Brady Corp (BRC) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Brady Corporation Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

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

Good morning, and welcome to the Brady Corporation Fiscal 2017 Third 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 #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 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. We released our fiscal 2017 third quarter financial results, and I'm proud to report our seventh consecutive quarter of improved year-on-year profitability.

Diluted earnings per share increased to $0.43 this quarter compared to $0.42 in the third quarter of last year, which was driven by improvement in profits in our IDS business. This is a statement to the focused efforts of the entire Brady team in identifying and taking actions on efficiency opportunities each and every day.

We're working hard to improve our organic revenues. And although consistent organic growth has been challenging, we believe we're moving in the right direction. Our focus on serving our customers extremely well, improving our manufacturing processes and identifying efficiencies in our SG&A structure are the drivers of our improved financial results. But we believe that the key to delivering improved results to our shareholders is through organic sales growth.

Our opportunities are focused on 2 parallel paths, with the first path focused on driving organic sales growth. This is critical to our long-term success. We're increasing our investment in R&D, and we expect this to continue over the next several quarters. Our R&D processes and our new product pipeline continue to improve, and we're driving innovation from the IDS stage to product launch and throughout the product life cycle.

We've also increased our focus on customer insights through site visits and in-depth discussions with management and site leaders. Through these visits, we've been able to identify customer needs that will help us to further spur new product development.

The second path is focused on operational efficiencies. We're developing the culture for success by pushing decision-making further into the business while ensuring that we maintain the proper mix of local ownership and accountability, while always implementing our long-term strategy. We're investing in our future by driving operational efficiencies, simplifying processes in our factories and investing in newer technology equipment.

This efficient mentality is becoming part of the mindset of our team, and we continue to identify opportunity daily. We're also making solid progress toward meaningful reductions in our G&A structure and streamlining processes to minimize our high overall SG&A expense.

In our WPS business, we continue to manage the shift from catalog to digital, and our digital sales continue to grow with the European business leading the way. We're refining our focus on compliance and our custom capabilities for workplace safety critical industries while continuing to develop our digital marketplace with a mobile-first mentality. By creating certain websites that are organized around the needs of our customers rather than specific

product offerings, people can more easily identify a complete set of solutions that they might not know they needed in the past.

We also believe that in the distribution space, companies are driving sales volume over gross profit margin at an increasing rate, which presents a challenge for the WPS business. In this environment of relative low economic growth and pricing pressure, focus and consistency are critical to help our teams execute every day.

Our top priorities must remain unchanged, which are to serve our customers extremely well, grow our pipeline of innovative new products and deliver operational efficiencies throughout our business. This will set us up so that as the top line grows, we will be able to capture accelerated bottom line improvement and cash generation.

Our goals are not only to improve short-term financial results, but to build the solid foundation for a successful future. Each employee is focused on making decisions today that will ensure our long-term success.

These actions often don't pay off immediately, but we're making the investment so that our process improvements are permanent and sustainable. The development of new products is a top priority, and I'm looking forward to all of the product launches planned in our pipeline.

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 as well as a few closing comments. Aaron?

Thank you, Michael. Good morning, everyone. I'll start the financial review on Slide #3. Total sales declined by 3.8% to $275.9 million this quarter. This consisted of a 1.9% decline in organic sales and a 1.9% decline due to foreign currency translation.

Diluted EPS increased 2.4%, finishing at $0.43 this quarter compared to $0.42 in the same quarter last year. This increase is a direct result of our ongoing efforts to identify and take action on efficiency opportunities throughout our global operations and our SG&A structure.

Our cash generation remains strong, with cash flow from operating activities of $37.8 million this quarter, which is equal to 168% of net earnings.

Moving to Slide #4, you'll find a summary of our quarterly sales trends. By division, organic sales decreased 0.8% in the ID Solutions segment and decreased 4.6% in the Workplace Safety segment.

This quarter was impacted by 1.7 fewer billing days when compared to last year's third quarter. To put this in perspective, with approximately 60 billing days in a typical quarter, each workday represents a little over 1.5 points of organic sales growth.

Also, foreign currency was a headwind when compared to the same quarter of last year, as the strengthening of the U.S. dollar against our basket of currencies reduced revenues by 1.9% this quarter.

Slide #5 provides an overview of our gross profit margin trending. We finished our third quarter with a gross profit margin of 50.7%, which is consistent with the third quarter of last year. Although pricing is a challenge in certain of our product categories, we've been able to overcome this pricing compression through our continued efforts to drive operational efficiencies while providing the highest quality products and a great experience for our customers.

On Slide #6, you'll find the trending of our SG&A expense. SG&A was $98.4 million this quarter compared to $105.8 million in the third quarter of last year. Approximately 25% of this decline in SG&A was caused by foreign currency translation while the remaining 3 quarters of the reduction was a result of the team's focused efforts to identify and drive efficiencies throughout the entire organization, with our largest area of efficiency gains coming from our G&A expense categories.

Slide #7 summarizes our diluted EPS, which finished at $0.43 this quarter compared to diluted EPS of $0.42 in the third quarter of last year. EPS continues to improve. And as Michael mentioned, this is our seventh quarter of year-over-year earnings growth. We were able to realize this improvement in EPS even with the reduction in sales and an increase in R&D spending, which we believe is necessary to fund long-term innovation efforts.

This quarter, the team executed nicely on the cost side while continuing to invest in growth initiatives.

Moving along to Slide #8, you'll see a summary of our cash generation. This quarter, we generated $37.8 million of cash flow from operating activities compared to $40.3 million generated in the third quarter of last year. Looking at free cash flow, we generated $34.2 million this quarter compared to $36.8 million in last year's third quarter.

We remain focused on cash generation, and we are consistently generating free cash flow in excess of net earnings.

In the third quarter, our primary uses of cash were to repay debt and pay dividends, which brings us to Slide #9.

This slide shows the trending of our net debt and our net debt-to-EBITDA over the last couple of years. At April 30, 2017, net debt was $9 million compared to $101 million just 1 year ago at April 30, 2016. This brings our net debt-to-EBITDA to approximately 0.1:1 at the end of the 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, IT 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 our disciplined approach to capital allocation.

Slide #10 summarizes our guidance for the full year ending July 31 of this year. We are increasing the bottom end of our guidance range, moving our full year EPS guidance range to $1.80 to $1.85 per share compared to our previous guidance range of $1.75 to $1.85. Included in our guidance are expectations for organic sales ranging from a slight decline to slightly positive for the full year ending July 31, 2017.

Looking at our cost structure, we expect to see our investments in R&D continue to grow in the fourth quarter at approximately the pace of the first 3 quarters of this year. Offsetting the challenging revenue environment and increased R&D expenses are ongoing efficiency gains in our manufacturing facilities and in our SG&A functions.

When comparing our fiscal 2017 guidance range to our performance in the fourth quarter of last year, there are 2 items that we expect to impact these results. First is foreign currency. Even with the recent depreciation of certain currencies versus the U.S. dollar over the last couple of weeks, we expect the year-over-year impact from the strengthening U.S. dollar to reduce revenues slightly in the fourth quarter of this year when comparing Q4 of this year to Q4 of last year. The impact of translation on our financials is forecasted to be approximately $0.01 of headwinds.

Second and more importantly, we expect that our fourth quarter tax rate will be higher and be in our more normal upper 20% range, which will be an increase over our 21.5% tax rate in Q4 of last year. Our tax rate tends to fluctuate from quarter-to-quarter, but over the longer term trends in the mid to upper 20% range. We expect this to provide a headwind of approximately $0.04 to $0.05 in the fourth quarter.

Other key operating assumptions in our guidance include depreciation and amortization expense of $28 million and capital expenditures of $17 million.

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

Thank you, Aaron. Slide #11 summarizes the Identification Solutions third quarter financial results.

Organic sales decreased 0.8% and foreign currency translation decreased sales by 1.5%. [And] total IDS sales decreased by 2.3%, finishing at $196.9 million this quarter. Organic sales were driven by our Asian and European IDS businesses. Sales in Asia increased in the double digits compared to third quarter of last year, and Europe showed slight organic growth.

Our Americas IDS business declined in the low single digits organically in the quarter. Sales increased in every geography within IDS Asia this quarter, with our China-based businesses leading the way. This marks the third straight quarter of organic sales growth in Asia, which is an encouraging sign of the positive sales momentum that this team is generating.

Organic sales in our European IDS businesses were driven by Western Europe. Our European business leaders have done an excellent job growing the businesses over the last 2 years despite less than robust economic conditions in that region. They're identifying sales opportunities while tackling operational efficiencies within our manufacturing processes and throughout SG&A.

Within our IDS Americas region, this low single-digit organic sales decline was due to the U.S.-based business. We're seeing optimism from certain customers and other industrial companies in the U.S., but we are yet to see this optimism translate into positive sales momentum.

As we continue to work on reducing our cost structure, a pickup in project spending in the U.S. will bring solid increases to our bottom line.

R&D expenses were up again this quarter by 12.2% compared to the third quarter of last year. We continue to work on not only just new product development, but also the process in which we select and develop new products to ensure that we're spending our R&D dollars efficiently and bringing them to market quickly.

It's exciting to see how our renewed focus on the needs of our customers and how we can solve their problems is impacting our new product pipeline.

The IDS segment had $32.6 million in segment profit in the quarter, which is an increase of 2.3% over the third quarter of last year. I'm proud of this team's ability to consistently increase segment profit over the past 2 years. The improvement is a direct result of the focus on efficiency and operational excellence we've been working so diligently to improve upon.

As a percentage of sales, segment profit improved to 16.6% this quarter compared to 15.8% last year. Looking ahead, we expect low single-digit organic sales growth for the full fiscal year for IDS and segment profit to be in the mid-teens as a percentage of sales. We expect to continue to incur additional expenses from our investments in R&D and to incur additional incentive compensation expense in Q4 compared to last year. However, our ongoing efficiency activities in our facilities and throughout our SG&A structure should also continue to provide benefit that will more than offset these costs and allow us to continue our trend of strong financial performance.

The Workplace Safety review begins on Slide #12.

Organic sales decreased 4.6% in the WPS segment this quarter. Organic sales declined in the low single digits in our European business this quarter. European digital sales increased in the high single digits when compared to last year's third quarter, but the increase was not enough to fully compensate for the decline in catalog sales.

On a sales per day basis, our European-based business grew organically in the low single digits compared to the third quarter last year.

Our Australian-based business [grew] key sales in the mid-single digits this quarter. We're focused on bringing our diverse product offering to many different industries in Australia, and we're starting to see this take hold in other areas of the economy besides our prior focus in mining. On a sales per day basis, our Australian-based businesses realized slight organic growth.

Our North American business declined in the high single digits this quarter. Digital sales increased over the third quarter of last year, but not enough to overcome the decline in catalog sales and turn this region to sales growth.

Certain distributors are creating pricing pressures that are impacting our WPS business. We're continuing to make adjustments to our cost structure to mitigate most of the bottom line impact from our sales and profit margin decline while refining our digital and mobile strategy.

Foreign currency continued to be a headwind, reducing WPS sales by 2.9%, primarily due to the impact of the British pound and euro depreciating against the U.S. dollar. We're focusing on growing this business and improving profitability. We know that our customers are accustomed to a certain type of business experience, and we're working to meet these expectations.

Every member of the WPS team has been driving 3 primary goals. First, we're managing the catalog to digital channel shift through effective and efficient catalog prospecting. Secondly, we're moving -- specifically, we are moving to a digitally produced catalog process.

Second, our websites have been a focus of our digital teams. We believe that a strong mobile presence is necessary to be an industry leader in this area, and this is definitely what we're 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 the improved capabilities of 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 using our team's deep knowledge and expertise in this area to drive sales.

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 $5.1 million this quarter compared to $6 million in last year's third quarter. As a percentage of sales, segment profit was 6.5% this quarter compared to 7% in last year's third quarter. This decrease in segment profit was due to the decline in organic sales, which included price pressures in certain markets. The organic sales reductions were partially offset by our actions to actively reduce our cost structure.

Looking ahead, we anticipate low single-digit declines in organic sales, and we expect segment profit to continue to be in the mid-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 are seeing a cultural shift. We're focusing our strong, talented and dedicated team toward 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 always been a highly innovative company. And with this increased level of local ownership and accountability, clearer expectations and a shift in mindset, we have a winning culture that will enable us to be successful for years to come.

We have made significant progress improving our operational issues. And as a result, we've delivered 7 consecutive quarters of year-over-year profit improvements.

We're focused on delivering profitable organic sales growth. And although we're seeing and feeling an increase in positive sentiment both internally and with many of our customers, this has not yet turned into an increased project spend by our customers.

We do expect challenges in the distribution channel to continue to impact our WPS business. However, we are more optimistic about growth in the fourth quarter in IDS.

This makes our efforts to our new product development and our focus on driving efficiency throughout our manufacturing facilities and in SG&A every single day that much more important.

I'm pleased with our progress, and I know that the Brady team can continue to deliver even more to our customers and to our shareholders.

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

(Operator Instructions) Our first question comes from the line of Charley Brady from SunTrust Robinson Humphrey.

This is actually Patrick Wu standing in for Charley. On IDS, you guys mentioned that obviously Asia has been growing for 3 quarters in a row. Can you just add a little bit more color as to what you're seeing there that's driving that and what your initiatives are sort of going in and going to that market and driving that kind of growth? And then in the Americas, you said that there's broad-based optimism that hasn't really translated to orders. And I guess, why -- what are you guys seeing that's driving that as well? Is it just CapEx not being released? Or are customers waiting for a specific event to come out or maybe waiting for your new products to come out that they may want to jump on those? Can you add a little bit more color on those 2 markets?

Patrick, first of all, in Asia, we are very pleased with the results we're seeing, specifically in China. That is the direct result of a very focused and positive development and sales initiative. Our teams there have been very effective and really creating customer-focused solutions that have a mindset of providing significant value to them and profitability and sales growth to Brady. That's a trend we're seeing there. And as a result, we believe that we will continue to see that trend. If I flip over to the United States specifically in IDS and the trends we're seeing in the markets based there, I think, historically, you know that we tend to do better at the end of an improvement cycle as compared to the beginning of a cycle. And so that as we see industrials improving, that may encourages us -- as we see our customers' sentiment improve, that encourages us, really knowing that a lot of the benefits we derive will come later. And we definitely are more optimistic about our fourth quarter in regards to IDS as a result.

Okay. That's helpful color. And if I may jump to the, I guess, WPS side. Margins were a little weaker here. I mean, is it -- is this strictly a function of organic sales? And I guess, what are some of the restructuring things that you guys are doing that can go in there and sort of add more -- sort of drive margins a little bit? Can you just talk about that? And then also maybe if Aaron can sort of remind us what the digital sort of sales as a percentage of the segment sales for each region, that would be helpful, too.

Okay. Patrick, I'll start by addressing the pressure there. There are really 2 factors. The revenue is certainly impacting margin. At the same time, we have to be very aware of our customer set there. And in particular, there is a certain set of distributors that are driving price decreases that are not necessarily aligned even with their cost structures. Regardless, that is creating downward pressure in the overall marketplace that we obviously have to both proactively and reactively manage. We have been able to work very hard on moving -- and a particular example, our catalogs, literally even a year ago, were not digitally-based catalog distribution or creation. By doing that, we actually are making much more efficient catalogs that we're able to change and modify quickly at a lower cost and also develop at a much lower cost. That's one example of many -- of things that we are doing to make sure that we not only position ourselves properly, but also have a good cost profile. And Aaron, you want to...

Sure. For the entire Workplace Safety segment, our digital sales are just under 20% of the total segment. And if you look at that by region, there's a higher percentage in the Americas than in Europe. We haven't given the actual breakdown by geography. However, I will say this, our European organic -- I'm sorry, our European digital sales have been growing nicely and are certainly catching up to the Americas. But as of today, Americas is still a higher percentage.

Our next question comes from the line of Mig Dobre from Baird.

I would like to start at IDS, maybe a little more color here. So the Americas business, the U.S. in particular, has contracted in the third quarter. It has grown, if I remember correctly, something like very low single digits in the front half of fiscal '17. From a macro standpoint, things are reported to be broadly better. As your fiscal '17 has progressed, you have grown -- gone from growth to slight contraction. And I guess, what I'm wondering here is, frankly, number one, kind of what is happening because my understanding is that your business is not so late cycle or long cycle to where it would significantly lag broader industrial trends. And then also, related to this, you talked about pricing [pressure] in WPS given what's happening in the distribution channel, but your biggest customer here is a large distributor, in IDS that is, is a large distributor that is undergoing some pretty significant pressure on the pricing side. I'm wondering are you starting to feel that pressure yourself from that distributor? And is there a risk to margin here and to top line as we look into fiscal '18?

Well, Mig, I would say that there's no question that if you look at our historical numbers and the historical basis of our sales cycles that we are actually a lag in regard to economic increases, and we tend to do much better towards the end of that improvement cycle than the beginning of that improvement cycle. So that's a fundamental positive for us as we look forward. I would also say, if you look at our per day sales numbers, as I mentioned, they are significantly better than the total number, because of the timing of our quarter, which is different given our quarter ends than other groups. So I think the 2 key indicators that are very positive are the per day sales and also the fact that we are later in the cycle. We certainly don't comment on individual distributors or customers in any way, shape or form. I will say that no one customer for Brady makes a significant amount of our revenue. And that makes us an incredibly strong company in regards to we have a very broadly spread customer base. And in addition to that, we literally have as end users, even through the distribution channel, a large, large number of customers throughout North America and the world that really give us a very strong base and are very loyal to the Brady brand and the Brady capabilities.

Well, right, Michael, but look, the improvement in industrial activity has started roughly a year ago in the U.S., right? So the question is, if you're lagging, what sort of lag are we talking about? And while I understand that you don't comment on specific customers, IDS does sell into the distribution channel. So you're a supplier to those distributors. And I guess, my question is, how are those discussions with these customers progressing given the pressure that they're under currently?

So Mig, as I said in my earlier comments, we feel fundamentally that we're optimistic about the fourth quarter, seeing improved sales revenue in IDS. In addition to that, although I know that you would really like specific comments in the distribution channel, as I said, we don't comment on individual companies in that channel. Overall, the fact that we are reflecting improved confidence in our fourth quarter revenue should say that we really do believe that through all of our channels and all of our distributors, in total, we will have an improved profile.

My final question is really on gross margins. You've expanded them for 6 quarters in a row. You're flat this quarter. The way I'm kind of looking through our model, guidance implies a decline in the fourth. And I guess, my question is, how should we think about gross margins going forward? Is this a story where we're going to go back to maybe flat to downward bias in gross margin given what we're seeing in terms of pricing pressure with more pressure on SG&A to stabilize earnings? Or is there some other dynamic at play here?

Actually, we're not indicating any of that in our guidance at all. I can't speak to your model, obviously, Mig. But I can say that any change in margin will be purely based on mix next quarter. We don't see any other indicators that would forecast a downward trend. But as far as mix, you obviously know that, that does have some impact. And as we go through the quarter, depending on the final mix, we'll make some changes. In addition, if we are seeing upward trends in IDS, obviously, that's a solid margin group, so that leads us to believe that we'd certainly won't see the downward pressure that you mentioned.

But do you still expect to be able to continue to expand gross margins the way, for instance, you've done over the past 1.5 years?

Yes.

Yes. We still have our plan out there of 51% to 52% when we exit F '18.

And that's still achievable on your view? I appreciate that.

Absolutely.

Our next question comes from the line of Keith Housum from Northcoast Research.

[One is] kind of looking at the R&D, Michael, I guess, a year or 2 ago, you kind of focused on R&D as being more a matter of smart spending as opposed to increased spending. But obviously, I think we're seeing an increase here in the R&D. I guess, what's kind of changed in your -- in terms of your thought process that kind of necessitated an increase in the R&D spend?

As we looked at it, I believe that was probably a timing-based question. We're really moving our R&D significantly not in the IDS area. We are looking at a better spend in that particular space. And I believe if I went back, the comment was most likely addressed to that. However, we are really challenging and funding our other businesses and particularly in spaces like health care to improve their R&D effort as we see there's more opportunity and more need. And in part of our effort to move out decision-making, to move out accountability and focus really with that customer-centric effort and making sure that we are developing products for our customers in line with the businesses, that we are actually doing that in the businesses. And that is the increase that you are seeing and will be the increase that you do see for several quarters to come.

Okay. All right. Are you seeing an increase in your sales from new products that have been developed in R&D recently? Or is it still -- are we still waiting to see that uptick?

As you can imagine, our product life cycle and development is anywhere from 18 months to 4 years. As a result, a lot of what we're doing now and have been doing in an increasingly strong manner over the past year-plus really isn't going to make a significant change this quickly in the cycle.

Got you. Got you. Okay. And then if -- I guess, change gears here over to WPS. WPS has been organically declining here for the past 5 years. Your confidence level that you can return WPS to growth here in the next year or 2, how would you state that?

I would state that in regards to Europe, with the exception of the U.K., as we've said, we actually have had a pretty strong track record. Australia, we saw a major pressure as a result of the mining industry deteriorating cyclically there in a dramatic fashion. However, in Australia, we've been able to show that we can pull out of that as we move through different industries and different capabilities. The U.S. marketing model is different from those 2 models and does provide more challenge. But our continued focus on really making sure we segmentize our customers and we're providing solutions for them that are differentiated and unique and the fact that we're putting more R&D specifically into that area as well, we do believe will allow us to change that U.S.-based trend. And as we change that U.S.-based trend, we will fundamentally, therefore, change WPS because the other major markets for that business, and Europe being a very large one for us in that space, are much more positive.

All right. And last one, if I may, just kind of squeak it in here. You guys talked about the challenges from the distributors and the pricing pressure. But because you guys [aren't] so diversified in terms of the distributors that you guys sell through, is this a wholesale change that's occurred in the distribution space that would just have -- that changed to lower profit margins? Or do you think this is perhaps a temporary event that could be gone in a year?

I want to be careful because we don't speak specifically about a distributor. But I do believe that overall, we have a very compelling value proposition for our end customers and for our distributors. We feel we have unique proprietary products in many cases, and we can maintain that value through the channel in a significant manner.

Our next question comes from the line of Joe Mondillo from Sidoti & Company.

Just to follow up there regarding WPS and R&D and such. I think in the past year or 2 ago, you were at -- about 50% of the products there were manufactured by Brady, correct me if I'm wrong. And I think one of the goals was to increase that percentage. Just wondering how the R&D at WPS is going and where that sort of percentage of in-house manufacturing is.

So first of all, you're directionally exactly correct on our percentage manufactured internally, and that's a strength we have within WPS that I feel very good about. As far as R&D, if I take a look at our efforts, we certainly have the most mature effort in our IDS group toward the health care space in that group. We're putting a lot more R&D in, but we've been doing that in a longer-term period than WPS. WPS, we've really reinvigorated the R&D in a shorter time span. And so it is going to take longer for us to see the benefits of that than the other spaces.

So in terms of the Americas part of that business that you're having challenges with, and I imagine the biggest challenge, I think it's obvious, is just on the competition side of things and distribution. Is part of the goal to increase your in-house manufacturing of goods that your competitive distribution channels do not have access to? Or what are the biggest tactics that you're taking to try to tackle the pricing and distribution challenges?

Absolutely we plan to produce a larger percentage of our own products, but specifically with differentiated proprietary capabilities that add unique value to our end customers.

And do you -- I mean, where are -- I guess, in terms of your answer relative to R&D, it seems like it's going to take a little while. I mean, are we expecting maybe a year or 2 from now, we're going to finally start to see maybe some stabilization or some maybe improvements relative to those changes and investments that you're making? Or where are we regarding that, do you think?

Obviously, it's a dynamic marketplace. And so we tend not to try to project specifically. But you should expect that the development cycle for key products is about 18 months to 3 years in that particular space. It's a little shorter than some of our spaces. So we would expect new products coming [in] that. In the meantime, we can make modifications and derivations of products and also take more advantage of our actual manufacturing competency and our low-cost profile on that. But we definitely believe that it is going to continue to take significant work in this space.

Okay. And then -- and just 2 other quick questions. One, do you think the mix -- product mix of IDS in the fourth quarter, is that something that you think will be sustainable going forward? And then number two, more so on your -- the cost side of things, a couple of quarters ago you sort of decentralized a lot of the administrative costs down to the lower level businesses. Do you still see a multiyear trend of cost declining because of what you're doing there and the focus there? And are you going to update your, I guess, end of 2018 guidance at the end of this year? Or is that going to stay the same until the end of 2018?

As far as the overall mix, we are happy with the mix that we are seeing and do believe that it's certainly sustainable. And in fact, we will be working hard to make sure that the products we're introducing and capabilities have a positive margin mix in our influence. In addition to that, we fundamentally are committed and strongly believe we will hit all of the cost targets that we have outlined for you in the past.

Okay. And then just in terms of the cost, is it still a multiyear cost cutting?

Absolutely. I would not call it a cost cutting. Really, it is a drive to make ourselves a lot more efficient and effective. We are looking for sustainable and repeatable long-term savings. So by changing the processes and how we're doing things, we're driving real savings. And we are, in the organization, seeing ourselves cutting out redundant, repetitive and nonvalue-added processes on a daily, weekly, monthly and quarterly basis. And we expect -- in fact, I am confident we'll be able to continue to do that as we have a pipeline of projects that we will be working on.

Our next questions come from the line of George Staphos from Bank of America.

This is actually Victoria Madsen sitting in for George Staphos. So I know we've spoken a little bit about organic growth overall in the quarter. But we recall a company saying in the past that Brady needs to generate organic growth by 2018 in order to kind of maintain the earnings momentum. And just overall across the segments, how confident are you in Brady's ability to generate that necessary organic growth?

Well, I would say unequivocally that we still have an awful lot to do in the area of creating a more efficient and effective organization that will give us some positive tailwinds in regards to profitability. So I am confident, we will be driving that segment of our profitability throughout FY '18. However, I have made the statement and continue to make it that, long term, our model and our focus is to create internal sales growth through innovative products, and we are dedicated to that. We also, as I said, see some positive tailwinds in our future from industrial improvements and believe we will not only benefit from our new products and technologies but also the general market.

Okay. And just reflecting on the quarter and the trends you're seeing to date in consideration of the product development as you were just referencing and also the customer service efforts, are you happy with those trends and why or why not?

Yes. I think -- you mentioned the customer service efforts, and we're really pleased with this. We've had a -- what we call focal points internally or a company-wide focus on several key areas. And one of them is delivering our product right the first time with the least amount of effort possible by our customer and creating the most positive experience. And we have internal measures for doing that. And those have continued to move up significantly not just throughout the quarter, but throughout the entire year. So as far as customer service is concerned and really having that as a positive approach to our customer, we are very pleased not only with what we're doing, but once again, we believe we can continue to improve that effort. So overall, we think that it's positive as we do our product innovation efforts.

Okay. And then just 2 more on my end. One, how has the acquisition pipeline changed in recent quarters? And have multiples become more attractive or less so? Also, we understand you might not want to discuss any specific areas that look more attractive per se, but can you call out any categories or geographies that seem to be offering more opportunities than they did 6 months ago, is one? And then, two, I know we've discussed macro trends in Americas and Asia -- or in the U.S., excuse me, and Asia. But from your vantage point, what are some of the macro trends you're seeing coming out of your fiscal third and entering into your -- and within your fiscal fourth maybe in Europe? Or if you could talk to macro trends a little bit more, that would be great.

Sure. So we will start with acquisitions. Our philosophy on acquisitions is markedly different than it had been anywhere from the 2009 to the 2014 time frame before I got here. We focus on acquisitions that will really add true technology to our company that we don't believe we can add in a timely and cost effective method but we also fundamentally believe will make a significant difference to the corporation. And as importantly, we believe that acquisition needs to really benefit from being part of Brady. As a result of that, we don't really talk about multiples. We talk about the value that they can create to the company, and therefore, the price point that, that value makes sense. So we continue to look at those and we absolutely, to your point, don't comment on any specifics. But our basic philosophy has not and I don't expect it to change in the future. If we look at the actual economy, I think it's a little early in Q4 to make comments about macro trends in the economy. I would say that as I mentioned earlier, the overall positive [moves] in industrials in the last quarter will hopefully continue to garner a positive effort for us as we benefit later in the cycle.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Ann Thornton for any further remarks.

We thank you for your participation today. As a reminder, the audio and slides from this morning's call are also available on our website at www.bradycorp.com. The replay of this conference call will be available over the phone beginning at 12:30 Central Time today, May 25. Phone number to access the call is 1 (855) 859-2056. International callers can dial (404) 537-3406, and the passcode is 14340241.

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Certainly. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.