced a very strong quarter with double-digit base growth. France was the main contributor as it benefited from significant business on no smoking products following the introduction of new legislation on February 1. The UK also experienced strong growth as it continued to bounce back following a weaker 2006 and has also begun to benefit from no smoking legislation being introduced between April 1 and July 1 of this year. And we were able to leverage our learnings from France.

The German direct marketing business grew slightly slower than the other businesses but it was still solid as it continued to improve its mailing effectiveness. The Brady brand has continued to show solid growth with good performances from the Benelux and Nordic regions. Germany and France showed modest growth, plus the UK was flat.

All regions continue to push into new geographies organically and through acquisitions to focus on the MRO markets such as process industries and telecom. For instance, the acquisitions of Scafftag and Modernotecnica at the end of 2006 have provided a boost to our business in the UK, an opportunity to expand in the Middle East, and gives us a real footprint in Italy.

Our focus going forward will be to leverage these acquisitions across the region and to integrate the recently acquired absorbent and spill control business of SPC in Belgium.

For the region as a whole, segment profit for the quarter was $29.4 million, an increase of 38% on quarter three of last year. Expected head office costs of the Tradex operations impacted the profitability of Europe with a very strong performance of our direct marketing and Brady core business has positively impacted the profits for the quarter.

Europe has enjoyed a very strong third quarter, continuing to improve on seven consecutive quarters of organic growth. Going forward, we will continue to integrate and leverage our acquisitions whilst working to maintain the momentum in our organic business built up this year.

We will now continue with the Asian region report, so over to you, Al.

Thanks, Peter. I direct your attention to slide number 23. Sales for the third quarter were $81.2 million, up 67% over last year. Organic growth was down 10% but acquisitions added 71%. Currency effect was positive by just under 6%. The same quarter last year was a very strong quarter for us with 66% growth over the prior year, most of this coming from our organic business. Therefore, the comparisons were very tough. While this quarter's results were disappointing, they were not unexpected.

As mentioned during last quarter's call, the third quarter was a busy quarter for our team as we continued to accelerate our integration plans across many different areas of the business. We have now completed the integration of seven duplicate sales offices. We have begun facility consolidations in six manufacturing locations worldwide, four of which are located in Asia. And made some personnel adjustments in our global die cut business.

The consolidation of duplicate facilities did not reduce our overall capacity, but rather combined the capacity into a smaller number of facilities. We believe this will result in superior customer service and extend our competitive advantages.

In our quest to balance capacity to meet our customers' needs, we are now fully operational with our second South China plant in Dongguan and our Bangalore, India facility is also fully operational. Our investment decisions in both of these areas seem to be well justified by the increasing level of investments by our customers in these regions.

While this quarter is typically not a high period in terms of volume demand from our mobile phone customers, this is a busy time for us at the key design centers as they are finalizing their product portfolio for the upcoming holiday seasons. We continue to do our best to help our customers with the pricing pressures they face as they are specifying newer, more cost competitive models and we are helping to redesign parts to allow for automated assembly.

We anticipate the pricing environment to remain challenging for the upcoming few quarters, but we are pleased with the amount of specification wins we have achieved with most of our major customers. We also are adding more capabilities and products to our offering, which allows us to be a more valuable supplier by reducing overall transaction costs. Our site consolidations should be completed by the end of our fiscal year, allowing us to be more focused on meeting the increasing and fluctuating demand that we will see in the fall of this year.

Growing our core business in the region and especially China continues to be an area of focus for us. The result of combining the Brady and Tradex sales teams has given us the flexibility to adjust and refocus our teams on specific markets, products, and even accounts. This refocusing has resulted in an increased sales pipeline within our core productlines such as high-performance labels, nameplates, and product branding, as well as opening up some new vertical market opportunities.

In conjunction with our medical converting, acquisitions in the U.S., we are leveraging those capabilities, expertise, and customer relationships in Asia with some good initial successes. Southeast Asia outside of Thailand continues to be a challenging environment for finding large sales growth opportunities. As economies such as Singapore shift their focus from manufacturing to more service related economies, we will need to adjust our selling focus to more of our MRO products such as wire marketing and safety and facility identification.

The Thai market, which is made up of mostly hard disk drive customers for us, continues to show growth prospects as we are recommending new products and technologies at U.S.-based design centers and continuing to expand our production capabilities locally.

Australia's core business and our two acquisitions in the region continue to be a bright spot for Australia. The Accidental first aid products are a nice addition to our Brady distribution business and vice versa. The Brady products are an attractive add-on to our first aid distributors.

In addition to these integration and investment activities, our team in Asia completed three more SAP go live implementations in the quarter, which brings us up to eight implementations in the last nine months. I am pleased to say that none of these implementations caused any service or performance disruptions.

Segment profit for the region was $11.9 million, down 4% over last year's segment profit of $12.4 million. Looking forward to the end of our fiscal year, we face one more quarter of difficult comparisons based on the loss of our Maxtor business. We will be working hard to ensure that most of our major consolidation work will be completed by the end of the quarter -- by the end of the year, excuse me -- and we can be focused on delivering operational excellence and flexibility to our customers as their volumes increase in the fall.

I will now turn the call back to Frank Jaehnert.

Thanks, Al. While our quarter's results were certainly not back to the levels of profitability we have come to expect, we believe we are on the right track. We made significant progress in our integration and restructuring efforts during the quarter. We saw the benefits of geographic diversification during the quarter where we were able to take advantage of both a strong European economy and short-term legislation effects which offset the slower economy in the U.S. and weakness in our OEM business in Asia.

As we conclude our fiscal year, our priorities for fourth quarter will remain the same. We will focus on our efforts to grow the top line through our base growth and organic -- and acquisitions, selective MRO acquisitions, leverage recently acquired businesses across the broader Brady business, and new product development. We will continue to rapidly execute our efforts to streamline the direct operations, the die cut operations of our growth in (inaudible) a new business at the science centers. We are confident that our strategy remains sound and we continue to execute it.

That is the end of our prepared comments and we will now start a Q&A. Operator, if you please provide the instructions to our listeners.

(OPERATOR INSTRUCTIONS) Wendy Caplan, Wachovia Securities.

A couple of questions that you raised in -- that were raised for us in your presentation, you did mention that the handset, the mobile handset spec program is going well. Can you give us some more detail, some color on how -- what that means?

Sure, Wendy. This is Allan. Relative to winning business in the mobile hand sector, there's really two parts that you have to win. First you have to win at the design centers and typically in doing that, our larger OEM customers will award us spec position to two suppliers. They like to have dual sourcing for programs. So the best that we can see right now is that we look at program by program and literally part number by part number within these programs, and we're very pleased with our levels of activities and the response from our customers based on some of the creative solutions that we have provided.

So right now it looks like as we approach the fall season that the OEMs are pleased with our offering and the competitiveness of the offering. Then what happens during the summer months is that they make the allocations of who their subcontractors and what the supply chain is going to look like. Then we have to go to those companies and once again work on an allocation percentage. They will take 100% of the business and divide it between two companies and that's a whole other selling cycle we have to go through. So the front half looks good. The second half will be decided in the latter part of the summer.

Okay an just to come to get another basis of comparison, Allen, would you say that your hit rate this year on the spec -- your spec wins is above, below, the same as it was last year?

You'd have to almost answer that account by account, which I would not be comfortable doing. But I would say in general it is as good or slightly better than where we were sitting last year.

Okay, that's helpful. Thank you. Then you mentioned when you're talking about the electric utility market in the Americas that it was softer than you had anticipated. Is that an inventory issue or a demand issue? How should we understand that please?

Matt, are you in the office?

Yes, I am.

All right, could you answer this question?

No problem. Our utility business is served by a business called Electromark and this business really is in the business of identification for transmission and distribution, that segment of the electric utility market. If you look at what has happened in the U.S., the housing market and the construction of new housing is down and as a result, the transmission and the construction of transmission right to a home is also down. Therefore that has impacted the marking that goes with that building of infrastructure.

Okay, thank you. Are there other -- can you just comment on other pieces of that market other than residential construction, or can you give us some sense of magnitude?

Well, that is really the part that has impacted us most negatively. We feel pretty positive about the power generation portion of the utility market going forward as the U.S. is having plans on the drawing board to build up the overall generation piece of it. So if you think about the whole electric utility market, it starts with the building of power generation and ends with the electricity coming into your home and building. And right now the U.S. is planning and starting to build the overall generation piece of that. So looking forward, the utility market looks pretty good for us I would say.

Charley Brady, BMO Capital Markets.

Just as a follow-up to Wendy's question on the utility market, did that business as far as what (inaudible) residential construction sequentially what kind of change did you see? Did it worsen sequentially or was it sort of the same as it was last quarter?

Actually I don't know from quarter-to-quarter. I know from the previous year that that business was down. From the second quarter to the third quarter, I would have to go back and look at that. But I know as you would compare it this year versus last year, that business was down.

Okay and just switching gears a bit on the Asian business as it pertains to Seagate Maxtor, can you just elaborate a little bit more on sort of where you are in the continuum of trying to get back to pre-acquisition levels? Is there any -- logistically from Seagate as far as approval of or verification of facilities or manufacturing processes from Brady that has to still be done? Or where is that process?

Where we are with the hard disk drive business is that our focus has shifted a little bit to working and paying more attention to some of what we would call the unmet needs of our customers and in doing that, we have spent a lot of attention building up our capabilities from a production standpoint, engineering and research and development around the areas of damping solutions and also filtering solutions. And we have received quite positive feedback from all of the customers in the hard disk drive industry as we brought those solutions to them.

There is nothing standing in the way in terms of facility qualifications. I forget what one of the other things that you mentioned, but all of our facilities are qualified and we have seen a very nice acceptance of these new products that we're bringing into the marketplace. So we feel good about the path that we are on with hard disk drive, but again that Maxtor loss was a big one that's going to take us a while to overcome.

Okay just on the cost reduction activity as we're looking towards Q4, what sort of level of either restructuring and/or acquisition impact would you expect in Q4?

Well, we believe we've done the bulk of the work in terms of cost reduction activity. We are not getting specific guidance on what we're doing in Q4. What will impact the P&L is being included in our guidance, Charley. We would prefer to talk about that in retrospect.

Will Stein, Credit Suisse.

Allan, a couple questions about your side of the business. In the handsets, of course the design wins I don't think have been a real problem for you guys. In the last quarter I think what was highlighted was a shift in where -- the allocation part of it, where the POs were going. I think they were shifted to a second source. Where are we in that process? Do we have any visibility of POs getting switched back to Brady given the improvement in the footprint?

I would say that the program lives are so short that when I talked last quarter or the quarter before that about POs being shifted, we did not anticipate those getting shifted back to Brady, because literally that would only be probably one or two quarters worth of activity. We're very pleased. Our customers have come in. Every one of our major customers has audited our Dongguan facility. They're very pleased with what they see in terms of our commitment to the region, the capabilities, the staff that we have put in place.

So the signs from our key customers coming directly from them are very positive about how they feel now about our presence in South China. The proof will be in the fall as the allocations are dealt out for the new programs, but from an infrastructure standpoint, we feel that we're very well positioned right now.

So will we see that play out in the July quarter or do we have to wait till October before we can discover whether that has had -- regain share?

Yes, I wish I could tell you that we will see it in the fourth quarter. There may be some anecdotal comments that we can share, but really the volumes that we would see from these allocations would not occur until the first quarter likely.

Just one more on the handsets still. As Brady is one of the two sources, would the second source -- are you typically seeing another third party component manufacturer or are you seeing an integrated ODM or EMS company (technical difficulty) designate that -- those design awards?

It is a good and astute question. I would say that the ODMs -- we do not see a lot of competition directly for die cut parts coming from the ODMs. If we do, it's on the simpler parts, if you will. And the variety of parts if we manufacture 20 to 25 parts inside of a mobile phone, some we would put in the easy category from a production standpoint and building up to very complicated. There are some people within the mobile phone supply chain that have tried to do the easy parts with some degrees of success. Others have tried and just gotten out of it because it is not a core competency.

But what Brady really focuses on is delivering innovative value added solutions which can ultimately help our customers improve the quality or the cost position of their product and for those high-end applications, our competition would be companies that would have a similar profile to ours.

Okay, I will stop there and let someone else hop on. Thank you.

Ajit Pai, Thomas Weisel Partners.

Good morning. Just one question about the guidance and your maintaining guidance for this year. I go back and I look at your seasonality and your earnings per share for maybe the past eight or nine years and only in one year in the past eight or nine, I think it was 2000, was your EPS up in the fourth quarter rather than down. Most of the verbal commentary you have provided so far on the OEM business has been that things could continue to be volatile in the July quarter.

So is it fair to assume that most of the encouraging guidance or implied guidance to the fourth quarter on the EPS front will be from cost-cutting?

No, I do not believe so. Obviously we will see some benefits from what we've done so far, Ajit. The past eight or nine years are not a good reflection of where we are right now with our products because we have grown dramatically through acquisitions. OEM electronics, this coming quarter is a little bit stronger for example than the quarter we're just leaving. In fact, Q3 is probably the softest quarter in OEM electronics and we've got a bigger business in that today. So there have been mix changes which would change that position.

I think that should be all. Thank you.

Rob Damron, 21st Century Equities.

My question is regarding the research and product development area. Maybe you could just give us a little color on what the pipeline looks like for new products? And do we expect some incremental growth as we go into fiscal '08 from new product developments?

Yes, I would like Bob Tatterson, our Chief Technology Officer, who some of you might not know yet, you might not have met him but he came to us about seven months ago from GE Plastics. I would like Bob to answer this question. If you're in the room, Bob, I think I've heard you before.

Yes, thank you. Definitely our focus here in the quarter and since I have arrived in the last six or seven months has really been around executing the current pipeline of activities we have. It has really involved a significant amount of recruiting of new resources to really realize the programs that we have in place. And I'm happy to say that our programs for the current year are largely on track in terms of new product delivery.

In terms of the pipeline, we've been working very closely with our marketing leadership around the world, the R&D organization and marketing together to identify those opportunities for the coming year and quite frankly, we see a pretty large opportunity ahead of us for new products that bring unique value to our customers. And we're going through the process now of assessing really a large pool of opportunities for those most profitable and sustaining activities to fund for future years.

So I think there is a lot of enthusiasm with respect to opportunities for the future and we're really laying the groundwork today in terms of defining exactly our plans for the coming year and putting those resources in place.

Okay, that's helpful. Just one other unrelated question regarding your acquisition guidance. I believe you did mention that the plan might be to slow down the acquisitions as we go into fiscal '08. I guess what is the main reason for that? And then is it -- are you looking more at focusing on integration of the existing businesses?

This is Frank. Let me take this question. We have done a lot of acquisitions in die cut and if you look at the growth rate in Asia, you can see that we grew I think about 71% through acquisitions in Asia Pacific. Now, that is a lot of growth through acquisitions and there is a digestive period now that we just have to integrate. We have to implement a lot of new things, accounting and financial reporting, combine sales forces, combine the facilities and so forth. Those people are just busy. They are super busy and we would not want to add another acquisition in this area.

Also we have stated in the past that we like the mix of one-third of our business being in OEM and about two-thirds in MRO. Right now we are over 40%, I think about 42% in OEM and we think that is a little bit too much because it is more volatile. So we will slow down our OEM activity and we will do more in MRO.

Now if you look at last year's acquisition, I think we acquired acquisitions for $350 million. This is the highest we have ever done and it's higher than what we would expect going forward. So this year we're not repeating this so far. So far I think we have made acquisitions about $150 million, $158 million so far, so we are clearly on a slow down phase. So you will see us doing many acquisitions because we think acquisitions is a very fast to grow but primarily in MRO, not so much in Asia, and probably also a little bit less in people identification where we have made also a lot of acquisitions lately.

But in the Americas we have not done too much in the last year and in Europe we haven't done too much, so I think those people -- those resources, human resources still have capacity.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Robert McCarthy, Robert W. Baird.

Frank, just a follow-up on your comments about acquisition activity. Understanding of course that your -- the level of activity has moderated from last years level, but I did not sense that you intended to convey that you think even this year's level is at any kind of an unusually high level, did you?

No.

Okay and how would you characterize the pipeline of activity in the MRO space? Do you have sort of consistent level of stuff that you're looking at today compared with, say, six months ago?

We have always many companies we look at. Acquisitions are a lumpy business. You might be able to -- like we did this acquisition of absorbent products just one or two months ago and that was a sizable acquisition. First of all there are not too many sizable acquisitions out there in general. It is a general comment because the MRO market is a very fragmented market. And if you look at the average acquisition we have made in this space, they are typically smaller than absorbent products.

So the pipeline I would say consists more of smaller acquisitions, but we have quite some activity there and as I said it is a lumpy business. You cannot time it, unfortunately. It would be nice if you could have timed the last 1.5 years a little bit more evenly over the quarters. But when somebody becomes available, maybe even goes to auction, you cannot do much to convince them to wait for half a year until we have maybe a little bit less activity in other spaces.

Of course. Thanks, Frank. Related to the acquisition side, David, can you tell us how much acquisitions contributed to receivables and inventory on the balance sheet at the end of the quarter?

I don't have that number here with me.

Okay. I will follow-up with you later then. (multiple speakers)

What we can say in general, what you find is that most of our acquisitions have lower inventory turns and have larger days sales outstanding than what we have, so it is usually a negative on working capital and negative meaning more working capital than sales initially.

And then I had a couple of questions that follow up on material in your slides. Would it be fair to say in Asia where your organic growth was done about 10% that if you had the same level of Maxtor business this year that you had last year that that number would still be negative?

A little bit, yes. I think Maxtor is by far the biggest part of it.

Okay, I just wanted to confirm that. Then on slide 10, where you pointed out execution on SG&A expense in the quarter, how you've been able to control -- well really actually you're putting up lower numbers than prior year -- obviously highlighting execution. My question is how would you characterize the variety of investment initiatives excluding of course the restructuring expense?

But the other things, would you characterize these as in anyway unusual or above normal levels? I am not trying to undercut the point. I just want to make sure that if there is an unusually high level of investment initiatives that we understand that as well.

Well, there is not any one thing, Robert. I think taken as a whole, our geographic expansion -- we have never had a call center in the Philippines in the beginning. We've never done our ship service in India. I don't think we have ever had 18 go lives planned or anything like it, so --

Yes but you had other initiatives going on in prior quarters, of course.

Yes, but I just think there's a level of activity taken as a whole, not any one thing but taken as a whole, I think is the highest.

And you know there are many other things which are it is not one individual item you can put your finger on but we have people traveling all over the world. There's all these acquisitions going on, due diligence, integration efforts, SAP implementations, startups. We have many people from the United States and from Western Europe flying all over the world to help people ramping up or integrating. And I have never seen in my twelve years at Brady this much activity.

Also as far as restructuring is concerned, we have restructurings going on all over the globe in many different businesses. You know we have -- we said regularly do things like this but we certainly have highest level I've ever seen and not necessarily in terms of sales or anything like that. But in terms of amount of activities --

-- just the sheer absolute level of activity?

Sheer absolute level of activity in different theaters, and of course, that is driven by our tremendous acquisition activity in the last couple of years. We have all those acquisitions and we see opportunities to get synergies by maybe combining something or getting them on SAP or changing our management structure and so forth. There's just a lot of stuff going on.

I think what I would like to add there is that with significant OEM business things that we are adding, all things being equal, see lower gross margins and lower SG&A and I think the reason you're not seeing much lower SG&A is because of all these activities, Robert. I think that is the point.

Okay. So then understanding that this elevated level could continue and in many ways desirable to continue for the next several quarters, the global SAP rollout on the other hand is something that should have -- what -- some kind of a curve that erodes over time? How long does that show up as a material incremental item going forward?

In terms of expense?

Yes.

We continue to have an ambitious program the following year and then things should kind of tail off a bit.

Okay, very good. Thank you.

A follow-up from Will Stein, Credit Suisse.

Two quick ones. First on the SAP implementations, can you talk to us a little bit about the expected benefit of all this work you are doing with the significant rollout efforts?

Yes, we believe we can get significant productivity improvements by using SAP. Some of our most profitable businesses are on SAP and over time you can really get great productivity. For example at the end of this calendar year, we're putting our EMED business on SAP and we can see a number of savings from doing that. So to me over a number of years we can really optimize our business using this system.

Is it going to reduce SG&A or cost of goods or --? Is it going to help cross sell or save on material purchases? How should we think about the benefit (multiple speakers)?

Let me -- I think it can impact both cost of goods sold and SG&A. We will just give you an example. Four years ago when we did our last restructuring just after I became CEO, the main excuse why we would not consolidate factories, for instance, was always that well, we can put the people together but they work shoulder to shoulder on two different systems. So all you do is you co-locate and you save on rent and they still have different processes.

So when we implemented SAP, all of a sudden we took an excuse away to again consolidation. So we have seen a lot of activity in the consolidation area when we have systems, the same system. Also if you think about Sarbanes Oxley, for instance, and they required -- or 404 -- that we have certain processes. If you change a process somewhere and you have one system, you change it once. If you have 30 systems, you change it 30 different times in different theaters of the world. Then we have one system, we can go -- let's say to a shared service.

Excuse me. We seem to have the same bark, David. Maybe we didn't sleep and off. We had yesterday board meeting after board meeting, flew out here and did not have much sleep.

But so we can for instance put our financials together, general ledger, or cash application accounts payable, go to a low-cost region such as India and do it in a shared service center there. If you have five or 10 different systems, you would not do this. It just does not make sense. So there's a lot of things which show up in either our cost of goods sold if you combine factories, or in SG&A if you do what I just described in finance. But we are not doing this to add cost. We are doing it to get a benefit later and reduce costs.

Great, that's helpful. Just one other quick one. Allan, turning to you again on the disk drive business this time. I understand you are doing more to -- in the way of R&D to make these customers more interested in you. Have you seen any new design wins with either Maxtor or any other disk drive customers? Or is it more in the kind of introduction, improving the technology stage at this point? Thanks.

No, we have seen -- yes -- specific design wins at what I would say our core customers, the customers that we have historically focused on. What we have also seen with some of our geographic expansion activities specifically in North Asia with Korea and even a little bit Japan is some interest in the R&D work that we have done from customers that we have never served before. So there is some reason to be optimistic there as well.

So it is a double answer to your question. With our core customers, they have responded with actual tooling orders and with new customers, they have responded with sincere interest to the technology that we have developed.

Great. Thank you.

(OPERATOR INSTRUCTIONS)

Okay, if there are no further questions, let me just wrap it up again. We have talked to many of you to many analysts and investors over the last couple of years and we have always gotten the question, what happened in 2003 when you had a slowdown in business and why did it take you so long to react to it?

We admitted that we waited too long and we also made a statement, Bob, David, and I [on that issue]. If we have a similar situation that we either have a slowdown in business or we have a slowdown with certain segments like mobile handsets and so forth, what you can expect from this management is swift reaction. Hopefully we have been able to convey this to you. We had a lot of activity going on right away. We are reacting to what is going on very swiftly and I am very proud of the team, how fast they have done it and how well they execute. At the same time not losing focus on the customer. As Al said, we are all over our customers trying to win specifications, trying to get speced in.

So there was a lot of activity going on and based on this, I feel pretty comfortable that in the cost reduction side, we have things under control and what we need now is to see in the first quarter if our efforts in mobile handsets and hard disk drives start to pay off. And as Al said, I wish I could show this in the fourth -- the fourth quarter but the cycles are such that it is going to show up in the first quarter. We have to be a little more patience in the meantime. We just execute, execute, execute and try to set the stage for the next couple of years with a lower cost structure.

So I thank you for participating in our conference call, for all your great questions. Barb, could you wrap up the call please?

Yes. Thanks. Just a reminder that the audio and slides from this call will be available on our website, bradycorp.com, and the replay of this taped call will be available via the phone beginning at 11:00 AM Central time today. The phone to access the call is 888-286-8010 with a pass code of 29839391. The replay will be available for one week until May 24.

As always, if you have questions please contact us. Thanks for your interest in Brady and have a great day. And operator, can you please disconnect the call?