Brady Earnings Call Insights: Europe Expectations and Asia Pacific

On Wednesday, Brady Corporation Class A (NYSE:BRC) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Europe Expectations

Jason Ursaner – CJS Securities: Looking at Europe, Peter mentioned a number of different puts and takes, but this question is actually for Frank. I think last quarter, you talked about the correlation to just the general economy and that it would be difficult to create your own growth story. So I guess first, do you still see that as the case and just what are your general expectations for the region in the next 6 to 12 months, maybe with the break between the core countries and those more on the periphery?

Frank M. Jaehnert – President and CEO: I think Europe is going to be a stagnant economy the next couple of months, not sure how long. As I said earlier, we need to create our own growth story and that’s what we are going to focus on. I think what you’ve seen in the (quarter through our) acquisitions is a result of this, like we see growth in South Africa, and the acquisition, albeit small in South Africa, is going to give us an opportunity to grow faster organically than the European or the EMEA region would grow in general. We also see in Scandinavia, we just made two acquisitions, we also see a more stable economy that in some or the other more Central European or more core European countries. So, that’s just an example. But beyond this we talked about moving into more digital focusing on certain vertical markets, for instance, aerospace, defense and mass transit where we’re taking share. Right now that’s the kind of activities we are undertaking in order to beat the economy in Europe.

Jason Ursaner – CJS Securities: Staying with acquisitions. You continue to find opportunities, you made the three small tuck-ins, is this a representative gauge in terms of size and are you seeing larger deals out there and are sellers expectations just very different as you begin to move up the size curve?

Frank M. Jaehnert – President and CEO: We are looking at all kind of sizes. I would say these acquisitions were just made we are on lower end of what we’re looking at, at the moment. Prices are, I would say, not as cheap as they used to be, but they’re still in a range where we can add shareholder value.

Jason Ursaner – CJS Securities: Lastly on Asia, I missed a little bit of Stephen’s commentary, but just from an internal perspective how much worse did the situation on the OEM side with the existing product offerings get relative to what you’ve been expecting?

Stephen Millar – President – Brady Asia Pacific: I don’t know that I can quantify that, Jason. But it was worst as we said we saw a drop off from our largest customer that we hadn’t expected. I couldn’t put a number to it but it was – that was pretty well with the (shortage) was.

Jason Ursaner – CJS Securities: But it was more short-term something that I guess had it was — could you have anniversarried everything from last year?

Stephen Millar – President – Brady Asia Pacific: The customers continued to decline more than we had anticipated. So, the question of the short term is part of question is, when they reach the bottom of their cycle?

Frank M. Jaehnert – President and CEO: Let me just maybe add some additional comments there, Jason. The customer you are talking about, their sales were down $0.29, not our sales for them, but their sales in the marketplace. That’s taken, and we said, this used to be our largest customer. Obviously, I’ll say in total, then are down in that range, actually pretty flat. So, this just shows you that we have been successful in getting business from other customers. Finally what we are seeing is we are seeing much more mix shorter run and less efficiencies in our system. So, I think some more of an impact on the bottom line than you saw on the top line as mix shifts from long run business with high volumes from one customer to many, many customers to shorter run, but more on the bottom line I think where we saw the impact than on the top line.

Jason Ursaner – CJS Securities: Was there any revenue catch-up from the delays last quarter on the hard disk drive market, and was revenue they benefit at all from the delays the last quarter?

Frank M. Jaehnert – President and CEO: Go ahead, Stephen.

Stephen Millar – President – Brady Asia Pacific: I wouldn’t say it benefitted from the delays. I mean, we continue to see improvements, an increase in revenues. We are largely at the capacity we can reach now with the temporary facility, where as I said, where the impact is no longer material to the Brady Corporation results, but I wouldn’t say we saw a catch-up attributable from quarter-to-quarter. I think we just saw an ongoing improvement.

Asia Pacific

Charles Brady – BMO Capital: On the Asia Pacific discussion on the separation of this two businesses you gave the sales breakout. I am wondering if you can give us some more granularity on the contribution to operating profit across those businesses. I mean, you said the die-cut is a smaller piece, but I am just – can you quantify that a little bit?

Frank M. Jaehnert – President and CEO: It is significantly smaller.

Charles Brady – BMO Capital: Is die-cut for the company in general still around 30 or has it shrunk meaningfully below that?

Frank M. Jaehnert – President and CEO: Excuse me, can you repeat the question?

Charles Brady – BMO Capital: Yeah, if I look at the die-cut business, right, it’s been running for a while around 30% of the total Brady revenues. I am just wondering kind of given some of the downtick in that business over the past couple of quarters where that percentage should stood at roughly?

Frank M. Jaehnert – President and CEO: For the total company I think it is much less than 30% and I can’t remember that it ever was 30%. Tom?

Thomas J. Felmer – SVP and CFO: As we said in our Investor Presentation, if you have the recent one it is probably just – I think historically it was around just under 20% and it is down from that maybe down into the – maybe it is down 4 or 5 points from that.

Charles Brady – BMO Capital: I guess, just philosophically when you look at that business longer term and you look at the price competition that’s probably unlikely to abate meaningfully anytime soon does it make sense, given your focus on when you are heading the company in the past few years to still be in that business?

Frank M. Jaehnert – President and CEO: That’s of course a question I cannot answer like this but I can give you a generic answer. First of all, if you look at all our businesses – businesses which are not performing and businesses which are performing very well and look at our total portfolio and say, you know what, what makes sense for us to be in and what makes sense for us not to be in but we have also said that we are – certainly we want to increase profitability of our die-cut business. We are in die-cut, and since we are in die-cut, we have to do everything we can to grow sales and profit, and by separating the operations facilities and responsibilities leadership for die-cut and the other businesses, I think we have positioned this business much better to increase probability, because of just more focus on it.

Charles Brady – BMO Capital: If you look at the R&D expense, it was down as a percent of sales and down in dollar terms, I’m just wondering, is that a temporary, should we expect that to come back to a little more normalized level going forward?

Thomas J. Felmer – SVP and CFO: Part of the explanation is due to incentive compensation. So, if you look at the actual number of people and resources, it’s actually been fairly flat compared to prior year.