Brady Corp (BRC) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 4, 2011 Brady Corporation earnings conference call. My name is Jennifer and I'll be your coordinator for today. At this time all participants will be in a listen-only mode and we will be facilitating a question and answer session toward the end of the conference.

(Operator Instructions)

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

Thank you, Jennifer. Good morning and welcome to our fiscal 2011 fourth-quarter conference call. During the call this morning you'll hear from Frank Jaehnert, Brady's CEO, and Tom Felmer, Brady's CFO, as well as from Peter Sephton, President of Europe, and Stephen Millar, President of the Asia-Pacific region. As usual after the prepared remarks by the team we'll open up the call to questions. We encourage you to follow along with the slides located on the internet as we'll be referring to respective slides throughout the presentation. These slides can be found on our website at www.investor.bradycorp.com. You'll have a few moments to get to those slides while we go through our usual introductory information and our safe harbor statements. It's also been brought to my attention that some people are having a hard time viewing the slides. If you are having a hard time getting to the slides, you can go to the Brady Corp. Investor site, click on the Presentations tab and then click on the Q4 F11 presentation and you will be able to see the slides that way.

Please note that during this call we may make comments about forward-looking information. Words such as expect, believe, forecast, 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 latest Form 10K which was filed with the SEC in September of 2010. Also, please note that this teleconference is copyrighted by Brady Corporation and there may be no rebroadcasting of this call without the consent of Brady. 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'd like to turn the call over to Frank Jaehnert. Frank?

Good morning and thank you, Aaron. Thank you for joining us. I'm pleased to report that our fiscal 2011 fourth-quarter net income grew 37% versus the same period in the prior year to finish at $29.6 million on total sales gross of 6.3%. Diluted earnings per share was up 34.1% over the prior year to finish at $0.55. If you exclude after-tax restructuring charges, diluted EPS grew 18.4% to $0.58. We remain highly focused on increasing efficiencies for the Brady business performance system and we are focused on continuing to streamline our SG&A functions.

During the fourth quarter our SG&A expenses declined to 31.9% of sales from 33.2% in the fourth quarter of last year. Better utilization of our SG&A results is [a try] of superior customer service and the most efficient and cost-effective manner continues to be a high priority. After we updated our full fiscal 2011 guidance on May 18 of this year, we experienced a slight but unanticipated slowdown in our business. We remain concerned about the general economic health of the global economy and the impact that a potential broad economic slowdown could have on our business as the economic recovery seems to have lost some momentum. As such, we will continue to be vigilant on keeping expenses in check. I'll be back later on the call to outline our strategies for growth and improved profitability, but first I would like to turn the call over to Tom Felmer for our fourth-quarter review. Tom?

Thanks, Frank, and good morning everyone. Before reporting on our fourth-quarter results I'd like to give some commentary on our fiscal 2011 full-year financial results which are summarized on slide 3. Net income was $108.7 million in fiscal 2011 which is an increase of 32.6% over fiscal 2010. Excluding restructuring charges, fiscal 2011 net income was $115.3 million up 23.4% compared to fiscal 2010. Our sales for the full year reached approximately $1.34 billion up 6.4% from fiscal 2010. Organic sales growth contributed 2.9% to our revenue growth, FX added 2.5% and the net impact of acquisitions and divestitures was a positive 1%. During fiscal 2011, our gross margin declined slightly ending at 49% of sales compared with 49.5% in fiscal 2010 and SG&A expense declined 160 basis points to finish at 33.0% of sales.

We continue to generate strong cash flows. During fiscal 2011 we generated free cash flow of $146.9 million, which equates to 135% of net income or 11% of sales. Our consistently strong cash flow has enabled us to increase our dividend for the 26th consecutive year. Last week we announced an increase in our annual dividend to $0.74 per share and today we allowed announced a $2 million share repurchase program. Returning funds to our shareholders continues to be an important use of our capital.

Let's move on to slide number 4 which is a summary of our fourth-quarter results. As Frank just said, despite effectively flat organic sales and increased input cost, our fiscal 2011 fourth-quarter net income increased 37% to finish at $29.6 million. If we exclude after-tax restructuring charges, net income was up 19.1% versus the prior year to finish at $31.2 million. Diluted EPS grew 34.1% over the prior year to finish at $0.55 per share in the fourth quarter. Excluding after-tax restructuring charges, EPS grew 18.4% to $0.58 per share.

The improvement in earnings was primarily due to the positive impact of our ongoing process improvement initiatives as well as benefits from foreign-currency translation. This quarter marks our 7th straight quarter of year-on-year increases in net income.

Sales grew by 6.3% in the fourth quarter, which included a sales decline from divestitures net of acquisition of 0.2%, a 7.1% increase in sales from foreign-currency translation and an organic sales decline of 0.6%. Heading into the quarter we anticipated organic sales growth in the low-single-digit range. Weaker-than-anticipated sales were noted in developed economies as well as in our Asian OEM businesses, thus indicating that at least a portion of this decrease was related to general economic conditions.

Our fourth-quarter gross profit margin finished at 48.1% versus the prior-year fourth-quarter gross profit margin of 49.2%. During the second half of fiscal 2011, we experienced raw material cost increases and increased freight charges that we were unable to fully offset in the quarter. SG&A expense was down 130 basis points to finish at 31.9% of sales when compared with 33.2% in the fourth quarter of last year. Cash flow continues to be strong. During the fourth quarter we generated free cash flow of $50 million which is 169% of net income and we ended with a total cash balance of $390 million at July 31.

Moving on to slide 5, we summarize our guidance for fiscal 2012. While we remain cautious about the overall economic environment, accordingly we do not anticipate significant organic growth in the first half of fiscal 2012 and we are forecasting low-single-digit organic sales growth in fiscal 2012. We believe that this sales level combined with the initiatives that Frank will be explaining will result in fiscal 2012 diluted EPS range of $2.30 to $2.50, excluding restructuring charges. Our guidance reflects a full-year income tax rate in the mid-20% range, a share count consistent with that as of July 31 and foreign currency exchange rates consistent with those as of today.

We expect capital expenditures of approximately $25 million, depreciation and amortization of approximately $45 million and interest expense of approximately $18 million. We believe that our focus on organic sales growth opportunities combined with a focus on holding expenses in check will be a catalyst for improvements in net income in fiscal 2012 and beyond. We are optimistic about our prospects for net income growth in fiscal 2012 even with what we believe will be a sluggish global economy.

Moving back to our actual results in Q4, slide 6 provides a summary of our quarterly sales trends. Our fourth-quarter sales were approximately $343 million, which is our highest quarterly sales figure since before the recession began in the first quarter of fiscal 2009. On a regional basis, we experienced 2% organic sales growth in Europe and a 0.4% organic growth in the Asia-Pacific region. We had a 2.7% reduction in organic sales in the Americas, however, adjusting for the one-time Gulf oil spills sale in fiscal 2010, core growth in the fourth quarter would have been 1.4% in the Americas. Looking at segment profit, we saw growth in absolute dollars in the Americas and Europe while the Asia-Pacific region was below last year. The regional presidents will provide further insight into the drivers of the respective regional organic sales and profitability trends. Divestitures net of acquisitions reduced sales by 0.2% in the quarter and the impact of exchange rates increased sales by 7.1% when compared with the fourth quarter of fiscal 2010.

Slide number 7 shows the trending of our gross profit margin. As I just mentioned, our fourth quarter gross profit margin was 48.1%. We continue to focus on driving gross profit improvements through BBPS, lean and a strategic sourcing initiative. Additionally, effective August 1, targeted price increases have been put into effect in an effort to offset rising input costs. On slide number 8 you can see that SG&A as a percent of sales decreased to 31.9% in the fourth quarter compared to 33.2% last year. As we've discussed in previous calls, we remain focused on driving down SG&A expense as a percentage of sales through increasing the effectiveness of our sales force as well as reducing general and administrative expenses by simplifying, standardizing and automating processes. Excluding restructuring charges, operating income was $44.8 million in the quarter up from $39.8 million in the prior year. As a percentage of sales, operating income was 13.1% in the quarter compared to 12.3% in the fourth quarter of last year. This marks the 7th consecutive quarter of year-on-year increases in operating income.

Moving on to slide number 9, GAAP net income for the quarter was $29.6 million, an increase of 37% versus the fourth quarter of last year, resulting in GAAP diluted EPS of $0.55 per share. After adjusting for after-tax restructuring charges we generated net income of $31.2 million and $0.58 per diluted share. This represents an 18.4% increase in diluted EPS before restructuring expenses when compared to the same period of a year ago. As mentioned previously the continued improvement in SG&A as a percent of sales is a major driver of our increased profitability.

On slide 10, we summarize our cash position and cash generation which continues to be strong. Cash flow from operating activities was $56.9 million or 192% of net income and free cash flow was $50 million or 169% of net income in the fourth quarter of fiscal 2011. Free cash flow for the full fiscal 2011 was $146.9 million, or 135% of net income. On the fourth quarter cash balance walk, the key items to point out are the that we invested $6.9 million in capital expenditures, made $18.8 million of debt principal payments and returned $9.6 million to shareholders in the form of dividends, all resulting in an ending cash balance on July 31 of $390 million. Overall our priorities for cash remain unchanged. We will continue to invest in organic growth opportunities, invest in value-creating acquisitions, return a dividend to our shareholders and repurchase shares from time to time.

On slide number 11 you can see that our gross debt is $393 million and our net debt is $3 million at the end of the fourth quarter. We believe that with our current cash balance of $390 million and our untapped line of credit that our conservative leverage profile provides us with adequate flexibility to support future organic and inorganic growth opportunities. Moving on to slide number 12, the positive momentum that we've enjoyed in the development and launching of new products continued in the fourth quarter. Products launched in the quarter included new thermal gap filler products in the Asia-Pacific region, new label capabilities in Brazil and new printing software tools for our European customers' compliance needs. Our commitment to the development of proprietary, innovative products is a critical component of our organic sales growth initiatives and has generated substantial pipeline of concepts and programs still under development.

I will now turn to slide number 13 while we go through the Americas review. Viewing the full year of fiscal 2011 (technical difficulty), we grew sales by $26.2 million or 4.8% and grew segment profits by $20.3 million or 16.3%. We were pleased with our ability to turn $0.78 of every dollar of sales growth into additional segment profit as our profit improvement initiatives were clearly successful in fiscal 2011 despite strong inflation on direct materials and fuel. Sales in the Americas in the fourth quarter were $146.2 million down 1.8% compared to the prior year. Organic sales were down 2.7%, currency added 1.6% and the sale of the Teklynx software business reduced revenues by 0.7%. Excluding the one-time Gulf oil spill revenues in fiscal F10, organic growth would have been 1.4% in the quarter. Excluding the spill sales that did not repeat, the Brady brand business grew respectively in the quarter in line with or exceeding many of our key distributors sales.

Our ongoing investment in R&D has contributed to this growth. Specifically in the fourth quarter we saw continued sales growth from recently launched product such as ToughStripe floor marking tape and the BBP31 MRO printing system. Our direct marketing and people ID businesses in the US slowed slightly towards the end of the fourth quarter as key manufacturing indices softened. We had another strong quarter in our publishing business led by improving sales efficiency, new product launches and expansions of our telemarketing team in Manila. In the direct marketing business, our strategies remain focused on increasing sales over the Internet, improving sales productivity, growing our customer files, improving all aspects of our customer experience and improving customer conversion and retention. Our overall strategy to improve our traffic and sales on the Internet continues to yield positive results across most businesses.

Segment profit in the Americas increased 5.4% to $36.9 million in the quarter. As a percent of sales, segment profit was 25.2% compared with 23.5% in the prior year. Profitability is being driven by a combination of an improved gross profit margin in the region due to certain facility consolidation actions taken at the beginning of fiscal 2011, along with results of ongoing action to streamline our selling expense structure. Today, our areas of focus on selling expense relate to improving productivity and processes of inside sales, field sales, inquiry management, optimizing our Internet results, and improving the segmentation or the segmenting of our customers.

In cost of goods sold our operational strategies of lean and facility consolidations have enabled us to better utilize capacity, thus reducing our overhead costs, all while serving our customers more efficiently and effectively. Although easing as of late, over the last 6 months we've seen an increase in inflation in oil-related raw materials and freight. Our global and regional sourcing actions combined with the selected price increases that took effect on August 1 are working to offset the impact of increased raw material costs.

Looking forward to fiscal 2012, we are focusing on organic sales growth opportunities in our best customer segments, continuing to improve our customers experience doing business with us, driving Internet sales across all of our businesses, launching new differentiated products that our customers value and increasing advertising in our direct marketing business as part of our strategy to grow our customer lists. Entering fiscal 2012, we are facing a tougher macroeconomic picture than we experienced in the first half of fiscal 2011. Even with what appears to be a weakening macro economy, we expect low-single-digit organic sales growth in fiscal 2012 primarily resulting from the numerous initiatives I have just outlined. We will continue to keep tight reins on spending that is not directly related to sales growth opportunities to ensure that we can maintain or grow our segment profit as a percent of sales. Peter Sephton will now report on the European results. Peter?

Thank you, Tom. Slide 14 includes a summary of our full-year fiscal 11 financial results. During fiscal '11 we increased sales by 6.5% and increased segment profit by 8.5%. Also, we were able to further increase segment profit as a percent of sales from 27.2% of sales in fiscal '10 to 27.7% this year. And quarter 4 in particular showed particularly good profit growth and I'll discuss that a little bit later.

Moving on to the current quarter then, sales in Europe were $103 million up 13.2% compared to the prior year. Organic sales grew 2%, currency provided a substantial tailwind of 12.8%, and the sale of Teklynx software business reduced overall revenues by 1.6%. Heading into this quarter, we are anticipating organic growth in the mid-single-digit range versus our actual organic sales growth of 2%. Across our main business streams, we achieved our targeted organic growth rate. However, we did experience slowing sales in our OEM business in Sweden, dampening some of that growth in the quarter. Our Brady business had effectively flat organic growth due to the slowdown of OEM label sales in Scandinavia and in some part due to tough comparables with last year. The underlying trend for this part of our business has been positive for the last 6 quarters as we continue to focus on deeper market penetration in the emerging markets in the Middle East and Eastern Europe, where sales in certain pockets are nearly double that of last year, albeit on low comparables.

We also continue our emphasis on 3 main strategic growth areas. First, we are focusing heavily on the process industries. Second, we're aggressively focusing more selling resources on recently launched product solutions. In the fourth quarter we pre-launched BBP31 MRO printing systems in Europe, and we further added capability to our MarkWare software to facilitate compliance with EU directors for CLP compliance labeling. And third, we're aggressively driving coordinated printer sales campaigns to provide deeper market penetration for our consumables downstream sales as we feel that we're underpenetrated in some areas of Europe.

Our direct marketing businesses had mid-single organic growth in the quarter, with strong results throughout northern and southern Europe, more than compensating for the UK weakness. We are seeing the benefits of our recently integrated regional direct marketing management structure where we created a more nimble organization and we're also seeing the benefits of building up our customer files and increasing our overall profitability due to productivity gains. Our direct marketing growth strategies are focused around 3 main themes. First of all, rebuilding our customer file in our traditional markets in western Europe by investing in prospecting, primarily in the north and southern areas of Europe. And secondly, by investing in increased customer service experience with our more mature markets such as the UK. Secondly, we're increasing sales over the Internet to both gain new customers as well as strengthen existing customer relationships. And third, by improving conversion and customer retention rates by better understanding the specific needs amongst all customers and prospects.

Segment profit in Europe increased strongly by 19.4% to $29.9 million in the quarter. As a percent of sales, segment profit was 29% compared to 27.5% in the prior year primarily due to the reduced selling expenses as a percent of sales as we maintain our focus on driving down SG&A as a percentage of sales. In cost of goods sold, our operational strategies which are focused around lean and enabling us to optimize capacity, thus reducing our overhead costs as a percentage of sales and freeing up capacity for future sales growth, although we do however, continue to see inflationary pressures like we do in America on raw materials and shipping costs. But we are working to mitigate these costs with better sourcing and pricing management. In selling expenses we do see the improvements from our first quarter reorganization to 3 business streams. This reorganization, combined with our ongoing focus to improve productivity and processes, is improving our overall profitability and continuing to drive organic sales growth.

Looking forward, then, into fiscal '12, we are anticipating that our more agile organizational structure will enable us to quickly capitalize on opportunities, thus delivering low-single-digit organic sales growth. We'll continue to focus on organic sales growth opportunities, including driving Internet sales across all areas of our business, driving new product sales expanding our geographic reach, especially deeper into eastern Europe and other emerging economies, as well as our focus on deeper penetration into selected vertical markets. The economic environment is showing signs of slowdown in many of our main markets, specifically in France and Germany. As internal demand has weakened due to uncertainties around the euro and sovereign debt. However, export-driven segments continue to present interesting growth opportunities in the near future, so for us is about where we allocate our investment. And I'll pass over to Stephen Millar for Asia-Pacific. Thank you.

Thanks, Peter. Continuing on slide 15, sales in the Asia-Pacific region in the fourth quarter were $93.9 million, up 13.3% from the prior year. Organic sales were up 0.4%, while currency had a positive impact of 10.5% and acquisitions contributed 2.3% to sales growth. Whilst our organic growth was modest, it was nonetheless encouraging after a tough third quarter. As we moved from the third quarter to the fourth quarter, there was significant uncertainty in forecasting our fourth-quarter revenues as sales to our largest customer had declined sharply in Q3 and the length of impact of the tragic earthquake in Japan were still uncertain. In the fourth quarter, organic growth was positive, despite our largest mobile handset customer reporting lower unit volume sales. We believe that we experienced the low point of year-on-year volume declines in the third quarter to this customer, and although we still have tough comparables to overcome in the first 2 quarters of fiscal 2012, we do not believe that the drop in volumes will be as dramatic as we saw in Q3. We are obviously monitoring this very carefully and managing our supply chains accordingly.

Our sales into the hard disk drive market continued to be slightly down due to general market softness and older platforms being replaced by newer ones with some of our proprietary new products are taking longer than expected for full-scale adoption. These sales' headwinds were somewhat offset by our continued end-customer diversification in both the OEM and MRO markets. Our growth strategies in the OEM market remain unchanged. First, we are focused on expanding our product offering into nearby adjacencies including display manufacturers and [tepid] computer manufacturers where our differentiated solutions for heat management and optical displays give us our competitive advantage. As these issues become more pressing in the electronics market, our customers are seeing greater value in our analytical capabilities which we can apply to help them optimize performance.

Second, through our R&D efforts, we continue to focus on the development of unique solutions that add significant value to our customers, so as to set us apart from our competitors. While we are executing on these growth strategies, which are designed to enhance our medium to long-term position, we continue to compete for business in the core spaces where we have experienced an expertise. This provides us a solid base to build on with careful executions of our growth strategies.

In the MRO business, we continued to experience organic growth in both our mature MRO business in Australia and our developing MRO businesses in north and south Asia. Our MRO growth strategy is primarily focused on strengthening and expanding our distribution network in key markets such as China, where the market is rapidly maturing, thus providing increased channels to market for our unique MRO product offering. We will boost growth by helping our partners focus on markets where there are factors driving higher uptake of products in our portfolio or within our development capabilities. As we have previously stated, we believe our regional infrastructure and processes coupled with our growing R&D capabilities provide a solid platform for us to support the expansion of our MRO business as we identify growth opportunities in this market.

Segment profit was $11.8 million, down $1.7 million from last year's fourth quarter segment of $13.5 million. With the recent decline in revenues to our largest customer, we have focused on increasing our customer base diversification, as well as increasing capacity utilization. This strategy to fill our factories has resulted in increased revenues and lessened the impact on our segment profit. As we enter fiscal 2012, there is the uncertainty that we are all aware of in the global markets and speculation around the timing of improvement in the market position of our largest customer. Notwithstanding these external factors, we are planning on the successful launch of new products in the first half of the fiscal year into the hard disk drive computing and MRO markets which will enable us to overcome the tough sales comparables at our biggest mobile handset customer and achieve low-single-digit organic growth in F'12. Success of these new products along with the further acceleration of growth in the MRO space is also expected to improve our overall segment profit in coming quarters. Although we remain quite cautious about the overall global economic health, we are confident that our strategies are well developed and their focused execution ensures that we have a strong foundation in place for future profitable growth. I'll now turn the call back to Frank.

Thanks, Stephen. Before we move to Q&A, I'd like to take this opportunity to share with you some of the initiatives that we are working on that will help drive future growth and continued profitability improvements. These initiatives are summarized on slide 16. First, we are committed to continual investment in new product development and we firmly believe that the development of high value-added proprietary products that are unique to the marketplace will drive sales growth and enable us to take market share. We are excited about the successes of our recent product launches and the robustness of our new product pipeline.

Second we are focused on e-business and multi-channel marketing. During the last several years we have launched a number of new websites and have seen considerable increases in website traffic and sales growth over the Internet. As we have discussed in the past we see the continued shifting of purchasing to online buying as a sizeable opportunity. Third we are taking a more strategic approach to identifying and seizing sales opportunities through robust market and customer segmentation. It has resulted in us better aligning our sales, marketing our new product development resources with the market and customer segments with the largest opportunities. For instance, we are devoting significant resources to capitalizing on brand protection applications, laboratory applications, the aerospace, defense and mass transit markets, as well as the Asian MRO opportunities that Stephen referred to.

We also remain committed to growth through acquisitions. Although we only completed 1 acquisition in fiscal 2011, we walked away from numerous opportunities that didn't fit our financial criteria. We continue to explore acquisitions squarely in our core space, as well as in adjacencies, and we believe that we have the financial and management discipline, as well as the balance sheet strength necessary to execute this acquisition strategy.

Switching to our profitability improvement strategies, the Brady Business Performance System continues to be the cornerstone to our activities. It is representative of Brady's culture that is focused on the highest level of customer service, lean and continuous improvement. BBPS has yielded nice results in our shop floor and has started to yield benefits in SG&A, where we have seen nice decreases in SG&A as a percentage of sales. We are also focusing on improving the efficiency of our SG&A functions, to ensure that our sales teams are focused on the right opportunities and that we are serving each customer in an optimum manner. At the same time, we are working to reduce redundant activities in our sales and marketing organizations and standardizing and automating our back office G&A functions such as IT and finance wherever feasible, including centralizing services in selected shared service centers around the world.

Last year, we launched our global strategic sourcing function. As already we knew, this function has enabled us to enjoy better vendor performance, fight off sales and cost increases and reduce costs where feasible. This has allowed us to better serve our customers by offering affordable high performance product at the highest level of service that our customers have come to expect from Brady. We believe that through the initiatives that I just mentioned, as well as numerous others, that we can make meaningful improvements in our bottom line even with only modest economic growth in fiscal 2012.

Again, we remain optimistic about fiscal 2012 however, to return to the profitability levels that we enjoyed pre-recession of net income in excess of 10% of sales, we will need to see higher organic revenue growth than we experienced in the second half of fiscal 2011, so clearly, sales growth will remain a top priority. I also would like to point out that Matt Williamson is traveling today. I think he is with customers at the West Coast and he regrets that he cannot be with us. We will do our best to fill in for them when questions come up. We thank you for your interest in Brady and we will now start the Q&A. Jennifer, can you please provide instructions for our listeners?

(Operator Instructions)

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

Good morning, Allison.

Could you give us a little color on how we should be thinking about margin expansion or operating margin expansion next year based on what we are seeing? Are we looking at something more moderate than we saw in 2011? Thanks.

(laughter) I'm looking to Tom.

As I said in our guidance, we expect low-single-digit organic growth, but we still anticipate improvements in net margin. It's a little bit complicated times right now. On the gross margins, we've talked about increased material costs that came through in the second half of the year. So we had a pretty nice run of dropping gross margins for a number of quarters, and we believe that we've seen the end of the increases in prices or increases in cost inputs so we're working out to reduce those. So as you look at each of the individual businesses, we think that that should continue to help us. The only area that we still have some concerns would be in Asia where, as Stephen said, with the loss of his largest customer we've been filling capacity to hold sales and keep the plants full, but it has been at a lower volume. So that would be the area of risk that I would see for next year. But in the Americas and Europe I would expect to see improvement in the gross margins.

Then in SG&A, we continue to work down at SG&A over time. I think we had an exceptionally good SG&A as a percent of sales in Q4. But I think if you just look at the general trend over the last, probably the last 2 years, we've seen a pretty continuous improvement on the SG&A line, so I don't know that you can look at the Q4 as a starting point but look at the average over the course of the last 2 years and you will continue to see improvements or we should continue to see improvements in SG&A. And all of that should result in the improved net margins as we talked about in our guidance.

I was in European business for quite some time, so you know with our high plus margins, any uptick in organic growth rate, will have a nice impact on operating profit. An if you look at the last quarter where we had basically a flat organic sales, we were able to increase our operating income quite nicely on flat to moderate declining sales. So it's all about organic growth and we have a lot of initiatives going on to see if we can grow even in a challenging economic environment, because we know what this does to our bottom line.

Sure. And Frank, you talked a little -- you talked about the customer slowing in fiscal Q4. Can you give us an update in fiscal Q1 in terms of if there's been any more significant changes in customer behaviors at this point?

Excuse me, in customer?

Yes, just customer buying patterns, as we're 6 weeks into the quarter.

Here's what Matt would tell you if he was here. What we saw, we saw that our sales to distributors in the Americas was lower than what we saw their sales was, so we think they might be a little bit cautious on inventory in anticipation, maybe of slowing economy or just because of uncertainty, so that's what's going on in the Americas. And Peter, you want to say something in Europe, what's going on there?

Yes, not quite the same in Europe, but it's August in Europe, or has been, and it's not really the month to call a year, but we didn't see any real reduction in our order book, per se. But I would add that caveat, it is August --

Yes. And of course, Asia is obviously a special situation right now.

Great. Thank you.

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

Hi, thanks, good morning, guys.

Good morning, Charlie.

With respect to the gross margin and your guidance looking out into fiscal '12, and getting back some of the -- on the price increases. Are you still going to be -- I know you're offsetting some of it, but are you offsetting all of your expected raw material price increases in fiscal '12 with this price increase you put through August 1? And what is your embedded assumption? Can you give us an embedded assumption of what kind of gross margin you're looking for in '12?

I think the comment that I made earlier is that, if you look across the businesses, I think it's easiest to talk about Europe and the Americas and, as I said, we think that we've seen the cost increases that we're going to receive with the majority of them and we're working through -- clearly the price increases are going to help that we're putting through in August, the strategic sourcing initiatives continue to help us and we believe that we have to see a -- there will be an improvement in gross margin in order for us to deliver the guidance that we put out. So I would expect to see that in the Americas and Europe. And Asia, it really comes down to how quickly we can really cover the declines, the loss in sales from our larger customers, and if we could continue to see improved margin on those sales that we're bringing in to offset those declines.

Yes. We definitely anticipate that our margin for the full year, gross margin for the full year, is going to be higher than what we saw in the fourth quarter.

Okay. And just on your Asia-Pacific comments, I want to make sure I heard you correctly. You are talking about your largest customer there. Are you expecting a sequential increase in sales from the fiscal fourth-quarter going into '12?

Yes, we are, Charlie. For 2 reasons. It's normally one of the higher quarters, as most of the mobile handset manufacturers are heading into the good cycle for the Christmas holiday period. But also, as we indicated, we felt that sales to our large customer had bottomed towards the end of the third quarter, and that's what we believe has happened, that's what we have seen.

Okay. One more, and I'll hop back in the queue. How much of sales in Europe today are coming out of Eastern Europe and where do you see that heading as one of your initiatives?

Well, it's a -- from a low comparable, Charlie, this is one of the areas I mentioned to you before, so, sort of doubling year on year. So, I don't know that I want to call it out specifically for a number of reasons, but it's heading in actually the right direction, in fact. I had a business review with our Brady [offerum] and we were talking about that very point, and it's encouraging, very encouraging --

It is certainly an area of focus.

And also in Eastern Europe and the Middle East, I hasten to add.

An area of focus no doubt, Eastern Europe, Asia, and South and Latin America.

Great. Thanks.

Your next question comes from the line of Wendy Caplan from SunTrust.

Thank you, good morning. Can we talk about your SG&A a little bit more? This is the lowest as a percentage of sales that we've seen in an awfully long time. Should we think of this as the new normal? Or is it a blip in the line?

I think the way that I answered the question a little bit earlier is, I think it is a blip in the line, but if you look at the trend over the last 2 years it has been going down. So I think if you kind of normalized that in the range that we see we expect it to continue to decline, but I don't view that as the new starting point for the future.

But the trend is clearly in the right direction. If you look at -- I think it's slide 8, where we show our SG&A as a percent of sales, you see that in the height of the recession it was up 36% if I'm seeing this right, it has come down 35%, 33%, 33%, 32%, then we blipped up 34%, then down to 32%. The trend is clearly in the right direction. We're working very hard in pushing this further down. I've said this before, and I'll repeat it gladly. We think there's more opportunity going forward in our SG&A reduction as a percent of sales as compared to gross margin. Our gross margins are about 49% and while we see there is still some opportunity for improvement, we do believe there's more opportunity in SG&A and we're working hard on this.

And Frank, can you give us some examples? I know you mentioned in your prepared comments and in the slides about some of the realignment of the organization, but also simplifying standardizing and automated the S&A. Can you give us some examples of what you're actually doing that's making a sizable difference?

There are plenty of examples. Let me just maybe start with Peter. Peter has reorganized his team in Europe, I think at the beginning of last fiscal year and Peter, you might just want to mention what you do specifically because we typically don't talk so much by region when we talk about those improvements. But I think it's an example of what's going on throughout the organization.

Couple things. Thanks Frank. A couple things on that, Wendy. We used to have a product decentralized; it's still semi-decentralized, so we're very localized to the customer. But we have 5 business units, 5 management teams, 5 general managers, I've integrated that into 3 business streams. And there are 2 benefits to that. There are some cost saving benefits, but we see the impact in better allocation of investments. So if you take our direct marketing business stream, direct marketing was run on a country-specific basis before that. Likewise the Brady offer. So we have portfolio managing directors managing whether it would be a direct marketing business, whether it be a people ID business, whether it be a Brady offer, and that sort of lacked a little bit of focus. It had run its course; it gave great customer service. I just felt it had run its course.

So we collapsed it into 3 focused business streams. So 3 managing directors heading those business streams across the whole region. So we have the Brady offer, we have direct marketing, and then businesses that didn't fall into any of those, businesses that we've acquired over the years that are good platforms for us, Transposafe, transportation security. We wanted to focus them and give them their own home as well so we could nurture growth out of those business streams and give them some special attention. And not just have them distracted or distract the other business streams. So that's one example of actually integrating them into a more simplified structure that gives us a lot of leverage both on the cost line but also our ability to customize on organic and inorganic growth opportunities.

So you can basically say, Wendy, we went from a country-specific organization to more of a regional organization. Let's say marketing, right? We can do marketing country by country, or we can say we can do marketing region-wide for Europe, so that's one example. Another example, which I might have mentioned before, we have moved a lot of our call center activity to Manila in the Philippines, and we have now a sizable call center there. Altogether, we do a lot of activity, not only call centers, but also designing our catalogs for online, designing our catalogs for mail, for our direct marketing business and many more things in Manila where we have about 300 people. So that is certainly a sign of competence now, where they can be more efficient because they are just all together, as well as because lower cost.

Another example which I like to mention is we have changed our go-to-market model, primarily in the US. Where we used to have salespeople together with distributer calling on many customers, some in remote areas, and what we have done, we have focused our sales team on the higher potential and larger customers and do a lot of more inside sales or online. So we have basically segmented our customers and our distributors into size and potential and depending on this, we put a -- and also, some customers want to have more of a direct in-person coordination and so we deal with them, with people in sales functions, and then we have others where we do it with inside sales, and then, of course, others where we have only online support. And this is certainly a shift which also has taken place over the last fiscal year. So we're pretty encouraged that it's not just aspirational. There's a lot of activities behind it and of course BBPS is moving more to the front office, as well. I am mentioning it because Greg Anapol, our leader of the BBPS system, just walked in and he probably would have reminded me of this later. (laughter)

Thanks, Frank. And one more question -- I don't know if I missed this or not, but the price increases you put into effect on August 1, can you give me some sense of the nature of those in terms of size and whether, if prices -- if input costs stay the same as they are today or when you put in that pricing, would they 100% cover them?

That's a question which was asked before, similar -- a little bit different way and we didn't really answer it, so I expected somebody to come back to this. Well, of course, it's always hard to tell how much of the price increases are going to stick but I can tell you, in the Americas sitting in for Matt here, we have price increases anywhere between 0% and 8%, depending on the competitiveness and the proprietariness of our products. Maybe on average, we could see something around 2% and hopefully it's going to offset the raw material and freight charges and so forth. But that's just for 1 region. And of course, it's hard to tell because we just increased prices, we'll see what the competitive situation looks like, and how much of this is going to stick but, just throw out 2%, and we'll see afterwards if this was right. Not sure about Europe, and Asia is always difficult to [thruse] your price down and Europe, Peter, do you have any --

I knew that it takes some time, with especially our direct marketing business, catalogs sort of -- our other contact strategy, through the Internet really starts having an impact towards the end of the quarter, so it's a difficult call. And of course, it's volume related. One thing I would add though, is that we've invested a lot over the past 12 months in intelligent pricing. And we're using some software systems now, actually we're using those everywhere, not just in Europe, to just understand that price volume much more smartly than we did before.

And maybe, a more generic comment, Wendy, when we look at our profit, our guidance for fiscal 2012, and we do not anticipate that we have an improvement in gross margins coming from sales price increases in excess of materials cost increases. It's productivity enhancing, BBPS, facility [accommodations] and so forth. So I kind of maybe think it's offsetting each other.

Okay. Thank you very much.

You're welcome.

(Operator Instructions)

Your next question comes from line of Jason Ursaner from CJS Securities. Please, proceed.

Good morning. You guys have all provided a lot of details on the call for the various businesses and I hear the cautious tone in the outlook and I'm trying to determine how much of this is really what you're reading and hearing versus actually seeing in the underlying business, because Americas was the only region that really experienced a core decline and that was related to the oil spill sales. So, for Frank, if I step back and look at the overall picture, I was trying to make a parallel to Q4 of '08. At that time you reported record results, came on, you're seeing broad-based slowdown and initiated a restructuring. So when you compare these 2 periods, what are you seeing now in terms of a slowdown versus what you were seeing at that time below the surface?

It's a great question. I can tell you when we reported that -- actually I think it was our first quarter, 2009 which was in November, 2008, we knew we are in for a major slowdown in the economy. We knew this for sure. Otherwise we wouldn't have taken action like reducing our workforce by 10%, and not giving a pay raise, and canceling all our bonuses; we knew we are in trouble. And of course we weren't the only one, the whole economy tanked back then. We have not taken any actions like this, of this magnitude. We are very cautious and I would say it's more uncertainty than it is knowing, so I think it's a big difference between what we saw in fall of 2008, what we are seeing now. And as far as, are we seeing it in our business or are we reacting to what we are reading, we just had one month behind us, August, and it's very difficult, based on August where nobody works in Europe. Excuse me, Peter, some people work. (laughter) You work, Peter, I know this for sure.

I was. I was.

You worked. Exactly. But I think you are the only one. Because I was vacationing in Europe. Everybody seems to be vacationing. So it's obviously difficult based in August to predict anything, so I don't want to do this -- so it's more like what we read and what we hear, than what we see in our business. Totally different in 2008.

Okay. That was it for me. Thank you very much.

Your next question comes from the line of Chris Weltzer from Robert Baird. Please, proceed.

Morning, guys. Wondering if you could talk a little bit about the acquisition pipeline, how it looks at this point, whether all the macro and market uncertainties have started to have an impact on the valuations you're seeing for businesses or conversely whether you're seeing businesses just sort of exit the process?

Yes. We have had a pipeline over the last 12 months which was obviously larger than it had ever been in our history. If you add everything together, the quantity and the size of the acquisition opportunity. But what we also saw is quality companies go for pretty high multiples and I think it's because so many companies are sitting on a lot of cash and if there is a quality business, everybody goes after it and if there is a business which is not as high quality, nobody wants it. So we clearly see multiples which are -- sometimes, which are sometimes beyond what would felt we could afford in order to create shareholder value. I think we are disciplined, we are very disciplined and when it comes to looking at the economy right now, that's another area of uncertainty. So I think, you know, high value is good, but the valuations are high and we'll make sure we do what's right for our shareholders by being prudent.

Absolutely. So no change in the last couple months or so in any significant way?

I'm looking to Scott. Do you see anything, Scott is also in charge of our corporate development and talks a lot to acquisition targets and to M&A and investment bankers. What are you seeing?

No. We look at our pipeline; it's healthy as it's ever been. I'm looking at it over the last 2- or 3-year window. The quality of the prospects are quite good, the size of the deals are larger than what we were looking at 4 or 5 years ago, and the deal flow in general and the volume is quite good. But to Frank's point, it is about what things are actionable, what's the prudent thing to do relative to the valuations in the market?

Okay. Thank you. And then just a quick cleanup question -- are there any share repurchases assumed in your guidance at this point for fiscal '12?

No. When we gave our guidance it was assuming the share count as of the end of the year.

Okay. Thank you, guys.

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

Hey, good morning. How are you? Just want to parse out the gross side of the guidance for '12. I think, Tom, you may have mentioned that you're expecting the second half to maybe be a stronger grower than the first half. Could you just clarify that, make sure I'm on base there? And then, if that is the case, what's the rationale behind sort of the second half acceleration?

You know, I know that we did say we did expect the second half to be a little better than the first half. As I look at it, I don't see a material difference between the 2. As I keep looking at economic forecasts and so forth -- we just see things to be relatively soft. Coming out of this quarter, we're seeing basically low-single-digit growth in our business, and that's pretty much what we're looking at going through the year.

Okay. So nothing sort of Brady-specific that would make the second half -- accelerate the second half? It's more of the macro side of it.

Correct.

And then, to drill down into that a little bit more, how much of the growth in your low-single-digit organic growth expectations is market-based versus contributions from your gains via the Internet, new products, things like that?

That's an interesting question. (laughter)

Typically, we don't talk about things in that level of detail. I would just say that what we're seeing is driving our growth today will be similar drivers going forward. We've talked about the initiatives that we're looking at. The Internet, new products have been contributors to growth over the past year. We expect to continue to see them to grow. Things that have been tailwinds for us I think will continue to be tailwinds. Nonresidential construction is not looking to come back in the next calendar year, so we're not looking at gains from that. There's a lot of little things that make up a low-single digit growth forecast.

And it's also very hard to tell, Tony -- you just talked about Internet, we clearly take much more business over the Internet, for instance, now direct mail catalog business, right? So we clearly have a shift towards more buying for the Internet. But in some cases, people see a catalog and then place the order on the Internet or, they come to us on Internet and they request a catalog or they talk to somebody on the phone, but what we don't know, we don't know how much of this is substitution. Somebody now buying online as opposed to buying from catalog in the past, and how much is incremental. Therefore it's very difficult to say how much is incremental. This just gives you one example of the difficulty of pinpointing this.

Right. Okay. And then as far as during the fourth quarter, could you just talk about the cadence of demand during the 3 months? Did it weaken? I think you mentioned a little softening there at the end. And then would that be outside the normal seasonality of intra-quarter progression?

I think -- you talk about our fourth quarter?

Yes.

I think it's -- I think our July was weaker than we anticipated. So but I wouldn't say that's a trend. Our August was actually an improvement over July. So, it's hard to make a statement just because of one month. So if August would have been as weak as July, I would have said, well, we see a trend. But that was not the case.

Okay. And then last question -- the share repurchase -- just want to make sure I understand, it's 2 million shares. Is that in addition to -- I think you had 200,000 left over at the end of the last quarter, so is your total authorization 2.2 million or is the total authorization 2 million?

It's the 2 combined.

Okay. So 2.2 million. Great. Thank you.

Your next question comes from line of Benjamin Wong from Bank of America Merrill Lynch. Please proceed.

Hi, guys. Good morning. One quick one, the UK has been pretty weak for the past few quarters. Just wondering if there's been any signs of improvement out of that market. Thank you.

Well, it's been -- you're right. It has been our weakest performing economy across all our business offers, in fact. But we did see a little bit of improvement in our direct marketing business towards the close of the year. So there we did -- that was the one that was most effective. But that's probably not down to economic recovery so much, Benjamin. It's just that as we go through the year, we've been revising our contact strategies in that business, and I think we're seeing some benefit from that. So it's too early to tell whether we can sustain that, but I'm not sure we're going to get any real favors from the economy in the UK.

Okay. Thanks.

Your next question comes from line of Jim Kitzinger from KLCM.

Good morning, everyone. I have got a couple of questions. The first is on R&D. It appears to me you guys had a pretty sizable ramp in new products over the last year, year and a half. Could we expect R&D spending on an absolute basis to remain here in the low 40s or is it going to back off or are there new projects were it's going to bounce up?

Hi, this is Bob Tatterson. I'm the CTO. We're expecting our R&D investment to be basically flat on a year-over-year basis. I think what's changing that over the last few years is a shift in the mix. We're really focusing more on investing that towards more differentiated products that have a more incremental impact versus product refreshes. So to that point, we've been investing a lot of those dollars into more advanced technology programs which are underway right now. We'll see those products coming out in the future years. So, a change in the mix of the spending, but similar overall spending levels.

Okay. The next question has to do with -- there was a comment about nonresidential construction and obviously, here and in Europe, it's ground to a halt, but in Asia it is booming. When we talked to your neighbors, Johnson Controls, the idea that there is a construction boom happening in Asia is understated. How are you attacking that market given the opportunities set there, and what kind of money are you spending to make that happen?

Okay, Jim. I need to take this one, obviously. There's a few things we're doing there. Now, the Asian market is very interesting in this area. There is a lot of infrastructure spend. And when you look at our traditional Brady MRO products, which is where we would generally experience the benefits side in Europe and North America from nonresidential construction, depending on what that construction in is in Asia, it may actually not lead to a lot of demand for Brady-style products. Multinational companies will be pitting for the same standards of facilities that we would be used to seeing and would identify that appropriately which is principally where Brady products would go.

But when you get down to -- in China, a lot more of the locally owned sort of operation for the facilities, they don't necessarily use the same level of product that we would have. Also, our product generally goes in fairly late in the piece so the last thing when you're building a new facility is put the signage and identification and warning signs and things up. So that's broadly where the markets at. In terms of how we reach that, we go through distribution in China pretty much the same way we do is in the other regions. Granted, the distribution infrastructure isn't the same. So that's to help you try to get there.

In addition, Stephen, I'd like to point out since Bob Tatterson, our Chief Technology Officer, is in the room as well, we have significantly stepped up our R&D team in Asia over the last couple of years. Some of them, of course, work in MRO, as well. And, we are going to launch this year, one of our first products for the MRO market, specifically developed by the team in Asia. And, I don't want to go into any specifics because it hasn't launched yet, but any more color on this, Bob?

It's exciting, we recognized an opportunity for MRO-type products in Asia, and that was one of the purposes of ramping the investments. So we have a dedicated R&D team both in Singapore and in Beijing and we've been focusing over the last few years and launching some products specifically for that market, and will be seeing those over the next 3 or 4 months.

Okay. Finally, the last question has to do with the acquisition side of it, and it sounds like pricing has been what's held you guys back, and I greatly appreciate your discipline on that side. My question really revolves around the pricing of other companies versus the pricing of Brady stock here, at about 6 times EBITDA. How are you seeing quality deals relative to that 6 EBITDA multiple? And given that, how aggressive will you be in buying back your stock? Is the objective truly to shrink the shares outstanding or just to keep them flat relative to the share issuance? And that's it for me, thanks.

Well, if you look at the publicly traded companies' valuation, I would say most of those companies, publicly traded companies, whether you look at -- no matter which company you look at, they are valued at a lower price than what you pay if you want to buy a company. We are talking about EBITDA multiples of 8, 9, 10. That's not at all untypical. As you know, if you look at probably 20 companies, their multiples are typically much lower. So that said, to valuation. As far as stock repurchase is concerned, we have never before announced the stock repurchase authorization of 2 million, so I do not want to give any predictions as to how aggressive you want to be on this, but maybe this give you some idea. I think the largest we ever had was 1 million, and we have now 2 million and we have still 200,000 left. So that should give you a clue how we feel about the valuation of the stock market in general and about the valuation of Brady Corporation.

Okay. Thank you, Frank.

There are no further questions at this time. I will now turn the call back over to Mr. Aaron Pearce for closing remarks.

We understand that there were certain technical difficulties at our website hosting company this morning. We apologize for any inconvenience this may have caused in getting to the slides. The audio recording and slides from this call today will also be available on our website at www.investor.bradycorp.com and the replay of this conference call will also be available via the phone beginning at 12.30 Central Time today, September 12. The phone number to access the call is 1-888-286-8010, or 617-801-6888 and the passcode is 29984538, and the phone replay will be available until September 19. As always, if you have questions, please contact us. Thanks, have a great day and operator, please disconnect the call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect. Have a great day.