Brady Corp (BRC) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Brady Corporation fourth quarter 2009 earnings conference call. I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. Now I'd like to turn the presentation over to your host for today's call, Ms. Barbara Bolens, Vice President and Treasurer, Director Investor Relations. Please proceed.

Good morning and thank you. We're glad you could join us. During our call this morning you'll hear from Frank Jaehnert, CEO, and then Tom Felmer, CFO, who will be presenting Brady's quarterly financial review, as well as some full year wrap-up comments. Also joining us this morning is Matt Williamson, President of Brady Americas, Peter Sephton, President of Brady Europe, and Allan Klotsche, President of Brady Asia Pacific, who will all assist us in providing regional reports. As usual, after brief presentations by the team, we will open up the floor to questions. We encourage you to follow along on the slides located on the internet as we'll be referring to each individual slide as we proceed through the presentation. These slides can be found on our website at www.investor.bradycorp.com. You have a few minutes to get to those while we go through our Safe Harbor Statement.

Please note in this call we may make comments about forward-looking information. Words such as expect, believe, and anticipate are a few examples of words identifying a forward-looking statement. It's 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 10K filed with the SEC in September of 2008. Second, please note this teleconference is copyrighted by Brady Corporation and there maybe no rebroadcasting of this without express written consent of Brady. Note also Brady 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 is Frank Jaehnert.

Good morning, and thanks for joining us. The results in the first quarter came in as expected. Our corrective cost cutting and restructuring during the year resulted in a gross margin of 47.4%, just 100 basis points off of our prior year fourth quarter and SG&A expenses were down 25% from prior year. As a result, net income was $19 million or $0.30 per share, and excluding restructuring charges, net income was $22.6 million or $0.43 a share. Our efforts in working capital improvement yielded strong cash flow generations throughout the entire year. We are pleased with the results of our timely and aggressive cost reductions and believe we are well positioned for the eventual economic recovery. For fiscal 2010 we anticipate the first half of our fiscal year to be consistent with business conditions in Q3 and Q4 of fiscal 2009 and we expect modest growth in the second half of the year. We also expect that we will continue to do some additional restructuring as we continue to fine tune our cost structure. I will now turn the call over to Tom Felmer, who will provide you with more details on our financials and guidance of fiscal 2010, and after the report I will provide some additional thoughts on fiscal 2010. Tom?

Thank you, Frank. Before reporting on the fourth quarter results, I'd like to summarize the highlights of our fiscal 2009. Many of you may recall in our first quarter offer fiscal 2009 we generated record sales and profits. While we were certainly pleased with our strong start we could already see that the balance of our year would be challenging, and in our first quarter conference call we had already announced that we would be taking aggressive cost actions by reducing our global workforce by 10%, eliminating wage and salary increases for the year, and reducing discretionary spending around the world. Cost reduction actions were expanded in the third quarter and ultimately led to a workforce reduction of more than 20% across the Company.

While our cost reductions allowed us to preserve profits and margins while in the midst of the recession, they also provided an opportunity for us to continue to invest in key growth initiatives including new product development, acquisition strategy, e-business and our Brady Business Performance System. The combination of these cost saving efforts and strategic growth initiatives position us well for the current economic climate as well as for the eventual economic recovery. Moving on to slide four, you can see that our final results for fiscal 2009 include sales of $1.2 billion and net income of $70 million. If one-time restructuring charges are excluded, net income was $90.3 million. Cash flow from operations for the year was $127 million.

On slide five we summarize our fourth quarter results. Sales for the quarter were $287 million, down 28% from last year. Similar to our third quarter results we were able to hold both gross margin and SG&A spending within approximately 100 basis points of prior year despite the significant sales decline. For the quarter we generated $30.3 million in operating income, $19.2 million in net income and $0.37 EPS. Excluding one-time restructuring charges in the quarter, operating profit was $32.9 million, net income was $22.6 million and EPS was $0.43. We also generated $49.6 million cash flow from operations in the quarter.

On slide six, we show our restructuring reconciliation for the year including the cash and non-cash impact of our restructuring. You can see that we had $25.8 million of pre-tax restructuring expense that is reflected in our income statement. The after-tax impact of this expense was $18.6 million for the year. We also had $1.6 million in tax restructuring expense which included the repayment of previously received tax holidays in Asia. We ended the year with $20.2 million in restructuring charges which is in line with the $20 million estimate that we have discussed throughout the year. We anticipate taking additional charges in fiscal 2010 as we continue to bring structural costs down to support current sales volumes. I will quantify the additional restructuring charges in F10 in a few slides when I discuss our F10 guidance.

On slide seven, we show that there was a 28% sales decline in the fourth quarter which was similar to both the declines in the second and third quarters. The decline was made up of a 23% drop inorganic sales and a 5% decline due to currency. The gross margin and SG&A charts on slide eight clearly show the effect of our cost reduction efforts. Gross margins continue to remain with 100 basis points of prior year despite the sales decline, SG&A as a percent of sales was up 110 basis points from last year, but in dollars our SG&A is down 25% from last year. We continue to invest in our new product initiatives and launch new products around the world.

On slide nine, we show examples of four new products that were launched in the quarter including new printers for the wire ID market and Chinese end-user market, a software product for documenting and managing network infrastructure, as well as new halogen free phone material for our hard disk drive market. We believe our investments in R&D will continue to help us take market share from competitors, and additionally we believe focus on proprietary products has helped expand margins through a recession and will continue to do so as the economy begins to improve. Slide 10 shows actual sales and operating margin dollars by quarter for the year, and we thought you could see following a strong first quarter we had a significant drop in sales in the second quarter followed by two more quarters at similarly weak levels. Our operating margin and net income charts demonstrate the results of our quick actions, while our profit dropped off sharply in the second quarter, as our sales declined, profit picked up substantially in Q3 and Q4 due to our aggressive cost reductions.

Moving on to slide 11, you see a similar picture for both our net income and earnings per share as they progress throughout the year, and slide 12, you could see that we continue to generate significant cash from our working capital initiatives. We began the quarter with a cash balance of $232.9 million, major sources of cash in the quarter were $49.6 million in cash flow from operating activities and a $9 million gain for currency translation. In the quarter we spent $8 million in capital expenses and paid dividends of $8.9 million. We also paid down $87.2 million in our outstanding debt including $21 million of a scheduled debt repayment and $66 million from the tender offer that was completed in June. These activities left us with a cash balance of $188.2 million to end the year.

Slide 13 is our year-end balance sheet which continues to be strong. And here you can see the impact that our working capital initiatives have made in bringing down both our inventory and accounts receivables. Slide 14, you can see that following the debt repayments made in the quarter, we have $391 million in gross debt giving us a gross debt to EBITDA ratio of 2.2 times and a net debt to EBITDA ratio of 1.1 time. We believe we remain conservatively leveraged, which has provided us stability in this downturn, and will also provide us with opportunities for investment in growth when the economy recovers. I will come back after our regional reports to discuss our fiscal F2010 guidance, but for now I'd like to turn the call over to Matt Williamson for an update on our fourth quarter results in the Americas. Matt?

Thanks, Tom, and good morning, everyone. Please refer to slide number 15. Americas sales in the fourth quarter were $124.9 million, down 26% compared to the prior year. Organic sales declined 24% and currency negatively impacted growth by 2%. In the US our Brady business remained weak compared to the prior year. The continued soft economy resulted in declining sales of products sold to manufacturing, maintenance, safety, electrical and construction sectors. It appears that sales of these products have stabilized, but we expect we will not see strong year on year growth for at least one more quarter due to strong comparables and weaker than desired economic indicators. Increased sales to focus markets such as medical, aerospace and defense and the laboratory market continued to buffer sales declines in other core markets. Outside the US, we experienced mixed results. In Canada, the Brady Business sustained similar declines to the US versus the prior year.

In Brazil we began to see some recovery from customers in the electronics and automotive OEM businesses in the fourth quarter, as a stabilization of the exchange rate in support of the Brazilian government has led to some businesses resuming production. Our small but growing Mexico business outperformed the general economy in the fourth quarter with double-digit growth over the prior year, as the effort on the local sales initiatives has paid off. In our direct marketing businesses, organic sales continued to be down significantly in the fourth quarter. Employee layoffs and plant closings at our customers in the manufacturing sector reduced response rates to our key marketing programs and negatively impacted our customer files. We partially offset this trend with productivity improvements to drive increases and customer order size and conversion rates.

MRO market sales showed some improvement in the quarter offset by continuing softness in the manufacturing industries. We did not see any improvement in our people ID businesses as customers continued to delay capital projects of our software and system products. Given the economic back drop we have used this time to focus on sustainable improvements to our business including significant work with lean, improved service to our customers, optimizing telesales operations, adding new products and making changes to our website to optimize traffic and conversion. We are optimistic we can increase our market share with these types of actions. Segment profit for the Americas declined 31% to $28.3 million in the quarter. As a percent of sales, segment profit decreased to 22.7% compared to 24.3% in the prior year. The loss of sales volume continues to impact our ability to absorb fixed costs and overhead. We are continuing to reduce our cost structure in areas that do not impact sales growth and productivity initiatives, however.

In the quarter, we announced for employees that we'll be shutting down two manufacturing facilities and two warehouses in the region. Our focus on implementation of lean management principles is accelerating in all facilities in order to drive better space utilization, labor efficiency, inventory reduction, and reduction of cycle time. This work has allowed us to maintain the high quality of our profit despite a sales decline of over 30%. In addition, we continued to significantly drive down our working capital in the fourth quarter to bring it in line with the reduced sales volume. Looking ahead, we still do not expect a near term improvement in the economy, but believe our ongoing cost reduction efforts and growth initiatives will position us well with end-users and distributors to take market share and drive accelerated profits. I'll now turn the time to Peter Sephton, who will report on the European results.

Thanks, Matt. I will continue now with slide 16. Sales in Europe were $86.6 million for the quarter with organic sales down 25% and currency reducing sales by over 9%. Looking at our business by brand, our overall direct marketing sales were down against the previous year and no country or region escaped the general economic downturn. There were, however a number of positive items that brightened the general picture. For instance, in the UK and France and to a lesser extent in Germany, we benefited from customers preparing against the swine flu pandemic, as governments continue to update their health warnings and announce plans to insure continuity of public service. The direct marketing units have been successful at adapting public offerings in the developing multi-channel marketing efforts in this market. The direct marketing businesses, our investment in e-business continues to yield very positive returns, while sales continue to grow steadily. We operate 16 highly functional branded websites across Europe from a common platform which gives us both cost leverage and scalability.

Moving on to the Brady brand, sales for the Brady brand softened more than our European average during the last quarter. Geographically, we continue to see the best performance in the UK, France and the Benelux, while central Europe has suffered the most with a combined effort with weak local economies and depreciating currency. You saw continued softness in products sold to the manufacturing, maintenance, safety, electrical and construction sectors. Sales in some traditional handheld printers and smaller MRO systems were particularly soft which confirms the general squeeze on even small expenditures in companies reigning in costs.

Our response has been to push on entry level such as the new BBP11 printer and launch some aggressive promotions for mini market and global marketing systems. These efforts boosted sales towards the end of the quarter. Our people ID business has shown exception resilience all against economic decline with particular strengthen France. Similarly our security business transfer safe has also fared well as security solutions become a greater importance in economic downturns.

Our dye cut business continues to be hit hard with its exposure to the electronics and automotive industries, while we cut substantial costs to the (inaudible) facility and the generalized application of lean, the debt (inaudible) in these sectors is very deep and makes a quick recovery here very unlikely. In line with the weaker sales and the stronger dollar over prior year, segment profit for Europe decreased 42% to $22 million, as a percent of sales profit decreased to 25.4% on 29% last quarter. It still remains very robust despite the challenges that we have faced. It was important to note that we had a very strong comparable where Q4 2008 was our best ever quarter with a combination of solid gross margin, working capital and cost management has helped us moderate the negative effects of the economy.

12 months ago the global economy was entering a recession and yet Brady Europe sales continue to grow well into the second quarter. As we see the first and fragile signs of returning economic tides, it's extremely difficult to exercise the forecast when we will start to see the benefit of an improving economy. As we have prepared ourselves over the past quarters for a prolonged recession we continue to maintain our cost reduction efforts and insure that our selling is directed to sustainable high margin opportunities. And now I'll turn the call over to Al Klotsche who will report on Asia Pacific. Off to you, Al.

Thanks, Peter. I will continue on slide number 17. Asia Pacific sales for the fourth quarter were $75.8 million down 21% from last year's sales in the fourth quarter of $95.8 million. Organic sales declined 15% while currency had a negative impact of 6%. This quarter's performance was very much in line with our expectations and represented a bit more stability in customer demand than we had seen in the previous two quarters. Volumes are still down from prior year levels, but we believe the majority of this is based on industry and economic trends rather than a drop in our own market share. From a general economic standpoint, we have seen stabilization in most parts of the region with the exception of Australia and Korea, who continued to be negatively impacted by currency valuations. Recent economic data reported that China and India's GDP remained quite strong despite the slowing recoveries in North America and Europe.

Our fourth quarter is usually a pretty good indicator of how our volumes will be in the first quarter as the electronic industry begins their ramp up of production to fill the pipeline. From the allocations that we have visibility to today, we believe we are maintaining market share, especially on the applications and customer base where we are most focused. We continue to see all levels of the electronic supply chain aggressively trying to maintain volumes as most of their business models are quite volume sensitive. As such there's been a lot of pricing pressure not only from the OEMs themselves but also from tier one and tier two suppliers. We have seen local competition be quite responsive to customer demands for price reductions, but also recognize the strain this puts on their capabilities, capacity and financial strength. As mentioned in previous quarters our focus has been more on profit improvement than top line growth.

Over the last few quarters we have increased the focus on our MRO business with the expectation that the multiple government stimulus packages throughout the region would yield incremental sales growth opportunities for us. In the fourth quarter our growth rates for our MRO products solidly outperformed our OEM business giving us reassurance that our strategic shift has paid off. Meanwhile, our OEM commercial and development teams have spent much of their time gathering voice of customer data around a new wave of new products that we are currently in development on. The continued growth of high end feature rich mobile devices presents a nice variety of opportunities for us to continue developing new products that truly solve customer problems and are priced accordingly. Throughout the quarter and for the majority of the upcoming year, our profit improvement efforts are focused around capacity, rationalization and efficiencies across our manufacturing operations.

We continue to utilize the process discipline and tools of our Brady Business Performance System to drive production efficiencies, material yields and throughput. I'm also very pleased to see our engineering and R&D teams regain their technical leadership position with some new technology that combines unparalleled precision with volume throughput. Segment profit for our region was $9.1 million, down 40% from last year's segment profit of $15.1 million in the fourth quarter. As a percent of sales, profit was 12% versus 15.8% in prior year. As we look ahead, our quarter one comparables are extremely challenging given the record first quarter that we had last year. We believe that current end-user volumes across our customer base will not support a repeat of that performance. Our expectations are that sales in the first quarter will be slightly higher than the fourth quarter of fiscal 2009, and we should see some lift in profitability based on the cost savings and efficiency improvements that were completed in 2009. I will now turn the call back to Tom Felmer.

Thanks, Al. Before Frank summarizes the outlook for fiscal 2010, I'd like to discuss our guidance and related assumptions for the year which are on slide 18. As you heard from all of the reports it remains very difficult to forecast sales and estimate when the current recession might end or how soon or how strong an economic recovery might impact our business. However, based on macroeconomic forecasts and other trends we expect sales to be at or near our current levels in the first half of our fiscal year followed by modest growth in the second half of our year. We believe that net income will be in the range of $85 million to $95 million with EPS between $1.60 and $1.80 excluding restructuring charges.

We plan to continue to optimize our cost structure and as a result, we expect additional restructuring charges of approximately $15 million in the year. We believe these actions will generate approximately $15 million in pretax savings of which $10 million are expected to be realized in fiscal 2010. Including our restructuring charges, we expect net income for the year to be between $74 million and $84 million with EPS between $1.40 and $1.60. Our guidance reflects additional cost savings from BBPS and other productivity initiatives throughout the year. It also reflects approximately $40 million of non-recurring savings from fiscal 2009 that will be incurred by the businesses in fiscal 2010. If non-recurring savings include a variety of expenses including customary commissions and incentives that will begin to be accrued beginning in the first quarter.

This guidance also assumes current exchange rates and a full year tax rate of 28%, and that tax rate will follow similar quarterly pattern to what we saw in 2009, with a higher rate expected in the first half of the year and a lower rate expected in the second half of the year. We expect capital expenditures of $25 million and depreciation and amortization of $55 million for the year. And with that information, I'd like to turn the call back over to Frank Jaehnert.

Thanks, Tom. You have heard from our business leaders that across the globe we continue to drive our growth initiatives to improve our market position and our cost structure. The processes and discipline we put in place through BBPS are institutionalized globally and are paying off in terms of cost reductions, better yields and improved facility usage. We continue to invest in new product development and expect that we will begin to have some meaningful product launches in the near future. Our eCommerce initiatives are allowing us to create multi-channel marketing strategies, to efficiently reach our customers. We've also been fine tuning our acquisition strategy to insure we are prepared to identify and acquire good companies as they become available at a reasonable price.

While we cannot predict when the economic recovery will occur and how robust it will be, we believe that the actions we have taken combined with our strong balance sheet we are very well positioned to be successful and financially strong in the years to come. We thank you for your interest in Brady and we will now start the Q&A. Michelle? Could you please provide instructions for our listeners?

(Operator Instructions). Your first question comes from the line of Jason Ursener of CJS Securities. Please proceed.

Good morning. Frank, in your prepared remarks you mentioned first half 2010 revenue flattish with Q3 and Q4 of this year and the back half showing modest growth. On an absolute dollar basis, since Q1 of this year accounted for over 30% of the year, we do expect the revenue to be down year to year, or could the growth in the second half maybe keep it closer to flat?

Yes, I think Tom you'll probably want to take this question, but I can tell you, we had a spectacular first quarter last year. It was the strongest quarter, not the first quarter but strongest quarter in the history of Brady, and then all of a sudden, the second quarter, the economy downturn hit us. So there's no question that we will not be able to repeat what we did last quarter, last year's first quarter, but I'll let Tom provide a little bit more.

Okay, thanks. As we said throughout the comments, it's very difficult to project the year. If we're off by a quarter or two when the recovery begins it has a big impact, but as we look at the year, we expect sales year to year to be about flat. We're hopeful that we could see a slight uptick with some recovery in the second half of the year, but I would say in your planning, we're looking at something that's fiscal 2010 to be similar to 2009.

Okay, so just to make sure I understand the guidance range, for net income of $85 million to $95 million which would bracket this year's adjusted income, assuming flattish revenue trends, some benefit from cost cutting initiatives, the lean initiatives and about $4 million less interest expense, what would cause you to be at the bottom end of the range with net income down year to year? Is it Q1 offsetting everything else, the add back of the non-recurring costs or is it just conservatism?

As Tom pointed out, we have about $40 million of expenses, cost reduction, which we think is going to come back this year, so that's one numbers we would just theoretically divided by four, $10 million per quarter, there you go, and then of course, the first quarter last year there's no way we can repeat this. Second, everything that we see in the economy and what we hear, we don't expect a V-shaped recovery to take hold right away. We think there's going to be a recovery eventually, but we don't think it's going to happen right in the first or second quarter, so we think we'll see a similar sales pattern as we had in the third or fourth quarter, in the first and second and we'll see some moderate uptick. So you take all of this into consideration and you just do the math and then you'll come up with numbers which reflects the guidance Tom gave for a -- I would say a stronger second half of the year profit wise than the first half of the year.

Okay and looking at the balance sheet, you're carrying a lot of cash. Should we assume that you'll just make the scheduled debt payments or are you likely to try and tender for more debt?

I would guess that we would just do our scheduled debt repayments in the year.

Okay, thank you very much.

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

Good morning. This is actually Tom Brinkman with BMO Capital Markets. Just wondering what the outlook is like for the hard disk drive market. Is that getting any better?

Yes, this is Al Klotsche. I would say that right now the hard disk drive market is doing fairly well. It's definitely not as strong as it was a year ago, but with the continued increase in applications driving the demand for storage, we really are not seeing a prolonged slowdown in that industry, things like netbooks coming out and some of the feature rich mobile devices continue to drive storage demands, although maybe not in some of the traditional formats, some of the larger formats we might see it in smaller formats, but the industry is fairly robust in terms of where they are in their recovery right now.

Okay. Along those same lines I'm curious about how many new cell phones you have components on, what is your market share looking like along those lines?

I couldn't even begin to guess to be honest with you. We have market share at every company that manufactures mobile phones and some of them have as many as 70 or 80 models, so candidly I don't know the answer to that question. I can give you a more general response that when I look at our market position today versus a year ago, it's very comparable. I haven't seen any slippage in market share.

Okay, and then I'm curious about the monthly sequential sales trends for the quarter, how the quarter progressed?

We typically don't give that but if you look over the sales for the last three quarters, they've been pretty flat, so I would say there's no material fluctuation within the quarter.

Okay, and then you also mentioned in the press release that the $40 million of fiscal 2009 protects savings and you did give a little bit of a detail on that on the call here with commissions and incentives accruing. Is that mostly for the salesforce, is that mostly for the management level compensation?

It's a combination. We have incentive pay for a majority of the employees in the Company, so it impacts everybody, so there's management bonuses in there, there's variable comp for all of our staff folks, there's Commissions for salesforce, so there's some across all areas of the Company.

We have a pretty flexible variable pay schedule, so we don't have anybody from human resources here, but I actually guess that the majority of our 7,000 employees is in some kind of variable pay scheme, and of course, the higher you up on the hierarchy the more of your pay becomes variable. This serves us very well in a downturn, as we have a natural hedge because all bonuses come down to zero basically this year, by the way we decided to even for people who make their goals, we had product launches go on time in research and development or the marketing people hit their goals, we decided to give nobody a bonus last fiscal year because it was just not a good year. Now, even though some people made those goals, this is certainly going to come back. As people make their goals they get bonuses again. So on the flip side of course, when the economy picks up, bonuses and variable pay is going to go up as well, so that's across the Company.

I see, okay. The final question, what currency levels are implied in your guidance?

Current rates.

Okay, thank you.

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

Good morning. Just want to talk a little bit more about this non-recurring expense coming back, just want a little more detail. I guess I think the comment was that the expectation is for the full year to have revenue levels flat with 2009 and EPS here is obviously flat or brackets a flat EPS. Why would $40 million come back on the variable expenses if that is -- if those two metrics are flat? I understand there's some product launch bonuses that Frank, you just alluded to, but does that really mean $40 million or does that assume some kind of growth?

Well, we have as I said earlier, we didn't give bonuses at all, so I think if we would have applied our formula, we have businesses which made the goal and they would have gotten a bonus, but it was not easy to convince them that because of the economic recovery, the economic situation, even if they hit their goals in this particular unit or they hit the goals in their plans, they aren't going to get any bonus. That's number one. So we do not intend to keep this going because we also want to make sure we retain our best people because in a time like this, the best people always find a job. Second, we have a pay raise. We have scheduled to give people pay raises again.

Again we did companywide not give any pay raises last year, so if you take 7,000 people and you make some kind of assumptions of pay raises, you immediately have costs coming back so independent from bonuses, and that's just a couple of things. There's other discretionary spending. We hit the brakes big time on travel. There's only so much you can do in our traveling, and then you have to run your business. You have to start traveling again and so forth, so our discretionary expenses as well. We just pointed out some of the larger, we didn't talk about pay raises, but certainly a larger portion of compensation is another one, discretionary spending. So it's a lot of things coming back as well.

Okay. So netting it all out, I guess there's no increase in the restructuring savings from the third quarter when you talk about an incremental $15 million, that $15 million is going to, well $10 million is going to happen in 2000 and 2010 here. So there's been no increase in, I mean it sounds like you're taking additional initiatives, but there's no increase in the estimate for the savings for 2010?

Are you talking about from restructuring?

Yes, savings from restructuring.

I guess what we've been talking about is we're just looking at it on a run rate basis, so most of the actions that we took in fiscal 2009, I'd say those are pretty much in the fourth quarter run rates. So I'm trying to go on the run rate rather than trying to tie out things we talked about last year into fiscal 2010.

I guess to tie this all up, does it mean expenses are going up next year even with the restructuring, savings?

Well, there will be more, certainly more activity, more savings coming into the year, more savings from EPS and some restructuring, there's still a lot of activity going on.

If you compare the full fiscal year, you're going to be looking at the first quarter of fiscal 2009 which was spectacular. But we do not expect to have anything like this, so you could take the benefit of the first quarter of fiscal 2009 totally out of the picture, and if you just look at our run rate, 2003, 2004, quarter fiscal 2009 and extrapolate, I think you'll have an easier way to bridge Also I've said in the past and I'm going to repeat it again because it's very important, we are a financially strong company and we have opportunities to invest in our future, because of our interest rates which others don't have.

We have been picking up talent from very reputable companies in the last couple of months, maybe they hit maybe three months in the fiscal 2009, they are going to hit the full year fiscal 2010, because we think now is the time for financially strong company to make selected investments in the future, and this of course means also increased expenses in order to get a leg up on competition and that's part of it as well. Now we did not detail all this and break it out into components but I just want to give you a flavor of our philosophy, we can continue to invest and take advantage of the economic downturn because many of the competitors are not able to do this and it's going to help us long term, might not help us in the first and second quarter, but when the economy comes back we believe that this will benefit us.

Okay. And this last question, I know you have limited visibility in your business, a lot of book and ship type business, smaller size type things. What's giving you confidence or what are you looking at that's pointing to the expectation for a modest uptick in the second half of 2009 from a top line perspective?

Well, we read the newspaper, for instance, and if you listen to what you read, sooner or later the economy has to catch up, and I think we will make a little bit more conservative compared to what you read in the press. I mean as I said earlier, companies, analysts who talk about a V-shaped recovery, there's a strong correlation to being how bad and how deep it goes and how fast it comes back, everything is going to be more moderate. So I think we take what we get and we apply our own judgment and our own judgment is not going to get much better in the next one or two quarters and we think it's going to come back in the second half of the year, and similar to what we did a year ago when we had a record quarter and at the same time, we announce the 10% cost reduction, 10% reduction cost and we decided not to give a pay raise.

Everybody was looking at us saying what are you guys doing? The economy is still great and everything is fine, but this was our judgment and we were right back then, and I hope I'm wrong this time, or we are wrong this time, and that the recovery comes earlier, which you know what, we take it. I have no problem if the recovery comes faster, we'll be ready to take advantage of this, but at this point of time we have to make assumptions and we assume a modest recovery in the second half of the year. And who knows who is right, but you have to make certain assumptions to adjust your spending and ramping up expenses and so forth. So, I'm not sure if that's satisfactory, but it's the honest truth.

Tony, the only additional data points that I could give you is, if you track our business against the ISM or industrial production, you've seen those clearly uptick over the last several months and we typically lag that by a quarter or two and we've talked about that in the past. So that's what gives us I guess some level of optimism and that's why we feel comfortable saying there will be an uptick by the second half of the year.

Okay. I'm sorry. One more question Tom for you, the tax line, the $1.6 million restructuring, could you could just give a little detail on that?

There's a couple of things in there, but in Asia, sometimes you negotiate tax holidays when you set up or start an operation, and we've been doing some consolidating, so there's been repayment of tax holidays in Asia. So that hit that tax line.

Okay, thank you.

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

Good morning. Can you just help me understand the moving pieces that lead you to think revenue will be roughly flat sequentially in the next two quarters? Because if I look historically, it looks like seasonally first quarter and second quarter are usually higher than the previous fourth quarter, currency assuming current rates should become a tail wind as opposed to a head wind, and then at some point, I think you'd be anniversarying some pretty rampid unsustainable destocking, so am I missing something, or is this just an element of conservatism?

I'm not sure you're missing something. Maybe the only flaw I can see in your logic is I don't think we can look at history and historical seasonality and apply it to a time when we have the gross recession after the great depression. I don't think seasonality accounts so much because it's going to be totally overcompensated by the economy, by economic forces and I think that's the only, that's the only area I would offer a different explanation and that's how we look at it. We cannot look at seasonality in such an environment and destocking is all valid. It's a great point.

Sooner or later, stocks are depleted and companies have to start restocking and certainly would benefit us, but to tell you the truth for Brady we are trying to get our inventory down and our inventory turns up and our Brady Business Performance System BBPS. But I think there are more companies who are taking a more serious look, can they get away with low inventory levels and higher turns, they are just trying to improve productivity efficiency reduced set up times and everything, that's the advantage. If you take it as an advantage to try to improve your company, I think many companies do this right now. So we have no plans to increase our inventory so we are still trying to get our inventory down, and I'm sure there are a lot of companies out there who are trying the same thing. They just want to become a better company and then leverage it into an economic recovery.

Fair enough. Could you remind us of how much of your business goes through independent distributors versus your OEM or direct marketing business?

About a third. 40% maybe. 40%.

Okay, and is there any way, or have you tried to look at a way of quantifying how much inventory destocking was a drag, or how much you undersold retail demand for your products in fiscal year 2009?

It's really hard to tell. We have so many different products, especially distribution. Many of our MRO products which are hundreds of thousands go through the distributors, and it may be easier for cell phones and hard disk drives to have a feel for how much inventory destocking has been going on, but for us, for the other part, for the MRO, it's very hard because of so many different partners. And we get anecdotal information, sometimes they don't share with us necessarily what the inventory level is and what the targets are, but some of the distributors do, and they show us what they have done, but that's not the majority so it's very hard to tell. I would say my gut feeling is the majority of destocking is behind us, but there are still some of it going on, and once the economies can recover depending on how fast it's going to go, we might get a pretty vigorous rebound, if the economy comes back fast and they start restocking quickly, but that's not what we are counting on.

We do not think we can have a fast rebound, we think it's going to be a moderate rebound, so it might be the destocking issue might not be such a big deal, because it's not a panic. All of a sudden, customers flood into our distributors, they have to restock rapidly, it's almost like a panic thing, but we don't expect this to happen. We think it's going to be moderate and therefore, this destocking effect I don't think, the restocking effect is not going to be a meaningful effect for us. That's what we think right now, again, we would love to be proven wrong on this one.

I think we have commented that in Asia in particular, look at our second quarter sales were off in the neighborhood of 30%, and then the third quarter off only about 10% comparing with the prior year. And what we believe happened there was the second quarter was some significant destocking and what you saw then I believe was some rebuild within the channel or within the supply chain, not what we saw in the channel. And that we saw in the fourth quarter sales were off about 20%, so the 30% and 10%, kind of offset each other in the second and third quarter and they are 20% off. So I think you've already seen the major impact of that take place already in Asia.

Got you, okay. But correct me if I'm wrong, but even if there is no restocking, just the absence of destocking, you producing in line with or you're selling in line with retail demand would be a benefit all else equal?

Right. But again, as we look at, that's why we keep talking about our business sequentially and we would see that's already taken place, and as Frank said we don't expect it to be anything material.

Yes. But I just want to add one more thing. Brady is still trying to increase our inventory turns. So if our business picks up we do not plan to get inventory back up in parallel with all increase, right? And I think there are other companies out there who try exactly the same, so that's as business picks up moderately, destocking is over, they might still try to increase the inventory turns and get away with less inventory. And therefore, this destocking effector this restocking effect is going to be compensated by them trying to be more efficient in the inventory management, at least that's our plan and I think that's what's happening throughout the industry because it's a good one, because it will increase competitiveness of those companies who do it.

Okay, thank you, guys.

Your next question comes from the line of Jason Ursaner. Please proceed.

Just a follow-up question. Can you talk a little bit about the long term strategy to leverage Brady's MRO footprint in Asia?

Yes, well, I think when we, Brady really aggressively went into Asia from an expansion standpoint about 10 to 12 years ago and we recognize then, our best entry point was going to be in the electronics industry, to take the market share that we had in North America and Europe and leverage that and to hopefully build a footprint faster than our competition and pick up some market share from them. And that clearly has worked, and today you've seen us build a fairly impressive infrastructure for a company of our size with our product mix in Asia. And over the last two to three years what we really have been doing, despite not having booming sales in the MRO area, is education and awareness of what the benefit of our products can bring to local governments, provinces, standard setting organizations, etc.

So we really feel good that in the next couple of decades, I know that's a long way out for your financial models, but we feel good that we're laying the seeds today for a healthy MRO business growth, and we've talked a little bit about trying to rebalance our portfolio in Asia, and I think that's going to happen as a result of that strategic shift for us. So whether it's China or India or even to some extent Vietnam and areas like that, currently we're putting a lot of energy into helping educate those markets and we are starting to see increased activity levels.

Okay, and what percentage of products are sold in the region where they're manufactured? Is currently impact more of a translation impact or is there actually an underlying manufacturing exposure?

The vast majority of the product we sell is made or sourced in the countries in which it's sold, so we've always talked about currency impacting us primarily from a translation standpoint.

And in terms of utilization levels, your manufacturing facilities, what type of range would they currently be running in?

We typically don't track that. The products we make, it's just so much short run, quick turn types of products. We run -- if you're doing it on a true basis most of the plants are one shift, five days a week, so when you look at utilization, by definition you're down to 30% or less.

I guess asking it another way, what incremental costs would you need to add if volumes recovered faster or stronger than you're currently anticipating?

Minimal. You have the direct labor, probably more so in Asia than in the other regions.

Okay, thank you very much.

(Operator Instructions). And as there are no further questions at this time, I will now turn the call back over to Barbara Bolens for closing remarks.

Thank you very much. We thank you for your participation today and would like to remind you that the audio and the slides from this call are also available on our website. The replay of the call will be available beginning at noon, central today, and will be available until September 18th. The number for the call is 888-286-8010, with a pass code of 99208294. As always if you have questions please contact us. Thanks for your interest in Brady and have a great day. Michelle, please disconnect the call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.