Brady Corp (BRC) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2007 Brady Corporation's earnings conference call. My name is Fab, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would like to turn the presentation over to Barbara Bolens, Director of Investor Relations. Please proceed, ma'am.

Good morning, everybody and thank you for joining us. Welcome to our fourth quarter fiscal 2007 earnings conference call. During the 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 Allen Klotsche, President of Brady Asia Pacific and Global Die Cut who will also present a portion of the regional reports.

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 at www.investor.BradyCorp.com. You have a few minutes to get to those while we go through our Safe Harbor statement. 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 forward-looking statement. It is important to note 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 this teleconference is copy righted by Brady Corporation and there may be no rebroadcasting without express written consent of Brady. Note also that Brady will be rebroadcasting this call on the internet, and your participation in the Q-and-A session will constitute your consent to being recorded. Thank you, and now here is Frank Jaehnert.

Thanks, Barb. Good morning. We are glad you could join us. Today we will be discussing our fiscal 2007 fourth quarter. I also want to take a couple of minutes to reflect on the entire fiscal year.

Now fourth quarter, sales were up 26% of which 5% was from organic growth. We continue to see great results from Europe and had solid growth in the Americas. Net income was up 17% over last year's fourth quarter, but excluding cost reduction charges, our quarterly net income was up 41%. EPS was up 12% over last year, 35% excluding our cost reduction charges. I am very pleased with these solid operating results in light of some of the challenges of this year.

I am especially pleased with what we accomplished during the year. We achieved record levels of sales and net income. We continued moving at a fast pace to grow the business, respond to changes in business conditions, and prepare ourselves for continued top and bottom line growth in the future. We completed further geographic expansion in six countries, continued our focus on new product development, completed seven acquisitions and 16 SAP implementations and also implemented significant cost reduction activities to right size certain parts of our business. We believe we are in a good position for fiscal 2008, with the ground work we have laid.

I will now turn the call over to David Mathieson who will provide the financial review. I will be back to talk about our priorities for fiscal 2008 later in the call. David.

Thanks, Frank. I would like to start my discussion at slide four, titled Q4 fiscal 2007 overview.

Sales at $363 million were a record for the fourth quarter, up 26 with 5% organic growth, 17% from acquisitions and 4% from currency. Gross margins at 47.8% were down 200 basis points from last year, SG&A at 33.9%, was 20 basis points up from last year, operating income was up 11%, and if you exclude cost reduction charges, up 31%. As I pointed out in the press release, this is a particular highlight, as it demonstrates excluding charges operating margin expansion for the first time this fiscal year, the first time since the fourth quarter fiscal 2006. Net income at $26.2 million was up 17%, and excluding charges, up 41%. Diluted earnings per share was up 12%, and excluding cost reduction charges, up 35%.

Overall, as Frank said, we're pleased with the results of the quarter. At $0.48 diluted earnings per share, we did miss our implicit guidance for the quarter, which was $0.54 to $0.63, but that was mostly due to additional cost reduction charges which were $0.10 in the quarter. We encouraged our business owners to get as much cost reductions done as they could during the year and all the regions responded. We feel good about the position we're in to start the year.

In slide five some of the cost reduction charges. We have recorded over $20 million in cost reduction charges, of which $11.5 million has been charged to the P&L pre-tax, and $8.7 million charged to goodwill. As we anticipated the action in our integration plans. As I said earlier, we are pleased with the amount of actions that we completed in the quarter and believe the Company is well positioned. Our actions in the quarter were not limited to die cut as we reduced costs in other business lines in Europe, Americas, and Asia Pacific. The savings from these activities will be around $14 million, which is up from the $10 million we estimated last quarter.

On slide six, the Company grew 26% in Q4, 5% organic, 17% from acquisitions, and currency 4%. I think it is notable that we have not made an acquisition since we closed on Sorbent Products five months ago in April. This welcome pause has allowed us to have a laser-beam focus on integration and cost reduction activity. On slide seven despite tough fourth quarter comparisons, we saw welcome return to organic growth in the Americas of 5% after a soft third quarter. Sorbent Products contributed nicely during the quarter as did other acquisitions closed previously.

Slide eight on Europe. Europe continued a record year with strong organic growth of 8% aided by the spread of no smoking legislation with the strength this quarter in England. The strong European economy helps, and the weakness of the dollar also boosts our results in Europe. We do see that the no-smoking legislation has been very welcome and well capitalized upon by our direct marketing businesses is largely a one off business.

In slide nine in Asia Pacific we grew 25% in the quarter with essentially flat organic growth, 18% from acquisitions, 7% from currency. We would characterize our mobile handset business as essentially stabilized. Overall, organically we're still experiencing tough comparisons with a reduction of our disk drive business due to the Maxtor takeover. As we look ahead, we have one more quarter of tough comparisons as we had a very strong first quarter in fiscal 2007.

On slide ten, our gross margins were down 200 basis points. The increased business in die cut and acquisitions in the last twelve months have more than offset the improvements we have made in the rest of our business. On slide 11, SG&A was 20 basis points higher than the last year, but excluding cost reduction charges, was down 150 basis points. We have a lot going on with integration activity, shared services, SAP rollout, and the geographic expansions we have been funding.

On slide 12, in R&D, in our fourth quarter last year, we had 32% of the annual R&D spend, so it was a big quarter for us last year. We are down 2% in dollars from last quarter, but up 18% year-over-year. We continue to improve the processes in our new product development and are pleased with the progress we see. We continue to see upside opportunity. Slide 13, operating income was up 11% over prior year, but excluding cost reductions is up 31%. As I mentioned earlier, we witnessed a resumption to operating margin expansion in the fourth quarter, excluding charges. We believe our cost reduction activities have positioned us well for fiscal 2008.

On slide 14, net income was up 17% during the quarter, excluding charges, up 41% from last year. On slide 15, diluted earnings per share is up 12% in the quarter, and excluding cost reduction charges, up 35%. For fiscal 2008 we will no longer have the dilutive effect of the equity offering we completed in June 2006. On slide 16, here is the cash from operating activities, and we have had a solid year with cash from operating activities up 18% year-over-year, excluding charges, in terms of cash, it's up 25%.

Slide 17, here is our cash flow for the year. Cash from operations is at 124% of our net income. We believe we have peaked in terms of CapEx at $52 million. I would also note that the acquisition spend this year is less than half last year's $351 million, resulting in a strong cash position of $143 million plus short-term investments not shown here of $19 million, and slide 18, our EBITDA for the quarter up 18%, up 34% excluding charges. On slide 19, our year end balance sheet shows net debt to total cap of 27.5%, so we continue to be conservatively leveraged. The short-term debt of $21 million shown is the first installment of the seven-year amortization of the $150 million we raised in 2004.

Slide 20. Here is the summary balance sheet over the last eight quarters. What is notable for me is that our controllable working capital, that is, receivables plus inventory pleas less payables reduced in the last quarter from the third quarter. We have a strong focus in fiscal 2008 on working capital, and I now look forward to seeing continued improvements in this element of our business. On slide 21, in our guidance for 2008, we assumed revenue growth of between 5 and 7% which assumes organic growth of between 2 to 4%. This range assumes our organic growth will be negatively impacted by 1.5%, due to non-repeating no smoking legislation in Europe, and shedding lower margin business in Die Cut. Acquisitions we have already made will add 3% to the top line next year.

Our net income guidance anticipates an increase in tax rate from 28 to 29%, mainly due to geographic mix of profit. We also expect more variability in tax rates per quarter with the introduction of FIN 48. We expect for fiscal 2008 the most significant improvement to our profitability will come from gross margin improvements as we have focused our cost reduction efforts on reduction of production sales. As we have done in the past, neither sales nor net income guidance assumes any future acquisitions. We expect CapEx of $45 million, down from the $52 million last year, and we have budgeted D&A of $65 million. Now we don't give guidance by quarter, and we won't start now. However, I would like to point out that our first quarter of fiscal 2007 was very strong, and we don't expect to match that quarter. Net improvements over prior year are expected in the last three quarters. We are watching the U.S. economy with interest, and this guidance does not assume a slow down in the global economy in fiscal 2008.

Slide 22, here is the last five years sales growth. You can see we had a record year in growth in fiscal 2007 with growth of 34%, 26% coming from acquisitions. I would also note that the average organic growth for the last five years is just short of 5% at 4.6%. The dollar has also been sliding and four out of the last five years, so we have benefited from that weakening. In slide 23, with growth of 26% last year from acquisitions, we have put a lot of pressure on our profitability. We continue to drive down our SG&A and have cost reduction charges that are excluded in fiscal 2007, our SG&A is 32.2% which is down 740 basis points from fiscal 2003.

On slide 24, in the last four years, we have grown net income every year and it is up 411% in fiscal 2003. We took a debt turn earnings per share in fiscal 2007 as a result of our equity offering at the end of fiscal 2006. Our priorities for 2008 look very similar to priorities for fiscal 2007. We have added an emphasis in working capital, and we have set out our goals to improve our profitability every quarter of our earnings. We are pleased with the significant progress that we made in the last quarter in positioning the Company for the future and we look forward to fiscal 2008.

Now I will turn the call over to Tom Felmer, who will provide the Americas overview.

Thanks, David. The Americas performed well in the fourth quarter with continued strong revenue growth coming from our base business and recent acquisitions. The increased volume resulted in strong profit growth over the prior year fourth quarter. The region's sales growth, our sales increased $169 million, an increase of 25%. Organically, we grew 5%, acquisitions added 19%, and foreign currency translation added about 1% to sales. Organic growth within both our Brady and direct marketing brands was strong in the fourth quarter compared to fourth quarter of the prior year. Sales in our Brady wire ID products and high performance labeling were solid. Regionally, Canada showed very positive results after a slow first half of the year. The Brady U.S. business grew steadily in the quarter, but was negatively impacted by difficult comparison from one-time items last year.

Growth in our Brady and direct marketing businesses in Brazil was also strong. Our Brady ID business in Brazil was strongly led by nice label sales and the acquisition of Asterisco, while sales of Die Cut parts in the mobile phone market offset this growth. During the quarter, we closed our Mexico City warehouse and sales office, and moved to a new facility in [Criadero] Mexico where we added label manufacturing which will strengthen our position in the Mexican market with local sales and service. The integration of Sorbent Products Company, which was acquired in April 2007 continues to progress well. This expands our MRO offering and has been well received by our field sales team, our distribution and customers. While still early, it is meeting sales and profit expectations.

Our Veritronics business had positive sales and profit improvement over Q4 last year as their new Veriquest products for the education market began shipping. We're very hopeful for this business as we enter a new school year. Segment profits rose 29%, or $8.8 million to $39.1 million in the quarter. Segment profit as a percent of sales was 23.2%, compared to 22.4% in the prior year. While we continue to experience cost increases in utilities and materials, the impact of our increase in volume is offsetting our cost increases. As expected, a recent acquisition had an initial rate of profit that below the average for the group, and we expect that as we integrate and achieve synergies we will enjoy increasing levels of profit going forward.

Peter Sephton will now report on the European business results.

Thanks, Tom. Now on slide 26. Europe performed well in the fourth quarter with continued strong revenue growth coming from our base businesses and recent acquisitions. The increased volume resulted in very strong profit growth over the prior year fourth quarter. Europe sales increased to $114 million, an increase of 28%. We continued to see strong contributions to our base business, with organic growth this quarter at 8%. Acquisitions added a further 12% and the strengthening of the European currencies versus the U.S. dollar caused a positive currency impact in the quarter of 8%.

Organic growth within our direct marketing brands was very strong for the fourth quarter, up solidly over the prior year. This was driven primarily within the U.K. by double-digit growth in both our Seton and safety shop brands largely resulting from the impact of new no smoking legislation enacted on July the 1st. Our direct marketing brands in France, Seton and Signals, also continued solid year with double-digit growth in the fourth quarter. While Seton in Germany recorded a marked improvement over the fourth quarter of last year. Our organic growth in the Brady brand continues as expected with solid growth in the business in Benelux, France and Germany, offset to an extent by continued migration of Die Cut business from Sweden and Slovakia to the Far East. Our business serving the MRO markets continued to perform well, following a strategy of focus within key selected markets across the whole of Europe and leveraging also our recent acquisitions such as [Texit] and Scafftag. Our European acquisitions in fiscal '07 included those of Scafftag, Modernotecnica, and Sorbent Products and have all performed at or above expectations and have good prospects ahead of them.

Our segment profit grew 49% or $10.7 million, to $32.6 million in the quarter. We're particularly pleased that the profitability of the percent of sales increased to 28.6% against 24.6% in the fourth quarter of last year, affecting our continued strategy to improve the quality of our earnings by focusing our organic and acquired businesses in our sweet spots and exiting low margin businesses. We also have seen some pressure on utility and material prices, but the impact of our increases in volume, particularly in our direct marketing business, is offsetting our cost increases.

In addition, we also continued to correct costs across the region, and although we had a great year, we took the opportunity to improve our competitiveness across the whole of the region by reducing non-value adding costs and processes. Europe has enjoyed a record fourth quarter, continuing to improve on eight consecutive quarters of organic growth. Going forward, we'll continue to integrate and leverage our acquisitions while working to maintain the momentum in the organic businesses built up this year.

I will now hand over to the Asian region report, so over to you, Al.

Thanks, Peter. I am now on slide number 27. Sales for the fourth quarter in Asia were $79.7 million, up 25% over last year. Organically, sales were flat while acquisitions added 18% and currency added another 7%. The same quarter last year was a very strong quarter for us with 87% growth over the prior year coming from the combination of solid organic growth and acquisitions. Therefore, our comparison was very tough. This quarter's results were largely in line with our expectations.

During the fourth quarter, our team remained focused on three primary areas, adjusting our footprint and capacity for our mobile handset business, securing our specification position at the key OEMs and understanding their supply chain strategies, and growing our core label and sign business. By the end of the quarter we have finalized the capacity and footprint changes we felt were needed, given current customer demands and future forecast. This will result in a reduced cost base for the coming year, but it will not impact our ability to respond to increases in customer demands. The reductions were made focused on reducing facility and overhead expenses and not with machinery and direct labor.

Operationally, we have seen some improvements from sharing best practices across the existing Brady businesses, and some of our recent acquisitions. Some of the improvements we are seeing are coming from the increased visibility that SAP provides us now that the majority of the region is up and running on the same system. Our global sales and engineering teams have pretty much completed their final push to ensure our spec position remains strong as our OEM customers move from prototyping to mass production in the coming months. Our success will now rest with the team's ability to win a proportionate amount of allocation as the programs programs ramp up within the respective supply chains.

On the third area focused around growing our core business, we had some mixed results. A few of our smaller initiatives around safety and facility identification showed strong growth and nice promise for the upcoming fiscal year. Combination of education, awareness, and multiple approaches to end customers appears to be working quite well. On the other hand, our labeling business remained somewhat sluggish compared with years past. Our strategy here is to keep differentiating Brady through the introduction of new materials and identification solutions.

While our geographic expansion has slowed down compared to prior quarters, we are pleased with our readiness in Dong Won, China and India. Both of these facilities have passed major customer and regulatory audits and are ramping up their production out put. At the end of the first quarter in fiscal 2008 we will begin production in a small manufacturing location in Japan. Our intent here is to provide stronger support to Japanese OEMs with their design specifications and prototyping and then capture the high volume production as it moves to China and other parts of southeast Asia. Our focus on Japanese M&Cs has been quite successful over the last three years, and we anticipate this to continue.

Elsewhere in the region, the combination of our businesses in Thailand and business rationalization in southeast Asia has helped us reduce operating expenses and spread them over a larger base of sales. Our performance in Australia continues to remain very solid, both with our core business as well as the acquisitions that we have made. Going forward, we will continue to look for ways to expand our portfolio in a way that could utilize our current approach to the market. During the fourth quarter, we faced many of the same pricing pressures as we have throughout the year. As our customers continue to battle for market share in the absence of any new revolutionary product introductions.

We are hopeful that the newer feature-rich phones coming out will stabilize industry average selling prices, and support some of the higher end design capabilities and tolerances that tend to differentiate Brady. Segment profit for the region was $10.8 million, down 11% from last year's segment profit of $12.2 million. Looking forward into fiscal 2008, we will be working hard to ensure that our major consolidation work will be completed, and we can be focused on delivering operational excellence and flexibility to our customers as their volumes increase. I will now turn the call back to Frank.

Thanks, Al. As you progress further into fiscal 2008, we believe we have taken the steps necessary to reduce our cost structure, invest in infrastructure with aggressive SAP rollouts and geographic expansions, continue to strengthen our R&D processes to support a higher rate of differentiated product introductions and collectively acquire some outstanding companies.

Our priorities during this year will be to focus on profitability and working capital improvements and a continued drive to increase organic growth. We have great opportunities in each of these areas to increase shareholder value. We will continue to integrate recently acquired companies and selectively acquire new companies that is help us achieve our goals of -- our goal of increasing shareholder value. We are watching the economy closely in hopes that the concerns in the housing and credit markets don't affect our business, but if they do we will make adjustments as necessary. We appreciate your support of this year and look forward to a great 2008.

This is the end of our prepared comments. We will now start the Q&A. Could you please give instructions?

(OPERATOR INSTRUCTIONS). Your first question is from the line of Charlie Brady from BMO Capital Markets. Please proceed.

Thanks. Good morning. With regard to the U.K. non smoking legislation and the expected fail off in revenue in that business, can you give us a sense of timing going into fiscal 2008 as to when you expect that business to start dropping off or all the way through that already?

Charlie, it is Peter Sephton. I can comment on that. It drops off very quickly. The law was enacted for enforcement by the end of July. Come the end of July really everyone should have been and had been compliant with legislation and we've seen a sharp downturn in that part of our business.

Okay. Thanks. Just with regard to acquisitions and sort of the pipeline, obviously the fourth quarter wasn't anything really going on. Can you speak to what the tenor of business is out there and any areas you might be focusing on?

Pipeline hasn't been as strong as in the past, but we still see some nice opportunities in the 10 to $25 million sales opportunities, so we're still pursuing acquisitions, Charlie. I would say the pipeline has not been as strong as it has been in the past. We're hoping actually that a credit crunch will reduce price expectations, but we'll see.

That's very good. My next question as far as in terms of prices or multiples being sought, have you seen any lowering of those sort of hoarder rates yet?

No, we haven't seen that yet. Bankers are telling us that it will happen, though, so I hope they're right.

Thanks. I will get back in queue.

Your next question comes from the line of Allison Poliniak from Wachovia.

Good morning.

Good morning.

A question in terms of legislation, going back to that, is there anything upcoming U.S., U.K., similar to the U.K. nonsmoking law that you guys can benefit from?

No, nothing as significant as the no smoking we've had in Europe this year.

Okay. And then, second, you talked about at your analyst meeting in June about your 12% net margin goal by 2010. Given now that you have your fiscal '08 outlook out there, are you guys still comfortable with reaching that goal?

Yes. We're not changing our goal. This guidance provides some steps towards that.

Great. Thank you.

Your next question comes from the line of Rob Damron from 21st Century Equity. Please proceed.

Good morning. Want to talk about the one-time costs we've seen over the past couple quarters. Is that pretty much behind us or should we expect any additional one-time costs as we move into the first fiscal quarter?

Pretty much behind us. We continue to do cost reductions, but there will be nothing that we foresee of this size, Rob.

Okay. That's helpful. Also wanted to talk about the new product development. What percent of your core growth in fiscal '07 was from new products, and maybe you can talk a little bit about the pipeline as we move into '08?

You know, it is not a significant amount. Most of our products, new product development has been on replacing products, so it maintains market leadership, hopefully it helps maintain our margins, but it is mainly this year has been about maintaining our leadership in the markets that we serve.

Okay. And any discussion on the new products that could be in the pine line that may help drive growth in '08?

Rob, it is Frank. We usually don't talk about this a lot for two reasons. First of all, we have a lot of new product launches during the year, and none of them is material with material impact or earnings projections. That's number one. Number two, we don't like to talk about something that we haven't seen succeed in the market yet.

We don't want to rise expectations and afterwards not make the numbers. We're quiet about it, but we had a very active year. We launched a lot of new products this year. If I compare to a prior year, it was significantly more than what we did in the past. We talked earlier about the Veriquest system at Veritronics that's an interesting launch and we launched a refresh hardware printer line. We are just rolling out very much simplified bench top printer where you -- it will significantly simplify what the customer has to do when using the printer, so there is always something going on. There is several software rollout, and certainly a much more active year than it was the prior years. We expect to ramp this up even further.

Okay. That's helpful. Thank you.

Your next question comes from the line of Ajit Pai from Thomas Weisel Partners.

Good morning. It is Thomas Weisel.

Hi.

Hi. Just a couple quick questions. The first is can you give us the breakup between MRO and Die Cut in this particular quarter?

MRO and OEM?

And OEM, yes.

Do we have the number?

I think it is close to 60/40.

It is 60/40. Looking at your Die Cut business, I think you said that you're getting out of some not so profitable businesses over there. Can you give us color as to what those businesses are?

It is not as much full business segment I did as it is micro segmentation of all of our customers and the parts that we sell to those individual customers and really looking and just scrubbing these and seeing which parts that we're able to make money on and which parts that we're not as profitable on and making the micro segmentation adjustments that way. It is not that we're getting out of an entire industry per se.

If you looking very broadly at the two largest categories you have over there, the handset manufacturers as an end market and the hard drive folks, are most of those areas getting out of more on the hard drive side? More on the handset side?

Again, it is really not areas as much it is individual products, and this is a business that we have a very good visibility and line of sight to the customers and to the products, so we're scrubbing every corner of the business, and I would say there is no disproportionate amount in one or the other.

And for your information, our disk drive business is really not anything significant any more compared to mobile handsets.

Right.

If you look at indications what's going on in the market and try to conclude, I think our disk drive is probably not representative of what's going on in OEM for us.

Got it, it is not as relevant any more.

Yep, that's right.

There is no downside from hard drives any more in case things slow down? Right now it is pretty robust business that that is seeing and not showing up in your numbers because it is not very material?

I think that's correct. It is not material.

It is not material.

Okay. When you're looking at the -- you talked about next generation handsets and premium products. The two fastest-growing set of next generation handsets out there from are from the Apple, iPhone, I know it's a very small base, as well as the BlackBerry is growing rapidly. Do you folks have any penetration into either of those manufacturers.

Absolutely with both of them.

Okay. You do? Just looking at the acquisition pipeline, you know, you talked a little bit right now about how strong your growth through acquisitions was in 2007, and I think you talked about focusing much more in 2008 on improving profitability and getting the synergies out of acquisitions, but in this environment with things being as volatile as they are, is your pipeline of acquisitions looking richer and are the valuations coming in, or you don't see any material changes yet on that side?

I let David answer this question before. Let me answer this time. It will be a little different. We continue to consider making acquisitions at core competence. We think our track record has been above average, above industry average, so we continue to push for acquisitions. We have intentionally slowed down especially the OEM space because we have made so many acquisitions in such a short time, so we want to provide some digestive period for management, and we have also shifted the focus more to MRO.

Just that be didn't make any acquisitions for the last five months doesn't indicate that we have lost interest in acquisitions. We continue to push hard on acquisitions. It is a volatile or a lumpy business. You might make 2 or 3, and then you do nothing for a couple of months, so we are working on our pipeline. It is a little lower than it used to be, but our guidance and our goals for the next couple of years we have said 5% organic growth and 5% acquisition growth and as you know we have done better in both categories over the last couple of years, so we continue to push.

When you're looking at your broad exposure by geography, you have about 46.6% Americas, 31.4% Europe and Asia about 22%, and your Asian business, I think is lowest in terms of absolute dollars it has been in about four quarters. Is there a focus on increasing one of those geographies greater than the others through acquisitions or any other means?

No. I don't think we've got a bias. We slowed down OEM which is largely a business in Asia Pacific is largely OEM, so I believe that impacted that, but we're not going to not do OEM acquisitions. We'll continue to do acquisitions. Recently mainly been MRO, but as Frank said we deliberately slowed down the OEM slate, but it doesn't mean we don't do OEM acquisitions in the future.

Theoretically, this MRO being about twice as big as OEM, statistically you should have about twice as many acquisitions if they're the same size, and we feel comfortable with this. Even so we right now have done a little less in OEM lately.

Okay. Thank you.

Your next question is from the line of Robert McCarthy from Robert W. Baird.

It is actually Chris Welch for Rob. A question on your guidance. I know you quantified a 1.5% drag on organic growth from the European signage issues. I was wondering if you could maybe put a number to shedding the lower margin businesses in the Die Cut area.

The 1.5% was to cover both items, and it is roughly 50/50.

All right. Got you.

What's driving this, Rob, Chris, excuse me, what's driving this is we have this goal out there which was shared with Wall Street 12% net income by 2010 which we still feel accountable to and would like to get there, so we need to increase earnings quality and that's a goal which goes through the whole organization. Allen Klotsche in Asia Pacific has made this one of his key goals for 2008, but you can accomplish this by doing a couple things. You can either be more selective in acquiring more profitable businesses or businesses where you think you can make more profitable. You can do it by being more selective in accepting orders from customers. You can shift around the product mix and so forth. We are doing all this. We really want to focus on earnings quality because we still feel accountable to the 12% after tax goal.

You're saying that --

Across the board.

You're saying that in Asia Pacific now you may see volumes down next year but the volume you're getting will be at a higher margin so you're happier with that?

I am not sure if we said this that specifically.

All right. Okay. We talked a lot about pricing pressures in Asia obviously. I was wondering if you could talk about the pricing environment, maybe Europe and the Americas?

Peter do you want to start pricing pressure in Europe.

We have a very strong brand franchise. When you look at our direct marketing brands, price -- we sell at a premium price NOA against the general market, because we sell convenience and we have a very strong brand franchise which is why we're able to capitalize so handsomely on changes in legislation. We don't see price pressure coming to that end of the business. We mitigated some of the margin pressure on utility and material prices by looking at more Asian sourcing so we're in pretty good shape. In our Brady business as well by focusing on very differentiated solutions to these focused markets, and I mentioned the process industry before where they're just having a great time. If you looked at exploration, chemical processing, petrochem, it is a great time, and we're satisfying compliance products, so not to say that price is never going to be an issue, but it is not such an issue for us.

This is Tom Felmer, just to comment on the Americas, I will echo what Peter's comments were. Because we enjoy just a diverse mix of customers and have such a relatively small order size we're not subject to the same kind of price pressure that Al might see in his businesses with the large OEM customers, so we don't see any material changes occurring through price pressures.

Okay. Thank you very much.

Your next question comes from the line of Will Stein from Credit Suisse.

Thank you. First I would like to make sure I understand the guidance both for the quarter that just closed and the go-forward guidance. Are you guys including or excluding these one-time charges in those guidance numbers? In other words, for this current quarter, did the guidance contemplate this 7.5 million pre-tax charge or did it not contemplate that?

We didn't contemplate as much as that, Will. We did not contemplate $0.10, so our guidance -- I think we missed the lower end of our guidance by $0.01. The rest is down to the fact we did a lot more cost reduction than we anticipated.

In other words, the guidance you provided, did that assume some level of restructuring charges?

Yes.

Okay.

But not as much as we actually set out to do.

Okay. Second on the growth guidance you're providing, I think I heard what was 2 to 4% organic. Is that right?

Yes.

And in the past organic growth has been somewhat higher than that. I am wondering if you're contemplating a global slowdown? I think you said no, but I am wondering if you can give any color on that?

Let me start. We certainly watch the economy. There is no question. I think the situation is maybe not as rosy as it used to be. Has it impacted our thinking of 2.4%, I think it has to a certain extent. Can I quantify it? I don't think so. I would say it has partly impacted our guidance, but I think it is more the earnings quality growth which is driving this number. That's how far I want to go at this point in time. We pointed out 2 to 4% organic because we have a 1.5% head wind created by no smoking legislation, just won't repeat --

Understood.

And we're shedding lower margin businesses, so excluding, that we're looking at 3.5 to 5.5, and if you look at the last five years we've done like 4.6, so I wouldn't say it has been tremendously impacted by the economy.

So just turning to that for a second or focusing on that, that sounds to me like you're essentially cherry picking in particular it sounds like on the OEM side of the business which is not a bad thing in and of itself, but I am wondering if you're worried about that damaging customer relationships? Maybe you can talk about that for a minute.

Let me just solve this with a generic answer. I think cherry picking is going too far. Cherry picking means you're just very, very selectively take a small portion of the business. We take the majority of the business, but we might have some parts of the business which have want returned the kind of investment we wanted, and we are more selective by either increasing prices to the customers or by walking away from it, but I would say cherry picking goes far beyond what our intentions are here. Anything you want to add, Al?

I think you can't cherry pick with OEMs. We take a look at an entire program if there is 35 parts within a phone or a mobile device, we have to look at that in totality, but as we're trying -- Frank talked about increased investment in R&D and trying to do more with innovative products. That's what we're trying to figure out is where are the customers problems going forward, and as we look at different clusters of types of products that we provide, where should we be spending more of our time and energy both as a salesforce and R&D team in developing new solutions?

That's helpful. Just one more following up on that. Can you talk about your relationships with OEMs and the ODM/EMS companies with regard to both penetration on the design side and then follow up with purchase orders? In other words, out of the top let's say 5 or so global handset manufacturers or top five OEMs, can you talk about among them as a group where you stand with new designs relative to purchase order traction?

Well, I can talk as a group. I won't talk about each one individually because I wouldn't be comfortable with that. Our sales teams have worked very, very hard in the spring and summer to ensure our specification position, and they're working hard in North America, Europe, and parts of Asia in the design centers, and we're pleased with -- I have talked about this in the past. We're pleased with the spec position that we have as myself and other executive management team have sat down with our customers, they continue to appreciate the value proposition that Brady brings with unique designs and manufacturing capabilities.

Now we hit the inflection point we slide over to the supply chain. We also feel good historically about our relationships with the supply chain partners that the OEMs have. It is still very, very early in the process as I talked about this is the time that designs are starting to ramp up, and we've seen our sales ramp up as we anticipate it. David talked about making quarter on quarter comparisons. Last year our first quarter and fiscal '07 was an unbelievable year for us, so that's a very, very difficult one for us to match that, but we see sales trending in a positive direction, and we anticipate that our sales teams are going to do a good job continuing to win this business this fall.

Print position now, relative to let's say a year ago, better, better, worse or similar among the top five as a group?

In aggregate, I would say slightly better, but that answer varies by individual OEM as well.

Sure. And purchase order traction, I suppose that's yet to come. Is that something that you should start getting visibility in within let's say a month or is it two or three months? When should you be aware of what your position is with regard to P O traction?

By the next call we'll be able to give people a pretty good feeling what the traction is like this fall. It is just too early right now to say that.

Thanks.

Your next question comes from the line of Yvonne Varano from Jefferies.

Thanks. On the cost savings you're looking for, the 14 million in '08, is that expected to come on day one or is it going to be a saving throughout the year?

Yes, the bulk of that has been completed at the end of July, so, yes, we should begin to see that, Yvonne.

Okay. And then on the hard disk drive side, can you update us on the progress that you're making in trying to replace some of that lost Maxtor business?

Sure. I think that we have taken a look at the different applications that we historically have provided to the hard disk drive market. We found a couple of those applications to be less attractive in terms of the customer needs and our ability to supply those needs in a differentiated form, in other words, those products that are more commodity products, we have decreased our emphasis, and we focused more on innovation where we can bring some of our new product development both chemically and mechanically into the picture, so hard disk drive is a much smaller piece of the business than it historically has been for Brady, but some of those little niche new R&D applications were faring pretty well in the marketplace.

So we should probably assume that this will continue to be a much smaller part going forward, even with some of these niche businesses?

That would be a good assumption.

Okay. And then also in Asia, you talked about the labeling side which continues to be sluggish there. What really needs to happen to turn that around?

Well, a couple of things. We talked about some of the distraction last year with the acquisition and the integration of our sales teams, and when you take a look at it, we were probably realigning over 100 sales people last year and slightly adjusting duties and focus, geographic or customer, and so we really have to make sure our focus is now 100% on the customer, and I would say that we're pretty much in that direction right now, all the clarity that's provided to the sales teams, the second thing is that as some of the environmental regulations have kicked in, it has actually made some of the manufacturing processes where our labels get used less harsh and easier for lower-performance labels to be acceptable in that solution, so we really need to make sure our marketing teams are working very closely with the advanced technology groups to understand what manufacturing methods are going to look like maybe 18 to 24 months from now to make sure the products we have in new product development are going to be appropriately differentiated in the future, so I would say this year it is focused, and next year it is going to be driven by innovation.

Great. Thanks very much.

(OPERATOR INSTRUCTIONS). Your next question is a follow-up from the line of Charlie Brady from BMO Capital Markets.

Thanks. I don't want to beat a dead horse on this one on the U.K. smoking thing, but can you help me understand why you've got additional similar bans coming up in Germany, I guess starting in '08, and you have a good part of the French market, the bulk of it, bars, restaurants, stuff like that coming later in the year, why those two markets combined wouldn't make up for and maybe add to the loss that you get from the U.K. being completed?

Charlie, I can answer that. It is Peter Sephton again. The French legislation was sen acted in two tranches, so we took substantial slights of business last year in general public places, but you're right, bars and restaurants were excluded for that period, but the truth is a lot of bars and restaurants did get carried up in that part of the legislation, so I think the uptick is going to be -- we may get some, but we can't really promise it because a lot of the bars and restaurants, we know who we mail. We mail hundreds of thousands of customers and we know who buys, and we anticipate a lot of that has been invested.

Interesting about Germany, believe me, it is the same discussion that we have as a leadership team across Germany because of the way Germany is structured, the choice for enactment is done on a very, very regional basis, and essentially the legislation that's been in place in Germany for quite some time, but then enactment and compliance has been incredibly slow and mixed, so it is a very different market dynamic. What we would have opened already to have even similar results from Germany, and we haven't frankly.

Is it fair to say, this to say, then, that the potential business out of Germany is not factored into your expectations for fiscal '08?

It is included in our guidance, and you know what? It is included but it is not material.

Okay. And switching gears for a minute on the mobile handset market. Is it possible to get a sense of how much of your business into the mobile handset market is coming out of these low end market versus maybe the higher mid-tier and where that looks like compared to a year ago?

It is. I would say that the low end market in general in terms of number of units shipped has been increasing faster for us and the part opportunities within low end phones is not as great, but we continue to be well positioned geographically when you look at our presence in India and other areas around Asia where the low cost phones are being manufactured even though there aren't as many parts there, our geographic business does differentiate us and give us some abilities in that market.

Okay. And as we look at that part of the business, then, if the continues to grow -- lower end continues to grow faster, would it be fair to expect some margin degradation as that mix shift changes a little bit?

I don't think so. No, I couldn't comment on that to be honest with you. I think we're very, very focused as Frank said on achieving our long-term vision of getting to the 12%, and we're going make sure our sales efforts are aligned with that.

Thanks very much.

Your next question is a follow-up from the line of Ajit Pai. Please proceed.

Just about your tax rate, I think you guided to 29% for this coming year, but your tax rate has been over a period of time been trending lower rather than higher, so why the volatility and what factors should be considered modeling your tax rate for '09?

I wouldn't say it has been very volatile, because we fell 28% for some time, but we've been acquiring businesses in the U.S. which is the second highest tax rate in the world. Tax rates in China are going up, so 29% in this, with what's happening is not bad budget.

It is not bad but it has been trending downward, so is the main it would drivers we should look at is your business mix in the U.S. and in China regardless of what percentage it is, the absolute tax rate is beginning to raise. Is that fair?

That's fair.

Right now we think on a go-forward basis we would expect the overall tax rate to stabilize at current levels or start trending upwards after having a downward trajectory for seven or eight years?

You know, 29% was reasonable going forward.

Okay.

What we had over the last couple of years where you saw that downward trend, a tremendous international expansion and especially into China, and of course there is no -- the tax situation in China changes the first couple of years. We think we have almost a third of our business in Asia, about a third in Europe, and about a third in the Americas roughly, right?

It is about 22% in the most recent quarter in Asia but it has been as high as 28.

I know you have a better number than I do here at this point in time. You said something like 31.4% before which impressed me a lot, but we think this shift of Brady moving into a lower cost tax regions over the last couple of years, that's probably done, so we are not going to get the benefit from this any more, so going forward and talking to our tax advisors, we think 29 is for the time being is a good assumption. David has also said over the new accounting regulations we might have delivered more volatility from quarter to quarter in how we have to record on our tax rate.

Okay.

I am sure you're aware of this,Ajit.

Okay. Thank you.

We have had a conference call now for one hour. There is urgent question we have not covered. I certainly don't want to cut people off at this pointed point in time otherwise you can always call us afterwards, but I just want to ask one more time is there urgent important questions which we have not addressed yet? Doesn't seem to be the case.

There are no further questions at this time.

Thank you very much. We appreciate your participation today and remind you that the audio and slides from this call are also available on our website. The replay of the taped call will be available via the phone beginning today at 11:30 central. The phone number to access the call is 888-286-8010 with a pass code of 75135302. The phone replay will be available for one week until September 19th. If you have questions please contact us, otherwise thanks for your interest in Brady and have a great day. Please disconnect the call.

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