BRC
#No, it's interesting.
As I noted, we've actually added engineers and will continue to add engineers.
At the same time, we've been cutting out layers of inefficiency and so we fundamentally believe that we are moving in a much more efficient and effective methodology of creating new products than we had been before.
We will continue to push innovation as a total concept into all of our base organizations.
We really went from a fundamental approach of a very, very centralized, autonomous, structured R&D group into one that was based in the businesses as much as possible.
We obviously have more centralized efforts in materials and things like that but even that has been fundamentally baked into our key business factors.
So I think what you're going to see over time, although it may not be that apparent from the outside, is individual units owning innovation and R&D.
And wherever possible, we do leverage the overall key core capabilities but we fundamentally push it, therefore the decision-making into the units that are accountable and that has been providing a lot more efficiency and effectiveness.
At the same time, as I said, we've been adding specifically in our purchase of PDC.
We've been developing a lot more direct engineering than had ever been there in the recent years before we acquired it because of the nature of their previous owner, and even after we acquired it, as an example.
Absolutely.
So, let me address a couple of your points.
First of all, you had mentioned anticipating operating inefficiencies.
We absolutely do not anticipate future operating inefficiencies.
We're clearly focused very much on improving the efficiencies not only within our factories of course but within our SG&A structure.
If you look at our guidance for the last three quarters of this year, there is a big drag and that is FX, of course.
So if you're comparing this year to last year FX plays a very material part in our EPS.
Frankly, it all comes down to the topline challenges.
So we don't anticipate operating inefficiencies.
But we do anticipate challenges, I'll say more macro challenges on the topline and that's what's driving the trend that you see.
I want to be careful not to give quarterly guidance but I will say this.
Our second quarter is typically our lowest performing quarter from a seasonality perspective and if you combine that seasonality with some of the order patterns challenges that we saw basically coming out of September and then through October, we absolutely are not anticipating, I'll say, a stellar Q2.
But again there's a fair amount of questions surrounding what's happening from an industrial economic perspective and that's factoring into our topline challenges' anticipated growth or lack thereof.
When you say trends from this quarter, you mean organic sales declines and improvements in margins.
(multiple speakers)
No.
That is absolutely not ---+ very good and fair question.
That is absolutely not how we're thinking about it.
We're not thinking that's (multiple speakers) going to bounce back.
Absolutely.
I think I stated ---+ hopefully unequivocally ---+ that we did have a larger improvement rate than we had even anticipated during the quarter.
Historically, I found that does happen.
You just can't always time that and totally predict the timing of that.
That said, I believe this is the gift that will keep on giving.
We have not reached what I would consider true operational excellence.
Until we do, our drive is to get there.
I want to be quite clear, I do not believe you can save your way into prosperity but I do believe that you have to be efficient and effective.
And we have an operational improvement areas across the board still.
Labor efficiency, materials efficiency.
All of the type of elements you'd want to talk about.
But in addition to that, we continue to see opportunities to make sure our employees are working on the most significant projects and needs of the Company as opposed to working on things that you might say could be theoretically good but aren't necessarily going to make a difference for our Company.
So that is not a reflection at all on the individual efforts of our people.
That's a reflection of our leadership needing to make sure we have everyone focused on the areas that will make the biggest difference for our future.
(multiple speakers) clear, we do see more improvements available.
I like the question, I think it's problematic to answer in that we continue to expect improvements.
I don't want to characterize it on a 1 to 10 scale.
You'll see some of these things end up in reality being a little lumpy because you make a breakthrough gain in an area and that will have a more significant impact within a timescale that you possibly anticipated.
And we have some of those still available to us without characterizing it specifically.
So, I think the key issue is you should see a steady improvement over the year.
Hopefully we will be able to do it in a manner that is lumpy but there is always a potential of that happening.
But as I said I expect to see a steady improvement but not giant waterfalls.
Well, I can tell you this, we absolutely do look at inventory as a source of cash.
The challenge that we have ---+ and actually it was a source this quarter, $1.3 million, I believe ---+ a source of cash.
But the reality is that you can build inventories very quickly as we saw last year but as you start to bring inventories down, it takes a bit more time.
And that's frankly what we are experiencing right now.
So you're right, we did improve inventory $1.3 million this quarter.
My comment with respect to the guidance looking forward is I wouldn't build into your models, it's a huge improvement in working capital.
We obviously are striving to drive down inventories.
We always strive on cash flow, on every piece of cash flow to be quite candid.
However, we also look at it and say, this is a relatively slow decline in inventories.
We ---+ our typical practice is not to include any sort of share repurchases in our EPS guidance, so zero.
(multiple speakers) Zero beyond what we already completed.
Well, we absolutely anticipate our administrative costs to come down.
If you look at what happened in the quarter, the biggest ---+ frankly, the biggest driver of the decline was foreign currency because our IT costs actually have been increasing and that's effectively been offset with some of the efficiencies in other areas.
Now, as far as a I'll say guidance on this line item for the rest of the year, I'm not going to give that level of granularity but clearly this is an area we are focused on.
It's an area we've made improvements on; it's an area we anticipate making future improvements on but I'm not at the point where I want to put out I'll say formal guidance with respect to what this year's going to look like.
Now we did put out the three-year guidance back in September where we anticipate some nice improvements in SG&A over the longer term but beyond that, I don't want to get into the more shorter term, i.
e.
I can.
So we put out the [D&A] guidance back in September of $40 million.
As we and obviously to your point, we incurred less than that in Q1.
Now as we look at this, the biggest driver of the lumpiness if you will, historically, has been foreign currency translation and as we sit here today, what could affect our actual D&A in the future is really the timing of our D&A guidance of $40 million.
If that gets pushed out to the latter half of fiscal 2016, we most likely would come in below that $40 million.
And actually we put one small nuance change into our guidance which is up to $40 million so we absolutely don't expect D&A to exceed $40 million this year but it may, to your point, come in slightly below that based on the timing of CapEx.
We actually don't look at CapEx breaking it out between maintenance growth, et cetera.
The main components of our CapEx will be continued IT investments because clearly digital is an area where we continue to focus a lot of time and energy and it's very important to the future of <UNK>.
In addition it's continuing to, I'll say, provide better more efficient equipment within our factories.
What you won't see us spending CapEx on this year would be a lot of brick and mortar.
It's more to drive efficiency this year.
And IT.
I will provide some.
We certainly have shied away from that as we feel it hasn't been that helpful for providing who we are.
But obviously you are looking at questions about the general medical space overall.
We've seen admissions go down just slightly in Q1 versus Q4 although overall our space in PDC is healthy, and we believe we have the potential to capture more than our fair share, so to speak, of that space.
We really don't want to break those out at this time.
We've moved away from that because we think it's problematic to provide just a little color on those and not significant color and you get into a Catch-22 on that.
I will tell you that we have key fundamental areas, as you know ---+ lockout, tagout, wire ID labels, printers, et cetera in the idea space.
We are investing in our core technology spaces and those are all among those.
We believe they all have a good and strong future.
And we don't have any anticipated plans to do anything but to continue some actual stronger investments that we've been doing in the recent years in all of those areas.
No, no.
It definitely is not a neutral impact on the bottom line.
We are hit from two aspects.
One is just normal translation.
So the strengthening of the US dollar and the impact on our foreign financial statements.
And then in addition to that, we are a net exporter out of the US particularly the ---+ out of our facility in Milwaukee.
So we get hit both on the transaction side as well as the translation side.
So it definitely is impacting our bottom line.
The translation is very easy to calculate.
The transaction side is a little more tricky but we ---+ our calculation is somewhere in the neighborhood of $0.05 to $0.06 in total.
So very significant to the organization.
Overall, if you look at the European space, it is certainly not strong so we believe we've been able to do to our infrastructure, our organization and our product sets that overcome some headwinds in that regard but I would not claim to say that's a robust space or has been a robust space as an overall market.
I think that is an indication that we have levers that we've been able to pull effectively in Europe that we are working to pull more effectively in our other regions, but at the same time I think the changes there have not been significant in that they've been fairly weak for a while.
Well, I want to make it clear, we are working on a product optimization project as one of our key focal points for this year.
It is not a product rationalization program and there's a fundamental difference, that word is significant to us.
In many cases, we believe we have products that are underdeveloped.
They are great products, great capabilities for our customers.
We haven't properly marketed or positioned those in conjunction with our other great products, and we believe we can do that.
That's first and foremost our primary effort.
But in addition to that, we do have product offerings right now that may have been good ideas, good concepts but fundamentally don't fit into our portfolio and effectively don't sell.
In some cases, don't sell it at all.
If we believe those products are ones that truly can't tie into our portfolio effectively then we will rationalize those out of the organization.
And that will allow us to put more time into catalog efforts, into distributor efforts depending on the space, into our OEM efforts, and focus more on introducing new more innovative products into our set.
We do have literally millions of SKUs as an organization.
I think that is fundamentally different than most companies that you'll deal with that are manufacturers.
So that does provide a challenge for us that we are working to make sure we're maximizing the total potential through the particular products we have.
So threefold, one, let's look at the products we have that aren't selling that should be and how do we make that happen.
Let's look at the products we have that really don't have any affinity to our customer base or current product sets and ask ourselves, should we end up eliminating those products.
And third, let's take that open capacity so to speak and drive new innovation through that.
And what I said to you specifically and I repeat, the great news about our efforts of making ourselves more efficient and not cutting costs is that we are actually adding engineers to our organization for the specific purpose of innovation that we already know we want to do and we have targeted.
Let's start, <UNK>, with the trend we saw in the quarter.
I think we actually said in our comments that we saw positive growth although not strong but positive growth through the end of September.
Then the decline and it also correlates with the decline that we've seen throughout our channel partners, our customers ---+ the industrial comments that we've been getting back really started to take place at the beginning of October.
Some of it has started to take place mid-September but that didn't overcome what had been a growth story for the quarter, albeit a small one.
But in October, we definitely saw enough downturn that that reduced and eliminated that trend.
So I think that's the color that we have on that but I think you are seeing that story from all of our channel partners that have publicly communicated, and you're seeing that story from a lot of the OEMs, et cetera, right now in the industrial space.
I'm sorry.
<UNK>, as it relates to the FX, the expectations that we built into our guidance are FX rates consistent with October 31.
So the end of our quarter.
So what that will result in from a topline perspective, assuming that those rates go unchanged for the rest of the second quarter, would be a pretty significant decline in our top line as a result of foreign currency in Q2.
And then that moderates quite significantly in the back half of this year because the real ---+ the biggest drop, I'm sorry ---+ the biggest improvement in the USD really happened call it in the December and toward the end of our second quarter last year.
So you'll see a big impact in Q2, significantly moderated in Q3 and Q4.
