Brady Corp (BRC) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter 2012 Brady Corporation earnings conference call. My name is Shequana and I will be your coordinator for today.

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

Thanks, Shequana. Good morning, and welcome to our fiscal 2012 second quarter conference call. During the call this morning, you will 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, EMEA President, and Steven Millar, President of the Asia Pacific Region. As usual, after the prepared remarks by the team we will open up the call to questions. The slides for this morning's call are located on our website at www.Bradycorp.com.,and then click on the investor tab.

Please note 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 2011.

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. Thanks, and now I would like to turn the call over to Frank Jaehnert, Frank.

Thanks, Aaron. Good morning, and thank you for joining us. During the second quarter, the comparability of our financial statements to last year was impacted by certain events, including the non-cash Asian goodwill impairment outlined in our press release this morning.

This impairment charge is a direct result of the challenges stemming from reduced sales volumes to one of our major mobile-handset customers due to shift in end-market shares and increased competition primarily in the mobile-handset industry compressing gross profit margins. This impairment charge was non-cash and the impairment charge will not impact our future financial results. Also in last year's second quarter, we sold our Teklynx software business at a gain. This onetime gain combined with unusually strong winter-related product sales in Europe last year contributed to last year's second quarter representing a tough comparable.

Second quarter revenues decreased by 2.6%, and we recorded a loss of $90 million this quarter, due to the non-cash goodwill impairment charge of $115.7 million. If you exclude the impairment charge and the restructuring charges incurred in this last year's second quarter, diluted EPS increased 2.1% even with the very tough comparables from the prior year, We experienced organic revenue growth of 2.9% in the Americas while organic revenues were down 5.7% in Europe, and 4.4% in the Asia-Pacific region.

Going forward, we are focused on improving results in Asia, and we are in the process of splitting our Asian business into two dedicated teams. One team focusing on die-cut business and the other team focused on our MRO and identification businesses. This change should help increase our focus on both businesses as we work to accelerate the growth and profitability of both of our businesses. While we are cautiously optimistic about the US economy, we remain concerned about the European economy. With that in mind, we believe we have create our own growth story, independent from the overall sluggishness of the world economy.

We will be focusing our energy on several growth initiatives. First, expanding our business in emerging geographies. Second, expanding globally in certain focus markets, third, new product development, fourth, customer conversion, and five, digital business. On digital business I have asked our Chief Information Officer, Bentley Curran, to coordinate the transition of Brady into a digital business. Bentley Curran will assume the role of Vice President Digital Business in addition to his current role of CIO. In this role, Bentley will oversee our global digital strategies to drive further growth in this critical area. I believe that the growth strategies we are pursuing in combination with acquisitions and disciplined cost control is a recipe for success.

Lastly, we will continue to return funds to our shareholders through dividends, which have increased for the last 26 years, a streak that we have no intention to break. Now I would like to turn the call over to Tom Felmer for our second quarter financial review. Tom.

Thank you, Frank, and good morning, everyone. As Frank mentioned there are a few notable items that impacted our financial results in the second quarter of fiscal 2012, which I have summarized for you on slide number 3. First, we recorded a $115.7 million or $2.21 per diluted share non-cash impairment charge this quarter related to our Asian business. This impairment charge does not impact our future operating results and does not change the outlook for Asia as we continue to focus on improving all aspects of this business and are in the process of the strategic realignment that Frank just mentioned. This non-cash impairment charge is a direct result of the gross margin compression primarily due to the sales decline at one of our largest customers combined with the impacts from the highly competitive landscape in our Asian mobile handset die-cut business.

Second, revenues were down at our Thai facility due to the recent floods decreasing diluted earnings per share by approximately $0.04. Lastly, on this page our second quarter financial results benefited from a reduction in variable compensation due primarily to the decrease in net income caused by the impact of the non-cash goodwill impairment charge and the reduction in our full fiscal 2012 forecasts.

Moving on to slide number 4, there is a summary of our second quarter financial results. As Frank just mentioned, sales were down 2.6% in the quarter with organic sales declining 1.8%.

Our second quarter gross profit margins finished at 47.8%. The main driver for our declining gross profit margins relates to our Asian segment where we took on lower-margin sales opportunities in an effort to offset volume declines at one of our larger mobile handset customers in order to keep our factories fully utilized. Margins throughout the rest of the business are up slightly compared to last year.

Net income excluding the impairment and restructuring charges was flat at $25.7 million in the second quarter of fiscal 2011 and fiscal 2012. Diluted earnings per share was up 2.1% compared with the prior year to finish at $0.49 per share in the second quarter, excluding the non-cash impairment and restructuring charges.

Lastly, on this slide our cash balance remains strong at $380 million as of January 31st, and our net debt position is nearly zero. Moving to slide 5, we've summarized our guidance for fiscal 2012. We have reduced our full year EPS guidance range from $2.30 to $2.50 per share down to $2.20 to $2.40 per diluted share excluding after-tax restructuring charges and excluding the onetime non-cash goodwill impairment charge that I just mentioned.

The reason for the decrease in our guidance is threefold. First, the strengthening of the US dollar against numerous other currencies including the Euro has contributed to a reduction in our full year financial results. Second, the weak macro economy has dampened our full-year outlook, in the European region, and lastly, the weak financial results in our mobile handset business in Asia has led us to reduce our F-12 earnings per share guidance

We anticipate low single-digit organic gross sales in the Americas and Asia and flat organic sales in Europe for the balance of the year. Our guidance reflects a full-year income tax rate in the mid-20% range, and is based on current foreign currency exchange rates. We also expect capital expenditures of approximately $25 million, depreciation, and amortization of between $40 million and $45 million, and free cash flow equal to approximately 100% to 120% of net income.

Let us move on to slide number 6 which is a summary of our quarterly sales trend. Our fiscal 2012 second quarter sales were $320.6 million. The second quarter is typically our lowest sales quarter of the year, and this year's decline is exacerbated by the strength of the US dollar, and certain comparability items including a loss of approximately $4 million of revenue due to the Thai flood, a $5 million reduction in revenue related to the timing of Chinese New Year falling in Q3 of last year, versus falling in the second quarter this year, and a $5 million reduction in revenues compared with last year's strong winter-related product sales in Europe. Organic sales were down 1.8% in the quarter. Divestitures net of acquisitions reduced sales by 0.04% in the quarter and the impact of foreign currency exchange rates decreased sales by another 0.04%when compared with the second quarter of fiscal 2011. Moving on to slide number 7, you can see the trending of our gross profit margins. We continue to focus on driving gross profit margin improvements through BBPS lean and strategic sourcing. However, during the second half of last year, and the first half of this year, Asia-Pacific segment profit gross margins declined because of heightened competition, thus reducing our overall gross margin profit percentage.

I would also like to point out however that the combined gross profit margin in Europe and the Americas remains strong and is slightly ahead of last year. Turning to SG&A, in the second quarter, SG&A as a percent of sales was 32.7%, compared to 32.8% in the second quarter last year. For comparability purposes if the gain on the sale of the Teklynx business was excluded from last year's second quarter, SG&A and the reduced variable compensation was removed from this year's SG&A we would have seen a 30 basis point increase in SG&A as a percentage of sales to 34.1% in the current quarter compared with 33.8% in the prior year.

As we have discussed in previous calls, we remain focused in driving down SG&A expenses as a percent of sales through increasing the effectiveness of our sales force as well as reducing general administrative expenses. This is balanced against investment needed for growth initiatives. Historically our third quarter is our highest SG&A quarter as we ramp up mailing campaigns and other growth initiatives that require funding. As such we expect our SG&A levels to increase in absolute dollars from Q2 to Q3. It is also worth noting that our restructuring program so far this year has been less material than last year, and we did not separately breakout restructuring charges in this quarter. Instead all restructuring-related larges have been included in SG&A expenses.

On slide number 8 net income excluding the impairment to restructuring charges was effectively flat at $25.7 million, in both the second quarters of fiscal 2011, and fiscal 2012, diluted EPS, excluding the impairment and restructuring charges, was up 2.1% to $0.49 per share, compared to $0.48 per share last year.

On slide number 7 we summarize our cash position and cash generation. On the second quarter cash balance walk the key items to point out during the quarter are that we generated $28 million of cash from operating activity, invested $5.3 million in capital expenditures, and returned $9.8 million to our shareholders in the form of dividends. All resulting in an ending cash balance on January 31st of $380 million.

In slide number 10, you can see our balance sheet is strong and continues to get stronger every quarter. With our current cash balance and our recently extended and expanded $300 million line of credit, we believe that our conservative leverage profile provides us adequate flexibility to support future organic and inorganic growth opportunities as well as continue our practice of annually increasing dividends. Moving on to slide number 11, our R&D investments continue to deliver a stream of innovations focused on solving the challenges of our customers in key markets.

On the electrical and data com market in Asia, we launched a new printing system, the BMP 91. This printing system is the first printer designed solely for the unique needs of the Asian markets. Having the right suite of products is critical for our future success as we expand our MRO and other identification businesses in the Asia-Pacific region. In the Americas we launched two new lines of durable materials for the Industrial Safety and Facility Identification market, and the Lab and Healthcare market, ToughJet Durable InkJet Media Adhesive Sheets and the B-7425 laboratory labels. We see a continued steady stream of new product launches over the foreseeable future as we have numerous projects in progress. 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 12. Sales in the Americas in the second quarter were $138.4 million, up 1.8% compared to the second quarter of fiscal 2011. Organic sales grew 2.9%, currency reduced sales by 0.7%, and the sales of our Teklynx software business reduced sales by 0.4%. Brady brand business in the US was our strongest performer as it grew nicely in the quarter. Our relentless pursuit of improving our customers' buying experience combined with the continual launch of proprietary new products and an excellent sales and distribution team enable us to take market share. In

In November we launched the BMP53 printing system, a portable printer for electrical and data communication applications. This product offers customers a hassle-free experience and the ability to make labels directly from their mobile phone, a first in our industry. We also launched the BMP51 printer last week to very positive reviews from our North American sales team. Additionally, we launched several new materials in the quarter, One example ToughJet is a unique to the market high-performance material that can be run through any inkjet printer for a variety of safety facility and labeling applications. And as Tom mentioned, we also launched a new specimen identification label further expanding our lab and healthcare material offerings.

Our Brady brand business in Brazil grew nicely in the quarter as well. This was driven by strong demand for our custom OEM products as well as several operational activities undergone to increase production capacity. Our direct marketing businesses are now also showing growth in the US and our commitment to multi-channel sales strategies have begun to yield results. In addition to our direct-mail campaigns, we are focusing -- are focused on increasing traffic and sales over the Internet and improving the productivity of our expanded outbound telesales teams in the US, Canada, and Manila. Execution of these strategies will grow our customer files, and improve every aspect of our customer's experience with us, leading to improved customer conversion and loyalty.

Our People ID business experienced mixed growth results as projects were slower than anticipated in what is also normally the slowest season of their year. Our overall strategy to improve our Internet traffic and sales continues to yield positive results as we are experiencing double-digit E-business growth in both our direct marketing and Brady businesses. Segment profit in the Americas increased 15.4% to $35.8 million in the quarter. As a percent of sales segment profit was 25.9%, compared to 22.8% in the prior year second quarter.

Profitability is being driven by a combination of an improved gross margin in the region due to selective price increases that went into effect at the beginning of this year, along with the results of an ongoing benefits from lean strategic sourcing, improved plant safety, and other plant operations, plus actions to improve our selling-expense structure. Today our focus on selling expenses relates to the productivity of inside sales, field sales, inquiry management, optimizing our Internet results, and improving the use of customer segmentation in all of our businesses. These activities not only yield productivity improvements, but also result in improved customer service.

Looking to the remainder of fiscal 2012, we are focused on organic sales growth opportunities in our best customer segments, and high-growth markets, continuing to improve the experience of customers doing business with us, driving Internet sales across all of our businesses, launching new differentiated products with a strong value proposition, and increasing our digital and telemarketing efforts in our direct marketing businesses. Although the global macro economy picture may be uncertain, the US economy seems to have stabilized with a modest pace of recovery. When you combine this with our numerous initiatives, we anticipate the trend of low single-digit organic growth to continue for the remainder of fiscal 2012. We continue to spend wisely, focused on things that directly impact our sales growth and operational improvements to ensure we maintain or grow our segment profit as a percent of sales. I will now turn the time to Peter Sephton who will report on EMEA results, Peter.

Thank you, Matt and good morning, everyone. I refer you now to slide 13. Sales in EMEA were down 8.1% to $95.6 million, organic sales were down 5.7%,

after last quarter 3.7% organic growth. The majority of this decline is a direct result of the milder winter throughout Europe this year. If winter product sales have been at a level consistent with fiscal 2011, our organic sales decline would have been 0.8% in the second quarter of fiscal 2012. This small decline in our base business is a direct result of the depressed macro economic conditions we are seeing throughout the region as a slowdown was noticeable in all countries of the EU 27. But it does confirm some resilience in our core and ongoing businesses. Whilst overall organic sales declined, we noted important differences in organic sales rate changes between our various business streams. For instance, if we exclude the impact of the lack of winter product sales our direct marketing business actually showed positive mid-single organic growth in Southern Europe and Germany, our two biggest units.

Our Brady business also showed mixed results finishing the quarter with a modest decline in organic sales. Southern Europe and our Swedish die-cut business continue to struggle while the rest of the Scandinavia and emerging markets of Central Europe and Turkey are showing solid growth. Our Brady business in the UK and France showed modest growth despite those economies in both of those countries declining in terms of manufacturing output. Paradoxically, our business in Germany, Europe's strongest economy, declined as our customers scaled back with the impending uncertainty. To mitigate these macro-economic risks, we are deploying our resources and expertise in emerging geographies where we see good opportunities for growth and are already gaining some traction in winning business in defined vertical markets such as oil and gas exploration and petrochemical. In mature economies we are driving our new product development more aggressively, and we will launch the BMP51 in the coming weeks.

Further we will launch our new BBP33, our next generation hand-held printers in the next few months as well. We have also implemented a price increase across all our businesses which we expect to contribute positively, and we are also aggressively driving quote conversion across all of our business streams to ensure that we maximize converting business away from our competition. Another example of our aggressive stance on winning new business is our commitment to allocate new customer acquisition investment to areas where we get the best response. For instance, our direct marketing business in Germany has increased its level of prospecting to win new customers, and further build our house file, and the early results are positive.

In France we are leveraging our product offer across all of our direct marketing brands, which include Securimed, Seton, and Signals, and cross-selling with very positive results. A good example of this approach is seen in our 2010 acquisition of Securimed where sales continue to grow at double-digit rates, but also where we have unlocked a new market segment with medical products. Our commitment to E-commerce as an opportunity to win new customers and service existing customers better is also ramping up.

During the quarter, we brought to completion integration of our Internet brands under one common Web platform and integrated a new system that enables us to cross-market between multiple channels seamlessly. These are foundational moves that position us well as and when the economies of Europe recover and allows to scale our offer into new geographies more quickly. Segment profit declined by 8.9% to $26.6 million in the quarter. The loss of profit from winter-related sales was a significant factor in this decline, together with the sale of Teklynx last year. These two factors account for all of the decline in the segment profit versus the prior year.

With the underlying strength of our gross margins which remained flat as a percentage of last year, we were able to keep segment profit high at 27.8% of sales, slightly down from 28% in the second quarter of fiscal 2011, as we found some compensation in lower selling experiences, we remain committed to driving down SG&A further. However, we firmly believe that our market position is sufficiently strong to invest in growth initiatives to mitigate the downside in the weakening macro-economy, and to gain market share in existing markets served, grow in new geographies and maintain our investment in building expertise in certain vertical markets with good long-term growth prospects. We need, though, to be realistic, and in the near term it will be challenging to generate core sales growth given the macro-economic challenges. As such, we are looking forward to the remainder of fiscal 2012, and with the winter comparable behind us, we anticipate organic sales to be approximately flat when compared to the prior year.

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 Africa as well as our ongoing focus on deeper penetration into selected vertical markets. The economic sentiment for Europe in general has been pointing down for the past few quarters, and we are clearly feeling it right now in our sales volumes, albeit somewhat mixed across the region. However, on a like- for-like basis our core businesses in Europe are showing some resilience to the euro zone crisis, and we will continue to push hard to capitalize on this and mitigate the magnitude of these headwinds. I will now pass over to Asia-Pacific with Steven Millar. Over to you, Steven.

Thanks, Peter. Continuing on slide 14. Sales in the Asia-Pacific region in the second quarter were $86.6 million, down 2.7% from the prior year. Organic sales were down 4.4% and currency had a positive impact of 1.7%.

Our focus on the Asia-Pacific region continues to be twofold. Firstly, we are intent on improving profitability in our die-cut business, and secondly, we seek to expand our presence in our other portfolios of workplace safety and compliance, wire and cable identification, and product identification. Let me take a moment to explain some of the changes we are in the process of making in our Asian business to drive this focus. We are in the process of splitting our North and South Asian businesses into two main teams.

First, we will have a dedicated die-cut team in the region, focusing exclusively on driving die-cut sales and increasing profitability, which has been our biggest soft spot in Asia. Our die-cut business represents just over half of our total Asia-Pacific sales, but a much smaller piece of our segment profit.

Second, we will have a team dedicated to our MRO and identification businesses. Our MRO business is largely our portfolio of products which help customers with workplace safety and compliance, and our identification businesses, which would include our traditional label and wire identification product lines. All in, our identification and MRO businesses in North and South Asia represent about a quarter of our overall APAC sales.

We have talked about the significant growth opportunities for our MRO products, and this realignment is a natural next step in our maturity as we dedicate a team to accelerate the growth in this area. This business has now achieved the critical mass necessary for us split it out and run it as a separate unit. Key markets such as China are maturing rapidly and our strategy of strengthening and expanding our distribution network will provide increased channels to market for a full portfolio of unique differentiated products to suit these markets.

Our first product built for Asia, for Asian customers, built in Asia for Asian customers, the BMP 91, our portable continuous tubing printer for wire marking, was launched in January 2012, and this is a watershed moment for our Asian customers. As we move forward, we will be continuing the focus on products and industries that are relevant in these markets where much of our customer spend is more on infrastructure compared with our mature markets in North America or Western Europe where the significant spend is on true maintenance, repair, and operations. The last piece of our A-Pac business is Australia, representing approximately 25% of our total Asian business.

The changes that I just referred to will not impact how we manage our Australian business. As we have been discussing since quarter three of fiscal 2011, we experienced lower sales volumes from one of our largest mobile handset customers when compared to the prior year, but we are quickly approaching the one-year anniversary of when we first saw the noted decline in volumes. The second quarter is seasonally our lowest growth quarter, and this year the slowdown was magnified by Chinese New Year falling in quarter two versus quarter three last year, and by the decline in our sales to the hard disk drive industry due to the Thai floods. If our sales in Thailand were at the level of last year, and Chinese New Year landed in the same quarter, our regional organic growth would have been in the mid-single digits.

Our team in Thailand has done an outstanding job of relocating production, and we are now shipping product and supporting our customers out of our new facility. However, the industry has not yet returned to pre-flood levels due to problems throughout our customer supply chains. We anticipate some level of insurance recovery, However, we are not yet sure of the size or timing of such claim. We do anticipate that the impact of the Thai floods will be a headwind for the remainder of this year, but the impact will not be as great as we experienced in Q2.

The Thai floods have also delayed the sales of some new products which were undergoing qualification by our customers. As these products cannot be approved while we are operating in a temporary facility, it is possible that these new product delays could extend another three or four quarters. Elsewhere in our die-cut business, we continue to execute our market growth strategies which include aggressively increasing our sales to other mobile handset customers, display manufacturers, and manufacturers of other computing devices, including tablet computers.

Whilst these sales compensated for the challenges we faced, this additional sales volume came at reduced gross profit margins which had a negative impact on the overall regional gross profit margin. Segment profit was $7.7 million, down $3.8 million compared to last year's second quarter. As indicated in my previous comments, we have made a concerted effort to increase our customer base and compete for business to offset the decline in revenues to one of our largest customers.

Looking to the second half of fiscal 2012, we anticipate returning to low single-digit organic sales growth rates. At the same time, we are focusing on executing our strategies to improve profitability. As such, although we are cautious about the overall global economic health and the continued competitive pressure in our die-cut mobile handset business, we believe the actions I explained about will result in improving profitability levels as we move throughout the remainder of this fiscal year and into next year. I will now turn the call back to Frank.

Thanks, Steven. Before turning the call over to questions, let me just share my concluding thoughts. Even though our second quarter was challenged by a number of headwinds including the impairment charge, the ongoing margin challenges in our Asian business, and the flooding in Thailand, we are still able to increase our earnings per share. We are working on the right items to drive growth including accelerating our E-business initiatives including the appointment of Bentley to lead our global-digital strategy. We have also been launching some of the best products in the history of our Company as our investments in R&D are starting to pay dividends. Of course, we cannot count on the macro-economy to drive our sales growth, and we are executing our own growth strategies by investing in these organic growth opportunities

Additionally, we have a strong pipeline of acquisition candidates that we are actively pursuing. As Peter, Steven and Matt articulated, we continue to aggressively focus on organic growth, and we believe that these opportunities combined with holding expenses in check could be a catalyst for net income improvements for the remainder of fiscal 2012 and beyond. We thank you for your interest in Brady, and we will now start the Q&A. Shequana, can you please provide instructions for our listeners.

Yes, sir. (Operator Instructions.) And your first question comes from the line of Charlie Brady representing BMO Capital Markets. Please proceed.

Thanks, hi. Morning guys.

Good morning.

On the handset sales, can you give us a sense of how much of Brady's total sales come from the Nokia today, and what are your expectations for sales in to them for the remainder of their year as far as continuing to decline -- give me a firm number, but expecting to decline, expecting to level out at current levels?

Yeah. Okay. Charlie, great things for the question. Obviously I cannot share the details of what their absolute sales are, but we have been seeing sequential increases with them, and we expect to see that, you know, we are -- obviously, we are coming out now of that tough comparable periods. So we expect to see that, but sequentially, the big question still with them is really how well their Windows phones bite, and what demand is. But at this stage, we are -- I am comfortable with saying we expect to see some sequential continued growth. That is probably the best way to put it.

Okay. And then can you guys talk about your expectations for gross margin in the second half of this year, in terms of relative to where it was in first half? You expect it to be flat, up, down?

Hi, Charlie, this is Tom. We would expect I guess a modest increase in gross margin.

However, I don't know that it would be anything materially. We have been running at a pretty good -- a pretty consistent rate for the last year, and I think what you will see though is maybe improvement over last year. We should see some improvement in the Asia margins.

Typically, the second quarter half of the year doesn't have so many holidays. Second quarter is typically a quarter where we are more challenged from a cross-margin because it is lower due to Thanksgiving, New Year, and in this year also Chinese New Year.

One more and I will hop back in the queue. On the EMEA, what was the price increase that went through? And then can you give us a sense of how much of emerging markets are of the EMEA today?

The price increase that went through is between 2% and 3%. We will not sustain all of that, because it's spread across product lines, but I'd expect to sustain and see some results, maybe just under 1%, sort of. But our gross margin's been holding up pretty well, so I think that might mitigate any other cost increases we've got coming through, so it depends how that plays out in terms of cost versus margin. In terms of emerging markets, most of the emerging market business we have is against the Brady business challenge.

We are already accessed in the mature economies and in our direct marketing business. Some of it is business in Scandinavia. We cannot really define that as emerging, but most of our business in Turkey, Central Europe, and in Africa is down to Brady. It has been increasing really quite nicely. And that accounts for about -- Well, let me defer that, as Frank -- do you want to disclose that number? I have got the numbers to hand.

Yes, if you have the number I have no problems with you disclosing it.

Yes, 16%.

16%?

16%.

Thanks that's helpful. I appreciate it. Thanks guys.

Your next question comes from the line of Anthony Kure representing KeyBanc. Please proceed.

Good morning, gentlemen. How are you this morning?

Thank you, well.

Good, I guess this question would be for you, Frank. The two teams in Asia now, is this segmentation intended to be the first step in a shift in the strategy as it relates to the future growth of the die-cut business.

Our first priority is to improve profitability, safe growth and profitability of our die-cut business, because that is where we have had some problems. And in the past we have -- because our die-cut business is by far the largest portion and we always had the strategy to grown the MRO and identification business over time, but we were leveraging the infrastructure of our die-cut, management and factories and so forth to support the smaller business, MRO and United Vacation Systems, and they have now reached a critical mass, and we talked about this earlier, about 25% of our business is now in Asia, excluding Australia, is now in these MRO and identification systems.

We think they can stand on their own, and on their own leadership, and even more importantly, we want to make sure that die-cut has one leader, has everything they need to operate independently and focused on the one leader. So we are going to have dedicated plans of die-cuts. We're going to have sales, marketing, manufacturing, purchasing, everything you need -- very focused under one leader. I think it will really help us to focus and streamline this business and help us grow sales and profit.

Okay. So you mentioned the different departments now assigned just to the die-cut, and I think you said manufacturers. Does that mean there are going to be separate manufacturing facilities now?

Yes, right now we have shared facilities, but we think, because the business is so different from our other businesses, and because we have now critical mass in the other businesses, we think we can now have dedicated plans.

Okay. And then could you guys maybe comment on trends by region for January? Demand trends?

For January?

Yes, please.

Yes, let me take -- let me take -- let me try to answer this. First of all, we had Chinese New Year -- I will talk about Asia first. We had Chinese New Year in January. And -- this year. And last year it was in the third quarter.

So what we are seeing naturally is we are seeing our Asian business doing relatively well compared to prior year, because of the Chinese New Year effect. So that is pretty encouraging, but we don't know how much of it so timing. But it is certainly encouraging. We see continued good business in the Americas, which is an indication to us that the American economy, especially the US economy is improving moderately. Europe is more challenging. However, we are just in the beginning of the quarter. So it is too early to tell what we are going to see here. I would say no change so far in Europe, but this is only based on two weeks in February.

Okay. Great. Thank you.

And your next question comes from the line of Jason Ursaner representing CJS Securities.

Good morning. Just another question on the Asia segment, I understand the concerted effort to take a low-margin business, but even when you look through the customer issues currently, is the long-term strategy to move up the value chain there still viable, or are markets just being commoditized too quickly?

Well Jason, the answer, to a degree, is yes to both of those. We are still investing in new product development to move up the value chain, so I referred to -- we had the hard disk drive industry and the mobile handset industry. I referred to some products which are actively in our development process for hard disk drive. And we were obviously disappointed we couldn't qualify them as quickly as we'd like because of the situation with having to relocate our Thai facility. Outside of that in the mobile handset there are certain areas where we are still focusing on new proprietary products. We think we have some technologies and capabilities that can continue to move us up the value chain.

At the same time, there are parts of that industry which appear to be coming more and more commoditized. So we are balancing the two here. The moving up the value chain has been an important part of our strategy and continues to be part of our strategy. But at the same time, we do not want to walk away from the mass market. So we try to manage that side of things as well, to keep in the game.

And the time line to achieve some of it, I mean is it really getting to the next design cycle, or are there products in -- I understand the hard disk drive market you could not qualify them, but on the mobile side are there products that are already in where you just need to gain traction on the actual device?

So the areas of development we are doing are more the technology application platform rather than a product-specific. So, we are developing a capability that we would then be able to apply to materials across multiple products as they come in. The product life cycles are relatively short here. So we do not look at mobile handset and say, we will develop something that is unique and specific for the next XYZ phone that's going to come. We develop a capability and material that we can apply across multiple models.

Okay. Thanks

Multiple industries, not just mobile handsets.

It is a platform development basis is what we are trying to achieve.

Okay, and then just a quick question for Peter. What type of trends did you see month-to-month? I am trying to understand why the commentary is pretty down beat. I understand the macro concerns in Europe, but excluding the winter bundles, core growth was almost flat. Germany has showed expectations growing in January. So just wondering what you are seeing maybe underlying there.

Yes, overcoming that. It is very much my sentiment, and I will give you a little bit of my spin on it. In fact, towards the end of the quarter in January our direct marketing sales were really quite strong, anyway. So we saw some pick up there. But Germany has continued to be a struggle for us. We haven't mentioned this, but we had a blistering quarter in our Brady offer business in Germany last year in fiscal 2011 and quarter two. And that was the Brady offer in Europe but that was driven by Germany.

So it is a bit of a tough comparable, and I think your sentiment is right. I do think there could be some pick up in Germany. My concern would be what happens in the rest of --Europe, particularly in France, and I guess that is where my caution comes from.

France has been relatively -- relative to many of the other Euro 27, really quite reasonable. But I wonder if we will see some slowing. And there has been some early signs that we have seen a little bit of slowdown there, and that is where my caution comes from, to be honest, in France. I think we have seen the worst of it in the UK.

And I think the other caution there, Peter, in general is just what we read every day in the news about Europe. Right? Europe is slowing down, and the uncertainty about the financial situation in Greece and so forth. This all weighs in our sentiment, and we will see over the next couple months how this plays out, but there is certainly nervousness in Europe. And Peter said earlier that Germany might have -- maybe was not as strong as we hoped; and typically in Germany they are reacting very, very fast to perceptions or to feelings about the economy.

This could turn around, of course, tomorrow, but we just want to be cautious. And this is in contrast to the Americas where I would characterize us as being cautiously optimistic, because everything we have seen also in our direct marketing business is to relax is going the right direction. So I would say we are cautiously optimistic about the Americas, and just cautious about Europe.

Okay. Thanks. I appreciate the details there.

And your next question comes from the line of Joe Mondillo representing Sidoti & Company. Please proceed

Good morning, guys.

Good morning.

First question, just you guys mentioned I think both in the Americas and Europe how Internet sales -- you guys have been benefiting from the higher profitability of Internet sales increasing. Could you talk about that a little bit more, and if you could quantify how much that is benefiting your profitability? And as a percent of COGS where is that, and where is that -- where do you see that in a couple years?

I don't remember that we ever made the comment that our Internet sales is more, less or more profitable than our other businesses. So I am not exactly sure where you heard that. Maybe somebody, an analyst speculated about this. Because we have not made a statement on this.

I thought you mentioned it in your prepared remarks.

Well, okay. Maybe there is a misunderstanding.

Okay. Let me ask you this. Are your Internet sales more profitable than your direct sales?

We do not comment on this.

Okay. Okay. I guess --

Maybe -- what we can do. Maybe we can ask Bentley in his new role, which is effective today, to maybe give a quick overview of what we are going to do and why they are so excited about transforming Brady into a digital business. I think this probably gives you some idea. I don't look at digital not so much as a cost-reduction move, but as a means to differentiate ourselves from competition to provide the ultimate customer experience, make it easy to do business with us, and hopefully support our organic growth. But I will let Bentley speak.

Yes, thanks, Joe, for the question. This is Bentley. If you look at our direct marketing businesses, we have seen some pretty good growth within our Internet sales and we have also seen our traffic not only just for the Internet Websites, but also our mobile traffic is increasing. So we see this as an opportunity to better align our resources, and actually take these capabilities and apply them to the other businesses so we can get the traction that we have had in our direct marketing business as well. So going forward, we are going to be focusing our energies on making sure we can accelerate the adoption and the capabilities that we have within our Company that we are seeing some good results with to the other businesses to get this Company growing in the areas that we want to. So right now we are seeing some great opportunities.

Okay. Great. Second question just has to do with the Asian segment. Gross margin, I think you mentioned that you expect that to improve -- or what is your outlook for the second half? I assume that is looking to improve and is that more of a volume-driven improvement, or is there pricing associated with that as well?

Joe, there are probably three things that are going to drive this. We do expect to see sequential improvement from Q2 to Q3. I mean we normally get this coming out of -- as Frank had mentioned -- more holidays, not so much in China, but for the rest of Asia. Then of course this year we had Chinese New Year at the end of Q2. And there is quite a volume of fixed profit absorption impact on our business from that. So

So February -- quarter three will be stronger just as more sales days and they are picking up on that. And then as you would expect, we continue to have initiatives aimed at improving gross margin from the perspective of pricing initiatives, but also operational efficiencies. And we are working on all of those things. We expect to see the sequential increase in Q3, in the second half and a bit on the first half.

And another point is, we have mentioned that our mobile handset business is probably the most challenged from a competitive point of view and from margin pressure point of view, and of course, our hard disk drive business has been depressed because of flood in Thailand. But as Steven said earlier this is improving every month now. So as this business comes back on line this should help our core margins for Asia in totality, and he also mentioned that our largest customer sequentially has been improving, and, this should also help.

Okay. Great. Two more questions, just in terms of capacity utilization, what are you guys sort of seeing yourselves at -- running at in terms of utilization, and then lastly, if you could talk about your use of cash and what your primary uses of cash is.

I can address the first part of the question, capacity utilization, and Tom can take the second part with utilization of cash. We have capacity, and it is not so much because of reduced states, it is because of all of the lean initiatives which we have taken. We do not see our capital expenditure go up materially over next one or two years. It all depends on how fast business is going to come back, but we have found ways to utilize our machinery equipment much better.

So if the economy continues to improve, even if it goes up 10%, 15%, we should have no problems across the Company. It might still be bottlenecks one or the other areas. Be we shouldn't have any problems as they continue to roll our lean across the whole organization. It has been a major improvement. And we have commented about this, and we do not think that's going to be major capital expenditure for expansion. If we have capital expansion then it is for improvement in quality, productivity, efficiency, tolerances and so forth, but not to improve capacity. And in the Asia-Pacific specifically in Asia, we are pretty full in Asia, on a seasonal adjust basis, because we have been able to replace some of the business we lost with some other businesses, which typically are lower priced and higher volume. So our volume actually in Asia is up, whereas our sales are flat. So good utilization in Asia.

What about specifically in Europe?

Peter, want to talk about this in Europe? First of all, we do not manufacture as much in Europe as we manufacture in Asia, or as we manufacture- -

Would you repeat the question again? I think I got lost in that. What was the question again?

Peter, I started answering the question. But the question was how about capacity utilization in Europe, and I started by saying that in Europe we do not manufacture as much as we manufacture in the Americas or in Asia. We source much more from third parties and also from the Americas and from Asia and Europe. So capacity utilization in Europe is not such a big issue, but if there is anything else you want to add, Peter.

Yes, and it's not. But actually in our two major manufacturing plants, one in Germany and one in Belgium, our capacity utilization is very high. We have some small manufacturing in Italy which has suffered as a result of some downturn in volumes, plus a little bit of overcapacity there, but you are right. It is not such a significant issue for us in Europe.

Okay.

Our two biggest theaters of manufacturing is Asia and the Americas. Americas of course is growing, which is good; that helps capacity. And Asia, we are pretty well utilized.

Okay. And then Tom if you can address use of cash and that will be my last question.

Sure, obviously, the best returns we get are when we invest in organic and keeping capital expenditures, or investing in CapEx. But we typically generate cash flow in excess of that, so the next number of items would be dividends, and as I think we mentioned early in the call, we've increased our dividend 26 years in a row, and we expect to see that trend continue. Then the remaining options would be share repurchase, debt paydowns and acquisitions, and we have made some repurchases of shares opportunistically as stock price is down, we made a little bit in the first quarter but nothing since then. So it not a major use, debt reduction is not something we have not had. Most of our debt is private placement, as fixed-term debt, and we have not been paying that down at all. So that leaves acquisition, I would say the primary focus for the available cash that we have on hand, and acquisitions remain an important part of our strategy. We continue to work hard to identify new opportunities, and we certainly hope to use that cash in acquisitions in the future.

All right. Great. Thanks.

(Operator Instructions). And your next question comes from the line of Benjamin Wong representing BOFA, Merrill Lynch. Please proceed.

Hi guys, good morning. Going back to Europe -- when we consider the region's probably already been in a small recession for a couple months already this might suggest that we are seeing the early stages of this show up in your European business. So my question is, A, do you agree with this? And then B, how comfortable are you with your expectation of flat organic sales for the rest of the year in that segment? Thanks.

We are seeing it. I don't know that it so much the early stages, it depends on how long that goes on, but we definitely have seen it, and the biggest -- the greatest bellwether we have for that is Germany. I said such in a previous answer that I felt that there was a possibility that Germany might start to recover, but then I think it will start to move into other areas of the Euro 27.

Now in terms of coming into quarter three and the rest of the year, a lot of these comparables go away, a lot of the really hard comparables, not just in terms of winter, but the growth that we saw last year across all of our business streams in fact, and again, driven to some extent by Germany, those comparables get a little bit easier here. But you know, with as much foresight as we have, and that is pretty limited, it is a very uncertain outlook in Europe, I feel as Frank said somewhat cautious about our forecast, and that is why we sort of worded as we do. It is going to be approximately flat with last year.

More than that I cannot say, and I just repeat what I said before. I think there might be some upside for us in Germany. I think we have gone through the worst of it in the UK, and the UK has been really struggling for the fast couple of years, and in fact in some of our businesses in the UK we have seen a return to the growth from some fairly weakish comparables, I hasten to add, we have seen a return to growth. It is what happens in France.

France, if you saw the figures on its economy more recently, showed surprisingly robust growth. Will that continue? Let us see what happens with Greece.

Okay. Thanks Peter. That is helpful. The second question is on Asia. Can you elaborate more on the increasing competition in die-cut over there, and are your competitors doing anything differently or is there any change in behavior? Thanks.

I think Benjamin it is just more -- the entry of a lower tier of smaller players who are not significant, but they are nipping at the heels. It is like any industry, I think where people see large volumes, it becomes attractive. And certainly the mobile handset industry there is still 1.4 billion phones or whatever it is being made every year. So it's very attractive to people to want to be in the - -We have seen- - the competition we are seeing, there some established players who we have known for a while. Some who have been around but made a concerted effort to buy their way into some business. I think it is the normal hurly burly you'd see in the markets. But it's becoming a little bit more aggressive because of the attractiveness of the market.

Thank you.

At this time, there are no further audio questions. I would now like to turn the call back over to Mr. Aaron Pearce for closing remarks.

We thank you for your participation today. As a reminder the audio and slides from this morning's call are available on our Website at www.bradycorp.com., and the replay of this conference call will be available via the phone beginning at 12.30 PM Central Time today. The phone number to access the call is 1-888-286-8010, or international callers can dial 617-801-6888, and the pass code is 81678765, and the phone replay will be available until February 23rd. As always if you have any questions please contact us. Thank you, and have a great day. Operator, can you please disconnect the call.

Yes, sir. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.