Brady Corp (BRC) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2008 Brady Corporation earnings conference call. My name is Lisa and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Barbara Bolens, Vice President and Treasurer.

Good morning and welcome to our conference call. We're glad you could join us.

During our call this morning, you'll hear from Frank Jaehnert, Brady Corporation's CEO, and Tom Felmer, CFO, who will be presenting Brady's quarterly financial review. Also joining us this morning is Matt Williamson, President of Brady's Americas region; Alan Klotsche, President of Brady's Asia-Pacific region; and Peter Sephton, President of Brady's European region, who will all be providing 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 and other usual information.

Please note that in this call we may make comments about forward-looking information. Words such as expect, believe and anticipate are a few examples of words identifying a forward-looking statements. It is important to note that forward-looking information is subject to various risk factors and uncertainties, which could significantly impact excepted results. Risk factors were noted in our news release this morning and in Brady's 10-K filed with the SEC in October of 2007.

Second, please note that this teleconference is copyrighted by Brady Corporation and there may be no rebroadcasting of this without expressed written consent of Brady. Please also note that Brady will be taping the call and rebroadcasting it on the Internet. Your participation in the question-and-answer session will constitute your consent to being recorded.

Now, here's Frank Jaehnert.

Thanks, Barbara, and good morning. I am pleased with the results of our second quarter. Sales growth in total was 13%. Organic growth, however, was down 1%. Despite the decline, our gross margins and operating margins both improved as a percent of sales. Additionally, net income improved 35% over last year's second quarter and operating cash flow grew substantially. We believe that improvement is a direct results of the actions we took to reduce our cost structure and integrate acquisitions. We will continue to look for ways to improve our cost structures as we face challenging economic times ahead. For example, the recently-combined leadership of the Americas business under Matt Williamson, which will help to create an even leaner cost structure. While we do not anticipate that any of these future changes will be as material as those that we have made last year, we are continuing to look for opportunities.

I am also pleased with the results of our company-wide focus on working capital. We have made progress in our efforts to improve Accounts Receivable, Accounts Payable and inventory turns. Our substantial increase in cash flow from operating activities translated into a nice improvement in our cash balance.

As you are aware, in early January, I named Tom Felmer to replace David Madison as our CFO. I am excited to have Tom in this role, as he combines great leadership and vision along with many years of great experience, which I believe will give him a unique perspective to the CFO role.

With that introduction, I will now turn the call over to Tom Felmer to provide the financial overview. I will return to provide a portion of the regional reports. Actually, that is not correct. We will have Peter and Allan and Matt give the regional reports, but I will conclude at the -- will come back at the end of the call with some concluding remarks. Tom?

Thank you, Frank. Good morning, everyone. I will begin my comments focused on slide three of the presentation.

Sales in the second quarter were up 13%. We've seen nice improvement in gross margin as a percent of sales, as it improved 140 basis points over last year's second quarter to 48.1%. SG&A was down slightly with a 10 basis point improvement over last year. Operating income was up 30% in dollars and up 150 basis points as a percent of sales. Net income was up 35%. Diluted earnings per share was up 33% at $0.48 per share. Finally, cash flow from operating activities was $54 million, up 118% over last year's second quarter.

Slide four, our growth continued to moderate, as we saw 8% growth from acquisitions, 6% from currency and a 1% decline in organic growth. Organic sales have softened in line with general economic trends in the Americas and Europe. Al will discuss specific sales trends in Asia, but organic growth was down in this region as well. Sales were negatively affected in several regions as we continue to shift away from low-profit sales that were acquired over the past couple of years.

On slide five, clearly one of the highlights of this quarter was the improvement that we've seen in the gross margin line. Margins were up 140 basis points compared with last year. We see improvements in most regions as we benefit from cost reduction activities and increased focus on higher-margin products. Our SG&A was also down 10 basis points mainly due to the cost reductions that we took in the second half of last year.

Slide six, we continue to improve our new product development processes around the world. Our investment in R&D is up almost $1 million over last year, with the largest increase coming in Asia, where we have expanded our talent and our capabilities to support future growth in the region. We continue build our new product pipelines as we look for new product sales to become a more important part of our growth over the next few years.

Slide seven, our operating income was up 30%, which is a 150 basis point improvement over the prior year. Even with additional interest expense and higher tax rate versus last year, our net income is up 35% and is at 7.3% of sales in the second quarter, a 120 basis point improvement over the prior year. Our tax rate for the quarter was 29.7% and is now impacted by FIN 48, which will cause quarterly variations in the rate. We expect a 29% tax rate for the full year, which means that our second half tax rates will be lower than what we've experienced in first half of the year.

To slide eight, last year's Q2 was the first period that we saw softening in our Asian mobile handset business. This suggests that we should have reasonable comparables for the balance of the year. Our diluted EPS for the quarter is $0.48, up 33%, and our EBITDA was $60.2 million, up 32% over the prior year.

Moving on to slide nine, as we mentioned in our last call, we have added working capital targets to our management incentive plans for this year. We are continuing to see a positive impact on working capital and cash flow metrics, as controllable working capital improved for the third consecutive quarter and we generated a second-quarter record of $54 million cash from operations, up 118% from prior year.

On slide 10, our balance sheet remains very strong and our focus on working capital led to a quarter-end balance of $199 million in cash and equivalents.

On slide 11, our gross debt remains unchanged at $500 million. Our gross debt to EBITDA ratio was two, with the ratio of net debt to pro forma EBITDA also dropping slightly to 1.2. We remain conservatively leveraged with cash and debt capacity available to continue executing our growth strategies.

On slide 12, we are pleased with the start that we have made in the first half of our fiscal year. Despite the softening economies, we have been able to continue to streamline our organization and hold costs in check, allowing us to deliver improved operating profit and net income. While we expect continued headwind from the economy, we remain confident that we have enough momentum and initiatives in place to carry us through this year. We are also confident that we will be well-positioned to leverage any lift in sales once the economy rebounds.

We confirm our guidance for fiscal 2008, with sales projected to be between 1.43 and $1.46 billion, net income between 129 and $135 million and EPS between $2.31 and $2.42 per share. Just as a note, we have reduced our CapEx guidance from $45 million to $40 million due to spending levels trending below our original plans.

Now, with that, we will now move on to our regional reports, as Matt Williamson will cover both Brady Americas and Direct Marketing Americas.

Thanks, Tom. Please refer to slide 13. Brady Americas' sales for the quarter increased to $95 million, an increase of 18%. Organic sales growth was 2% in the quarter, while currency added 3% and acquisitions 13%. The organic growth of 2% within the region was driven by strong results in the laboratory, aerospace/defense markets, offset by slowing in manufacturing and utility markets.

We continue to be pleased with results of our new IP thermal label printer, which we introduced in September. This proprietary printer is recognized for its innovativeness and simplicity, while performing to meet the needs of the customer.

While Brady America's growth slowed in the U.S. and Mexico, we continue to see strength in our label and die cut business to industrial and electronic OEMs in Brazil. In addition, we experienced strong growth in our Canadian business. The acquisition of Asterisco in Brazil in December 2006 continues to yield synergies within our base label business. We continue the integration of SPC into our core MRO business and are expecting to complete an SAP implementation in this business in the quarter three, which will help us to continue to drive synergies.

We have also begun the consolidation of our two medical die cut businesses, TruMed and Precision Converting, into Brady Medical in a new plant outside of Dallas. Combining these two smaller businesses will help us leverage resources and drive improvements in profitability.

Segment profit rose 35%, or $5 million, to $19.5 in the quarter, driven by increased sales volume from both base and acquisitions. Segment profit as a percent of sales was higher than the prior year at 20.5% due mainly to cost control efforts and improvements made in businesses with lower performance in the prior year.

Sales in the Direct Marketing and People ID Americas businesses were $61.3 million, up 3% over last year. Organic growth was down 4%, negatively impacted by several factors, including a large onetime order in the prior year, a softening in the construction and manufacturing sectors, which particularly impacted our EMED business and the EMED SAP go-live. Our Seton business showed stronger results and organic growth for the quarter due to its focus on the broader MRO market. The Clement Communications acquisition contributed 5% and foreign currency impact was a positive 2% in the quarter.

By geography, we experienced solid organic growth in Brazil and moderate declines in both the U.S. and Canada. The U.S. business was also impacted by softness in our People ID businesses.

During the quarter, our region launched several new catalogs with a wide array of new products, which we expect to further expand our ability to service customers. We also adjusted mail plans to improve growth of the organic business. In December, we implemented SAP in our EMED Direct Marketing business and we consolidated our two Chinese People ID manufacturing plants into our Xiamen facility, where we have also automated some of our manufacturing processes. While both of these initiatives will provide operating benefits in the near term, they did have a negative impact on the second quarter.

Segment profit for the quarter was $12.5 million, a decline of 16%. Segment profit as a percent of sales was lower than the prior year at 20.4% due to the decline in high-margin organic sales and unplanned cost and business interruption associated with the move of manufacturing in People ID in China. As highlighted in previous comments, we have taken a number of measures to reduce operational spending and manufacturing costs and we will continue to work to achieve synergies between our businesses to proactively offset the impact of sales decline if the economy continues to soften.

Now I'll turn the time over to Peter Sephton to report on the European business results.

Thanks, Matt. Hello, everybody. I will be referring to slide 14.

Sales for the European region were $122.6 million, increasing 24% over the same period last year. Organic growth was 2%, while acquisitions added 12% and currency a further 10%.

The core gross is balanced between our Brady MRO offer and our Direct Marketing businesses, which continued to build on the success of newly-acquired customers.

Overall we are pleased with the core growth, which is up against a tough comparison after the exceptional success we had last year with the smoking ban legislation in France in quarter two and also our decision to withdraw from some low-margin businesses. This has translated to an improvement in our quality of earnings, which we will refer to later.

The Direct Marketing businesses in most of the region continue to show growth in quarter two. We continue to benchmark the business and leverage knowledge and expertise across the region to enhance our marketing strategies. Both the French and a UK businesses have benefited from increased customer bases acquired during the no smoking legislation campaign during the last fiscal year.

We continued to improve in our smaller geographies and the introduction of a smoking ban in Portugal has helped the establishment of Seton Portugal. In addition, we launched SAP into our Safety Shop business in the UK, which will allow us to further leverage our resources within that business.

Moving on to the Brady brand, results were mixed throughout the region, where we felt a slowing economy in some parts of the region and some stability in others. In the Benelux, for instance, the grew at double digits while the economy grew at single digits. During the quarter we successfully launched the IP printer series, which is proving a great success across all the regions that we serve.

Our geographic expansion continues as we grow our businesses in Romania and Russia, while the Middle East is benefiting from the leverage with our Scafftag business and the strength of the oil industry and infrastructure development.

Moving on to acquisitions, our recent acquisitions of ModernoTecnica in Italy, Sorbent Products and Scafftag all continue to perform ahead of our expectations. The Brady Italy business has been successfully integrated with ModernoTecnica. The Belgian business of Sorbent Products, acquired in April 2007, continues to perform ahead of our expectations and further strengthens our MRO focus in the region. During the quarter, we completed the acquisition of Transposafe, a leading distributor of sealing and mobile securities solutions. This company, with its headquarters in Amsterdam and sales offices in Belgium, Poland and Germany, compliments our existing security solutions offer throughout Europe. In the quarter -- in quarter three, we will continue to integrate Transposafe and leverage the capabilities it brings to us across the whole of the region.

Segment profit for the region as a whole was up to $31.1 million, an increase of 37%. Segment profit as a percentage of sales was 25.4%, up 250 basis points from 22.9% in quarter two of last year. This reflects the increased mix towards MRO, assisted by the acquisitions of ModernoTecnica and Scafftag last year and the growth of our Direct Marketing business. In addition, cost reduction actions that we took at the end of last fiscal year helped boost probability in the quarter.

As we look ahead to the next quarter, we have some tough comparables and the prospect of an even softer economy. However the steps that we taken to reduce costs, improve productivity and strengthen our MRO mix in Europe should help us build on the solid performance in Q2.

Now I will pass the caller over to Al, who will report on Asia.

Thanks, Peter. Still on slide 23 on the bottom, for the second quarter, sales for the region were $84.9 million, up 3% from last year's $82.4 million. Organic growth was down 4%. Acquisitions had a minimal impact on the quarter and currency added a positive 7%.

Although we experienced some positive momentum late in the quarter, overall performance fourth quarter was below our expectations. Our Mobile Handset business with the largest area of underperformance during this quarter. As we entered the beginning of the quarter, we were comfortable with the spec-in position that we had with major OEMs and started to see sales building. However, our expectation for continued growth, especially in the first two months of the quarter, never quite materialized.

After much analysis, I would summarize that there were three contributing factors to our results. First was a conscientious choice on our part to deemphasize some lower-profitability business. This is not always an easy thing to do when customers make supplier choices across a full array of parts, but we have been successful across a few segments of our business in accomplishing this. Second was the decline in average selling prices that we saw across the OEMs., reflecting a continual shift towards lower-feature phones making up a disproportionate amount of the volume growth in this market. As the OEMs release their sales and profit data for the quarter, we were not surprised at all to see strong volume growth, but very little, if any, topline revenue growth. The third impact was the continuation of quarterly cost down and pricing pressures. In looking at the results from the mobile OEMs, some of them were able to post moderate earnings growth, reflecting their ability to improve manufacturing efficiencies and driving cost out of the supply chain. Certainly we were impacted by this.

Market dynamics continue to be very fluid as the OEMs jockey for market share position. Major news releases within the last month lead us to believe that further consolidation will occur in this industry. How and what that may look like is only speculation at this time. We continue to have a strong position at each of the leading OEMs who may pursue a consolidation strategy, as well as the broadest product and geographic coverage, especially in Asia, among our competitors.

In an environment that may be challenged over the next quarter or two, we believe that our past investments in infrastructure will continue to serve as very well. We are also seeing the impact of our cost-cutting efforts undertaken in the last half of fiscal 2007 relative to facility consolidations and improvements in manufacturing. Added volume will highlight these savings even further as we progress into the latter part of this fiscal year.

As we gain visibility, to the third-quarter forecast and our relative market share, we remain optimistic in being able to sustain our leadership position and drive increased volumes relative to the same period last year.

Our hard disk drive business, although a smaller part of our overall portfolio, performed quite well in the second quarter as our ability to introduce new products and manufacturing capabilities to the market is being well-received by our customers. Our efforts to reduce our footprint and the complexity of this business model have also helped our performance in this sector.

Our high-performance label business continues to grow on the heels of established products, as well as certain new products that have been launched. Our safety and facility identification business is gaining summarize traction with the support of the larger and more focused group of channel partners that we've been developing over the last year. The combination of education, awareness and multiple approaches to the end customers appears to be working well in this market.

While our geographic expansion has not been as robust as previous quarters, we are particularly pleased with the strong business ramp up at our Dongguan plant in southern China. This plant is steadily increasing their capabilities and the production volumes are similarly increasing.

Brady India in Bangalore is also enjoying nice sales growth. Within the last 60 days, we have witnessed an acceleration of our customers wanting to localize their supply chains.

We have also started production at our Japanese greenfield plant. Our focus in Japan, as previously mentioned, is to provide stronger support to the Japanese design centers and then support the high-volume production as it moves to China and other parts of Southeast Asia.

Our performance in Australia continues to remain very solid, both with our core businesses as well as the acquisitions that we've made.

Segment profit for the region was $12.7 million, up 2% from last year's segment profit of $12.4 million. Looking forward to the second half of the year, we remain cautiously optimistic on the full year. However, we continue to watch economic indicators in the U.S. and European markets and recognize that further softening of the U.S. and European economies may impact purchases of the products that we are manufacturing for. As we have continued to do over the past year, we closely monitor our variable expenses and we are continually assessing our fixed cost structure to ensure that we are quickly making adjustments if and when necessary, while at the same time, ensuring an appropriate capacity to meet continuation of customer demand.

I will now turn the call back to Frank Jaehnert.

Thanks, Al. We have hopefully given you a sense today of both the results of our business for the last quarter as well as the efforts that are being made to make continuous improvements going forward. I am pleased with the result of our quarter given the already soft U.S. economy, the slowing European economy and continued challenges in some of our markets we serve in Asia.

For the remainder of the year, we will move forward with our integration initiatives to fully realize the value of our acquired companies and we continue to invest in R&D to increase our pipeline of future new products and we will continue to pursue acquisition opportunities. We have another four SAP roll outs planned for this year, which will allow us to leverage common resources just as shared services. Our focus on working capital will also continue to be a priority for us. While we do not believe our cost reduction activities will be as significant as last year, we do intend to monitor our business and look for opportunities to improve our cost structure to a level appropriate for current business conditions by keeping a sharp focus on our customer.

That is the end of our prepared comments and we will now start the Q&A. I will please ask the operator to provide instructions to our listeners?

(OPERATOR INSTRUCTIONS) Will Stein, Credit Suisse.

Frank, can you update us on the Company's acquisition strategy today. Is it as much focus as it has been in the past? Can you comment on the split between MRO and OEM markets for the acquisitions?

Certainly, Will. We do believe that acquisitions is a core competence of Brady. We have made 29 acquisitions under my leadership as CEO and lately, we have done less than we did in the past. There are two reasons for it. Number one, we conscientiously slowed down OEM, because we always wanted to have something like a two-third MRO and one-third OEM split. Because of the activity -- heavy activity in OEM over the last 1.5 years, we got higher than one-third sales from OEM, so we conscientiously slowed this down also to give the opportunity to the business to digest all those acquisitions.

In MRO, we have not slowed down. We have not made as many acquisitions as we hoped to and that is not necessarily due to less favorable conditions. It is just a lumpy business, so we continue to push along. We have a good cash position, with close $200 million in cash and we have credit facilities, so is something nice comes along, we are going to execute on this.

Can you talk to us about the current split between OEM and MRO business today? Approximately?

64% 36% MRO to OEM.

Okay, one more actually for Allan. Several quarters ago we talked about POs kind of going to competitors as there was perhaps a capacity issue at a plant you had in China, I think. And today you have talked about a good design win position. I'm wondering if you can update us on the Company's ability to increase the PO win rate.

Sure, I be happy to. I recall that conversation about our capacity in South China. I forget exactly which quarter it was, maybe three quarters ago, but, Will, we look at our marketshare every quarter and we have a lot of detailed information internally and then this is the sector to reports quite a bit publicly. So when we look at the last quarter's marketshare, we're feeling pretty good about our ability to win the allocation that you were talking about in your question.

If you look sequentially at the industry, sales in the mobile handset across the major suppliers were up 16% and these are worldwide figures, not just A-PAC. But the industry was up 16% and Brady, our business worldwide was up a little bit above that 16%. So we feel like we have definitely kept pace with the industry from a unit growth standpoint and from a volume standpoint. And we feel that any of the capacity imbalance issues that existed may be three quarters ago are behind us and we are very well positioned to be able to capture the new business that we are working on in the coming quarters ahead.

Just one other question. You went through three areas that you thought -- you felt might relate to the weakness on the handset side or cause concern there. Any concern on inventories either at your customers or further downstream in the channel for handsets?

No, not yet. It is a good question and this is typically the time that we have watched that very closely, when you come out of the big build on the holidays and then you hit January/February. Knock on wood, we haven't heard anything that is material in that area.

Okay, great. Thanks very much.

Allison Poliniak, Wachovia.

On the Direct Marketing segment, do you have what organic sales would have been excluding that onetime order that did not repeat?

We're looking around the table and nobody raises their hand.

Allison, each one of those things is not material in and of themselves. It's just three or four things that combined that affect the top line, but we have not broken that out.

Okay, and that was just a onetime order, so we won't see that in the next quarter, right?

That is correct.

Okay, then there were a lot of capacity adjustments that you guys made on the die-cut business last year. Are you comfortable with the capacity footprint as we speak at this point or could we expect more?

No, I would say that we are very comfortable with the way that our capacity is laid out right now. There are some things that are I would say less material in nature that will be working on to further reduce our cost base, but where we are, how many machines we have, I think we are well positioned for the coming quarters.

Okay, great. Thank you.

Matt McConnell, Robert W. Baird.

Could you discuss the economic assumptions that are built into your FY '08 outlook?

We did not.

Do you have explicit forecasts or just kind of continued slowing of the U.S. economy or anything that --?

That's probably one of the most difficult questions to answer. We have not assumed a dramatic deterioration of any economies we are in, actually may be a little bit of -- a tiny little bit deterioration of the economies we have included, but nothing dramatic, nor have we assumed a rebound.

Okay, kind of expanding on the previous question, can you talk about your U.S. footprint and cost structure and whether you expect any near-term restructuring activities there or is that pretty much at the level that you desire right now?

That's another good question. Of course it's a question where many of our employees are probably going to listen to how I answer this, but I am always very honest with our employees and here's the situation. We have had a tremendous shift from U.S. and Europe to Asia a couple of years ago, as many of our customers, like Motorola and so forth, electronic customers, would move to China. I would say that is largely behind us.

We also had a couple of major moves towards lower-cost countries, such as Mexico, from manufacturing for the U.S. That is also -- the major move is behind us, so we do not foresee at this point of time any major moves in this direction. I think we are probably positioned in all three geographies.

Thanks, and if I could ask one last question, could you maybe quantify the working capital reduction opportunity and just kind of as it relates to the sustainability of the free cash flow levels that you generated in the first half of the year?

We have historically said -- and I remember, particularly, David Madison was asked this question in an earlier conference call. He said, well, our first goal would be to stabilize the increase in our working capital and it looks like we have accomplished this. And then of course we push beyond. You know, we always have looked at working capital, but we have increased our emphasis and I think it is pretty early still to tell how successful this is going to be. So I would say stay tuned in the next couple of quarters, but we certainly have an emphasis on it and we think there's opportunity.

Okay, thank you.

Anthony Kure, KeyBanc.

Good morning. Just a couple questions on Asia and then some other assorted things. First, in Asia, can you just kind of quantify the magnitude of the pricing headwind you are facing on the mobile handset businesses? I just want to get an idea of what kind of value you are up against on the cost.

Sure, depending on which customer you talk to, it is always a negotiation. And typically the negotiations on the customer's starts somewhere in double digits and we moderate halfway in between, somewhere around four, five, 6% typically. You have to understand this business that it is very hard to build models around that and I'm sorry that I am making it difficult for you here, but it depends on the life of the part. So these are parts that typically last nine to 12 months, and so they are typically subjected to two to three, maybe four quarters of cost reduction over their life.

Okay, great. Then I guess I just wanted to kind of reconcile how the deemphasis of lower-profitable business kind of reconciles against lower selling prices and kind of the higher mix of lower-cost funds. Are going to continue to deemphasize these lower-profitable forms as the mix shifts?

I just would make a clarification. It is not that we are deemphasizing the lower-cost phones. There's sub -- let's say that we produce 25 or 30 parts in a particular phone. Through microsegmenting our business over the last six months, we have a better understanding of parts that were really differentiated where we adding value to the customers and subsequently, our profit margins are higher. So we are trying to do more of that and less of the ones that were less differentiated.

So it doesn't have anything to do with the type of phone that it's going into. It is actually the complexity of the process, the complexity of the converting process and the sophistication of the materials.

I think we also inherited with some of our positions some products, some parts which maybe we wouldn't have taken this business and so there's opportunity to improve. Usually this is every acquisition, every time you get something, you always have this opportunity. That's not particular to this industry. Our profit expectations are relatively high and we just see many times when we acquire businesses, especially smaller businesses, that they maybe don't have the same focus, as is true for working capital. Let's get back to the other question.

You know, many of our acquisitions didn't have as good of a capital management, working capital management base as we have. That is where the opportunity comes from.

Great, great and then just a couple more questions. On the SG&A side, you were up as a percent of sales in the second quarter, I guess how do we think about the full year 2008 as a percent of sales given that you are going to be integrating all these acquisitions and taking some costs out?

Actually, we were down a little bit in the second quarter on SG&A. I think we said we were down 10 basis points.

I'm sorry, I was talking sequentially.

Let me take this question. Second quarter is always a quarter where you -- we have less sales volumes because there's so many holidays. There's Christmas, there's New Year, so second quarter is always a quarter where it's challenging to make improvements in SG&A compared to prior quarter, the first quarter, which is typically pretty strong and the third quarter and fourth quarter, which are stronger. So I think better comparisons compared to prior year and here we made slight improvements.

Okay, so for the full year we can anticipate then some incremental improvement over the percent of sales in '07?

Usually we don't give guidance as far as gross margins and SG&A. We kind of give net income guidance for the year and I don't want to get too specific on this one, because it is impacted by so many things like acquisition activity, mix and so forth. I think what you should walk away with here is we believe that opportunity in both gross margin and SG&A going forward without particularly talking about this particular year.

I'm sorry, one more question and I'll get back in queue. Just some color on the locations where SAP is going to go live in the second half of '08. I think you said there were four locations.

Do you really know this one? (multiple speakers) Three U.S., one in Australia.

Okay, good. Thank you.

Ajit Pai, Thomas Weisel Partners.

There's only one market where you actually talked about pricing pressures and competitive pressures and that is Asia-Pacific? When you're looking at the other markets, could you give us some color as to what the pricing environment is like and also across your businesses, whether you are seeing any higher inflationary pressures in your raw materials and in local wages, North America, Europe and in Asia. If you are, whether you are able to go to -- pass them on to your customers?

I would suggest we take this by region. Al has already talked about pricing in Asia, but I will let Matt and Peter respond to the pricing pressure question and raw material pressure and then maybe, Al, at the end, you come back and talk a little about raw materials. Do you want to start, Matt?

Yes, on the raw material side, given that many of our raw materials are resin-based products, whether it's pressure-sensitive products, the adhesives, the substrate itself or our Sorbent Products. These are areas where the costs have continued to go up greater than the overall inflation rate. So we have implemented price increases and we continue to explore that to offset that, but overall, those commodities have definitely gone up and we're trying to offset that with price increases. That is one point.

As far as pricing pressure, I would say that it really comes down to not so much a overall market. Obviously there's the electronics market where we feel that, but it's really more in the area of specific product pressure. So for example, in the area of wire markers, there's far more competition in the area of portable printers. This is printers making wire markers that we sell to many markets and there's a lot more competition in this area and the result is there's a lot more pricing pressure, which comes in a lot of different areas. Deals for different distributors driving the end-user prices down, discounts of that and that sort of thing. So it is more along individual products versus an overall market.

What about wage pressures?

In the Americas?

Yes.

I would not say that there's anything significant there.

Got it.

Ajit, in Europe, just to answer your question from the European perspective, most of our business is geared towards MRO, where we've got less price sensitivity, so where we are seeing upward cost pressure on finished goods and raw materials, we are able to pass those on to our customers. However, we are getting much smarter at sourcing products in Asia and combining purchasing power across Europe, which is very fragmented, so we're keeping that cost pressure to an absolute minimum. And we're not seeing much unusual in the way of wage inflation here.

Okay, so when you're looking overall at your business right now, you know, your gross margins are still I think about 500 basis points to 600 basis points below where they were about 2.5 years ago. As your Asian business moderates and your American and European businesses expands and your MRO business on a relative basis does well, do you see potential right now for your margins to rise back to sort of the mid-50s?

I don't know that we can give a specific number, but clearly we have felt those margins before and we've liked them, so we continue to push in that direction. But I can't say that we build that into our forecast.

Okay, is the strategy in Asia Pacific to sort of control your growth, because that's the area where the pricing pressure is the greatest, or do you still think that gaining share in Asia Pacific and investing in Asia Pacific is a healthy strategy for the overall Brady?

We have really taken a pause, as Frank talked about, in the last year to make sure that we completely understood the business model with the consolidation and acquisitions that we have. We've got our arms around that. We think, as a corporation, that Asia still represents a nice opportunity for growth Brady Corporation, so we're making investments not only in infrastructure, but also in research and development, to take advantage of that growth going forward.

Got it. Thank you so much.

Yvonne Varnao, Jefferies.

I was wondering if you could just give us a little more color on what was in the other income line in the quarter. It was just a little larger than it typically is.

It was interest income.

Okay, the whole two point --

The majority of it was interest income.

Just two other clarifications. In the Americas, you said the People ID was a little weaker. Is that just a more macro-based or is there something more specific going on there?

I'd make two comments on that. One is we sell a lot to the manufacturing environment, so that's impacted it, plus we have integrated a number of businesses together and I think that that impacted it as well.

Yvonne, let me just elaborate a little bit on this. We had several businesses to which we combined. We had CPE. We had [jam]. We had [Temtec]. And we combined some of those operations in the United States. We combined some operations in China, so I would say we had a similar -- and it's not as material, but in complexity and amount of change, a similar amount of change in People ID as we had in our mobile phone business, because we had so many businesses we combined and that certainly has taken a toll, in addition to was Matt said some of the manufacturing slowdowns.

As an example, when we brought these two plants together, which we commented on, that impacted our ability to meet the leadtime requirements of our customers at a level that we would want. So as we brought that together, we're trying to get that back to where we can be more than competitive in the marketplace. But in the short-term, that impacted sales.

Okay, so that's a short-term. Just in Europe, I know you touched on a smoking ban in Portugal. When did that start to go into effect and how long do you expect to see any benefit from it?

Just put it in perspective, it's a fairly small economy and the reason we made reference to Portugal was really not so much the incremental sales from those (inaudible) there have been some, but it is our ability to acquire new customers in Portugal. It started at the beginning of the quarter and I guess we will see some incremental benefits. It is really not large. It's our ability to acquire customers that the most relevant thing.

Thanks very much.

Charles Brady, BMO Capital Markets.

This actually Tom Brinkmann with BMO Capital Markets. Just a couple questions on productlines. I was wondering if any specific productlines that you can identify are doing well in terms of sales performance and maybe talk about a couple of productlines that aren't doing as well. You mentioned product by product sort of breakdown in terms of pricing pressure. I'm just curious about sales performance.

That's a very difficult question, because we have so many productlines we are in. But I think if you were to ask me which were some of the areas where we in the past talked about difficulties and which have turned nicely in a positive direction or the other way around, things which is gone well in the past and have deteriorated. The only thing that comes to mind for me right now it's hard disk drive. Remember, we had the Maxtor business being taken over by Seagate. We had a strong position with Maxtor and Seagate has continued discontinued all Maxtor drivers in a short period of time. We lost all our business and then the question was how well are we going to do at replacing some of this business at Seagate in other accounts? I think we have done very well in this area. This was an area of concern which we have shared with you. Other than that, nothing comes to mind right now in any way material. Anybody else care to comment. Looking around, Peter?

Nothing specific.

Maybe another area, which we quickly talked about, we launched a new printer, the IP printer, which is a nice printer, exceeded all our expectations. The reason I'm saying this, again, I'm not saying this because a huge sales impact to the Company, but also to highlight one of our strategies. We want to make sure that we have more proprietary products, because proprietary products help us resist pricing pressure from customers. We can see that.

Matt earlier said that in certain pockets he has price pressure. Whenever we have material proprietary products, we feel that we can pass on price increases much better and when we have more commodity-like product, it is much more difficult. So we certainly have a push and I'm very pleased that this IP printer actually stands for intelligent printer, because it makes changing the ribbons and labor material hassle-free. So easy, so it's something proprietary and things like this, if we can do more like this and our plan is to do more like this, the things that will help us. Also getting back to Ajit's question regarding gross margin. These are the kind of things we're planning to do more of in the future.

Okay, good. Also just curious about the outlook for acquisitions now. Obviously if you believe the headlines, the credit crunch has made a lot of private equity players, bidders, withdraw from the market. But are you seeing a more attractive merger and acquisition market? Are multiples coming down? I guess what is your outlook there?

I'm surprised. I read this as well and we don't see this. Actually I have never seen this in the past that early in the downcycle. It always happens, but I think it happens later. Let me give you an example, as a family company that would have $100 million sales price and they have a nice profit and all of a sudden, that profit comes down. They're not going to say, well, we are going to be happy now with $80 million. They still want to have $100 million. It takes them usually well over a year to realize that it's not realistic anymore or they just wait until they get their profit level again up to a level, which substantially -- which supports a $100 million purchase price.

As far as private equity is concerned, what we are hearing, we have not seen it as much, but what we're hearing is they're locked out of big deals, so they are shifting their focus down to the midmarket, competing maybe more with us than the past, because we were not doing real big deals. However, we have not seen this either, because many of our deals are probably still too small for the private equity firms to get in there, but they still have money, certainly for the big deals.

So I think as time goes along, we will have a more attractive market for acquisitions, but at this point of time, we haven't seen it yet.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Anthony Kure, KeyBanc.

I just wanted to quantify the unplanned moving expenses to China in Direct Marketing.

We don't quantify this. You know, sorry, I hate to do this, but I don't want to get too specific, but I can tell you one thing we did, originally not anticipate this and we just saw an opportunity. It is always the same. You consolidate facilities. You have upfront costs. Later, you have savings. We have the upfront costs now.

Okay, thanks. That's it.

(OPERATOR INSTRUCTIONS). There are no additional questions at this time. I would now like to turn the presentation back over to Ms. Barbara Bolens.

Thank you very much. I want to point out there was about a four minute time during this call, I think it was during the Q&A when the sound was dropped for those listening on the Internet. That full four-minute period will be available on the replay that will be available starting at noon today, so we apologize. I believe it was a technical issue that occurred.

We do thank you for your participation today and would like to remind you that you can listen to the call, especially that four-minute period, on our website at www.investors.BradyCorp.com. The replay will be available beginning at noon Central today and will be available until February 27. If you have questions, please feel free to contract us and we do appreciate your interest in Brady and wish you a good day.

Operator, please disconnect the call.

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