Brady Corp (BRC) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Brady Corporation earnings conference call. My name is Regina, and I will be your Operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Aaron Pearce, Director of Investor Relations. Please proceed, sir.

Thank you. Good morning.

This is Aaron Pearce, Director of Investor Relations for Brady. Welcome to our fiscal 2010 second quarter conference call. We're happy you could join us. During the call this morning you will hear from Frank Jaehnert, CEO, and Tom Felmer, CFO. They 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 Al Klotsche, President of Brady Asia Pacific, who will all assist in providing the regional reports. A usual, after brief presentations by the team, we will open up the floor to questions.

We encourage you to follow along with the slides located on the Internet, as we will be referring to the individual slides as we proceed through the presentation. These slides can be found on our website at www.investor.bradycorp.com. We will start with slide three. You will have a few minutes to get to those slides while we go through our Safe Harbor statement and other usual information.

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

Also, please note that this teleconference is copyrighted by Brady Corporation, and there may be no rebroadcasting of this without the express written consent of Brady. Note also that Brady will be recording this 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. Now here's Frank Jaehnert.

Good morning, and thank you for joining us.

I'm pleased to report that our quarterly sales of $296 million grew 11% over the same period in fiscal 2009. Our organic sales increased by 2.9%. Acquisitions accounted for 0.9%, and currency added another 7.2% to growth. It should be noted that the prior year provides weak comparables, especially in the Asia Pacific region, where sales were down in the prior year due to the Lunar New Year holiday, and globally due to the impact of the economic recession.

We're also pleased to see the impact that our ongoing restructuring activities and process improvement activities had on our gross margin, which increased to 49.7% from 47.3% in the prior year quarter. As a result, excluding the after-tax impact of restructuring charges, our net income was $17.6 million and earnings per diluted share were $0.33; both stronger than the same period of last year where our net income and diluted EPS before restructuring were $9.8 million and $0.19.

As you can see in our press release, the primary reason for our local Company core growth -- for total Company core growth was our relative strength seen in the Asia Pacific region. We remain very committed to investing in key initiatives to drive organic growth, in particular new product development activities. In the past quarter, we launched several new products addressing our customer needs. We also continue to invest in growth through acquisitions, acquiring a label manufacturer in Brazil.

I'm pleased with the progress we have made in first half of fiscal 2010. However, visibility into our end markets continues to be limited, and we are cautious about the breadth and depth of the economic recovery. As a result, we are maintaining our previously published net income and EPS guidance for fiscal 2010.

I will be back later to summarize our thoughts for the remainder of the fiscal year. And here's Tom Felmer with a review of the financials. Tom?

Thank you, Frank.

As Frank mentioned, we were pleased with the second quarter financial performance. While we are seeing progress in both sales and profits, we should also point out that last year's second quarter was soft, due to several factors including many of our customers having extended shutdowns last year that they dealt with the global recession, and the Lunar New Year, which impacts our Asian business, fell in the second quarter last year, while it was fall in our third quarter this year.

As we move on to slide four, you can see our second quarter income statement compared with the prior year. Frank just reported on our sales and gross margin. Our gross margin continues to be one of the highlights of our performance throughout the economic downturn, and it continues to strengthen as we return to growth. This quarter's gross margin expansion is even more notable, as it comes in a seasonably low sales quarter, and Asian sales were a greater portion of our overall sales mix. SG&A was up $15.1 million compared with last year; approximately half of the SG&A increase was due to currency and the other half due to the return of commissions, bonuses, and some discretionary spending in this year's financials, while these expenses were not incurred last year.

We also increased our investment in R&D by $2.1 million, as we continue to focus on building our new product pipeline. Interest expense was down $1.1 million compared with last year, as we paid down $88 million of debt over the past 12 months. GAAP net income for the quarter was $15 million, resulting in diluted EPS of $0.28 per share. However, when adjusting for after-tax restructuring charges of $2.6 million, we generated $17.6 million and $0.33 per diluted share.

Moving on to slide five, we see the impact of our normal seasonality quarter-on-quarter, but encouraging improvements in our sales year-on-year as organic sales increased by 2.9%. Our gross margin and operating margins in the quarter were helped by savings that we are realizing from the restructuring, and our ongoing process improvement initiatives through Lean and the Brady Business Performance System. For the quarter, our gross margin was 49.7%, up from our seasonally much stronger first quarter gross margin of 49.4%, and the second quarter of last year's gross margin of 47.3%.

On slide six, you can see an increase in our SG&A for the quarter. As I just mentioned, our increase in SG&A was driven by currency and the return of commissions, bonuses and other discretionary expenses. We have maintained much of our sales and marking infrastructure in order to maintain high service levels to our customers, and gain market share through the recession. We are, however, beginning to expand the focus of our BBPS and Lean events from our operations to our SG&A functions. We believe that there's an opportunity to maintain our service levels and selling effectiveness, with a more efficient SG&A process.

On slide seven, we highlighted net income and diluted earnings per share, showing a nice improvement over last year's second quarter. As expected, our second quarter sales and profits dropped below first quarter levels, as they normally do, because of the slowdown in electronics production in Asia and fewer working days in all three regions due to the Holiday seasons.

On slide eight, we break out our restructuring charges for the current quarter in both F10 and F09. The after-tax impact of this quarter's restructuring charges was $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 discussion in September.

Moving on to slide nine, we summarize our second quarter cash flows. As outlined, we continue to generate strong cash flows from operating activities, and strong free cash flow in excess of net income. Free cash flow for the quarter was $28.2 million, or 188% of net income.

On the cash balance [walk], we generated $34.2 million of cash from operating activities. After a break in acquisition activity for several quarters, we're again utilizing some of our cash to invest in acquisitions, as we spent $18.5 million in acquisitions in the second quarter. We also invested $6 million in capital expenditures this quarter, AND currency exchange had a negative impact, decreasing our cash position by $2.6 million. Our cash balance at January 31st was $206 million, which we believe gives us adequate flexibility for future investments.

Moving on to slide ten, gross debt remains at $391 million, and net debt is approximately $186 million at the end of the quarter. As expected, our trailing 12-month debt to EBITDA ratio has improved in Q2, due to last year's particularly weak second quarter being replaced by a stronger second quarter this year. We believe we have sufficient capacity to take on additional debt, should we choose to invest in additional acquisitions in the future.

And finally, on slide 11, you can see that we continue to make investments in R&D. 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 of our products, such as the BMP 71 portable printing system, launching on the heels of last quarter's BMP 21. The BMP 71 offers some of the most advanced technology ever seen in the portable printer market, and is being very well received by our customers. Also launched this quarter is the BBP 72 double-sided printer, our B-345 PermaSleeve Wire Markers, designed to exacting military standards, Transtherm Gap Filler for the electronics market, and our B-6477 Halogen-Free Wire Markers.

At this time I would like to turn the call over to Matt Williamson for an update on the Americas business.

Good morning. Thanks, Tom.

Please refer to slide 12. Americas sales in the second quarter were $121.6 million, down 1.1% compared to the prior year. An organic sales decline of 4.3% accounted for the majority of the sales decline, as the impact from currency was a positive 2.6%, and we only had the benefit of one-month sales from our recent acquisition in Brazil contributing 0.6% to sales. Although our sales continued to be softer in the quarter than last year, we see an overall improving growth trend versus 2009.

In the Brady US business, we saw a slight sales decline versus the prior year, as our MRO business continued to decline compared to the second quarter of fiscal 2009 but at a lower rate. Our sales to the US OEM markets have started to improve versus last year and sequentially, as we have focused sales initiatives in several key markets. Overall, though, we have not yet seen significant signs of economic recovery in this business. Our strategy has been to drive organic sales by focusing on the introduction of new differentiated products, growing in new markets and preparing to launch our new transactional website.

The new BMP 21 printer and consumables launched in the first quarter of fiscal 2010 continued to exceed our sales plan in the second quarter. Response from customers and our channel partners in the electrical datacom and industrial markets is very positive regarding the quality and ease of use of this product, which is translating into sales. As Tom mentioned, our strategy to grow by innovative new products was bolstered with the recent launch of the BMP 71 portable printers and consumables, that are geared to the safety, industrial, and electrical markets. The product remains -- represents a major leap forward versus current Brady and competitive products, in its ease of use and flexibility for our customers in high-performance label and sign printing applications. We also launched a new thermal transfer printer and PermaSleeve high temperature wire identification materials for the aerospace, mass transit and industrial markets.

Outside the US, we have seen improving results, with growth in Canada and Brazil. In Sao Paolo, Brazil, we acquired Stickolor to improve and to help us drive our growth in Brazil's improving OEM markets. Stickolor manufactures customer-specific screen printed labels, overlays, and name plates for the transportation, electronics, white goods, and general industrial markets. Sales are approximately $9 million annually. One month of Stickolor's results were included in our second quarter.

Our Mexico business, although small, continues to show consistent strong growth over the prior year. Our direct marketing business has been negatively impacted by employment losses at US customers. To drive growth in these businesses, we are focusing on new customer acquisition, E-business initiatives and new product introductions. New, easier-to-use websites for four of our businesses, including our Seton and EMED brands, were launched in the second quarter, and we are investing in programs to drive more traffic to these sites. Our strategy to drive sales through new products is also playing out in these businesses, with the launch of new compliance products and our latest version of our premises access control software.

Segment profit for the Americas increased 6.8% to $23.5 million in the quarter. As a percent of sales, segment profit increased to $19.4% compared to $17.9% in the prior year. Our strategy to improve gross margin continues to pay off, as we have driven productivity improvements with Lean manufacturing, in addition to numerous facility consolidations concluded or in process, plus other operational improvement initiatives. These have improved our cost structure and resulted in improved gross margins and bottom line profit.

As our Lean management principles have grown, we are now in the early stages of focusing on opportunities in the front end of our business. Additionally, we have reinstated incentive compensation and salary increases. We remain tight on adding headcount and discretionary spending.

Going forward, we remain cautious about any real sales growth in our largest markets, thus are focused on our sales and operational improvements to drive profitable organic growth, and to take market share in a down economy.

Peter Sephton will now report on the European results. Peter?

Thanks, Matt. Good morning, everybody. I will draw your attention now to slide 13.

Sales in Europe were $96.6 million for the quarter, up 10.8% versus the prior year. Organic sales were down 1.6% against the same quarter the previous year. Acquisitions added 2% to sales, and currency contributed a further 10.4%. In general, our business performed slightly better in the second quarter than we had expected, sustained by what appears to be a slowly -- I'll emphasize that -- a slowly improving economic climate.

In particular, the agility of our direct marketing businesses to respond to external changes has once again proven key to this improvement. During the last six weeks of the quarter, significant parts of Europe were hit by severe winter conditions, which gave a boost to our range of winter products in our catalogs in France, the UK, and Germany. Underlying and recurring core business volumes also improved, leading to second quarter sales slightly above those of the same period in fiscal 2009.

Our sales to the Internet continues to grow month after month at double-digit rates, as we continue to roll out new applications aimed at online buyers. This tactical multichannel agility is at the core of our strategy for our direct marketing businesses, and follows the success we have seen with European legislative changes in the past. Our extensive reach into the market, linked with local sourcing and logistics expertise, allows us to respond and capitalize on opportunities very quickly.

The Brady brand showed a slight improvement sequentially over the previous quarter, although sales are still below those of fiscal 2009. The main reasons for this is are the slow recovery of European exports, and a general reluctance amongst main industry players to commit to new capital investment. We've seen some general improvement in growth in our MRO business, benefiting from our segment focus on process industries and laboratory identification, for instance. But the continued weakness of our OEM business, especially in Germany and the Scandinavian countries, has just about denied us growth overall. Business in the UK, France, and Benelux was more encouraging, and our business in Eastern Europe and some of our newer markets, such as Turkey, are in growth but start from a relatively small base.

We continue to sustain our sales efforts with a drive towards greater selling effectiveness, and an accelerated flow of new product launches for both the medium and low end of the market. New product launches in Europe this quarter included the BPP 72 benchtop thermal printer, targeting growth in aerospace, defense and mass transit, and our PermaSleeve materials, as Matt outlined. These are designed with two print heads that a heat shrink tubing printer can print on both the top and the bottom of the sleeve simultaneously. Looking forward, we're preparing for the staged launch of our BMP 71 printer in the next quarter in Europe.

During the second quarter, we continued and accelerated the integration of our UK catalog business that we acquired in the previous quarter, called [Welker]. This business has rapidly proven to be a solid contributor to our existing UK direct marking business.

Europe's segment profit for the quarter was $25.9 million, which was 13.1% above the same quarter of last year. Profits as a percentage of sales increased from 26.3% in the prior year to 26.9% for the current year. In general we can take some encouragement from this, especially with our profit improvement and the improvement in our quality of earnings, which were achieved in a macroeconomic environment which remains still very challenging.

While the economic barometer points towards growth in Europe, record levels of unemployment and a hesitant credit market still remains. Furthermore, the tensions within the Eurozone over government deficits continue to impact the investment climate. For Brady in Europe, this translates into a market that's unwilling to invest in capital expenditure and other growth investments. And as a result, we also remain cautious in our outlook for the remainder of the year.

Now I will pass it over to Al Klotsche, who will report on Asia. Over to you, Al.

Thanks, Peter.

I would ask that you turn your attention to slide 14. Asia Pacific sales for the second quarter were $77.6 million, up 38% from prior year. Organic sales increased 25.7%, while currency had had a positive impact of 12.2%. Despite continued challenges with the global economy, we were very pleased with our second quarter. Our growth in the consumer electronics market was driven by solutions where we truly add value to our customers versus the more commoditized applications. The solutions we have focused on are most often used in high-end electronics, where volumes may be a bit lower, but their higher prices are reflective of the value they provide. These solutions help our customers improve on problems such as excess heat generation, optical clarity, and extended battery life. Our focus on customer groups with common problems has allowed us to quickly replicate our new products and capability success stories. We continue to be encouraged by the speed of convergence of consumer electronic devices, and see many new opportunities in the coming quarters for further innovation.

We have also adjusted our manufacturing footprint to align with this newer business strategy, with the recent consolidation of two of our facilities in southern China. While not giving up any machine capacity, we are now able to better manage our supply chains and other resources. In Southeast Asia, our business continues on a very strong pace, as the team continues to leverage the unique manufacturing capabilities that we have in converting and precision stamping. The relative health of the computer industry, plus the disproportionate growth that comes from some of the solutions we are providing, has resulted in nice top-line growth, excellent capacity utilization, and thus increased profitability.

Our MRO business, which is spread throughout the region, continues to gain momentum as a result of our increased investment and focus. We continue to expand the number of channel partners who can take our solutions to new markets, both geographically and vertically. The newly-introduced MRO products that Matt and Peter have discussed are doing quite well in Asia, despite not being tailored to meet the specific needs of our market. Our investment in localized R&D resources now gives us the opportunity to modify some of these solutions to meet the specific and unique needs in the Asia Pacific region.

This quarter we have launched a new material, B-6427. This new Wire Market construction is unique, in that it is halogen-free, and has a self-laminating feature which provides superior abrasion resistance.

Our business in Australia is beginning to wake up from a long recession, the likes of which we have seen in North America and Europe. The overall recovery in Australia is highlighted by the reopening of major activities in the mining sector in western Australia, where we have a strong presence. We have also consolidated our businesses in Sydney, now into one facility. This space and cost savings is a great example of the efficiencies that result from a team who has aggressively driven Lean principles throughout the entire operation.

Segment profit in the region was $10.7 million, up 159% from last year's segment profit of $4.1 million in the second quarter. As a percent of sales, profit was 13.8% versus 7.3% the prior year. Much of our improvement has come from our focus on driving waste out of all of our business processes, better facility rationalization, and the benefits of the newly-launched products.

Looking forward, our customers continue to watch their inventories very closely, and have reduced the average size of their orders, thus reducing some of our visibility to the future. We expect the third quarter to start out slowly, with the Lunar New Year falling in the middle of February, and then pick up as new programs begin ramping up for the Summer and the Fall.

I will now turn the call back to Tom Felmer.

Thanks, Al.

On slide 15 you can see that we are reaffirming the full year guidance that we provided in our November conference call. While we are somewhat encouraged by our results this quarter, we still have limited visibility to future business conditions, and accordingly remain cautious, primarily with our businesses in Europe and the Americas. Nonetheless, we still anticipate some lift in third and fourth quarter sales, as the global economy begins to gradually improve, and we enter a seasonally stronger period for our businesses.

Additional guidance assumptions for restructuring capital expenditures and depreciation and amortization remain unchanged, and are also listed on slide 15. We also see a 100-basis point improvement in our tax rate projection for the full year, from 28% down to 27%, due to the relative strengthening of our business in Asia, where tax rates are generally lower compared to the US and Europe.

And now I would like to turn the call back to Frank for his closing comments.

Thanks, Tom.

We are pleased with the direction the business is moving in, especially given the continued uncertainty in the economy. As we noted in the first quarter, our cost reduction efforts continue to impact our business positively, as reflected in our gross margin performance. And our growth initiatives, especially our investments in developing new proprietary products, are beginning to bear fruit. We are optimistic about the momentum we have begun to build, and we'll do what we can to assure it continues.

However, we believe that there continues to be significant uncertainty as to how robust the economy -- the economic recovery truly is. In short, we are concerned that the economy remains fragile, and may not recover at a solid pace. Because of this uncertainty, we continue to be somewhat cautious in our outlook.

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

(Operator Instructions)

Your first question comes from the line of Charlie Brady with BMO Capital Partners. Your line is open, sir.

Thanks, good morning.

Good morning.

With respect to SG&A, I guess going forward, you said that you held on to a lot of the -- I guess SG&A infrastructure, and commissions are coming back. So from a percentage of sales standpoint, I guess even from a dollar standpoint, if I look at a Q2 run rate on a dollar standpoint, which was basically flat with Q1, is that the kind of run rate level we're up against right now, given where you see sales playing out over the rest of 2010?

Again, we talked about the Delta from the run rate you from Q2 through Q4 of last year has popped up, and is due partly -- about half of it was due to currency and half due to the return of some of those infrastructure costs, that we actually called out when we gave our initial guidance. So we would anticipate them being in a similar range going forward.

I also commented that we -- while we continue to focus our Lean efforts on the operations side of the business, we're starting to work on using some of those similar techniques in looking at the SG&A and, I would say, the carpet side of our business. So it's a focus area for us, but from a run rate standpoint I would say that those numbers are correct.

Okay. In terms of R&D spend, obviously you guys have really kind of ramped that up, a lot of new products coming out. I'm just wondering, for the balance of the fiscal year -- I guess what I'm trying to understand is was there more of a first half run-up in R&D expense that ought to tail off a bit, now that you've had a bunch of products come out, or are you kind maintaining this level throughout the fiscal year?

We have our Chief Technology Officer, Bob Tatterson, with us; and maybe, Bob, you want to comment on this?

Yes, definitely, we ramped up our activity over the last year in terms of real productive activity, and also we have the impact of, again, incentive compensation coming into play this year as well. So I think the level of activity is going to continue on as you see here.

I think the important thing is we're also working really on the productivity side, both in terms of productivity and efficiency of the R&D execution, obviously to get more output for the same input, but also bringing in higher-quality programs into the process. So we look forward to greater impact as we go forward.

In general, I would like to repeat a comment I have made over the years, which we have really been able to execute on the R&D side. I've always said there two are line items in the profit and loss statement which I would like to see going up as a percent of sales. One is profit, and the other one is investments, or expenses related to new product development, including R&D. We have struggled over the last couple years to make this happen, but I think we have a lot of momentum going on in R&D. So I would not mind if R&D as a percent of sales would go up.

But the same time, of course, we are pushing on cost of goods sold, and SG&A as a percent of sales to go down. And I think with what Tom said earlier, I'd like to echo this, we have seen a tremendous amount of progress in our gross margins, I think primarily driven by our Lean efforts, the Brady Business Performance System, and I think even exceeding our expectations, and encouraged by this. We are starting to push this on the carpet; in other words, trying to do what we have done in the cost of goods sold side also in SG&A. So while this probably is not anything short term, and we certainly don't want to give any guidance or any numbers on this, we believe there's opportunity going forward.

Thanks. I'll ask one more and get back in the queue. If you look at the cell phone and the handset market, can you give us maybe a broader sense of application? So where the market is kind of at today and where you see is it moving? Is it moving -- is there still good growth momentum in more of the higher content cell phones, or is there -- is the push into simplified phones into developing markets kind of driving the market over the next 12 months or so?

I'd say -- this is Al Klotsche. I'd say that you see on both ends of the spectrum a lot of growth, certainly in the high-end feature-rich phones, that is the segment of the total market that's growing the fastest, and that's really where we've concentrated our new product development efforts. The low-end phones in the developing markets are also growing pretty well, but not as fast as the feature-rich. The part that's kind of stagnant a little bit is that middle-end of the mobile phone segment.

Thanks very much.

Your next question comes from the line of Allison Poliniak with Wells Fargo.

Hi, good morning.

Good morning, Allison.

Al, could you quantify the impact of the change in the Lunar holiday? Is it point to sales, or is it more, should we be thinking?

Al shakes his head. I think that's a no.

I'm not sure that I can quantify that. It's different every year, and with people bleeding their inventories down so far before, we actually have had some calls for supplying product during Lunar New Year, which is happening right now. So it's really difficult to say year-on-year what the impact is to us as a company.

But basically what it means, it's one week of holidays, right, which was last year in the second quarter, and this year it's coming in the third quarter.

Okay. Then Frank, could you give your thoughts on the acquisition environment currently, and then more specifically as it relates to Brady?

Yes, we think there's more activity in the M&A market in general. We don't see too much activity from private equity. It's more strategic who we are up against. As far as Brady is concerned, we have intentionally stopped all acquisition activity when the recession started in Fall last year, and -- to preserve cash, because we didn't know how bad this would really get. But we have started again to make acquisitions.

And also, many of the acquisitions we have made, for instance Stickolor, this was an acquisition we have talked to for about one and-a-half years. I mean the recession started, we stopped talking to them but we kept them interested, and we're now able to execute on this. We have several companies we are talking to, and we have talked for awhile. Because you can never tell which one is going to happen, because there's always a price question and -- but we are becoming more active and more encouraged also by the bottoming out of the economy. And, of course, our good cash position.

Great, thank you.

Your next question comes from the line of Jason Ursaner with CJS Securities.

Good morning, everyone. Just looking at the gross margin line, it improved sequentially on $23 million lower revenue; and even with some of the growth coming from Asia Pacific, which I generally thought was lower margin. So is this just realizing the benefit of the cost restructuring, or is there a product mix that's playing a factor here?

From a high level, if we look at it, again a year ago we had a lot of our restructuring activities took place in the second quarter, so we have the full impact of that in this year's second quarter, plus we've been talking now for about a year and-a-half or so on Lean and BBPS, and I think you're starting to see the momentum and the impact of that taking place. We have Lean events going on all the time at all of our facilities around the world. So you're seeing that benefit.

And there's some benefit from price, maybe, in Asia. I know Al talked about continuing to focus on moving upstream to the more complex cell phones, and providing parts there. I think you may be seeing some of that impact as well. That's also impacting the overall profit of Asia, as Al talked about.

And with all the costs you have taken out, how should we think about incremental margins that the business can achieve from additional revenue?

Let me try to answer this. I've been with the Company for 14 years, and every time Brady comes out of a recession, its gross margin is close to 50%; we have quite some leverage. I don't think that's going to be any different this time.

Well, if I just look at it year-to-year, you added about $29.5 million revenue, and it contributed $21 million gross margin, which would be about 70% incremental margin. Is that at least a decent starting point, or would that be kind of not really in the right range, just with $20 million of that increase from currency?

I think the restructuring activity we had had this recession was more than what we had in the past, so you have a combination here on top of the normal leverage. So going forward, I think you more or less will see a normal leverage, not so much any more the impact of restructuring. So, in other words, I cannot answer your question.

Okay. In the investment income, there was pretty strong Delta sequentially. Are you investing cash more aggressively, or is there some mark-to-market on an investment that hit that?

It's all related to deferred compensation.

It just moves around different P&L lines. It moves around between SG&A and other income.

Okay. And then just on SG&A, I know that you were asked a little bit about it, but just trying to make sense of the number being flat sequentially. Was there any one-time related to the Stickolor acquisition, or new hiring, or is it all just the higher accruals and currency?

I'm sorry, are you talking about the SG&A from last year to this year?

No, just for the quarter.

It's not material, the Stickolor.

In general to SG&A, I think what I would like to say is, we have -- in every recession we had, we have always cut back and taken restructuring when we felt it was prudent. On the other hand, we are aware that financially we are an above-average, strong company. So we don't have to cut back, let's say, prospecting in direct marketing, and that's a very easy way to reduce your SG&A, but you are going to regret it two or three years later. But because of our financial strength, we don't have to do things like this.

We are not just quarter to quarter. We are in for the long term, and we have cut back in SG&A significantly less than we have cut back in other areas, because we believe this is a time where our financial strengths should be used to take share and to be there in front of our customers. So that's, I would say, part of the relatively high SG&A you can see. So it's, to a certain extent, also intentional; in addition to commissions coming back, discretionary spending coming back and bonuses coming back, that we have talked about earlier.

Based on the adjusted targets for this year, you wouldn't expect any reversals of accruals at this point in the second half at current rates?

At this point of time, we're are not planning for it. As you know, we have not changed our guidance now, I think, for half a year, right? So there is no reason to adjust anything.

Okay, thanks a lot.

It very much depends on the economy, of course, right? And the exchange rates and what have you.

Of course. Thanks a lot, guys. I will jump back in the queue.

Your next question comes from line of Paul Mammola with Sidoti & Company.

Good morning, everyone. I was hoping that Matt and Peter could give us a sense of how the businesses trended during the quarter. Was January stronger than November? I guess I'm just surprised that the business isn't seeing a volume up-turn yet, given what's seen as a little bit of an uptick in the general economy anyway?

If I can weigh in, Paul, we did see an uptick toward the end, but as I pointed out we saw that through the sale of Winter products. But, you know, when you look at the uptick in the European economies, it's very, very marginal. The thing that really tracks our business is fixed capital formation, so investment, and that's still declining in Europe. It was down, I think, 10.6% last year. It's down 2.9% this year. So whilst we've seen a very, very marginal uptick in the Eurozone, our sales generally tend to track capital investment. So I think that's the best answer I can give.

Matt, I guess similar thing for you, for the Americas?

Well, first of all, we are seeing, as you look at the quarter, that we're improving over the quarter, and we would expect that to continue to improve, although we're not super-optimistic about the economy, but we would expect it to the improve. Our sales bottomed out toward the early part of summer last year. So we would continue to see it, the improvement that we're seeing in the quarter continue.

But, you know, in addition to what Peter said, when you look at our business, take, for example, the direct marketing business, the people ID business, very much linked to projects that companies are doing, their willingness to invest in facility upgrades, in projects as it relates to the number of employees they have. So in the people ID business, their willingness to invest in a project for access and security control into these facilities, and this is an area where there's no question businesses have held off on. The manufacturing and construction markets in the US particularly are -- have held us back. We have a lot of business in those markets, and we haven't seen a lot of improvements in those industries. So as those will improve, our business will improve also.

So we're projecting most of our business right now, improvement to come from things that we doing to improve our market position.

Okay. And for the same two businesses, can you give us a sense of how pricing is right now? Would you say competitors are price-rational? And have you negotiated any changes in pricing with distributors for the year?

We haven't had any price increases this year at all. Very selectively on products, but as opposed to previous years, where we've had major price changes, with for the most part across-the-board increases, we have not had that; and due to the market that we're in, we're not planning on that going forward.

I would echo that for Europe. In previous years, we've had some latitude in price, and it's not as if we're finding aggressive pricing out there, but I don't think this is a market where we can really ramp up our prices. But you can see in all the other financial reports, you can see it in Europe and in America [broadly] how gross margins are increasing, so we're finding our ability to sustain pricing in what is a tough environment. And that's a testament to our marketing and sales team, and our operations team to maintain those gross margins.

Okay, understood there. So Tom, I would assume that pricing for films, plastic-based products, paper products from pulp, are going up. Is there any big cost difference between what's in your raw material right now, relative to your finished product inventory?

I would say nothing material right now.

Okay. And then finally, Al, could you just take us quickly again through why you're collapsing a couple of facilities, given good utilization there, good year-over-year growth? And was there any meaningful idle capacity in the quarter as you moved machinery?

Well, the reason that we're doing it is with our focus on Lean, we're finding that -- specifically, I'll talk about our two facilities in south China. Both facilities were able to free up enough space that we decided to move both of those facilities, our leases had come up, into one new shared facility with less space than the combination of the previous two.

So it's just our continued effort around rationalizing our cost base. And whereas five years ago, our customers were demanding next-door instantaneous service, which we'd like to give them and we had given them in the past, as cost pressures have increased they've had to recognize and accept the fact that that next-door instantaneous service isn't always going to be available.

I would say as a general comment to Lean, first of all I'm very pleased how this whole Lean initiative has changed our culture. The biggest surprise to me has been how much space it frees up; inventory reshuffling into sales, manufacturing and so forth. I would say that has been the biggest surprise to me, the freeing up space everywhere. We have consolidated for instance in the US, we have taken manufacturing out of two operations, personal [concepts] and (inaudible) and put into our EMED location. We have moved some of our production from other facilities to Mexico, for instance, and still have space. So that to me, I would say, is the biggest surprise.

Thanks for your time, guys.

Regina?

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

Good morning. This question is just about Europe. Just looking at what's going on in the Eurozone these days, and you alluded to the in your comments, but do you expect actually a step down in Europe going forward, or are you looking for sort of more of the same, flat growth as you proceed through the rest of the year?

I think it's the latter, it's more of the same. I just think that the numbers, following Paul's previous question -- you know, the thing that really [attacks] our business is -- the OECD described it as gross fixed capital formation, and that was down 10.5% percentage points last year, and forecasting down about minus 2.9%. So that rate of decline is slowing down, and we'd expect to track that.

Okay. And as far as just broadly speaking across all the businesses, could you just comment on inventory levels and where we stand there, with what your opinion is as far as the channel goes, and how -- what their shelf space looks like?

In the US, just like our own Company, the inventories went down in our distributors and in our end users over the course of the last year, and I would say at this point there's modest changes there in terms of going down. But I think in the OEM space, we've seen that they're depleted and they're starting to buy again. That's one of the reasons why our OEM business is increasing.

So I don't see where inventories are going to go down much further, unless the economy was to tank.

I'd echo that for Europe as well. We have an efficient service model. We don't expect our distributors to hold some inventory. So whether the economy is up or whether it's down, they hold -- they're pretty professional companies, and they hold a fairly optimum level of stock. So I wouldn't expect to see much change in that, either.

Okay, and last question is for Al. Just as far as currency impact in Asia, can you remind me what the big contributors are there, either positive or negatively, what drives currency in Asia?

I'll look at Tom as I answer this. I think the two that drove us most were the Australian dollar and the Korean won this quarter. I'm getting an affirmative head nod.

Okay, thank you.

Your next question comes from the line of Rob McCarthy with Robert W. Baird.

Good morning, this is Daniel [Zutek] in for Rob McCarthy. In November, Nokia kind of mentioned a 10% handset volume increase for calendar year 2010. Can you talk about how your growth expectations would compare to that number?

We don't comment on individual customers.

Could you just comment on how you would see, like, your growth expectations compared to that overall handset volume increase for the year?

Sure. If you look at that the market, we historically have tracked or exceeded the market. The only thing that I would say is that, looking forward, that middle end of the market segment that I was talking about, we've probably de-emphasized our efforts a little bit more, and put our efforts more on the higher end solutions. So I'm less concerned about our top line sales as I am the profitability of our sales to that sector.

So we're really focused on understanding what our customers unmet problems are, delivering unique and differentiated solutions, which are going to uphold margins and allow for continued reinvestment in R&D.

Okay. And then moving over towards your guys' eBusiness initiatives, you mentioned like the new Seton website in early November, and some of the other new sites you mentioned. Could you possibly help us quantify any progress at these websites?

We have seen more traffic on those sites, for sure. Now, of course, we just launched them, but we saw a spike immediately.

Bentley, do you have anything to add to this? Bentley is our Chief Information Officer, who also is in the room here.

I would say that it's too early to tell at this point, but the major improvements in the site, usability, graphic improvements, and some of our search engine optimization, is going to allow us to perform better going forward. But at this point it's too early to tell, and the plans to continue this progress in the Brady market are on schedule, and we're looking forward to the next quarter as these improvements go into the sites.

Great, thank you.

Your next question comes from the line of George Staphos with Banc of America/Merrill Lynch.

Good morning. Maybe a question for everyone, Frank, bigger picture. You mentioned that visibility right now is still somewhat limited as you're entering the next quarter, and my sense is that's normally the case whenever you are in recovery, visibility is quite limited. How would you, and how would the team, compare the trends that you're seeing and the response you're getting from customers regarding outlook versus past recessions? In other words, are we seeing the normal sort of hesitancy from your customers, and if that's the case then obviously that bodes well for the future? Thanks.

Well, let me give you a general, not customer-specific answer. This is a recession which is unlike any other recession in the past. I think it will have permanently shaped or changed the way people think about taking on risk; and, of course, as you know, risk was driving a lot of the growth in the past. So I think maybe even similar to the Great Depression, when you meet people from the Great Depression, those people have forever been changed in their behavior. I don't think it's quite like this, but I think the risk tolerance has gone down.

So from this point of view, that certainly is different than in prior recessions. And that's what goes into my big picture thinking, as I said earlier. That's not customer-specific. That's just what I'm seeing going on, and that's all over the world, globally.

As far as customer-specific, do we hear anything different this time from customers as compared to the last recessions? Al, Peter, Matt?

In the US market, I think it's very similar. Tentative, and slow to come out of it. Outside of the US, when you look at the Latin American market, Mexico and Brazil particularly, there's growing consumers there, and they're coming out of the recession faster, and we're benefiting from that.

We haven't quite seen anything like this before, so the jury is still out on the pace of recovery, but there will be a certain pace to recovery. In some instances it will be game-changing, but my general sense is when I look at the business market, people are moving ahead cautiously. I think people can see the light at the end of the tunnel. So that's kind of an overall (inaudible).

George, I would have said in the past, and I think I did say in the past recessions, we're going to wake up one day and all of the sudden sales growth is coming back and we don't even know why. One day we wake up, and it's back.

I don't think that's going to happen this time. You're not going to wake up one day and all of a sudden we don't know how to fulfill orders. I think it's going to be much more subdued this time. At least, that's how we are planning. If I'm wrong, it would be fantastic, because we have the capacity, the machine capacity to ramp up fast, and I don't think we would have any problems hiring people either, with the unemployment we have all over the world.

Frank, maybe as a follow-on, how do you then correlate that or reconcile that with your marketing plans? In other words, might that argue that perhaps you don't need to be as aggressive in new product development, et cetera, because you be able to -- and marketing to your customers, because will you be able to see that wave coming at a greater distance than perhaps in the past?

Well, there two are components to growing sales. One is growth of the market and the economy; the other one is growth compared to competition. And I think when we launch new products, every time we launch new products we see our sales benefit nicely from it.

And also, if we continue to invest in our marketing operations, or in our sales team, internal sales, external sales, or people on the street, we might not benefit from the economy, but I think we benefit from taking share from competition. This has been our strength going back through all recessions. We see companies, some of our competitors really struggling, and they have to cut back everywhere, and we have the luxury of not doing this.

Now, I do realize we could show higher profits if we were to cut back stronger. But as I said earlier, we are not here for the third or fourth quarter, we're here for the next of couple years. This strategy has served us well, and I do believe it will serve us well this time as well.

Thanks for the color, Frank. Good luck in the quarter.

Thank you, George.

Do we have any more questions, Regina? Regina? Hello? Is there any button we can push to get the Operator? Maybe something like pound zero or star zero?

The next question comes from line of Rick Lane. Please proceed.

Good morning, guys.

Good morning.

On the CapEx side, is $25 million a run rate you think that will sustain you? What do you think, looking over the next couple of years?

I think we've said historically that about 2% of sales is required to operate the business. That takes care of the general maintenance of the business, as well as some efficiency and some upgrades.

I would say, Rick, maybe there's some -- one thing that has changed, again with our Lean initiatives, we are able to increase what we can manufacture on our machines now, because we have reduced setup times, and we increased yield. So where as we would have maybe had to expand capacity in the past, I think we can push this further out.

So I think when you see investments, it's not just replacement -- it's not so much expansion of capacity anymore what we are looking for over next couple years, it's probably new technology improvements. Bob, you have --

I'll just add exactly that. I think we're seeing improved efficiencies with our current assets, but we're going to continue investing and perhaps invest preferentially more in investments for new technologies, new product capabilities.

So more of a shift into R&D, really?

Yes, manufacturing technology, step it up instead of expanding capacity. We try to get as much as we can out of existing equipment and invest for new technologies, which should give us a competitive advantage.

Al talked about in Asia on the hard disk drive industry, we have a competitive advantage for quite some time, because we can manufacture something that nobody else can, and they've been trying for years, and that's the kind of investment we would certainly like to continue to make as opposed to expansion of capacity.

Okay. And then just to help clarify my own mind, in more of a -- let's say an intermediate sense, you've heard me ask this question in this way again. From where we sit, the factors of mix, seasonality, restructuring benefits, adding all those things into the mix, it makes it really hard to analyze Brady, let's say from a volume base, incremental margin type of a typical analysis.

So I guess notwithstanding the long-term focus now that you are going to put, applying Lean to the carpet side of business longer term, were you implying that the $109 million level is a reasonable run rate to look at SG&A?

No, Rick, we are never satisfied. So if you ask me am I happy with the $109 million, I'm not happy with $109 million. I don't want to say if it's a reasonable run rate going forward. I don't want to go there. But we constantly push forward. If you look at our SG&A as it was in the sales, it's high. And, you know, if you look at our cost of goods sold of sales, it's low, if you compare to our peers.

So going forward, you know, we want to increase the quality of earnings, and so we are going to push certainly to get cost of goods sold as a percentage of sales down, and we have maybe a head start here because of Lean. But I think going forward, I think there's more opportunity in SG&A to come down as a percent of sales. So earnings quality probably comes more from SG&A, maybe a little bit less from cost of goods sold, and we might invest more in R&D as a percent of sales.

And likewise, though, I mean, given the fact that you've got things screwed down pretty tight there to begin with, and obviously the absolute level of business is operating at a pretty low level, I'm just thinking that most of the leverage over the next year, year and-a-half on the SG&A front really would more come from incremental volume than it would from any Lean initiatives, that take time to work their way into the equation?

I think it's all a question of how fast does the economic recovery happen, how much does our sales grow when the economy comes back, and how fast can we move Lean to the carpet. We certainly don't want to wait for the economy and say, you know, we're just going to sit there on $109 million SG&A in the last quarter, and the economy is going to help us get our SG&A as a percent of sales down. We're going to work on all fronts, and as the economy comes back and our sales grow, even better.

Of course. And then on the gross margin side, likewise, is 49% to 50% in the current environment not a bad way to think of it? Ignoring, of course, the enormous leverage that you do get on incremental sales in your business that you had earlier talked about, but on the current level of business, is that -- are we -- is that a reasonable way to look at it?

I think it's in the range of our historic levels. I would say it's reasonable, or within a range. As Frank said, are we happy with 50%? It's certainly better than 47%, but we've seen times when we've been more than that. So our goals are always higher, but it's within the range. It's -- from a short term for the next quarter or two, it's probably reasonable.

And if I could just ask Al quickly, now that you have been operating over there for quite awhile, and you've obviously increased the percentage of your business to the more differentiated solutions, and tried to focus the business on that and get away there lower-end commodity phones, I'm curious how you would describe the mix between commodity and non-commodity? And do you feel more comfortable than you did two years ago about your relationship you have with those customers, and their customers buying into the differentiated solutions that you're providing, or is it still a day-to-day absolute battle? How would you describe that?

I think when you play in the electronics industry, there's always a challenge on a short-term basis because of the pressures that we as consumers put on the industry in general. But I feel very good. I love our market position, because as a company we're looking to grow, and when you look at consumer electronics for the next five to ten years, there's a lot of projected growth in that industry.

Our key is to capitalize on the right subsectors of growth within that, and I feel really good that our customers are responding well to the new products that we're bringing into the marketplace.

And what would you guess your mix now is between commodity and more value add, understanding the definition is a little nebulous, but --

I think because the definition is so cloudy, and because some of our competitors may be interested in that information, I would rather not comment.

Fair enough. Thank you.

Thanks.

(Operator Instructions)

At this time we have no further questions. I would like to turn the call over to Aaron Pearce for closing remarks.

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