Brady Corporation
Q2 2013 Earnings Call Transcript

Published: 21 Feb 2013

[Operator:]

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.

[Aaron J. Pearce:]

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

[Frank M. Jaehnert:]

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 2013 and $0.10 to $0.15 accretion in fiscal 2014. I've met many of the key managers of PDC and I'm quite impressed with the team. And I believe we have a great cultural fit and then experience in either revenue and profitability growth in the healthcare identification space over the next several years. Moving to Slide #5. In this morning's news release, we announced a reorganization of our business, moving from a geographic-focused organization to an organization structured around 3 global business platforms. This change is part of our strategy to improve organic growth and profitability. We will start to operate under the 3 business platforms of Identification Solutions, Workplace Safety and Die-Cut in May 2013. Our Identification Solutions business will be led by Matt Williamson. And they will continue to focus on innovative identification solutions for a broad range of applications, including wire identification, product identification, safety and facility identification, people identification and healthcare identification. We will continue to identify more opportunities to leverage our identification capabilities, including expanding our product line or broad line of high-performance identification products and new product capabilities in faster-growing geographies and faster-growing and less-cyclical sectors such as healthcare. In our Workplace Safety business, under the leadership of Scott Hoffman, we will be expanding our focus on the Internet and offering a broader set of workplace safety products that our customers want and need. By expanding the scope of products in our Workplace Safety business, we can leverage our broad customer reach and compliance knowledge to provide greater opportunities for organic growth around the world. A word about Scott Hoffman. Scott has been with Brady for 27 years. He has been in several operating roles over his career at Brady, and most recently he has led our M&A and business development efforts. Our Die-Cut business will be led by the Stephen Millar. Under Stephen's leadership, we will continue to provide precision die-cut solutions primarily to the global electronics industry. And we will continue our effort of segmenting and optimizing Die-Cut to improve profitability and grow this business platform. Also, as noted in our press release this morning, Peter Sephton has announced his desire to retire. He will remain in his current role as Vice President of Brady and President of Brady EMEA through April 2013 and thereafter will assist with the transition to the new global business platforms through July 2013 when he retires. You're going to hear from Peter later in the call, but I want to take this opportunity to thank Peter for his 16 successful years at Brady and for his willingness to schedule his retirement effective July 31 in order to assist in the orderly transition to our new business model. Under Peter's leadership, we have had strong success in Europe. Most recently, Peter demonstrated great leadership as he led the European team through the very difficult macroeconomic times in Western Europe while still maintaining a very profitable business. We will all very much miss Peter's leadership. We believe that our reorganization around global business platforms will create better alignment of resources required to deliver increasing levels of organic sales growth. We will also be able to create a leaner, flatter organization that is closer to the customer, allowing us to reduce costs by approximately $25 million to $30 million while annually, some of which will be reinvested to growth initiatives. Costs to implement this reorganization are expected to be approximately $15 million to $18 million. The global business reorganization will be effective May 1, 2013, with most of the restructuring completed by the end of fiscal 2013. Looking forward, I'm confident that the actions we are taking, including the acquisition of PDC, the reorganization around global businesses and our initiatives to growing selected vertical sectors expanding in emerging geographies and significantly increasing our digital capabilities will accelerate future sales and profitability. In spite of the continued weak economy, we have not reduced our material investments on initiatives to accelerate growth. Now I would like to turn the call over to Tom Felmer for the financial review. Tom?

[Thomas J. Felmer:]

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 the mid- to upper-20% range for the full fiscal 2013, exclusive of the nonroutine items such as non-cash tax charges related to the repatriation of cash to fund the acquisition of PDC. We also expect additional non-cash tax charges of $3 million to $5 million in the next several quarters as we finalize the tax accounting related to the repatriation of cash to finance the acquisition of PDC. Because of the nonroutine charges related to the PDC acquisition, we incurred a loss of $8.7 million that was in the second quarter, and diluted EPS was a negative $0.17 in the quarter. Slide 8 summarizes our guidance for fiscal 2013. As Frank mentioned, we are seeing pressure in our organic sales across several geographies and businesses. Our businesses in both Australia and Brazil experienced negative organic sales this quarter. We are seeing declines in demand for die-cut parts for the hard disk drive industry and the overall macro economy in Europe remains weak. However, against this backdrop, we remain confident in our ability to execute our growth and productivity initiatives to deliver fiscal 2013 EPS towards the lower end of our prior guidance range of $2.20 to $2.40 per share, exclusive of nonroutine items, restructuring charges and other items for the full year fiscal 2013, with the fourth quarter being stronger than the third quarter. This range includes the EPS generated by PDC's operations as well as some savings from restructuring activities in the fourth quarter and it excludes after-tax restructuring charges in other nonroutine items, including all of the favorable and unfavorable items called out on Slide #6. Our guidance is based on foreign currency exchange rates as of January 31. Previously, we were anticipating low-single-digit organic growth in the second half of fiscal 2013. However, given the persistent weakness we are seeing in certain geographies, we are now decreasing this outlook to approximately flat organic sales for the remainder of 2013. Now let's move on to Slide #9 which is a summary of our quarterly sales trends. Total sales were up 1.1% in the quarter to $324 million. Moving on to Slide #10, you can see the trending of our gross profit margins. Our second quarter gross profit margin of 46.3% is down from last year's second quarter gross profit margin of 47.8%. We continue to focus on driving gross profit improvements through lean strategic sourcing and the reorganization activities that Frank described. On the right hand of the -- right-hand side of the page, you can see the trending of SG&A. SG&A was up from $104.8 million in Q2 of fiscal '12 to $117.2 million in the second quarter of fiscal '13. This increase was caused primarily by the acquisition of PDC which contributed $9 million of SG&A, inclusive of $3.6 million of acquisition-related expenses. SG&A also increased as a result of targeted investments to accelerate organic growth such as investments to expand in emerging geographies, transform our business to a digital platform and increased focus on vertical markets, to name a few. As Frank mentioned, as part of our strategic realignment, we will be reducing headcount in certain areas, including our SG&A functions. On Slide #11, you can see that our diluted EPS, excluding restructuring charges and the other items I mentioned earlier, was down 22% in the second quarter. We have summarized our Q2 cash generation and our ending cash balance on Slide #12. During the quarter, we generated $24 million of cash from operating activities, invested $301 million in the acquisition of PDC, returned $9.8 million to our shareholders in the form of dividends and borrowed an incremental $108 million, all resulting in an ending cash balance on January 31 of $141 million. In Slide #13, you can see that our balance sheet remained strong even after completing the largest acquisition in Brady's history. Our gross debt-to-EBITDA remains at approximately 2x, inclusive of the trailing 12 months of PDC's EBITDA. Having a strong balance sheet and such a strong cash-generating business puts us in a solid financial position to fund future organic and inorganic growth opportunities. I'd now like to turn the call over to Matt Williamson to start our regional reviews. Matt?

[Matthew O. Williamson:]

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, but this growth has not been enough to offset declines in sales to our OEM customers. Brazil is a key emerging economy for us and we expect to see improvement over the balance of the year due to the economy improving and our ongoing work with OEM and MRO customers. We see strong growth potential there and, as a result, are committed to improve our capacity and operations efficiency. As such, we just installed the first of 2 new "state of the art" printing capabilities in São Paulo to serve our OEM customers. In our America's Direct Marketing businesses, our sales in the second quarter were down slightly as revenue declines from our traditional direct mail businesses have not been offset by business done over the Internet. We continue to see a migration of customer buying habits from the mail to the web. Our strategy is focused on growing sales in our customer base through a multichannel sales model, which includes digital, direct mail and outbound telesales, while also providing them an ultimate buying experience both on- and off-line. We're particularly focused on improving customer traffic and conversion on our websites. Segment profit in the Americas decreased 9.7% to $32.3 million in the quarter. Our profit compared to last year was negatively impacted by the mix of lower sales of our Direct Marketing businesses, strong sales in some lower-margin ID solution products and a difficult comparable for distributor marketing expenses that positively impacted 2012. As a percent of sales, segment profit was 22% compared to 26% in last year's second quarter and, excluding the impact of PDC's segment profits, would have been 23.4% of sales. Although the U.S. economic growth rate is modest and the Brazilian economy has been struggling, we are confident that our initiatives we've undertaken and further investments that we're making will drive organic sales growth. As we look to the remainder of fiscal 2013, we anticipate low-single-digit organic sales growth, with the strongest growth coming from our Identification Solutions business. Although we're making increased investments to expand our core growth in fiscal 2013, the cost-reduction and efficiency actions that we've taken should offset these investments, thus resulting in segment profit percentages comparable to those we experienced in 2012. Now I'll turn the time over to Peter Sephton who will report on EMEA. Peter?

[Peter C. Sephton:]

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% as a result of reduced public sector spending and prolonged business closures during the Christmas holidays. Against this backdrop, we are accelerating our transformation to a multichannel marketer with greater presence through the Internet. Our commitment to e-commerce as an opportunity to win new customers and service existing customers better continues to ramp up, growing 14% from the second quarter of last year. Our Identification Solutions business fared better due to our increasing presence in emerging geographies and our focus on our 2 other strategic initiatives

[Stephen Millar:]

Thanks, Peter, and best wishes for the future. Continuing on Slide 16. Our focus on Asia continues to be twofold

[Frank M. Jaehnert:]

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:]

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

[Unknown Analyst:]

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?

[Thomas J. Felmer:]

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.

[Unknown Analyst:]

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?

[Frank M. Jaehnert:]

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.

[Thomas J. Felmer:]

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.

[Operator:]

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

[Jason Ursaner:]

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?

[Thomas J. Felmer:]

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.

[Jason Ursaner:]

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?

[Matthew O. Williamson:]

Are you speaking about sales growth?

[Jason Ursaner:]

Yes.

[Matthew O. Williamson:]

Yes, that's...

[Frank M. Jaehnert:]

I think, [indiscernible].

[Matthew O. Williamson:]

Yes. That's about right.

[Jason Ursaner:]

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?

[Matthew O. Williamson:]

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.

[Thomas J. Felmer:]

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

[Jason Ursaner:]

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.

[Matthew O. Williamson:]

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.

[Frank M. Jaehnert:]

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

[Jason Ursaner:]

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.

[Thomas J. Felmer:]

That is correct.

[Jason Ursaner:]

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?

[Thomas J. Felmer:]

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

[Operator:]

And our next question comes from the line of Mig Dobre with Robert W. Baird.

[Mircea Dobre:]

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?

[Frank M. Jaehnert:]

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

[Mircea Dobre:]

And then back to my question, though, as you're looking at your cost structure, how should we see -- how we should we think about COGS versus SG&A as to where these costs are coming out of? Because from what I understand, the way that you're describing it, that would imply that a lot of it would come out of SG&A in identification.

[Frank M. Jaehnert:]

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:]

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?

[Frank M. Jaehnert:]

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

[Mircea Dobre:]

Yes, but just to be clear here

[Frank M. Jaehnert:]

That's correct. It's the best way [ph] to get there.

[Mircea Dobre:]

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?

[Frank M. Jaehnert:]

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

[Thomas J. Felmer:]

Yes, and I'll just reiterate

[Mircea Dobre:]

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?

[Thomas J. Felmer:]

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.

[Frank M. Jaehnert:]

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:]

The numbers I was quoting are basically the things that were in your release, as far as the unit breakdowns.

[Frank M. Jaehnert:]

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:]

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.

[Thomas J. Felmer:]

That is correct.

[Operator:]

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

[George L. Staphos:]

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.

[Thomas J. Felmer:]

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.

[George L. Staphos:]

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.

[Thomas J. Felmer:]

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

[Frank M. Jaehnert:]

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.

[George L. Staphos:]

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?

[Thomas J. Felmer:]

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...

[George L. Staphos:]

For PDC.

[Thomas J. Felmer:]

I mean, for PDC, right.

[Frank M. Jaehnert:]

So there's no change for it.

[Thomas J. Felmer:]

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

[Frank M. Jaehnert:]

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

[George L. Staphos:]

And this is D&A.

[Frank M. Jaehnert:]

Yes.

[Operator:]

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.

[Aaron J. Pearce:]

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 [phone]. International callers can dial [phone], 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?

[Operator:]

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.