Brady Corp (BRC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Brady Corporation earnings conference call. My name is Fab and I will be your operator for today.

At this time all participants are in listen only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Thanks, Fab. Good morning and welcome to our fiscal 2012 first-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 our three regional Presidents, Matt Williamson, President of the Americas; Peter Sephton, President of Europe; and Stephen Millar, President of the Asia Pacific region.

As usual, after the prepared remarks by the team we will open up the call 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. You will have a few moments to get to those slides while we go through our usual introductory information and our Safe Harbor statements.

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 is 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 10-K, which was filed with the SEC in September of 2011. Also, please note that this teleconference is copyrighted by Brady Corporation and there may be no rebroadcast 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 I will now turn the call over to Frank Jaehnert. Frank?

Thanks, Aaron. Good morning everyone and thank you for joining us. We are pleased to report a strong start to fiscal 2012 as our first-quarter revenues grew 6% and net income grew 24.5%. Excluding restructuring charges, net income grew by 13.2%. This included nice organic revenue growth of 5.7% in the Americas and 3.7% in Europe. Our focus on superior customer service and on providing highly innovative new products is helping propel organic growth in the Americas and Europe at above GDP growth levels.

Profitability in both the Americas and Europe was also up nicely. Overall I'm pleased with our results in these two regions.

In the Asia-Pacific region organic sales were basically flat. We continue to face the challenges that we have been discussing over the last several quarters as we saw year-on-year sales decline at our largest mobile handset customer. We were able to replace these sales, but at lower margins, resulting in 21% decline in segment profit in Asia. We are focused on improving the operating results, as Stephen will talk to in a few minutes.

While we are cognizant of the challenges in the macro economy and do not expect any significant economic tailwind, we do believe that we are well positioned to continue to increase revenues and profitability in fiscal 2012. As such, we remain focused on generating strong free cash flow throughout our businesses, and then deploying the cash in a disciplined manner to add shareholder value.

Our priorities for the year for the use of cash remain unchanged. First and foremost, we will invest in long-term strategic initiatives to drive organic growth, including our e-business initiatives, the development and commercialization of high-quality new products, and continued expansion in developing economies.

Second, we will continue to invest in strategic acquisitions, both in our core space and in near-in adjacencies as we put our balance sheet to work to acquire companies that bring us new customers, markets, technologies and/or geographic presence.

Lastly, we will continue to return funds to our shareholders through dividends, which have increased for the last 26 years, as well as through share buybacks from time to time.

As an organization we are highly focused on providing our customers with the best products and the highest level of service to make their buying experience superior to our competition. We believe that an unrivaled customer experience is, and always will be, a key to our long-term success. This high level of customer focus, combined with a constant stream of new products, will be a catalyst for both near-term and long-term organic revenue growth.

I will be back later during the Q&A session. Now I would like to turn the call over to Tom Felmer for our first-quarter financial review. Tom?

Thank you, Frank, and good morning everyone. Let's move to slide number 3, which is a summary of our first-quarter financial results. As Frank just mentioned, we started our fiscal 2012 with a 24.5% increase in net income to $32.7 million for the quarter compared to $26.3 million in the same quarter last year. Diluted earnings per share grew 24% over the prior year to finish at $0.62 per share in the first quarter.

The improvement in earnings was primarily due to the positive impacts of our organic growth initiatives, coupled with ongoing process improvement initiatives. This quarter marks our eighth consecutive quarter of year-on-year increases in net income and earnings per share.

Sales grew by 6% in the first quarter, which included organic sales growth of 3.5%. Our first-quarter gross profit margin finished at 48%, which compares to the prior-year first-quarter gross profit margin of 49.9%.

Although raw material and freight costs are higher than they were this time last year, the biggest driver for our decline in gross profit margin relates to our Asian segment, where we took on lower-margin sales opportunities in an effort to offset volume declines at our largest mobile handset customer.

SG&A expense was down 200 basis points to finish at 31.2% of sales compared to 33.2% in the first quarter of last year. Lastly, on this slide, our cash balance remained strong at $372 million as of October 31, despite paying $9.7 million in dividends to our shareholders and repurchasing 457,000 shares at a cost of $12.3 million.

Let's move on to slide number 4, which is a summary of our quarterly sales trends. Looking at the chart you can see a nice trend of steadily increasing sales over the last two years. Our fiscal 2012 first-quarter sales were approximately $350 million, which is our highest quarterly sales figures since the recession began in the first quarter of fiscal 2009.

Organic sales increased 3.5% in the quarter. Divestitures, net of acquisitions, reduced sales by 0.2% in the quarter. And the impact of foreign currency exchange rates increased sales by 2.7% when compared with the first quarter of fiscal 2011.

Moving on to slide number 5. You can see the trending of our gross profit margins. We continue to focus on driving gross profit margin improvement through BBPS, lean and strategic sourcing. However, during the second half of last year and the first quarter of this year we took on lower-gross profit margin work in the Asia-Pacific segment to better utilize our converting capacity, thus reducing our overall gross profit margin percentage.

Now turning to SG&A in the first quarter. SG&A as a percent of sales was 31.2% compared to 33.2% in the first quarter last year. As we have discussed in previous calls, we remain focused on driving down SG&A expense as a percent of sales through increasing the effectiveness of our salesforce, as well as reducing general administrative expenses.

As our restructuring programs are becoming less material, we did not separately break out restructuring charges in this quarter; instead, any restructuring related charges have been included in SG&A expenses.

Moving on to slide number 6. Our GAAP net income for the quarter was $32.7 million, an increase of 24.5% over the first quarter of last year, resulting in GAAP diluted EPS of $0.62 per share. As mentioned previously, organic sales growth and reduced SG&A and restructuring expenses are major catalysts for our increased profitability.

On slide number 7 we summarize our cash position and cash generation. On the first-quarter cash balance walk, the key items to point out include our investment of $5.8 million in capital expenditures. We returned $9.7 million to our shareholders in the form of dividends, and we repurchased 457,000 shares of Brady stock for $12.3 million at an average price of less than $27 per share. All resulting in an ending cash balance on October 31 of $372 million.

Our balanced approach to capital allocation remains unchanged. We continue to invest in organic growth opportunities, invest in value-creating acquisitions, and consistently return cash to our shareholders through dividends that have increased for the last 26 years. Although not an essential point of our capital allocation strategy, we will also repurchase Brady shares from time to time.

On slide number 8 you can see that our gross debt is $391 million and our net debt is $19 million at the end of the first quarter. We believe that with our current cash balance and our untapped line of credit that our conservative leverage profile provides us with adequate flexibility to support future organic and inorganic growth opportunities, as well as continue our practice of annually increasing dividends.

Moving on to slide 9. The positive momentum that we've enjoyed in the development and launching of new products continued in the first quarter. Product launches in the quarter included a significant movement at Brady into leveraging smartphone-based mobile technology to bring new value and ease-of-use to our products.

The Brady IDenticard People ID business launched a new mobile interface to allow security administrators to view and manage access control and ID card generation while away from their desk.

Our Brady brand business also introduced new software and hardware which will be in many of our products going forward that allows users to download and compose and print labels from their smartphone wirelessly to a Brady printing system. The first printers to tap into this capability are the new BMP 51 and BMP 53 portable printing systems. These printers build on our history and reputation of highly featured and durable portable printing systems for both MRO and OEM applications.

I would now like to turn the call over to Matt Williamson to start our regional reviews. Matt?

Thank you, Tom, and good morning everyone. Please refer to slide number 10 for the Americas review. Sales in the America in the fourth quarter were $153.9 million, up 5.4% compared to the first quarter of fiscal 2011. Organic sales grew 5.7%; currency added 0.4%. And the sale of the Teklynx software business reduced revenues by 0.7%.

The Brady brand businesses in the US, Canada and Mexico grew respectively in the quarter, in-line or exceeding many of our key distributor sales. Our ongoing investment in R&D and the resulting new product launches have contributed to this growth.

In October we launched the BMP 53 label maker. This launch extends our line of proprietary Brady printers and consumables, and is the first printer of its kind to allow users to design and create labels remotely from their smartphones.

Our Brady brand business in Brazil grew nicely in the quarter as well. This was driven by strong demand from our OEM customers, as well as several operational activities undergone to increase our production capacity in Brazil.

Our direct marketing and People ID businesses in the US also grew during the quarter, but did not grow at the same pace as the Brady business. We had another strong quarter in our publishing business led by improved sales efficiency, new product launches, and the expansion of our telemarketing team in Manila.

In the direct marketing business our strategies remain focused on increasing traffic and sales over the Internet, improving sales productivity of our telemarketing teams in both the US and Manila, growing our customer files, and improving all aspects of our customers' experience to drive improved customer conversion and retention.

Our People ID businesses benefited from the freeing up of previously frozen government budget spending in the first quarter. Additionally, we launched our PremiSys mobile access control software in the quarter. This application allows system administrators to quickly and easily manage their systems from any remote locations via their smartphone.

Our overall strategy to improve our Internet traffic and sales continues to yield positive results across our businesses, as we are experiencing double-digit e-business growth rates in both our direct marketing and Brady businesses.

Segment profit in the Americas increased 9.8% to $43.2 million in the quarter. As a percent of sales segment profit was 28.1% compared to 27% in the prior year. Profitability is being driven by a combination of improved gross margin in the region due to select price increases that went into effect on August 1, along with the results of ongoing benefits from lean, strategic sourcing and actions taken to improve our selling expense structure.

Today our focus on selling and expenses relate to improving productivity and processes of our inside sales teams, field sales, inquiry management, optimizing our Internet results, and improving the use of customer segmentation in our businesses. These activities not only improve effectiveness but also result in the improved service to our customers.

In cost of goods sold our operational strategies of lean and facility consolidations have enabled us to better utilize capacity and reduce our overhead costs, all while serving our customers more efficiently and effectively.

Overall, we have now reached a point where our price increases, combined with operational efficiencies, have caught up with our raw material price inflation that we saw during the second half of last year, although material costs remain higher than one year ago.

Looking to the remainder of 2012 we are focusing on organic sales growth opportunities in our best customer segments, continuing to improve the experience of our customers doing business with us, driving Internet sales across all of our businesses, launching new and differentiated products with a strong value proposition for our customers, and increasing our advertising and telemarketing efforts in our direct marketing business.

We are facing an uncertain macroeconomic picture, and accordingly we do not believe that we have significant economic tailwind to drive organic sales growth. Through our internal initiatives we are targeting greater than GDP organic growth. We expect low-single-digit growth for the balance of fiscal 2012.

We will also continue to keep tight reins on spending not directly related to our sales growth opportunities to ensure that we can maintain or grow our segment profit as a percent of sales.

Now I will turn the time over to Peter, who will report on our European results. Peter?

Thank you, Matt, and good morning everyone. I would draw your attention to slide number 11. Sales in Europe were $97.4 million, up 5.8% compared to the prior year. Organic sales grew by 3.7%, currency added another 3.7%, and the sale of our Teklynx software business reduced revenues by 1.6%.

Whilst the overall organic sales growth was at 3.7%, we noted important differences in growth rates between our various business streams. The strongest growth rate was achieved in our direct marketing businesses, where Northern and Southern Europe achieved upper single-digit growth rates. This compensated for ongoing UK weakness, where we still noted a sales decline for the quarter. But there are clear signs of a recovery towards the end of the period.

The main drivers of this growth were strong Internet sales and an individualized approach towards house-buyer growth in each of our major markets, tailored towards specific situations for that local market, and supported by the recently integrated regional marketing management structure that we have adopted. This resulted not only in a more robust growth, but also increased margins, a more efficient use of advertising spend, and increased profitability overall.

The Brady business showed mixed results and achieved an overall low-single-digit growth rate, negatively impacted by reduced mobile handset sales in our Scandinavian business. If we exclude the weakness in our Scandinavian business, our Brady core business throughout Europe had mid-single-digit growth throughout the quarter.

We continue to benefit from the success of our recently renewed range of portable printers, specifically BMP 71 and BMP 21. We also expanded our vertical markets such as renewable energy, and these have been a growing area for us. Whilst our existing markets that continue to focus on the process industry and particularly steel and paper manufacturing, have shown an increased demand for our workplace and safety product range.

Segment profit increased by 9.3% to $26.3 million in the quarter. As a percent of sales segment profit was 27% compared to 26.1% in the first quarter of 2011. After adjusting for the impact of the sale of our Teklynx software business, our gross margin was down slightly. But this was more than offset by reduced selling expenses where we are seeing the improvements from the re-organization into the three business streams.

As we maintain our focus on driving our costs down, both SG&A -- both as a percentage of sales and in real terms this will allow us to reinvest those selling expenses saved to drive new growth initiatives.

Looking forward to the remainder of fiscal 2012, we continue to anticipate low-single-digit organic sales growth. Consistent with Frank's comments, we are highly focused on organic sales growth opportunities, including driving Internet sales across all of our businesses, driving new product sales, expanding our geographic reach deeper into Eastern Europe and other emerging economies, as well as our ongoing focus on deeper penetration into selected vertical markets.

The economic sentiment for Europe in general has been pointing firmly down for the past few months, and this is only slowly seeping into our demand, with some exceptions like Germany and the Middle East where we have seen some decline in demand. However, our other European businesses continue to show continued resilience, and the UK in particular has begun to bounce off its lows of the previous year. All of this translates into a forecast for low-single-digit topline growth for the remainder of this year.

I will now pass over to Asia-Pacific, so over to you, Stephen.

Thanks, Peter. Continuing on slide 12, sales in the Asia-Pacific region in the first quarter were $98.3 million, up 7.4% from the prior year. Organic sales were down a slight 0.2%. Currency had a positive impact of 5.5%, and acquisitions contributed 2.1% to sales growth.

The relatively flat organic growth in the first quarter does not reflect the effort that our sales and operations teams put in to grow our business. We have discussed extensively in the last two quarters the impact of our largest mobile handset customer on Brady in the second half of fiscal 2011.

In the first quarter of F12 we experienced our second sequential quarter of increased sales to this customer, recording growth of 37% over quarter four of F11. However, our comparisons with quarter one in F11 are still tough, as this was before their marketshare decline.

We were able to compensate for the sales reduction by aggressively increasing our sales to other mobile handset customers, LCD display manufacturers, and manufacturers of other computing devices. However, this additional sales volume came at reduced gross profit margins, which had a negative impact on the overall regional gross profit margin. We will continue to have tough comparables to overcome throughout the second quarter and the first part of the third quarter.

We were also negatively impacted by the flooding situation in Thailand. Our employees are all accounted for, but many have lost their homes, and virtually all have been impacted in some way by the flooding. We have a facility in the Bangkok area where the streets are currently flooded and our facility, although dry, was either fully shut down or operating at a significantly reduced level for most of October.

The impact of the flood was not material to our first-quarter financial statements, where net income was only impacted by approximately $0.01 per share. We are in the process of transferring production to a recently leased facility just outside of the flood zone in Thailand. Realistically it will take at least another 90 days before we are running at pre-flood capacity due to the overall hard disk drive supply-chain issues. As such, our visibility beyond our fiscal second quarter is limited.

We believe that this flooding situation will reduce our Q2 EPS by approximately $0.05 per share. We have property and business interruption insurance; however, there will most likely be a timing issue between when we incurred the actual business interruption and when we record the actual insurance proceeds.

So there will be a headwind in Q2 as we most likely will not receive any insurance proceeds in Q2. But our take on the situation is that this is a temporary issue and that the business will return to normal sometime in the first half of calendar 2012, and that these floods will not harm the long-term viability of the hard disk industry. To put the potential financial impact in perspective, our Thai business generated just under $35 million of annual revenues in fiscal 2011.

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 tablet manufacturers where we are able to leverage our differentiated solutions for heat management and optical displays.

As these issues become more pressing in the electronics market, we continue to bring together our materials expertise and analytical capabilities to try and take solutions to our customers 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.

On the new product front we have seen some recent success with proprietary products with key global OEMs, where our unique converting and materials knowledge have allowed us to enjoy success.

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 expertise. This provides a solid base for us to build on with careful execution of our growth strategies.

In MRO organic revenues were effectively flat, partly due to our decision not to ship to one of our major distributors whilst we were awaiting a reduction in their debt position with us, which did not incur until late in the first quarter. This also impacted our overall margin position in the quarter.

Our MRO growth strategy is 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 their effect is 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 $13.3 million, down $3.5 million from last year's first quarter. As indicated in my previous comments, we have made a concerted effort to increase our customer base and compete for business to maximize our capacity utilization to offset the decline in revenues to our largest customer. This strategy to fill our factories has resulted in increased revenues. And although we have experienced some margin impact due to product and customer mix, we have in fact lessened the impact on our segment profit.

Looking forward, although we remain quite cautious about the global economic health and we have headwinds in Q2 due to tough comparables and the continuing sales disruption in Thailand, we are confident that our strategies are well developed and that our focused execution ensures that we have a strong foundation in place for future profitable growth.

I will now turn the call back to Tom.

Thanks, Stephen. Slide 13 summarizes our guidance for fiscal 2012. Our EPS guidance remains unchanged. As Frank mentioned, we remain cautious about the overall economic environment and we are also seeing headwinds from currency. However, we remain confident in our ability to execute our growth and productivity initiatives.

We continue to forecast low-single-digit organic sales growth and a fiscal 2012 diluted EPS range of $2.30 to $2.50, excluding after-tax restructuring charges. Our guidance reflects a full-year income tax rate in the mid-20% range and is based on our current foreign currency exchange rates.

We also expect capital expenditures of approximately $25 million and depreciation and amortization of approximately $45 million. We believe that our focus on organic sales growth opportunities, combined with holding expenses in check, will be a catalyst for net income improvement for the remainder of fiscal 2012 and beyond.

We thank you for your interest in Brady, and we will now start the question and answer period. Operator, could you please provide instructions for our listeners?

(Operator Instructions). Jason Ursaner, CJS Securities.

First, on core growth in the Americas, I want to compare the core growth from this quarter of 6% with the core contraction last quarter of close to 3%. If I adjust last quarter for the very strong Q4 in fiscal year 2010, and I adjust this quarter for still building on fiscal Q1 of 2011 when you maybe hadn't pulled through the full effect of the recovery, is the underlying business activity in the Americas, when you take into account seasonal variations, is it really accelerating or is it actually more flat?

That is an interesting question. I would say that it is accelerating.

Is there anything you could add to that in one specific area? Is it the e-business or is it just the pricing initiatives?

Well, definitely both of those things. I touched on both of those in the comments there.

So we have implemented price increases that are sticking. That is certainly a positive, particularly in the Brady business. Our e-business has accelerated, both in Brady and in our direct marketing business. And some of the things that we are doing in the core Brady business and our People business are taking share.

And then a similar question on core growth in Asia. You have discussed the impact from Nokia and the impact that is having on the business. If I look at the segment, holding essentially flat core growth -- you mentioned the decision to take on additional low-margin volume.

If you had just stuck to the strategy of moving up the value chain how far down would core growth have been? And should we take that as somewhat of a negative sign of market acceptance for new products that it couldn't offset it as you come through the holiday cycle?

Okay, Jason, a couple of questions there. First, let me answer the second one. I don't think we should take that as a negative sign of market acceptance. I think it is just -- we are hungry for business. We are competing for business and we are taking business, so it is not -- margin drop is not an indication of that.

I think the question about core growth, it is always hard to quantify, but I would try and put some context around it. Perhaps if our sales to our largest customer had been in-line with last year, we would have 2 to 3 points more organic growth than we did have.

Okay, that helps a lot, actually. And then just back to the Americas for my last question. Looking at operating profit margin, how should we be thinking about the seasonal sequential decline in operating margin? R&D expense is essentially fixed, and it gets spread over the holiday period, so could you maybe help us quantify non-variable cost for the upcoming period?

If you are asking why it declined, it didn't decline. (multiple speakers).

He's talking about next quarter, right? Jason, you're talking about next quarter?

Yes.

Okay, there is a few things there. One of the main things is we have far fewer business days in the second quarter because of the holidays this month and in December, with the same overall cost structure. We have our merit increases going into effect on November 1, so that is a second thing. Those would be the two primary things.

Can you maybe help us try and quantify what the nonvariable costs are though?

I can't do that.

I realize what you want to do. You want to pick out what the number might be for the second quarter. We look at our business not in terms of quarters. We just -- I mean, certainly we have a cost structure which is there, a structural cost structure, and there is nothing going to change there. Of course, material cost is going to go down, we think, with lower sales, and there is the seasonality in the second quarter.

But we tend to look at this more long term. I think if I just maybe give you some general information, how I see the second quarter. We certainly have -- in Asia we will have the Thailand situation, which will not be fixed in the second quarter. It is probably going to be more impactful -- it is going to be more impactful in the second quarter than it was in the first quarter.

As Stephen pointed out, it is about -- was about $0.01 impact, EPS impact in the first quarter. We think it is going to be more in the second quarter. But on the other hand, we gave you an idea how big this business is in general, and Thailand is about $35 million annualized, so I think it is not that dramatic.

And this in combination with a seasonally weaker second quarter as we have every year gives you maybe a little bit of flavor for what is going on. Also, we do not expect a tremendous turnaround in the sales of our largest customer in the second quarter either. I think it is going to improve over time, but second quarter is probably a little more challenging than the third and fourth quarter.

Okay, thanks. I appreciate the commentary.

Allison Poliniak, Wells Fargo.

Just going back to Asia, and sort of it is not a reversal of what you guys have been trying to do in terms of taking lower-margin volume, but it sounds like the -- I guess the shocking decline of one of your largest customers has maybe put you in that position temporarily. Is it a couple quarter issue where next year we could probably see a more pronounced impact from those improved profit margin products coming out?

It is a good question. The strategies we are following we would expect to see margin lift. And what we have seen now -- what we are seeing now, I think to your question, obviously, when we suffer a volume decline from any one customer we seek to keep our capacities full. So we compete -- and I think we have been competing to win. I think we will see margin lift.

I wouldn't say -- I wouldn't want -- I don't want to try and put numbers around where we are going to go. I think we will continue to see some pickup, but it is pretty tough to forecast how rapid that will be.

And I think -- I would like to mention something else that has not been mentioned before. Allison and Jason, we are also, of course, investing in MRO in Asia. And we have not pulled back any of this. As Stephen has said earlier in his prepared remarks, we had one large customer who we kind of had in (inaudible), is this right?

Yes.

(inaudible) right. And so -- but we didn't -- we think that is a temporary thing. It certainly didn't help either the margins, because our MRO margins are -- gross margins are typically higher than our OEM margins, so this didn't help.

And at the same time we continued to invest in MRO in Asia, primarily in China, because we really, really believe in this business. So as I said, we are not about next quarter. We are about long-term and we think -- we want to continue to invest in MRO in China, because we think that is certainly a future for Brady.

I think Frank has made a great pickup here. We shouldn't just focus the Asian margin decline in the quarter just on the OEM business. The mix across both businesses is an important part of this as well, as Frank [said].

Okay, great. And then, Peter, I know Europe is very, very diverse. How should we think about it? Are you weighted in a specific region there that we should be concerned about or is it just too diverse to even think of it from that respect?

Well, I mean, it is diverse, thank goodness, anyway. What is even more encouraging is that we have been working over the past couple of years to extend beyond developed or mature Europe into Eastern Europe, Middle East and some parts of Africa, and that is helping our core growth. So you can see from that core growth that we are outpacing a very economic dire situation really in Europe. So that should continue.

But there is no one area. Ironically Germany -- our business in Germany, which was the most robust economy in Europe and has been a real driver of growth for so many companies, as I said in my report, we have seen that taper off. And somewhat surprisingly our business in Italy, somewhat ironically has been growing well.

But you know it is very mixed, and it just shows the diversity of our product offer. And also the fact that the vast majority of our business in Europe is MRO, and that shows a little bit more resilience to economic downturns than some other businesses.

Great, thank you.

Charlie Brady, BMO Capital.

Could we just -- on the gross margin impact, can we just drill down? How much -- can you quantify how much of the gross margin impact was from the Thailand flooding and how much was from taking some of the lower-margin business to fill up capacity?

It is hard to split that out. The impact of the Thailand flooding is in the volume impact for the gross margin, actually dollar decline from not shipping the sales. The gross margins in the hard disk drive industry have been pretty consistent, because the customer base is smaller and we haven't the same volatility that you do when you have customer movements in the MHS. So I think within the OEM business the impact of the flooding on gross margin just seemed to just -- is minimal.

Can you talk -- in terms of taking the lower-margin business to fill capacity, had you -- I guess what I'm trying to get to -- had you not taken that -- the lower-margin business, what would have gross margin been otherwise?

We haven't modeled that out, and we really can't -- I wouldn't even want to have a stab at that.

Is it fair to think then that aside from normal seasonality in Q2, because you've got a greater impact from flooding, you are still taking on some of this lower-margin business, Q2 gross margin ought to be sequentially down from Q1?

No, I wouldn't expect it to be sequentially down from Q1.

Okay. That is helpful. And on the SG&A expense, obviously that was a pretty good number this quarter on the expense control. And I am just trying to wrap my arms around the sustainability of that. Was there anything -- from your comments it sounds as though much of what has been done is pretty sustainable longer-term.

What I'm trying to get to was there anything specific and Q1 that maybe is not repeatable going forward for the rest of the year or should we really expect on a year-over-year basis to see that SG&A as a percentage of sales -- to see a meaningful downtick?

Obviously, we have been talking about focusing on SG&A for the last year or so, and we are pleased with a lot of the results that we have seen. Some of the things that we will see is second-quarter sales, it's usually our slowest sales quarter, so as a percent of sales SG&A is likely to tick up in Q2.

I think Matt also mentioned that the way our Company operates is annual incentives go into -- or merit increases across the Company go into effect on November 1. So there will be a little bit of an uptick from that as well, but we continue to monitor them closely.

The other thing that we manage really month-to-month and quarter-to-quarter is we continue to be focused on driving organic sales opportunities. And if we see an opportunity to make an investment that we think will give us a good return, you could see an uptick there. But in general it is still a focus area for us.

Second quarter will go up a little bit, I believe as a percent of sales. And after that we'll just continue to monitor it. I would expect it to be -- continue to improve long term, It is just difficult to say quarter-to-quarter.

Thanks.

Anthony Kure, KeyBanc Capital Markets.

This is Karl Ackerman filling on for Tony. Just a few quick questions. I think you had mentioned that you had a price increase go in effect in August. And that it was probably a neutral price cost spread in the quarter. I am just wondering if you are expecting neutral price cost spread throughout fiscal 2012?

I'm not sure exactly what you're asking, but I can tell you we not only have price increases in August, we also have price increases in January. I know in Europe they have some price increases in January. And it could also be that if we think the market will bear it that we could have another price increase during the year in some of our other regions.

Sorry, again, it is hard to tell. Does this answer your question?

Yes. Again, I was just curious if the price increases that you have and will potentially implement in the future, if they are expected to offset any increases in raw material costs. So -- but, yes, it does.

The next question I had, just on kind of the sales progression during the quarter, I just wonder if you could talk about how that trended throughout the quarter?

Different in each region, I would say it -- I don't know if there was a big difference between the months. I think Europe may have slowed a little bit. I think the Americas may have strengthened a little bit through the quarter. And Asia was pretty consistent through the quarter.

I wouldn't say there was a clear trend one way or the other, neither discouraging nor encouraging trend. When I step back and just look at the numbers, actually I'm pretty encouraged with organic growth both in Europe and the Americas in light of the economy -- economic situation.

I also know that in the Americas for sure we know that we grew faster than our distributors, i.e., we are taking share. I think maybe that is a little bit of a philosophical change which we have in the Company. We just said to ourselves, the economy is not going to provide any major tailwind in Europe or in the Americas, not even in developing countries, though they are growing faster, so we should create our own growth story.

So we have to go after customers, after competitors, try to convert accounts. And, of course, there you can see the fastest impact is in Asia where we have been successful in taking share, albeit at a lower margin.

Part of it is also when you get some new products you have a lot of expenses for tooling, because we have first -- we take tooling and then we get the -- we charge for tooling over the life of the program and passing it on in prices to the customers, not that the customer pays for our tooling. So we had some of this.

So I think what may be a take away is we will not wait for the economy to bounce back. We have to create our own growth story, trying to take share from competition, systematically going after our key customers, trying to increase our share with existing customers, going after new customers, providing unrivaled customer service. And I think you are seeing the initial impact of this, especially in the Americas and to a certain extent also in Europe.

Great, thanks, gentlemen. I am sorry?

I was going to say in Europe our sales in direct marketing, we did see a little bit of acceleration towards the end of the quarter in direct marketing.

Great, thank you.

Benjamin Wong, Bank of America Merrill Lynch.

A quick one for Stephen. If you had already discussed that, I apologize if I missed it, but can you comment about the Australian business did in the Asia-Pac segment? Thanks.

I didn't comment on it so you didn't miss it. They had a very solid quarter. It was the last quarter for them of comparable -- without comparables of the acquisition they made in start of Q2 last year. But we are very pleased our Australian business is outgrowing the GDP growth there and is a solid part of the APAC region.

Great. Thank you.

(Operator Instructions). Robert McCarthy, Robert W. Baird.

I must confess to some confusion about a couple things I would like to ask about. But, first, you talked about business interruption insurance in Thailand being able to provide some offset. Compared with the $0.06 estimated impact of Thai flooding through the second quarter, how much of that would you expect to recover, and would that all be during the current fiscal year?

That is hard to tell. As you can imagine, this is not a black and white thing. You talk to the insurance companies and they want to have all kind of documentation. And after a while, hopefully in this coming year, but we don't even know if it is this fiscal year or next we hopefully will see some of the money coming back to us -- very hard to tell.

I can only tell you that we have done everything we can during the flood and talking to the insurance company to make sure that we do everything we can to make sure that we preserve our -- protect our assets -- try to produce and so forth so that we have -- we left no stone unturned. And we are also working right now with insurance and a third-party adviser to make sure that we do our best to get a good portion back.

But it is really hard to tell. And unfortunately or fortunately, I would say -- I should say, fortunately, we don't have any experience in this from any prior issues.

Okay.

Let me say, I'm going to grandstand for a minute and take a second after that from Frank just to reiterate what we have done in Thailand, and mitigating the insurance loss is part of it, but business continuation is really important. So I'll take 30 seconds here.

90% of our employees have been affected by this, which is quite -- it is quite staggering when you reflect on this. And this is a story of, I guess you would call it tragedy with perseverance, and it says a lot about the Brady spirit.

We had -- we shut our factory for the first time on October 11. And they built a wall outside. The floodwaters reached nearly 4 feet. We never had more than about 6 inches of water inside our plant. We moved all of our machinery and inventory, I think, up to a height of 10 inches. We had employees sleeping in the facility, running in excess of 30 pumps overnight to keep the place dry.

So this -- bear in mind this was October 11. We are now on November 18. We are in a temporary facility, which is about 30 miles away. We invoiced our first product out of there two days ago. We are in final stages of qualification with one of our major customers. We expect by next week we will be running at 40% of capacity that we were in the other facility.

The other facility, by the way, still has 2 feet of water outside, and it is two to three weeks before that comes down. So it is really quite an extraordinary story how we are mitigating this, and I think it says a lot about our people in Thailand.

And also, probably our chances of getting some money back from insurance.

Absolutely.

Because you have got to prove that you did everything in your power to avoid business interruption and damage to assets or machinery/equipment.

Well, I can certainly say that we have been impressed with what we heard from you about the steps that have been taken so far. And naturally our hearts go out to the people who have been affected by this terrible tragedy.

The other thing I wanted to focus on was your outlook for organic growth. First, I just need a little help understanding the apparent contradiction between characterization of business in the Americas as accelerating when you put up a basically 6% organic growth in the first quarter, but your full-year forecast is for low-single-digit organic growth. Can you help me understand -- or am I just -- am I making something out of mischaracterization on my part?

Well, I would say, when you compare it -- and I look at some of our individual businesses versus last year at this same time, we have several businesses that are definitely accelerating. And as Tom indicated, when you look at the quarter, our sales per day is slightly accelerating on a monthly basis. And then when I also look at our ability to convert customers, that is helping the US business.

So I think that when you look at our outlook and you look at our confidence in the economy, we temper our -- I guess, our enthusiasm for the things we are doing as opposed to an economy that doesn't look like it is going to help us at all.

So we have definitely seen some signs of acceleration. E-business is another one that I mentioned. We feel good about all these things. So that is the reason that I brought that up. But counter that with what we think the economy is going to do, so we just kind of (multiple speakers) our enthusiasm there.

Maybe phrased a little differently -- tell me if you disagree with this, evidence to date would support a stronger outlook. But it is awfully early in the year and there are an awful lot of uncertainties to be raising your outlook at this point.

That is true, and also there is a couple of businesses where we had a weaker quarter last year, so that that growth rate is -- and although it is not super material is one of the things that creates a little greater growth rate this year. And we don't see that because it was truly in the first quarter of two particular businesses.

Okay, thank you, that is helpful. Then similarly as I look at Europe, where you indeed did generate a, some might say, a low mid-single-digit number, but certainly well within the low-single-digit organic growth category, it would on the face of it appear that you are up against a fairly tough comparison in the upcoming quarter. Plus, of course, as you pointed out, the markets that have been strongest are weakening, and there is basically a daily diet of incrementally weaker data coming out of Europe.

So can you talk about what has to happen to be able to support that ongoing outlook for the full year, and whether this outlook in your view can accommodate an actual recession, which seems to be the consensus outlook?

What we need to continue to do is to beat the competition and win new business, as Frank said before. There hasn't been an economic tailwind for some time now in Europe. We've got a little bit of a blip in the early part of last year from our business in Germany. But we were commenting before on how diverse our business is in Europe, so we have that to our advantage. But it is about beating the competition.

If I look at our core, core businesses, those three business streams that I talk about, our direct marketing business, and that includes our (inaudible) Seton (inaudible) that are well-established, met all the workplace safety and compliance standards in Europe; our Brady offer, which is a very, very strong brand, and has been very consistent in its growth and actually was very healthy in this quarter, and is expanding well in emerging markets.

I guess that combination of that resilience of our MRO business, a continued focus on emerging markets, beating the competition -- and one other thing I didn't allude to in -- it may be a little bit too granular -- but we alluded to a little bit of dilution in margin. In part that was deliberate because we have been increasing our installed base of printers in some emerging economies so that we will get the downstream benefits of that. But essentially it comes down to doing most of the smart things like beating the competition.

And there is no doubt we are going to have an economic headwind, and that is going to increase, and we need to compensate for that by winning more business.

So I will stick with it. Unless we plunge into the depths of depression, we are going to face an economic headwind. And I think there will be some parts of Europe that do go into recession. I mean, things have been pretty bad in the UK for some time now, and all the pundits are saying now that it is going to get a little bit worse.

But you know, we have seen our own business, our business in the UK bounce off lows, and albeit marginally, and that is because of stuff that we have done; there has been no help from the economy. So we should be able to continue that. But it is going to be tough.

Then if I could, lastly, I wanted to ask about the -- maybe this helps everybody understand the first-quarter gross margin challenges that you had in Asia. I was surprised to hear conviction about the idea that Asian gross margins could be flat or up sequentially in the second quarter compared with the first. Despite the problems that we were talking about earlier, of course, in Thailand and lower volume, I think implied seasonally even beyond that.

So is the real key to understanding what is happening there this issue with your MRO business in China, did it create such a negative impact to then be followed by positive swing in mix in the second quarter that it is the determining factor that would allow you to overcome the volume comparisons and hold margins flat?

I would say there are many factors which play in there. It is very difficult to predict this. Stephen took a risk here or took an attempt to predict what is going to happen, but there are so many moving parts.

You are absolutely right, the impact of MRO is something to consider. It is not immaterial. And if you -- we had a weak MRO quarter and we hope this is going to pick up so it would help our margins.

The question is how fast our largest customer is going to bounce back if this continues, or if it accelerates. Then, of course, how our businesses are doing with some of the other customers. Because it is not that everybody has the same margins, they have different margins, different budgets have different margins.

I would say it is one of the most difficult ones to predict and also the tooling impact. There are so many moving parts I would say it is hard to predict. Stephen, as I again said, took an attempt to do this and we all hope that he is right.

Let me just give you maybe another general comment. You talked about the economy -- economic outlook deteriorating, and we agree with you. When we read what is going on in Europe it looks like everybody is talking about a recession in Europe. And the US economy, who knows where it goes? I think Europe people are more on the same size towards a recession.

We took all this into consideration when we gave our guidance and our guidance is unchanged, even though the economic forecasts are deteriorating. I think it should tell you something about the confidence we have in our own ability to take share, to convert our customers. And this is not just based on hope, it is based on something what we have been seeing.

Peter, for instance, said Italy. Yes, we know we are taking share in Italy. And we also know we are taking share in the US.

So we have taken all this into consideration. A deteriorating economy, but maybe a little bit more confidence in our own ability to create growth, and based on this we have decided to leave the guidance unchanged.

I am going to press my luck and then ask lastly, in part maybe because I got the impression maybe there aren't any other questions, but, Frank, can you talk about what you're seeing in terms of acquisition potential? You have got a lot of firepower and a lot of ambition, but market conditions have proven difficult. Do you have stuff in the pipeline now that you have some optimism might turn into transactions during the course of the next quarter or two?

We always have something in the pipeline. And you are right, we are ambitious, and if you look at our history we have made many acquisitions. So we know how to make acquisitions and we also have firepower. You are absolutely right.

But at the same time we want to make sure we create shareholder value. And while it would be easy to pull the trigger on some of those acquisitions, if you just look at EPS accretion, we have an EVA model of discounted cash flow where we apply 11% cost of capital. And it is right now just the case that many companies still have not come back to the levels of profitability they had before the recession, and sellers are holding off bringing their company to market.

And then if somebody brings a company to market it is typically the ones which have been performing better -- above average. And then many companies have cash on the sidelines as we do and there is a lot of demand for good targets. And we will not make an acquisition consciously which we do not think is going to create shareholder value.

We had some of those cases where we found nice, and actually nice sized companies as well, where we just didn't go up all the way to the price the seller wanted. Some of them we lost to some other companies like private equity. And some actually were pulled off the market by the seller, because they didn't -- they could not get what they wanted to. That is actually -- that is actually not just one, there was several which we had looked at where the seller pulled it -- mainly private equity firms -- because it just -- they couldn't get what they wanted. That is in a nutshell.

So we will see how this goes, and if there is something where we think we can create shareholder value, we will execute.

Okay, thank you for your patience with all my questions.

I just want to jump back in just so I can -- I wasn't misleading with the comment about the margin uptick. My thought train is very much around core parts of the business where we are looking for improvement, whether it is customer mix or whatever. There are a couple of other things which are relevant. I think to Frank's point, there is a lot of moving things.

I didn't include the impact of the flood in there, so there is the Thailand flood. And the other thing which had slipped my mind which is relevant is Lunar New Year falls in Q2 this year, and last year it was in Q3. So we actually have a -- so just check the spot. And as Frank said, it is a big [pull] to make a prediction. It is not as black and white as perhaps I thought it was -- as I said it was.

I appreciate the clarification.

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

Thanks. We thank you for your participation today. I would like to remind you that the audio and slides from this morning's call are available on our website at www.investor.bradycorp.com. The replay of this conference call will also be available via the phone beginning at 12.30 Central time today. The phone number to access the call is 1-888-286-8010 and international callers can dial 617-801-6888. And the passcode is 64181380 and the phone replay will be available until November 25.

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