Brady Corp (BRC) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter four 2008 Brady Corporation earnings conference call. My name is Nora and I'll 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. Barb Bolens, director of investor relations. Please proceed.

Thank you and good morning, everybody. We're glad you could join us. During our call this morning you will hear from Frank Jaehnert, CEO, and then Tom Felmer, CFO, presenting Brady's quarterly financial review. Also joining us this morning is Matt Williamson, President of Brady Americas; Peter Sephton, President of Brady Europe; and Allen Klotsche, President of Brady Asia-Pacific, who will all be assisting in 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'll be referring to the individual slides as we proceed through the presentation. These slides can be found on our website at bradycorp.com. You have a few minutes to get to those while we go through Safe Harbor statement and other usual information.

Please also 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 forward-looking statements. It's important to note that these forward -- that this 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 2007. Please also note that this teleconference is copyrighted by Brady Corporation, and there may be no rebroadcasting of this without express written consent of Brady. Note that we will also be taping the call and broadcasting it on the internet for replay and your participation in the question-and-answer session will constitute your sess -- you consent to being recorded.

Thank you and now here's Frank Jaehnert.

Thanks, Barb. Good morning, everyone, and thanks for joining us. We are very pleased to end fiscal 2008 with a solid quarter, especially in light of a challenging economy. During the quarter we completed the transition of management of the Americas under the leadership of Matt Williamson. As a result we are reporting the Americas once again as one segment. Our organic sales in the Americas and Europe have certainly been challenged by the slower economy. However, as expected, we saw organic growth in Asia at 11.5%, the first time we have seen organic growth in the region since the first quarter of fiscal 2007. This growth, combined with cost reduction activities of fiscal '07, led to 40% growth in segment profit in the region. We believe we have prepared ourselves well for slower economic times by reducing cost structure and that allowed us to meet sales and profit projections for the year just ended. We continue to look for ways to optimize our business model to assure our business is right sized for our economy today and it will provide us leverage for profit improvements when our organic growth returns to more normal levels.

As we look back on fiscal 2008 there are many accomplishments beyond our sales and earnings per share results which I'm very pleased with. We established targets for working capital improvement at the start of the year and had the entire organization working toward achievement of those goals. As a result of this Company-wide effort our free cash flow increased 137% during the year. Part way through the year we started down our part toward Lean, which led us to the development of the Brady Business Performance System, BBPS. Today we have hundreds of BBPS activities occuring throughout the Company, which is why we continue to believe we can improve the profitability of the business even in challenging economic times. We've had many other accomplishments during the year and I can say that I'm truly pleased with the results.

I will now turn the call over to Tom Felmer, who will walk you through the fourth quarter financial review. I will return after regional reports to give some thoughts in fiscal 2009. Tom?

Thank you, Frank, and good morning, everyone. I'd like to walk you through Brady's results beginning on slide three of our presentation. As Frank mentioned, we had many accomplishments and delivered very solid results in fiscal 2008. Our financial results for the year were highlighted by record sales of $1.523 billion, up 12% over prior year; record net income of $132.2 million, up 21% over prior year; and record cash flow from operations of $226 million, up 66% over fiscal 2007. We also launched the Brady Business Performance System to align key growth and productivity initiatives across the country -- Company. We continue to invest and upgrade in all areas of our R&D and new product development functions. And we also completed eight SAP [goalizes] and two acquisitions throughout the year.

As you can see on slide four, our fourth quarter also showed significant improvement over prior-year fourth quarter. Our $397 million in sales were 9% over prior year; gross margins of 48.4% were up 50 basis points; SG&A came in at 31.8%, down 210 basis points; net income and diluted EPS were at 300 -- excuse me, $34.8 million and $0.64 for the quarter, both up 33% over prior year. Finally, we generated $73 million cash flow from operations, which was a 30% improvement over prior year.

Moving on to slide five, we show our quarterly growth trends over past year and break down the 9% sales growth we generated in the fourth quarter. Organic growth was flat for the Company. However, as Frank mentioned earlier, we generated 11% core growth in Asia, while core growth in the Americas and Europe were down 2% and 3% respectively. Acquisition growth for the quarter was 3% and currency added 6%. On slide six you can see the gross margin improved consistently in each of the last three-quarters over prior year, ending the year at 48.4% in the fourth quarter. SG&A also improved meaningfully in the quarter at 31.8%, down 210 basis points from the prior year. Both gross margin and SG&A saw improvements from productivity efforts throughout this year and last. We continue to focus much of our BBPS efforts in these areas in order to drive more improvements in the future.

Moving to slide seven, we continue to build our investment in R&D. In the fourth quarter we launched several new products, including new circuit board labels, new high-performance wire markets, a new thermal transfer printer, and a software program that helps companies automate Lean practices that result in reduced downtime and increased performance. We also accelerated spending in the quarter on several key programs, which resulted in our spending -- increased spending on prior year by 18% in the quarter. Slide eight shows that our operating income and net income are up each quarter this year, ending with 32% operating income growth in the quarter and net income of $34.8 million, up 33% over last year's fourth quarter. In slide nine diluted EPS growth for the quarter was $0.64, up 33% over last year's $0.48, During the quarter we repurchased approximately 405,000 shares under our repurchase authorization. Q4 EBITDA was up $70.8 million, up 25% over last year.

On slide ten we provide a summary of our cash generation and usage for the year. As you can see we began the year with $142.8 million in cash and added $115.6 million throughout the year to end with $258.4 million. The increase was driven by generating $225.6 million in cash from operating activities, converting $19.2 million in short-term investments to cash, and adding $14.5 million cash, which was generated as a result of employees exercising stock options. These gains were partially offset by using cash to pay down $21.4 million in debt, investing $26.4 million in capital expenditures, $29.3 million in acquisition, paying $32.5 million in dividends, and repurchasing $42.2 million worth of stock throughout the year. There was also another $8.1 million that was generated through various means.

We have talked throughout the year about our focus on improving working capital and momentum of those efforts can be seen on slide 11. It is clear by the amount of cash that we have generated this year that these efforts have been successful and leave us in a very solid cash position. Our priorities for our use of cash remain the same. We look to fund internal growth through efforts such as new product development and geographic expansion, we continue to seek acquisition opportunities in our core spaces and adjacencies, and we continue to improve the returns to our shareholders through dividends and share repurchases. as evidenced through our announcement earlier today of an increase of dividends by $0.08 per share in fiscal 2009 and the repurchase of more than $42 million worth of shares throughout the past 12 months.

On slide 12 we show our year-ending balance sheet for fiscal 2008 and fiscal 2007. Here you can see that we continue to increase our cash while showing reduction in inventories even as we grow our business by 12% for the year. Receivables grew at a slower pace than the top line. In slide 13 it shows our capital structure and debt balances. We finished the year with $479 million of gross debt and using cash to offset debt we end the year with $220 million in net debt. Our debt to EBITDA ratio is 1.8 and net debt to EBITDA ratio is 0.8. We continue to be comfortable with a net debt to EBITDA ratio that averages two over time. We are well within that level and have sufficient flexibility to add to our debt should an attractive growth opportunity present itself. In summary we are pleased that despite a challenging economy we have delivered very successful results, both for the fourth quarter and for our full 2008 fiscal year.

Moving on to slide 14, as we look ahead to our fiscal 2009 we will continue to focus on creating shareholder value by improving our operating results through the continued implementation of the Brady Business Performance System and growing through investments in new product development and value-adding acquisitions. In June we issued guidance for our fiscal 2009 that said we would generate revenues of $1.56 billion to $1.59 billion and net income of $145 million to $152 million. Over the past month or so we have seen a significant strengthening of the US dollar and conversely a weakening of currencies in many of the company -- countries in which we operate.

Because these currencies have fallen below the average exchange rates that we experienced in F '08 and because we have seen deteriorating economy that is expected through the end of calendar 2008 and the beginning of 2009, we feel that it is prudent to adjust our F '09 guidance to reflect these changes. Our updated guidance for fiscal 2009 is that we expect to generate revenues between $1.52 billion and $1.55 billion and net income between $140 million and $145 million, which will result in diluted earnings per share between $2.54 and $2.63. We expect the first half of F '09 to be slower than the second half due to the economy in Americas and Europe and our assumptions for tax rate, CapEx, and depreciation and amortization remain unchanged from our previous guidance.

Before I turn the discussion over to our group presidents for their updates I'd like to confirm a statement that was in our press release this morning. During the fourth quarter we completed the consolidation of the Direct Marketing Americas and Brady Americas businesses under Matt Williamson. Because these businesses are now under Matt's leadership and share much of the same infrastructure we have combined them into one segment, similar to the way that they were reported in fiscal 2007 and similar to the way that we report our European businesses. Beginning with this report and the 10-K that will be released with our fiscal 2008 results we will report our results for the three regional segments, Brady Americas, Brady Europe, and Brady Asia.

With that background, I'd like to move on to our regional updates. Matt Williamson will begin with the Americas region.

Thanks, Tom. Good morning, everyone. Please refer to slide 15. Americas sales in the fourth quarter were $169 million, which was flat versus the prior year. Organic sales declined 2%, while acquisitions added less than 1% and foreign currency translation added about 2% to sales. In the US our Brady business was flat to the prior year, driven by lower sales in our die cut business and sales into end markets, such as construction and utility, where we have seen softness for several quarters. These sales declines were offset by growth with key Brady US distribution partners. Additionally, we believe several of the strategic initiatives in which we have made investments have allowed us to offset soft economic conditions.

Several of these market initiatives include the aerospace and defense manufacturers, where we have focused our sales efforts on specifying Brady products, and the energy market, where we've been able to capitalize on a growing market through product differentiation. We have also had success in the education market with our new VeriQuest product line and laboratory markets, where we again have focused our sales efforts with differentiated labels and printing systems. We are pleased with the growth in these end markets given the soft economic conditions in the US and some increased pricing pressure in the markets on our less-differentiated products.

Similarly, our strategy to grow sales to industrial and electronic manufacturers in Brazil and Mexico is continuing to yield strong results. Our acquisition of [Astaresco], combined with our sales team's strategic account focus, has proven successful, with good market acceptance of our products and broad penetration into these customers. Growth in Canada was also strong in all markets, but especially on energy, as we saw in the US. In our Direct Marketing businesses organic sales were down moderately due to declines in construction, retail, utility and manufacturing markets that we believe is a result of a softer economy. Our strategy to diversify our channels to include more e-business is beginning to pay off with stronger internet sales. In the People identification business, we are addressing some integration difficulties which contributed to a sales decline during the quarter, but we believe these challenges are mostly behind us.

Segment profit rose 4%, or $1.6 million, to $41.2 million in the quarter. As a percent of sales segment profit increased to 24.3% compared to 23.5% in the prior year, and this year's fourth quarter included a significant increase in R&D spend over last year. Through the acquisitions of SPC and DAWG we have strategically expanded into the [sorbins] market adjacency. These products are mainly petroleum based and the steep increase in raw material costs has led to a challenge to maintain margins.

Finally, our working capital as a percent of sales improved 19% in the fourth quarter versus the prior year. To offset the slowing US economy we continue to aggressively manage our cost base with accelerated Lean management across all functions, ongoing implementation of SAP, as well as manufacturing cost savings projects and facility utilization. We expect that these moves will provide cost savings to offset increases in raw materials and drive absorption of our facilities to improve gross margin. Going forward we continue to watch the US economy particularly. We are focused on numerous strategies to drive core product sales growth while continuing to drive operational improvements, sales efficiencies, and reduce our production costs.

With that I'll turn the time over to Peter Sephton, who will now report on our European businesses.

Thanks, Matt, and good morning, everybody. I'll turn your attention to slide 16. Sales in Europe grew by 16% in the quarter to $131.8 million compared to $114 million last year. Acquisitions contributed 8% and currency added a further 11%. Organic growth was down 3% due to the benefit we had in 2007 that you may remember from the no smoking legislation, which effectively ended in August 2007, and we did see a little bit of general softening in our Direct Marketing business in the UK. Looking now at our business by brand, our overall Direct Marketing sales were down against the previous year, primarily in the UK. However, our Direct Marketing business is new geographies and those that were not affected by the public smoking performed solidly and continued to post healthy growth figures.

Our strategy to extend our product offer, geographic reach and refining our multichannel science is progressing well. For instance, our two newer Direct Market business in Sweden and Portugal grew strongly in the quarter. Furthermore our success in Sweden is particularly encouraging because we drive most of our customer contacts in that country via the internet and from this we are developing a new start-up strategy that will allow us to expand our business at a lower cost across the region.

Moving now to the Brady Brand, Brady Brand was a good source of core growth in the quarter. Our MRO focus in this business showed good resistance against a general economic softness. The success in MRO is a deliberate strategy to focus our proprietary product line in industries that have good growth prospects and are more -- typically more resilient to economic cycles. For instance, our Lockout Tagout product lines are growing at double-digit rates across the whole of the region, boosted by the acquisition of Scafftag and our market focus on process industries. Similarly our People ID business grew solidly and our strategy to win business with major grocery retailers has proven to be very fruitful indeed. While the majority of our business is in MRO our OEM business continues to benefit from the shift away from commodity electronics and into more sophisticated parts of the medical industry. While this is at an early stage initial signs are very encouraging.

Another area of focus was ensuring that all our acquisitions are successful in Europe. Scafftag in the UK has become one of our top performers, combining excellent profitability with healthy growth rates, both in the UK and in the Middle East. SPC of Belgium adds consumable spill control programs to our MRO offer and continues to grow its sales as our distributor model is being implemented across the whole of the region. [Transfer Safe], our security sales business. posted its best quarter so far under our ownership reflecting the increased need for security and safety in freight and distribution. Moderna Technica, our Italian wire identification business, continues to perform well despite a weak economy. These businesses and brands are becoming an established part of the Brady business. All of this contributed to segment profit for Europe showing strong improvement over last year despite a very tough comparable. We grew profit at 17.3% to $38.2 million. We're pleased that also our operating profit as a percentage of sales improved to 29% from 28.6% last year.

Turning our attention now towards the future, as more and more indicators point towards a much tougher economic climate all over Europe in the coming months we've already taken a number of cost reduction initiatives to safeguard our position and margin. These actions should enable to us weather a turbulent economic environment. Our Direct Marketing business with such a diversified customer base is often a bellwether for general economic weakness and we expect to see some softening in the UK and Germany, in particular. The steps we've taken to firm up our margins through mix and strong cost control should help to us to mitigate these risks.

And with that I'll pass you on to Asia-Pacific and Al Klotsche.

Thanks, Peter, and good morning. I would direct your attention now to Slide 17. Asia-Pacific sales for the fourth quarter were $95.8 million, up 20% from last year. Organic growth was 11%, while currency added a positive 9% and acquisitions had no impact on our fourth quarter sales growth. As expected, we saw a strong quarter in terms of core growth. especially in our OEM electronics business. Our mobile handset business performed at or slightly above our projections for the quarter based on successful conversion of design wins to volume production.

Sales of die cut products and labels for entry-level phones, serving markets such as India, Africa, and parts of inland China continue to drive a bulk of the volume, but this quarter also saw a nice uptick in sales of higher-end solutions for a newly-introduced group of feature-rich mobile handsets. We believe that our innovative solutions are valued by the industry, as OEMs strive to differentiate themselves from one another. The continued success of product like Apple's iPhone, Nokia's N95 and the Samsung Instinct, combined with the rollout of 3G in China, is driving demand for higher performance materials and complex converting.

With the uptick in core growth relative to what we have seen over the prior quarters our challenge will be ensuring that we have enough capacity in the right locations to meet this fall's upcoming demand. China continues to be the largest area of concentration for this business, but other geographies. such as India and even Vietnam. are starting to show signs of growth. as manufacturers look beyond the borders of China for a variety of reasons. Regionally we will continue our increased efforts and spending around research and development to bring new and innovative solutions to this marketplace.

Competition really hasn't changed a lot in this market as it continues to be a mix of local and multinational converters. Downward pricing pressures from the marketplace, coupled with rising material costs, place a premium on our ability to consistently redesign our process for efficiency. We continue to look for opportunities to streamline our infrastructure to ensure the lowest cost delivery without sacrificing baseline service levels to our customers. Although a much smaller portion of the Asia product portfolio, our hard disk drive business has delivered solid results throughout the year. With demand for storage capacity continuing to rise in all forms, the need for continuous innovation is as strong as ever. Our research and development investments focused on higher-end solutions have paid off with our North American hard disk drive customers, as well as opening some new doors to Asian hard disk drive manufacturers. We also face aggressive competition in this marketplace, but to date our competitors have not been able to match our capabilities and geographic presence.

Our high-performance label business grew in line with the market, with a mix of established production as well as new solutions. Some of the products that we have successfully introduced in North America and Europe were launched in the later half of our fourth quarter in Asia and should have a positive impact in our fiscal 2009. Our safety and facility identification business continued to grow nicely with the support of a larger and more focused group of channel partners that we have been developing over the last year. However, we are starting to see slower growth rates in selected geographies, including our Australian business, which is a predominantly MRO-focused business. Although our business in Australia had grown organically, and with the acquisitions over the last two years, the softening economy is definitely having an impact on our overall business there.

Southeast Asia, outside of Thailand, continues to be a challenging environment for finding large sales growth opportunities. As the economy, such as Singapore, shift their focus from manufacturing to a more service-related economy we are adjusting our selling focus to more of our MRO products, such as plant and facility identification and wire marking.

Segment profit for the region was $15.1 million, up 40% from last year's segment profit of $10.8 million. The increased loading of our facilities has had a positive impact on profitability. We were also very pleased to see the efforts around process improvement and efficiency being recognized in our financials this quarter. Looking forward to our first quarter of fiscal 2009 we expect to see sales levels similar to our first quarter last year. You may recall this was a strong quarter for us last year. From a profitability standpoint, we also expect to grow over our prior year, but more so in the later portion of fiscal 2009, as the investments we are making in R&D and new product development begin to take hold commercially.

I will now turn the call back to Frank Jaehnert.

Thanks, Al. I'm very pleased to have had a strong end to fiscal '08 in which we had record sales, record net income and record net flow -- cash flow. As we look forward to the coming quarters we are optimistic about our opportunities, even in light of the soft economy which we face in the Americas and Europe. With that said, we could not have anticipated the speed at which the dollar correction occurred, nor did we anticipate a further deterioration of the global economy when we issued our original fiscal '09 guidance three months ago. As a result, we reduced our guidance today for the full year. We cannot change the economy and direction and pace of currency moves, but we can continue to make improvements to our business overall, our cost structure and our profitability. I'm very excited about the pace of our rollout of Brady Business Performance Systems throughout the Company. In fiscal 2008 we saw the power and success of having the entire organization focused on improving working capital. I expect that in fiscal '09, as we deploy the concept of Lean and strategy deployment through our processes globally, that we will see a similar success.

I'm also excited about the progress we are making in new product development. We believe that the system, personnel, and pipeline that have been built should begin to provide meaningful results in the future. While our SAP deployment is not on as a rapid pace as it was the last two years we continue to see the benefits of having nearly 70% of our business on a common IT platform and we will continue to leverage that through shared services and common processes. We also continue to look for acquisitions in our existing and adjacent markets to continue to expand our businesses. We still believe the goal of 5% top-line growth through acquisitions is a good pace long term, but we have seen over the years that the actual pace can be quite lumpy. This doesn't mean we have stopped looking. Finally we continue to look for ways to manage our cost structure in such a way that we can (inaudible) solid earnings per share growth while we expect soft organic growth and a currency head wind. This has become part of our culture over the last years and we continue to see opportunities ahead of us.

That is the end of our prepared comments and we will now start the Q&A. Nora, please provide the instructions for our listeners.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Charles Brady of BMO Capital Markets. Please proceed.

Thanks. Good morning, Frank. On your revised guidance, how much of that is currency related, how much is broader economy related?

This is Tom Felmer. The majority of it is currency related. As far as -- we didn't and we don't break it out on an allocation basis but the majority of it is currency related.

Okay, thanks. Just with regards to the European segment, the -3% organic growth there, how much of that is from the tough comp on the UK smoking legislation that's not repeated, and how much is just general economic softness in the UK and western Europe? And maybe you could just comment on specific markets the degree of softness you're seeing outside the UK, such as Germany, France, Spain, and western Europe in general?

I can comment on that, Charles. I think if you look at the hard numbers you could look at it both ways. You could say that all of it is down to the tough comp last year, and the decline was in the UK, as we pointed out. However, there wasn't enough to compensate. We expected general growth through better mailing so that gives us an indication that there is softness and certainly in the UK economy, and the UK economy is always the first to react with a more flexible labor market. So we've seen it in the UK.

You could analyze the numbers and say it's all down to that tough comp, but there wasn't enough upside to compensate for that decline in no smoking legislation, which we anticipated. We would have thought that in the UK we'd do a little better. As we pointed out, going forward it's difficult to predict, but I think your best judgment would tell you with all the indicators that we're seeing in Europe and with the spread of customers that we've got in our Direct Marketing businesses we may start to see signs in some of the other developed economies across Europe where we have good presence, in Germany in particular, so that's what we're trying to point out.

Thanks. Frank, with regard to your comments on acquisitions, obviously they can be lumpy but I wonder if you could just give us maybe some more color on the pipeline as to how looks today and maybe pricing multiples, things of that nature?

Yes, it's interesting. I've gone through times like this before and it's always the same. When the economy slows down then it becomes more difficult and a company's profitability is challenged or maybe goes down. The sales of the company which we are dealing with in many cases are privately held companies and they have a certain number in mind which they need to retire, and if they cannot achieve this number then they just don't sell. They just wait it out. Typically they are very well off people, and just say, why would I want to sell now when you're not willing to pay me the price I'd like to have. And we have seen this more lately, but typically what happens, after awhile a sense of reality sets in, and all of a sudden they might say, you know what, maybe I cannot get the price any more which I hoped I could get, or the economy turns around, and their profitability comes up, at which time we can then go in the market again and buy. But it's not like we are seeing fire sales. All of a sudden you can have bargains all over the place. We have not seen this at this point in time at all.

Thanks very much. I'll get back in the queue.

And your next question comes from the line of Will Stein of Credit Suisse. Please proceed.

Thanks, guys. Allen, I don't want to pick on you but I'm going to talk about the Asian growth. Very actually confused as to the guidance of flat year over year. I think, unless I'm doing something wrong in my model, we're going to get about 7% year-over-year growth just from ForEx, so to get to flat year over year we're going to need a decline in organic growth and coming off -- we've finally balanced. We saw the first quarter of substantial year-over-year growth in a while in the July quarter that you are reporting today. Your guidance is basically suggesting that 11.5% is going to go back down to like -7%. Can you help us understand that, or is there a bit of conservatism built in here?

Well, I can tell you a couple of things. We saw a spike in our business in the fourth quarter and that's typically a spike that we wee in the first quarter and there's maybe a number of reasons for that but most of the OEMs are building up their supply chain so that they can get inventory into the systems for the holiday rush and so that means they've got to get the inventory typically into the system by the end of November and December. Typically for us historically we've seen August, September, October be a busy buildup season. We actually saw that buildup happening a little bit sooner this year. When you look at the specific programs that we've been involved in, I guess the programs were a little bit -- they were ready earlier than they have been in other years, perhaps indicating a smoother transition from engineering to production. The other thing that could enter into this, and we honestly don't know this yet, is the Olympics in China. There was a lot of concern about what is this going do to the supply chain, and we think that people tried to pull things ahead a little bit in terms of normal cycles to compensate for that.

So those are two macro economic things. And then we're concerned about the continued pressures from a pricing standpoint and we're really not sure what models are going to sell the best coming into this fall season. Our indications are coming out that it's the lower-end phones that are going to do the best and so as we're looking at our production mix that's where we're going to be impacted by lower selling prices. So I guess -- I'm not sure I'm answering your question as definitively as you'd like but that's the best information that we have at this point in time. I think when we talk at the end next quarter this will become a whole lot more evident to us, but we didn't intentionally build conservatism into our comments.

Maybe I'm getting it totally wrong here. Al talked about flat first quarter. I don't think you made a comment about the year, did you?

No, I just --

Flat year over year in the quarter was the comment, right?

First quarter, right? Yes, I just want to make sure that he talked about the first quarter, he didn't talk about the year, and I don't think he wants to talk about the year because it's -- there's a lot of uncertainty but we talked about the first quarter.

Okay. Just digging a little deeper on that can you remind us, in Asia what's the split between OEM and MRO, and within OEM, the split between handsets and drives? I assume handsets and drives make up all of it, or maybe the vast majority.

The latter portion of your question broke up. Could you say that last sentence again, please?

Yes, drives versus handsets and assuming that that's the majority or the entirety of Asian segment -- pardon me, of the OEM segment not Asia.

Yes. I'll give you some generalities and I think this'll directionally point you to where you need to go. About 70% of our business in Asia is OEM focused and 30% would be MRO focused, and then within that OEM focus of the business would say that our mobile handset business is well over 50% of that, so it's the majority of it.

And besides handsets and hard drives anything else of note in the OEM business?

Well, it's a little bit hard. Even as we subcategorize it internally by our sales people you have mobile handset, you have what we call consumer electronics, and those two have really blended together. We used to call Apple the consumer electronics account, and now we're -- I'm not sure what you'd call Apple. These devices as they converge on each other that's where it makes it really difficult to answer your question, and even storage to some extent is starting to come into the mix here so that's why there's a little bit of ambiguity in the answer.

[OEM's all (inaudible) to its high-performance labels, it's a wire marker for data communications, and, of course, all disk drives it's a portion, too.] I think historically we have said -- Barb, correct me if I'm wrong -- I think we have said handset is by far the largest followed by high-performance identification, and all the others. So hard disk drive is smaller than high-performance identification labels.

Very helpful. Thank you very much.

And your next question comes from the line of Robert McCarthy of Robert Baird. Please proceed.

That's Robert W. Baird, of course. Morning, everybody. (LAUGHTER)

Hi, Rob.

I'd like to try to get to you flesh out your outlook just a little bit more. First in terms of -- and I'm talking about fiscal '09. In terms of organic growth, I -- clearly you're forecasting some kind of a negative number for overall organic growth. Does your current outlook include positive organic growth for the year in any of your three regions?

We don't -- as you know, Rob, we don't break it out that way. We're just looking at our -- the current state of business and current state of of the economies and we're expecting similar things going forward.

Okay. For the full year can you talk about your expectations for -- based around this forecast would you expect cash from operations to increase year to year?

I guess we would expect -- as we've talked about the implementation of BBPS and continued emphasis on working capital throughout the organization, I think we've said in previous discussions we expect that there's still opportunity to improve so I think there might still be some up side in that number.

Okay. And can you talk at all about your operating margin assumptions that are embedded in the outlook, again with a regional focus? Where I'm trying to go, Tom, is I'm trying to get some idea of which region you have the most favorable outlook for and which region you have the least favorable outlook for, it's really that simple.

That's a simple question. (LAUGHTER) It's really a simple question, but I'm afraid the answer's not as simple. That's a lot of uncertainty. We expected Europe to slow down sooner or later, maybe a year ago and it just didn't happen. All of a sudden, of course, now Europe is slowing down. It's really, really a difficult question to answer, so I'd just like to leave it at that.

Okay. All right, I'll get back in line.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Ajit Pai of Thomas Weisel Partners. Please proceed.

Good morning.

Good morning.

A couple of quick questions. I think the first one goes back to the cash flow. I think you've had some pretty incredible cash flow generation over the past four quarters as business has slowed and the working capital, you've managed to become far more efficient, but going into next year I think there's already a question you tried to address a few minutes ago but I didn't quite understand the answer. Do you think that you can continue to at least sustain the cash flow levels that you had this year or do you think that there's potential that you could actually see an increase in cash flow as you are forecasting increase in earnings for '09?

I thought that I answered it already but as I said, with the continued focus on working capital and the implementation of BBPS we do believe that there's still upside in the cash generation so we would expect it to at least be equal to this year and we're hoping that it's even more.

Got it. And then, while you have provided a number for the amount that you have used to buy back shares in this quarter, could you give us an update as to what your strategy in terms of uses of cash are and also what is the average price you paid for a share you repurchased during the quarter?

I think (inaudible) the uses of cash, as far as that question goes. We've stated that the primary uses of cash are clearly for internal growth, through expenditures in new product development, geographic expansion, all the organic initiatives that we have in place. Beyond that we still feel that acquisitions play a key role in our growth strategies. continue to look for acquisitions, both in our core space and our adjacencies. We have not backed off over our intentions there at all. And we still are looking to -- we increased our dividends this morning -- or announced the increase of dividends this morning and the buyback of shares. We bought $42 million worth in the year. As far as price that we paid -- it was 1.3 million shares.

Got it. And then when you're looking at the potential acquisitions, I think you talked a little bit about the private acquisition that you've historically made and reluctance right now to sell, but public market valuations have come down and Brady also has become a much larger company with a much more solid balance sheet and cash flow generation. Are you beginning to see acquisitions on the public market side that could potentially belong to Brady right now?

We certainly look at the public market, as well, no question. You have a very good point. Brady has become a larger company and this provides us the opportunity to also look at the public market, so we are looking at this, as well as privately-held markets. Historically we have primarily played only in privately-held markets. However, Varitronics was a publicly traded company, so we have done this in the past. We have tried a takeover once in the UK of [Crichley], which was a publicly-traded company, so it's not something we have not done or attempted to do in the past. But as you pointed out [we are becoming] a larger company, so it's -- probably over the next couple years it's probably safe to assume that it might play a larger role.

Okay. And then last question is on the tax rate. I think you've guided to a 29% tax rate for next year. Could you give us some indication looking further out whether that tax rate still has potential to come down over time or whether we should look at the 29% -- 28%, 29% tax rate as a long-term stable tax rate?

Obviously we're always looking to improve our tax rate but it's hard to predict. It all depends on where the mix of profits are generated around the world. So we feel 29% is a reasonable number, but we continue to try and move it down, but if our profits start coming in higher tax regions that becomes a. challenge.

Also, the corporate tax rate in the US is kind of unpredictable. We thought it was pretty high and we'd hope it could come down but we have listened to some of the comments being made by politicians, you wonder if this is healthy assumption that US corporate tax rate might be the thing. There are many, many things which play into this.

Got it. Okay, thank you so much.

Your next question comes from the line of Anthony Kure of KeyBanc. Please proceed.

Good morning. Most of my questions have been answered. Just had a quick question on the rationale behind the reallocation of Direct Marketing back into the Americas. I know management change is what drove it but if you could just speak a little bit to what went on there?

Your comment is really what drove it. We combined the management and what we've been doing is consolidating a lot of the organization underneath it. We've always run Europe that way and we see the best way to run the Americas is the same way, and it's simpler for us to run it that way and ultimately report that it way.

Of course, it's driven by -- we believe opportunities to reduce our cost structure and improve profitability.

Okay. So that's -- you just split is it about a year ag, and now it's come back, is that more about the cost savings then. or -- just seems like a pretty rapid shift within the last year or so from back and forth.

We agree. But, yes, it's driven by -- we just the opportunities for cost reductions and profit improvements and we're kind of similar now like we are in Europe and Asia. I can really not disagree with your argument. You ripped it apart and then you put it is together, but we just feel we have more opportunities for running a streamlined business by putting it together.

Okay, thank you.

And your next question comes from the line of Will Stein of Credit Suisse. Please proceed.

Thanks. I'm wondering if you can comment on raw material price trends. We're seeing the commodities come off pretty dramatically, as dramatically or maybe even more so than the degree to which they rose only a few quarters ago, and wondering if there's a delay in when you wind up seeing those -- seeing increases or decreases to your material, because clearly you're not buying directly from the mines, right? Any comment on the trends there?

We have histor -- we've gotten this question over time historically and typically what we have said, and that's how it is, we don't talk too much about material price increases. It has historically has not been a major issue for Brady. It has become lately in [solvents]. We made two acquisitions in solvents and they are much more dependent on resin prices, so all of a sudden we talk a little bit more about this. And certainly we have felt the pressure in material cost increases in this area and we're looking forward tot he reduction in oil price to sooner or later come back and help us. But we are also not able to fully pass on the material cost increases to our customers because it's a competitive market. But you're right, the pressure should hopefully go down over time. But for the rest of our business --Tom, if you have any other comments, please chime in -- has never been such a big issue for us.

[The gas as they] were going up we said it wasn't have a material impact on us and likewise, as they come down the answer is the same it will not after material impact.

Can you comment, though, as to the timing of -- I understand that there's -- you can't pass it all on to customers, so maybe eventually you pass some of it on over time because all the competitors are facing the same headwind, but as far as the cost, I'm curious if, for example, there's a long enough lag you could still see those material costs increasing today, and that's really what I'm -- I'm not trying to get to you quantify, I'm just trying to give you-- ask if you could provide a directional view?

Yes, I think you probably don't want to waste your time in trying to put something in a model because I don't think it's material. What we are more looking at is postage increases for our Direct Marketing business, so that's something that really makes a difference for us. Printing for our catalog business, as well. These are more -- so if something were to happen here, postage increase and so forth, I think that's probably when we should talk. General oil prices or anything like this or other commodities like steel -- steel doesn't make a difference -- copper and all those other commodities, it really doesn't make a big difference. I wouldn't know what to tell to you put in your model. It's not something that we discuss a lot, because there's not too much impact on our P&L.

Okay. Just one other quick one then. We were talking a minute ago about the repurchase during the quarter. Can you remind us what the current authorization is? Maybe you mentioned it, I just missed it. Is there more authorized that's yet to be done?

We're work off a one million -- an authorization for one million shares.

Of which we have purchase -- repurchased --

And there's 650,000 left.

At the end of the quarter how much have we left? About half of it?

We had a bout 405, 000.

About 405,000 shares --

We bought.

-- that we purchased. -- in the quarter.

So about 600,000 left?

Yes.

And what's the life span of that authorization?

I'm sorry?

Is the authorization good for another year, or --?

It's indefinite.

Indefinite. Okay, thank you.

And your next question comes from the line of Charles Brady of BMO Capital Markets. Please proceed.

Thanks. I just want to make sure I understand with regard to your guidance. Your assumptions for currency in your revised 2009 guidance, are you assuming currency rates stay where they are today, or is there some other assumption baked into that guidance?

It's about where they are today. We -- typically we don't forecast our currencies out in our guidance so it's assuming a comparable guidance -- or comparable currency as to where we are today.

Okay. Thanks very much.

(OPERATOR INSTRUCTIONS) You have no questions at this time.

Thank you very much, Nora. We thank you again for your participation today and would like to remind you that the audio and slides from this call are available on our website. The replay of this taped conference call will also be available via the phone beginning at noon central today. The phone number to access the call is 888-286-8010, with a passcode of 28908337. The replay will be available until 11:59 p.m. on September 24th. As always, if you have questions, please contact us. Thanks for your interest in Brady and have a great day. Nora, if you could please disconnect the call.

Thank you very much. Ladies and gentlemen, thank you for your participation. This now concludes your conference. You may now disconnect. Have a great day.