Brady Corp (BRC) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Brady Corporation's third-quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference call over to Ann Thornton, Director of Investor Relations. Ma'am, please go ahead.

Thank you. Good morning and welcome to the Brady Corporation's fiscal 2016 third-quarter earnings conference call. The slides for this morning's call are located on our website at w are located on our website at www.bradycorp.com. We will begin our prepared remarks on slide number 3.

Please note that during this call, we may make comments about forward-looking information. Words such as expect, will, may, believe, forecast and anticipate, are just 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 fiscal 2015 Form 10-K, which was filed with the SEC in September of last year.

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

Thank you. I will now turn the call over to Brady's President and Chief Executive Officer, Michael Nauman.

Thank you, Ann. Good morning, and thank you all for joining us this morning. I'm pleased to report that Brady's fiscal third-quarter profits once again exceeded the prior-year's results.

This marks our third consecutive quarter of improved financial performance. I'm proud of our team's focus on continually improving the experience of our customers while creating a more efficient and effective organization, as we are seeing continued improvement in our manufacturing processes through increased gross margins, and throughout the rest of the organization in reduced selling, general and administrative costs.

This quarter, we experienced a 27% increase in GAAP earnings-per-share and a 40% increase in operating cash flow when compared to the same quarter of last year. I'm impressed with the level of focus and consistency that the team has shown in driving our organizational goals. And we are pushing to carry this momentum through the fourth quarter and into fiscal 2017.

Through the first nine months of the year, we've been able to remove most of the distractions that impacted our financial results last year. We are no longer consolidating facilities and dealing with operational and customer service disruptions. We don't have an ongoing restructuring plan and we are not impairing our assets. Instead, our attention is returned to what has made Brady a great company.

We are developing innovative products that fulfill a need for our customers while providing excellent customer service. Growing the core business while continuing to drive operational efficiencies is our number one focus and will remain our priority next fiscal year as well. Although our organic revenue decline was less than we anticipated at 0.1%, the current economic environment is making our R&D and new product development efforts even more important. Our R&D processes are improving each and every day, which is leading to stronger product introductions.

Specifically, we launched a new printer in our Identification Solutions business this quarter, and the new printers launched in the first-half of this fiscal year are exceeding our sales expectations. I'm also excited about the products we have in the pipeline to launch in fiscal 2017.

We've accomplished a lot through the first three quarters of this fiscal year, but we are not satisfied. And we will continue pushing for stronger results. We still expect economic conditions to challenge our growth initiatives in the short-term, resulting in low-single-digit organic sales declines in the fourth quarter and for this entire fiscal year.

As we've previously discussed, our business has a very short cycle from the time that we receive an order to when we ship the product to our customer. This limits our visibility into future order patterns and makes it challenging to predict future revenue trends. Our channel partners continue to note a difficult environment and softness in overall demand. To navigate through this macro environment and to offset the short-term organic sales growth challenges, we will continue investing in our future through increased and focused R&D spending while driving operational efficiencies throughout our manufacturing sites and within selling, general and administrative functions.

I have confidence in our talented team and their level of motivation toward achieving our organizational goals. Every day, we are tackling what we have the power to control by driving continuous improvement throughout the organization. Eliminating distractions and creating a stable environment has allowed each Brady employee to think differently about what to do and how to do it. We're finding opportunities to improve our cost structure, and we have the right team in place to take Brady to the next level and to drive shareholder value.

Now I'll turn the call over to Aaron to discuss our third-quarter financial results. I'll then be back to provide some specific commentary on our Identification Solutions and Workplace Safety businesses, and provide a few closing comments. Aaron?

Thank you, Michael, and good morning, everyone. I'll start the financial review on slide number 3. This quarter, revenues were down 1.2% to $286.8 million when compared to the third quarter of last year. This reduction consists of an organic sales decline of 0.1% and a reduction of 1.1% due to foreign currency translation.

Turning to earnings, on a GAAP basis, our EPS grew 27% this quarter. Diluted EPS was $0.42 in the quarter compared to GAAP EPS of $0.33 in the third quarter of last year. We have no non-GAAP items to call out this year. However, when comparing against the prior-year earnings and EPS figures, the best measure is prior-year non-GAAP earnings from continuing operations, as it excludes restructuring charges, discontinued operations, and a one-time gain from the curtailment of a post-retirement benefit plan.

Non-GAAP EPS from continuing operations was $0.34 in last year's third-quarter, which compares to our GAAP EPS of $0.42 in the current quarter, a solid increase of 23.5%.

Slide number 4 is a summary of our quarterly sales trends. In the third quarter, revenues finished at $286.8 million. And as I just mentioned, total Company organic sales decreased by 0.1%. On a divisional basis, organic sales decreased by 0.8% in the Identification Solutions segment, and increased by 1.2% in the Workplace Safety segment.

Looking a bit deeper at our slight organic sales decline, we saw declining sales in markets such as Western Canada, Western Australia, and parts of Texas and the Dakotas, where our customer base and the economy in general have some ties to natural resource extraction such as mining, natural gas or oil. At the same time, we saw improvement in geographies where there was less of a tie to natural resources, such as in Western Europe.

This quarter, we benefited from an extra workday when compared to the prior year. This extra day won't repeat in the fourth quarter. In fact, we will have one less workday in the fourth quarter of this year as compared to the fourth quarter of last year.

We also experienced a slight slowdown in our order pattern in April, after relative stability in February and March. Neither our order patterns nor the number of workdays sets us up well for organic sales growth into the fourth quarter.

Overall, foreign currency continues to be a bit of a headwind when compared to the third quarter of last year, as evidenced by the 1.1% decline in sales attributed to foreign currency translation. However, if we look at foreign currency on a sequential basis, the US dollar depreciated this quarter versus a broad basket of currencies when compared to the second quarter of this fiscal year. To put this in perspective, coming into the quarter, we anticipated an approximate 3% decline in sales due to foreign currencies, and we ended with 1.1% decline.

Turning to slide number 5, you can see that our third-quarter gross profit margin finished at 50.7%. This represents a 210 basis point improvement over the third quarter of last year. More importantly, this continues the trend of sequential gross margin improvements [up] 120 basis points when compared to the second quarter of this fiscal year.

Sequentially, we are seeing most of our gross profit margin improvement in the facilities that we consolidated in fiscal 2015. We are encouraged by these improvements, but as Michael mentioned, we know that we have more work to do over the next several quarters and years in order to achieve our operational and efficiency goals.

On the left-hand side of slide number 6 is the trending of SG&A expense. SG&A expense was $105.8 million this quarter compared to $103 million in Q3 of last year. The prior-year SG&A expense included a pretax gain of $4.3 million, due to the curtailment of a post-retirement medical plan. If you exclude the impact of this gain, SG&A expense would have been down $1.5 million when comparing the third quarter of this year to the third quarter of last year.

On the right-hand side of this page is a chart summarizing our general and administrative expenses. G&A expenses finished at $29.4 million in the third quarter compared to $24.8 million in last year's third quarter. Again, if you adjust the prior-year G&A expense for the curtailment gain I just mentioned, we see that G&A expense was effectively flat with the prior-year.

Moving on to slide number 7, you can see that our diluted earnings-per-share was $0.42 this quarter, which compares to non-GAAP EPS from continuing operations of $0.34 in last year's third-quarter. Overall, we are pleased with our team's ability to drive operational improvements, resulting in improved gross profit margins, improved segment profit margins, and controlled SG&A expenses, resulting in growth in both earnings and EPS this quarter.

The weaker macro environment has made sales growth a challenge, which we expect to continue through the remainder of 2016 and into next fiscal year as well. But we know that the team is motivated and dedicated to achieving operational excellence in everything that we do, and we know we have opportunities for continued profit improvement.

Slide number 8 summarizes our quarterly cash generation. This quarter, we finished with $40.3 million of cash from operating activities compared to $28.8 million in last year's third-quarter. Looking at free cash flow, we finished this quarter at $36.8 million compared with $23.1 million in last year's third-quarter.

The chart in the upper left-hand corner of this slide provides more detail on cash generation. The bars represent cash flow from operating activities and illustrate how we've realized improved cash flows over the last several quarters, as we've moved beyond the period of elevated cash outflows from our restructuring programs and facility consolidation activities, and into a period of increased focus, which is really helping increase cash generation.

We returned $10.2 million to our shareholders in the form of dividends this quarter while repaying $13.3 million of debt. Looking forward, we expect cash flow to continue to be solid. However, due to tougher prior-year comparables, we do expect that our year-on-year free cash flow percentage growth will moderate in the fourth-quarter.

Our EBITDA trending and net debt trending are presented on slide number 9. Our net debt to EBITDA was approximately 0.8 to 1 at the end of the quarter. Our total net debt position has been trending down since December 2012. And, at April 30, 2016, it was $100.9 million compared to net debt of $167.9 million at the same time last year.

Our balance sheet is strong, which gives us the flexibility to fund future growth opportunities and return funds to our shareholders. Our disciplined and patient capital allocation approach remains unchanged. First, we use our cash to fund organic growth opportunities, which includes funding investments in new product development, digital enhancements, sales generating personnel, capital expenditures, and the like.

Second, we focus on returning cash to our shareholders in the form of dividends. Our streak of annual dividends, dividend increases, has now reached 30 consecutive years. Third, we use our cash to improve shareholder returns through share repurchases. Share repurchases are executed in an opportunistic and patient manner, whereby we only repurchase shares when we see an opportunity to drive meaningful incremental shareholder value.

Fourth and finally, we use our cash for acquisitions. As we've stated, we do not expect acquisitions to be a significant use of cash in the near-term. We believe that we can meaningfully enhance shareholder value over the long-term by executing this prioritized and disciplined approach to capital allocation.

Slide number 10 is our updated EPS guidance for fiscal 2016. We are increasing our full-year guidance to $1.37 to $1.45 for the full fiscal year ending July 31. We expect that we'll achieve this EPS guidance range on low-single-digit organic revenue declines in both of our segments. Our revenue expectations are reflective of the current economic environment, which we believe provides near-term challenges in certain industrial end markets and geographies, including the US.

In order to offset this weak sales outlook, we expect continued efficiency gains in our manufacturing facilities as well as in SG&A expenses. Other key assumptions in our guidance include CapEx, which we believe will come in closer to $13 million versus our previous guidance range of $17 million to $20 million, due to the timing of certain projects. And we expect depreciation and amortization expense of approximately $33 million this fiscal year, which is also down slightly from our previous guidance range.

Our tax rate is expected to be in the high-20% range. As is our historical practice, we are currently planning on providing formal fiscal 2017 guidance with our fourth-quarter earnings release in September. However, we expect the current economic challenges to continue, thus making organic growth difficult in fiscal 2017 and putting pressure on our ability to meaningfully improve earnings next year. These anticipated organic sales challenges, as well as more clarity on our outlook and our priorities, will ultimately be incorporated into our full fiscal year 2017 guidance to be announced during our next earnings call in September.

I'll now turn the call back to Michael to provide some color on our segments and some closing comments before turning the call over to Q&A. Michael?

Thank you, Aaron. Let's turn to slide 11 for a summary of the Identification Solutions' financial results for the third-quarter. Organic sales [decreased] by 0.8% and foreign currency translation further decreased sales by 1.1%. In total, IDS sales were down 1.9% to $197 million this quarter.

Our European IDS business had solid organic sales growth in the third quarter, improving by mid-single-digits compared to last year. Strong sales growth in Europe has been a consistent trend, which is a testament to our team in Europe who have been executing their plan effectively, specifically in Western Europe. IDS organic sales were weakest in our Americas and Asian regions. We continue to be impacted by the economy in Brazil as well as sluggish demand in the US and Canada.

Our end customers and channel partners have seen reduction in revenues, which has had an impact on Brady, and we expect further declines in the near-term. In Asia, our reduced sales are mostly driven by China, but we are also finding that growth is difficult across the entire Asia-Pacific region. We have been taking actions to drive our Asian sales, including certain focused hirings in our sales organizations.

Looking at segment profit, IDS finished at $46.4 million in the quarter compared to $41.6 million in last year's third quarter. As a percentage of sales, segment profit improved to 23.6% this quarter compared to 20.7% in last year's third-quarter. I'm encouraged by the increasing segment profit margin in the IDS business.

These improvements are a direct result of our continued focus on efficiency through our manufacturing processes in both the Americas and Europe, as well as improving efficiency levels in both our sales and R&D organizations. Meanwhile, we are not backing away from investments and innovations that will drive our future.

This quarter, we launched the new BPP30 label printer, which is an entry-level, user-friendly, industrial printer with a wide range of applications for dozens of industries, including manufacturing, hospitals, utilities, universities, building management, and construction. It's compact in size, and is designed for uses such as pipe marking, shelf and bin labeling, chemical labeling, and warning labeling.

We also introduced the new BSP45 automated sleeve applicator in the third quarter. This product automates the wire sleeve application process by removing sleeves from a liner, opening them, and applying them to a wire. This applicator significantly reduces time required to apply sleeves to wires, while reducing the ergonomic stress on an operator while performing this task manually. We designed it specifically for intensive wire sleeve users in the aerospace, defense, rail, and chemical oil and gas industries.

We are excited about these new launches, as they continue our stream of innovative new products that our customers have come to expect and will keep us ahead of our competition. We expect to finish fiscal 2016 with a low-single-digit decline in organic sales in the IDS business, due to the current economic challenges in North America and Brazil. Our focus on efficiency gains throughout our manufacturing processes and sales organizations will result in full-year segment profit to be slightly over 20% of sales.

The Workplace Safety Review begins on slide 12. Organic sales increased by 1.2% this quarter. Consistent with the first-half of the year, sales growth continued to be driven by our European businesses, which improved by mid-single-digits compared to the prior-year. Our European leadership team has done a terrific job executing their plan, and the strength in sales in this region drove the increase in organic growth for the quarter.

Both catalog and digital sales increased, with digital sales improving by 25% in Europe when compared to the third quarter of last year. The improvement in organic sales in our European-based businesses was partly offset by low-single-digit declines in our North American and Australian-based businesses. The rates of decline in both of these regions decelerated during the third quarter, especially in the US, where our digital investments are delivering positive results.

At the same time, we've been adjusting our cost structure in both the US and Australia, where we've been successful in improving segment profit as a percentage of sales when compared to the third quarter of last year. Throughout this fiscal year, we've experienced significant foreign currency headwinds in our European and Australian businesses, which combined, represent approximately two-thirds of our WPS business. However, much of the year-on-year headwind is now behind us, as foreign currency only reduced our WPS sales by 0.7% this quarter, as we saw a general weakening in the US dollar against other currencies.

During fiscal 2016, each and every member of the WPS team has been driving three primary goals. First, we are managing the catalog to digital channel shift that is underway through effective and efficient catalog prospecting. Our digital sales are growing, with third-quarter digital revenues up high-single-digits in the Americas and up 25% in Europe. We clearly have momentum and we are starting to see the payback on our digital investments.

Second, we are creating an industry-leading digital business by building websites with a mobile-first mentality. We now have 10 sites converted to mobile, and we have seven sites in Europe remaining to convert in the fourth-quarter. Although mobile sales are still a small part of our business, sales generated on mobile devices are increasing every month as a result of improved capabilities of these new sites. We believe that having a strong mobile presence is necessary in order to be an industry leader in this area.

Third, we are driving product leadership in the Safety Identification product category through innovation and a focus on unique and customized offerings. Our focus and investments in these areas is creating long-term value through an improved customer experience in our digital and mobile capabilities, and a strong innovative product line in every key category.

Segment profit in the Workplace Safety platform was $13.8 million this quarter compared to $12.3 million in last year's third-quarter. As a percentage of sales, segment profit was 15.3% this quarter compared to 13.7% in last year's third-quarter. This improvement in segment profit is encouraging, as it marks the fourth consecutive quarter of improvement over prior-year comparables. Although we expect a low-single-digit organic sales decline in fiscal 2016, we continue to expect WPS segment profit to be in the mid-to-upper-teens as a percentage of sales for the full-year.

Before turning over the call to Q&A, I'd like to provide a few concluding comments. I'm proud of the entire team's hard work and dedication to our organizational goals, which have resulted in improved financial performance for three consecutive quarters. We are creating a culture of local accountability and ownership, which has allowed every member of our team to identify opportunities and to take action to improve what we do and how we do it on a daily basis.

Pushing our pay-for-performance approach is also contributing to an overall improvement in financial performance. With all 6,000-plus Brady employees working toward our long-term objective of developing high-quality, innovative products, and providing excellent customer service with an efficient streamlined organization, we will continue to show improved profitability and drive shareholder value.

As we stated last quarter, we expected to see organic sales decline this quarter. However, our organic sales did not decline quite as much as we had anticipated coming out of the quarter, and we also did a better job of driving profitability improvements. Even with these better-than-anticipated profit results, we are concerned about our ability to deliver organic sales growth the rest of the fiscal year and into the next fiscal year, due to challenging economic conditions in several geographies, including the US.

We are committed to delivering our EPS guidance for this fiscal year, as we drive operational efficiencies and manage our costs, while keeping our focus on customer service as our top priority. Our team is more motivated than ever. And we know that Brady's powerful brand, high-quality products, and commitment to the best possible customer experience, will allow us to deliver what we promise to our customers, employees, and shareholders.

I'm pleased with our progress through three quarters of fiscal 2016. And I know we have the ability to achieve more as an organization. We are pushing ourselves to finish this year strong and to build momentum that will carry us into fiscal 2017.

I'd like to now start the Q&A. Operator, would you please provide instructions to our listeners?

(Operator Instructions) Mig Dobre, Baird.

Maybe a couple of questions on ID solutions. I'm trying to understand the puts and takes of your margin performance in the quarter, which was quite good. If I'm to look at the third-quarter and compare it to your, say, first-quarter numbers -- in the first-quarter, you pretty much had the same revenue as you had in the third, yet you end up with roughly $6 million more operating profit. So I'm trying to understand how much of that came from your initiatives from cost savings as opposed to mix and other items?

I can address that, Mig. Actually I'm going to take a broader step back, and that is to look at our gross profit margins. So if you look at the gross profit margin improvements that we saw this quarter, it was effectively all in Identification Solutions, as Workplace Safety was relatively flat with the prior-year. So, that's where the biggest benefit that you are seeing in ID Solutions is coming from.

And frankly, it's coming from primarily North America, where we've had the majority of our facility consolidation activities. And we are seeing benefits literally across the board. And I mean we are seeing benefits in freight costs; we are seeing benefits in reduced personnel costs, reduced temporary labor costs, better material usage, less scrap, reduced supply purchases. The bottom line, frankly, is that when you look at the ID Solutions performance on a profitability perspective, yes, the team is doing a very nice job managing their selling expenses, but the biggest benefit is coming from our gross profit margin.

Sure. And you were talking year-over-year. I was really talking versus your first-quarter. Where I'm going with this one is that, it seems to me that these benefits are really starting to kick in, maybe in the third and really in all earnestness in the third quarter, and going forward. Am I correct in that assumption?

You are correct. If you look at our gross margin in ID Solutions, it's been a nice steady improvement story.

And I do believe we conveyed that in previous quarters' discussions with you.

Okay. Just --

Because that was our anticipation.

Sure. I mean your year-over-year comps are easy in this regard in the third and the fourth quarter. So I was checking that that's still the case. Then looking at your guidance for the segment, you mentioned low-single-digit decline for the year as a whole in IDS organically, and margin slightly above 20%.

If I look as to what that implies in the fourth quarter, it implies, call it, relatively flattish revenue sequentially, but the operating margin to be down sequentially and, frankly, not improve a whole lot year-over-year in the fourth quarter. So I'm trying to understand why you are framing the guidance that way or perhaps I'm not understanding something here.

Yes. I'll answer that one again. So when I look at the -- where we are year-to-date in Identification Solutions from a segment profit perspective, we are at a little over 21%. So, maybe it was the way that we phrased our guidance. But as I think about just over 20%, I think we are actually in that range right now, at that 21.4% that we finished year-to-date.

So, that's about where we would anticipate coming out for the rest of the year. My point is, is that I don't anticipate a huge uptick or -- frankly, or a large decline either. And then shifting to organic growth, year-to-date in Identification Solutions, we are down 0.7%, I believe. And we would anticipate that that perhaps could get a bit worse from a year-to-date perspective. So --.

But, Aaron, I guess what I'm wondering here, you're not really expecting sequentially a meaningful decline in revenue from the third quarter to the fourth in IDS. I'm wondering why you would expect your operating margin to decline then?

Yes. So, very good question. I'm sorry I didn't answer that the first time. So when we look at -- I'm going to go back again to our gross profit margin. And when we look at our -- when we look at the third quarter in particular, I have to tell you the third quarter is one of those where, effectively, everything went right. We didn't have much go wrong in the way of one-off items; no one-off costs.

Frankly, there were no surprises in our gross profit margin. And as we improve and continue to improve, what we've been seeing is that we still do have some costs that get incurred that we need to overcome. Frankly, we didn't have that in the third quarter. Our third-quarter margin performance in Identification Solutions was solid.

So, as we look at our fourth quarter, we always expect that there will be a bit of something. And again, we didn't have that in the third quarter.

That's really helpful. And then the last question for me is -- really looking out into 2017 and so on -- knowing the initiatives that you've already put through in terms of cost savings and maybe some of the other things that you have in the pipeline, recognizing that the demand environment might be weak, is it fair to assume that margins can continue to expand in IDS?

The answer to that is yes. However, we are not putting out fiscal 2017 guidance at the moment, as you know. But yes, we absolutely believe that margins can expand in both ID Solutions as well as Workplace Safety. The challenge that we have, and why we are as cautious as we are, it really comes down to revenue. And we have concerns about -- obviously, we have concerns about the macro environment that we are operating in today. I mean, that is the real wild card that we are seeing at the moment.

Thank you for the color.

Thank you.

George Staphos, Bank of America Merrill Lynch.

It's actually Alex Wong on for George. Thanks for taking our questions. Just on the guidance, if we think about versus the previous guidance, I think at the midpoint, you raised it about $0.13 or so. On the positive side of the ledger, it looks like FX is maybe less of a headwind. You called out lower D&A. I assume there is also some roll-forward from the strong performance in the third quarter.

And then on the negative side, the slightly higher tax rate, but I don't assume that's a necessary needle-mover. But can you just maybe help us parse out maybe the raised guidance and how we should be thinking about that?

Yes. Well, I think you just hit on most of the components actually. And then obviously the other piece to add in would be the topline performance as well. And when you add it all together, we do believe that we'll do a bit -- frankly, we are anticipating that our fourth-quarter will be a bit better than what we had anticipated about three months ago, which is why you see the increase in our guidance.

So, frankly, beyond that, there's not much more to comment on. SG&A continues to be an area of focus, continues to be an area that we are driving down. Margin performance, we just talked about. So, I think you just hit on the main components of the guidance.

I mean, just to clarify, so would you say the primary factor is really more of a roll-forward? Or are you seeing underlying operational efficiency come in maybe better than your expectations?

We definitely saw operational improvements come in better than we had anticipated. When we came in -- when we gave our last guidance at the end of our second quarter, the financials that underpin that guidance did not have the margin performance that you saw this quarter. So, clearly, we've been improving our margin at a faster clip than we had anticipated.

Appreciate that. Just as a second question -- it's maybe a little difficult sometimes to get visibility on some of the operational efficiency and SG&A trends until quarterly reporting. You just talked about some specific areas really across the board that you are seeing this improvement coming in ahead of your plans.

But ultimately, maybe how much left is on the manufacturing efficiency related to the facility moves as we head into 2017? Is it possible to quantify that versus maybe more normal improvements that you are trying to extract on an ongoing basis from productivity and asset utilization?

Yes, it's actually hard to parse out the two components of that, Alex. We actually -- we get a question quite often actually, and that is what inning are you in, in your operational efficiencies? And we typically answer the question -- we haven't even gotten into the batter's box yet.

I mean, the reality is, is that as we look at our operations -- and this isn't just our gross profit margin improvements, but SG&A as well -- we see a significant runway of opportunities over -- I mean, frankly, over the next several years. And to parse it out between just facility consolidation-related costs and, I'll call it, normal operational efficiencies, it becomes very difficult. Because frankly, we've been in our consolidated facilities now for actually about a year.

And we are in bigger facilities. It's easier to identify operational improvements. They are bigger improvements when you do identify them and you do execute them. So, I know I'm not giving you a direct answer of how much is operational improvements versus facility consolidations, but at the end of the day, we see a pretty significant and long-term runway.

Understood. And just last one before I turn it over. Europe continues, I think, to be a strong performer in the third quarter for both segments, and then you also talked about maybe this balance by some sluggishness in the US. Can you just talk about specific factors impacting one region versus the other, whether it may be end market product mix or share gains or something else?

Sure, Alex. If we take a look at our different regions, we do see several different factors operating. If we walk through IDS, there is no questions that the overall economy in the Americas US, Canada and Brazil was slowing down. We did have some solid upside in Mexico, and continue to see some very good, and expect to see, continued growth opportunities in Mexico.

So, the overall pattern was definitely related to the economy. And particularly, you can dive down into areas like Houston, Western Canada, where we see a lot of dependence on our oil and gas-related products, you definitely see significant hits to our business there. If you take a look at Europe on the other hand, their economy is structured slightly different at this point. And as an end result, we are able to do better.

We certainly have a very strong team there in IDS, and they are doing a terrific job. But a lot of the factors have to do with the nature of industry in Europe versus the nature of industry in the Americas.

And finally, Asia really -- you can divided it into several pieces for us -- China, Southeastern Asia; actually Japan is differentiated from China. And the GDP there, we are having mixed results with handling their entire GDP situation. We definitely, though, have an effort to increase some specific key sales efforts in there, because we do believe we can do a better job despite the downward trends.

If we look at Americas and WPS on the other hand, we see pretty similar trends. We would add Australia as opposed to China to that discussion. And the good news there is that we are actually improving our revenue decline in Australia, and we continue to see a stabilization of profits, as we've really leaned-out the team and focused them.

They are definitely undergoing some major long-term issues with commodities that are extraction industries, in particular, that are key to that region and key to our previous and future success there. So, we have to work harder in the areas that aren't extraction-related to overcome that situation. But frankly, that's a dominant force in their economy and the types of products that we manufacture. So that is a unique challenge to overcome, with the proportion of their economy in that regard.

Understood. Appreciate the thoughts.

Charley Brady, SunTrust Robinson Humphrey.

I just want to clarify a comment that Aaron made in response to a question on the IDS operating margin. With the guidance being slightly over 20% for the year, and year-to-date running at about 21.3%, I thought I heard Aaron say that 21.3% would be considered equivalent to just over 20%, which seems like a pretty wide space to me. I just wanted to make sure I heard you correctly on that.

You did hear me correctly.

Okay. So really, you would expect year to be over 21%, rather than just over 20%?

Yes, I think that's fair.

Okay. And I guess since Aaron brought it up, I know you're not giving guidance for 2018, but since Aaron kind of brought it up about the organic growth outlook, can you talk about what you saw organic growth going just in the early part of fourth-quarter? And given your comments on your organic growth and what you said about the ability going into 2018, and the EPS growth outlook, are you, at this time, expecting EPS to be up year-on-year in 2018? Or do you think you would be flat?

I guess I'll answer that. Well, first of all, we're not giving -- you're right; we're not giving guidance for our fiscal 2017. And the specific question that you had with respect to how did we start our fourth quarter, I'd really rather not talk about that. And the reason that I would not like to talk about it is, because when you look at our sales on a per-day basis throughout a month, it can be extremely misleading. And it's hard to extrapolate in a 15 or 16-day period what the actual results will be for the month.

So, I guess I'd rather not comment on that. And obviously, as it relates to 2017, of course, we anticipate increasing earnings-per-share. But beyond that, I'd rather not give any more color.

Okay, thanks.

Keith Housum, Northcoast Research.

Thanks for taking my question. I guess my questions will focus more on the balance sheet. As we look at your CapEx guidance earlier in the year, I think you guys were [pointing to] $25 million, and you guys were down [at] $13 million for the year. And I think you noted that just the timing of some of your projects, but could you provide a little bit more color? I mean, was there anything in the overall environment that's pushing out the spending in the CapEx? And perhaps what these projects may be -- or they expansion of existing lines or facilities? Or any color you can give around the delayed projects.

Sure. Straight out, we are actually excited with our deployment of capital. We have become very disciplined in our approach. Our product pipeline is increasing and becoming stronger, and at the same time, we are looking at and pursuing capital equipment to help our factories become more efficient and effective, and also for us to be less dependent in critical areas of sourcing.

The end result is, I want to send a strong message to you that we are actually working harder and more effectively in that area to put more into deploying proper capital. That said, the timing of our use is -- has not been exactly what we anticipated. None of that is a negative for our future; quite the contrary.

Great, thanks. And then, as we look at your balance sheet, especially your cash position, it's probably the strongest I can remember it being many years. You guys have done a great job of getting your net debt position down. But there's been no change in your capital allocation strategy. And as we look at your R&D, your R&D number hasn't really changed much as well.

So can you perhaps expand a little bit more on how you plan to put your balance sheet to work and at least investing back into the business? Do you plan on R&D increasing in the future or in growing your sales staff to help drive sales?

Well, we are always going to look at that -- those factors very carefully. But there is no question that we are refocused as an innovation, product-driven organization, and that we are driving that mentality throughout our Company in all of our businesses.

And we feel that we are making significant progress in that area, but you are correct. We will be looking at some of our platforms in particular to drive a more innovative product -- unique product-centric culture, where we are providing absolute differential value to our customers and, at the same time, providing differential value to ourselves.

So yes, we would expect to see more -- both efficient, effective and increased efforts in the area of R&D. We also believe that our sales efforts will continue to move forward as we see opportunities to expand into markets or to customer bases that we had not before. But there is an absolute effort become not just a farmer-driven mentality as an organization of sales, but hunter-driven, where we go after our opportunities earlier in the cycle so that we can actually provide more differential improvement.

Okay. And then I guess finally, as your cash position is growing, is there more a priority that you are going to give to share repurchases than perhaps dividends? Because I'm assuming that you are going to have more, I think, perhaps to dividend out without significantly increasing that dividend payment. I guess is there a change in the weighting you are giving in terms of your priorities for your capital allocation?

We are not changing the way we are doing our priorities specifically. We have 30 consecutive years of improving our dividend. We are quite proud of that. We believe that sends a very strong message of stability and consistency, and we are not anticipating changing that model.

On top of that, I think that you know I'm not a fan of programmed repurchases. We are always looking at our cash position, our opportunities, and the situation with our stock. We have purchased, I believe, just over $23 million worth of stock back this year; a little over 1.5 million shares. That is up above historical levels, and certainly way above my first year here where we repurchased zero. But we believed, and do believe, that the price point that we purchased, that was a terrific investment for our shareholders.

And just to clarify, it was 1.1 million shares.

Apologize. I said 1.5 million. Yes, it was 1.1 million.

Yes, at $23.5 million.

Right.

All right, great guys. Appreciate it.

You're right.

Thank you.

Joe Mondillo, Sidoti & Company.

Just to jump on that -- the prior R&D question, just wondering how much change or benefit have you started to realize with the focus, the increased focus that you've put in place? I would imagine not a whole lot. And are we expected to sort of see an accelerated amount of benefits over the next year or two?

Absolutely. That's -- if we take a look at our approach on R&D, you are correct -- it is a longer-term focus. We believe that the best way to create value for our shareholders is to truly drive it internally through creative solutions -- unique solutions in the niche markets.

That takes a while. Our marketplace tends to be slower to move than some. That's good news on the back end of a product lifecycle, but as you are developing products, that also means it takes longer not only to introduce them to the marketplace, but to get traction in the marketplace. Very, very positive results.

We are introducing products specifically in business units that are very exciting that we have not been introducing products into in several years. That is an exact indicator to me of what we want to be doing for our future. But I don't expect those products to have giant traction in the near future, because it does take anywhere from 18 months to three to five years, depending if it's in medical space or somewhere like that, to actually get significant traction.

But we are establishing the mentality, establishing the process and the structure, the innovative ideas and developing them, to do exactly that -- have a stronger, longer-term path forward in growth. As we spoke to you before, we are looking at operational efficiencies to help garner positive momentum for our value. In the near-term, we are looking at product innovation to help garner a much stronger value stream in the longer-term.

All right. And then in regard to the operational improvements, IDS this year has seen, I think, a significant amount of margin improvement year-over-year as related to the easier comps with the inefficiencies related to the closing consolidation as well as the actual benefit from further improvement.

WPS, could you talk about -- that segment has seen a significant amount of margin expansion too. Could you talk about what the drivers are there? I think it's a little different, given all the changes in restructuring that you are doing with that segment?

Well, you know, we are very pleased. As you saw, we had growth in WPS this quarter. That, in and of itself, puts a tremendous positive pressure on our margins, that when we see declines, because of the margin levels that we have and the fixed capital that we have in place, it definitely has a super-significant impact.

So, being able to reverse that direction is a major player. That said, we have really focused on becoming much more efficient and process-driven on how that business functions. And so a lot of those improvements you are seeing from the factories all the way up in our organization to the product management teams, to the development groups as they are introducing new products into that space as well, making sure that they are suited, that it works well, and that we are driving efficiencies and effectiveness. So, definitely seeing similar results.

So, I think a year or two ago for a matter of a few years, we were seeing a lot of competitive pressure, pricing pressures. Would you characterize it as primarily that? Or an inability or inefficiency of the business to sort of evolve to the market, and more so an internally type of thing? And now it's really reversing that? Is it more that? Or is there still pricing pressure, and you are just offsetting that with the improvements that you are making?

So, you articulated it very well. It's actually both. There has been a shift in the market in the way the market is viewed. We are now getting ahead of those shifts as opposed to being behind those shifts. And we are becoming more focused on how we deliver our products in the new situations that we deal with.

We are also developing more focused approaches to specific marketplaces that generate significantly more value to our customers. At the end of the day, all customers are going to flock in a direction that provides them with the most value. We are now gaining that back.

And I think you were correct -- for a while there with the market shifts and our situation, we had lost that momentum. But we are very strongly moving in the proper direction at this time. But it is absolutely both factors. It's not one or the other.

And in addition to IDS, do you still see a lot of upside in margin improvement there?

Yes. I mean, the great news of that business is that if we can garner particularly revenue improvements, we'll see significant margin improvements.

Is that what it's going to take -- is that the big -- at this point in time, going forward, is that the big mover? You have to see organic revenue or --?

That would be the biggest mover, yes. That would certainly -- that certainly allows us to improve even more than operational efficiency.

So this year, we've sort of seen sort of, call it, flattish, maybe slightly negative organic revenue, but you saw a lot of margin improvement. You've already picked the low-hanging fruit in terms of improvements, and now it's sort of an organic revenue story? Is that what you are saying?

I want to be clear. We still see operational improvements for the next foreseeable future -- three-plus years.

For WPS?

For WPS and IDS. Yes, sir, both businesses. However, to be clear, revenue is a great friend of ours in WPS in regards to margin if we can improve it.

Sure, sure. Just lastly, I just wanted to ask a question on the G&A expenses. Even if you add back that $4.3 million, it looks like the year is sort of trending flattish. Is there -- have you sort of, I guess, structured that cost structure to the point where you don't see any more sort of downside? Or was it a pause this year and you still see a lot of opportunity next year? How are you thinking about the G&A expense line?

Obviously, G&A is a sticky cost that you have to pry culturally in most organizations. That said, we fundamentally believe that, as we look at best-in-class approaches, we still have opportunities in most of our functional areas. That's the good news.

The challenge is that that takes time. And it's not an issue of just cutting costs. It's an issue of thinking differently about how we do business and taking different approaches to our functions.

Okay. All right, thank you.

George Staphos, Bank of America Merrill Lynch.

Thanks so much for taking a follow-up. Just two quick questions. One, Aaron, can you just remind us again -- so, can you comment to the extra day that impacted third-quarter? And is it possible to estimate the benefit? And how does this impact the fourth quarter?

Well, one day on a quarter is about a percent-and-a-half of organic sales. So, up and down.

Appreciate that. And just as a second follow-up, kind of moving back to piggybacking the WPS question, you talked about some of the growth rates in digital in the quarter. It's nice to see -- I think this is all related to kind of consolidating the backend infrastructure that feeds into various front-end displays, if I'm not mistaken.

Maybe what's the next phase of digital investment required? I'm guessing it's mobile, but I would appreciate any views you could provide there.

Well, I think you made some very salient comments there. It's a combination of improving our backend processes where we still have a lot of opportunities, and also improving the actual front-end interface.

And you are correct -- we see a lot of headroom still in the mobile platform to improve that experience for our customers. At the end of the day, that needs to be a very focused experience that is very easy for them to navigate and to get to their particular need sets and purchase as quickly as possible. So, we see improvement opportunities in the backend still significant, and we see significant improvement opportunities in the front-end, the interface mobile, specifically.

Appreciate. And would you need -- just to clarify, would you need much incremental investments on that? Or much of it is the groundwork has been laid, so there is minimal incremental investments related to improving that --?

Minimal incremental investments. We are anticipating having to make incremental investments.

Thanks very much, guys.

Thank you.

Thank you. I'm showing no further questions. I'd like to turn the call back to Ann Thornton for closing remarks.

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