Brady Corp (BRC) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 fiscal 2009 Brady Corporation earnings conference call. My name is Becky, and I will be your coordinator for today. (Operator Instuctions)

I would now like to turn the presentation over to your host for today's call, Ms. Barbara Bolens Director of Investor Relations. Please proceed.

Thank you very much. We're glad you could join us for our conference call this morning. During the call will you hear from Frank Jaehnert, CEO, and then Tom Felmer, CFO who will be 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 assist 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 www.investor.bradycorp.com. You do have a couple of minutes to get to those while we go through Safe Harbor Statement and other usual information.

Please note that in this call, we may make comments about forward-looking information. Words such as expects, believes, and anticipates are a few examples of words identifying a forward-looking statement. It is important to note that forward-looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release this morning and in Brady's 10-K filed with the SEC in September 2008. Second, please note that this teleconference is copyrighted by Brady Corporation, and there may be no rebroadcasting of this without express written consent of Brady. Note also that we will be taping the call and broadcasting it on the Internet, and your participation in the question-and-answer session will constitute your consent to being recorded. Thank you and now here's Frank Jaehnert.

Thanks, Barbara, and good morning, thanks for joining us. (inaudible) in our second quarter are down 27% with organic sales down 21% and exchange rate translation shaving off another 6%. The worst global recession in our lifetime affected all our geographic regions with a somewhat more pronounced weakness in businesses selling into the OEM market. The weakness in sales in our second quarter was compounded by several holidays such as Christmas, New Year, and the Lunar New Year celebration in Asia, which caused many of our customers to shut their businesses down for extended periods, sometimes for a couple of weeks or even more. This rapid deterioration in sales was much more than what we anticipated. Fortunately, because of our swift and bold actions to cut expenses, we were able to mitigate the impact on our bottom line. Our net loss was $4.2 million which included after tax restructuring charges of $14 million, primarily for severance related to our workforce reduction. Net income before restructuring charges was $9.8 million, or 3.7% of sales.

While we believe that business is not going to be as weak going forward as it was in the second quarter, we stand ready to make further adjustment in our cost structure should this become necessary. You will hear more from the regional presidents that business was weak across all geographies and all businesses; however, we believe we have not lost market share. As a result of the much weaker than anticipated sales in the second quarter and our limited visibility to any improvement in our end markets, we have reduced our guidance for the fiscal year. Tom will go through the specifics of the guidance but it reflects current business conditions and does not anticipate additional restructuring charges beyond what we have already announced. I will return after the regional reports to provide color on how we are approaching the remainder of fiscal 2009. Now here's Tom.

Thank you, Frank. Starting on slide 3, I would like to walk you through the financial highlights for our second quarter. As Frank mentioned sales for the quarter were $266 million, down 27% or $98 million versus the prior year. Even though we saw dramatic decline in sales in the quarter we were able to reduce costs to a point that we only saw an 80 basis point decline in gross margins versus prior year down to 47.3%. We also aggressively managed SG&A bringing these costs down $29 million from prior year, resulting in a 150 basis point increase as a percent of sales to 35.1% in the quarter. We've executed about two-thirds of the year's planned restructuring activities in the quarter, which resulted in pretax charges of $19.4 million.

By region, our restructuring expense was approximately $11 million in the Americas, $6 million in Europe, and $2 million in Asia. Severance expense is made up -- severance expense made up the majority of our restructuring and the closure of our facility in Bratislava was the only material facility action taken. The cost savings associated with the restructuring activity will be split approximately evenly between gross margin and SG&A. On slide four, we detail the financial breakout of the restructuring charges taken during the quarter. Of the total $19.4 million, $17 million of that was employee related severance, $1.2 million asset write-offs, and $1.1 million of other charges. We paid out $5.9 million of the charges during the quarter and an additional $12.5 million remains to be paid out in future quarters. Operating income was $4.6 million for the quarter, down 89% from the prior year. Excluding restructuring, operating income was $24 million down 43% from prior year. We generated a net loss of $4.2 million or $0.08 per share for the quarter. Equities excluding restructuring Brady had net income of $9.8 million, or $0.19 per share.

And despite the challenging quarter we were still able to generate a positive cash flow from operations of $26.7 million in the quarter. CapEx was $6.5 million, depreciation and amortization was $13.5 million. On slide five, you can see the details of our 27% sales decline with organic sales down 21% and currency contributing 6% of the decline. We saw double-digit declines in all regions. On slide six we show slight deterioration of gross margin and SG&A compared to prior year. However, as I said a few minutes ago, considering the 27% drop in sales, we feel that the aggressive cost reduction actions that we announced in November were both timely and well executed.

Next, on slide seven, we continue to invest in R&D and new product development. R&D investment was up 40 basis points as a percent of sales. In the quarter we extended our successful IP printer with an auto cutter feature. We also introduced a new label design software, for Labelmark version 4.0, as well as environmentally friendlily line of Permasleeve (inaudible) ID labels. Slides eight and nine provide graphic views of our quarterly operating income, net income, diluted earnings per share, and EBITDA compared with prior year. On slide eight, you can see that excluding restructuring charges, operating income is down 43% and net income is down 63%. The reason net income is down more than operating income is due to a decline in other income expense and the increased tax rate for the quarter.

On slide 10, you can see that we continue to generate significant cash in our business as second quarter cash flow from operations was $26.7 million. On slides 11 and 12 we highlight Brady's strong balance sheet which shows a healthy cash balance of $185 million as well as our debt of $479 million and reasonable leverage of 2.1 debt to EBITDA and a 1.3 net debt to EBIT ratio. Our guidance -- our updated guidance for fiscal 2009 can be found on slide 13. While it remains very difficult to predict the economy for the next six months we feel that it is prudent to take our net income guidance down $10 million from the guidance that we provided in November. Assumptions that we have built into our guidance include that the economy will remain soft for the balance of our fiscal year. We anticipate mid teens percent declines in base business for balance of the fiscal year. We expect current -- we assume current exchange rates. We assume a full year tax rate of 28%. Capital expenditures of $30 million and depreciation and amortization of $60 million for the full year both unchanged from our previous guidance.

In our November call we stated that we would incur pretax restructuring charges of $30 million that would generate approximately $45 million in pretax annual savings, two-thirds of which we will realize in fiscal 2009. In the quarter, we recognized $19.4 million of our planned restructuring and remain on track with our original guidance. With these assumptions, we have updated our guidance for the year and expect to generate pre restructuring net income of $85 million to $95 million, and $1.61 to $1.80 diluted earnings per share. Including restructuring charges we expect to generate $65 to $75 million of net income, and $1.23 to $1.42 of diluted earnings per share. With that background we will continue with our regional updates. Matt Williamson will begin with the America's region.

Good morning. Thanks Tom and please refer to slide 14. America's sales in the second quarter were $123 million, which was down 22% compared to the prior year. Organic sales declined 20%. Acquisitions had a 1% impact on the quarter, and currency negatively impacted growth by 3%. In the US, our Brady business was down significantly to the prior year driven by two factors. The first is a dramatic downturn in the economy which is negatively impacted products sold to markets such as manufacturing and construction. As companies, business levels have slowed considerably this has driven a drop in demand for our products. We also believe there's been an effort among our end users to reduce inventory. The second is related to our distribution partners decreasing inventory which is confirmed through their point of sale shipments to their customers versus their actual purchases from us. Their point of sale results or their out-the-door sales show much less of a decline than our actual sales through our channel partners. This gap as a result of de-stocking is significantly greater than it was for the same quarter last year.

In Brazil we experienced a significant decline which is in sharp contrast to the strong results we had been experiencing there. This is driven by a sudden slowdown in the electronics and automotive OEMs, many of whom closed operations for 30 days around the holidays. In Canada, the Brady business was down significantly in the quarter driven by deteriorating economic conditions as well as cancellations in oil sands related projects. Mexico had nice growth but had slowed to modest growth toward the end of the quarter. In our direct marketing businesses, organic sales were also down significantly although much less so than we realized in our Brady business due to the greater mix of compliance products sales. The weakness that we have experienced is being driven by overall economic conditions with the declines in manufacturing sector proving to be the greatest challenge. The direct marketing business in Canada grew slightly.

In our people ID business, we are seeing a sales decline, as many customers and markets delay capital projects of our proprietary software and systems, even though business security remains a market driver. In addition, sales of our badging products have been hurt as attendance is off at off site meetings, conferences, and trade shows, all of which generally require badging. In addition, the tremendous number of layoffs we are seeing in US businesses directly affect the demand for employee badging products. Segment profit for the Americas declined 31% or 10% to $22 million for the quarter. As a percent of sales, segment profit decreased to 17.9% compared to 20.5% in the prior year. The loss of sales volume has impacted our ability to absorb fixed costs and overhead.

Our margins for some products are coming under greater pressure as customers seek to bid multiple suppliers and demand lower prices. To offset this impact we are more aggressively managing our cost base in a number of ways. For example, in the quarter, we realized savings from the headcount reduction taken at the end of December, and we will fully realize this impact in future quarters. We are passing along price increases where we can but these are limited. We continue to apply pressure to our suppliers to realize lower raw material costs, now that commodity linked material costs have come back down. Third, we continue to implement lean management principles across our businesses in order to drive better space utilization, labor efficiency and cycle times. In addition, we have specific initiatives in place to significantly drive down our working capital over the next quarter so as more in line with our current sales volume run rates. Now I will turn the time to Peter Sephton who will report on the European business results.

Thanks, Matt. I'll bring your attention to slide 15. Sales for the European region were $87.2 million, down 29% against last year. Organic business was down 17% while stronger US dollar against our European currencies had a 12% negative impact. This quarter there was no effect from acquisitions. When we look at our businesses regionally, we see declines in most geographies driven by the economic slowdown and extended plant shut downs. The results are surprisingly mixed. Our business in France, the Benelux, and our German direct marketing businesses saw a modest decline, whereas our UK business declined more sharply. This mix of results is driven by the differing speed of impact the recession is having in the region which in turn is impacted by more restricted employment markets in certain countries.

A better analysis of the underlying results of our European business and the economic dynamics that play across the region comes from analyzing the mix between OEM and MRO, and here Europe's focus on MRO helped mitigate sharp declines in our OEM businesses. Our businesses and product lines serving the MRO market which includes our direct marketing businesses, make up the majority of our sales in Europe and declined by low double digits over the second quarter of last year. In MRO our direct marketing businesses sales held up reasonably well, and showed a low double digit decline in constant currency. No country was immune from the slow down although lower sales were more visible in northern Europe and the UK than in southern Europe. In France a series of successful multichannel campaigns helped to soften the effect of a weakening economy.

In the UK our sales were mixed as sales to the public sector from our safety shop direct marketing brand increased solidly. While our Seton UK brand declined more sharply as it's traditional market is in the private sector. All our recently acquired businesses [Transporsay, Scattag and BIG] are performing well, and this supports our strategy to acquire high-growth MRO businesses with a strong value proposition. Turning now to our businesses serving the OEM markets which include high-performance labeling and die-cut, these suffered a much more pronounced decline. Plus we anticipated this demise earlier and planned for the closure of back-end operations at the start of this fiscal year. The decline in this part of the business was very rapid. As a result, we have made further cost and staff reductions, ensuring that we're able to maintain our first-class service to our key customers and continue to provide value. (inaudible) profit was $22.9 million, a decline of 26%, but in local currency this decline was slightly less than the decline in our organic sales results at about 15%.

We should point out that quarter two of last year in Europe saw an exceptional 37% increase in profit so this is a tough comparable. More encouragingly, profit as a percent of sales improved further from 25.3% to 26.3% helped by strong cost management. Overall we're pleased that the absolute value and quality of our earnings is proven to be very robust in a very challenging economic environment, allowing this to continue to invest further in profitable and sustainable businesses. Similar to the rest of the world, Europe is now tin thick of recession which is hitting the continent hard and in many aspect faster than most governments expected. Our capacity in Europe for generating a strong profit and cash flow from a diverse customer base is very solid. We believe that this together with our focus on MRO and shifting resources to more profitable businesses will help us to ensure that even with the sharp sales decline, our profitability and quality of earnings will remain solid. I will now turn the call over to Asia Pacific with Al Klotsche Over to you, Al.

Thanks, Peter. We will now focus on slide number 16. Asia Pacific sales for the second quarter were $56.3 million, down 34% from last year's sales in the first quarter which were $84.9 million. Organic sales declined 29% while currency had a negative impact of 5% and acquisitions had no impact on this quarter's sales growth. While all of our product lines were impacted by the slowdown, the sharpest down turn has been with our electronics business. This comes on the heels of two very strong quarters prior to this. You may recall that Brady's Asia Pacific sales in the last two quarters grew at a very nice rate.

Our sales to mobile phone customers were up approximately 30% for the fourth quarter of fiscal 2008, and in the first quarter of fiscal 2009. While during those same six months our customers reported sales were down 2%. In the most recent quarter; however, our sales were down 34% while our customers have reported a reduction in sales in the neighborhood of 10 to 15%. In addition to this, they have reported a reduction in their inventories of 15%. To us this clearly indicates that our strong sales in the second half of our fiscal 2008 wound up in inventory which was consumed during the end of the year and the beginning of 2009, thus causing a significant slowdown in our orders. Taking all things into consideration, we remain confident that our market share has remained constant over this period of time. The demands for working capital and pricing pressures have driven some of our smaller competitors out of the marketplace. There now appears to be some acceptance among our customers that there is little excess margin to be squeezed out of the supply chain.

Throughout the quarter we took action to reduce our variable costs including the shortened work weeks, restrictions on discretionary spending, and reductions in our work force. We are pleased to see that a number of our strategic suppliers have begun working more aggressively with us on cost reductions and lower cost material substitutions. Similar to other parts of the world, governments across Asia have introduced economic stimulus packages, many of which are focused on pumping money into infrastructure development. This should provide some nice opportunities for us in coming quarters for our MRO products. Segment profit for the region was $4.1 million, down 67% from last year's segment profit of $12.7 million.

As mentioned earlier we have taken significant measures to reduce costs in our business, but the full effect of these reductions was not realized during the second quarter. Looking forward, we expect Q3 revenues to look much like our second quarter. And if industry cycles repeat themselves, OEM sales should begin to pick up towards the end of our fourth quarter. Our focus on the design centers remains and our success rate appears to be very much in line with prior years. We remain confident that we will be able to retain market share and are well positioned to bring new solutions to the design centers with a major push on our new products. We continue to use lean techniques to drive waste and cost out of our business, and will continue to optimize our footprint by the end of this summer. I will now turn the call back to Frank Jaehnert.

Thanks, Al. As we have heard from our business leaders we are taking this recession very serious and are committed to do whatever it takes to not only weather the storm, but to emerge from it as a winner. We know that our strong financial position, especially our strong balance sheet, provides us with a competitive advantage which will allow us to continue to invest in those opportunities that will position us well for the future, such as research and development, new orders, e-commerce, the Brady business performance systems and acquisitions. We thank you for your interest in Brady. We will now start the Q and A. Becky, please provide the instructions to our listeners.

(Operator Instructions) And your first question comes from the line of Allison Poliniak of Wachovia Securities. Please proceed.

Hi, good morning.

Good morning, Allison.

Frank, just going back to something you said in your opening remarks, I think you said sort of sales, you're not seen as weak going forward. That mainly due to the holidays that won't be repeated in fiscal Q3 or is it something else that you are seeing?

Yes, that's the main reason. We had Christmas, New Year, Lunar New Year in the second quarter. We certainly don't have this repeating itself. I think the other aspect which we considered is inventory reductions. In our distribution channel and as Al mentioned, some of our OEM customers. So we think we had a double whammy, and we do not expect this to go forward. Of course, what we don't know is what's the economy going to do? But everything else being equal we do not expect such a weak quarter.

Sure. I guess second, Al, you touched a little bit about this, but looking out, the OEM electronics, the competitive landscape in Asia right now, just given the significant volume declines, do you think that could force even more of the smaller competitors out of that industry for you?

I do. We've seen some of that happen over the last quarter, and I think that cash flow becomes a major issue when you are holding inventory an sales aren't coming in as quickly as before. So we expect some of the smaller and weaker competitors to either drop out or fade away.

Okay. Great. Thank you.

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

Thanks. First a housekeeping question. What exchange rate primarily Euro, are you embedding in your guidance?

Current exchange rate, it's the Euro it's just under 130.

And, I don't know if you covered this-- how did the hard disk drive market fair in the quarter?

I didn't specifically address that. It was not down as much as our mobile phone business, but it was still hurt somewhat but not to the same degree.

Do you have an expectation for mobile handset sort of forecast or what that business will look like remainder of the year?

Well, I can sort of repeat what some of our customers are telling us. Our customers -- originally, going back a quarter ago, they said that it was going to be a slow start to calendar 2009 with maybe 5 to 10% drop-offs in sales versus prior year, then they saw it picking up in the second half. I think we're starting to read between the lines that maybe they see a little bit of a delay in that pickup. The best thing I can tell you is that our market share is remaining steady. Our new product development is focused on some of the higher end solutions. So we still expect softness in this market with hopefully a rebound coming towards the end of the calendar year as people build up for 2009 holidays.

Thanks. Frank, can you just help me understanding better your visibility into the distribution channel, and I guess more specifically, insights you get from exactly what the inventory levels are and how much more de-stocking might have to occur.

Fortunately, we have Matt with us, who keeps a close watch over this, and Matt, what can you share with us?

Well, we don't have, first of all, a lot of specific information on that, other than what our sales managers and channel managers would get access to in discussions with the managers of our distributors. So that is anecdotal information and what the plans are for these distributors. And these are things that we're being told by these distributors. The other thing that we have, which is more specific information is we're able to track the sales of our products versus what they're purchasing from us. And I touched on this on my comments. So we can compare this over time, and there's no question that we are seeing that they are de-stocking, and that their out-the-door sales are more positive than their purchases from us. So we're tracking this, and that probably is the most factual information that we have. What we see every quarter and how that compares to the previous year.

This would be for a handful of larger distributors.

Right,

That may be a point of sale information about our own product.

Right, the major national chains that have inventory in various different ways. They may have them in regional centers versus individual stocking locations so to properly get commission to our sales people we have to get point of sale information. So that gives us specific insight into what they're buying versus what they're actually selling.

Is there any sense of what the out-the-door sales would be for those distributors on average, what the differential would be between what they're actually buying from you and what their out-the-door sales would be?

Do we know that? Is that what you are asking this.

Yes, and I guess I'm saying, you are saying out-the-door sales are not as -- have not declined as much as the actual purchases directly from you. I'm just trying to get a sense of how wide that differential is.

I think these are two questions. First, do we know the answer. Yes. Are we willing to share it, and the answer is no. I don't want to be -- come across as we don't want to tell you. I don't think it's big enough number to be representative. So we have a couple of larger distributors where we know it, and I wouldn't want anybody to draw a conclusion. If there is a gap of 5% or 10% or something like that, that would you apply it across the board, maybe even across other countries.

So I just ask for your understanding in this respect. Visibility is very, very low. I'm more concerned about the overall visibility of our business. We don't have back orders or anything -- we get orders today and ship it tomorrow. Things can change daily, but what we do believe is that both in large OEM account and in larger distributors, that we had a reduction of inventory, which led to our sales to our distributors and OEMs being less than what there sales were out-of-the door of our products. We think this is going to come down going forward.

Thanks very much. That's very helpful for the color. I appreciate it.

And your next question comes from the line of Ajit Pai of Thomas Weisel. Please proceed.

Yes, good morning.

Good morning, Ajit.

Couple quick questions. I think the first one, you talked about opportunities in MRO and Asia. Could you give us some color right now? I think the OEM business has been quite weak there. What the mix of that business is, how much is now MRO and how much is now OEM. Then on that same question, I think you talked about in the supply chain people acknowledging that there isn't any excess margin to come out. So by that, what exactly did you mean in the commentary? Does that mean that your pricing is now stable, or does that mean that they will give you better pricing because there's less absorption of overhead?

Well to your first question, about our mix in Asia, we really don't reveal all of the specifics, but we're still over 50% of our mix coming from OEM, but it's much closer to 50 than it has been in the past. Relative to the pricing question, I guess what I would say is, we've had to have some pretty difficult discussions with some of our OEMs and look them in the eye and say, the quarterly price reduction discussions that we've historically had with you, we're just not going to be able to have for the foreseeable future because there's nothing left to give. The reaction to that, certainly they don't warmly embrace that but the reaction is-- it seems like they're getting that message pretty consistently across many of their different suppliers.

Okay, so then it's fair to assume that from a pricing perspective, things are flat, then for modeling purposes we just assume that fixed overhead leverage could still impact margins depending on whether we're modeling an increase or decrease in volumes. Is that fair?

Yeah, I'm digesting your question a little bit. I think so.

Got it. And just looking at the sort of acquisition pipeline, you spoke that de-leverage still sort of generating cash, valuations have been coming in, in the broader market, and it's been awhile since eve made a very significant large acquisition so could you give us color as to whether your lenders have tightened or relaxed the lending to you, whether any -- seeing any changes in their views on allowing to you borrow for acquisition -- can't use just cash flow from operations, and what you are seeing in terms of valuation expectation in the market?

Ajit, let me take this question. The reason that it didn't make many acquisitions, I think we didn't make one for a year now, it's not so much cash related or lending related as it is related to us just being careful. What we see, we have had conversations -- we have ongoing conversations with acquisition targets, and we just realize all of a sudden (inaudible) starts to cave in and go down big time. And then the question is how bad is it going to get, and should we at this point in time pull the trigger and buy this company.

Price expectations from sellers are still based on how business was a couple months ago. So they're not necessarily beginning to come down with price expectations yet. So high price expectations still on the seller's side. It's us being very cautious about how business can look like. So our strategy right now is to continue to establish relationships, hold relationships, but with the understanding that we might not do anything for half a year until we have a better visibility of how is this economy is going to play out. So that's, I would say, the primary driver of us not doing as many acquisitions.

Got it. Is there a geography that you are still focused on some I think Asia as a percentage of your overall revenues is still small. Would it be focused there, or you are looking at opportunities across the globe?

We are look at opportunities across the globe. However, Asia has always been a more challenging geography to make acquisitions. If you look at how many acquisitions are being done in Japan, for instance, it's not too many. Maybe 100 a year by foreign indices. Countries which are maybe a little bit more open to acquisition activity in Asia, it's still a far cry from what we can see in Europe and in the United States, and so I think over time, unless something changes significantly, there's more opportunity in Europe and in the United States than there is in Asia.

Got it. The last question would just be uses of cash. You are using cash for dividends, for acquisition, for CapEx, for share repurchase as well. So how would you prioritize your current use of cash? I think for the next six months you have said that acquisitions are sort of de-prioritized, but what about share repurchases as well as any sort of CapEx items that we should think about?

The number one priority for cash deployment is certainly internal. Investing in CapEx which would help to us become more productive or efficient or into newer computer software right now. We are in the middle of implementing three software packages which should make us more efficient. For instance, one in collecting receivables, the system called Get Paid. This would be something we are working in implementing sales force.com to make our sales force more efficient, then we also are implementing a new HR-IS system, and we're investing in capital expenditures to make us more productive or lower cost. These are certainly our number one priority. Just to make sure that we increase our competitiveness.

Dividend has always been something what we have taken very seriously, and we have paid dividends since 1984, and, we just announced, was it yesterday, or the day before yesterday, that we were going to continue to pay the dividend for the last quarter. So that's also very important to us. As far as share repurchase is concerned, that's something we discuss, and we have been doing historically, and consider doing going forward as well. Of course, all this is a function of what's on the horizon-- what the stock price, many factors to explain this, but I would not want to take stock repurchase off the table, either, at this point in time.

Got it. Thank you so much.

And your next question comes from the line of Anthony Kure of Keybanc. Please proceed.

Good morning. Couple questions related to the inventory question, and that is, I understand there's a de-stocking, or an opinion that there's some de-stocking going on. Wonder if you had a gut feel as to, given what has already happened, you feel like the inventory levels now are at the right size, are below replacement level, or are still too high.

Well, let me -- let me try to give you an answer. It's really, really hard to tell, because our customers and our distributors, they don't share with us how much inventory they have. We can just, from a trend point of view, and from the different -- we know what they are selling, what their sales growth is and what our sales growth is-- we just know that they have reduced the inventory level compared to what they had maybe one or two quarters ago. We know this. Now how far down are they? How much inventory of our product did they carry? We do not know. We do not know if they feel they are now fine or if they are still seeing they have too much or maybe they have cut too far. We just don't know this. So it's very, very hard, because we just don't have the data.

How would this type of de-stocking activity compare to maybe the last time you may have seen a similar dynamic I don't know if this happened in 2001 or 2002, but would this be more severe or can you compare to the that?

Maybe Matt can give us some opinion on this.

No opinion. Don't know.

One thing I think over the last 10 years, I think, distributors and end user -- or end customers have been holding less inventory. So I would think that it would be less impactful. What you would be seeing in the distribution is they're just right now reacting to what I would see as their drop in sales. So that would be the only additional comment that I could add.

I can give you maybe a little bit of flavor. We are sitting here in our conference room debating, especially on the OEM side, how come our sales are so strong, what else, something I showed you, increase to mobile phone manufacturers or to their subcontractors in the fourth quarter, third or fourth quarter, something like this, of our fiscal year. Just wondering, because economy was clearly cooling down, and I think we might have even shared this in conference call.

We were wondering what are their plans, do they think they're going to take share from each other, mobile phone manufacturers, or do they think that people might not buy a new car, but maybe they will buy a new phone instead? We're just sitting around wondering, why is it that our sales are so strong? I think now we have the answer. They didn't sell as much as they hoped, they built up inventory, and now they start to draw from the inventory and don't order from us any more as much as they used to. That's the kind of -- that's as much as I can share. But beyond that, it's really difficult.

Okay. Along the lines of the shutdowns you saw during the prior quarter, and we're hearing of shorter work weeks from some facilities also, have those -- you alluded to it already, based on your comments, but have you actually seen in February some plants coming back on line or work weeks being more normalized? Maybe you can talk about how things have progressed since the end of the quarter.

I can share with you some perspectives from Asia. The Chinese New Year was the last week in January, and many companies in normal times would shut down for a period of about seven to ten days, and we saw a number of our customers adding a week or ten days on the front end or the back end, and in some extreme cases, on both ends. And so when we started looking at the beginning of February, it was a pretty bouncy sales period of time, because we still had a number of customers that weren't working, quote unquote, normal times. Now that we're towards the end of February, I think we're starting to see normalized levels of work, and when I say normalized, I mean at the 2009 normal rates.

Right.

so the rates that we're seeing today are sort of what we would anticipate seeing going forward in the next couple quarters.

How about in the Americas or Europe? Any similar type dynamic playing out there?

Yeah, I would make two comments. First of all, I did make the specific comment regarding the situation in Brazil, and those facilities took a very specific time period off, and those companies are back on-line. However, what we are seeing there is that these companies are negotiating with the unions down there, which are government unions, to reduce the work week and go to-- instead of eliminating their workforce to minimize the time that people are working, and so they have to negotiate with the government unions to do that.

So although they came back on, they're in a negotiation in terms of how to reduce going forward. And then in the US, we've not seen that. However, you just -- look at all the news. People are looking to cut staff, cutting staff, reducing the number of shifts that they're working. So if you are looking for maybe a sign of hopefulness there that some are coming back on, somewhat neutralized by the fact that there's just less production activity in the US and cutting the workforce and the number of shifts and so on.

Any comments from Europe, Peter?

I'd echo Matt's comments. We've seen some factories come back on line after the government funded plant shut down and we have some unique situations across Europe where governments (inaudible) sponsor or pay 80% of employee wage bills for a shut down so we've seen some automotive and steel manufacturers come back on-line. It's not a big part of our business, (inaudible) so I guess we're a little bit protected from it. But I agree with Matt. For every one that comes on-line, (inaudible) jobs and a shorter working week last week in the UK, so for every one that comes back on-line, there's another one that goes on to a shorter week. It's going to be more of the same for a period of time.

Okay, thank you, I appreciate that.

(Operator Instructions) And your next question comes from the line of Robert McCarthy of Robert W. Baird. Please proceed.

Good morning, everybody.

Good morning.

I wanted to first ask for a little clarification on a couple of things that you talked about before. I think, Tom, you made a comment about excess working capital levels and looking to work some of that off in the upcoming quarter. I wonder, is that really just a generalized comment reflecting disappointing absolute sales levels, or do you see a particular issue in one particular category and or region? What I'm thinking is that we might be mostly talking about inventory or alternatively, given longer collection periods that are typical in foreign markets, maybe it's the lag on catching up in receivables. I'm just looking for some color there.

Right now, receivables are actually in pretty good shape. The area that we're focused on now is our inventories, making sure that our inventories are at appropriate levels. We saw significant decline in sales. So we want to make sure that we don't get caught down the road with excess inventory. So that's where our focus is today.

Okay. In terms of restructuring actions, you closed the plant in Bratislava -- do I understand that we're not at this point anyway looking at any incremental plant closures?

We always look at how we can optimize our plant footprints. Over the last five years we've made almost 30 acquisitions, so there's a lot of facilities out there. That's just the regular course of business for us. The only action we've taken this quarter from the past quarter was Bratislava. We're not announcing anything for the next quarter but we constantly look at that, so over time, I'm sure there will be more, but we don't have any specific announcement.

Okay, I guess I didn't ask that. rightly. There's nothing in your current plan that would require another plant closure.

No.

Okay. And then I wanted to -- if I can, just explore a little bit more the competitive situation that you are facing, Al, in Asia Pacific. And what I'm keyed on is the observation that certain small competitors have already disappeared, and you believe that there are some others who have cash flow problems, size, maybe sitting on inventory, et cetera, yet pricing is stabilizing for you, so does that mean that we really aren't concerned about the needs of some of these more desperate competitors to try to use price to either move inventory or try to win business because they're not really with your current customers, or do we perhaps still have a little bit of short-term risk to the pricing environment as this competitive dynamic shakes out some more players?

I think there's always that short-term risk, Rob. They are going to make some desperate last attempt to try to gain business, but more so than any period that I can recall, customers are actually calling us to the table and asking us about the health of Brady Corporation, and they're asking us to look at our balance sheets and how strong we are as a company. And so while the purchasing agents are trying to squeeze things on price, they're also starting to look at the macro picture and saying, we can't afford to upset our supply chain by picking some supplier that's on very questionable standing in terms of cash flow and working capital. So I think we're gaining some credibility and stock in the eyes of our customers because of the strength of Brady Corporation. It's not to say that there won't be pricing pressures going forward, but I think that more so than ever we're appreciated and respected for the stability that we bring to our customers.

Al, that's perfect in terms of getting to where I was going with my question. You make the general -- and I recognize that market share data is something that you really have to estimate, but the core of this question is your observation that your markets -- you are convinced your market share was at least flat in the quarter. It seems to -- when I heard that, my thought was, why isn't it up, given the strain on the supply chain, and I guess you're telling us that your expectation is that it will be, it's simply too early for that to have been reflected in resourcing and orders and shipments.

Yes. Determining market share is definitely not an exact science. We have an advantage in this business because the customers publish so much data, and there's a lot of data published on inventory turns. Anecdotally we started out by asking our sales people on the ground, how are you feeling, are you winning more deals or losing more deals, and their answer was we're hanging in there and we're doing very well, it doesn't feel like our market share is any different than last year, but we wanted to prove that out numerically.

That's where we went through the analysis of our sales and what each of our customers did. I gave you general industry data. We have that by customer, which is more specific than I'd like to share, but -- so take that into consideration, and you take into consideration the drop in inventory levels that they've had, and we feel good that we're not losing market share, but our data realistically is going to be plus or minus 5 or 10%.

Sure Rob, unfortunately, I've had my share of recessions. I've been with Brady now 13 years. CEO almost six years. So unfortunately I have some experience here, and every time when we come out of a recession, we realize there's less competition, because we lost some of the weaker players, and you might even remember, Rob, I have mentioned this in many conversations with analysts, and with shareholders, as hard as a recession is on our company, and our shareholders, declining sales, declining profit, layoffs, and all of this stuff you don't want to have, share price going down and so forth, mid-term, the longer and the deep the recession is, the better it is for strong companies.

And I consider ourselves an above-average financially strong company, and we are going to be one of those companies who are going to benefit from this. Maybe it's because I'm a little bit more optimistic than maybe the average person. I think when this all is over and done, we might have an opportunity to pick up some share, because there's just going to be less people. There's going to be a reduced capacity, and business is going to pick up, and I think it's going to be good for us.

I think we're on the same page, Frank. My contribution in this dialogue is the idea that because of the unique dynamics of the Asian electronics market, you might actually get a stronger effect that way than you've seen in prior cycles because of the need to transition that market to a more rational basis of competition.

That's all hope. On the other hand, I think it's still early. I remember when we announced internally our head count reduction and pay freeze, especially in Asia, and end of October we announced internally, we have a lot of people questioning our rationale, because many of our businesses are still running three shifts operation, seven days a week, and we are running over time. Just the end of October, took about two more weeks, middle of November to end of November, for the Asians to realize it's really deteriorating big-time. So, has not been -- even though it feels bad, it has not been too bad for too long in Asia.

Because the question you asked earlier, hey, Al, you said your market share is flat, why didn't you pick up anything? That's a question I could have asked. That's a typical CEO question. Right? Define market share flat. But I want to see increasing market share. I think it's just too early, yet. Those people are still hanging in, (inaudible) but they still hang in. And maybe might be desperate and cut prices to just get business.

Okay, thanks, Frank.

And your next question comes from the line of [Rick Lane of Broadview Advisers]. Please proceed.

Good morning, guys.

Good morning, Rick.

Couple questions here. Start with Al. You had mentioned the OEM MRO mix change in Asia. No doubt the OEM business is under more pressure, would account for a lot of that, but are you making strides in getting more MRO business in Europe, or maybe just a little bit more color on that mix.

Well, yes, we've had a concerted effort over the last couple years to-- we don't want to lose market share in our OEM space, but we're trying to divert some of our resources, strategic resources, towards some of the MRO sectors, and we're having some success with that. It starts out, as you are well aware, of building a distribution channel. That's a critical element of success in the MRO space. So we've been doing that for the last 12 to 18 months. We have some new loyal distribution partners, people that have been with us for 18 months and now understand our products, and they're starting to gain some traction in the marketplace. So really what swung that market share percentage that I was referring to earlier was that our MRO business has not been impacted the same way that our OEM business has.

Sure. If there is such a thing, under normal economic conditions what would you guess your run rate mix would be between OEM and MRO right now?

60/40ish.

Oh, really, that much. Okay.

60 is the OEM.

Yes, of course, but I might have guessed it was still more like 80/20. On a normalized basis.

Yes, it's tough to say what normal means right now, but I think 60/40, then it would be 80/20.

Where do you think that would be in, let's say, three years, again under normal economic circumstances?

Well, if that was a tough question for me, now '03, I honestly can't answer that.

What do you think would be realistic?

I can give you an answer, Rick. When I worked at Bosch, their goal was always to become less dependent on automotive, and automotive was always about 50%. So they always tried to push it below 50%. But then all of a sudden the economy turned around and business boomed, and automotive was solidly above 50.

I think we might after similar situation here, that Al doesn't want to lose any business in OEM, and he wants to certainly grow in MRO, maybe even through acquisitions, but once we get through this negative cycle, growth in OEM will probably outpace -- outperform growth in MRO, and if we have 60/40, if that's the case and you grow faster in the 60% portion, it's hard to keep up on the MRO side. But yet certainly the strategy, to diversify also, it's hard to -- all depends how big is the bounce back going to be. I do realize it's not satisfactory, but that's all we can tell you.

There's two other things, Rick, that I just can't see three years out, and one is acquisitions. and the second adjacent core moves-- or core business moves, and so I'm sorry that I can't answer your question definitively because I think that if we have a move into an adjacent market space with our core products, or an acquisition, that could so significantly skew the numbers that my guess would be way off.

You are addressing that question to Asia, aren't you because at the end of the question, you mentioned Europe. Sorry, it's Peter from Europe. But you are addressing it to Asia?

Yes, I was, but as long as I've got your, Peter, my next question was, I'm just trying to understand how you are thinking about this and positioning Brady Corp during this downturn in that obviously United States started the economic downturn first, Europe followed, and towards that end, organic sales were weaker, in the United States, than Europe. But from all the things that we read here, in the United States, I'm curious what you are thinking. It seems like, and it seems like UK obviously worse than continent, and maybe coincident with the United States, with respect to the downturn, but in continental Europe, does it feel like it's going to get worse than the United States? Again, so far, Europe has lagged the United States, as far as timing, and I would say magnitude.

That's a great question. So Peter -- I couldn't answer this question.

I maybe can answer. I don't think it will get worse than the U.S. I don't think it will get worse. Is there a time lag? Yes, for sure there is, where the UK has a more aligned economy to the US, more flexible labor market, we've seen some pretty steep declines, and I think we've got more of it to come.

And the rest of continental Europe, there's many factors at play. Levels of personal indebtedness typically are much lower. You look at Germany. People, consumers just aren't saddled with debt, and I think that that will play out as time goes on. So I think it will be mixed. I think we're seeing this wave of events across Europe. We've seen it in the UK, sharp decline in the U.K. , more modest declines in other parts of Europe. But, Rick, who knows the outcome of this. I don't think it will be worse in the US. Whether it will be better off in a more socialist Europe with controlled plant shutdowns, government assisted plant shutdowns, that's an economic model that needs to be proven out. My crystal ball isn't telling me the assets of

We have now had the conference call for an hour. Are there any further questions, Becky?

Yes sir, we have two questions in queue.

All right.

And Your next question comes from the line of [Benjamin Wong of Bank of America/Merrill Lynch]. Please proceed.

Actually been answered, thank you.

Hello? Bank of America?

I believe he said his question was asked, so your final question comes from the line of [Jim Kissinger, of Kissinger, Lautman Capital] please proceed.

Good morning everyone, couple quick things. Could you give me a rundown on what the debt structure looks like right now and when stuff is due, and what the revolver looks like?

Hi, Jim, it's Barb. The $479 million that's on the balance sheet is our long-term private placement. It amortizes equally over the last seven years of each deal. So for example, this fiscal year we have $21 million amortizing. Next year we have $50 million. So it's a very steady amortization schedule. Our revolver is $200 million. That's fully available.

Okay. And are there any covenants that would -- that are even close on either the debt -- on the private placement stuff or the revolver?

No, right now we're -- in our 10-Q, from first quarter, we laid out what the covenant structure is but the debt to EBITDA on the covenant -- on the revolve is three to one, and we have in the presentation that we're at two to one right now.

Okay. Good. You said there's 20% workforce reduction, 10% permanent and 10% temporary. Is there much more slack in the temporary, on the temp side? Is there more to take out there if business gets tougher? How much is actually there? And where are those temp workers?

Let me try to answer this, Jim. We have always historically tried to protect our permanent -- you cannot really call them permanent, but our Brady employees, and have used temporary labor more as variable. So that's certainly always the first one we look at. But then of course, also it's geographic difference so we have a higher portion of temporary workers in Asia, and then, of course, it depends how business is. Let's say business goes down in the US and we have less temporaries. What we have to do is then we have to go to our regular Brady employees and they have to go down.

That's where it started. It started here in the US, and we have temporaries, not as many. It took a big portion out of our regular employees, then when Asia started to slow down, of course, we had a bigger bite out of temporary. Now we still have temporary employees if we can go further down, but it all depends what business is it, how many employees are there. We are having a shortened work week in some of our businesses here in the US and in Asia. Not sure about Europe. Peter, have we anything in Europe? Any shortened work week?

Well, I think it's -- no, there's no -- on an industry basis. There are some in France.

The way I'd answer, at this point in time, I'd like to get a little bit of stability in our Brady work force, non temporary, Brady employed work force, we have taken a big chunk out, and we have frozen pay and wages, raises, we didn't give any increases. We just want to wait a little bit and see, after the holidays are over, after January is behind us, and maybe February, probably have a better feel how our cost reductions will hit the bottom line. As somebody said early in the conference call, the majority of the cost reductions in the workforce were end of December. Now the quarter, of course, has only one month where those people were gone, November and December they were still around -- haven't seen the full impact yet. I would like to get some stability in there, and while we have a shortened work week, maybe do another layoff.

But I also said in my script, when I read it earlier, we will do whatever it takes. That's what we have told investors over the last couple years. They always ask, what if a recession hits you? What's going to be different this time than last time? And we told you, we're going to take bold and swift action, and I think that's what we have done. Certainly we are surprised by the dramatic duration in organic sales in all geographies and in all product lines. But we have taken bold action, and taken it down, so as bad as sales were, we were pleased what we could do to preserve reasonable financial performance, because of our cost reduction efforts. Tom said it took $29 million out of SG&A compared to prior year, and cost of goods sold, we've only had 80% basis point reduction (inaudible) . It's partly mix driven because of less OEM and more MRO but still it's reflected of cost reduction

Frank, maybe to add a little bit of color to that, if you really only took this reduction for one month of the three-month quarter, if you would have annualized that, would you have saved another 5 million bucks this quarter? I'm trying to figure out kind of where the base is on the fixed cost side of this thing. If you would have been clairvoyant and reduced that staff on the very first day of the quarter instead of two-thirds of the way through, would the cost structure have been down another 5 million bucks, $3 million, $8 million?

We didn't want to reduce our workforce because business slowed down, because you've got to serve your customers, so we couldn't have done it October 1st, but absolutely, had we done it earlier, we would have faced more. I'd like to get back to a comment Al made because I realize I'm still digesting your question what I can tell you; however, is the following: we believe that this $30 million of restructuring, pretax restructuring charges, we believe that this year we are going to save about $30 million in cost next year because it's going to be more about $45 million. So this much I can tell you. Is it $5 million more or less? I have to think about this. I don't want to give an answer without having had a chance to talk to some of my financial staff. Typically they are a little bit more accurate than what I am.

I just think you have to keep in mind, in SG&A, there is a currency impact in SG&A, which is worth some. You can calculate most of that from the numbers you see. So sales are down, bonuses, commissions from sales forces around the world are down, so those are also contributing factors. As far as breaking it down and annualizing we don't have that information today.

One last one then. CapEx you said would be about $30 million for fiscal '09. As you look at that is that a recent run rate for 10? Is that $30 million really kind of maintenance CapEx along with some productivity tools, the kinds of things you guys do year in and year out?

I think if you look back over time, the run rate I think is about 2% of sales. So I would use that as guideline.

Maybe capital expenditure right now, it would not be for expansion purposes. It would be for productivity enhancements or something what makes us more efficient or reduce our lead time. I talked about software, before which makes us a better company. It would not be expanding, like having another headquarters building here in Milwaukee, that's certainly -- you know, Jim, you live here. You probably won't see this for awhile.

There's a lot of real estate available, Frank. You could really snag a great location at a cheap price. But you'd have a lot of upset people.

With the temperatures we have right now, we'd probably be looking in the south, and I'm not talking about south Milwaukee.

I've got connections down there. I could help you with that. On that I'll leave you guys go. Thank you very much.

Thank you.

Gentlemen, you do have one more question. Would you like to take that now?

Sure.

Okay, great. Your final question comes from the line of [Thomas Kim of Green Arrow.] Please proceed.

Hi, thanks for taking my last question. I was wondering if you could help us out and give any color with respect to free cash flow guidance and your expectations there, either in comparison to adjusted net income or just on stand-alone basis. Thanks very much.

We did not give any guidance, right?

No.

We didn't give any guidance. We give a lot of guidance. Net income, we talked about efforts to reduce inventory. We talk about CapEx, amortization, depreciation, but we didn't give any free cash flow guidance, per se, and I don't even think we have the numbers right now, ready to share. I apologize. Even though we took your question, unfortunately we cannot give you an answer.

Appreciate it.

And you have no further questions at this time. I would now like to turn the call back over to Barbara Bolens for closing remarks.

Thank you very much, and we appreciate your participation today. The replay of this call will be available both via the Internet and via phone starting today, and will be available for a week. The replay number to access the call is 888-286-8010 with a passcode of 55435103. If you have any questions as always please contact us. Thank you for your interest in Brady, and have a great day. Becky, please disconnect the call.