Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Brady Corporation Earnings Conference Call. My name is Ann, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Aaron Pearce, Director of Investor Relations. Please proceed, sir.

Thank you, Ann. Good morning, and welcome to the Brady Corporation Fiscal 2013 Second Quarter Conference Call. During the call this morning, you'll hear from Frank Jaehnert, Brady's CEO; and Tom Felmer, Brady's CFO; as well as our 3 regional presidents: Stephen Millar, President of the Asia Pacific region; Peter Sephton, EMEA President; and Matt Williamson, President of the Americas region. After the prepared remarks by the team, we'll open up the call to questions. The slides for this morning's call are located on our website at www.bradycorp.com. Please note that, during this call, we may make comments about forward-looking information. Words such as expect, believe, forecast and anticipate are 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 latest Form 10-K which was filed with the SEC in September 2012. 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. Your participation in the Q&A session will constitute your consent to being recorded. Thank you. And now I'll turn the call over to Brady's CEO, Frank Jaehnert. Frank?

Good morning, and thank you for joining us. This quarter, we grew sales by 1.1%. The acquisition of PDC, net of divestitures, increased sales by 4%, while organic sales declined 3.1%. Business conditions remained challenging in Europe, resulting in an organic revenue decline. As such, we have been shifting our resources to the highest-growth opportunities which include expanding our business in Central Europe, the Middle East and Africa. The Americas grew by 6.7%, including 0.6% increase in organic sales. We continued to see positive growth in our U.S. Identification Solutions business, while our Direct Marketing and Brazil businesses contracted. The trends in our Asia business are consistent with what we experienced last quarter, and our Australian business is suffering due to the macroeconomic slowdown. And our Thailand business, which is focused on the hard disk drive industry, has contracted more than anticipated compared to the first quarter. You will hear more about business conditions from Tom and the group presidents later in the call. Moving on. Slide 3 gives a bit more commentary on our December 28 acquisition of Precision Dynamics Corporation. This was the largest acquisition in the history of Brady, with a purchase price of $301 million and $173 million of revenues in calendar 2012. Approximately 85% of PDC's revenues come from the sale of identification products such as labels and wristbands to the healthcare industry, with the remaining 15% of sales coming from the sale of identification products to the leisure and entertainment sectors. The acquisition of PDC late [ph] in the U.S. healthcare identification space is a significant step forward in our movement to faster-growing industries with less cyclicality. Slide 4 provides a summary of the anticipated financial impact of PDC. We expect PDC to provide approximately $0.05 to $0.07 of diluted EPS accretion in fiscal…

Thanks, Frank, and good morning, everyone. Let's start with Slide #6 where we highlight a number of nonroutine items that occurred this quarter. In addition to restructuring charges of $0.06 related to the closure of our die-cut facility in Sweden and the elimination of certain US-based positions, we received the final insurance settlement related to last year's flooding in Thailand. We recognized a pretax gain of approximately $5.2 million, which translates to EPS of approximately $0.08. We also recognized certain expenses related to the PDC acquisition, including a $1.5 million charge or $0.02 of EPS related to the application of purchase accounting to inventory valuations, approximately $3.6 million or $0.06 of EPS related to the direct costs of PDC acquisition such as legal, accounting and investment banking fees. And we also incurred a $25 million non-tax -- no, tax -- non-cash tax charge this quarter associated with the repatriation of cash to fund the PDC acquisition. This non-cash tax charge is equivalent to approximately $0.49 of EPS. Moving on to Slide #7. Revenues were up 1.1% to $324.2 million in the second quarter. Acquisitions, net of divestitures, added 4% to sales this quarter. And currency translation was minimal, adding 0.2%. Organic revenues were down 3.1% in total. By region, organic revenues were up,0.6% in the Americas, down 5% in EMEA and down 7% in the Asia-Pacific region. Our second quarter gross profit margin finished at 46.3%, down from the 47.8% gross profit margin in last year's second quarter. SG&A was 36.2% of sales in the second quarter compared with 32.7% of sales in last year's second quarter. After you exclude the non-cash $25 million tax charge related to the funding of PDC acquisition, the income tax was approximately 25% in the quarter. We continue to anticipate a tax rate in…

Good morning. Thanks, Tom. Please turn to Slide 14 for the Americas review. Sales in the Americas were $147.7 million in the second quarter. Total sales increased 6.7%, with organic sales growth of 0.6%; and the acquisition of PDC, net of the divestitures of Brady Medical and Varitronics, contributing 6.5% to sales. Foreign currency translation provided a modest revenue decline of 0.4% when compared to the second quarter of last year. As Frank mentioned, we purchased PDC on December 28. Because of the application of purchase accounting, PDC was dilutive to segment profit as a percentage of sales in the quarter. If we were to exclude the complete impact of PDC on the Americas segment results, segment profit would've been $30.8 million or 23.4% of sales. Employees at both Brady and PDC are very excited to have PDC as a part of Brady. We have a dedicated team focused on the integration of key functions, operational cost synergies, new product development and sales opportunities across both PDC and the Brady brand business. The integration work is going as we planned. Looking deeper at our second quarter results. Our Identification Solutions business and People ID business in North America had organic growth of approximately 4% to 5%. We continue to focus on launching innovative new products, including the recent launch of 13,000 new safety and facility ID products. We've also enjoyed strong growth with our coded materials; Internet sales, including nodes to Amazon; and our services business supporting our customers' equipment safety requirements needed by creating and maintaining lockout procedures and providing specialized signs, tags and lockout products. Our overall ID solutions business in Brazil was softer than anticipated as the overall economy was worse, particularly impacting our OEM business to automotive customers. Our MRO business in Brazil continues to grow,…

Thank you, Matt. Moving on to Slide 15. Sales in EMEA were $94.4 million in the second quarter, 1.3% down on the prior year. Organic sales declined 5% and foreign currency translation decreased revenues by 0.3% compared to the second quarter of last year. Acquisitions, net of divestitures of our paper label business Etimark, increased our revenues by 4% in the quarter. Overall, these results show the impact of difficult economic conditions where most of the main European economies have slipped back into recession, with the U.K. recording a triple dip and most other parts of the EU-27 either in decline or static. On a combined GDP basis, the EU is still below 2008 levels, which is why we accelerated our focus on emerging geographies for our ID solutions business, which has helped offset some of this decline. In the quarter, we experienced an unusually weak December which followed a relatively strong start in November. And the second half of January experienced a strong finish, so we can reasonably explain that the combined effect of Christmas and the sluggish economy caused extended shutdowns over the festive period. With this context, we can take the -- a look at our business-by-business platform. Our Direct Marketing business, with its heavy concentration of sales in the EU-27, saw organic sales decline in all European countries, and the overall growth of 4% was due to last year's acquisition in Sweden and Norway. However, there were bright spots despite the economic malaise in Europe. Our Seton business in France showed remarkable resilience driven by market agility and focus on segments such as healthcare, while the Securimed business continues to outperform with organic sales growth in excess of 10%. Italy, Spain and the U.K. and Scandinavia fared worse and saw sales declines of more than 10%…

Thanks, Peter, and best wishes for the future. Continuing on Slide 16. Our focus on Asia continues to be twofold: first, improved profitability in our Die-Cut business; and second, expand our presence in our Identification Solutions businesses of safety and facility identification, wire and cable identification and product identification. Sales in the Asia-Pacific region were $82.1 million in the second quarter. Organic sales decreased 7%, while foreign currency translation increased revenues by 1.8%. In our First Quarter Conference Call, we articulated the relative strength of our mobile handset Die-Cut business and the relative weakness in our hard disk drive Die-Cut business and our Australian business, but we felt the trajectory we were on would sequentially lead to overall flat organic growth in Q2 and Q3. Both our Australian and Thai businesses faced more headwinds than we anticipated. And this, coupled with a tough mobile handset comparison from last year, resulted in the decline in overall regional organic sales in quarter 2. We're pleased with our current position in the mobile handset Die-Cut business, as the benefits from our restructuring actions taken last year to split the Die-Cut businesses from the rest of our Asian business to improve focus is paying dividends. We continue to enjoy allocations to customer programs, new in F '13 [ph], but we still have tough comparisons with last year due to some large projects that went end-of-life towards the end of F '12 [ph]. We also had one of our major customers between models in quarter 2, and the net result of these factors is that, on a quarter-to-quarter comparison, our mobile handset was slightly down on last year. On the other hand, our other Die-Cut business in Asia serves the hard disk drive sector. This business experienced a slight increase in revenues this quarter, but…

Thanks, Stephen. Before moving to questions, let me share some concluding thoughts. Entering the second quarter, we anticipated some economic headwinds and did not expect to have a strong quarter. However, organic sales were a bit weaker than anticipated. As we look to increase core growth and profitability, our path is clear. First, reorganize by global business platforms to better align resources required to deliver an -- increasing levels of organic sales. This reorganization should have the added benefit of taking out a meaningful amount of cost. The global business reorganization will be effective May 1, 2013, with most of the restructuring completed by the end of fiscal 2013. Second, continue to drive all organic growth initiatives, including expanding our business in emerging geographies; expanding globally in certain focus markets such as aerospace and mass transit, chemical oil and gas, and food and beverage processing, and healthcare; expanding our new product development efforts; and expanding our digital capabilities. Third, we will continue the process of adjusting our portfolio of companies through shifting to sectors with longer-term growth opportunities and less cyclicality. We took a meaningful step in this direction this quarter with the acquisition of PDC, and we have sold 3 non-core businesses within the last 7 months. But we are not done as we will continue to prune our portfolio as necessary and continue to invest in companies in our focus sectors such as healthcare. Lastly, we will take a balanced capital allocation approach that invests in our future through organic and inorganic growth opportunities while continuing to pay increasing levels of dividends to our shareholders and repurchasing shares in an opportunistic manner. Let's now start the Q&A. Ann?

[Operator Instructions] And our first question comes from the line of Charlie Brady with BMO Capital Markets.

This is Andrew, on for Charlie Brady. I was wondering, with the cost savings associated with the restructuring, like, how much of that is permanent cost savings? And also how much of that will be going back into growth?

Yes, as we look at it, so we expect to save $25 million to $30 million. And right now, it's not clear. We do know that we will be reinvesting some of that into growth initiatives, but I don't have a clear number yet. That will evolve as we go through our planning process that we're starting to work on for next year.

Okay. I guess the next question is, if, like, you -- and this might be along the same lines, but if you might be able to provide any sort of kind of growth profile for kind of for the different -- the new segments?

Well, we will be reporting in the fourth quarter by the new segments, and I think that will be the time to talk about this.

And so if you piece together the comments from the regions right now, you'd see that the ID solutions business has been growing at a -- has been showing some growth throughout the year. The Workplace Safety and the Direct Marketing businesses, as they're usually referred to, have been in a slight decline for most of the year.

And our next question comes from the line of Jason Ursaner with CJS Securities.

Just a follow-up to the previous question. Given that you are somewhat at an inflection point for core growth in several of the geographies, do you at least still plan to provide revenue by geography as part of the normal release for the next few quarters? Or alternatively, would you give more detail to sorts [ph] for the global business backlogs?

Yes, when we come out, we'll likely tell you what you'll know today, what the sales are by geographies. And then I guess we haven't laid that out yet. Clearly, on an annual basis, much like we do today, we provide guidelines as to -- today, we provide indications as to how much revenue is coming from each of the business platforms and I would expect we wouldn't do the same type of thing for the regions, going forward.

Okay. And then on the PDC acquisition. If I just look at the acquisition run rate in the Americas and exclude some offset from the medical Die-Cut business that you divested, it looks like it's roughly at a pretty flat total annual run rate. So I guess, is that the right way to be looking at it? Is there any material international sales or monthly variations since it's only single month that's in there?

Are you speaking about sales growth?

Yes.

Yes, that's...

I think, [indiscernible].

Yes. That's about right.

Okay. So I guess, can you just reiterate what the overall growth outlook had been? And can you break down what you're seeing in terms of volume and pricing so far?

Yes, the overall growth rate has been pretty flat. The volume varies by product. There's been some volume increase in some products, but overall, overall pretty flat; getting increase in label sales, increase in the international business; a shift in the mix of the types of wristbands that we're selling, focused more on the print-on-demand, so we're getting more growth there.

Just a question, Jason, can you reiterate your question? What are you looking for?

Well, yes. I guess I'm also looking to hear a little bit -- last -- or when you made acquisition, Frank mentioned potential for some pricing headwinds, given the Affordable Care Act. I mean, are you seeing better volume, with some pricing pressure? I was just generally trying to look at this [indiscernible] number.

At this point, the answer to that would be no on both fronts. So what we would hope would happen as the number of insured people comes on board, that we will get more volume because of that. There will be more insured people as the economy improves. There'll be improvement there. At this point, admissions into hospitals are down, so when you look at our overall sales, it's -- we feel pretty good, actually, considering that overall admissions are down, but we expect that we would grow faster than that. So the price pressure, we would expect, as the government implements these programs, that there would be some price pressure. But our hope there is that -- given this product line is a relatively small portion of what hospital organizations buy, that we're hoping that, that would be a little bit under the radar. But we're anticipating some price pressure offset by improved admissions due to the economy and the number of insured people.

And Jason, so far, we have not seen this price pressure.

Okay. And then just, I guess, quickly on the cost side of PDC, I think -- Tom, I think you mentioned there was over $9 million of SG&A that it added but $3.5 million of that or so was acquisition related charges.

That is correct.

Okay. And in terms of a monthly run rate on SG&A, I mean, is that -- if I take out the acquisition charges, is that sort of the right way to be thinking about it?

For PDC specifically, yes, that's a reasonable way to look at it.

And our next question comes from the line of Mig Dobre with Robert W. Baird. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: So going to the strategic realignment here. I guess I'm trying to understand a couple of things. What exactly do you mean by a leaner and flatter organization? And why is this change occurring now, why not before? What are some of the catalysts to get you to look at your business differently? And then when you're talking about the cost savings going forward, where should we be thinking that these would be coming from, what percentage from COGS versus SG&A?

That's a great question. Well, we have started to develop our strategy by business platform about 1.5 years ago. We would still execute with this strategy on our regional structure. They may be all organized right now, but we saw there's a benefit in a coordinating global strategy, let's say, for our Direct Marketing business, for our Identification Solutions business, for Die-Cut. Die-Cut was always cultivated on a global basis. Let me just give you an example: In Direct Marketing, there's a transformation of cost to online. And this is different than what's happening in Identification Solutions, the other part of the business, and of course, very much different than what's happening in Die-Cut. So we felt, by coordinating our strategy on a global basis, it would really help us. We have also done a lot of work looking at the strategy going forward in our Direct Marketing business. And I always said, try to follow a strategy. Let's first figure out what exactly our strategy is, where we want to take the business, and then ask ourselves, what is the best structure to execute this strategy? And our conclusion is it has become clearer and clearer over the last couple of months that we should be organized by global business platforms. And when you look at workplace safety and compliances, especially right now [ph], our Workplace Safety is the right name. That's basically, at this point of time, our Direct Marketing business, but this is changing because of the Internet. And the way we look at it, we're probably going to broaden our product line over time, it's going to be more Internet based and so forth. But so that's why we did this. Now, why do we think we can take costs out? Whenever you reorganize a company,…

Yes, no, that's correct. I think, certainly then, we will be looking at cost of goods sold as well, but I think you will see the majority coming out of SG&A. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Very well. And as far as the amount to be reinvested, I understand that you're not quantifying it down, but can you give us a sense what your thought process is as to what could drive more or less reinvestment versus the way you're currently thinking about it?

Well, we have already made this year a significant amount of investment into going after emerging geographies, so we have made major investments in Europe, to expand the Middle East and South Africa. We have also made investments in China to grow faster of the -- outside of the Die-Cut businesses in order to grow our Identification Solutions business faster in Asia [ph]. So there was a lot of investment. We have also stepped-up significantly our investments into digital, transforming our Direct Marketing businesses that we now call Workplace Safety starting in May. To transform it quicker to a digital platform, we have certain focus markets where we have hired industry managers to help us lift -- takes food and beverage industry; aerospace; mass transit; chemical, oil and gas. So we have made significant investments. And I want to point out so that everybody understands that we have not pulled back any of those investments in spite of the economy being weaker than what we anticipated. So this will continue and as we put our plans together for fiscal 2014. This is going to happen in the next couple of months. We will have much more -- a much better visibility how much we need to reinvest. But we did make a statement: We didn't say that most of the savings are going to be reinvested, we said some. And so "some" is certainly significantly less than "most." So I think the majority or a larger portion is going to drop to the bottom line and a smaller portion is going to be reinvested. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Yes, but just to be clear here: If for instance, when you're going through your planning process, or come the fourth quarter, you're going to have to issue guidance for next year, if we're not seeing any sort of macro acceleration in some of the end markets that are troubling, should we be expecting to see perhaps a little bit less reinvestment and more flowing through the -- through to the bottom line?

That's correct. It's the best way [ph] to get there. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Very well. And if I can move on to gross margin here. I'm looking, x PDC, gross margin in the quarter was really the lowest since, I think, the second quarter of '07. And I guess I'm wondering, can you give us some color for the moving parts here? I mean, we've got some volume issues. We also have, I know, some issues with PDC; the shift towards Internet. There's kind of a lot of moving parts. How should we think about that?

Yes, let me try to help you. And I think Tom is already ready -- is about to give you some input. First of all, second quarter is typically the quarter where we have the lowest gross margin because we have a lot of holidays: Thanksgiving, Christmas, New Year and so forth. So that sets one component. But if you say compare, it's the lowest compared to -- going back to 2007. I think it's a mix issue also. Our Direct Marketing business, which is traditionally, and you know this, higher gross margin, has been weaker than some of our other businesses. And then in APAC, Australia and Thailand, the hard disk drive, business have higher margins than the rest of the business. So we had a couple of mix issues by traditionally higher gross margin businesses being weaker in the mix than some of our other businesses. That's what I would say right off the gate. Now Tom, if you'll add anything else.

Yes, and I'll just reiterate: Q2 is always a tough one. This is our lowest-volume month of the year. The volume in December, in particular, was very weak for us. When you look at -- you did -- we did mention the onetime expense associated with the PDC inventory. Stephen also mentioned there was a move in Australia and there were some onetime costs associated with that, that dragged margins down a little bit. As we look at margin over the next couple of quarters, the only really continuing element that we see that would bring them down a little bit is the mix of PDC, we -- that PDC is a little -- is lower gross margin than the rest of our business, running in the low 40% to 42% range. And as we look compared to prior year and so forth, that's really about the extent of what we'd expect our margin to be impacted by, going forward. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: And my last question is on inventories. You're up 11% year-over-year. And I'm looking at the finished good component as well, up 15% year-over-year. And from everything I get around the call, it looks to me like your expectations for revenue growth have actually softened. So I'm wondering, how do we reconcile that with movements in inventory? And what does that imply for margins, again, going forward?

Yes, the biggest -- obviously, the biggest change we have right now is the addition of the PDC inventory. We've been changing some product lines over, and there's been a little bit of buildup in some areas. But in general, we still expect inventories to remain flat or down slightly.

Well, PDC is safe last year. I think we have $172 million or $173 million, something like this. And this, in comparison to Brady's total savings, will be more than 10%, 12%. And so I'm not sure, have you -- and these numbers -- I don't have the numbers in front of me. Is all in, what you told us, or did you exclude PDC? Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: The numbers I was quoting are basically the things that were in your release, as far as the unit breakdowns.

Okay. So then I think the perfect explanation is we have about 12% more sales added in, and therefore it's added inventory. Innovation is -- actually, I would say, based on the inventory turns at PDC, which I think are lower than ours, I think it would suggest that we have made progress in the Brady inventory turns and PDC has basically contributed to the increase. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: So just to be clear, are you saying that the year-over-year inventory increase in the quarter was primarily driven by the acquisition, the PDC acquisition.

That is correct.

[Operator Instructions] And our next question comes from the line of George Staphos with Merrill Lynch.

I just wanted to ask a quick question, broadly enumerated. Some of the factors that maybe have been a little bit more negative, as in your outlook, than perhaps what you had thought in the fiscal first quarter. What -- this is not to humor you, but certainly, the guidance on PDC accretion of $0.05 to $0.07 for the year was a little bit ahead of my forecast relative to your prior guidance, which was for a modest contribution in the year. As you think about the various areas, Brazil, disk drive, die-cut, Europe, what have you, which area or which product line worsened the most in terms of your outlook over the last 3 months? And then I had just a couple of housekeeping questions.

Yes, I mean, I think what we talked about in the call was we specifically called out Australia, Brazil and Thailand as being businesses that were notably softer than we'd expected.

And Tom, of that bunch, which was the most, if you can isolate one? And if you can't, that's fine. I just wanted you to try to go a little bit deeper.

Out of the 3 businesses, Australia is the largest, so...

And so Australia was the biggest surprise to us, right? I mean, Australia has been a pretty stable business. But I think it's across all our product lines, and Australia, just much weaker than we anticipated. So this hard disk drives, this is a volatile business, has always been, so I think we are kind of used to swings like this. But I think Australia was one which really kind of surprised us all a bit, how fast it slowed down. And of course, as you know, the Australian economy slowed down tremendously, so it's not anything, you see, Brady-related [ph]. It's just a slowdown in the economy. I would say it was the biggest surprise.

And then just housekeeping. If you had mentioned, I had missed it. What -- do you have an outlook, a guidance number for depreciation and also capital spending for the year?

The only addition that we would have too, as we outlined before, is for PDC. And for the year, I think we're looking at D&A being up about $10 million. With, I think, depreciation being...

For PDC.

I mean, for PDC, right.

So there's no change for it.

Other than that, we should still be in-line.

$56 million in total for the year both in PDC.

And this is D&A.

Yes.

Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn this call back to Aaron Pearce for closing remarks.

Thank you for your participation today. As a reminder, the audio and slides from this morning's call are also available on our website at www.bradycorp.com. The replay of this conference call will be available by the phone beginning at 12 Central Time today, February 21. The phone number to access the call is 1 (888) 286-8010. International callers can dial (617) 801-6888, and the passcode is 41742635. And the phone replay will be available for 1 week. As always, if you have questions, please contact us. Thanks. Have a great day. And Ann, could you please disconnect the call?

Gladly. And thank you. Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.