Brady Corp (BRC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Brady Corporation first quarter 2009 earnings conference call. My name is Monica, and I will be your operator for today. At this time, all participants are in listen-only mode. We will have a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. At this time, I would now like to turn the call over to Barbara Bolens, Vice President, Treasurer and Director of Investor Relations. Please proceed.

Good morning. Thank you for joining us. During our call this morning you will hear from Frank Jaehnert, CEO and then Tom Felmer, CFO, presenting Brady's quarterly financial review. Also joining us this morning is Matt Williamson, President of Brady Americas, Peter Sephton, President of Brady Europe and Allen Klotsche, President of Brady Asia-Pacific, who will all assist in providing the regional reports. 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 our internet site, as we will be referring to the individual slides as we proceed through the presentation. These slides can be found on our website at www.investor.BradyCorp..com.

Please note that in this call we may make comments about forward-looking information. Words such as expect, believe, and anticipate are a few examples of words identifying a forward-looking 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 10-K filed with the SEC in September of 2009.

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 Brady will be taping the call and broadcasting it over the Internet for replay and your participation in the question-and-answer session will constitute your consent to being recorded. Thank you. Now, here's Frank Jaehnert.

Good morning and thank you for joining us. I'm pleased to report that our quarterly sales of $318.5 million grew 11% over our fourth quarter and came in above our expectations. For the first time in a number of quarters, currency had no affect on revenues and assuming exchange rates stay at today's level, we would have a tailwind. We were very pleased to see the impact that our ongoing restructuring had on gross margins in the quarter, increasing 160 basis points from prior year. As a result, net income of $22 million EPS of $0.41 a share were also stronger than expectations and included about $2.6 million or $0.05 a share of restructuring activity.

The first quarter last year was a quarter in which we were, in which we recorded our highest net income ever, making year-on-year comparisons very challenging. Results of our most recent quarter, however, were very encouraging. Several factors resulted in the 11% sequential revenue growth. First of all, we believe the economy has stabilized, leading to higher demand for our products. Our investment in new product development resulted in several launches during the quarter including our BMP21 handheld printer which has been very well received in the market. Stimulus related programs have driven demand in our education market.

In Europe, quick reaction to market demand for H1N1-related products resulted in a sales lift in certain European geographic markets. I'm very pleased with our start for fiscal 2010. However, it's still very early in our year, and our visibility to our end markets continues to be very limited, as a result, we left our guidance unchanged, and will monitor end market demand as the year progresses and make changes to our year end projections when appropriate. I will summarize our thoughts for the upcoming quarters after our business leaders provide their regional updates. Now here's Tom to review the financials.

Thank you, Frank. As Frank mentioned, last year's first quarter was our all time record quarter for sales and profit. It was also the last strong quarter prior to the the global recession. As a result, our comparisons in future quarters should become more favorable.

Moving on to slide four, you can see that our first quarter income statement compared with prior year, sales were $318 million or 16% below last year. Our gross margin continues to be one of the highlights of our performance throughout the recession. Despite sales being down nearly $60 million compared with fiscal '09 we were able to increase our gross margin by 160 basis points. SG&A was down $5.6 million compared with prior year. We also increased R&D investments by $600,000, as we continue to focus on building our new product pipelines. Interest expense was down compared with last year as we paid down $88 million of debt over the past 12 months and our GAAP net income for the quarter was $21.7 million, resulting in $0.41 earnings per share. However, when adjusting for after tax restructuring charges of $2.6 million, we generated net income of $24.3 million, and $0.46 per share.

Moving on to slides five and six, we see the sequential improvement of our sales, gross margins and operating margins over the past three quarters. Sequentially, our first quarter sales were up 10.9%. As Frank commented, this lift from Q4 of fiscal 2009 was driven by positive quarter-to-quarter impact from currency, stabilization in our markets, the seasonal lift in Asia, and a number of additional items including the sale of swine flu products in Europe, some stimulus-driven sales in the education market from our Varitronics business and the launch of new products including the BMP21 handheld printer which will be covered again in the regional discussions.

The lift in sales along with savings that we are realizing from restructuring and our BBPS lean initiatives helped improve our gross margins and operating margins if the quarter. You can see from the charts on slide five that our margins have continued to improve both in absolute dollars as well as a percent of sales. While SG&A was down compared with prior year, there was a sequential increase due to increased accruals for bonus and commissions, as well as increases in discretionary expenses and increases in selling initiatives, and new product launches.

You can also see on slide seven, you can see that our sales and margin improvements are carrying through to net income and diluted earnings per share which were at $24.3 million, and $0.46 respectively, excluding restructuring charges. We are encouraged to see the sequential improvement in our profitability since the beginning of the recession. While we believe profitability will continue to improve for the balance of the year, we do expect our second quarter profits to drop below first quarter levels as they normally do, because of the slowdown in the electronics production in Asia, and fewer working days in all three regions due to the holiday season.

On slide eight we break out our Q1 restructuring charges for both fiscal 2009 and fiscal 2010. The aftertax impact of this quarter's restructuring charges were $2.6 million, or $0.05 per share. We remain on plan to take $15 million in restructuring charges for the year as announced in our F10 guidance discussions in September.

Slide nine reviews our first quarter cash flows. We continue to generate free cash flow in excess of net income. Free cash flow for the quarter was $24.8 million, or 115% of net income. On the cash balance walk, we generated $33.8 million cash from operating activities, and increased our cash balance from $188 million, to $208 million through the quarter. While we spent $9 million on capital expenditures in the quarter, we still believe that capital expenditures for the year will be approximately $25 million.

Moving on to slide 10, gross debt remains at $391 million, with net debt dropping to $183 million at the end of the quarter. Our debt to EBITDA ratio for the quarter was 2.5 to 1 and we believe that based on current business conditions and projections this ratio will begin to decline in Q2 as the weak second quarter of fiscal 2009 is replaced by what should be a stronger second quarter this year. Additionally, we believe we have sufficient capacity to take on additional debt should we choose to make acquisitions in the future.

Finally, on slide 11, can you see that we continue to make investments in Research and Development. Our investments in new product development and associated results are accelerating. We have outlined the key new products that were introduced in the quarter on this slide. These include significant upgrades and extensions in our products such as the BMP21 portable printing system and the label Mark five label design software as well as a new product innovation such as the BSP31 laboratory labeling system and the B80080 halogen high performance label.

Also in the quarter, we opened new R&D facilities in Beijing, China and Singapore to enhance our ability to serve customers in the growing region. R&D spending is up in absolute spend compared to prior year as we look to continue to invest in this area in order to improve market share and accelerate organic growth. I would now like to turn the call over to Matt Williamson for an update on the Americas business.

Good morning and thanks, Tom. Please refer to slide number 12. Americas sales in the first quarter were $136.2 million, down 15% compared to the prior year. Organic sales accounted for the full decline, as the impact from currency was minimal.

In the US, our Brady business declined compared to the record first quarter of fiscal 2009. We have seen a slight uptick in the first quarter sequential sales per day. This uptick is driven by a number of sales initiatives that were implemented, some economic lift, and new product launches including our newest mobile printer, the BMP21 designed for wire identification and industrial labeling applications. It has been well-received in our markets and was recently named the best new product at the recent Affiliated Distributors National Conference.

We also launched a new suite of proprietary products for laboratory markets for specimen identification, new LabelMark software for label printing applications and new sorbent products to expand our SPC offering. Initial customer reaction to these products has been very positive and we are expecting these products to help us outperform the general economy going forward. We're also pleased to be on the front end of new business with Hewlett-Packard. As we are selected as their supplier for brand protection anticounterfeiting labeling for printer cartridges.

Outside the US we believe we have begun to see our markets recover. In Canada, the Brady business has seen smaller declines versus prior year than in the US as the Canadian economy seems to have remained more stable than that of the US. In Brazil, while we have seen over year declines in sales, we continue to see a recovery in the general economy, driven in part by government programs providing incentives to aid automotive and light good sales. Activity in the electronics market has increased sequentially due to our seasonal demand for mobile electronics. Our Mexico business continues to outperform the general economy there in the first quarter, with very significant growth over the last year as we continue to write new business in industrial labeling and wire identification.

In our direct marketing businesses, we have seen a slight uptick in sales sequentially. However, sales continue to be down significantly versus prior first year sales in key markets such as manufacturing which have not recovered, and due to our house files for direct marketing campaigns that have shrunk, leading to lower call volumes. We have been able to partially offset the call volume shortfalls by improving our sales conversion and average order size. Additionally, investment in our e-business strategy became a reality with the launch of our new website for our safety business. This is the first of a number of businesses that will be upgrading our sites as we drive to significantly improve our traffic on the web through a multi-media strategy.

In our People ID business, we saw little improvement in the core business but have seen improvement year-over-year driven by new products, such as the premises software and access control product. A bright spot is our Varitronics business, which sells into the education market. This business saw excellent growth in the first quarter, driven by the continued success of our visual learning products launched in 2007, and by stimulus funds available to schools. In addition to the investments in new products and e-business, we have continued to accelerate our efforts to improve our front and back end business processes. Significant work with lean, both in manufacturing and the office is ongoing as is our work to reduce our operational footprint in the Americas. We believe these activities, in conjunction with strategies to grow sales will set us up well for continued profit improvement and market share gains going forward.

Segment profit for the Americas declined 8% to $32.8 million in the quarter. As a percent of sales, segment profit increased to 24.1%, compared to 22.1 in the prior year. Cost reduction initiatives we have implemented last year have improved our cost structure and resulted in our profits declining at a much slower pace than our revenues. Looking ahead, while we still do not anticipate a measurable impact to our business from an improving economy, we believe our growth and cost reduction strategies will position us well to take market share and drive accelerated profits.

Peter Sephton will now report on the European results.

Thanks, Matt and good morning everyone. Continuing now on slide 13. Sales in Europe were $94.3 million for the quarter, with organic sales down 12% and currency reducing sales by 1%. Sequentially, this is a marked improvement over the last quarter of fiscal 2009 when sales declined organically by 25%. The extent of recovery was different from country to country, and partly influenced by the continued success of our swine flu range of hygiene products. Our direct marketing business was the key contributor to the improved results and was particularly strong towards the end of the quarter and in some cases at near prerecession levels. This was helped by successful swine flu campaigns in UK and France following increased national alert levels.

We also managed to increase the number of customers to our house file, which in turn provides an opportunity to leverage those customers for future growth. The intensity of such event or legislation driven marketing allows us to test our eCommerce tool kit as we continue to invest aggressively in this channel in all our direct marketing units, e-business growth outstretched the sales growth from traditional paper-based media, and developing our capabilities for this channel remains a priority. The Brady brand declined by a greater rate than the total region but sequentially also showed an improvement, although at a more modest level than our direct marketing business. Since the beginning of this fiscal year we have concentrated our sales efforts towards the process industry and the automotive, defense and mass transportation sector and this focus is paying off. We believe these industries which have benefited from various stimulus packages will be among the first to recover.

Some of our proprietary product ranges which were key to us winning new deals such as Lockout Tagout products, where we have some remarkable successes in Central Europe, and IP printer and consumables for labels using extreme conditions which found their way into the defense and public safety applications. This quarter also saw the launch of the BMP21 and other new products which should help our organic sales in the future. Among our smaller businesses, the dye-cut units benefited from an early pickup in demand from the automotive and electronics industries. The People ID business which previously had shown exceptional resilience against the economic decline had a mixed performance during the first quarter. The security seals business, or Transposafe was one of our strongest performers in the quarter.

Geographically, the UK, southern Europe, the Benelux, Middle East and Africa performed better with modest rates of decline. While Central Europe and Scandinavia continues to show increasing decline rates. This last group trading is more difficult due to the weakness of local currencies outside the Euro zone. In Germany, which is traditionally a very strong export-oriented industry economic zone, the recent strengthening of the Euro against the US dollar and GB pound could however delay recovery.

In mid-October, we took the opportunity to acquire the assets of the UK catalog business of Welco. This business, located in Birmingham, will be integrated in our existing direct marketing business, consisting of Seton, Safetyshop, and PO Safety. It enhances the existing product offering for workplace equipment and came with its own customer file of 12,000 names. Europe's profit for the quarter was $24.9 million, which was 20% below the same quarter of last year. Profit as a percentage of sales decreased from 28.8% in the prior year to 26.4%, but improved sequentially.

This is a fairly robust performance against strong prerecession comparables and proof of our business' agility to seize opportunity such as the H1N1. Whereas in the previous reports we still spoke about the first and fragile signs of a turning tide, there is now some indication that the recession has bottomed out in most countries of the Euro zone as well as the UK. Against this, a potential limiting factor here will be the strength of the Euro which has in the short term a negative effect on export development. As a result, we remain cautious in our outlook, but we remain well positioned to grasp any any growth opportunity when and where they appear.

We'll now move over to Asia Pacific. Over to you, Al.

Thanks, Peter.

Good morning and I would draw your attention to slide number 14. Asia-Pacific sales for the first quarter were $87.9 million, down 19.5% from the prior year. Organic sales declined 20.4% while currency had a positive impact of 0.9%. Despite falling short of last year's record first quarter, this quarter's performance was slightly above our expectations. We were pleased with our ability to retain market share across our OEM customer base, despite a very challenging competitive environment.

Most of the OEM segments that we serve are showing year on year drops in volumes, which certainly have impacted our top line sales. The traditional uptick in volumes to support the upcoming holiday season is still present, but more muted than previous years, as our customers are still nervous about end user demand and inventory management. In the mobile hand set market, we continue to face very stiff competition from local converters, for the more commoditized parts. However, our introductions of new materials and converting technologies have been very well recognized by our customers as a means of helping them solve some of their technical problems and providing differentiation for their product appearance and performance.

The hard disc drive market, which is predominantly focused in Southeast Asia, has seen a nice uptick in demand during the recent quarter. Despite published industry reports which show volumes in this industry being relatively flat, we are seeing recent increases in end user demand, which support the launch of new products for the upcoming holiday season. Our MRO business, while still small, has seen nice growth during the recent two quarters. Much of this growth has come from the government stimulus packages that are focused on infrastructure development.

China and other emerging markets continue to provide plenty of infrastructure opportunities for the foreseeable future. This quarter, we have also launched the BMP21 printer, and are also working on an Asian language version which should further boost demand in coming quarters. We also have a number of other MRO products in development which should impact sales positively towards the end of our fiscal 2010. Australia continues to be the one area of sluggish demand for us in the region. Despite recent reports that the recession is ending in Australia, we have not seen as consistent of a recovery in demand as we have in other parts of the region. We have used the recent slow period to focus on business process improvements and infrastructure rationalization, and remain confident that our business in Australia will rebound on pace with the economy.

Segment profit for the region was $15.1 million, down 32.5% from last year's segment profit of $22.4 million. As a percent of sales, profit was 17.2%, versus 20.5% in prior year. Over the last three quarters, we have made a lot of adjustments to our business in terms of capacity rationalization, process improvements driven by our Brady Business Performance Systems and raw material supplier partnerships. All of those areas have helped us stop our margin erosion and more recently make some improvements.

During this quarter, in which sales were 32.5% down from prior year, our margins remained steady and have improved sequentially. The increase in gross margins was not recognized at the operating profit level due to our increased expenditure and focus on Research and Development to support both our own regions' needs and some of the global product launches. Looking forward, the second quarter last year was the point at which our business took a sharp downturn. Our second quarter usually falls short of the first due to cyclicality of Consumer Electronics, but should not show nearly as severe of a dropoff as we saw last year. However, with our customers' concerns about inventory and consumer demand, we remain cautious.

I will now turn the call back to Tom Felmer.

Thanks, Al. On slide 15 we reconfirm the full year guidance that we originally provided on our September 11th conference call. As you have heard throughout our call we are encouraged by the improvements that we saw in our top line growth during the quarter as well as the continued profit improvement that has been driven by restructuring and BBPS initiatives. While we are encouraged by these results, we still have limited visibility into future business conditions. We expect second quarter results to soften in line with historical trends as the Asian business slows following the seasonal ramp-up in electronics production and the slower holiday periods that affect business conditions in Europe and the Americas.

We may also see a decline from the first quarter sales that were driven by government stimulus in the Americas and swine flu in Europe as those programs may not be sustained going forward. We still anticipate some lift in Q3 and Q4 sales as the global economy begins to improve. Additional guidance assumptions for capital expenditures, tax rates, restructuring and depreciation and amortization remain unchanged and are also listed on slide 15. I will now turn the call back to Frank for his closing comments. Frank?

Thanks, Tom. We are pleased with the improvement in the business from our fourth quarter. Especially given the continued softness in the economy. Our cost reduction efforts have clearly impacted our business positively as reflected in our gross margin performance. The common message in the reports of our business leaders is that we are influencing our markets and driving growth. We haven launched the first of a number of meaningful products that are differentiated and will provide incremental revenues. We have seized opportunities such as H1N1 to drive business. We are partnering with end users in the electronics markets to develop differentiated products that are valued and allow us to more effectively compete in these markets.

Our proactive efforts in all these areas are the result of our investment in strategy, process and product development during the recession. We are optimistic about the momentum we have begun to build and we will do what we can to ensure it continues. We believe there continues to be mixed signals in the markets today as well as uncertainties when a full recovery will take place. In spite of a better than expected first quarter, we have left our guidance unchanged as it is still early in our fiscal year and we want to see more indications for sustainable economic recovery before we become more optimistic.

We thank you for your interest in Brady and we will now start the Q&A. Monica, please provide the instructions for our listeners.

Thank you. (Operator Instructions). Your first question comes from the line of Jason Ursaner with CJS Securities. Please proceed.

Good morning everyone. Great quarter. You referred a lot to the slides a number of times. I'm not sure if they're actually posted to the presentation portion of your investor website yet. I think SG&A increased about 15% sequentially. Can you try and quantify the impact of the new product launches?

We called out the components of the increase but we did not break out the -- how much each of them contributed. We did say coming into the fiscal year there would be an increase of -- we would be bringing back expenses of about $40 million due to bonuses and other increases in some of our variable discretionary expenses, but we also had in the quarter some increase due to the new sales programs, partly what Peter talked about with the H1N1 and where we have the opportunity to accelerate some growth, we did put additional investments. We did have some of these new major product launch as well that drove some of that incremental expense.

In terms of the Asia-Pacific operations, this is usually a higher percentage of SG&A relative to the other segments?

No, actually, ours tends to be a little bit lower. We have more of a direct selling model without as much catalog production and trade show participation, et cetera.

And sticking with Asia-Pacific, it was up about 16% sequentially but a decent amount of this was currency. In terms of -- was the normal build cycle extended through September for the holiday season of the mobile devices?

When you say through September, a little bit. There's a holiday in China called Golden Week which was unusually long this year and it occurred in the first week in October so we saw a little bit of distribution of demand that was different than prior years but we think it was mostly impacted by Golden Week. And so we typically see the biggest spike pre-November and then still a little bit of demand and then starting to tail off in December.

Okay. And in terms of overall inventory levels at your end customers, with them so low going into the quarter, do you think you saw any inventory restocking or do you believe that the sequential increase is just pulling straight from end user demand?

I think it's more so the latter. People are -- our customers are still very, very nervous about putting too much inventory in so they're running very lean, just because of the uncertain economic times and similar to Brady Corporation they too are focused on lean manufacturing principles and trying to reduce their overall inventory carrying levels.

Okay. And in terms of the reversal in the dollar having no net effect on revenue in the quarter, but in terms of the previous few quarters it's been a major headwind and I understand that the exposure is primarily translational but how big a tailwind is currency like would it be at current rates and have you ever quantified the pretax operating benefit of, say, like a $0.01 improvement in the Euro versus the dollar.

We don't call that out. You are correct, though, in that the impact is primarily translational. When you look at the currency impact from when we gave our guidance in September, the overall basket of currencies that we look at hasn't improved that much. When you look sequentially over the last couple of quarters, we have seen improvement again, like I said, from when we gave our guidance in September. There hasn't been that much of an improvement.

Okay. And final question from me, just a lot of the -- you talked a lot about the government stimulus benefits. Where do you see intrinsic demand eventually coming from when the government spigot begins to turn off? Can you talk a little bit about overall capacity and utilization in the industry, particularly maybe with some of your European competitors who may not be in as strong a financial condition as Brady?

Well, we've already seen some benefits from the stimulus package. The automotive industry has held up better than we expected. In terms of our holding up better than our competitors, in our direct marketing businesses we know that we're holding up better than our competitors. Certainly, those that are publicly traded so we know that we've been able to take advantage of things like H1N1, which obviously hasn't got anything to do with stimulus packages. It's very difficult to really assess market share there but we're very conscious that we haven't lost anything and by focusing on process industries and some other ADM industries, we know that we're picking up market share but it's a long haul. We've got that business, we're winning that business and thankfully we're going to have it for a long time.

We have made a conscious decision to invest in the middle of a recession and I do not believe that in average our competitors are investing as much as we do and I think that's due to the fact that we are financially very strong Company and we have after initially cutting back costs and starting about a year ago, took us maybe two or three months to start investing. Because if we are really financially stronger than other companies out there, which we believe we are, let's take advantage by investing in major initiatives such as new product development, e-business, lean, and so forth. We have really made a conscious investment because we believe this is going to pay off midterm for us. So I do realize it's a generic answer but I'm pretty sure that we are out-spending right now our competition, majority of our. New products would be for instance an area that we might get more intrinsic growth once the government stimulus stops.

Okay. Thanks a lot.

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

Hey, thanks. Just with reference to the H1N1 lift that you guys got and your commentary that may or may not follow through, can you just quantify as to what kind of lift you got in the quarter and looking forward, as we can try and model out maybe whether that's going to be sustainable or not.

Yeah, for competitive reasons we wouldn't actually disclose how much it actually lifted the quarter. But you know, it had some impact. It's very difficult to quantify how that's going to be sustainable going forward. What we did do is we acquired lots of new customers. The smart thing we've got to work out is which customers will place more business with us and which customers won't. We're used to these sort of event and legislation driven drivers in our direct marketing business. We've had it with no smoking ban, you remember that. We do know at a certain point. At a certain point it stops and very, very quickly. We've just got to be very, very diligent and anticipate when that will be.

Thanks. And just a similar question, on the education stimulus, can you just give us more detail. What type of spending is that and where are those products coming out of? That you're seeing the benefit out of.

When you're saying where they're coming out of, clarify that.

You comment you're getting a bit of a lift from education stimulus spending. I'm just trying to understand a little bit better what -- how that's benefiting you, what way?

We have a business that's in Minneapolis called Varitronics and this business specifically focuses on schools, kindergarten through twelfth great. This is an area where the government has allocated spending money. This particular case, they're driving the schools to invest in things that improve the education of children and we happen to have products, this VariQuest system, that the schools buy to improve the overall education of students. So particularly in special education, which is -- it's getting rather micro in terms of where it's allocated but that's how we're benefiting. The government is allocating a certain amount of this money to special education programs and they buy this VariQuest system to enhance those students.

And that's a product line we normally don't talk about but if you go to the Internet and it's probably under VariQuest, you can Google it under VariQuest, you can get an idea. It's a pretty cool system. It consists of a poster maker, cut-out maker, just things they use in schools. We have talked about it in prior conference calls. We have not seen money arrive at schools in prior quarters but it seems that the money is now finding finally its way into different states and different schools. And we are seeing a benefit from it because, it's not like the money didn't come and we didn't get a benefit. It's also that schools waited. They didn't buy anything. They were waiting for the stimulus money. It's almost like it took the color out of cork out of the bottle.

Thank you.

(Operator Instructions). Your next question comes from the line of Anthony Kure with KeyBanc Capital Markets. Please proceed.

Good morning. Just a couple of questions. Just want to tie up the H1N1 discussion. It was a lot of the commentary was around Europe. Was there any impact in the US or is that expected to come later? Is it just not as compliance-driven?

No impact in the US. We put together a similar direct marketing campaign through our direct marketing businesses and got no traction. Sales were minimal.

It's not common across all of Europe. We didn't really benefit too much in Germany. France and the UK were the main beneficiaries.

Okay. And then as far as the deal with HP, just want to drill down on that a little bit. Can you sort of size the relative opportunity there and did you see any impact of that already in the first quarter? Is this something that starts here in the second quarter?

Well, we can't talk about the size of the opportunity. That's confidential, obviously. And this really started in the first quarter, our sales to Hewlett-Packard. And it's a part of a sales initiative and a product development program that we have had going on for a number of years to focus our labeling products on the issue that particularly electronics manufacturers have around counterfeiting of their products. And so as part of our overall labeling strategies, we're trying to incorporate the ability to give our customers anti-counterfeiting brand protection through their labeling and so with Hewlett-Packard, it just happened to be a really high profile product in that Hewlett-Packard is actually marketing this anti-counterfeiting as a part of their overall marketing program for printer cartridges. Therefore, the reason why we would even go public with it. Otherwise, these are the types of applications that we refrain from commenting on at all at a customer level.

Okay. As far as the increase in the SG&A relative to the sales, the sales decline relative to the SG&A decline, and in sort of the context of some of this $40 million coming back in 2010, was that about as expected as far as the weighting of these expenses coming back for the full year in the first quarter? Was it let's call it $10 million or whatever or was it more lightly weighted or more heavily weighted in the first quarter than you expected?

No, we expected it to be pretty much evenly spread across the four quarters. Like I said earlier, a big chunk of it is commission and bonus which are accrued expenses so those would come back fairly evenly throughout the year and like we said, there was some spending for the launches of the new products and as we looked at taking advantage of some of these unique opportunities, we did have some increased spending in the quarter.

Okay. And then finally, given the relatively healthy top line performance in the first quarter, relative to expectations, and some stabilizing demand, the commentary around that, was there something that -- other than regular conservatism, something that happened in November that you saw sort of a sea change as far as demand on an organic level or is it just relative conservatism for the full year and lack of visibility?

It's really the lack of visibility. When you see the lift from the H1N1 and some of the stimulus, you just have no idea, you could have a nice month one month and as Peter said, it could just stop the next month. So it's difficult to project those and build those into a forecast. So we're cautious about that and we still have general concerns over the economy. You hear talk of people still slowing down over the holidays, people are still watching their inventories, it's still not clear that there's a robust stabilization. After what we've been through over the last nine months you still have to be very cautious -- you still have to be cautious at this time.

Especially over the holiday season, our second quarter typically is always a very difficult quarter because there's Thanksgiving, you have Christmas, you have New Year, you have Chinese New Year and typically what companies do especially companies who are not doing so well, they use those times to maybe extended shutdowns. Why we do not have as much maybe impact from this as we had during the summer, we still think this might happen. Even so we might not hear from customers about this but I think our second quarter is going to be an interesting quarter with all the holidays again and the economy is still weak.

And forgive me, I don't have the Chinese New Year in front of me, but does that fall in the second quarter this year?

It transcends the end of the second quarter, early third quarter.

So it sort of straddles it, is that what you mean?

Yes.

Okay. Thanks. That's all.

(Operator Instructions). At this time, I would now like to turn the call over to Barbara Bolens for closing remarks.

Thank you very much. We appreciate your participation today and would like to remind you that the audio and slides from this call today are available on our website. The replay of this taped conference call will be available via the phone beginning today at noon central time. The phone number to access the call is 888-286-8010, and the pass code is 32712052. The phone replay will be available until November 26th. As always, if you have questions, please contact us. Thank you for your interest in Brady and have a great day. Please disconnect the call.

Ladies and gentlemen, thank you for your participation. You may now disconnect. Good day.