Good day, ladies and gentlemen, and welcome to the Q3 2015 Brady Corporation Earnings Conference Call. My name is Mark and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ann Thornton, Director of Investor Relations. Please proceed, ma'am.

Good morning and welcome to the Brady Corporation's fiscal 2015 third quarter earnings conference call. The slides for this morning's call are located on our website at www.bradycorp.com. We'll 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, believe, forecast and anticipate are just a few examples of words identifying forward-looking statements. 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 2014 Form 10-K, which was filed with the SEC in September of 2014. 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. Thank you. I'll now turn the call over to Brady's President and Chief Executive Officer, Michael Nauman.

Thank you, Ann. Good morning, and thank you all for joining us today. I'm pleased to report that Brady generated total company organic sales growth again this quarter, which was driven by continued strength in our Identification Solutions business. Sales within our Workplace Safety business were below our expectation in the quarter, but I am optimistic that with the progress we're making in our digital and other initiative that this business will soon return to its trend of organic growth. As mentioned last quarter, we continue to anticipate the IDS business will show low single digit organic growth for the full year ending July 31, 2015. However, organic revenue in our WPS business is expected to decline in the fourth quarter. Looking at the fourth quarter, we're pushing for a strong finish to the fiscal year and to execute on the six critical activities we set out to achieve at the beginning of the year. First, we recently completed the consolidation of selected Manufacturing facilities in North America, South America and Europe. Through these consolidation efforts, we are creating scale and more consistent processes that will enable us to better serve our customers. We continue to incur incremental cost in our third quarter such as duplicate labor, increased supplies, rent, utilities and moving costs and we’re working to return our customer service level metrics to pre-move levels and are pushing for improved operational performance in our newly consolidated facilities. Our second focus area is operational excellence, which we define broadly as our ability to deliver an unrivalled customer experience in every customer interaction from the moment we quote a customer to the final collection of cash. I've had the opportunity to meet most of our employees since I joined Brady just over nine months ago and it's clear to me…

Thank you, Michael and good morning, everyone. Please turn to Slide number 4 for an overview of our third quarter financial results. Organic sales growth for the quarter was 1.7%. The substantial strengthening of the U.S. dollar resulted in foreign currency translation negatively impacting sales by 8% when compared to the prior year. Overall, including this headwind from foreign currency, revenues were down 6.3% to $290.2 million. Our third quarter gross profit margin finished at 48.6%, down from 50.1% in the prior year. SG&A expense finished at $103.0 million or 35.5% of sales in the third quarter. This compares to $116.7 million or 37.7% in last year's third quarter. GAAP EPS from continuing operations was $0.33 in the quarter compared to $0.39 in the third quarter of last year. Bridging from our GAAP financial results to our non-GAAP financial results, we are adjusting for $3.2 million of after-tax restructuring charges and we are also adjusting for a $2.8 million after-tax benefit from the discontinuation of our retiree medical defined benefit plan. Excluding these two items, our non-GAAP earnings per share from continuing operations were $0.34 in the third quarter compared to non-GAAP EPS of $0.43 in the prior year. Slide Number 5 summarizes our guidance for the remainder of this fiscal year. As a result of the heightened operating expenses in our recently consolidated facilities, and anticipated organic sales declines in our Workplace safety business, we do not anticipate our fourth quarter financial results to significantly improve over what we experienced in the third quarter. We are expecting non-GAAP EPS from continuing operations to range from $0.30 to $0.40 during the quarter ending July 31, 2015. Included in our fourth quarter guidance is low single-digit organic sales growth in the IDS business and slightly negative organic sales in the WPS…

Thank you, Aaron. Let's turn to Slide 11 for a summary of the third quarter Identification Solutions financial results. Organic sales were up 3% while foreign currency translation decreased sales by 5.7%. In total, sales were down 2.7% to $200.8 million in the third quarter. As I mentioned, one of our focus areas is to expand our IDS business in selected industries where Brady products can provide significant value. We've been increasing our focus in industries such as chemical, oil and gas, food and beverage, laboratories, industrial OEMs, and healthcare, and continue to see a positive sales trend in the industries where we’ve focused expansion efforts. During the quarter, our areas of strongest growth were in selected product lines and our Global Safety and Facility Identification product family. Safety and Facility ID grew globally with specific growth coming from our Facility ID consumables. Our printer sales were also strong this quarter with the standout product continuing to be the BMP21-PLUS and its associated consumables, which were lost last year. Product ID was another area of strength, which grew in the mid-single digits fueled by continued growth in the Asia-Pacific region. Our healthcare ID product offerings also grew in the low-single digits during the quarter. Segment profit finished at $41.6 million in the quarter compared to $44.3 million in last year’s third quarter. As a percentage of sales, segment profit was 20.7% this quarter, compared to 21.5% in last year’s third quarter. The decline in segment profit as a percentage of sales was the result of reduction in gross profit margin that we mentioned led into the heightened operational cost in North America along with geographic product mix as Asia continues to be a region with greatest growth and in general, Asia has our lowest segment profit margins. Foreign currency also…

[Operator Instructions] Your first question comes from George Staphos from Bank of America. Please proceed.

This is Alex Wong sitting in for George. Thanks for taking the question. First question, can you just talk us through full-year guidance? The guided $0.30 to $0.40 for fiscal fourth quarter implies roughly $1.34 for the full year and this compares with the last guidance of $1.50. Can you just discuss the $0.15 delta and maybe one or two things that contributed to the reduction? I assume FX is a component, but the euro was actually relatively stable from mid-February to about end of April.

Good morning, Alex this is Aaron. Yeah I can answer that question. First of all just the FX piece just because you brought that up. I agree with you we exited the quarter with the euro basically where we started the quarter at February 1. However, we did have a dip of course in the middle of the quarter where the euro was down in the call it $1.04, $1.05 range. It clearly had an impact, but to be quite candid it was probably $0.02 or less on the full year. So the real reason for the guidance reduction was frankly coming into the quarter we were anticipating earnings somewhere in the neighborhood of a $1.35, implied guidance for the full year is a $1.34 now. And it’s really two main items, first is our WPS business, it just flat out has not shown as much growth as we anticipated. We finished the quarter with organic sales down 1.1% and we were anticipating growth in what is typically or seasonally our stronger third and fourth quarters and frankly we expect a bit of this weakness to continue into the fourth quarter. And then the second component relates to the IDS business and I know Michael alluded to this on the call quite a bit and that is that we continue to experience an elevated cost, which are driving our margins down as it relates to the facilities that we’ve recently consolidated. So it’s really the combination of gross margin in our IDS business and in the top line in our WPS business.

I appreciate that color, and just two quick follow-ons, all around WPS. Maybe starting out, what tangible two or three reasons would you expect WPS to see improved earnings in fiscal 2016 and is there any way to quantify the drivers?

I fundamentally believe that our efforts in our Digital Platform and our web interfaces, our mobile interfaces are strong. And we’re seeing growth in that area to the neighborhood of our sales are now about 15% off the web and I think that the Internet platforms and I believe we will continue to see that grow and we’ll see that grow at a more accelerated rate. In addition to that, the whole team is executing our catalog strategy more effectively and we’re starting to see some results from that. And then the final element that I think is important is our emphasis on a total solution to the customer that is perceived by the customer is flawless, is continuing to show very positive results in our metrics as we move them up. So those elements are very significant. I would add one more, we believe that we’re continuing to add differentiated products to their offering that give our customers a unique opportunity when they buy from us not only to have a more total solution, but to have one with the level of expertise provided that more opaque sites and more opaque suppliers just can't offer.

That's helpful. Appreciate that. And then just quickly, again on workplace safety, we have seen the year-over-year margin compression lessen as we progress through the fiscal year. Are you expecting a similar year-over-year change in fiscal fourth quarter relative to what we saw in fiscal third quarter? How should we think about the moving pieces, i.e., topline growth versus the increased investment spending?

Yeah Alex, I can answer that question and as you look at the segment profit in the Workplace Safety business, we finished at 13.7% this quarter, which clearly is not where we wanted to be. And actually if you go back and look at our original guidance at the beginning of the year we anticipated to do quite a bit better than that by the end of the year. Clearly, we expect to move upwards from the 13.7% segment profit in our fourth quarter and beyond of course. But I absolutely don’t expect to getting back to that 18% level and it’s not so much the increased investment, because the investment was factored into our guidance it’s really the top line. This is a business that has a quite a bit of leverage as you know. So a 1.1% decline organically clearly has an impact on our gross margin, which of course flows all the way down through our segment profit. Does that answer your question?

Yes, Aaron. Thanks very much. Good luck in the quarter.

Thank you.

Thanks Alex. Appreciate your time.

Your next question comes from the line of Allison Poliniak from Wells Fargo. Please proceed.

Hi guys good morning. On ID Solution.

Good morning Allison, how are you today?

Good, how are you?

Good. Thanks.

On ID solutions, obviously it sounds like some of those operating efficiencies, customer service issues could be transitory. Is this one of those things that, yes, impacting Q4, but should obviously improve as we head into the next year?

Yes there I appreciate that thought Allison. It’s absolutely true; you could look at these things two ways, I look at them as great opportunity, as I see the consolidations of our factories together we brought multiple factories into - factories simultaneously. That obviously creates an awful lot of challenges to your existing workforce and your new workforce in those facilities. So as I go around and I have actually been to those facilities multiple times in the last quarter’s helping to support this effort, I see a lot of upside. Your point of several quarters is important. Those upsides don’t just take place overnight as we drive more efficiencies into the organization as we lean them out, as we really apply the principles of proper optimization to those organizations, you’ll see a continued pattern of improvement and I’m actually very excited about that.

Great and then…

And I hope that answers your question.

It does. It does. And then, just with workplace safety, obviously FX is a big headwind there. Is there any way to help us quantify what the impact to margins were? Obviously, you have increased investment, but what the FX particular impact was in that segment for the quarter?

Yeah Allison, this is Aaron. I actually I don’t have that at the segment level. I can tell you that through the full quarter that including translation and transaction the impact of FX in our bottom line was about $0.06 versus the prior year, but I don’t have that broken out by segment.

Okay. No, that’s perfect. Thank you.

Thank you, Allison.

Your next question comes from the line of Mig Dobre from Robert Baird. Please proceed.

Good morning, Mig.

Good morning, gentlemen. Michael, sorry to have to do this, but I guess my perspective on the quarter and performance is a little bit different than yours. You were talking about strong performance and about delivering on goals going into year-end. But the way I see it, you ended up cutting guidance by 11%, and when I am looking at segment level, it's hard for me to see really any improvement anywhere. I mean, the margin performance in the third quarter in workplace safety is the worst on record. And I understand that there is some issues with FX, which I wish we could have broken them out a little bit further so that we really understand what we are working with here. But how can we as outsiders evaluate the change that is occurring within this Company to gain any kind of confidence that 2016 is going to be a better year than 2015, when 2015 seems to have worked out so much different than what you were expecting initially?

Mig. I will tell you when I came into this position nine months ago and as I have continued throughout the process, I believe I've been very frank with our community of investors, in addition with our employees, our customers and our suppliers. We're definitely in a rebuilding effort and those efforts have moments of easily perceived upside on the outside and some moment of downside as perceived from the outside. But what we actually are seeing is a solid momentum to transition ourselves from an organization that have been focused on acquisitions into one that is focused back on the key fundamentals of business. Those fundamentals being getting the products out the door and the way we expect them to and when we expect them to. Those changes are absolutely taking place. Those changes don’t instantly reflect in results, but over the long haul they do, redeveloping a true differentiated R&D product pipeline that our customers want. Once again we’re actually driving those products significantly into and therefore out of our organization. But as you well know as we introduce new products a great example is BMP21-PLUS. The traction from that development that's started a couple of years ago doesn’t really impact until the second year and even the third year of our product being introduced. So the fact that we are tremendously strengthening the differentiated pipeline of our product offering isn’t going to show as effectively as we would like this year. A final big point I’d like to make is that as we go to one global platform once again large, large investments, you can see the numbers that we're putting into that, but the efficiencies that we gain from everywhere, from the operational elements all the way through the interfaces to our customers, are tremendous. But those efficiencies once again are not ones that are a light switch effect, I view them as a rheostat or a dimmer switch, you will slowly start to see those and those improvement though will accelerate over time as we complete those efforts and they are able to grab hold of our organization or our customer's interface experience. So fundamentally the improvements are there. We’re telling you about them. But there are going to be bumps in this road as we move from what had been a acquisition strategy to a more fundamental business strategy going forward. Thanks for the question.

Well, I appreciate that. Unfortunately, I'm going to have to stick with this topic. When we are looking at workplace safety, I guess one of the things that I am having a hard time understanding is why we continue to see organic declines in this business and you're guiding for additional organic declines going forward, considering the level of investment that you have applied recently here, especially in catalogs. And I'm wondering what is the ROI that you're getting from your increased investment. And I also want to tack onto your comment about 15% of sales coming from online. If I remember correctly, that's a statistic that was used roughly a year ago as well, so maybe my memory doesn't serve me well. Have online sales grown significantly for Brady in the past six to 12 months?

The number that I believe you’re given was about 12% so that is growing. As far as further details we will stick to the details we've given. I’ll tell you that the fundamentals of the business do have some challenges and that is, areas like North America that we're seeing a downturn and we believe we have a basis to see many of our direct competitors are seeing a downturn. It is a challenging environment. It is more challenging than we expected it to be and if you take a look at analysts reports and competitor's comments, although I won't reflect on them specifically today, you certainly can do that, you will see that many of them were also surprised by what had been stronger growth going into the quarter and clearly was a negative impact during the quarter. Thank you though, appreciate the questions.

Your next question comes from the line of Jason Ursaner, CJS Securities. Please proceed.

Good morning. How are you today?

Good. Just first on IDS, you pointed to strength in the safety and facility ID and product ID groups. Just wondering how growth broke down in the other three groups and directionally whether all of them were positive.

Yeah, Jason, I can answer that question and well I can attempt to answer the question. I can tell you that those were the two groups where we had the strongest growth. We also grew in our healthcare ID space as well. Beyond that, actually I don’t have the data sitting in front of me, but frankly those were the standout, those were the standout areas. The other functions of course would include Wire ID and the people ID business and I just don’t have that in front me, but the other area of growth was healthcare ID as well.

Okay, and the expectations for low single-digit growth in Q4, is that assuming a negative trend in any other groups or pretty broad-based low single-digit growth?

Very broad based.

Okay. And at the gross-margin level, just maybe following up on Mig's question a little bit, is there any way to think about how big an impact the facility consolidation is on the impact on gross margin in the IDS segment?

No, we don’t really have a breakout for you on that. I can tell you that I do see it is a fundamentally large opportunity for us. And I’m excited that we can actually translate that into positive gains in the future.

Okay. Would it be the majority? If we look historically relative to where the segment is, is the majority of the variance entirely that consolidation activity?

Well, I can answer that. The majority at profit decline absolutely is, so there is a 80 basis point decline in segment profit this quarter that was definitely the driver.

Fundamental of those facilities, I believe we'll be able to have large improvements because the improvement possibilities are visible.

Got it. I am asking more gross margin, rather than operating profit.

Oh, I’m sorry. Well we don’t give gross margin by platform as you know, but the drop in segment profit in ID solutions was driven by gross margin. So I guess indirectly, I actually answered the gross margin question.

Okay. And in WPS, maybe just taking Mig's question from a different angle, you had had three consecutive quarters of organic growth there, obviously back a little bit negative this quarter. Just maybe more qualitatively, how would you look at that in terms of a true operational sales contraction with some of the fundamental challenges you mentioned versus maybe more of just a timing issue, since this was up against a pretty difficult comp from last year?

I am Jason, can you repeat the question I apologize.

When you look at the organic decline in WPS, how much of that are you qualitatively seeing as a true organic contraction from fundamental issues versus just being up against a more difficult comp last year?

That is a very good question. We haven’t that broken that out. I will tell you that if you look at the industry you will see that a large part of it appears to be both from our analysis and from a general review of our competitors related to a overall decline. At the same time, your comment about being up over a more difficult comp is also true. We’re not prepared at this movement to a give a breakout of that, but to tell you both factors are real.

Okay, and the One Digital Platform, is this in terms of the front end or back end? I guess I'm just slightly confused.

It’s a great question. It actually use the back end. So you’ll see the very front end of the interface. We’re actually allowing our businesses to customize it to their needs much more. We’re creating a modular approach. So that all the key core data, the data integrity, the ability to use it, the ability to integrate it into different platforms and different mediums that’s are going to become much, much more focused and efficient but then at the very front end touches the customer. We want that to be highly customized, so that each of our units can specifically adapt to their customer needs and the product focus that they’re looking at and the methodologies they are looking at. So it is a two pronged effect as you pointed out that way

Okay. And on the digital business, you mentioned that is now 15% or so of segment sales. Any measure for organic growth there versus the broader segment? And just directionally, assuming it's broken out on its own P&L internally, is it profitable at this level?

Yes, up and up. Yes up and yes profitable.

Okay. Appreciate all the details. Thanks guys.

Absolutely sir. Thank you.

Your next question comes from the line of Joe Mondillo, Sidoti & Company.

Good morning, guys.

Good morning Joe. How are you sir?

Doing well. So the first question that I had was just related to WPS, so you talk about how obviously there has been challenges not only within your internal business that you have been trying to obviously fix, but the industry sounds like they were seeing some pressure. One, I was just wondering how you think that negative 1% measures up to the industry. And two, how does the pricing at that business look like?

I think fundamentally that we did see some differentiation in that answer on the first one that some competitors did slightly better than others, I would say we were in, I’ve seen mid pack, in overall results for what I saw. In addition as far as the pricing I assume you mean, could you clarify what your question is in regard to pricing.

Yes, just a large part of the margin erosion over the last several years, I believe, was related to competition and pricing, and just wondering what those competitive headwinds look like in terms of overall pricing and how you are pricing -- how you are able to push price there?

I think the team has done a much better job of overall pricing. We’ve actually been able to improve our pricing and have not seen it hurt, where we’ve improved our revenue growth. So that’s actually a positive story we have and in some of our regions we’ve been able to improve our pricing more than others. So its differentiated in regions and products sets. But overall there is some impact of the more open channel access that you see today, but at the same time if we niche it properly and particularly by region we’ve been able to have some price gains.

Okay. And then in terms of the first bullet of your five-point strategy at WPS, the e-commerce expansion, that's been going on for, I believe, almost a year now and you mentioned that, as a total of sales, online sales were up compared to a year ago. So does that mean -- can we interpret that to mean that we are seeing growth in the online sales and it is really maybe on the catalog side that is more of a challenge?

Yes, that’s absolutely true.

And then, I also wanted to ask in regard to the cost structure. I know in the recent past, on the last call, I asked this. I just wanted to get an update on how you are looking at SG&A, the cost structure. I believe in the past you have thought that it is somewhat bloated and can be possibly reduced somewhat over the next year or two. Just wondering on your updated thoughts on that.

Absolutely, I’ve said in recent meetings, it's wonderful to see a transition of mentality here within Brady, while we’re looking at cost and we’re looking at investments very, very differently. I have an overall view that everything we do has to have a return and that you can determine a return and I don’t believe that had been the view before certainly within segments of our business. Now people are looking at it much more entrepreneurs, much more businessmen and we’re also driving a lot of cost, the recent example is our plan to take a lot of the IT resources that are actually fundamental to the businesses and put those in the business. That had been an area that we had struggled with, we initially worked through the concept of driving cost into the businesses but we now see a very solid, very exciting path forward and the proof of that is the IT team is the one that’s most excited about it and they’re driving it and the businesses are thrilled with it. So as we do that, that is fundamental for our ability as I said last time to put cost into the businesses where they’re far more accountable and then as we lower the water in the corporate areas to be able to see who are the alligators are, who are the rocks are, who are the elements that we need to fix are and we’re doing that. That process is I believe Aaron outlined as last time does take a while. It’s like any of our major initiatives like product rationalization. Usually those are not a quick fix. There are two or three year transition, but going down that path, we’re already established on it and as we move down we’re seeing more and more accountability and more and more reality checks as to what we’re working on and why?

So, just to follow up on that, the administrative cost line that you report, that's been declining year over year for six quarters now. Is that related to that? What was the timing of starting to push? I guess it is related to those admin costs or -- why are the admin costs falling for six straight quarters and, I guess, how is that related to your comments that you just made?

I can answer that Joe and that is we’ve been working on driving down our admin cost frankly for quite a while and as Michael talks about pushing cost into the segments, there is no classification issues here, I mean we’re looking at apples-to-apples. So the year-on-year reductions that you’ve seen including this quarter are true efforts to drive down G&A expense. Now I will say this and that is if you look at quarter-on-quarter, so from Q2 to Q3 of this year, our true G&A expense actually bumped up a little bit, which I actually believe is quite normal that you’ll have a little bit of choppiness as we work to take out admin cost but overall I feel pretty good about where we’re headed with admin expense. It’s clearly a focus area. Will clearly continue to be a focus area to really drive down as much as we possibly can.

Absolutely, I want to be quite clear that it’s not just driving the cost into the business for accountability, it’s our belief that we need to optimize those cost much more effectively or drive them down into a level that it’s more efficient than we had in the past and we’re doing that.

Okay, and so just lastly, following up on this topic, how long of a process do you see these centralized costs being pushed into the businesses? How long does that take? And then, how long does the process of maybe that translating into actual overall costs coming out of the entire business or more efficient -- more efficiency take place?

Aaron and I are tied to this one very closely because we see this as a very mutually interdependent effort. We will see continued progress in this area literally for two to three years. It does take some while. I always equate these things to peeling back the onion. As we peel back different layers and look at different opportunity, we suddenly realize we can drive more cost than we expected or different cost than we expected in to the businesses as the businesses see the positive result, they’re more excited about doing that as the functions are seeing results. They’re more excited about doing that. So we don’t want to do anything drastic because we believe it’s much more about getting ourselves aligned properly over time to where we should be. So I would say that you should see this continue to transpire for the next two to three years.

Okay. Thanks, I appreciate that and thanks for taking my questions.

Thank you, sir. Appreciate the time.

Your next question comes from the line of Keith Housum from Northcoast Research. Please proceed.

Good morning, Keith.

Good morning guys. Thanks for taking the question. My questions here are probably just going to be more derivatives of what we have already asked before, but I appreciate the opportunity here. As we look at pricing in your WPS business in Europe and the way the dollar has strengthened, if we assume that the euro stays where it's at against the dollar, are you guys at parity with your competitors there based on pricing because of the fact that you are a US company or are you guys disadvantaged there on a go-forward basis?

Because Europe is -- I’ll answer the question because Europe is a net importer actually as they are in our industry many of our competitors if not most, I would say most, are in very similar situations to us. And we’ve actually seen positive results in growth and outsized results in growth and profitability versus the economy in Europe and we believe most of our competitors. So the good news is we could be in their position.

Got you. Okay. As we look at R&D, Michael, you know, R&D is obviously a core tenet of what you hope to do at Brady here going forward, but yet we haven't seen a change in the amount of money you guys are spending on R&D. I am assuming that's because you guys are probably doing things smarter as opposed to trying to throw more money at it. But how should we look at that going forward? Do you expect R&D to increase, because it sounds like you are changing the way that you are doing R&D, so is that -- if that's elongating the process, is that starving products from being put out today versus invariably what's going to come out tomorrow?

Great question. I won’t dive into the specific segment because we don’t do that, but I’ll talk you philosophically. I’ve actually been looking at where we invest by segment and reallocating money. One of the challenges with a more established company is that you tend to continue to do the things that made you successful in the past even when going forward the dynamics are changing and the way that you need to invest is changing. And so what you have to do is you have to eliminate the investments in the trap over technologies that you just continue to sustain, I’ll give an example if you look at a market totally unrelated telecommunications, if you continue to invest your resources into some of larger platform providers of all you would end up being in trouble. And I think instead of moving those resources to new platform providers that are much more successful and you see them being much more successful in the future, what we had to do is look at where we’ve been making those investments realize that some of those although legacy had been important but they needed to be diverted. And in the Medical space for instance, I believe we’re fundamentally under-investing overall like in labs, in areas like that and we are transitioning investment into there. And there is other spaces that I would rather not talk about specifically that we’ve been over investing for what we believe is a future potential, if you look at the actual percentage by segment that’s what we’re trying to drive into what’s the efficient R&D spend there. But you’re fundamentally correct, as a result of both of the methodology we used to use to invest, if you notice like continually reference a more strategic approach, a more filtered approach to investments and where we are investing in product sets and opportunities, I believe we can become both more efficient and more effective at the same time.

Okay. So it goes forward…

No I want to be quite clear, I believe R&D is a core backbone to our future success. Product differentiation is something that Brady has always done and I believe we can do an even better job in the future.

Okay. So we shouldn’t expect the change of R&D spending from roughly 3% of your sales?

No.

Okay, got you. Next question for you, it goes over to the WPS segment, your digital platform. You talked about the 12% to 15% growth in the digital sales. How are you thinking about that going forward? Is there any point in time that you think there is going to be a significant jump in sales to the digital platform? For example, do you have any type of digital strategy that you think is going to push sales dramatically in that direction or should we expect to see digital sales just slowly creep up over time?

So I will equate this one to something initially you may find bizarre, but paper consumption in the United States I believe did peak in 2002. And the reason I say that is when the internet was introduced, the comment was made that paper would be dead within a couple of years. In reality, paper continued to grow for a decade plus after that and is actually still strong because people still utilize that. In the same way I don’t believe you’re going to see an instant switch, but there are going to be moments of quick acceleration between catalogue users and internet users. But at certain point we are going to get to what I call a platform bottom that will last for an extended period of time as that user base ages, but doesn’t walk out of the work force and in addition to that, there are people who fundamentally use an interactive approach, which is a combination of catalogues, internet and phone that they find to be the most useful for themselves. So that catalogue should often still act as a trigger point although you’re in-sale be either be over the phone or the internet and so we do think it’s going to be a three tiered platform in the long term going forward for certainly a significant period of time, but to be very specific in answering your question, we expect a general decline and a change in the mix over time with some burst as different people groups and technologies accelerate the transition. Is that a clear answer.

I think so. I guess in summary what I am hearing is that we shouldn't expect digital sales to be a dramatic driver of WPS sales in a quick manner. You are going to see it more extended over in time if it is a combination of being driven by catalog sales or just by itself.

Absolutely, but you should see -- continue to see an upward growth trajectory of our digital sales as both the results of our specific efforts and as a result of the market place changes.

Will you guys call this out of the quarter going forward?

Pardon.

Will you guys call this out every quarter going forward?

Pardon.

Will you guys call this out every quarter on these quarterly calls?

I don’t know that we will commit to that here on the call today. But if it is a relevant topic we would certainly try to bring it up all relevant topics, absolutely.

Thank you.

Thank you.

Your next question comes from the line of Joe Mondillo from Sidoti & Company. Please proceed.

Good morning, Joe.

Just two quick -- actually, one quick follow-up. First off, the debt increase from quarter to quarter, why increasing the debt? Why did that increase? And should that start to tick down at all? And then, secondly, in terms of your working capital, how are you looking at investment to working capital and really use of cash? With all the efficiency improvements and lean manufacturing going forward that you see, do you see a smaller need for investment in working capital in the next -- at least in the next year or two or how do you think about that?

Well, I will start with the second question and then I’ll let Aaron answer the first question. Philosophically, I’d like to say that we are strongly aligned and that we think cash that it’s an important element of how we think about going about doing our business in cash efficiency and the use of cash. I am a big believer of when you stop thinking that way, your employees stop thinking that it's their own business and their own business concerns. So cash efficiency and effectiveness is absolutely a mantra that we’re driving. But on top of that you’re right. As we geared up for the consolidations we saw things like inventory builds and the like, we believe in those areas that we have already seen some positive cash improvement this last quarter and we continue to plan to not only see those, but to drive those. But in very even simple ways that I want to point out, often we make the topic complex and it needs to be simple. We talk turns, which honestly are not relevant to most employees, instead we're switching to days because people can get and relate to the number of days of inventory. How many days this takes to get in? How many days you need in stock? And therefore what should your optimum number of days inventory be. So we actually are not only looking at a fundamental change of how we think about the process and we really want to align the cash flow being critical, but we also have changed how we communicate the topic to our employees so that all the down the organization they can get it. I’m a firm believer of you can explain the topic, you probably don’t understand it enough and if you can explain it to where they understand it, it’s not going to impact results. So I hope that answers that question. I wanted to answer it personally because I feel very passionate about it, but I’ll let Aaron answer the other question.

The debt question.

Yes sir.

Joe, so your question was why is debt up in the quarter? Actually debt is actually down a bit in the quarter. It’s down about $9 million. I’m assuming that you’re looking at one of our slides, which compares July 31 debt balance to the current debt balance and that’s basically driven by a change in our cash balance. So our cash from July 31 is actually up about $18 million. So that’s really the driver and frankly the way that we look at this is we look at net debt and net debt has been trending down and frankly we expect it to continue to trend down.

Were those fair answers, Joe.

Okay, yes. Thank you very much.

Thank you. We appreciate the questions.

I would now like to hand it back over to Ann Thornton for closing 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 via the phone beginning at 2.30 Central Time today May 21. The phone number to access the call is 1-888-286-8010. International callers can dial 617-801-6888 and the passcode is 58283822. As always, if you have questions please contact us. Thanks and have a nice day. Operator, could you please disconnect the call.