Brady Corp (BRC) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Brady Corporation Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Ms. Ann Thornton, Chief Accounting Officer. Ma'am, please go ahead.

Thank you. Good morning, and welcome to the Brady Corporation Fiscal 2018 Fourth Quarter Earnings Conference Call. The slides for this morning's call are located on our website at www.bradycorp.com/investors. 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 2018 Form 10-K, which was filed with the SEC this morning.

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 2018 fourth quarter financial results and I'm proud to report our 12th consecutive quarter of improved year-on-year profitability.

We also closed the sale of our Runelandhs business based in Sweden this quarter. This business is a high-quality operation but it is not core to our strategy. Our strategy remains unchanged and we've worked to divest noncore businesses in a profitable manner so that we can focus on our strategic business segments.

Excluding the gain on this sale, we increased pretax earnings by 13% compared to the fourth quarter of last year. I'm extremely proud of the entire Brady team for their consistent delivery of quarterly pretax profit improvement in each quarter over the past 3 years.

This quarter also marks our fifth consecutive quarter of organic sales growth and I'm pleased to, once again, report growth in both our Identification Solutions and Workplace Safety businesses. The focus of the team on driving organic sales while executing efficiency. Opportunities continue to be the driver behind the consistent improvement in our financial results for the past 3 years. Total sales growth was 2.9% this quarter and organic sales growth was 2.5%. Our continued focus on introducing innovative products and the development of a robust pipeline is working. We have some exciting new products that were launched this quarter and we have more plans for 2019 that we expect to drive growth over the next several years. Our investment in research and development increased by more than 6% this quarter, which brings our increase in R&D to 14.2% for the full fiscal year. We fully funded this additional investment in R&D through efficiency gains and SG&A without reducing customer-facing selling resources. In fact, we're planning to continue to invest in selling resources and to add to our sales force as we move into fiscal 2019.

We finished this fiscal year by maintaining our focus on a consistent set of priorities, which are develop innovative, high-quality products; to serve our customers extremely well; to drive improvements throughout our manufacturing processes and to execute efficiency gains throughout our SG&A structure. A significant part of our drive for efficiency gains includes a focus on increasing automation and improving our manufacturing capabilities throughout our global facilities, which has been a primary driver of our increased CapEx as manufacturing workers are becoming more scarce in many of our markets as a result of a robust job market and declining working age populations. These priorities will remain consistent in fiscal 2019.

Our ability to deliver improved financial results is due to the consistency in our goals and initiatives. We've now delivered 12 consecutive quarters of year-over-year profit improvement, 5 straight quarters of organic sales growth and 3 straight years of strong cash flow in excess of net earnings.

Our Identification Solutions business grew sales organically in all 3 regions and in most of our product lines in the fourth quarter. Our health care product line is still challenged, but I'm confident that we're taking the right actions and making the necessary investments to set this business up for success in the future. The global IDS team continues to deliver organic sales growth and profit improvements. Their ability to execute their strategy has led our financial success over the past 3 years.

Our WPS business reported its second consecutive quarter of organic sales growth with an increase of 3% in the fourth quarter. The increase in sales was led by our Australian business, which grew sales organically in the high single digits. We're building momentum in Australia and we've continued to identify new opportunities for growth. Our European business continues to be strong and grew sales in the quarter in the mid-single digits. This business has consistently increased sales for the past 4 years and continues to lead the WPS division's improved financial performance.

Organic sales in the North American business declined slightly this quarter after reporting organic sales growth last quarter. We believe we're making the right moves in the North American business, but as I stated last quarter, our sales results will be choppy over the next year as the business works to complete a turnaround and return to consistent organic growth.

I'm proud to report a strong finish through 2018 and yesterday, we announced our 33rd consecutive year of annual dividend increases as we increased our annual dividend to $0.85 per share. We're delivering what we promised to our customers, to our shareholders and to our employees. We're maintaining our focus on the long term by taking actions that may not pay off immediately, but that will result in sustainable improvements into the future. We're setting ourselves up so that as we continue to grow sales, we're also accelerating bottom line growth and cash generation.

I'll now turn the call over to Aaron to discuss our financial results for the fourth quarter. And then I'll return to provide more specific commentary about our Identification Solutions and Workplace Safety businesses. Aaron?

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

Sales increased 2.9% to $297.5 million in the fourth quarter, which consisted of organic sales growth of 2.5% and an increase of 1% from foreign currency translation, partially offset by a decrease of 0.6% from the sale of our Runelandhs business in Sweden. We increased our investment in research and development, once again, this quarter. R&D expense was $11.7 million, which was an increase of 6.3% over last year's fourth quarter. Our trend of improved profitability continued this quarter as well. Excluding the $4.7 million gain on divestiture, pretax earnings increased 13% to $40.6 million compared to $35.9 million in last year's fourth quarter. The profit improvement was driven by organic sales growth and profit growth in both our IDS and WPS businesses as well as our continued focus on driving sustainable efficiency gains throughout our SG&A structure.

Net earnings finished at $35 million this quarter compared to $25.2 million in the fourth quarter of last year. Excluding the gain on the divestiture, net earnings would have been $30.3 million, which is an increase of 20% over last year's fourth quarter.

Our tax rate, excluding the gain on the divestiture, was 25.4%, which compares to a tax rate of 29.7% in last year's fourth quarter. This quarter, EPS benefited approximately $0.09 from the sale of Runelandhs. Excluding this gain, EPS would have been $0.57, which is an increase of 18.8% over the $0.48 of EPS recorded in last year's fourth quarter. Our cash generation continues to be strong. Cash flow from operating activities was $53.8 million this quarter, which was equal to 154% of net earnings.

Overall, we had a strong finish to fiscal 2018. We grew organically. We realized efficiency gains in our SG&A structure. We generated strong cash flow. We increased our investment in R&D, and we increased our investments in machinery and equipment to further drive efficiencies and automation within our manufacturing facilities.

On Slide #4, you'll find our quarterly sales trends. Total sales grew 2.9% and organic sales increased 2.5%. We're building positive sales momentum in both our IDS and WPS segments, which we're expecting to continue into fiscal 2019.

Our gross profit margin trending is outlined on Slide #5. Our gross profit margin was effectively flat at 49.6% this quarter compared to 49.7% in the fourth quarter of last year.

Slide #6 details our SG&A expense trending. SG&A was $90.9 million this quarter compared to $96.5 million in the fourth quarter of last year. Excluding the gain on the divestiture, SG&A expense was $95.6 million, which is a decrease of approximately $900,000 from last year's fourth quarter. This decrease is a direct result of our ongoing efforts to improve processes and drive sustainable efficiency gains throughout our SG&A structure.

Looking forward, we expect that our general and administrative expenses will continue this general downward trend, while we reinvest the savings into R&D resources to drive future sales growth.

Slide #7 illustrates the trending of our investments in R&D. We increased our investments in R&D, once again, this quarter from $11 million in last year's fourth quarter to $11.7 million this year. We're committed to new product development. We launched another new printer this quarter and we have an improved pipeline with more products planned to launch in fiscal 2019. We believe investments in growing the business organically will ultimately have the highest rate of return and are critical to growing sales consistently over the long term.

Moving to Slide #8. You'll find our quarterly trending of pretax earnings. Excluding the gain on the divestiture, this quarter, we increased pretax earnings by $4.7 million or 13%. This marks our 12th consecutive quarter of pretax earnings improvement.

Slide #9 shows the trending of our quarterly earnings per share and net earnings. Excluding the gain on divestiture, our diluted EPS would have been $0.57 this quarter compared to $0.48 in last year's fourth quarter, an increase of 18.8%.

Excluding the gain on divestiture, our tax rate was 25.4% this quarter. As we look ahead into fiscal 2019, we expect our tax rate to be in the mid-20% range as we realize benefits from the U.S. tax reform that was signed into law in December of 2017. However, this tax rate is subject to further refinement as the U.S. Treasury continues to come out with various interpretations and implementation guidance.

Moving along to Slide #10. You'll find a summary of our cash generation. We generated $53.8 million of cash flow from operating activities compared to $52.9 million in last year's fourth quarter. Free cash flow was $46.8 million this quarter compared to $48.6 million in the same quarter last year. We continued our trend of generating cash flow in excess of net earnings. In the fourth quarter, cash flow from operating activities was equal to 154% of net earnings and free cash flow was equal to 134% of net earnings. Our primary uses of cash were to invest in organic sales generating activities, to strengthen our balance sheet by paying down debt and to return funds to our shareholders in the form of dividends.

This brings us to Slide #11. This slide outlines the trending of our net cash position and provides a snapshot of our debt structure at the end of our fiscal year. We increased our net cash position by more than $100 million this year while increasing both our investment in R&D and in capital expenditures, which is a testament to our strong cash-generating ability. At the end of the year, our net cash position was $128.8 million.

As we look at deploying our cash, our approach to capital allocation is disciplined and patient. First, we use our cash to fund organic opportunities throughout the cycle, which includes funding investments in new product development, sales-generating resources, IT improvements, capability-enhancing capital expenditures and capital expenditures to increase efficiency and increase automation in our factories.

Second, we focus on returning cash to our shareholders in the form of dividends. After funding organic 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 use our cash to improve shareholder returns through opportunistic share repurchases. We have nearly 2 million shares authorized for repurchase as of July 31.

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

Before moving to our fiscal 2019 EPS guidance, I'd like to provide a look back at our fiscal 2018 financial results, which is on Slide #12. This year, we reported organic sales growth in each quarter and grew 2.6% organically for the year. We increased our GAAP pretax earnings by 20% and if you exclude the gain on the sale of Runelandhs, we record -- then our pretax earnings grew 16.4%. We returned our Workplace Safety business to organic sales growth with organic sales growth increasing 0.7% and WPS segment profit increasing 24.1%. And we generated $143 million of cash flow from operating activities, which equates to approximately 157% of net earnings. We continue to execute efficiency improvements, which is evidenced in our reduced SG&A as a percent of sales. We have more opportunities to reduce our G&A expense in our back office selling activities while improving our processes around the customer buying experience.

We also increased our investment in R&D, which was up 14% this year. This is directly in line with our strategy to drive long-term sales growth through the development of a steady pipeline of new product introductions throughout our businesses.

Overall, our FAT and financial results were strong and we have very strong positive momentum going into fiscal 2019.

Slide #13 introduces our diluted earnings per share guidance for our fiscal year ending July 31, 2019. We expect earnings per diluted Class A Nonvoting Common Share to range from $2.15 to $2.25 per share and we expect organic sales growth to range from 2% to 4%. Included in our F '19 guidance is an increase in R&D investments of approximately 7%. We expect our income tax rate to be in the mid-20% range. We expect depreciation and amortization expense of approximately $26 million and capital expenditures of approximately $35 million. Included in our CapEx guidance is approximately $10 million of expenditures related to the construction of certain facilities that are currently leased. Excluding these facility construction costs, our CapEx is still running a bit higher than our historical averages as we continue to invest in factory automation and improved manufacturing capabilities.

Our guidance is based on foreign currency exchange rates as of July 31, 2018. Based on these exchange rates, we expect that foreign currency will negatively impact our F '19 results by approximately $0.12 per share, which is, of course, built into our guidance range of $2.15 to $2.25 per share. 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 divisional results and provide some closing comments before turning the call over to Q&A. Michael?

Thank you, Aaron. Slide #14 summarizes the Identification Solutions' fourth quarter financial results. IDS sales increased by 3.1%, finishing at $217.8 million with organic sales growth of 2.4% and foreign currency translation increasing sales by another 0.7%.

Organic sales growth was led by Asia with mid-single-digit growth in the quarter, followed by Europe and the America regions posting growth in the low single digits. In the Americas, organic sales growth was the strongest in our Wire ID and Product ID product lines. We're building our momentum and improving both sales and profit within most of our product lines in the Americas. Mid-single-digit sales growth with our U.S. industrial customers was partially offset by a low single-digit organic sales decline in our health care product line. Our Asian businesses continue to do well within all geographies and we drove a significant profit improvement over the prior year. We continue to have excellent opportunities for new customer wins as well as growth within our existing base of customers, specifically within China and India. I'm optimistic about the future of our Asian business.

Low single-digit growth in Europe was driven by Western Europe and our emerging markets regions. Our Wire ID and Product ID lines continue to drive sales in this region and we grew organic revenue in almost all of our major geographies in Europe this quarter. Segment profit in the IDS division was $36.5 million in the fourth quarter, which was an increase of 1.7% compared to the fourth quarter of last year. As a percentage of sales, segment profit was 16.8% this quarter compared to 17% last year.

I'm proud of this team's ability to consistently increase segment profit over the past 3 years. This business is growing in most major geographies and product lines. We're launching new products and creating a robust pipeline through improved R&D processes and we're driving efficiencies throughout the business. Our consistent focus on our key priorities is working.

This quarter, we launched the i5100 Industrial Label Printer. This is a durable, easy-to-use printer with a wide variety of applications in many industries such as aerospace, electrical, automotive, electronics, manufacturing and lab. This printer includes a touchscreen along with intelligent print technologies that allows the materials, printer and software to communicate, making it extremely easy to use and customized for the needs of the job. It has the ability to print on a wide variety of Brady's materials, making it another versatile printing solution for a broad range of customers. This is the third printer introduced by Brady during fiscal 2018. The largest quantity and strongest collection of printers introduced by our company in its history. We expect to continue this trend of introducing innovative new printer products.

Looking ahead to fiscal 2019. We expect IDS organic growth to grow from 3% to 4%. We'll continue to invest in R&D, while efficiency activities in our manufacturing sites and throughout SG&A will provide benefits that will more than offset our investments in new product development.

Turning to Slide #15. You'll find our Workplace Safety review. I'm pleased to report that the WPS business reported its second consecutive quarter of organic sales growth. Organic sales continued to increase in the European and Australian businesses where we've seen consistent growth for quite some time. Organic sales in the North American business declined slightly in the quarter. We continue to expect that our organic sales turnaround will be choppy over the next year or so while the North American business executes its strategy. But I'm confident we're taking the right actions to deliver consistent organic sales growth in this region of the WPS business.

WPS sales increased by 2.3%, which consisted of organic sales growth of 3%, an increase from foreign currency translation of 1.6%, partially offset by a decline of 2.3% from the sale of Runelandhs. Sales growth was led by our Australian-based business with growth in the high single digits. We continue to grow sales in Australia in most of our major product lines and we're identifying new opportunities while realizing growth in our existing base of customers. Organic sales increased in the mid-single-digits in the European business this quarter, continuing our trend of low to mid-single-digit organic sales growth that we've delivered for the past 4 years. Digital sales continue to drive sales growth in Europe with revenue through the online channel increasing by nearly 20% compared to last year's fourth quarter. We're driving SG&A improvements through efficiencies in our catalog, prospecting strategy and our process improvement initiatives, which has resulted in significant profit improvements in the WPS division throughout this fiscal year.

Our focus within the WPS division is consistent and is centered on 3 priorities. First, we're improving the buying experience for our customers so it is as simple as possible. Reaching our customers the way they would like to be reached, whether it's online, mobile, catalog, in person or a combination of these channels. It is essential to our gaining market share and growing this business.

Second, we're increasing our customer interactions to provide more value than simply fulfilling orders. This allows us to better understand what our customers are facing from a safety and identification standpoint and to better serve those needs by offering our compliance expertise and complete solutions.

Third, one of our strengths is our ability to customize and quickly turn orders for our customers. So we're improving our portfolio of products by introducing more customized and proprietary products that our customers needs while offering our extensive safety and compliance expertise.

We're still working hard to return the North American business to consistent organic growth and at the same time, we're working to streamline our processes to reduce the cost to process orders and to reduce our structural costs as well, which includes everything from order processing, to catalog processing costs, to efficiencies and shipping processes. We believe that our industry and compliance expertise differentiates us from our competition and through the solutions that we provide to our customers that others cannot or will not provide. It will enable us to drive the WPS to consistent profitable growth.

WPS segment profit was $10.7 million compared to $7.9 million in last year's fourth quarter, an increase of 34.5%. As a percentage of sales, segment profit was 13.4% this quarter compared to 10.2% in last year's fourth quarter. This increase in segment profit as a percentage of sales was due to leverage from our organic sales growth, smarter spending in catalog advertising and some benefit from geographic mix. We continue to address our cost structures throughout this business and the results of this effort is clear through the significant improvement in our segment profit. We're still investing in sales-generating resources while at the same time, streamlining processes and reducing the cost to process orders.

For the full fiscal 2019, we expect the WPS business to grow organic sales from 1% to 3% and we expect to continue an improvement segment profit through organic growth and continued efficiencies in SG&A.

This quarter marks the completion of my first 4 years with Brady. As I reflect on my time here, I continue to be impressed by our reputation, our specialized and innovative products and our powerful brand name. We have an incredibly talented team that is more committed to moving the company forward than ever before and I know we're giving our people the right mix of support and autonomy to make the best decisions and to ensure our continued success. We have a commitment to quality and we're focusing on innovation more than ever. Innovation is not only relevant to our new product development teams, it's relevant to each and every Brady employee. Being innovative about what we do and how we do it has allowed us to drive 3 straight years of pretax profit improvement. It takes the entire company moving in the same direction to deliver this level of consistent financial improvement. This is something I'm proud of, and something that the entire Brady team can be proud of. It's thanks to our great employees and strong customer relationships that we're doing so well. But we're not slowing down. We're going to build on the sales growth we started this year and we're going to keep pushing for more in 2019. We must continue to invest in sales and R&D resources while driving operational excellence in every decision we make. Our focus on reducing complexity in our global structure remains unchanged. Local managers are empowered and are expected to think, decide and act on their feet every single day. We've clarified roles and responsibilities throughout the global organization for our people to be confident in their decision-making and clear in their actions. We have more work to do and we're constantly pushing ourselves to find that edge and to improve in everything that we do.

I'm proud of our results this year, and how far we've come over the past 4 years. We've improved our operational issues and renewed our focus on the customer. We've simplified our structure and delivered 5 quarters of organic sales growth. We've created an innovative culture with local ownership and accountability and we've delivered 12 consecutive quarters of year-over-year profit improvements.

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 George Staphos with Bank of America Merrill Lynch.

This is actually Molly Baum sitting in for George Staphos. My first question, you kind of highlighted Brady's priorities of growing the pipeline of innovative new products. CapEx has been increased to about $35 million. When you look at organic growth by segment, are there any important products that are -- sorry, product categories that will be driving the growth in each segment?

Pleasure to speak with you today, Molly. Absolutely. As I mentioned and something we're extremely proud of is, one of the backbones of a lot of the areas that we're working are our printers. And this year, we've introduced 3 new printers, which, as I said -- and it's critical to see not only the largest number, but the most significant set of printers as a group that we've introduced in our history. We believe that's not only going to be the backbone of actual printer sales, but also our consumables, which are fed through our printers, and which we typically see a lag in improvement from the actual introduction of the printers themselves. So as we add more in significant printers in the product lines, we expect to see those not only grow, but we also expect to see our consumables grow. In addition, as I mentioned, we have more printer capability in the pipeline. Capability that I'm very excited about, that, once again, will continue to create a gap of differentiation between us and our competitors and once again, add more consumable focus. In addition to all of that, we're using software and our strong software capability to drive more advancements within all of our products basis, not only things like printers, but lockout and tag out, Product ID, Wire ID capabilities across the board. If you think of our capabilities as a stool, we started out years ago with materials as our major leg. The materials segment remains a significant and powerful resource we have, but in addition to that, we've now added and have added strong segment for a while of hardware and mechanical capabilities to that. We've added electrical capabilities and finally, the fourth leg that we're very proud of and believe we're growing tremendously in is software. Integrating those 4 sets of capabilities is something we've been doing and something that you're going to see in our new product line in the future.

That was really helpful. My next question is on margins and IDS. They were pretty flat, maybe slightly down year-over-year in terms of comparisons. Can you kind of provide a bit more color on what the offsets were to the increases in profitability in Asia that you had mentioned?

Oh, the profitability increase in Asia? Well, revenue is a certain driver for us, but we've also become a much more efficient organization in Asia. I'm quite proud of our Asian team. We have excellent, world-class leadership there. And I don't use that word, world-class, lightly. You'll actually not hear it come out of my mouth very often. But I do feel very proud of our team there and their capabilities and their ability to really leverage both our capacity and our technological skill sets in Asia. We have strong technology base in Asia, both in Singapore and in particular, also in Beijing. And between that, it allows us to really do a much better job of leveraging our margins.

And then my last question, turning over to WPS. Can you provide a bit more detail on the various factors that really drove the strong year-over-year margin improvement? You mentioned the improvement in catalog spending and geographic mix, but if you could just provide a bit more color on that, that would be helpful.

One of the key factors is our fourth quarter does always tend to be our strongest quarter. And this year, geographic mix certainly helped us as we had higher margin geographies contributing more. In addition to that, you are correct. Once again, the fourth quarter, we typically are able to look at our advertising differently because parts of our world geography slows down in August. As an example, the catalog spending prior to that is lower than you would typically see in other quarters.

Our next question comes from Allison Poliniak with Wells Fargo.

I want to go back to the R&D question. I know you've been investing quite heavily the past few years and it's -- I know there's mixed events markets and there's no home run here, but can you help us understand maybe the contribution to '18 in terms of new products that have been developed and now are fully integrated into your system? Because I'm just trying to understand the success or how we can read the success of that program in your numbers.

We actually don't -- thank you, Allison. We don't actually break down to that level, but it's -- there's no question that we're starting to see the pipeline of products that we've developed show in our actual revenue in our sales. And that's across-the-board with the exception of our health care products, where frankly we've lagged behind versus our other product groups in creating the innovative products and we're focusing more in that area. And so you will see that outperform in the years to come. We can go across each of our product lines internally and see that significant improvements in our sales growth are related to the new products that we're introducing. And more importantly, I expect that growth to continue from those products and from new products that are coming out of our pipeline. But as a specific breakdown, we don't give that detail.

Okay. And then just looking at Workplace Safety. Nice organic growth there, 3%. Was there any price contribution? Was it volume? Could you help me understand that mix in that business for organic growth?

We -- that's a space where we do work on price on a constant basis, particularly in the Internet space. And we are managing and evaluating our price models very carefully because it can have a dramatic impact, both in revenue and profitability. And so that is something that we believe we've been able to create differentiation, as we pointed out, through our complete packaging, our custom solutions and expertise that has allowed us to get some solid price performance. In addition, our volumes have gone up in general because of the types of products that we're focusing on that we do believe we have advantages in.

Our next question comes from Charley Brady with SunTrust Robinson Humphrey.

I just wanted to go back on the margin question. I think it was Molly who was asking it on the -- on IDS, op margin down year-over-year. Can you just dig in a little bit on what the driver of that really was? Was it just increased spend that's going on? And also, on a segment level, I didn't see any margin guidance this time around, which we've gotten in the past. So what is the expectation for the segment margins for fiscal '19?

Well, I'll start with the other half and then I'll flip it over to Aaron for the second half. Effectively, you can look at 2 big elements. Our health care space, we've been investing strongly in, in the fourth quarter. We took a very deep look at that and with leadership there, we have focused on really adding resources and capabilities. In addition, we've been increasing our R&D with purpose and those 2 key factors are the elements that would drive to that margin question with the fourth quarter. As far as going to next year, Aaron?

Yes, as we look at next year in the segment profit margins, so if you look at IDS, we finished this year at, I believe, 16.9%. We absolutely would expect that to increase slightly next year. When you look at WPS, we finished at 9.7% this year. Now, WPS is a little different story because when you look at currency, a big piece of the currency impact next year is in our Workplace Safety business because a full half of the business is in Western Europe. So they will have a bit of, I'll say, headwind on the margin as a percent of sales because our European businesses are very, very strong. They finished at 9.7% this year. I would expect them to be relatively close to that next year.

And overall, Charley, that is embedded in our guidance for next year.

Absolutely is.

Yes, understood. And I guess, just on the cash build. A good problem to have, I suppose. But you guys are really building out a substantial amount of cash. I know in the prepared remarks, you went through a ton of your cap allocations, the criteria or the path you want to go, how you want to spend it, the ranking. But at some point, with the cash level that has continued to build, you're increasing the dividend, at some point, it probably necessitates a more aggressive action one way or the other whether it's an M&A transaction, which seems as though that's been kind of a back burner for a while or a significant increase in dividend or significant share buyback. I'm just trying to get your thinking on, what level does cash build to where you say, "We probably ought to take a more aggressive action on this."

So you are correct. Our basic approach to use of cash has not changed. As you've noticed, we're investing more and more in the business itself, which is our fundamental first priority. In particular, in a couple of key areas, R&D and capital. Capital being actual infrastructure and even more exciting, into the automated capabilities of our manufacturing set, which is very positive both from a point of view of cost and quality, throughput performances, but also in the changing workforce that we're all dealing with. But the next area, obviously, we focus on dividends and we're quite proud to have increased it by $0.02 versus $0.01. So you are correct. We've looked at it and believe that we can increase our dividend more significantly than we have over the last few years. But then in addition to that, we still have stock buybacks as an option. And on top of that, we did, and as I came on board, and you can look back 4 years ago, had to reset our mentality on acquisitions. That does not mean that we are not looking regularly at acquisitions. We go through the key elements. So first, we don't buy acquisitions for market share as a primary driver. We look at acquisitions for technology. Is there a technology that we need and want that we can't develop in a timely and cost-effective manner internally? Then we look at the fact that, "Can we find that on the outside and will it be a win-win? Will the company we're acquiring win and the people involved win and Brady win?" Because we believe that's fundamental to create the energy and the real positive momentum that all players involved have to win. And then the final criteria that is really challenging right now, and I think you'd know that our price points for acquisitions. Obviously, they are above market prices when you acquire a company, typically. And at this point, that is all -- that is a challenge. That said, we're looking and have looked actively for a while, but we are not rushed in our approach. We're careful allocators of our capital. We feel confident that having that capital available for deployment at the right time will serve our shareholders extremely well. So when we do an acquisition, we're going to believe it fits all of our criteria and will be one that will please our shareholder base in the long term.

Guys, that's a great comprehensive answer. I appreciate it. And just one more on this...

Thank you, Charley.

Just on the sole business, you broke out the revenue impact. And I'm wondering, what was the margin impact of that business? And going forward, what -- is there a meaningful margin impact by not having that business in the mix any longer?

Yes. So you're right, we broke out revenues, revenues about $16 million. Actually, at the end of last quarter, we talked about the EBITDA. So we sold it about a 9x multiple. So EBITDA is somewhere in the neighborhood of $2.2 million to $2.3 million. The entire gain, by the way, that we recorded this quarter was recorded in selling and general and administrative expenses not reflected in the WPS segment. So now as we look at margins going forward, you can see the margin profile of this Runelandhs business in Sweden. It's a very nice business and frankly, pretty much in line with the rest of our Workplace Safety business. So it will have, I'll say minimal impact on the margin profile within WPS next year, but of course, the $16 million of revenue now is gone.

Our next question comes from Joe Mondillo with Sidoti.

Most of my questions were asked, but I did want to ask a couple of things. So Michael, the first 2 years that you were there, there was a lot of heavy lifting. And then I would sort of phrase the last 2 years as being sort of, just focusing on processes and focusing on the strategies that you've been talking about as well as what you talked about today, processes and people in place kind of stuff. It seems like a lot of these sort of things are in place and have been in place for a while now. So I'm just wondering, sort of what your specific focuses are at this point in time?

Joe, that's a very good point. One thing I would like to say, that I think continues to surprise the outside world, is that we have a long way to go in our drive for efficiency and operational effectiveness. We talk as a team. We have looked at the outline and we have plans for significant operational improvements for the next 2 years. That doesn't mean we'll be done improving operations 2 years from now, but it means we can see a specific pipeline to major improvements for the next 2 years. I think that is something that isn't necessarily -- or wasn't necessarily obvious to the outside even a year or 2 ago, as you -- I think many people thought we would be wrapping that up. But that's, I believe, very good news for our organization. I said at the beginning when I came here, it's about lowering the water, looking at the rocks and then lowering the water again. And the good news is, we still have an amazing amount of rocks that we can take advantage of. So I don't want to undersell that potential in our business. But you're right, most of my focus has now shifted to looking at development opportunities, looking at technological opportunities, looking at new market sets and products. And in my history and what I love and passion is growing businesses and we've turned the corner on that and we are now working very hard to create the technological infrastructure, the product infrastructure, the market depth and capability through our development engineers, through our sales resources, through our product managers and more importantly, through the innovative mentality of our company. I literally have been to all of our sales meetings in the last month and the comments back were almost 100%. It's the best product pipeline and product offering that they've seen. And many of our sales people have long experience with Brady. And it gives them advantages that they are very excited to go in the marketplace about. And then the concepts that we have been throwing at people have made them even more excited. So you're right. Really, if I look at my focus, it has shifted from more operational to more of a growth-oriented mentality.

All right. I appreciate that. Just to sort of follow up on that last comment. How -- for how long of a period of time have you been noticing positive feedback regarding the product -- the new product pipeline? Has it been just the last 6 months? Or has it been last 12 to 18 months?

So I would say it's the last -- a year ago, we started to receive a real turnaround in mentality. And it has been exponentially growing in excitement and energy from our sales force, from our engineering groups and from our customers, particularly, our beta site customers. Very, very positive. We have -- from a point of view of this solves our customers problems in unique ways that others can't and won't. And from our sales people, this provides them an incredible entry into customers that not only love us, but customers that we really want to become stronger in.

And is this still -- is this in more so in IDS or both segments?

So I would start with IDS. We've got a longer pipeline strength there. But WPS is a markets base where innovation had not really been our strength for many years and that difference, you can see a groundswell of excitement probably in the 6 months time frame as opposed to a year or more. As they're starting to see a pipeline of products that not only their sister divisions and businesses developed to help them, but they're actually developing themselves. And it's a real eye-opener for a lot of that organization. And you're right, one that they're excited about. It takes some time, as you know though, to really switch a culture and a philosophy and that is, we can't -- we had to create a strong foundation. We had to create a belief in success and we had to really point to people where we were successful and why we needed to drive even more innovation. And that's been paying off first, as you said, in IDS. But yes, I would unequivocally tell you the WPS energy and excitement around their roadmaps is much, much stronger than it was.

Okay. And then I just wanted to also ask about the health care business, the IDS. Could you just provide an update? I know you said in terms of costs and why the margins were down partially because you're investing in that business. Is it still weak? Have you noticed any sort of turn or positive indicator with that, business? Any update there would be positive or would be helpful.

Yes, we have a strong leadership team there. We have had made some significant transitions, which have been very well received. As the end result, we're focusing more on making sure that our sales resources that really are the tip of our spear that allow us to show our differentiation are properly deployed and robust enough. And so we've been adding in those areas significantly. And then we've also been really looking hard at making sure that our entire organization understands not only who we are, but who we want to be, the types of products we need to develop, how we need to go-to-market with our customers. And we are -- I am seeing the shoots of a very positive future. But as you know, those shoots take a while to grow. It's sometimes like watching a building go up. At first, you see the framework go up instantly and you say, "Wow, this is going to be very quick." But then if you really want to make it right, you've got to make sure all the internals are strong and successful. And so the frames up. We're confident of that and we're working very, very hard to make sure all of the key infrastructure elements are going to be strong for a long future, but I actually think we have significant upside potential there. But like we have to rebuild different elements of our business at times, this is one that we're going to make sure we build it right. I think I had a quote earlier that said, "Sometimes, we invest in things that don't pay off immediately, but will pay off in the years and decades to come." And this is one I really believe will absolutely do that for Brady.

So just to follow up, and this is my last question. It sounds like you're definitely focusing on sort of the structure of that business. How long have you been really digging in deep in terms of that structure? In terms of implementing this? And then also, in terms of your 2019 guidance, it sounds like maybe we see a -- how would you think about 2019? Is it a slight -- maybe a slight improvement? And then maybe, acceleration in 2020, hopefully? Or sort of how you think about the outlook? And then also in terms of when you implemented the plan?

So I made a fundamental determination end of March, beginning of April, that we could not incrementally fix the problems in our health care space. So I would look at you and say, "We're working our second strong quarter of that." I believe that you will see some differentiation in how we're doing in the second half of this year and you are correct, we'll accelerate more into next year.

Our next question comes from Keith Housum with Northcoast Research.

In sort of your commentary regarding labor and freight costs, was that some of the pressure that we saw in gross margins this quarter? And what's the ability to offset some of that pressure through this scale and operating efficiencies that you are able to identify?

That's a general question around probably inflation, inflationary issues. There's no question that they're having an impact. Wage pressure, freight pressure, fuel pressure are all fundamental drivers for costs to go up. We're confident that our structure, the efforts that we're putting forth, and you are correct, the volume drivers will be able to overcome that and we're very, very confident in the numbers that we projected to you despite those inflationary pressures that I'm sure you're hearing are out there across the board. Fuel and shipping is certainly a major issue for us, but one that will not fundamentally inhibit our ability to both succeed and to meet or exceed our numbers.

Got you. And then, obviously, printers and consumables are a critical part of the IDS business and I'm assuming that's -- and your commentary suggests it's where a lot of your R&D focus is on. Are we working on just replacing current models? Or are we expanding into new verticals and new applications? And can you give us any color about some of the things that you guys are working on there?

Well, I would tell you this. What we focus on does vary by quarter. We actually have a pretty broad product base in IDS. And I would say printers and consumables are very important, but actually not even a majority part of our revenue and profit in that business space. We've got some great technological improvements going on that are extremely exciting and innovative for us in Wire ID as an example. In our lockout tagout areas, we're working hard. So we have a lot of different technologies basis. So I don't want to oversell our printers as a fundamental leg, which it is, of our business, but it is not the majority of the business. That said, to answer your question specifically about printers, these are different printers, different capabilities, different abilities that we haven't seen in the marketplace even if some printers may be replacing older models, they're not replacing them all in the same way, in the same manner.

Got it, got it. And then, sort of, can you give a little bit more color on the revenue growth guidance of 2% to 4%? I know roughly 50% of your business in the U.S. And we look at GDP forecast for next year, industrial production numbers, as they stand right now, you guys did grow GDP plus 1% or 2%. It seems like that would be a little bit higher than the 2% to 4% revenue guidance you guys are suggesting. Can you help reconcile the difference there?

Yes. Well, I would tell you that I wish, historically, we've been growing at GDP plus 1% or 2%. That is definitely our aspiration. If you look at our history over the last 7 to 10 years, I would tell you that if you pull out acquisitions, we've been growing negative for many years. We turned that around to flat and from flat, we turned it into growth. And from growth, over the past 5 quarters, we are -- we're feeling good about GDP and then you're exactly correct. My absolute, unequivocal goal is to get consistent GDP plus growth. But I would say that we haven't been able to historically, over the last 7 to 10 years, hadn't been able to show that. The good news is, you can look at our trend now and see where we're going, and I absolutely feel confident we're going to strongly get there. But we'd hold our guidance right now at the point that it's at.

Okay, understood. And last question for you. You, guys, increased R&D this year quite a bit. I know you have given guidance for 7%, again, for next year increase. Is there a change in focus? Or is there additional special mode of R&D that you guys are able to do with those increased funds? Or what's the plan for the increase?

Yes. We actually have had -- last year, we brought on a concept that many companies have had, but ended up being incredibly positive for not only idea sets, but our whole ideation culture, our whole innovation culture. We called it the Brady Big Ideas Challenge, it's an innovation challenge. Without giving you specific numbers, we created more ideas from that challenge than the people interfacing with us from the software company had seen before ever from a company our size. So there's no question that we have pent-up capability and capacity within our company for innovation. As an outcome of that, we're developing a number of new products not only that were "winners" of the challenge, but ones that didn't even "win" that we believe we're innovating within our company. So we've had to -- and we wanted to and are excited about investing even more money in those ideas than we did out of our standard pipeline. And then on top of that, we've created, for the first time, an incubator where we're really taking ideas that are outside the stream of a specific division. We want to make sure we get focus on them, we get funding on them and support so that those ideas, which might die within a standard structure of a division, that's focused on getting their everyday job done, will blossom and be successful. So we're seeing a combination.

And I'm showing no further questions in queue at this time. I'd like to turn the call back to Michael Nauman for closing remarks.

Thank you. I'd like to leave you with a few concluding comments this morning. Fiscal 2018 was another strong year for us. We reported consistent organic sales growth, which we're proud about. That's a big turnaround. We reduced our SG&A expenses and we improved pretax earnings by 20%, all while increasing our investment in R&D by 14.2%. I want to make it clear that we're investing every day for the long term and at the same time, we're continuing to see very positive short-term results. We are increasing our capital expenditures in our factories to develop more automation and we're making sustainable improvements in our SG&A structure.

Growing our pipelines of new products is critical to our long-term success and we're committing to delivering on the increase in our R&D investment that we've made over the past 2 years and continue to increase.

I know that our talented team is motivated to continue our financial improvements into the future and I am more motivated than ever. I'm proud of what we've accomplished so far and I'm optimistic about the future because I know what we're doing is working. We're making the right moves today that will set us up to deliver more as an organization to our customers, our employees and our shareholders for years to come.

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

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great afternoon.