Brady Corp (BRC) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Brady Corporation Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference call, Ms. Ann Thornton, Chief Accounting Officer. You may begin, ma'am.

Thank you. Good morning, and welcome to the Brady Corporation Fiscal 2017 Fourth 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 for joining us.

This morning, we released our fiscal 2017 fourth quarter financial results, and I'm pleased to report our eighth consecutive quarter of improved year-on-year profitability. We increased pretax earnings by 12% when compared to the fourth quarter of last year, and we reported diluted EPS of $0.48. Both operating income and pretax earnings were up this quarter. I'm proud of the team's focus and dedication to our goals.

This quarter, we reported organic sales growth of 3%. This was driven by our IDS business, which increased organically by 4.4%, while organic sales decreased by 0.6% in WPS. We're seeing growth in all 3 regions of our IDS business and in 2 of our 3 regions in our WPS business. This positive organic sales momentum will carry us into 2018.

These continuing improvements are direct results of our consistent focus on investing in our future while relentlessly pursuing efficiency gains throughout the entire Brady organization. We ensure that every major decision considers the appropriate balance between investing in our future and delivering sustainable efficiency gains and profit improvement. The focus in our future is demonstrated through our increased investment in research and development.

R&D expenses were up 11% this year, and we're seeing an increase in our new product pipelines and new product launches. We have some exciting new products and printer updates coming in 2018, which I look forward to sharing with our customers.

We fully funded the increased investment in R&D through efficiency gains and SG&A without reducing customer-facing selling resources. Instead, we're working on improving our back end selling processes as well as our G&A functions such as finance, IT and HR. In fact, all of our SG&A savings in the fourth quarter came from efficiencies in those G&A areas.

In our Workplace Safety business, we're actively managing the catalog to digital shift and our digital sales continue to grow. Digital sales now comprise 19% of our total WPS sales. We're taking a mobile-first mentality and creating certain websites that are organized around our customer safety and compliance needs such as setonschoolsafety.com and lockoutpro.com so that our customers may more easily find a complete set of solutions to their particular needs.

We're also refining our focus on compliance and our custom capabilities for Workplace Safety critical industries. These actions are proving successful in both Europe and Australia where our WPS businesses continue to grow nicely.

In our North American Workplace Safety business, there are companies in the distribution space that are driving sales volume over gross profit margin at an increasing rate, which represents a challenge for some product categories in this portion of the WPS business.

We're responding to these changes in market dynamics by building websites that use the newest e-commerce platform. We're also increasing the value we provide to our customers providing industry-leading expertise and more customized and proprietary product in the Identification and Workplace Safety areas, all while continuing to deliver excellent customer service.

Our IDS business is performing well and growing in all regions and in most of our product categories. This business is posting solid organic growth, increasing its investments in innovation, improving our customers' buying experience and driving efficiency gain, which is leading to profitability improvement. Overall, our Identification Solutions business is strong.

Our priorities for fiscal 2018 remain unchanged, which are to improve our underperforming businesses, grow our pipeline of innovative new products, provide excellent customer service and deliver efficiency gains throughout the company. We're setting ourselves up so that when we consistently deliver positive organic growth, we'll also accelerate bottom line growth and cash generation.

As I reflect on fiscal 2017, I know we're moving Brady forward and we're making meaningful progress in growing organic sales and driving operational efficiency. All of this is driving the achievement of our financial goals. For the longer term, we have been renewing our focus on innovation in developing new creative ideas and solutions for our customers. We continue to make decisions today that will ensure our long-term success. Many times, these investments don't pay off immediately, but if it's the right decision for the future of the company, then we'll make the investment every single time.

Now I'll turn the call over to Aaron to discuss our financial results and provide our fiscal 2018 guidance. I'll then be back to provide some specific commentary on our Identification Solutions and Workplace Safety businesses. Aaron?

Thank you, Michael. Good morning, everyone. The financial review starts on Slide #3.

Total sales increased 2.5% to $289.2 million in the fourth quarter, which consisted of a 3% increase in organic sales and a 0.5% decline due to foreign currency translation.

We're heavily focused on driving efficiencies throughout the organization and our fourth quarter results reflect this focus. At the same time, we're increasing our investments in innovation. We increased the R&D spend by 19% this quarter, and this is an area where we also expect to see year-over-year increases in the future.

Our pretax earnings increased 12% to $35.9 million compared to $32 million in last year's fourth quarter. Last year, we benefited from a lower-than-normal 21.5% tax rate in the fourth quarter whereas our tax rate was 29.7% in the fourth quarter of this year. Looking forward to fiscal 2018, we expect our full year income tax rate to be in our historical range of 27% to 29%.

Diluted earnings per share finished at $0.48 this quarter compared to $0.49 in the fourth quarter of last year. Our cash generation was also very strong as cash flow from operating activities was more than double net earnings this quarter.

Overall, we finished fiscal 2017 strong as we had accelerating organic sales growth, we realized nice efficiency gains in our G&A structure, and we had strong cash generation, all while ramping up our investments in R&D.

On Slide #4, you'll find a summary of our quarterly sales trends. As you can see from this chart, our fourth quarter revenue was the highest we've seen over the last 2 years, and our organic growth rate was also the highest we've seen in quite some time. Although global currencies have recently strengthen versus the U.S. dollar, during our fiscal fourth quarter that ran from May 1 to July 31, the dollar was still stronger than it was in the prior year, resulting in a modest 0.5% decline in revenue from foreign currency translation. This quarter, we did benefit from approximately 0.6 additional billing days as well. Organic sales per day grew 2% in the fourth quarter.

Slide #5 provides an overview of our gross profit margin trending. We finished our fourth quarter with a gross profit margin of 49.7%, which was a 30 basis point decline compared to the fourth quarter of last year. The decline in our gross profit margin this quarter was due primarily to the pricing challenges in our North American WPS business.

On Slide #6, you'll find the trending of our SG&A expense. SG&A was $96.5 million this quarter compared to $98.4 million in the fourth quarter of last year. Approximately 25% of this year-over-year decline in SG&A was due to 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.

Slide #7 summarizes our diluted earnings per share, which finished at $0.48 this quarter compared to diluted EPS of $0.49 in the fourth quarter of last year. As I mentioned, the fourth quarter of last year benefited from a lower-than-normal tax rate. If our fourth quarter tax rate would have been consistent between fiscal 2016 and fiscal 2017, our fourth quarter EPS would have increased by approximately 10%.

Moving along to Slide #8, you'll see a summary of our cash generation. This quarter, we generated $52.9 million of cash flow from operating activities compared to $40.4 million generated in the fourth quarter of last year.

Looking at free cash flow, we generated $48.6 million this quarter compared to $30.8 million in last year's fourth quarter. Our fourth quarter cash generation benefited from the timing of certain payments between the third and fourth quarters this year. We remain focused on cash generation, and we are consistently generating free cash flow in excess of net earnings.

In the fourth quarter, our primary uses of cash were to invest in organic sales-generating activities, to strengthen our balance sheet by paying down debt and to pay dividends to our shareholders, which brings us to Slide #9.

This slide shows the trending of our net debt position and provides a snapshot of our debt structure at the end of this fiscal year. At July 31, we were in a net cash position of $26.2 million compared to a net -- compared to net debt of $75.7 million at the start of this fiscal year. This is more than a $100 million reduction in net debt this year, which is a testament to our strong cash generation.

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 and 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. In fact, yesterday, we announced our 32nd consecutive year of annual dividend increases.

After funding organic growth investments and dividends, we then patiently deploy our cash in a disciplined manner for acquisitions, where we believe we have strong synergistic opportunities. And we used our cash to improve shareholder returns through opportunistic share repurchases. We currently have 2 million shares authorized for repurchase.

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

Before moving to our F '18 guidance, let me provide a look back at our financial results for our full fiscal year ended July 31, 2017, which is on Slide #10. This year, we returned to organic sales growth, we increased our pretax earnings by 16%, we increased net earnings by 19% and we generated $144 million of cash flow from operating activities, which equates to approximately 151% of net earnings. We also improved our gross profit margin by 20 basis points, and we're successful at executing efficiency gains in our SG&A structure, which resulted in a $17.4 million decrease in the absolute dollar amount of SG&A spend.

As a percent of sales, SG&A declined from 36.2% last year to 34.8% this year. Our reductions in SG&A have been a focus -- have been focused on G&A expense, back office selling activities and improving our processes around the overall customer buying experience.

We have more work to do in this area, but we're seeing some nice results from our efforts. As we drive efficiencies and operations in our G&A structure, we're also investing in R&D. R&D spend was up 11% this year, which is consistent with our strategy for driving long-term sales growth by building an innovation-focused culture and an efficient new product development process.

Overall, our F '17 financial results were quite strong, and we've set the foundation for future success through a more simplified cost structure, a renewed sense of local ownership and accountability and the increasing benefits from our long-term investments in innovation.

The next slide, Slide 11, introduces guidance for our fiscal year ending July 31, 2018. We expect earnings per diluted Class A Nonvoting Common Share to range from $1.85 to $1.95, and we expect low single-digit organic sales growth for the year ending July 31, 2018.

When comparing our F '18 guidance range to where we just finished fiscal 2017, it's important to remember that we had an unusually low income tax rate of 24.5% in fiscal 2017 due to certain noncash tax benefits resulting from our second quarter cash repatriation that we don't expect to repeat in fiscal 2018.

In F '18, we expect our tax rate to return to our historical range of 27% to 29%. If our fiscal 2017 tax rate would have been closer to our historical average of 28%, then our diluted EPS would have been $1.75 last year. So at normalized tax rate, our F '18 guidance range of $1.85 to $1.95 per share represents EPS growth of between $0.10 and $0.20 over fiscal 2017.

In addition, in fiscal 2018, we expect to increase our R&D investment by another 10% when compared to fiscal '17. Offsetting this increase in R&D spend and the more normalized tax rate are ongoing efficiency gains and our manufacturing facilities and in our SG&A cost structure. Other key operating assumptions in our guidance are depreciation and amortization of approximately $26 million and capital expenditures of approximately $30 million.

Included in our capital expenditure plan is approximately $10 million for the purchase of certain strategic facilities, and the remaining $20 million is primarily for enhancements to equipment to improve our capabilities or drive efficiency gain. We are not anticipating any restructuring charges, and we are not excluding any onetime items from this guidance.

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

Thank you, Aaron. Slide #12 summarizes the Identification Solutions' fourth quarter financial result. Organic sales increased 4.4% and foreign currency translation decreased sales by 0.4%. In total, IDS sales increased by 4%, finishing at $211.3 million this quarter. We realized organic sales growth across all 3 regions of the IDS business. Organic sales in the Americas and EMEA regions increased in the low single digit while organic sales in Asia increased in the upper teens this quarter.

Sales grew in every country in Asia with the strongest growth coming from China where organic sales increased by more than 25% from several new customer and project wins, along with increased activity in our existing customer base. Organic sales growth in our IDS business in EMEA continued to be driven by Western Europe, where we've had strong enough growth to overcome weaknesses in the Middle East where companies in the oil and gas industry continue to restrict project spending.

In the Americas region of IDS, sales grew in the U.S., Canada and Brazil and declined slightly in Mexico. Sales increased in Canada in the mid-teens and increased in Brazil by just over 10%. Our largest business is the U.S., where we made the turn to solid mid-single-digit organic sales growth across most of our traditional project categories but there's strongest growth in our more proprietary product offerings.

This strong sales growth in the U.S. industrial market was partially offset by a mid-single-digit decline in our health care product line. This business is facing pricing pressure with uncertain product categories from the consolidation of group purchasing organization and large health care organization. We're adjusting these issues through a continued investment in R&D and a strong focus on launching innovative new product, particularly those that help reduce incorrect data and treatment errors for a patient. For example, this quarter, we launched a new fade-resistant wristband for the health care market to help ensure greater patient data accuracy.

More product launches are planned for 2018 that we're looking forward to bringing to our health care customers. We've invested more heavily in R&D this quarter, and we expect this trend of increasing R&D spend to continue as innovative and proprietary new products are an important piece of our long-term growth strategy. We continue to work on 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 products to market quickly.

It's exciting to see our renewed focus on solving our customers' problems is impacting our new product pipeline. We have some new exciting printers and lockout/tagout products planned for launch this coming year that we believe solve unique problems for our customers in an efficient and effective way.

The IDS segment had $35.9 million of segment profit this quarter, which is an increase of 12.6% over the fourth 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 increased organic sales as well as the efficiency and operational excellence that we've been working so diligently to improve upon. As a percentage of sales, segment profit improved to 17% this quarter compared to 15.7% last quarter.

Looking ahead to fiscal 2018, we expect low digital organic sales growth for the full fiscal year for IDS, and we expect segment profit to be in the mid to high teens as a percentage of sales. We expect to continue to incur additional expenses from our investments in R&D while efficiency activities in our facilities and throughout our SG&A structure should continue to provide benefits that will more than offset our innovative investment, allow us to continue our trend of strong financial performance.

Moving to Slide 13 is our Workplace Safety review. Organic sales decreased 0.6% in the WPS segment this quarter. When looking at our WPS business, we have 2 regions that performed well, Europe and Australia. A third region, North America, which is just under 35% of the total WPS segment revenue, is where we struggle. Organic sales increased in the low single digits in our European business this quarter, continuing the trend of low and mid-single-digit organic sales per day growth that we've maintained for 14 consecutive quarters.

In Europe, one of the major drivers of this growth is online sales, which increased by 11% this quarter. The WPS team in Europe has done a great job, consistently executing our strategy and growing sales especially through the digital channel.

We do face pricing pressures in Europe, but we've been able to make up for these pricing challenges through strong customer service, along with operational efficiency gain and improvements in our SG&A cost structure.

Our Australian-based business increased sales in the high single digits this quarter. We've been successful in bringing our diverse product offering to many different industries in Australia as our sales for the mining industry have become less significant in recent years. The team has also done a nice job of reducing its cost structure and improving profitability.

Organic sales in our North American WPS business declined in the high single digits this quarter. Digital sales increased over the fourth quarter of last year but not enough to overcome the decline in catalog sales and return this business to sales growth. Pricing pressures are impacting our WPS business in the U.S. and Canada and compressing margins in our less proprietary product offerings. Although our North American WPS business is struggling, we have been taking numerous actions to put this business back on the trajectory of growth and improved profitability.

To counteract pricing pressures on our last proprietary products, we're focusing in 3 primary areas. First, we must ensure that our customers have a simple buying process that meets their expectations. A strong mobile presence as well as powerful e-commerce platforms will help us become industry leaders in this area. 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 improved capabilities of these sites.

Second, we're improving our position as industry experts to ensure that we provide more value to our customers and simply fulfill the orders. Our increased customer interaction allows us to add meaningful value by helping solve their unique safety and identification needs. Third, we're improving our product portfolio by introducing more customized and proprietary products and services.

While we're working to improve our revenue trajectory through this improved digital presence, industrial expertise and a stronger product pipeline of customized products, we're not standing still on the cost side. We've been working on streamlining our processes to [reach across] the fulfill orders, and we've been [rooting] our structural cost as well, which includes actions to improve our facility footprint.

Segment profit in the Workplace Safety platform was $7.9 million this quarter compared to $9.1 million in last year's fourth quarter. As a percentage of sales, segment profit was 10.2% this quarter compared to 11.5% in last year's fourth quarter. This decrease in segment profit was due to the organic sales decline and pricing pressures I just mentioned in the North American market.

Although we've been disappointed in our financial progress in our North American WPS business, we're starting to see improvements in this business that we believe will translate into improving sales trends as we regress through fiscal 2018.

For the full year fiscal 2018, we expect the global WPS business to have approximately flat organic sales, and we expect segment profit to continue to be in the mid to high single digits as a percentage of sale.

Slide #14 provides an update to our midterm financial target. 2 years ago, we released an EPS target of $2 per share exiting fiscal 2018. We remain on pace and committed to achieving this target.

Over the longer term, we expect to generate organic sales growth in excess of GDP through the investments we're making today in R&D. Our emphasis on R&D process is new product innovation, and the development of integrated solutions and embedded technologies to create smarter product will allow us to accelerate organic sales growth in the future while protecting our margin.

We continue to believe that our renewed focus on innovation, combined with our ongoing digital investment, excellent customer service and our continued shift toward local ownership and accountability is a winning combination that allow us to accelerate organic growth rate to a point where we're exceeding GDP and taking share.

Looking ahead, we expect to rely more heavily on improvements and efficiency at SG&A rather than gross profit margin to achieve our target.

We expect our gross profit margins exiting 2018 to range from 50% to 50.5%, which is comparable with our fiscal 2017 results. We continue to make nice progress in driving efficiencies in our operations. However, we're also seeing pricing pressures in some of our less-proprietary product areas, which is offsetting many of the benefits from our operational improvement.

We expect SG&A as a percentage of sales to decline from 34.8% we reported this year to a range of 33.5% to 34% of sales as we exit fiscal 2018. We certainly have opportunities for improvement within SG&A, but as I mentioned earlier, we won't starve our customer-facing selling resources in order to hit a short-term profitability target. We're investing in our future and tackling ongoing efficiency opportunities on a daily basis. We're confident in our ability to achieve our goals, and I'm optimistic about the long-term future of Brady and our ability to continue to drive value for our shareholders.

As I reflect upon my first 3 years at Brady, I continue to be impressed by Brady's strong reputation, unique and specialized product offering and powerful brand name. We have a commitment to quality that is pervasive throughout the company because our people know that producing the highest quality products that solve our customers' problems is the best way to differentiate ourselves from our competitors and to ensure long-term success.

I visited almost every one of our 62 locations globally and personally met with most of our employees, and I know we have a talented and dedicated team made up of both experienced dedicated employees and exciting new talent. I've motivated to push more every single day and the people at Brady further motivate me to achieve more for the company and our shareholders.

We've improved our operational issues from 3 years ago. We've simplified our structure and returned to organic sales growth. We're creating an innovative culture with local ownership and accountability, and we've delivered 8 consecutive quarters of year-over-year profit improvement. But we have more work to do. We need to carry our positive organic sales growth momentum from the fourth quarter into fiscal 2018 and put ourselves in a position where we're consistently delivering organic sales growth. Our improved cost structure will then allow us to drive increased earnings to the bottom line and strong cash generation for our shareholders.

I'm pleased with our progress and the strong finish to fiscal 2017, but I know that we have the ability to achieve more as an organization. I'm motivated and I know that the team is excited about what the future will bring to Brady, our employees, our customers and 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 Joe Mondillo of Sidoti & Company.

So my first question, I have a couple of things on WPS. So you've been doing a really good job on IDS by far. But WPS, I'm just wondering, first off, when you're looking for sort of flat revenues, number one, what gives you the sort of the confidence level that you can attain flat revenues? I mean, no fault of your own. It seems like it's certainly an uphill battle here, especially in North America. Number two, if you do achieve flat revenues, what is sort of the expectation on margins because it seems like the trend has been margin constrict pressures? And then lastly, do you see any risks to the strength that you see in your European and Australian businesses as sort of this online wave continues, Alibaba, et cetera, in terms of the competitive pressures over there?

I'll start with the last. First, we'll start with Europe and Australia. We've been incredibly pleased, particularly in Europe, with 14 quarters of improved results. We do expect that to continue. We have the team in place, the structure in place, the differentiation in our different marketplaces and newer, more innovative products coming into that space that excite us. In the Australian model, we really are generating growth from targeting newer marketplaces and different marketplaces and our traditional space in mining that had long been a staple of that business and obviously is not as strong at this current time in Australia, but we are fundamentally growing there. We're making sure that we're reaching out with our products holistically to the key customer sets and markets. So I have good confidence that, that will continue. As far as achieving flat results, that is certainly not my long-term goal. We do expect as a company to grow, but we do have to turn the corner. And the fact that we are turning the corner is significant. In North America, we have been improving or, I'll say, decreasing at less dramatic of a rate. And we're going to continue to do that with the upside of Europe and Australia. We do expect the total package to be flat for the year. And that will be a major change for that entire business, and we are pleased with that progress that we're working to make, but we are not satisfied. Now I want to make that clear. We have to continue to focus on innovative products in this space and a significant portion of our products we manufacture ourselves, which is different than some of our competitors. We also have innovation as a key focus of our company in that business. And we have often created unique products that really differentiate ourselves in our spaces, and we're going to be doing that more and more effectively in WPS, in particular, in North America. And then really creating a much more cost-effective profile as we go forward is another major focus of that business, making sure as we do see margin pressure, we mentioned it in our comments, that we're able to offset a lot of that margin pressure with a more efficient, effective operation.

Okay. And then just a follow-up regarding WPS. The product offering, I know you continued to talk about trying to add more of a value-added type of a product offering. Could you talk about how much has changed over the last couple of years and what the expectation is going forward? Any sort of insight or any additional information that you can give us a sense that things are maybe changing toward the better regarding the product offering?

Sure. I would say, first of all, that, as I said, a significant portion of our revenue, we do manufacture. So we control key issues like customization. And we've been doing a much, much better job of really focusing on customization, specifically in the North American market. And that gives us a key differential advantage with a lot of our customer base. And that is a quicker way to really create some proprietary capability. However, at the same time, as we look at our key cores of safety and identification, we're making sure that we're going out having a stronger voice of customer and coming back with product needs and then fulfilling those needs in a unique way. That takes significantly longer. And we really are on the path to do that, but we have a long way to go. I'm excited about this path. We're farther ahead, obviously, in IDS in getting that really moving effectively. In our health care business, we've come behind our traditional industrial IDS. And then finally, in WPS, it's the third wave of that effort. And we've actually created engineering and technology focuses that we didn't have before to do that.

Okay. And then last question for me, sort of CapEx R&D topic, just sort of based on WPS, which is around the whole entire company. R&D, how -- the high level where you are at the company and with all the different SKUs and products and end market and such, give us an idea of how you monitor R&D and how you are confident that R&D is going in the right direction, in the spending and such. And then could you comment on CapEx? Looks like it's going up quite a bit this year. What are you spending on CapEx in terms of growth initiatives?

Certainly. Once again, I'll reverse the question. Part of that CapEx is we're investing in some strategic structures, infrastructure that we believe we must own to be able to modify in a way that will be effective for our businesses and modify so that we can do more longer-term customization of those facilities. So that is some -- but we are investing in proprietary technologies for both product processes and new product development. I can't get into more details on that, but I will tell you that we're quite excited about the unique capabilities that we're going to be able to introduce throughout the year and actually through the next 2 years. Some of them take a while to develop obviously. In regards to how I monitor R&D, it's twofold. One, we do -- we have decentralized R&D to the core areas where we can fundamentally control and drive. We have certain core capabilities that remain company-wide such as our coatings, which are -- world-class capabilities. But in many cases, we want the units themselves to drive that capability. And so that is pushed down. How do I monitor it? I actually have regular reviews of R&D. I have benchmarks of acceptable spending rates. And if a project gets significantly large, we drive it. But I look at all of the key R&D efforts on a very consistent and regular basis for all of our units. That is a significant portion of where we see our future.

Our next question comes from Allison Poliniak with Wells Fargo.

Just want to go back to the first question in terms of the Europe and Australia market outperforming in WPS versus North America. I just want to try to understand sort of the defensibility. Is it mixed, is it lack of e-commerce? I mean, are there things that you can bring to the North America market to help stabilize that a bit? Just a little more color there would be helpful.

Sure. I think the fundamental issues in North America are, as I -- we mentioned, we do have pressure from certain large distributors that are creating a downward spiral in pricing, and that is not necessarily one that we don't believe we can't overcome. In fact, we do believe we'll overcome it because we have a more niched approach. So niched approach to our products, making sure we really are the experts in the area, having proprietary capabilities in customization that others can't match and continuing to drive a more direct interface with our customers. We're doing all of that. And you will see there are players in the market, this North American market, that are succeeding. And in many ways, they often have a similar approach to the one that we're taking. Where you have a totally general approach, a high cost model, and you're trying to drive generic products across the board to many, many customers, it's more problematic. That is specifically the other direction from where we're headed. Now let's talk about Europe and Australia in light of that. We're able to do a -- and have been able to do a great job of niching those markets, making sure that they're not as commoditized in the products that we sell, getting more closely interactive with our customers, driving real expertise into those industries and offering new, innovative and creative products. And we've done that in a more effective way. So we do have confidence that we can continue that, and we also have confidence that we can drive some, if not all, of that in the North American market. There's no question that the North American market is larger and more homogenous than the other markets, which creates some level of challenge. But as I said, we fundamentally are starting to overcome that, and we will continue driving that.

Okay. And I guess, going back to that, just sort of the pricing in North America, I mean, given all of that, it sounds like that could take time as -- over -- in the next few quarters as you continue to push that through. Are you sensing pricing starting to stabilize? I guess, one of the bigger concerns out there is it's sort of a race to the bottom in terms of pricing right now over here.

Well, I try not to talk too specifically about pricing. I will say, and we did say in our comments, that our certain key large players that appear to be driving volume over total profitability even with infrastructures that are very costly. And so it's my fundamental belief that, that will become more and more problematic for them. And as a result, we need to make sure that we're always creating niches and environments that we really do add significant value so that people aren't just price shopping. In a world of total price shopping, everyone loses. And if you aren't providing some difference, then the customers will certainly price shop more. So our goal is to really continue to increase differentiation and expertise in customization, very, very important for us. And you're right, without that, there will be continued deterioration in the overall marketplace. But I can't speak for what others will continue to do.

Great. And just last, just sort of the increase in R&D expense, we've talked about that. It's expected and obviously a good way to utilize investment dollars. In terms of, say, a longer-term growth, if I look at the contribution from new products, are you looking that they could add a point or 2 or 3 points of growth? Or am I looking at it the wrong way? Just any thoughts there.

We're not actually, at this time, speculating on specific growth rates. But I will say unequivocally that, that is the engine to our future success. And we do expect to drive better than GDP growth off of that difference, absolutely our expectation.

Our next question comes from Keith Housum with Northcoast Research.

In terms of China now, it looks like this has been probably the third quarter in a row which China has contributed growth, I think, about the past years, it's been significant. How sustainable is that? And what's the opportunity for future growth in China?

We still are a small player in China, Keith, at this point. We definitely see good opportunities. Even in a bad market, which China isn't, you can gain share if you're a smaller player. China is a solid market, continues to grow. We can argue the numbers, but it does continue to grow and create lots of opportunity. Safety issues, environmental issues are becoming more and more salient and the very reliability and the durability of our products sells very, very well there. So we have good hopes to that. In addition, we have design centers there, we have local manufacturing capabilities there, we are definitely a player today and in the future.

Great. And then if I turn over to -- the question I get from investors a lot is Amazon. Is Amazon a friend or foe to you guys? Perhaps you can talk a little bit about your relationship your Amazon. I mean, how is it contributing to your margin profile?

Well, first of all, Amazon is a great distributor of ours. We won't talk any more than that directly because we don't talk about our distributor relationships, except to say that they're a well-run company that does an extremely good job of executing, and we always want to be aligned with companies like that.

Great. And then final question for you. With the hurricanes that have been happening down in Texas and -- well, maybe here in the East Coast here very shortly, is there any exposure that you guys have to the hurricane areas in terms of manufacturing plants or large customers?

Well, first of all, I would like to say, Keith, that our foundation and our employees are contributing to the efforts in Texas, and our sincere concern goes out to the people of Texas. As you or may not know, my family is very close in the state, next to Arkansas. And so there's an awful lot of ties personally and corporately to that state. And likewise, we have operations in Florida. We have people in Florida. And so both our sincere concern for all of those people and their future, not only safety, but livelihoods are the first and foremost on our minds. But we do believe though that we also have product sets that can help, and we've positioned them to help an awful lot of environmental areas such as absorbents, are ones that one can be useful in very difficult, water-penetrated situations. So we have positioned our products to help, we've positioned ourselves to make sure that we are looking after our teams and our employees. And once again, sincerely -- just horrific situations that people are going through. And I really would say that our entire team has made me proud by their outreaching, this concern and questions of how we as a company and they as individual employees can help.

Great, I appreciate those comments. But you guys don't have manufacturing plants that are in a danger of any type, do you?

No. We do have a plant in Florida, but we are confident in that situation -- well, as confident as one can be.

Our next question comes from Mig Dobre with Robert W. Baird.

It's Joe Grabowski on for Mig this morning. I'll start with the target for exiting FY '18. You lowered the gross margin target by about 125 basis points versus where you were last year. You had lowered the SG&A by 25 basis points, yet the top line and the bottom line stayed the same. So are there other offsets or is it an issue where maybe it was exiting FY '18, it was $2, maybe a little higher than $2 to now, total closer to $2? Just your thoughts on that.

Yes. Joe, I can answer that. There's a fair amount of moving parts, of course, in our plan. And as Michael said, we are absolutely committed to the targets and we're certainly on track to achieve it. Our gross margin did come down, which effectively is reflective of the current environment that we've been talking about on this call, and G&A is certainly trending in the right direction as well. Other puts and takes that would factor into our guidance, into our longer-range planned guidance would be, of course, interest cost, additional R&D spend, et cetera. And when you add it all up, it still gets us to the target of $2 per share.

Great, that makes sense.

And I think the message we'd want to make sure we send is that we are investing strongly in R&D for the future, and that's an investment that we believe and we're confident will pay off in even larger increased revenue. And if we can spend more in R&D today confidently, we're always going to do it because we know that it will generate future revenue and profitability that will make us a much stronger company.

No, makes sense. Then switching to IDS, organic growth in the fourth quarter was 4.4%, the comparisons, kind of 1 and 2 years, are fairly benign. U.S. PMI is at a 6-year high. PMIs around the world are quite strong and trending in the right direction. Is there an opportunity to do better than low single digits in IDS for FY '18?

We're not going to comment anything other than our guidance except to say we as an organization have become a culture that's driving for performance, pushing ourselves, pushing each other. As I've gone through our regional sales meetings, first in Asia, then North America and finally, in Europe, I see a group of people in IDS that are very talented, very motivated. And I'm excited about the products that we have and the products that are coming out. So I will say that we're absolutely going to work diligently to always improve. But at this time, our guidance is our current guidance.

Fair enough. And then one more last quick question. Aaron, just wondering if there's any selling days, variances quarter-to-quarter that we should be aware when we're building our model that might swing quarterly, percent changes, again, throughout FY '18?

Yes. Actually, when you look at F '18, thankfully, there's virtually none, no changes from a daily perspective.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Michael.

Thank you very much. Fiscal 2017 was a strong year. We returned to organic sales growth, improved gross margins, reduced SG&A expense and increased net earnings by 19%, all while significantly ramping up our investments in innovation. We're actively working to improve our businesses and outperforming up to expectation. We're investing in R&D to grow our pipeline of innovative new products that add value to our customers and separate us from our competition. We will continue to drive sustainability efficiency gains throughout the entire Brady organization from our manufacturing floors to our corporate offices.

I'm proud of what the Brady team has accomplished. We've been working on more than just driving efficiencies and increasing innovation, we've been shifting our culture. Brady's foundation is as a highly innovative company. We're working hard to bring our company back to what originally made us so successful. With the increase in local ownership and accountability and with the establishment of clear expectations and focus, we are creating a winning culture that will enable us to be successful for years to come.

As always, if you have questions, please contact us. Thank you all very much for participating today, and have a great day. Operator, you may disconnect the call.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.