Brady Corporation (BRC)

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Brady Corporation (BRC)

F2Q09 Earnings Call

February 20, 2009 10:30 am ET

Executives

Barbara Bolens - Vice President, Treasurer & Director of Investor Relations

Frank M. Jaehnert - President, Chief Executive Officer, Director

Thomas Felmer - Chief Financial Officer, Senior Vice President

Matthew Williamson - Vice President, President - Brady Americas

Peter Sephton - Vice President, President - Brady Europe

Allan Klotsche - Vice President, President - Brady Asia-Pacific

Analysts

Charles D. Brady - BMO Capital Markets

Allison Poliniak - Wachovia Capital Markets

[Chris Waltzer] - Robert W. Baird

Anthony Kure - Keybanc Capital Markets

Ajit Pai - Thomas Weisel Partners

Presentation

Operator

Good day ladies and gentlemen. And welcome to the Q2 Fiscal 2009 Brady Corporation Earnings Conference Call. My name is Becky and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and- answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Ms. Barbara Bolens, Director of Investor Relations. Please proceed.

Barbara Bolens

Thank you very much. We’re glad you could join us for our conference call this morning. During the call, you will hear from Frank Jaehnert, CEO, and then Tom Felmer, CFO, who will be presenting Brady’s quarterly financial review. Also joining us this morning; is Matt Williamson, President of Brady Americas, Peter Sephton, President of Brady Europe, and Allan Klotsche, President of Brady Asia-Pacific, who will all assist in providing the regional reports.

As usual after brief presentations by the team, we will open up the floor to questions. We encourage you to follow along with the slides located on the Internet as we will be referring to the individual slides as we proceed through the presentation. These slides can be found on our website at www.investor.bradycorp.com. You do have a couple of minutes to get to those while we go through our Safe Harbor statement and other usual information.

Please note that in this call, we may make comments about forward-looking information. Words such as expect, believe and anticipate are a few examples of words identifying our 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 10-K filed with the SEC in September of 2008.

Second, please note that this teleconference is copyrighted by Brady Corporation and there may be no rebroadcasting of this without express written consent of Brady. Note also that, we will be taping the call and broadcasting it on the Internet and your participation in the question-and-answer session will constitute your consent to being recorded.

Thank you and now here’s Frank Jaehnert.

Frank Jaehnert

Thanks Barbara and good morning and thanks for joining us. Sales in our second quarter were down 27%, with organic sales down 21% and exchange rate translations shaving off another 6%. The gross global recession in our life time affected all our geographic regions there is somewhat more pronounced weakness in businesses selling into the OEM market.

The weakness in sales in our second quarter was compounded by several holidays such as Christmas, New Year and the Lunar New Year celebrations in Asia, which caused many of our customers to shut their business down for extended periods, some times for a couple of weeks or even more.

This rapid deterioration in sales was much more than what we anticipated. Fortunately, because of our swift and bold actions to cut expenses, we were able to mitigate the impact on our bottom-line.

Our net loss was $4.2 million, which included after tax restructuring charges of the $14 million, primarily for a severance related to our workforce reduction. Net income before restructuring charges was $9.8 million or 3.7% of sales.

While we believe that business is not going to be as weak going forward as it was in the second quarter, we stand ready to make further adjustments in our cost structure, should this become necessary. You will hear more from the regional president, that business was weak across all geographies in all businesses. However, we believe we have not lost market share.

As a result of the much weaker than anticipated sales in the second quarter and our limited visibility to any improvements in our end-markets. We have reduced our guidance for the fiscal year. Tom will go through the specifics of the guidance but it reflects current business conditions and does not anticipate additional restructuring charges beyond what we have already announced.

I will return after the regional reports, to provide color on how we are approaching the remainder of fiscal 2009.

Now, here’s Tom.

Thomas Felmer

Thank you, Frank. Starting on slide three. I would like to walk you through the financial highlights for our second quarter.

As Frank mentioned, sales for the quarter were $266 million, down 27% or $98 million versus the prior year. Even though, we saw a dramatic decline in sales in the quarter, we were able to reduce costs to a point that we only saw an 80 basis point decline in gross margins versus prior year, down to 47.3%.

We also aggressively managed SG&A, bringing these costs down $29 million from prior year resulting in a 150 basis point increase as a percent of sales to 35.1% in the quarter. We have executed about two-thirds of the years planned restructuring activities in the quarter, which resulted in pre-tax charges of $19.4 million.

By region, our restructuring expense was approximately $11 million in the Americas, $6 million in Europe and $2 million in Asia. Severance expense made up the majority of our restructuring in the closure of our facility in Bratislava, with the only material facility action taken. The cost savings associated with the restructuring activity will be split approximately evenly between gross margin and SG&A.

On slide four, we detailed a financial breakout of the restructuring charges taken during the quarter. Of the total $19.4 million, $17 million of that was employee related severance, $1.2 million asset write-offs and $1.1 million of other charges.

We paid out $5.9 million of the charges, during the quarter and an additional $12.5 million remains to be paid out in future quarters. Operating income was $4.6 million for the quarter down 89% from the prior year, excluding restructuring, operating income was $24 million, down 43% from prior year.

We generated a net loss of $4.2 million or $0.8 per share for the quarter, excluding restructuring, Brady had net income of $9.8 million or $0.19 per share. And despite the challenging quarter, we were still able to generate a positive cash flow from operations $26.7 million in the quarter. CapEx was 6.5 million, depreciation & amortization with $13.5 million.

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