Brady Corporation (BRC) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Brady Corporation Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this today's program is being recorded. And now, I would now like to introduce your host for today program Ann Thornton, Chief Accounting Officer. Please go ahead.

Good morning and welcome to the Brady Corporation fiscal 2017 third quarter earnings conference call. The slides for this morning's call are located on our website at www.bradycorp.com. We will begin our prepared remarks on Slide number three. Please note that during this call, we may make comments about forward-looking information. Words such as expect, will, may, believe, forecast, and anticipate are just a few examples of words identifying a forward-looking statement. It's important to note that forward-looking information is subject to various risk factors and uncertainties, which could significantly impact expected results. Risk Factors were noted in our news release this morning and in Brady's fiscal 2016 Form 10-K, which was filed with the SEC in September of last year. Also, please note that this teleconference is copyrighted by Brady Corporation and may not be rebroadcast without the consent of Brady. We will be recording this call and broadcasting it on the internet. As such, your participation in the Q&A session will constitute your consent to being recorded. I will now turn the call over to Brady's President and Chief Executive Officer, Michael Nauman.

Thank you, Ann. Good morning, and thank you all for joining us. We released our fiscal 2017 third quarter financial results and I’m proud to report our seventh consecutive quarter of improved year-on-year profitability. Diluted earnings per share increased to $0.43 this quarter compared to $0.42 in the third quarter of last year, which was driven by improvements in profit in our IDS business. This is a statement to the focused efforts of the entire Brady team in identifying and taking actions on efficiency opportunities each and every day. We are working hard to improve our organic revenues and although consistent organic growth has been challenging, we believe we are moving in the right direction. Our focus on serving our customers extremely well, improving our manufacturing processes and identifying efficiencies in our SG&A structure are the drivers of our improved financial results. But we believe that the key to delivering improved results to our shareholders is through organic sales growth. Our opportunities are focused on two parallel paths with the first path focused on driving organic sales growth. This is critical to our long-term success. We are increasing our investment at R&D and we expect this to continue over the next several quarters. Our R&D processes and our new product pipelines continue to improve and will drive the innovations from the idea stage to product launch and throughout the product lifecycle. We have also increased our focus on customer insights through site visits and in-depth discussions with management and site leaders. Through these visits, we have been able to identify customer needs that will help us to further spur new product development. The second path is focused on operational efficiencies. We are developing the culture for success by pushing decision making further into the business while ensuring that we maintain a proper mix of local ownership at accountability while always implementing our long-term strategy. We are investing in our future by driving operational efficiencies, simplifying processes in our factories and investing in newer technology equipments. This efficient mentality is becoming part of the mindset of our team and we continue to identify opportunities daily. We are also making solid progress towards meaningful reductions in our G&A structure and streamlining processes to minimize our high overall SG&A expense. In our WPS business, we continue to manage the shift from catalog to digital and our digital sales continue to grow with the European business leading the way. We are refining our focus on compliance and our custom capabilities for workplace safety critical industry while continuing to develop our digital marketplace with a mobile first mentality. By creating certain websites that are organized around the needs of our customers rather than specific product offerings, people can more easily identify a complete set of solution that they might not know they needed in the past. We also believe that in the distribution space, companies are driving sales volume over gross profit margin at an increasing rate, which presents a challenge for the WPS business. In this environment relatively lower economic growth and pricing pressure focusing consistencies are critical to help our teams to execute every day. Our top priorities must remain unchanged, which are to serve our customers extremely well, grow our pipeline of innovative new products and to deliver operational efficiencies throughout our business. This will set us up so that as the top line grows, we will be able to capture and accelerated bottom line improvement and cash generation. Our goals are not only improve short-term financial results, but to build a solid foundation for a successful future. Each employee is focused on making decisions today that will ensure our long-term success. These actions often don’t pay off immediately, but we are making the investments so that our process improvement are permanent and sustainable. The development of new product is a top priority and I’m looking forward to all of the products launches planned in our pipeline. Now, I'll turn the call over to Aaron to discuss our third quarter financial results. I'll then be back to provide some specific commentary on our identification solutions and workplace safety businesses as well as few closing comments. Aaron.

Thank you, Michael. Good morning everyone. I'll start the financial review on slide number three, total sales declined by 3.8% to 275.9 million this quarter, this consisted of a 1.9% decline in organic sales and a 1.9% decline due to foreign currency translation. Diluted EPS increased 2.4%, finishing at $0.43 this quarter compared to $0.42 in the same quarter last year. This increase is a direct result of our ongoing efforts to identify and take action on efficiency opportunities throughout our global operations and our SG&A structure. Our cash generation remains strong with cash flow from operating activities of 37.8 million this quarter, which is equal to a 168% of net earnings. Moving to slide number four, you will find a summary of our quarterly sales trends. By division, organic sales decreased 0.8% in the ID solution segment and decreased 4.6% in the workplace safety segment. This quarter was impacted by 1.7 fewer billings days when compared to last year's third quarter. To put this in perspective with approximately 60 billing days in a typical quarter each work day represents a little over 1.5 points of organic sales growth. Also foreign currency was a headwind when compared to the same quarter of last year as the strengthening of the U.S. dollar against our basket of currencies reduced revenues by 1.9% this quarter. Slide number five provides an overview of our gross profit margin trending. We finished our third quarter with a gross profit margin of 5.7% which is consistent with the third quarter of last year. Although, pricing is a challenge in certain of our product categories, we have been able to overcome this pricing compression through our continued efforts to drive operational efficiencies, while providing the highest quality products and in great experience for our customers. On slide number six, you will find the trending of our SG&A expense. SG&A was 98.4 million this quarter, compared to 105.8 million in the third quarter of last year. Approximately 25% of this decline in SG&A was cause by foreign currency translation, while the remaining three quarters of the reduction was a result of the team’s focused efforts to identify and drive efficiency throughout the entire organization with our largest area of efficiency gains coming from our G&A expense categories. Slide number seven, summarizes our diluted EPS, which finished at $0.43 this quarter, compared to diluted EPS of $0.42 in the third quarter of last year. EPS continues to improve and as Michael mentioned this is our seventh quarter of year-over-year earnings growth. We are able to realize this improvement and EPS even with the reduction in sales and an increase in R&D spending, which we believe is necessary to fund long-term innovation efforts. This quarter, the team executed nicely on the costs side, while continuing to invest in growth initiatives. Moving along to slide number eight, you will see a summary of our cash generation. This quarter, we generated 37.8 million of cash flow from operating activities, compared to 40.3 million generated in the third quarter of last year. Looking at free cash flow, we generated 34.2 million this quarter, compared to 36.8 million in last year’s third quarter. We remain focused on cash generation and we are consistent in generating free cash flow and access of net earnings. In the third quarter, our primary uses of this cash were to repay debt and pay dividends, which brings us to slide number nine. This slide shows the trending of our net debt and our net debt to EBITDA over the last couple of years. At April 30, 2017, net debt was 9 million, compared to 101 million just a one year ago at April 30, 2016. This brings our net debt to EBITDA to approximately 0.1 to one at the end of the quarter. As we look at deploying our cash. Our capital allocation approach is disciplined and patient. First, we use our cash to fund organic growth opportunities, which includes funding investments in new product development, IT improvements, capability enhancing capital expenditures et cetera. Second, we focused on returning cash to our shareholders in the form of dividend. Third, we use our cash to improve shareholder returns to opportunistic share purchases. We currently have two million shares of authorized for purchase. Fourth and finally, we use our cash for acquisitions, if we believe, we have strong synergistic opportunities to give us the higher likelihood of success. Overall, our cash generation is strong, our balance sheet is strong and we are focused on driving long-term value to our shareholders through our disciplined approach to capital allocation. Slide number 10 summarizes our guidance for the full-year ending July 31 of this year. We are increasing the bottom end of our guidance range, moving our full-year EPS guidance range to $1.80 to $1.85 per share, compared to our previous guidance range of $1.75 to $1.85. Included in our guidance, our expectations for organic sales ranging from a slight decline to slightly positive for the full-year ending July 31, 2017. Looking at our cost structure. We expect to see our investments and R&D continue to grow in the fourth quarter at approximately the pace of the first three quarters of this year. Offsetting the challenging revenue environment and increased R&D expenses, our ongoing efficiency gains in our manufacturing facilities and in our SG&A functions. When comparing our fiscal 2017 guidance range to our performance in the fourth quarter of last year. There are two items that we expect to impact these results. First is foreign currency, even with the recent depreciation of certain currencies versus the U.S. dollar over the last couple of weeks, we expect the year-over-year impact from the strengthening U.S. dollar to reduce revenue slightly in the fourth quarter of this year and when comparing Q4 of this year to Q4 of last year, the impact of translation on our financials is forecasted to be approximately $0.01 of headwinds. Second and more importantly we expect that our fourth quarter tax rate will be higher and be in a more normal upper 20% range, which will be an increase over a 21.5% tax rate in Q4 of last year. Our tax rate tends to fluctuate from quarter-to-quarter, but over the longer term trends in the mid to upper 20% range. We expect this to provide a headwind of approximately $0.04 to $0.05 in the fourth quarter. Other key operating assumptions in our guidance include depreciation and amortization expenses of 28 million and capital expenditures up 17 million. I’ll now turn the call over to Michael to provide some details on our divisional operating performance. Michael.

Thank you Aaron. Slide number 11 summarizes the identification solutions third quarter financial results. Organic sales decreased 0.8% and foreign currency translation decreased sales by 1.5% and total IDS sales decreased by 2.3% finishing at 196.9 million this quarter. Organic sales were driven by our Asian and European IDS businesses. Sales in Asia increased in double-digits compared to third quarter of last year and Europe showed slight organic growth. Our Americas IDS business declined in the low single-digits organically in the quarter. Sales increased in every geography within IDS Asia this quarter with our China based businesses leading the way. This marks the third straight quarter of organic sales growth in Asia, which is an encouraging sign of the positive sales momentum that this team has generated. Organic sales in our European IDS businesses were driven by Western Europe. Our European business leaders have done an excellent job growing the businesses over the last two years despite less than robust economic conditions in that regions. They are identifying sales opportunities while tackling operational efficiencies within our manufacturing processes and throughout SG&A. Within our IDS Americas region, the low single-digit organic sales decline was due to the U.S. based business. We are seeing optimism from certain customers and other industrial companies in the U.S., but we are yet to see this optimism translate into positive sales momentum. As we continue to work on reducing our cost structure, a pick-up in [project] (Ph) spending in the U.S. will bring solid increases to our bottom-line. R&D expenses were up again this quarter by 4.2% compared to the third quarter of last year. We have continued to work on not only just new product development, but also the process in which we select and develop and new products to ensure that we are spending our R&D dollars efficiently and bringing them to market quickly. It’s exciting to see how our renewed focus on the needs of our customers and how we can solve their problems is impacting our new product pipeline. The IDS segment had 32.6 million in segment profit in the quarter, which is an increase of 2.3% over the third quarter of last year. I’m proud of this team’s ability to consistently increase segment profit over the past two years. The improvement is a direct result of the focus on efficiency and operational excellence we have been working through diligently to improve upon. As a percentage of sales, segment profit improved to 16.6% this quarter compared to 15.8% last year. Looking ahead, we expect low single-digit organic sales growth for the full fiscal year for IDS and segment profit to be in the mid-teens as a percentage of sales. We expect to continue to incur additional expenses from our investment R&D and to incur additional incentive compensation expense in Q4 compared to last year. However, our ongoing efficiency activities in our facilities and throughout our SG&A structure should also continue to provide benefit that will more than offset these cost and will allow us to continue our trend of strong financial performance. The workplace safety review begins on slide number 12. Organic sales decreased 4.6% in the WPS segment this quarter. Organic sales declined in the low single-digits in our European business this quarter, European digital sales increased in the high single-digits when compared to last year's third quarter, but the increase was not and up to fully common take for the decline in the catalog sales. On a sales per day basis, our European base business grew organically in the low single-digit compared to the third quarter of last year. Our Australian base business sales in the mid single-digit this quarter, we are focused on bringing our diverse product offering to many different industries in Australia and we are starting to see this take hold than other areas of economy besides our prior focus in mining. On a sales per day basis, our Australian base business realized slight organic growth. Our North America business declined in the high single-digit this quarter, digital sales increased over the third quarter of last year, but not enough to overcome the decline in catalog sales and turn this region to sales growth. Certain distributors are creating pricing pressures that are impacting our WPS business. We are continue to make adjustments to our cost structure to mitigate most of the bottom line impact from our sales and profit margin declined while refining our digital and mobile strategy. Foreign currency continues to be headwinds reducing WPS sales by 2.9% primarily due to the impact of the British Pound and Euro depreciating against the U.S. dollar. We are focusing and growing this business and improving profitability, we know that our customers are accustomed to a certain type of business experience and we are working to meet these expectations. Every member of the WPS team has been driving three primary goals. First, we are managing the catalog to digital channel shift to effective and efficient catalog prospect. Secondly, we specifically are moving to a digitally produced catalog process. Second, our website have been a focused of our digital teams, we believe that our strong mobile present is necessary to be in the industry leader in this area and this is definitely what we are working towards. Although mobile sales are still a relatively small part of our business, sales generated on mobile devices are increasing every month as a result of the improve capabilities of these new sites. Third, we will gaining product leadership in the safety identification product category through a focus on unique and customize offerings and we are using our team’s deep knowledge and expertise in this area to drive sales. Our focus and investments in these areas are creating long-term value to an improve customer experience in our digital mobile capabilities and a strong innovative product lines in every key category. Segment profit and the workplace safety platform was 5.1 million this quarter compared to 6 million in last year's third quarter. As a percentage of sales, segment profit was 6.5% this quarter compared to 7% in last year's third quarter, this decrease in segment profit was due to the decline in organic sales, which included price pressures in certain markets. The organic sales reductions were partially offset by our actions that are actively reduced our cost structure. Looking ahead, we anticipate low single-digit declines in organic sales and we segment profit to continue to be in the mid-single-digit as a percentage of sales for this full fiscal year. Before turning the call over to Q&A, I would like to provide a few concluding comments. I’m proud of what the Brady has accomplished. We have been working and more than just driving efficiencies and pushing for innovation. We are seeing a cultural shift, we are focusing our strong, talented and dedicated team toward consistently living our core values and driving to exceed our goals. I have seen our culture shift positively towards increased ownership and accountability, thinking differently about performance, always delivering what we promised and always expecting to win. Brady has always been a highly innovative company and with this increased level of local ownership and accountability, clear expectations and a shift in mindset we have a winning culture that will enable us to be successful for years to come. We have made significant progress improving our operational issues and as a result, we have delivered seven consecutive quarters of year-over-year profit improvements. We are focused on delivering profitable organic sales growth and although we are seeing and feeling an increase in positive sentiment both internally and with many of our customers, this has not yet turned into an increased project spend by our customers. We do expect challenges and the distribution channel to continue to impact our WPS business. However, we are more optimistic about growth in the fourth quarter in IDS. This makes our efforts towards new product development and our focus in driving efficiencies to auto manufacturing facilities and in SG&A every single day that much more important. I’m pleased with our progress and I know that the Brady team can continue to deliver even more to our customers and to our shareholders. I would now like to start the Q&A. Operator, would you please provide instructions to our listeners.

Certainly. [Operator Instructions]. Our first question comes from the line of Charley Brady from SunTrust Robinson Humphrey. Your question please.

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

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

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

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

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

Okay, great. Thank you.

Thanks Patrick.

Thank you. Our next question comes from the line of Mirc Dobre from Baird. Your question please.

Good morning everyone. I would like to start at IDS, maybe a little more color here. So the Americas business, the U.S. in particular has contracted, in the third quarter it has grown if I remember correctly something like very low single-digits in the front half of fiscal 2017. From a macro standpoint, things are reported to be broadly better as your fiscal 2017 has progressed. You have gone from growth to slight contraction. And I guess what I’m wondering here is frankly number one, kind of what is happening, because my understanding is that your business is not so late cycle or long cycle to where it would significantly lag broader industrial trends. And then also related to this, you talked about pricing pressure in WTS given what’s happening in the distribution channel. But your biggest customer here is a large distributor in IDS that is, is a large distributor is better undergoing some pretty significant pressure on the pricing side. I'm wondering are you starting to feel that pressure yourself from that distributor. And is there a risk to margin here and to top line as we look into fiscal 2018?

Look Mirc, I would say that there is no question that if you look at our historical numbers and the historical basis of our sales cycles that we are actually a lag in regard to economic increases and we tend to do much better towards the end of that improvement cycle than the beginning of that improvement cycle. So that’s a fundamental positive for us as we look forward. I would also say if you look at our per day sales numbers as I mentioned, they are significantly better than the total number, because of the timing of our quarter which is different giving our quarter end another group. So, I think the two key indicators that are very positive are, the per day sales and also the fact that we are later in this cycle. We certainly comment on individual distributors and customers in any way shape of form, I will say that no one customer for Brady makes a significant amount of our revenue and that makes us an incredibly strong company in regards to we have a very broadly spread customer base. In addition to that, we literally have it end users even through the distribution channel, a large, large number of customers throughout North America and the world that really give us a very strong base and very loyal to the Brady brand and the Brady capabilities.

Well, right Michael. But, look the improvement in industrial activity has started roughly a year ago in the U.S., right. So, the question is you are lagging what sort of lag are we talking about. And while I understand that you don’t comment on specific customers, ideas does sale into the distribution channel. So, your supply to those distributor and I guess my question is how are those discussions with these customers progressing given the pressure that they are under currently?

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

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

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

But do you still expect to be able to continue to expand gross margins the way for instance, you have done over the past year and half?

Yes.

Okay.

We still have our plan out there 51% to 52% when we exit F’2018.

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

Absolutely.

Thank you.

Thank you Mirc.

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

Good morning. Just kind of looking at the R&D. Michael, I guess a year or two ago, you kind of focused in R&D being with more matter of smart spending as oppose to increased spending. But obviously, I think, we are seeing increase here in the R&D. What kind of changed in terms of your thought process that kind of necessitated the increase in the R&D spend?

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

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

As you can imagine, our product life cycling development is anywhere from 18 months to four years. As a result, a lot of what we are doing now and have been doing in increasingly strong matter over the past year plus. Really isn’t going to make a significant change this quickly in this cycle.

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

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

Alright. Last one if I may just quickly in here. You kind of talked about the challenges from the distributor is in the pricing pressure, because you guys are so diversified in terms of the distributors that you guys felt real, is this a wholesale of change that have occurred in the distribution space that will just have change the lower profit margins or do you think this is perhaps a temporary event that could be gone in the year?

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

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Joe Mondillo from Sidoti & Company. Your question please.

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

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

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

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

And I mean in terms of your answer relative to R&D it seems like it’s going to take a little while. I mean are we expecting maybe a year or two from now, we are going to finally start to see maybe some stabilization or maybe some improvement relative to those changes in investments that you are making or where are we with regards this do you think?

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

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

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

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

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

Okay, great. Thanks a lot. I appreciate it.

Thank you.

Thank you. Our next question comes from the line of George Staphos form Bank of America. Your question please.

Hi, this is actually Victoria Madsen sitting in for George Staphos. Thank you for taking my question. Good morning. So, I know you spoke in a little bit about organic growth overall in the quarter. But we recall company saying in the past that Brady needs to generate organic growth by 2018 in order to kind of maintained the earnings momentum. And just overall across the segments, how confident are you in Brady's ability to generate that necessary organic growth?

Well, I would say unequivocally that we still have an awful lot to do in the area of creating more efficient and effective organization that will give us some positive tailwinds in regard to profitability. So, I’m confident we will be driving that segment of our profitability throughout FY 2018. However, I have made the statement and continue to make it, that long-term our model and our focus is to create internal sales growth through innovative products and we are dedicated to that. We also as I said, see some positive tailwinds in our future from industrial improvements and believe we will not only benefit from our new products and technology, but also general market.

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

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

Okay. Thank you. And then just two more on my end. One how has the acquisition pipeline change in recent quarters and have multiples become more attractive or less sell? Also we understand you might not want to discuss any specific areas that look more attractive per se, but can you call out any categories or geographies that seem to be offering more opportunity than they did six months ago is one. And then, two, I know we have discussed macro trend in Americas and Asia or in U.S., because you see at Asia. But from your vantage point, what are some of the macro trends you are seeing coming out of your fiscal third and within your fiscal fourth? Maybe in Europe or if you could to macro trends a little bit more of that will be great?

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

Okay. Thank you.

Thank you.

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

We thank you for your participation today. As a reminder, the audio and slides from this morning’s call are also available on our website at www.bradycorp.com. The replay of this conference call will be available over the phone beginning at 12:30 Central Time today May 25th. Phone number to access the call is 1855-859-2056. International callers can dial 404-537-3406 and the passcode in 143-40241. As always if you have questions, please contact us. Thanks and have a nice day. Operator could you please disconnect the call.