Brady Corp (BRC) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Brady Corporation's second-quarter 2017 earnings conference call. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Ann Thornton, Chief Accounting Officer. Please go ahead.

Good morning and welcome to the Brady Corporation fiscal 2017 second-quarter earnings conference call. The slides for this morning's call are located on our website at www.BradyCorp.com. We will begin our prepared remarks on slide number three.

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 2016 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.

I'll 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, we released our fiscal 2017 second-quarter financial results, and I'm pleased to report our sixth consecutive quarter of improved year-on-year profitability. We increased pretax earnings by 42% compared to second quarter of last year and increased EPS by 63%. These results were helped by lower-than-normal tax rate, but even without the lower-than-normal tax rate, we would've grown EPS by 33%.

As part of our fundamental effort to improve the basics of our business, I am pleased to report organic sales growth of 1.3% this quarter. We're working hard to improve our organic revenues, and although we do expect to see choppy organic growth patterns in the near term, we believe we're beginning to move in the right direction. Our focused efforts on high-quality product development, providing excellent customer service, developing efficient and effective manufacturing processes, and driving efficiency in our G&A structure continue to be drivers of our improved financial results.

We're focused on delivering long-term, consistent organic growth because we believe this is the key to our continued success. Our priorities are focused on two parallel paths, with the first path focused on driving operational efficiencies. This means developing the right culture for success by driving decision-making further into the business to ensure that we have the proper mix of local ownership and accountability. We're driving efficiencies and simplifying processes in our manufacturing facility; investing in more efficient, higher-quality equipment; optimizing our product offering; reducing our centralized G&A structure; and streamlining the processes that result in a relatively high SG&A expense.

The second path is equally as important as the first and is focused on rebuilding our organic sales engine. We're excited about where this is taking us.

As you can see in the results this morning, our R&D expense increased as we are increasing our investment in new product development and emerging technologies. We expect to continue this increase in R&D spending in order to build the foundation for our future growth. Our R&D process and our new product pipeline are improving and our customers are responding positively to the printers we've launched over the past two years.

In our WPS business, we continue to actively manage the catalog to digital shift. We're creating an industry-leading digital marketplace with a mobile-first mentality and we're sharpening our focus on compliance and customization for workplace safety critical industries.

In addition to our renewed focus on innovation and executing the fundamentals of greater customer service, we're seizing every sales opportunity that we identify. From a macro perspective, we are seeing more optimism at the customer base than some other industrial companies; however, we have yet to see this optimism translate into positive sales momentum. In this environment, focus and consistency are critical to helping our teams execute every day to ensure that in the future when we achieve consistently positive topline growth that we are able to turn these revenues into accelerated bottom-line improvements and cash generation.

As such, our main priorities remain unchanged, which are to serve our customers extremely well, to grow our pipeline of innovative new products, and to deliver operational efficiencies throughout our business that will generate results now and, more importantly, in sustainable improvements into the future. Our goals are not only to improve short-term financial results, but to build a solid foundation for a successful future.

Every employee is focused on making the right decisions today that will ensure our long-term success. The spirit of innovation that was a core of Brady's success is taking hold again, from our efforts in R&D to the everyday improvements in work processes and providing excellent customer service. In many instances, these actions don't pay off immediately, but we're tackling these items every day because we know they will position Brady for long-term success.

I'll now turn the call over to Aaron to discuss our second-quarter financial results. I'll then be back to provide some specific commentary on our identification solutions and workplace safety businesses and a few closing comments. Aaron?

Thank you, Michael, and good morning, everyone. I'll start the financial review on slide number three.

This quarter, organic sales growth was 1.3%. Offsetting this quarter's organic sales growth was a decline of 1.5%, due to foreign currency translation. The overall result was total revenue of $268 million, down 0.2% from the same quarter last year.

Our diluted EPS increased 63%, finishing at $0.49 this quarter, compared to $0.30 in last year's second quarter. This quarter, we benefited from a 13.1% income tax rate, which was caused primarily by one-time tax benefits from a cash repatriation of over $125 million to the US in the second quarter. If our tax rate would have been closer to our historical average of 28%, it would have reduced reported diluted EPS to $0.40 this quarter, which, as Michael just mentioned, would have been a 33% increase over last year's second quarter.

Our cash flow from operating activities declined this quarter, finishing at $19.3 million, compared to $27.9 million in the second quarter of last year. This decrease was caused by the timing of certain payments occurring in the first quarter of last year and the second quarter of this year. Our focus on strong cash generation and working capital management remains unchanged, and we expect our cash flow to remain strong in the back half of this fiscal year.

Turning to slide number four, you'll find a summary of our quarterly sales trends. By division, organic sales increased 1.9% in the ID solutions segment and decreased 0.2% in the workplace safety segment. I'll let Michael provide a bit more color on the drivers of the revenue changes in our two segments this quarter, but let me touch on the impact of billing days. This quarter, we benefited from an extra 1.3 billing days when compared to last year's second quarter, and this certainly helped to contribute to our organic sales growth this quarter.

On average, each workday represents a little over 1.5 points of organic sales growth, so an additional 1.3 days equates to about 2% of organic sales growth; however, this billing-day benefit will reverse in the third quarter, as we will have 1.7 fewer workdays this year when compared to last year's third quarter. So the benefits from extra billing days that we just enjoyed in the second quarter will effectively all be given back in the third quarter.

Also, foreign currency remains a challenge for us as the strengthening of the US dollar against our basket of currencies continued to challenge our financial results, reducing revenues by 1.5% this quarter. This is a trend that has continued over the last five-plus years, which requires that we work that much harder to drive efficiency gains and organic sales growth to offset these foreign-currency challenges.

Slide number five provides an overview of our gross profit margin trending. We finished our second quarter with a gross profit margin of 50.1%. This is a 60 basis-point increase over the 49.5% gross profit margin realized in the second quarter of last year. This year-over-year improvement was a direct result of our ongoing efforts to drive efficiencies while providing the best-quality products and best experiences for our customers.

Slide number six shows the trending of SG&A expense. SG&A was $94.7 million this quarter, compared to $100.2 million in the second quarter of last year. This trend of decreasing SG&A is a result of our team's focused efforts to identify and drive efficiencies and savings throughout the entire organization. We're also finding that, as we drive efficiencies in SG&A, the quality of our customers' buying experience improves as we become a much easier company to work with.

Turning to slide number seven, our diluted earnings per share grew 63%, finishing at $0.49 this quarter, compared to diluted EPS of 30% last year. As I just mentioned, our tax rate certainly contributed to our improved EPS, and with a normalized tax rate, our EPS would have been $0.40.

We were able to realize this improved EPS even with the decline in revenues caused by foreign currency and an intentional increase in R&D spending. This improvement in profitability was driven by a combination of our modest organic sales growth and the relentless pursuit of efficiency gains in our factories and our SG&A structure. Overall, the team executed well on the cost side, while continuing to invest in growth initiatives and drive innovation.

Slide number eight summarizes our cash generation. This quarter, we finished with $19.3 million of cash flow from operating activities, compared to $27.9 million in last year's second quarter. Looking at free cash flow, we generated $16 million this quarter, compared to $26 million in last year's second quarter. As I mentioned, our cash generation was impacted by the timing of our annual employee bonuses, which were paid in the first quarter last year, but were paid in the second quarter this year. This is simply a timing item that doesn't change the overall trend of consistent cash generation in excess of reported net earnings.

Also, the repatriation of cash to the US this quarter enabled us to reduce our overall debt balance. This quarter, we used $51 million to repay debt, leaving us with $125 million of cash on hand at January 31. Approximately $37 million of our cash was held in the US at the end of our second quarter.

If we move to slide number nine, we can see the trending of our net debt and our net debt to EBITDA over the last couple of years. At January 31, 2017, net debt was $37.7 million, compared to $132.5 million just one year ago at January 31, 2016. This brings our net debt to EBITDA to approximately 0.2 to 1 at the end of this quarter.

As we look at deploying our cash, our capital allocation approach is disciplined and patient. First, we use our cash to fund organic growth opportunities, which includes funding investments in new product development, digital improvements, capability-enhancing capital expenditures, et cetera. Second, we focus on returning cash to our shareholders in the form of dividends. Third, we use our cash to improve shareholder returns through opportunistic share repurchases. We currently have 2 million shares authorized for purchase. Fourth and finally, we use our cash for acquisitions if we believe we have strong synergistic opportunities to give us a higher likelihood of success.

Overall, our cash generation is strong, our balance sheet is strong, and we're focused on driving long-term value to our shareholders through this disciplined approach to capital allocation.

Slide number 10 summarizes our guidance for the full year ending July 31 of this year. We are increasing our full-year EPS guidance to a range of $1.75 to $1.85. Included in our guidance are expectations for organic sales, ranging from a low single-digit decline to slightly positive growth for the full year ending July 31, 2017, and as I just mentioned, this is impacted by 1.7 fewer billing days in our upcoming third quarter when compared to the third quarter of last year.

Looking at our cost structure, we expect to see our investments in R&D continue to grow in the back half of fiscal 2017 at approximately the pace you saw in the first two quarters of this year. Offsetting this challenging revenue environment and the increased R&D expenses are ongoing efficiency gains in our manufacturing facilities and in our selling, general, and administrative expenses.

When comparing our guidance range to our fiscal -- I'm sorry. When comparing our guidance range to our financial performance in the third and fourth quarters of last year, there are two additional items that are significantly impacting these results. First, we expect the year-over-year impact from the strengthening US dollar to reduce revenues by approximately 2.5% to 3% in the back half of this year. The stronger dollar also compresses overseas gross margins, as we have a fair amount of our costs denominated in USD, whereas our foreign sales are mostly denominated in local foreign currency.

Of course, we're working to overcome these margin pressures and the translation effect of the stronger US dollar by driving efficiency gains, but when comparing to the back half of the prior year, this has a pretty significant impact as the translation alone reduces our net earnings by approximately $0.04 per share and the compression of our margins accounts for another $0.02 of headwinds.

Second, we expect that our tax rate will be in the upper 20% range in the second half of this fiscal year, which will be an increase over our approximate 25% tax rate in the second half of last year. Our tax rate tends to fluctuate from quarter to quarter, but over the long term our tax rate tends to trend in the mid to upper 20% range.

Other key operating assumptions in our guidance include depreciation and amortization expense of approximately $30 million and capital expenditures of approximately $20 million.

I'll now turn the call back to Michael to give some color on our divisional operating performance. Michael?

Thank you, Aaron.

Slide number 11 summarizes the identification solutions second-quarter financial results. Organic sales increased 1.9% and foreign currency translation decreased sales by 1.3%. In total, IDS sales increased by 0.6%, finishing at $191 million this quarter.

Organic sales were driven by our European IDS business, which increased organically in the mid-single digits, while both our Americas and Asian IDS businesses increased organic sales in the low single digits this quarter. After a slight step back in organic sales in the first quarter of this fiscal year, our European IDS businesses returned to solid organic sales growth.

I'm also encouraged by the improvement in organic sales growth in Asia for the second straight quarter. After struggling with declines for several quarters, we have positive momentum and a solid pipeline of future sales opportunities.

Within our IDS Americas region, organic sales were driven by low single-digit increases in the US and Canada, partially offset by declines in Brazil. As I mentioned, we're hearing about an increase in optimism in the US, but we've yet to see it translate into material project spend. We do believe that we are well positioned to capture increased growth in the US, and with our more efficient structure, a pickup in spending in the US will have a positive impact on our bottom line.

Our R&D spend falls primarily within the identification solutions segment, and as you can see, R&D expense was up 4.2% this quarter when compared to the second quarter of last year. We've been very clear that our investment in R&D is not simply about how much we spend, but our investment must be on the right products that our customers need and want.

The printers we've launched during the past year and a half are selling better than planned and our customers are responding positively to them. This quarter, we launched a new outdoor label product, which is extremely durable and was developed with our proprietary materials. This product will last for more than 12 years outdoors while protecting against liquids, UV light, and abrasion. It's a high-quality, long-lasting label material designed for a wide variety of applications and industries, which is another example of Brady's unique capabilities in high-performance materials.

IDS finished with $29 million in segment profit in the quarter, which is an increase of 25.6% over the second quarter of last year. This is a direct result of the focus on efficiency and operational excellence that we've been working so diligently to improve upon over the past two years, as the percentage of sales segment profit improved to 15.2% this quarter compared to 12.1% last year. I am pleased at the increase in segment profit in the IDS business. It's a testament to the focused efforts of the entire team in driving cost efficiencies.

Looking forward, we expect low single-digit organic sales growth in the full fiscal year and we expect to see IDS segment profit to continue to be in the mid-teens as a percentage of sales. We are increasing our R&D spend and we expect to incur additional expenses from these investments in innovation. We also expect to incur additional incentive compensation expense in the back half of this year, when compared to last year. At the same time, we expect to see our ongoing efficiency activities in our factories and SG&A provide further benefits.

Let's move to slide number 12 for workplace safety review. Organic sales decreased 0.2% in the WPS segment this quarter. Our European business continues to perform well, with another quarter of organic sales growth in the mid-single digits. This is a continuation of the trends we saw throughout fiscal 2016. European digital sales increased by nearly 20%, compared to the second quarter of last year, and continue to be the driver of sales growth in the region. Increasing organic sales in less than a robust economic condition was a direct result of our European leadership team's ability to drive results and execute their strategy, which involves serving our customers how they want to be served, be it online or through catalogs.

We also realized organic sales growth in our Australian-based business this quarter. Our team is stabilized and is focused on bringing Brady's diverse product offering to many different industry groups in Australia. Mining continues to be a challenge in Australia, but we're making up for this weakness by focusing our efforts in other areas of the economy.

The improvement in organic sales in our European and Australian-based businesses was offset by high single-digit declines in our North American business. We experienced sluggish demand in the US, but through continued adjustments to our cost structure, we've been able to mitigate much of the bottom-line impact from our sales volume decline.

Foreign currency headwinds continued into Q2 of this year, reducing our WPS sales by 2.1%, primarily due to the impact of the British pound and the euro depreciating against the US dollar. We're focused on growing this business and improving profitability.

Each and every member of the WPS team has been driving three primary goals. First, we're managing the catalog to digital channel shift through efficient and effective catalog prospecting. Secondly, we're moving to a digitally focused produced catalog process.

Second, our websites have been a focus of our digital team choosing responsive design to maximize our digital channel. We also believe that a continually improving mobile presence is necessary to be an industry leader in this area and this is definitely what we are working towards. Although mobile sales are still a relatively small part of our business, sales generated on mobile devices are increasing every month as a result of our improved capabilities on these new sites.

Third, we're regaining product leadership in the safety identification product category through a focus on unique and customized offerings and we're taking advantage of our team's deep knowledge and expertise in this area.

Our focus and investments in these areas are 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 $6.1 million this quarter, compared to $6.3 million in last year's second quarter. As a percentage of sales, segment profit was 7.9% this quarter, compared to 8% in last year's second quarter. This reduction in segment profit was due to reduced revenues and compressed gross profit margins.

Looking ahead, we anticipate low single-digit declines in organic sales and we expect segment profit to continue to be in the upper single digits as a percentage of sales for this full fiscal year.

Before turning the call over to Q&A, I'd like to provide a few concluding comments. I'm proud of what the Brady team has accomplished. We've been working on more than just driving efficiencies and pushing for innovation. We've been working on a cultural shift as well. We're focused on our strong, talented, and dedicated team who are consistently living our core values and driving to exceed our goals.

I've seen our culture shift positively towards increased ownership and accountability, thinking differently about performance, always delivering what we promise, and always expecting to win. Brady has been a highly innovative company, and with this increased level of local ownership and accountability, clear expectations, and a shift in mindset, we have a winning culture and the winning team that will enable us to be successful for years to come.

We've made significant progress improving our operational issues and, as a result, we've delivered six consecutive quarters of year-over-year profit improvement. We're focused on delivering profitable organic sales growth, and although we've started to see an increase in positive sentiment both internally and with many of our customers, this has not yet materialized into increased project spend by our customers. This makes our efforts towards new product development and our focus on driving efficiencies through our manufacturing facility and in SG&A every single day that much more important. I'm pleased with our progress and I know that we can continue to deliver even more.

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

(Operator Instructions). Joe Mondillo, Sidoti & Company.

So my first question, just regarding capital distribution, so now that you've sort of paid down some of your debts or you are sort of almost right around net debt neutral at this point, sort of underlevered, I'd say, and given you are going to be generating over $100 million of free cash flow going forward on a 12-month forward basis, just wondering if you could update us. Do you see any strategic acquisitions that you've talked about in the past? You've always talked about that you don't intend on doing many acquisitions, but if there is a strategic one, and if not, I'm wondering if you are going to plan on being a little more aggressive on the share buybacks going forward.

So, Joe, we continue our very disciplined approach to capital allocation. We know it is one of the absolute top priorities of our leadership for the Company. We want to make sure that the first thing we always do is reinvest in the business, and you're seeing that.

In particular, you've seen that we are investing more in R&D and we have said that we'll continue to invest more in R&D, so our first priority is always that.

We also have a philosophy of handing back profit through dividends on a consistent, and as you can tell from our long history, and increasing basis year over year. That remains our overall fundamental philosophy. We do believe in share buybacks. We don't believe in programmed buybacks, but we do approach buybacks in a disciplined and effective manner.

In regard to acquisitions, we don't speculate on acquisitions or our future potential to acquire companies. We believe fundamentally that we take that as a very careful, disciplined approach. First and foremost, we look to acquire technology, technologies that we as a Company can make sure would fundamentally, positively impact our Company. We do not look specifically for market-share acquisitions.

Secondly, we want to make sure that these companies are ones that will really be able to benefit from being with Brady and Brady us. But in no way am I speculating about a change in philosophy or approach. Those are the same statements I've made when I arrived at Brady, and once again we are very disciplined, we are very consistent, and we're patient in making sure that we are not looking to do anything based on timing, but rather based on specific opportunity.

Okay. Thanks. And secondly, I was just wondering if you could provide a little more detail on sort of what you're doing with SG&A. I know there's probably still a lot more cost that you want to take out of the business, but could you update us on -- just recently, I think a quarter or two ago, you just shifted down a lot of the centralized corporate administrative-type costs down to the segment levels, changed compensation to try to drive management at those segment levels to try to drive those costs out. Just wondering if you could update us on that?

And also, if you could provide any color on sort of what your goals are, what you're looking at to sort of judge how that's going. It seems to be obviously going really well so far, but I think there's a lot more work that you've talked about to do going forward. So just on the SG&A front, if you could provide a little more color there. Thanks.

Absolutely. I've always believed ownership and accountability are key to success, and one of the areas that we've made a significant change is Brady historically has always worked off of income from operations and really treated our structural or SG&A cost as separate entities, so to speak.

I fundamentally have changed that. All of our incentive programs are management accountability. Our daily, weekly, monthly, and quarterly reviews work down on operational income. So now the business leaders, the profit leaders, the product managers are all being driven to total applied cost. So if we can move it into the business, we do so and have been doing so.

And you pointed out, and it's true, that's been having a very positive impact on how people treat their investments. If you're working in G&A, these are investments just like any other investment we make. I don't believe we historically viewed them that way, but we absolutely do now.

So what I would say is we continue, Joe, down this path and we do have more expenses that we are putting into the divisions as we see it appropriate to do so. We continue to see people making smarter, wiser, more careful decisions.

I've got to tell you personally I love to hear the dialogue about projects that people would have pushed for two years ago that now they are asking, why would we invest that when there isn't a positive return on it for the Company? That's the type of dynamic that you can't quantify up front, but is having a major impact on what we do and how we do it.

But overall, we are also benchmarking ourselves in all of our functions and all of our units to make sure we have logical reasons for the cost structures that we have, and if not that we drive to inclusion of what we can do about it and how we can do it.

So fundamentally, we do see, as we've shown in our guidance, that we will continue to push down those costs. I fundamentally believe that remains a source of opportunity for us, but equally I believe as we really invest in the proper areas of R&D in a focused and effective manner that is really getting the guidance of our end users and our customers, I think you're going to see that that investment, although that is increasing G&A costs in that area, will pay off significantly in the longer term.

And just to follow up there just real quick, in terms of at the rate of revenue that you're doing right now, do you think that your SG&A as a percent of sales can continue to fall? And if so, do you have any sort of goals that you would like to quantify at all?

Joe, I can comment on the goals, and that is that we have a goal of 33.5% to 34.5% of sales included in our investor presentation. That's still where we're trending to. Clearly, if we get to that level, we will then reset our goals because this absolutely is an iterative process. So, that's where we're trending right now. Beyond that, we don't have other goals in place, but as Michael mentioned, this is a constant focus for the organization.

Okay, great. Thanks a lot, guys. Appreciate it.

Mig Dobre, Robert Baird.

Good morning, Michael and Aaron. This is Joe Grabowski on the line for Mig this morning. Congratulations on a solid quarter and thanks for the detail on the billing days.

I was wondering -- I assume part of the billing day drag in the third quarter is due to leap year last year that obviously doesn't repeat. How much does leap year impact the full year as far as billing days and a drag on organic growth?

I guess I'm not sure of exactly what the impact of leap year is on the full year, but I can tell you this. For the full year, we have -- I believe it's 1.1 days less --

Okay.

-- than in the prior year, and that's for the full year.

Okay. And that's maybe a half a percent drag or maybe a little less, I'm guessing?

Yes, probably about that, so figure 240 billing days a year.

Sure. Okay. Great. Thanks for that. And switching to workplace safety, the Americas have been declining about high single digits the last couple quarters. Maybe update us on what the catalog strategy is right now in the Americas and where you're at on the catalog to digital shift in the Americas?

So we continue to make progress. You obviously know and we've unequivocally stated it's a challenging marketplace right now. Fundamentally, I spoke when I first got here about a couple of real factors. We not only wanted to create a positive digital experience, but we wanted to really create an interactive digital catalog that allowed us to be more effective, lower cost, and more focused on the catalogs that are going out.

That's one of the comments I made during the commentary, that as we create our catalogs in a digital manner, it allows us to be much more responsive and leaner in our cost effort. That not only reduces prices, but means as we look at niche segments to distribute catalogs to, we can actually do that in a meaningful manner, whereas with a higher-cost structure catalog, that becomes much more problematic.

So, we are continuing to make that shift both in aligning the revenue we need to digital and interactive digital mediums, but we're also becoming much more effective on how we position and focus our hardline catalogs.

That makes sense. And then, if I can just sneak in one last question, nice turnaround in Australia in workplace safety. You mentioned in your prepared remarks focusing on other parts of the economy, if you could maybe drill a little deeper into that and kind of what's driving the turnaround in Australia.

First of all, I'd like to give great credit to our leadership team in Australia. They've done an amazing job of really reinvigorating a group with an extremely difficult challenge. The economy of Australia, as you well know, had been living large off of a mining industry for an extended period of time, and when a major shift like that happens, it is a painful transition.

But they've gone across the board in a variety of industries to make sure that we're actually growing despite the losses in mining. I don't want to call out one particular industry because, quite frankly, they've done a pretty good job of doing what I like to do anyway, which is putting their eggs in multiple baskets. I think that if you look at the economy of Australia, we are now broadly representative or much more broadly represented than we were before where we had a preponderance of our effort in mining, and I think that's healthy for the long run. I want to be clear if mining -- when mining does come back, because all these things are cyclical, we're still well positioned in that segment, but now we're fundamentally much better positioned in the broader economy.

Great. Okay. Thanks, guys. Good luck in the second half.

So, Joe, let me come back to your first question as well. I just want to make sure that we're very clear with respect to billing days this year.

So in the first half of this year, so the summation of the first and second quarters, we had 2.2 more billing days than the year before. In the second half of this year, we have 1.1 less billing days. So for the full year, we'll have 1.1 less billing days, just to be clear on how that all breaks out between the first and second half.

Got it. Okay. Thank you.

I'm sorry -- 1.1 more (multiple speakers)

Right, 1.1 more.

Let me say it again, 2.2 more in the first half, 1.1 less in the second half; 1.1 more for the full year.

1.1 more. Okay. Got it. Okay. Thanks, guys.

Charley Brady, SunTrust.

Hi, guys. This is actually Patrick Wu standing in for Charley. Thanks for taking my question.

Good morning, Patrick.

Good morning, Mike. On IDS, just wanted to know how much of the organic growth that you saw this quarter, irrespective of the billing days, would you classify as new product introduced in the past, let's say, 12 months.

Patrick, as you are probably aware, in industrial segments growth from product introductions takes a significant amount of time. As we've talked about, specifically our printers have doing much better than we expected, but the great part about our product offering, particularly the printers segment, is that that introduction revenue is just the start of the positive revenue stream over many years.

So what we're able to anticipate as a result of that is a continued improvement in the entire printer revenue space as we introduce new printer lines. It isn't a significant increase in our revenue in the shorter term. It is a good indicator that we're heading in the right direction as far as increased revenue in the longer term.

So I would say it isn't as large as you might anticipate, but all of the indicators, based on the segments we're in, the industry, and the type of products we make, are very positive.

Okay. That's helpful. And I just want to move to WPS side. The high single digits decline in the US, can you just maybe give a little bit more color on where exactly the end-market weakness is, and then how does it look for the rest of the second half of 2017?

And then on the margin side, I think last quarter you mentioned that high single-digits, approaching 10%, is likely to end the year. Does that embed any organic growth or can it be pretty much achieved at the current quarter [decline] basis? Is that something that you guys are still holding onto?

We're still holding -- we still believe in that and it can be achieved, based on the current modeling, and we do not have to achieve significant growth to get there.

In regard to where we're seeing challenges, as we've said in our commentary in general, we are hearing a lot of positive information in the US in particular in regards to infrastructure and everything else, and there is definitely a different sense of excitement and momentum. However, if you look at oil and gas, although prices are certainly higher, that industry is not in an investment mode. If you look at a lot of industrial factory construction, so far, although we've heard once again positive momentum, we haven't actually seen a shift in projects, et cetera.

So, what we're looking to see to change that and what we haven't seen yet is a total project spend increasing in those key markets, and it's just not right now there as far as general construction and particular oil and gas, et cetera, throughout the industry.

Got it. Thanks.

We will be happy to see that.

Okay, got it. Thanks. Good quarter, guys.

Allison Poliniak, Wells Fargo.

Aaron, could you help me with this days? I'm just trying to understand. The organic growth that you posted, say, in IDS, was that accounting for that incremental days or is that more of a flat number (multiple speakers)

The organic growth will be the real organic growth, regardless of days, not of organic sales per day.

Got it. Okay. And then, just looking at IDS specifically, you guys have done a lot on the cost side, and trying to be optimistic here that we could be reaching inflection in terms of improving sales. What level of sales growth would you need to get or you feel you need to get to get back into sort of that high teen, low 20 kind of EBIT margin, if that's even something you can help quantify?

You know, I don't really want to speculate on that. I can tell you unequivocally, Allison, that we are driving hard through the fundamentals of R&D market penetration, driving a much stronger product management base, totally integrating our team so that they are working together, engineers, salesman, product managers in ways that they haven't period before, to really create a positive revenue momentum.

And I think historically you've seen, and we believe that would be very true in the future, that as we grow real revenue, financially a significant portion of that drops to the bottom line.

Great. Thank you.

Keith Housum, Northcoast Research.

I guess the first question for you is -- the first question is on SG&A. Was there anything unusual during the quarter? Obviously, you had a nice year-over-year and even sequential drop, and then in addition to that, remind us again how much of that is variable versus fixed.

So I'll start and then we'll have Aaron answer the second half of the question.

I always say that one-time items occur on a constant basis and great companies find ways to overcome them. So, typically you will see some unusual items in a quarter, but this was a wonderfully dull quarter for us. We did not see any significant unusual items at all that we had to overcome, but that's also part of the discipline we're creating in an organization. When you drive down accountability, when people are making decisions at the lowest level possible, you don't end up having these giant oops moments that we've seen in the past.

And so, that is not just luck that we are changing that, or timing. I believe that's based on a philosophical change and a real change in how we do business.

As far as your second question regarding the breakout of fixed versus variable on SG&A, actually I don't know the answer to that. We've certainly never disclosed anything externally. That's actually not how we think about it internally, either, so I'm not sure I can help you with that question.

I would argue that we look at it all as an opportunity, and fundamentally there are some things -- we'll give you an example. We may have a long-term lease. We still look at the whole process of what do we want to do with those facilities, when do we want to do it? We look at everything as an open opportunity, and so I would agree with Aaron. I never think of it as fixed or variable; I think of it all as an opportunity and we have a lot of opportunities.

Got you. And a second question, if I may. Obviously, I'm going to follow up with questions regarding the workplace safety in the Americas. As you look at the Americas versus Europe, the challenges that you are facing in the Americas versus the opportunities or the benefit that you have in Europe, how much is market driven versus execution driven for you guys?

I think the answer to that question is yes. We certainly have more niche markets in Europe. We have a very strong team in Europe. We have a great history there.

We fundamentally did not make changes there to pricing and structure and organization that we did here. I guess about three-plus years ago that they really maintained a very solid and a very strong approach, and I believe long-term solid approaches with strong management teams are what really drives profitable organizations to grow and to maintain their viability.

We've had to change out resources in the US. We've come back to fundamental approaches to doing business, and as a result, they have been struggling more. But I would also say that the market in the US is a little more fluid and we have had to therefore really work very hard on positioning our expertise, our niche focus, and our capabilities, which are quite strong, in a way that shows to our customer base.

Would you say that the Americas is more competitive than Europe, or not?

I wouldn't call it more competitive, because historically Europeans are actually super hard price drivers. That may not be intuitively obvious, but having done this for a long time, I find European negotiators are very, very careful.

I know we've had some retail companies from the US who have gone into, for instance, the German market expecting to make solid profits on a low-cost model and found out that German suppliers and companies are extremely price conscious. So, I would absolutely not say that. I would say it's a different market and you have to show them a different value stream, and we've been very good about being able to do that.

Great. Thank you.

Thank you. And at this time, I'm not showing any further questions. I would now like to turn the call back over to Ann Thornton for any closing remarks.

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