Brady Corp (BRC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Brady Corporation Earnings conference call. My name is Karma and I will be your coordinator for today. (Operator Instructions).

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

Thank you, Karma. Good morning everyone. This is Aaron Pearce, Director of Investor Relations for Brady Corporation. Welcome to our Fiscal 2011 Second Quarter conference call, and thank you all for joining us.

During the call this morning, you will hear from Frank Jaehnert, Brady's CEO, and Tom Felmer, Brady's CFO, who will review Brady's second quarter financial results. Also joining us this morning are our three Regional Presidents, Matt Williamson, President of the Americas region, Peter Sephton, President of Europe, and Al Klotsche, President of the Asia Pacific region, who will all provide their respective regional reports.

As usual, after 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 respective slides throughout the presentation. These slides can be found on our website at www.investor.bradycorp.com. We will be starting with slide number three, and you'll have a few moments to get to those slides while we go through our usual introductory information and Safe Harbor statements.

Please note that during 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 our last Form 10-K filed with the SEC in September of 2010.

Also, please note that this teleconference is copyrighted by Brady Corporation and there may be no re-broadcasting of this call without the express consent of Brady Corporation. We will be recording this call and broadcasting it on the Internet. Your participation in the Q & A session will constitute your consent to being recorded. Thank you and now I will turn the call over to Frank Jaehnert. Frank?

Thanks Aaron and good morning. Thanks for joining us. I am pleased to report that our fiscal 2011 second-quarter diluted EPS, excluding our after-tax restructuring charges grew 45.5% to $0.48 per share. Net income, again excluding after-tax restructuring charges in the quarter, were up 46% versus the prior year to finish at $25.7 million.

The improvement in earnings was primarily due to our strong organic sales growth 9.8%. Which included positive organic sales growth in each of our three regions. Organic sales growth was particularly strong in the European business where we generated 12.4% organic growth. This strong sales growth, combined with the positive impact of our ongoing process improvement activities, led to our strong operating results this quarter.

In total, our second quarter sales grew 11.2%, which included the organic sales growth of 9.8%. Sales growth from acquisitions net of divestitures of 1.8% and a currency headwind of 0.4%. We are pleased with this nice improvement in organic revenue growth.

On a regional basis, we saw sales and segment profit growth in all regions as the overall economy continues to improve. I'll be back later in the call to summarize our thoughts for the upcoming quarter after our business leaders provide more detail in their regional updates. But first, I would like to turn the call over to Tom Felmer for our second quarter financial review. Tom?

Thanks Frank. Let's start on slide number three which is a summary of our second quarter results. As Frank mentioned, our second quarter financial performance included 9.8% organic sales growth and total sales growth of 11.2%. Our second-quarter gross profit margin finished at 48.3%, versus the prior year gross profit margin of 49.7%. SG&A expense was down 400 basis points to finish at 32.8% of sales when compared to the second quarter of last year.

Included in SG&A expense this quarter is the one-time gain on the sale of our Teklynx software business, net of directly related divestiture costs. The net impact of the sale of this business and SG&A expense, was the increase in our second-quarter SG&A expenses as a percentage of sales of approximately 100 basis points. Excluding this net one-time benefit, SG&A expense would have approximated 33.8% of sales.

The stronger organic growth and decreased SG&A expense as a percent of sales resulted in a healthy 46% increase in net income. Exclusive of the after-tax restructuring charges to finish at $25.7 million and an increase of 45.5% in diluted earnings per share, again exclusive of after-tax restructuring charges, to finish at $0.48 per share.

On a GAAP basis, our earnings per share growth was even stronger -- 64.3%. We also continued to generate strong cash flow during the quarter. We generated $41.4 million of cash from operating activities and ended with a total cash balance of $362 million at January 31.

As a result of our strong second quarter earnings, we are increasing our full year fiscal 2011 guidance range for earnings per diluted Class A common share from between $2.05 and $2.25 to between $2.15 and $2.35, excluding pre tax restructuring charges of $7 million to $10 million, or $0.10 to $0.14 per share. I will provide a bit more commentary on the outlook after the reports from each of the three regional presidents.

Moving onto slide four. We outline our quarterly sales trends, and we are pleased to report that our 9.8% organic growth this quarter marks our fifth consecutive quarter of organic sales growth. Acquisitions net of divestitures, provided a sales lift of 1.8% in the quarter, and even with recent weakness in the US dollar versus many other currencies exchange rates were still a headwind of four-tenths of a percent, when compared with the second quarter of fiscal 2010.

Slide five shows the trending of our gross profit margin, as I just mentioned our second quarter gross profit margin was down compared to the same quarter of last year due to a variety of mix and one-times cost across our businesses. Going forward, we will continue to focus on driving gross profit improvements through lean in the Brady business performance system.

On slide number six, you can see that SG&A as a percent of sales decreased from 36.8% last year to 32.8% this year. Again our second quarter SG&A expense benefited by approximately 100 basis points from the gain on the sale of the Teklynx software business, net of certain one-time divestiture related costs. While we experienced a significant improvement in SG&A when compared to the prior year, our expenses are consistent with levels over the past two quarters.

Excluding restructuring charges, operating income was $39.2 million in the quarter, up from $27.6 million in the prior year. As a percentage of sales operating income was 11.9% in the second quarter, compared to 9.3% of sales in the second quarter of fiscal 2010. This marks the fifth straight quarter of year-on-year increase in operating income.

Slide number seven, our GAAP net income for the quarter was $24.2 million, an increase of 61.3% versus the second quarter of last year, resulting in GAAP diluted EPS of $0.46 per share. After adjusting for after-tax restructuring charges of $1.5 million, we generated net income of $25.7 million and $0.48 per diluted share. This represents a 45.5% increase in diluted EPS before restructuring expense, when compared to the same quarter in the prior year. The net after-tax gain on the sale of our Teklynx software business increased our diluted EPS in the second quarter by approximately $0.02 per share.

On slide number eight, we summarize our cash position and cash generation in the second quarter. We continue to generate strong cash flow from operating activity, and strong free cash flow with cash flow from operations at $41.4 million or 171% of net income in the second quarter of the fiscal 2011. We continue to focus on cash generation and are forecasting strong cash flow for the remainder of fiscal 2011. We anticipate that our full year 2011 free cash flow will approximate 120% to 140% of net income.

On the second quarter of cash balance walk, we generated $41.4 million of cash from operating activities, received approximately $13 million from the sale of our Teklynx software business. Invested $8 million for the acquisition of ID Warehouse, invested $6.2 million in fixed asset additions and returned $9.5 million in dividends to our shareholders, resulting in an ending cash balance at January 31 of $362.3 million.

On slide number nine our gross debt is $449 million and our net debt is $87 million at the end of the second quarter. Our net debt to EBITDA continues to decline, finishing at 0.4 to 1 ratio. We believe that with our current cash balance of $362 million, our untapped $200 million line of credit and our conservative leverage, that we have adequate flexibility to support future growth.

Moving onto slide ten, our second quarter included several new software product launches. Multi-language signage software helps our customers easily and accurately create multi-language signs in English, and five Asian languages for safety and facility identification. Our Tiscor equipment management and inspection business launched their latest web-based inspection and track software, as a service tool to aid in scheduling, tracking, and documenting equipment management and inspection activities.

As you can see, we remain committed to investing in research and development, spending $11.7 million or 3.6% of sales in the second quarter which is consistent with the second quarter of fiscal 2010. Our commitment to the development of proprietary innovative products is helping to propel our organic sales growth and has generated a substantial pipeline of concepts and programs still under development. We believe that our investment in R&D and associated strategic marketing and product management activities will be a key driver of future organic growth and profitability.

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

Thanks Tom, good morning everyone. Please refer to slide number 11. Americas' sales in the second quarter were $136 million, up 11.9% compared to the prior year. Organic sales were up 9.7%, currency added 0.8% and revenue growth from acquisition net of divestitures was 1.4%.

Our sales growth was solid across both the OEM and MRO segments throughout the Americas. This year over year growth in sales in the second quarter was driven largely by the positive results of our targeted strategies.

The Brady businesses in the US, Mexico, Brazil and Canada saw positive results with new products and the execution of their sales and marketing strategies. Our direct marketing businesses in the US are rebounding, driven by our strategy to grow our house file of customers, increase sales over the internet, and improve customer conversion and retention.

Our publishing business also had a strong quarter, as they enjoy the high season driven by customer compliance to updated regulations. They also saw record sales of new products and strong growth with new customers in the second quarter.

This quarter marks our first full year with the Stickolor business in Brazil. Stickolor's products are focused primarily in the automotive market, which remains strong in Brazil. As the middle class continues to grow there, demand for our labeling products is growing at a brisk pace and we are increasing capacity in Brazil to service this demand. Segment profit for the Americas increased 31.7% to $31 million in the quarter. As a percent of sales, segment profit was 22.8% compared to 19.4% in the prior year.

Profitability is being driven by sustainable gross margin improvements from the execution of our operational strategies, lean and facility consolidations as we continue to improve our operations functioning in less space. We are also making good progress with our global sourcing strategy and improving our pricing strategies.

Our increased sales volumes spread over a lower fixed cost base are improving our results. A reorganization of various selling and marketing resources in the first quarter, plus our ongoing attention to improving productivity and processes of these same operations is improving our profitability while also driving sales growth.

Going forward, we will continue to invest in the internet across all of our businesses, launching new products, and advertising in our direct marketing business as a part of our strategy to grow our customer files, coming out of the recession. We expect these investments along with our continued strategy for operational productivity, to further grow our seasonally adjusted sales and profitability. We expect mid single digit organic sales growth in the third and fourth quarters of this year, due to timing of some businesses and comparables in the last fiscal year. Most notably, one-time sales of our SPC sorbent products, related to the Gulf oil spill.

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

Thanks, Matt. Continue now on slide 12. Sales in Europe were $104 million for the quarter. Organic sales were up 12.4%, with 2.2% added from acquisitions net of divestitures. Our currency reduced revenue by approximately 6.9%. The divestiture of Teklynx, our software business, completed in December had a small negative impact of 50 basis points on the reported sales growth figure for the quarter.

With organic sales up 12.4% in the quarter, that was an encouraging improvement over the first quarter of this year which stood at just 1% before acquisitions. This growth was reflected by all business streams and in all locations.

Also, while the recovering economy certainly provided the right circumstances for growth, a combination of marketing agility and added impetus from earlier new product launches allowed us to outpace the rate of economic growth. This was most noticeable in our European direct marketing business, which benefited from poor weather in most of the European countries during December. Under our new integrated management structure in Europe, the combination of early preparation and the more agile organization, proved a winning set up when winter hit early.

By pulling on our experience from previous campaigns, our units managed to roll out a multi-channel pan-European campaign in record time. This helped our European marketing business to post high teen double-digit growth in local currency. The success of the winter campaigns provided a boost in revenue in the second quarter, although this is not expected to continue for the rest of this fiscal year.

It has however contributed to our strategy of rebuilding our house file following the decline during the recession. We are also pleased to report last year's acquisition of Welco and Securimed are both trading above their initial planned projections.

The European Brady business continues its strong performance, posting strong organic growth. Growth was highest in southern Europe, France, and Italy, as well as Germany where the solid economic recovery allowed us to realize high teen double-digit sales increases.

Northern and central Europe also have performed well, with high single digit organic growth figures. It was particularly encouraging to see that in emerging regions where our presence was only recently established, like Middle East and Eastern Europe, were among the best performers and in some areas are nearly double that of last year.

These results were achieved by our continued emphasis on three strategic growth axes; focus on the process industries, aggressively push new product development, and thirdly coordinated printer sales campaigns to provide deeper market penetration. We will continue to drive these strategies and capitalize on the economic recovery on our increased presence in emerging regions. Our other businesses, which include Die Cut, People ID, and transportation security also showed solid organic sales growth in the quarter.

Our transportation and security business, TransferSafe, was solid as we positioned ourselves as a premier supplier to the banking and cash in transit industries where there is increasing legislation and harmonization across the whole of Europe. In our People ID business, we are seeing the benefits of a focus on personal identification in major retailers, where our online design and ordering solution gives the customer a flexible and cost-effective way to identify their staff.

Segment profit in the quarter increased by 12.4% or $3.2 million, finishing at $29.2 million. Before the effective currency, segment profit increased by slightly more than 20%. This solid increase in operating profit was driven by volume increases and our efforts to further streamline selling expenses. Our segment profit as a percent of sales increased from 26.9% to 28% of sales.

We take confidence from the healthy improvement in all our businesses, rapid growth in emerging economies in [the year] and an improved and more agile organizational structure, allowing us to leverage costs and capitalize on our opportunities quickly. Against this we see a sluggish economic environment in most of Western Europe with exception of Germany and some lingering doubt about government finances in some of the euro countries.

In addition, we are experiencing mild weather in February, as well as tougher comparables going forward. We expect that these factors combined will moderate organic sales growth for the remainder of this year. We'll now move on to Asia Pacific, so over to you Al.

Thank you, Peter. Continuing now on slide number 13. Asia Pacific sales in the second quarter were $89 million, up 14.6% from the prior year. Organic sales grew 6.9% while currency had a positive impact of 5.6% and acquisitions contributed 2.1% of sales growth.

Overall, we were pleased to see a nice organic sales growth over the same period of last year coming from an expanded offering of solutions to a more diversified customer base. The end result was core growth rates that more closely aligned with market growth rates. Something that we previously thought would take a few more quarters.

Our largest sales increase came from the consumer electronics market, where our differentiated solutions for heat management and optical displays brought us some significant wins with leading smartphone and tablet computer manufacturers. Unfortunately, one of our largest customers in this segment saw a drop in their market share, at the expense of some new market entrants. As witnessed at the recent consumer electronics show in Las Vegas, there are now a large number of new entrants into the smartphone and tablet computing markets, which do offer us the opportunity to grow and diversify our customer base.

In South Asia and the hard disk drive industry in general, our results were mixed as we adjusted our product portfolio and focus on the 2.5 inch drive, a sector of the market that has seen the highest growth rates. A number of new products that we have introduced to this market have been received positively, but the qualification cycles are proving to take longer than we anticipated. The outlook for the storage industry is continued growth for the coming year as well as an increased complexity of design, both of which are good trends for Brady.

In Australia, our core business and recently acquired ID Warehouse business had a very strong quarter. Across the rest of the Asia Pacific region, our MRO business continues to grow very nicely, at rates multiple times that of our OEM business. While still small, the growth trajectory is on a path that supports our increased focus and investment in the MRO markets. Most of our MRO growth is coming through focusing on vertical niches and continuing to strengthen our distribution network, versus demand generated from new product launches, which are scheduled later this year.

Segment profit in the region was $11.5 million, up 7.8% from last year's segment profit of $10.7 million in the second quarter. As a percent of sales, segment profit was 13% versus 13.8% in the prior year.

Looking forward, assuming that some key programs that we are involved in do successfully launch, we expect to see continued sequential core growth, driven by differentiated production and design capabilities and then later in the calendar year with targeted new product launches. The success of these new products, along with the further acceleration of the growth in the MRO space, should also improve our overall segment profit in coming quarters. As volumes begin to pick back up across the region, we will be monitoring some early signals of price inflation from some of our key material suppliers.

I'll now turn the call back to Tom.

Thanks Al. Let's move on to slide number 14 which highlights our guidance for the full fiscal 2011.

As I previously mentioned, we are increasing our full-year fiscal 2011 guidance to $2.15 to $2.35 per diluted share, excluding pre tax restructuring charges of approximately $7 million to $10 million or $0.10 to $0.14 per share. Our guidance reflects all cost savings we expect to realize this year from restructuring activities as well as from our Brady Business Performance System initiatives for operational improvements.

As you have heard from the regional presidents, in aggregate we expect mid-single digit organic sales growth to continue into our third and fourth quarters. Thus our guidance of mid-single digit organic sales growth for the full fiscal 2011 remains intact. Guidance assumptions for capital expenditures, our income tax rate, depreciation and amortization expenses have not changed materially and are also listed here on slide 14.

Going forward, we remain committed to growing revenues organically, as well as growth through acquisitions. As we have discussed in previous calls, reducing our SG&A as a percent of sales continues to be a focus area for the organization. While we are working to make our SG&A functions more productive, we are careful not to jeopardize our top line growth.

Again we are encouraged by our revenue and net income growth in the second quarter. Now I would like to turn the call back to Frank for his closing comments. Frank?

Thanks Tom. Our priorities remain unchanged and focus on customer-driven growth through market and customer segmentation and multi channel marketing. As well as improving the productivity and efficiency of our operations, and sales and marketing teams around the world.

We also remain committed to investing in organic growth which has proprietary new product development as the cornerstone to this strategy. We are excited about the success of our recent product launches and we're positive about our product pipeline.

The numerous product launches of last year and those that will come this year, demonstrate the commitment of major investment in organic growth during the depth of the recession. These products, along with generally improving business climate, and customer demand, will form the basis of organic growth in the coming quarters. We also remain committed to growth through acquisitions both in our core market, as well as near adjacencies.

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

(Operator Instructions)

The first question comes from the line of Charlie Brady from BMO Capital Markets. Please proceed.

Okay, thanks. Good morning, guys.

Good morning, Charlie.

If we focus on the SG&A and percent of sales for a minute, are you expecting that to continue to see a decline into the back half of fiscal '11? Relative to -- if we exclude the gain you got in the second quarter?

Right. You know, again, this is a focus area for the Company, is to improve the productivity of SG&A. And I think I mentioned in my comments that, although the SG&A as a percent of sales dropped, compared to last year's second quarter, the absolute dollars that we've spent has remained fairly flat over the last three quarters, and I would say that's probably more likely to be the trend. So, I don't know that you'll see it go down, but as sales increase, that SG&A as a percent of sales should come down.

So, in essence, dollar terms, you're running kind of a normal level in Q2. It shouldn't fluctuate much more from that.

We would expect -- it's been at that level for the last few quarters, and I don't see anything changing materially going forward.

Okay, thanks. With respect to the Asia business, any impact from the Australia flooding, particularly with ID Warehouse?

Not that we could see; that happened right at the end of the quarter. We're still kind of measuring and monitoring things. The Australian government has come out and said that it could impact their GDP is a country by as much as a percent or 1.25%, but it's just too early for us to tell right now the impact on our business. If there is an impact, I would expect it to be more on our core Brady business than the ID Warehouse business.

Great, thank you.

The next question comes from the line of Allison Poliniak from Wells Fargo. Please proceed.

Hi, good morning. A little off, but that's all right. Just on the electronic side, the new areas that you're going into, is there any difference in terms of the margin profiles of those products, versus what you have done over there?

I think that it's safe to say that where we're focusing on is where customers are having more difficult problems that require true innovation on our part, and typically, those would be higher gross profit margin products. But I don't know that we're deep enough into some of these new products and design cycles to fully understand what the long-term margins are going to be. But, that's our intent is to focus on applications that would be more difficult to solve and result in higher gross profit margins.

Okay, great. And then second, on just the portfolio; you guys did the one divestiture. I mean, are there other areas that you're looking at, or is this just considered maybe a one-off divestiture that you were doing?

We always look at all of our portfolio, and you know, I don't think there's anything material in the pipeline, as far as divestitures are concerned, but we are certainly looking at everything, and as we grow as a Company, organically and through acquisitions, there might be one or the other divestitures in the future as well, but I don't see anything material right now in the pipeline.

Great, thank you.

The next question comes from the line of Wendy Caplan from SunTrust. Please proceed.

Thank you, good morning.

Good morning, Wendy.

I have a gross margin question. Tom, you cited some mix and one-time items. Can you help us understand that a little better in terms of the gross margin in the quarter?

Yes. As you look at it -- as you know the business that we have is -- there are a lot of business units and a lot of parts, so it's difficult to pin it down to one thing. It's a little bit in a lot of places, actually.

And the biggest concern that we had, as we initially saw, was are we seeing significant input costs -- rises in input costs, and although we do see some of that, that's not the reason for the full decline. Just a little bit of additional color, just to answer your question specifically, so it is a combination of mix and some one-time items, and the raw material input costs would be a fraction of what you see in the decline in gross margin.

And the mix, specifically, Tom?

It's just -- in each of the businesses -- Peter talked about some of the winter products in Europe, you know, see, that's something that we would be -- there's a lot of products that go out -- salt and other products that may not have the same gross margin profile as the rest of the business. It's just one example, and you see pieces of that --

And I think, you know, when you look at these winter product sales, that's a seasonal thing, but we kind of use this to build our house file; get new customers at competitive prices. So, I think you might see a little bit of a negative impact on the gross margin, but we think the additional customers you get into your file; it will pay off going forward.

Sure.

That's just one example.

Okay. And when you talk about your free cash flow conversion ratio for the full year, your expectation of it being 120% to 140%. Can you give us some sense, Tom, of how much of this is, obviously, higher earnings, but do you bake some working capital changes into that?

The majority of it is really the amortization and reduced depreciation. We've been working hard to keep our CapEx low as a percent of sales, and doing a very nice job of that.

Working capital has actually been going up with sales. I don't know that there's a big pick-up from working capital as we go forward. That should be pretty consistent.

Okay, so on a dollar basis you expect -- or, I'm sorry, on a percentage basis, you expect working capital to stay in that mid-20% range?

That's correct.

Okay, and one last question. Several of you talked about, Matt and Peter and Al, you talked about new products, and can you give us some -- is there a metric we can use? I mean, obviously the R&D is a good proxy, but is there a metric in terms of how much of sales is coming from new products that weren't in the portfolio, like three years ago?

Let me answer this. Everybody is looking at each other here because it's different from region to region. I think our sales for new products, which were launched the last three years, is somewhat close to 20%. And we certainly would like to push this higher over the next couple of years. Does this help?

Yes, it does. And just regionally, which one -- should we be looking at a certain region that has more new product introductions than the others, or --?

I would say, because of the nature of the markets we are in and the customers, I think Asia is typically the one where you have shorter product lifecycles and more turnover. But they would be -- certainly be higher.

Sure.

Now, if you look at our more traditional markets like safety signs, it's harder to be innovative and coming up with a new safety sign. So, I think it very much depends on the product range.

You know, one thing, Wendy, from a -- I guess from a European (inaudible) perspective, all the product development you've heard about over previous quarters has really revamped our printer range, and that's what I was referring to, in terms of the tailwind we have from that. So, we just have a very comprehensive range of printers, and that's where we've been pushing them aggressively to gain market penetration.

So, it's not all about new products in the quarter, or new products last quarter. It's the complete portfolio that we have now which is giving us a lot of encouragement.

Yes. And what I see in the future, Wendy, is we are looking at a couple of verticals where we would like to grow faster, and we talked about this in the past like process industries; oil, gas, chemical; aerospace; mass transit; laboratory, we talked in the past. And as we try to focus on some of those verticals, and penetrate it deeper -- our MRO in Asia would be a prime example -- and we talked to our customers to avoid the customer exercises. We will come up with more and more new product ideas and feed this back into our pipeline.

Even so, these might be, let's say, MRO -- might be not as innovative as other industries. But as you are going into a different vertical, MRO in Asia, or let's say oil and gas, they might have different requirements, and then we are going to develop products for these areas. And I think that's why, over time, these new product sales from products the last three years are going to go up beyond 20%.

Okay, thank you very much. That makes a lot of sense.

The next question comes from the line of Jason Ursaner from CJS Securities. Please proceed.

Good morning, everyone. Congratulations on a very strong quarter.

Good morning, Jason.

On the gross margin, you mentioned some rising input costs, but were the planned wage increases also done in the quarter?

Yes, I think we've talked in the past that wage increases do go into effect in November for most of the Company. That is part of the -- the key point that I was trying to make was that the -- we're looking for raw material cost increases, and we're saying that is not the majority of the increase.

Would the wage increases, though, have been a large factor of the gross margin decline, sequentially?

I would say not material.

Okay. And then just two quick questions on SG&A to follow-up on some of the others. Tom, you talked about holding this level relatively consistent on an absolute dollar basis, and then improving productivity as you grow sales. Can you just remind us what the key variable components will be going forward?

In our SG&A?

Yes.

Labor for sales force and advertising costs, travel.

Okay. And if sales growth continues, perhaps at a little higher level than previously anticipated, do you see major true-ups in the second half from current accruals?

No, I would not. At least -- depending on what opportunities we have. We're still trying to make that balance between being very efficient -- or productive with our selling expenses, but if we see opportunities to grow the business, we may still spend a little bit more to get those sales. That -- you're saying what would be the thing that would change that number, or cause us to increase it, that's probably what we would look at.

Sure. And then, for Frank. As you look out longer-term to 2012, '13, beyond, if we think of a sustainable core growth rate in the mid-single digit range for top line, is the leverage at the bottom line -- you know, earnings growth really in excess of sales growth, is it going to be both SG&A shrinking, as percentage of sales and incremental gross margin expansion? Or do you see it more difficult to absorb the impact of some of the inflation going forward?

Well, obviously, there's gross margins close to 50%. I think there is a limit to how high our gross margins can go. We see more opportunity in SG&A. This doesn't mean that we think we're maxed out on our gross margin -- I don't think so. I think there's room for further improvement as well, but I think relatively speaking, there's more room in SG&A.

Okay. And in the Americas, we talked the last call about sustainability of operating profitability, and whether it was real productivity improvements driving fundamental profitability. On $10 million less revenue, the segment lost a little over $8 million of EBIT, so can you maybe help me understand the sequential decline there?

Which one was it?

Americas. (multiple speakers)

I think what you typically see is in the second quarter, there are a lot of expenses that we incurred through the holidays, and I think that's the biggest impact of the additional -- the incremental decline that we see. And I think that's consistent with what we've seen for years in our Company, when you look across all of our businesses. You look at the number of -- we have more days paid in the quarter than we do actually have days of selling, so you pick up some incremental expense in that quarter.

Yes, it's always difficult. I would caution against using the second quarter in any given year as a proxy. It's always very difficult because of all the holidays. There are all kinds of anomalies. So, I would rather not look at the second quarter.

Okay. Then just the last question given the cash and liquidity position. Frank you've been fairly clear in terms of what you would like Brady to be targeting for acquisitions. But can you discuss more generally what you are actually seeing in terms of quantity, quality and size of potential acquisitions out there?

First of all we are very active. We have actively been looking at acquisition opportunities. We have talked to many potential targets. We have walked away from some deals, we have lost some deals. We are a very disciplined acquirer, we continue to be a disciplined acquirer.

I can tell you this much. There are no bargains out there right now. There is a lot of money on the sidelines in corporations and public trade companies, in private equity. So, it is pretty competitive.

We won't be carried away by this competitiveness and overpay. But we see more opportunities coming to the table and I am sure you know one of these days we are going to make an acquisition. But again we are going to look at this in a very disciplined way, as has been our practice in the past.

Okay, thanks a lot for taking all of my questions and congratulations again on the quarter.

Thank you.

And the next question comes from the line of Tony Kure from KeyBanc. Please proceed.

Good morning everyone, how are you today?

Hello Tony.

A couple of questions just to follow up again on the SG&A line. I know we have talked about this quite a bit. You mentioned there's sort of a flat line on a dollars basis through the balance of 2011.

Does that imply that none or very little of the majority of the cost take out plans that were expected to hit fourth quarter and beyond, have hit or was there some pull forward in that? Or should we not expect to see those benefits maybe until next year?

Let me -- I'm not sure if I totally understand the question. But, let me put it this way. We are growing. We grew about 10% organically and trying to keep our SG&A flat and mid-single digit growth with business picking up.

I think you can you can only do this if you at the same time find productivity improvements from ongoing initiatives. I think that is what we have seen in the past. So, I'm not sure if this answers your question. But, that is how I see it.

We have to -- in order to -- because we have really slimmed down during the recession. We have taken a lot of restructuring costs and we have reduced our cost structure. And as you grow, we don't want this to come back and as long as we grow in somewhere mid-single digits. We think and don't pin us down quarter for quarter and ask us next quarter if it goes up a little bit. If the strategy doesn't work. It's not that scientific.

But I think directionally, if we grow mid-single digits organically, we believe we can keep our SG&A about a safe level, due to many, many initiatives to increase productivity and efficiency. While at the same time, being able to specifically invest in certain areas, let's say for instance strategic marketing, to go after new verticals. Come up with new product ideas to feed our R&D pipeline.

Okay, thanks. I thought there was more explicit, you never targeted anything, I am not saying that. I thought there was a more explicit plan. You did a great job on the gross margin takeout, cost take-out in prior periods. That is bearing success.

And then, I thought the target was now more towards the SG&A line, without that actually appearing until the later part of the year. But it sounds like it is just going to be a consistent holding level on the SG&A as you grow. Is that the way to think about it now?

Yes, I think that is probably more in line. Especially as the Company starts to grow, you still pick up some additional commission costs and things like that. We did -- much like I think in response to Jason's question. We did have wage increases in November. So, the fact that we are holding our SG&A fairly flat through our wage increase, which is significant on the SG&A line, shows we have taken cost out. Just to hold it flat.

When you look at the third quarter, you may pick up a little bit additional advertising expense, you don't send as many catalogs out right before the holidays, or maybe to December. The direct marketing businesses will ramp up For -- the third quarter usually our biggest quarter in sales. It might be a little pickup in advertising expenses there. But I would say the philosophy on what we are trying to hold, and trying to look at as a Company, is to hold that SG&A as tight as we can.

Okay great, thank you. And in Asia, in the second quarter, it looks like it was the second year in a row that margins are down sequentially. And is there just some seasonality going on there that causes that to happen and then there is a subsequent rebound? But is there some sort of margin seasonality there in Asia?

Yes, well, I think just the general trends over there, you've got Chinese New Year and people have a bunch of different philosophies in terms of our customers and how they stock up and ready for that.

We worked some extra overtime, to get products out in people's inventories in advance of this. So, I think to say it is a trend might be too strong. But it has happened as Tom mentioned in the last couple of years in the second quarter for us. It just seems to be a bit of an anomaly in that quarter.

Okay, and then also in Asia I think we talked about in the past, there was an inventory adjustment going on into December. Supposed to end by the end of the calendar year, did that play out as you expected?

Seems like it. There's some -- are you referring to the storage market?

Yes. Where there was excess inventory that had to be pared down?

Yes. It seems like it, we are seeing a greater degree of regularity in ordering from our customers again. And so that is typically a pretty good sign that they worked through their inventory. There are still rumblings about it in the marketplace, but it seems like it is either returned or returning to normality.

Okay, thanks so much.

(Operator Instructions).

The next question comes from the line of Jason Ursaner from CJS Securities. Please proceed.

Just a quick follow-up, because I'm hearing you talk a lot more about SG&A on an absolute basis than the past. I just want to make sure I'm really understanding the current level. If I think about it excluding TekLynx, it's kind of a little bit over $111 million. But Q2, is the investment in other income, is that still an offset of deferred comp?

Yes.

Okay. The majority about would be basically a one-to-one impact to SG&A?

That is hard to say. (multiple speakers)

It's not material.

We are being told it is not material.

Okay. Thank you very much.

If we have no further questions at this time, I would now like to turn the call back over to Mr. Aaron Pearce for closing remarks.

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This concludes the presentation. Ladies and gentlemen, you may now disconnect. Have a wonderful day.