Brady Corp (BRC) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Quarter 3 2013 Brady Corporation earnings conference call. My name is Angela and I will be your operator for today.

At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Aaron Pierce, Director of Investor Relations. Please proceed, sir.

Thank you, Angela. Good morning and welcome to the Brady Corporation fiscal 2013 third-quarter earnings 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 Stephen Millar, President of the Asia-Pacific region and Matt Williamson, President of the Americas region.

After the prepared remarks by the team we'll open up the call to questions. The slides for this morning's call are located on our website at www.BradyCorp.com.

Please note that during this call we may make comments about forward-looking information. Words such as expect, believe, forecast and anticipate are a few examples of words identifying a forward-looking statement. It's important to note that forward-looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release this morning and in Brady's latest Form 10-K which was filed with the SEC in September of 2012.

Also please note that this teleconference is copyrighted by Brady and may not be rebroadcast without the consent of the Brady. We will be recording this call and broadcasting it on the Internet. Your participation in the Q&A session will constitute your consent to being recorded.

Thank you and now I'll turn the call over to Brady's CEO Frank Jaehnert.

Thanks, Aaron. Good morning and thank you for joining us. This morning was the announcement that we intend to sell our Asia-based Die-Cut business. We took the largest step in the shifting of our portfolio business into the less volatile industry supported by macroeconomic trends.

Over the last 12 months we have sold three other companies and we acquired Precision Dynamics Corporation, which is a leader in the healthcare identification space.

Our Die-Cut business primarily consists of the sale of high-performance products such as gaskets, meshes, heated patient materials, antennae, dampers, filters, and similar products sold into the consumer electronics industries including the mobile handset and hard disk drive industries. This business has shown many signs of improvement and has recently secured several meaningful new orders.

However, we no longer consider this business core to our strategy and believe that our customers and our employees will be better served by being with a company where Die-Cut is a core product offering. As such, we are actively marketing this business through an investment adviser. We will continue to operate this business and ongoing business, execute our plans to grow revenues and improve its profitability while engaged in the divestiture process.

Our Die-Cut business's annual revenue is approximately $179 million and adjusted EBITDA of approximately $13 million during the fiscal year ended July 31, 2012.

But as you can see from the income statement in our press release this morning, during the quarter ended April 30, 2013 our Die-Cut business incurred a net loss of approximately $7.6 million, which included a $15.7 million non-cash asset write-down.

As you see in our financials, the Die-Cut business along with the three business has we have divested over the last year are shown at the one line item net of tax in our total Company income statement. Therefore, let me now talk about our financials. These figures will be excluding the Die-Cut business and the three businesses we have already disposed of from all periods presented.

On that note, this quarter we grew sales by 11%. Acquisitions added 16.8% of sales while organic sales declined 4.7% and foreign exchange rate was a headwind of 1.1%.

The Americas region grew by 24.8% with the biggest driver of sales growth coming from PDC, which contributed approximately $41 million of sales in the quarter.

Our organic sales in the America has region was -- we are down 2.9%.

Conditions remain challenging in Western Europe, and the shifting of resources to faster growing markets such as the Middle East, Africa and Central Europe has not been enough to offset those revenue declines, resulting in a total organic sales decline in EMEA of 4.8%.

The trends in our Asia-Pacific business are consistent with what we experienced last quarter as our Australian business is suffering due to the macroeconomic slowdown, and we continue to invest in growing our core identification solutions product offerings in Asia. You will hear more about business conditions from Tom and the group presidents later in the call.

As announced last quarter, we're taking significant steps to increase organic sales. Specifically we are reorganizing our business around three global business platforms. We started to operate under the three business platforms of identification solutions, workplace safety and Die-Cut in our [fiscal fourth] quarter starting May 1, 2013. We believe that our reorganization around global business platforms will create better alignment of resources required to deliver increasing levels of organic sales growth.

We will also start reporting on a new [order] structure starting with the [fourth] quarter.

We are targeting expansion in faster growing geographies such as the Middle East, Africa and selected markets in Asia. We are also working to diversify our sectors served, as we are focusing on industries such as food and beverage processing; chemical, oil and gas; mining; and of course healthcare through our acquisition of PDC.

Along with these ongoing initiatives to drive organic sales growth, we are also taking steps to reduce cost. Also the primary reason for the reorganization is we expect annual cost savings of $25 million to $30 million, with approximately half of these cost savings reinvested into organic growth initiatives such as improving our digital capabilities. We also continue to [review] our facility footprint and believe that we have further opportunity for facility consolidation and rationalization.

I'm confident that the actions we're taking, including the acquisition of PDC, the plan to sell our Die-Cut business, the reorganization around global business platforms, and our initiative to grow in selected vertical sectors, expand in emerging geographies, and significantly increase our digital capabilities will accelerate future sales and profit growth.

Now I would like to turn the call over to Tom Felmer for the financial review. Tom?

Great. Thanks, Frank, and good morning everyone. Starting on slide 3, in connection with our business organization, we incurred restructuring charges of approximately $8.5 million or $0.13 per share in our third quarter. Approximately one-third of these charges are non-cash and relate to the write-down of certain trade names as we consolidate brands as part of our simplification efforts.

The remainder of the restructuring charges are primarily severance-related charges. Excluding restructuring charges from Q3 of F13 and F12, EPS from continuing operations was $0.55 in the current year compared to $0.56 in the prior year.

Moving on to slide number 4, sales were up 11% to $305.7 million in the third quarter. Acquisitions net of divestitures added 16.8% to sales. Foreign currency translation decreased sales by 1.1% and organic revenues were down 4.7%.

By region, organic revenues were down 2.9% in the Americas, 4.8% in EMEA and 11.6% in the Asia-Pacific region.

Our third-quarter gross profit margin finished at 52.2%, down from the 55.1% gross profit margin in last year's third quarter.

SG&A was $112.1 million in the third quarter of this year compared to $98.6 million in the third quarter of last year.

EPS from continuing operations was $0.42 per share in the quarter. After adjusting for restructuring charges, EPS from continuing operations was $0.55 in the third quarter compared to $0.56 in last year's third quarter.

During the third quarter ended April 30, 2013 reduced bonus compensation compared to the prior year benefited EPS and continuing operations by $0.06.

Slide number 5 summarizes our EPS from continuing operations guidance for the fourth quarter of fiscal 2013. We expect the EPS from continuing operations to range from $0.45 to $0.55 during the fourth quarter ending July 31, 2013, exclusive of restructuring charges and certain other items. As Frank mentioned, we are seeing pressure on organic sales across several geographies and business as the overall macro economies remain weak.

While we have limited visibility to future business, we are anticipating low single-digit organic sales declines in the fourth quarter. We continue to invest in improving our digital capabilities and the customer buying experience in our workplace safety business. And these investments, which are included in our guidance, will reduce Q4 EPS by approximately $0.04.

Slide 6 is a summary of our quarterly sales trends. Revenues were up 11% in the quarter to $305.7 million.

Moving along to slide number 7, you can see the trending of our gross profit margin. Our third-quarter gross profit margin was 52.2%. If we exclude the impact of PDC, our third-quarter gross profit margin would have been 53.9%.

We continue to focus on driving gross profit margin improvements through lean strategic sourcing and the reorganization activities that Frank described. However, the recent declines in organic sales volume, combined with lower gross profit margins from acquisitions, has resulted in a reduced gross profit margin when compared to the 55.1% incurred in last year's third quarter.

On the right hand of this slide you can see the trending of SG&A expense. SG&A expense was up from $98.6 million in Q3 of F12 to $112.1 million in Q3 of F13. The primary reason for this increase in SG&A is the addition of $15 million of SG&A from PDC.

Moving on to slide number 8, you can see there our diluted EPS from continuing operations excluding restructuring charges was $0.55, which is down 1.8% from the $0.56 generated in the third quarter of last year.

We've summarized our Q3 cash generation and our ending cash balance on slide 9. During the quarter we generated $45 million of cash from operating activities, returned $9.8 million to our shareholders in the form of dividends and repaid approximately $92 million of debt, all resulting in an ending cash balance on April 30 of $77 million.

On slide number 10, you can see that our balance sheet remains strong. Even after completing the largest acquisition of Brady's history in the second quarter, our gross debt to EBITDA remains at approximately 1.7, inclusive of the trailing 12 month of PDC's EBITDA, as we have already repaid most of the debt incurred to finance the PDC acquisition. Having a strong balance sheet and strong cash generating business puts us in a solid financial position to fund future organic and inorganic growth opportunities.

Slide number 11 summarizes several of our key product launches in the third quarter including the launch of a new fluid line identification material for aerospace applications, continuous sleeve solutions for high-volume sleeving identification in the electrical and aerospace markets, and enhanced sign printing software for the Asian market.

I'd now like to start to the regional reviews, and I will cover the EMEA financial results which are on slide number 12. Sales in EMEA were $94 million in the third quarter effectively flat with the $94.1 million in the third quarter of last year.

Last year's acquisition of Pervaco, RunelandhsB and Grafo increased revenues by 6% in the quarter. Organic sales declined 4.8% and foreign currency translation reduced revenues by 1.3%.

These results show the impact of difficult economic conditions in Western Europe where most of the main European economies have either slipped back into recessions or are static. To offset these weak macroeconomic conditions, in our ID Solutions business we continue to focus on emerging geographies as Central Europe, the Middle East and Africa where we have historically been under penetrated. However, any growth of these geographies has not been enough to overcome the ongoing weakness in Western Europe.

Our workplace safety business, with its heavy concentration of sales in the EU 27, saw organic sales decline in all European countries. And the overall growth of 4% is due to last year's acquisitions in Sweden and Norway.

There were bright spots despite the macroeconomic weaknesses. Our businesses in France and Germany, although down slightly, continue to show resilience driven by the market agility and focus on segments such as healthcare through our Securimed business in France. We are accelerating our investments to improve our digital capabilities across our workplace safety platform as customers are increasingly buying over the Web and becoming much more price conscious.

Our commitment to grow through the eCommerce channel has kept traffic at the same level versus last year in a declining market. However, to succeed over the long term, we need to accelerate our investments to improve our customers' buying experience and to convert more customer visits and inquiries into orders. We are currently working on quicker navigation, extended product content and improved online pricing.

Our Identification Solutions business fared better due to our increasing presence in emerging geographies, our focus on launching new differentiated products, and our drive to gain market share in specific vertical markets including chemical, oil and gas, and the aerospace and mass transit markets. I'll talk to each of these three initiatives in further detail.

First, our expansion into emerging geographies. Our strategy to reallocate resources away from the troubled Western European economies into emerging economies is working. South Africa and Central Europe performed well in the quarter as we continue to ramp up sales resources. We are clearly encouraged by this growth will continue to expand deeper into these markets.

Sales in the Middle East were slightly below last year due to the timing of certain larger projects which we secured in the third quarter of last year but not in this year's third quarter. Year to date our business in the Middle East remains up versus last year.

Second, newly developed products. We're encouraged by the continued incremental growth achieved from launching new differentiated products, customized for our markets. Our aerospace market sales in EMEA to have continued to grow with the help of our focused product development efforts. Through close collaboration with our customers we have developed application-specific products which should start to generate sales in the next fiscal year.

And third, market share growth in selected vertical markets. Our targeted product offering to the specific needs of vertical markets such as chemical, oil and gas industries and our targeted strategic account management programs are resulting in customer wins in these focused industries that need high-performance identification products.

Due to the reduced organic sales that I just mentioned, along with our continuing investment in digital and new geographies, our segment profit as a percentage of sales was 24.4% this quarter compared to 27.2% in last year's third quarter.

To maintain our segment profit our forecast -- or excuse me, our focus is on driving organic sales growth and taking market share wherever possible. Although we are continually working on driving efficiencies through facility consolidations, our primary focus remains on driving organic sales growth.

Looking forward we will continue to focus 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 the Middle East and Africa, as well as our ongoing focus on deeper penetration into select vertical markets. However, as we saw this quarter, we do not believe that these actions will fully offset the ongoing economic weakness in Europe.

In the fourth quarter we anticipate low to mid-single-digit organic sales declines to be comparable to the organic sales declines that we experienced in this third quarter.

We will now move on to the Americas region with Matt Williamson. Matt?

Thanks, Tom, and good morning everyone. Please refer to slide number 13 for the Americas review.

Sales in the Americas increased 24.8% to $178.6 million in the third quarter. The acquisition of PDC contributed 28.4% [to] sales. Foreign currency translation provided a modest revenue decline of 0.7% and organic sales were down 2.9%.

Looking deeper into our third quarter results, our Identification Solutions business in North America had slight organic sales declines as we saw contractions of inventories at some of our major distributors, thus resulting in reduced orders. We continue to focus on launching innovative new products and improving our presence on the Internet. Our sales in North America over the Internet continue to accelerate as we had a very strong quarter with sales on our BradyID.com website.

We are getting positive responses in the market from our recently launched BBP85 printer for making safety and facility identification products. We launched, as Tom mentioned, a continuous sleeving wire identification system for the aerospace and mass transit markets. This is for high-volume applications.

Our ID solutions business in Brazil was lower than expected, as sales to our OEM customers were softer than planned, including sales in the automotive industry. Our MRO business has been growing but not enough to offset the declining sales to our OEM customers. Brazil is a key emerging economy for both our OEM and MRO businesses, and we expect to see improvement as we have installed new printing capabilities and are beginning to see increased orders as a result of these capabilities.

Although we expect improvements in the fourth quarter we do not anticipate seeing organic growth in Brazil until the first quarter of next year.

In our Americas workplace safety businesses, organic sales in the third quarter were down approximately 6%. We continue to see a migration of customer buying habits away from our traditional catalogs toward the Internet. Our focus is on growing sales in four primary strategies; expansion of our presence on the Internet, broadening our line of safety and MRO products, optimizing our pricing, and focusing on the critical safety requirements of our target markets.

Segment profit in the Americas increased 9.6% to $42.9 million in the quarter compared to $39.2 million last year. PDC was a significant driver of our increase segment profit, adding approximately $7 million in the quarter. As a percent of sales, segment profit of was 24.0% compared to 27.4% in last year's third quarter.

PDC was dilutive to our segment profit percentage. Without PDC, segment profit would have been 26.2% of sales in the third quarter of fiscal 2013.

As we look to the fourth quarter we anticipate approximately flat organic sales. This is a reduction from last quarter's outlook for both our workplace safety and our ID solutions businesses, which have softened. And our business in Brazil, having experience larger sales declines than anticipated, although we expect to see improvements, we do not believe that these improvements will bring us back to organic sales growth until fiscal 2014.

I'll now turn the time over to Stephen Millar, who will report on the Asia-Pacific financial results.

Thanks, Matt. Before I continue on slide 14, I would repeat Frank's comments that are Die-Cut business has shown many signs of improvement and has recently secured several meaningful new orders. However, we no longer consider this business core to our strategy and believe that our Die-Cut customer and our employees will be better served by being with a company where Die-Cut is a core product offering.

As such, we are marketing this business for sale through an investment advisor. We will continue to operate this business as an ongoing business and execute our plans to grow revenues and improve its product profitability while engaged in the divestiture process.

The information on slide 14 is for our continuing businesses in Asia, which consists of [their] identification solutions business in Asia and our business in Australia.

Sales in the Asia-Pacific region were $33.1 million in the third quarter. Organic sales decreased 11.6% and foreign currency translation decreased revenues by 1.6%.

The business strength that we discussed in our last two conference calls continues this quarter. Customer demand has not yet rebounded in our Australian business, as the slowdown that started in the fourth quarter of last year continues.

Overall, organic sales in Australia were down approximately 17%. Our sales in Australia include sales into many different end markets, but have a higher concentration in markets that are tied to manufacturing, non-residential construction and mining, all of which have been down over the last 12 months.

Although we anticipate ongoing economic softness, we also anticipate that we will see improved results in Australia due to normal seasonality as well as weaker prior year comparables.

Switching to our identification solutions business, key geographies such as China are maturing and our strategy of strengthening and expanding our distribution network is providing increased channels for our portfolio of differentiated products.

In addition to growing our distribution base, we are also focused on developing and launching new products specifically for the Asian markets. For instance, we've just launched our newest Markware sign and label creation software. Combining this software with our BBP85 wide-format four-color sign printing system is enabling our customers to create custom signage in their local languages with ease.

Capable in Chinese, Japanese and Korean languages, this software enables printing with over 1000 safety symbols, as well as barcode symbols, a built-in graphics library and a template wizard, and a database of 2000 chemicals for creating warning labels. These are the types of innovative value-added products that we need to continually launch to be successful in China and other Asian markets.

Our Asian ID solutions business is profitable, but we are also in investment mode at this point, so the level of segment profit is below that of Australia. However, over the midterm we see a path to improved profitability after we reach critical mass.

Segment profit was $5.5 million or 16.6% of sales, down $600,000 from last year's third quarter. Lower sales in our more profitable Australia business had a negative mix impact on our segment profit.

Looking to the fourth quarter of fiscal 2013, we expect our Australian business to improve from its double-digit organic sales decline to slightly negative organic sales in the fourth quarter. As such we expect flat to slightly negative organic sales growth for the Asia-Pacific region in the fourth quarter.

The APAC team is focused on driving profitability improvements across all of our businesses. And I'm optimistic that we will be able to drive improvements throughout the fourth quarter and into fiscal 2014 on a positive note.

Before I turn the call back to Frank, let me make a few additional comments on our Die-Cut business, which is no longer included in the Asia segment results.

Our Die-Cut business has principal manufacturing sites in China, Thailand, Singapore, Korea and India. This was a very substantial business that has a long history of meeting and exceeding the demands of many of the world's largest electronics customers. We have been steadily improving the financial results and performance in our mobile handset business since the bottom in last year's fourth quarter.

We are pleased with our current position and have recently won several sizable orders, and were awarded increased allocations on existing programs, which bodes well for the Die-Cut busy season which starts to ramp up at around the end of our fiscal year.

Overall, the charges that we made in separating our Die-Cut business and having teams dedicated to growing and improving the profitability is paying off, as we are experiencing improved profitability and strengthening our spec-in position in our mobile handset business.

On the other hand our other Die-Cut business in Asia serves the hard disk drive sector. And this business experienced organic revenue declines in the quarter. The underperformance in this business is a direct result of decreased global demand for hard disk drives, as well as a decrease in customer allocations, as the HDD manufacturers rebalance their sourcing allocations as other vendors have since ramped up production following the flooding in Thailand last year.

We expect the softness in our hard disk drive Die-Cut business to continue throughout the rest of fiscal 2013.

As I mentioned, as long as these businesses are owned by Brady, we will remain focused on growing the business and improving profitability while providing the highest quality products with great customer service. Our people are committed to the success of this business and we continue to win new business and see improved performance in our factories. I'll now turn the call back to Frank.

Thanks, Stephen. Before moving on to questions, let me share some concluding thoughts. Robust organic sales growth is not easy to come by in today's macroeconomic environment. As such, we are taking three major actions to improve organic sales growth and increase profitability.

First, we are actively transforming our portfolio of businesses. We have sold three underperforming businesses in the last 12 months and we have just announced that our Die-Cut business is for sale.

About the same time we acquired PDC, which is the largest acquisition in history of the Company. This acquisition moves Brady into the more stable healthcare industry which has a long-term macro tailwind.

The plan to sell our Die-Cut business moves Brady away from the more volatile consumer-electronics end market. Once the sale of the Die-Cut business is complete, Brady will be a very different Company than it was just one year ago.

Second, we are taking aggressive actions to drive organic sales growth in our continuing business platform of identification solutions and workplace safety. We are reorganizing around global business platforms to sharpen focus and better align resources required to deliver increasing levels of organic sales.

We're expanding our business in emerging geographies, in certain focused markets sectors such as aerospace and mass transit, chemical, oil and gas, and food and beverage, and of course healthcare. We are also expanding our new product development efforts and rapidly improving our digital capabilities.

Along with these sales growth initiatives, we are also addressing our cost structure. As I mentioned, I expect the business reorganization process to yield annual cost savings of $25 million to $30 million, with approximately half of these cost savings reinvested into the organic growth initiatives I just mentioned.

We also continue to review our facility footprint and believe that we have further opportunities for facility consolidation and rationalization.

The changes we are undertaking are some of the most significant changes we have made in the Company's 99-plus-year history. Once complete, Brady will emerge as a Company with a portfolio of businesses which are much more stable and more supported by long-term macroeconomic trends. We'll have global businesses focused on driving organic sales, and we will have a leaner cost structure which will enable strong incremental margins on every dollar of organic increase sales.

Even though we are fighting through a tough macroeconomic environment I am convinced that the strategies and initiatives mentioned before are positioning us well, even in a continued weak economy, and will pay off substantially once the economy recovers.

Let's now start the Q&A. Angela, can you please provide instructions for our listeners?

(Operator Instructions) Jason Ursaner, CJS Securities.

For the acquisition growth in the Americas, was there no negative offset from the US medical Die-Cut business you guys sold?

Not in the quarter.

Okay, and the $15 million of SG&A for Precision (multiple speakers)

[Incorporating, yes].

How much of that is being credited to the Americas segment versus just general and administrative?

Don't know, but would say the majority.

Jason, I just had a clarification on your question regarding medical Die-Cut offset. In the continuing operations that is pulled out. So any impact of the medical Die Co was pulled out and shows up in our discontinued operations line. So, on a continuing operations, there is no impact.

Okay, so I guess I'm just trying to back into the $7 million of segment operating profit, because it looks like you guys are attributing $24 million of cost of goods sold to it. And on $41 million of sales, I'm just -- I guess I'm not quite getting to where the rest of the SG&A is going, if it was kind of in line with that $15 million or so a quarter.

Yes, let us -- maybe that's a question for us after the call. As you know, take a close look at our financials to answer this question. I don't think we have all these numbers here handy.

Okay, just moving onto the Asia Die-Cut piece, what's the expected profit from discontinued operations next quarter? I'm just trying to reconcile the current guidance with our previous estimates that would have had it in there, since it's a seasonally important quarter.

It's minimal. There really is no -- as you can see year to date, there's not much of an impact. You wouldn't expect much next quarter either.

Okay. And generally, from the advisors you've hired, what level of proceeds do you might expect to realize from the sale?

Yes, that's something we're really not prepared to talk about.

Okay I'll jump back in the queue, appreciate it.

Let me put it this way -- as much as possible (laughter).

Appreciate it, good luck.

Alison Poliniak, Wells Fargo.

Frank, as you used to talk about the business longer-term with the Die-Cut, we've always talked about sort of 5% organic growth through a cycle. Are we thinking about that differently now that Die-Cut is not going to be a part of that, or is it still pretty consistent there?

Well, I would say first of all it's very difficult in these economic times to talk about organic growth and what a reasonable number might be. But I think the biggest impact of having no longer Die-Cut in our portfolio is much less volatility, because this used to be a very volatile business; can grow more than 10% and it can go negative.

So I think it will provide a more stable and more predictable organic growth trajectory. But at this point of time, with the economy the way it is, I'm really not ready to make any predictions as to how big this number -- the organic growth numbers would be.

Okay, but if we're still thinking about sort of the MRO side of things, is that sort of like GDP plus or [minus] -- plus 1 or 2 points for Brady?

Yes.

Okay. And then you're left with the ID solutions, workplace safety, obviously ID solutions is a bit bigger. But when we think of acquisition targets as we go forward over the next few years, is there a preference for either/or? Or are they both equally attractive to you at this point?

I would say they're both equally attractive. But I would also like to point out we just made the largest acquisition in the history of Brady for about $300 million in purchase price and roughly $180 million in sales. Our number one priority is to make sure we integrate this acquisition [by] the previous three acquisitions made in Europe.

That was still looking but it's not our number one priority. Our number one priority is to focus on organic growth, expand into emerging geographies, going to focus end markets, improving our digital capabilities. So I would say that that's what we're working on full steam, not so much on acquisitions.

But of course we're not shutting the acquisition pipeline off. We are still talking to people, but just not as intense as we used to.

Great, last question on Asia. I guess Asia proper, you obviously are increasing your investments there to build out sort of your platform there. Is there any sense -- you know, obviously profitability is going to be impacted by that. Is that sort of a three-year five-year sort of growth projection at this point before we can reap the benefits there?

Yes, I'll let Stephen answer this. But maybe if I'll just preface this with -- I think it was about a year ago when we took one of our -- the leader of one of our largest businesses in the Company and put him over to Asia, primarily to grow China. And of course it takes a while for this to take hold. But we are really encouraged by what we are seeing.

So from a sales point of view, certainly, we already are seeing indications that we might increase our organic sales growth. But I'll ask Stephen maybe give you a little more flavor on this one. How do you see it, Stephen?

Yes, Alison, I think the way I would answer that by saying what we've been focusing on doing in the last 12 to 18 months is putting more rigor around how we approach the growth. So it's very easy when you first go into China, particularly, to get some opportunities opportunistic wins. And we've had those.

But now we're putting a lot more structure around sustainability in terms of the types of customers we have, the distribution channels and those sorts of things, all with a view, I think, to certainly the 3- to 5-year time frame having a very sustainable business there.

I think China is the sort of place where it's not going to grow quickly overnight. But I think certainly in a 3-year horizon we would expect to see the scale would start to get to a point, I think, where the segment profit would be looking more like what we are used to.

Perfect, thanks guys.

Charley Brady, BMO Capital Markets.

This is [Andrew Dunham] for Charley Brady. I was just wondering if you could kind of go through -- maybe if you have any sense of the timeline for the divestiture of the Asia-based Die-Cut business, and also remind us of the timeline for your reorganizational efforts.

Yes, so from the reorganization efforts, May 1 we put the new organization structure in place and the new leaders. So we are going to have three global platforms -- identification solutions led by Matt Williamson, workplace safety led by Scott Hoffman, and Die-Cut led by Stephen. Stephen also has responsibility for all of APAC.

And this is effective May 1, so basically two weeks in now.

At the same time, we are going through a business simplification project where we said we are going to -- we think are going to have about $25 million to $30 million of cost savings. We're about, I would say, one-third to halfway into this project. We have already seen some impact, but as the savings are going to come more or less in fiscal 2014.

As far as timing for the divestiture process is concerned, of course we would like to sell this business soon, because we have decided it's no longer core to our strategy. But of course we are going to make sure that we, you know, go through an orderly process that interested parties look at this business. And typically negotiations take a couple of months. So we'll see how fast this goes, but we are in the middle of the process.

Okay great. Did you mention most of the savings -- is that going to be coming from facility rationalization? Or where do you see that $25 million to $30 million of pretax savings coming from?

And then I know you mentioned growth initiatives in the press release. And you've been mentioning growth -- various growth initiatives throughout the call. But I was just wondering if there was anything -- any specific area of where this will be funding or if it's just kind of being spread around to all the different segments?

Yes, so these are two great questions. First of all, the $25 million to $30 million cost savings is not from facility consolidations. There might be a little bit of it, but the majority is a reduction of people, primarily severance, I would say, to a very, very large portion.

We are just going through the organization layer by layer trying to reduce the amount of hierarchical layers we have in the Company, increase [spin-off] control, and do this in combination with reorganization of the Company so that we are -- in the end, if you remove layers in the organization, we are closer to the customer.

That's why I said earlier the cost reduction was not the main driver. We want to be closer to the customer, we want to increase the speed, decision-making and simplify our processes. So the majority here is savings when we talk about people.

When we talk about facility consolidation, this would be something which would be expected on top of it. But at this point of time we have not made any decisions. But we are analyzing and everything there is opportunity.

As far as growth initiatives, do we kind of spread it equally, I think there are a couple of areas where we go to invest more. Digital, eCommerce in certain area which will get the bulk of the investment over the next one or two years. And the rest of it I would say maybe might participate [on equally] but the bulk goes to digital online.

And this is true especially for our workplace safety business, where we still sell the majority of our products through catalogs. But it's increasingly moving to the Internet.

But even in our identification solutions business, customers more and more come to us, to our website. They want to learn about our product. They educate themselves. This is a more important component as well.

And of course, as you know, we have BradyID.com which is a transaction website where customers can buy directly from us, and investment in this area as well. So digital is a big, important initiative for us going forward.

Okay, great. Just one more quick kind of follow-up here. With the facility rationalizations you mentioned you are kind of like -- you are evaluating it right now. Do you see a heightened level of facility rationalizations within like the next six months?

Well, as soon as we have finished our analysis we will communicate this to the public. At this point of time we are not ready to talk about it.

Okay, all right. Thank you guys.

Joe Mondillo, Sidoti & Co.

First question just related to the Americas business. Ex-PDC, it seems like those [op] margins are holding up pretty well considering the organic declines on the topline that you're seeing. Just wondering how you're able to do that.

And also, if you could address the direct marketing piece of the business; I know that has been a potential challenge. Talk about your Internet sales and the pricing challenges there.

Okay, with regard to the margins, we focused on margins from a couple of perspectives over the years. We have really done a lot of work with Lean, which has enabled us to have more efficient operations. That's been a big part of it.

Overall facility rationalizations -- we've been fairly active in this over the past few years. We've also been a little smarter how we've looked at our pricing, particularly on the ID solutions part of the business. All of those things I would say have contributed positively over the last couple of years.

With regard to the workplace safety business, the biggest thing that we're seeing which I emphasize in my comments is this business has been traditionally a business based on a circulation plan of mailing catalogs. And the response to the catalog is simply not strong as it was before. It's still a significant part of the business, and our focus as Frank has mentioned is to shift that balance.

And the other part of this, of course, is the exposure that we have seen to pricing and the ability to shop on the Internet. So we continue to look at ways to better represent our products and to test our pricing strategy on the Internet as a way to look to grow the business.

This business is not too different, except that it is transactional Internet business from our catalog business, because our catalog business is heavy analytics. We have a lot of people analyzing response rates, how different offers and different prices impact the business. It's just that's now shifting. There are different skill sets needed there.

You know, there's how fast is your website. What -- how easy can people find their products on the website and so forth. So there is a lot of investment needed to do this.

But there's certainly more price sensitivity online than we see in the catalog, so we have to find a lower cost business model for the online business and we're working very hard on it. And we are also investing a lot of money.

So I think you have two impacts. We have -- on the one side, you have pricing -- more price sensitivity. On the other hand you have a lot of investment going into the transformation to digital, which is depressing the operating profit. And that's basically what you are referring to.

So when you're looking at the lower cost model versus maybe the lower margin that you're getting because of the pricing challenges, how does that business compare in terms of gross margin compared to the traditional catalog business?

I mean at this point -- how does -- well, because the gross margins are going to be lower, and the question is how much lower is the SG&A going to be, because a lot of money right now is spent in catalog -- mailing out catalogs; postage, paper and so forth. We think this is going to come down, of course, but we think also our gross margin might come down.

If we are successful in executing in the next couple of years, we think we can have a lower gross margin, lower SG&A business model.

Okay great. And then also looking at the Asia-Pacific business, the sort of guidance that you gave for the fourth quarter, do you expect that slight improvement or that modest decline compared to the double-digit decline that you saw in the third quarter? Is that more so related to just the easy comp that we see year-over-year or is there a sequential improvement?

I think it's two things there. The comp gets easier because, you know, Australia being biggest part of the decline that started in Q4 last year or the end of Q3. But it's also the seasonality, particularly in the Australian business, so sequentially quarter 4 is always better than Q3 and is the best the best of the year. So it's both of those.

Okay and then --

I just want to make sure you remember Die-Cut was pretty weak in the last year's fourth quarter. But we are no longer comparing Die-Cut, because Die-Cut is in our discontinued operations.

So we are only looking at identification and workplace solutions business. And the biggest impact here is -- compared to prior year is how the Australian economy is going to perform because that is a substantial part. And of course how well we are doing in growing organically in our identification MRO space in China and in the rest of Asia.

I just want to make sure that this is clear, because last year Die-Cut was really weak in the fourth quarter, but we aren't going to benefit from this because it's no longer in our comparison.

Right. Just my last question regarding the reinvestment of the $10 million to $15 million or whatever it's going to be in terms of the restructuring savings. What kind of payback or what kind of interim contribution do you expect to receive from that and what exactly is it going into?

Yes, again, I think the majority is going to go into digital. And we are just -- we just started recently our annual operating plan, putting this together where we can determine where exactly they are going to invest it, where we are going to see the return and when are we going to see return. I think it's too early to talk about this.

I just want to make one correction. We said in the last conference call that some of the $25 million to $30 million of savings are going to be reinvested. We're now seeing about half, so we have ramped up our investments by primarily in the digital.

And this is in response to organic growth. We are adjusting because of the weak macro economy. And because of our organic growth, which is not where we want it to be, that we want to ramp up our spending, our investments for organic growth. So, when I was saying about half of the $25 million to $30 million we're going to reinvest.

Okay, thanks.

Just as a follow-up Joe, you started your question asking about the Americas results. But I'm going to answer is actually in response to a question Jason asked earlier. But we have given information on the Americas segment and commented on PDC's impact. And PDC delivered $41 million of sales in the quarter.

And the two other pieces of information I was trying to reconcile, as we said, the segment profit was $7 million. But SG&A it was $15 million for that business. I just want to clarify that only $10 million of the SG&A for PDC shows up in segment profit; $5 million of it is in SG&A and drove into the corporate number.

So I think that those two pieces of information will help Jason reconcile the profit impact on the Americas.

Mig Dobre, Robert W. Baird.

It's Mig Dobre, good morning guys. A lot of ground has been covered here already, but I guess maybe a couple of clarification questions, first on EMEA. I'm trying to understand exactly how big your exposure to Western Europe is as a percentage of total revenue, because this has been a geography that's been called out for quite a few quarters now as being weak. And you called out growth in emerging areas. So I'm wondering how that mix has changed maybe.

Do we have the numbers available? Okay, we have historically not talked about it.

But I mean, you can assume that the majority, of course, is -- you look at the GDPs of those countries, even if you had equal penetration in emerging geographies as the Middle East, Africa, Eastern Europe -- even if you had the same penetration, which we don't have, same market share as a percent GDP, GDP in Germany, in France, UK, Italy, Spain, so much bigger than in emerging geographies.

So, I think I mean Western Europe determines where we go organically. And so I think I'd leave it at this. But we still think there's opportunity because we see customers ask for our products and we're ramped up our investment, sales people and so forth, in those geographies.

And we're growing, but there's no way that they can offset what's going on in Germany, which is I think still the fourth largest economy in the world or something like this, to what's happening in Dubai or in South Africa or in the Czech Republic.

We have talked in the past about -- when you look at France, Germany and UK, each of those are roughly one-fourth of Europe's business. And the balance is the Benelux, Scandinavia, and all that we're doing in Central Europe, Middle East and Africa. So, as you can imagine, those emerging markets are a pretty small percentage of our European sales.

Sure, okay that's helpful. And I guess I'm trying to understand where we are maybe now versus where we were, say, in 2011 in Western Europe revenues, or maybe even compared to the prior peak, because we've had, what, I think six consecutive quarters of negative organic growth in Western Europe. And obviously this recession that they are dealing with perhaps is not going to last forever.

So what is the opportunity for the rebound here? How should we think about that?

Yes, you know we are wondering same thing. When you look at many industrial companies who have reported earnings for the first quarter, we are not alone in this. I mean, many companies have double-digit declines in Western Europe.

And I think Western Europe is officially -- or the EU is officially in recession. It has been now for quite some time. And I was just seeing -- I just read in the Wall Street Journal the longest-lasting recession ever in Europe in modern history. So we are not in alone in this.

But you know I wish I could answer this question, when is this going to turn around. I'm sure it's going to turn around at some point of time. But we're not counting on it to happen anytime in the next one or two quarters.

No, I understand that. I'm not asking you to call for a turnaround. I'm trying to understand how far below the prior peak -- or maybe I should say even the recent peak, if you would, in 2011 your business is in Western Europe.

We are looking at it.

Okay.

I don't have the file that shows back just for Europe, so we'll have to get that for you. We clearly talked about it, so we'll get that to you later.

Yes, I'm sure we might have talked about this before, but maybe we can take it off-line.

Okay, then if I may move to Asia Pacific, the margin performance there was really solid in spite of quite a bit of organic decline in Australia. So I guess I'm wondering if -- you were talking about your comps and maybe even some potential improvement eventually. How should we think about margin here beyond the next quarter?

Stephen?

Yes, well, our Australian business, as we've indicated, Australian business overall the EBIT return are more in line with what we would expect out of Europe and North America. They're more mature economies. And obviously that hangs off the back of some higher gross margins as well.

I think as we move forward in the medium term, we would expect to see overall as the China and the rest of Asia grows, that will pull the blended margin down slightly because those markets are not generating the same margins as Australia. But I wouldn't like to put a number on where it would hit, other than to say the long-term trends might be for significantly increased margins just as their mix changes.

I see. And I guess my last question is on PDC. And I'm looking at the topline performance there, and it seems to be pretty much in line with the revenue run rate when you acquired the business. I'm wondering what are your expectations for growth in PDC over the next say 12 to 18 months? How should we think about that when we model?

I would say you could expect to see things in line with hospital admission rates right now. So you'd see something in flat to slightly down.

And that's what we're seeing right now, right? And the question is what do hospital admission rates do, because a big portion of what we sell are like wristbands, labels, and every time somebody walks in the hospital they get a wristband.

So hospital admissions is a big, big contributor to growth and they have been down recently 1% to 1.5%. And of course our business has been down a little bit as well. But over the next 12 to 18 months we actually expect this to rebound because I think it's now two years in a row that admissions has been down.

And if I recall it correctly, don't lock me in on this, but if I recall correctly from our due diligence in 20 years, admissions have always been up except for two years and I think it was the last two years. So at one point of time, I think people have to go back and see a doctor. They can only push out this hip replacement for so long.

But certainly the economy seems to be impacting people's appetite to go into the hospital. But we, for the next 12 to 15 months, 18 months which was your question, we expect this to pick back up.

All right, thank you very much and best of luck going forward.

Joe Mondillo, Sidoti & Company.

Hey guys, I just had two quick follow-up questions. One, excluding the restructuring charges, did you see sort of any benefits in the third quarter?

You mean like savings?

Yes.

Negligible.

Okay. And then second, what are the annual D&A at Die-Cut?

Do we have that number, (multiple speakers) D&A of Die-Cut?

No, we don't have that broken out for you right now.

We have it, but we just don't have it right now.

Okay, thanks.

Thank you, ladies and gentlemen. I would now like to turn the call back to Aaron Pearce for closing remarks.

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