Good day ladies and gentlemen and welcome to the Q1 2016 Brady Corporation Earnings Conference Call. My name is Whitley and I will 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 call is being recorded for replay purposes. I would now like to turn the conference over to your host for today Ms. Ann Thornton, Director of Investor Relations. Please proceed.

Thank you, Whitley. Good morning, and welcome to the Brady Corporation Fiscal 2016 first quarter earnings conference call. The slides for this morning’s call are located on our website, at www.bradycorp.com. We will begin our prepared remarks on Slide number 3. Please note that during this call, we may make comments about forward-looking information. Words such as expect, will, may, believe, forecast, and anticipate are just a few examples of words identifying a forward-looking statement. It’s important to note that forward-looking information is subject to various risk factors and uncertainties, which could significantly impact expected results. Risk factors were noted in our news release this morning, and in Brady’s fiscal 2015 Form 10-K, which was filed with the SEC in September of this year. Also, please note that this teleconference is copyrighted by Brady Corporation, and may not be rebroadcast without the consent of Brady. We will be recording this call and broadcasting it on the Internet. As such, your participation in the Q&A session will constitute your consent to being recorded. 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. This morning we released our first quarter fiscal 2016 financial results. In our first quarter, we experienced fundamental improvements in our operating costs. Our gross margins improved as a result of driving efficiencies throughout our facilities. We’re also seeing steady improvements in our SG&A expenses. With our manufacturing teams and recently consolidated sites focused heavily on improving customer service and driving efficiencies, we have seen improvements in numerous areas including freight costs, labor costs, supplies, material usage and charges for excess inventories. This resulted in better than expected EPS. We’ve continue to be challenge in the current economy with organic sales which declined 2.2%, the low single-digit organic sales declines in both the Identification Solutions and Workplace Safety segments. The organic sales trends we experienced in the fourth quarter of last year continued into our first quarter. Specifically in the IDS segment, we experienced declines in the Americas and Asia regions although our European business grew slightly. Similarly in our WPS business sales declined in both North America and Australia, while we had continued growth in Europe. In addition to our financial improvements we’re making noticeable gains in our customer service metrics with lead time shrinking, on-time deliveries improving and backlogs declining. Strong customer service and delivering the highest quality products, which our customers have come to expect and deserve is our number one priority. As stated previously, it is very important that we’re seeing continued improvements in these metrics. I’m proud of the strong efforts and the results being generated by the Brady team, but we have more work to do throughout the year and customer service was certainly continued to be our primary focus. We expect to see modest, yet steady margin improvement throughout the…

Thank you, Michael and good morning everyone. Please turn to Slide 3, for an overview of our first quarter financial results. Total company revenues were heavily impacted by the much stronger U.S. dollar when compared to last year’s first quarter. Total revenues were down 8.8% to $283.1 million, when compared to the first quarter of last year, this was driven by a combination of a 2.2% decline in organic sales and a 6.6% decline due to foreign currency translation. Diluted earnings per share were $0.37 this quarter, compared to $0.30 in the first quarter of last year. In fiscal 2015, we completed our restructuring plans and also completed the sales of Die-Cut business. As such our fiscal 2016 financial results are not impacted by discontinued operations, restructuring charges or any other items to be called out for comparability purposes. When comparing against the prior year earnings and EPS figures, the best measure is prior year non-GAAP earnings from continuing operations as it excludes restructuring charges and discontinued operations. Non-GAAP EPS from continuing operations was $0.36 in last year’s first quarter. Having these restructuring activities and discontinued operations behind us not only provides much cleaner financial results, but it’s significantly reduces distractions and enables our team to operate in a more stable environment which helps us focused on strong customer service, organic sales growth and operational efficiencies. Slide number 4, is a summary of our quarterly sales trends. In the first quarter, revenues finished at $283 million as I just mentioned total company organic sales were down 2.2% and we had significant foreign currency headwinds which further reduce sales when compared to the prior year. As we look at our order pattern throughout the quarter, organic sales were up slightly through the end of September, while we experienced sluggish demand in…

Thank you, Aaron. Let's turn to Slide 11, for a summary of the first quarter Identification Solutions’ financial results. Organic sales were down 2.4%, while foreign currency translation decreased sales by 5%. In total, IDS sales were down 7.4% to $196.3 million in the first quarter. When compared to the prior year our European IDS business had slight organic sales growth in the first quarter. We have a strong team in Europe, and they've been doing an excellent job working through the less than robust economic environment over the last year or so. Our organic sales challenges in IDS are due to related sales in Americas and Asia. The Americas results continue to be impacted by the macro economy in Brazil, as well as what appears to be a slowing order pattern in North America. A number of our end customers and our channel partners have seen or projecting a reduction in revenues, which will most certainly haven't further impact on Brady. Within the Asia region, we are experiencing broad based sluggish demand both within China and the rest of the region. As we've talked about in the past, an area of focus for us is to enhance the efficiency and effectiveness of our R&D functions to bring the highest quality products to market in the most efficient manner. Our new IDS President Russell Shaller is presenting a significant amount of time working with our R&D teams to drive improvements in this very important area to ensure long-term success. The core of our R&D organization is strong is evidenced by another quarter of product launches. During the quarter, we specifically launched the new BBP35 and BBP37 multicolored sign and label printers, which are both selling better than our initial launch projections. These desktop printers combined touch-screen, multicolor printing and shape-cutting…

[Operator Instructions] Our first question comes from the line of Allison Poliniak with Wells Fargo. Please proceed.

Hi, guys. Good morning.

Good morning, Allison.

Gross margin, I know a nice uptick sequentially there. Could you talk about the level of sustainability there this year, just given some of the macro headwinds, maybe even pricing pressure just offset by some of those, I guess no cost related to the consolidations anymore. Can you maybe walk through that a little bit with us.

Well, as we mentioned in our previous conversations. We have not been having the pricing pressure that I initially expected. We would have and in fact, our pricing itself has remained strong, really the areas were internally created, our pressures downward. And so we believe fundamentally we have the ability to control and improve that.

Great. And then just going to the segment profit levels, so just your outlook there. You know Workplace Safety it sounds like the seasonality is going to impact, obviously have an effect on that this year. But IDS with the margin there, you talked about some cost outs and restructuring. What’s going on there that, we’re not getting any improvement from today’s level. Is it just the volume headwinds there?

Well, we do have some volume headwinds. We did project this going into this quarter. However we do see stronger than expected decline in our overall channel partners and customers. Not only in recent ordering pattern since just a little before, the start of October but also in their projections for the future and in fact their public projections. We see a downward decline in many of our channel partners. And that is creating a headwind.

Sure, that’s fair. Thank You.

Thank You.

Thank You.

Your next question comes from the line of George Staphos with Bank of America Merrill Lynch. Please proceed.

Good morning, George.

Good morning, George.

Good morning, it’s actually Alex Wong sitting in for George. Congratulations on the quarter and progress.

Thank you.

Thank you.

Just first question on the guidance, with organic growth moving sort of lower, but you talked about some costs being offset back. Can you just provide some specific examples from the cost side you mentioned some of the operational metrics that have been improving, I don’t know if you could kind of go into that or a specific cost leverage that your line of sight that really gives you confidence in the guidance?

Absolutely, I think we are first and fundamentally pleased that our efforts to become more efficient and effective. I have already shown results slightly better than our expectations. We will continue to be able to do that particularly in the areas of gross margin improvements. But also fundamentally in G&A, I think I’ve mentioned to you in the past that I felt our G&A was less than optimized. We’re looking very hard at making sure we continue to put people into the physical businesses so they can be accountable to the results and that’s having a strong effect. In addition at the factory level, our operators are becoming much more efficient. Our organizational structure around them is becoming much more confident and we had some major and significant increases in volumes as we did the consolidations in SPC as an example that created a challenge that we’re overcoming And in Tijuana, we created such a large facilities compared to the ones that have been there in that area before, that it really created a new level of expectations for our overall operating team and they’re becoming much more confident and comfortable in that. And then finally we’re able to take advantage of the leveraging of those volumes. In addition to getting used to them which will create a much stronger area of opportunity. Specifically in IDS, we’ve been able to under the new leadership of Russell Shaller, focus on making sure that our process flow from voice of the customer, sales organization to our engineering organization is clean and tight, and it had not been before, we actually had a lot of redundant efforts that it best, created cost and worse created dissimilar views on an approach. And now, we’ve really done a much, much better job of focusing in that area. So our costs are going down, yet our actual engineers that are working on projects are going up. So it’s a double win for us.

I’d appreciate the color, it’s helpful. Just second question, you referenced reduced catalog advertising as part of the margin improvement in WPS, we saw the company reduced catalog spending a few years ago and perhaps created some difficulties, are there any parallels there or if you could provide some color on to that? And then, if you could also talk a little bit about digital versus catalog growth for the quarter?

Absolutely, so let’s start with the catalog one, because I think, this is critically important, a couple of years ago, prior to my arrival, a decision was made to instantly switch from catalogs to digital and that was actually implemented North America. The problem with that was our customer base wasn’t going to instantly switch. And in fact, we remain strong in catalogs for years to come based on demographic issues. We also weren’t prepared even if the customers were prepared for that digital switch you can’t just announce that you’re going to put all your money into digital and hope the customers will come to sites that are not geared around quicken expeditious, and proper purchasing requirements. If we fast forward to two years, so what we did a year plus ago was restore all the catalog efforts we just did it holistically, because to be able to determine the most efficient effective way to distribute those catalogs at that point would have been highly risky. In the meantime, if you move forward another year we’ve been carefully beta testing and analyzing how we distribute our catalogs, so that we can reduce from what had been an elevated level of catalogs, because we went back to wholesale to make sure we closed the gap totally to an efficient and effective use of our catalog. So we have absolutely not done this in a manner to say we’re switching to digital, instead we’ve done this in a manner to say, if you treat the catalog business as a catalog business, as a standalone effort, you need to make sure that you’re sending the catalogs to the people who will actually use them and use them effectively, and that’s what we’ve been doing over these last period. And it’s actually paid off tremendously for us. Hopefully that helps. Now, as far as the second half of your question the digital growth, although we don’t provide specific numbers, we did talk to you about the double-digit increases, we’re seeing tremendous improvements in that area, I’m very actually proud of our sites. One of our first sites to go over, I’d like to let people know about its www.emedco.com, if you take a look at that site, short of filling in your personal data and your credit card number, you can literally find and procure and buy a product in less than 10 seconds. That is 180 degrees of what you are able to do just a year ago. And we’re not only doing that, we’re doing that in a variety of other sites www.seton.com we introduced this quarter those are major revenue producers for us as we continue to develop those sites, we’re going to continue to see significant growth. We’re not making a particular projection at this point, but as we’ve said we’ve seen double-digit growth on those sites.

Got it. And just last one for us, I’ll turn it over. Aaron, just on the cash flows, nice to see the improvement there especially on the inventory line as kind of the inefficiencies to dwindled down. If we look forward, is this a stabilized kind of rate that we should expect or do you continue to foresee additional improvements on the casual side, maybe which areas if so.

Yes, so from a cash flow perspective, I’m mean, obviously we’ve given our guidance with respect to CapEx. So we expect our CapEx to be down from where it was last year. As we look at cash flow from operating activities, I wouldn’t anticipate, I’ll say major improvements in working capital we continue to drive down, specifically inventories. But that rate of decline is also relatively measured. So as we look at the $30 million or so of cash flow from operating activities this quarter, it did include a bit of tailwind if you will from working capital and frankly as we look at, we’re always working to drive down working capital. However, we certainly don’t include it in all of our cash flow projections and whatnot. So I just be a little cautious as you look at working capital.

Thanks.

Your next question comes from the line of Charley Brady, SunTrust Robinson Humphrey. Please proceed.

Hi, thanks. Good Morning.

Good morning, Charley.

Let's go back to the on the catalog sales decline in WPS. I just want to make sure I understand. Can you quantify what impact that had on margin in the quarter and are we going to see further reductions or has the catalog spending been taken to kind of a new level that ought to be kind of flatlined. Obviously, it's going to move up and down with sales in the seasonality but essentially the bulk of the reduction is done or is there more to come?

Okay. So – I think there is two halves to that question. One is related to the spin on catalogs, the other is related to the actual revenue decline, Charley. I’ll start with the catalog reduction. We’re going to continue to model that situation and beta test. We actually developed very specific beta testing methodologies that we used to determine, whether or not we should increase or decrease catalogs in certain segments under certain user basis. We fundamentally believe over the next ten years to fifteen years, you will continue to see a decline in catalog use, particularly we’ve said in the past you’ll see some incremental steps as the generational changes take place. But we believe it’s a fundamentally strong marketplace for the foreseeable future that we certainly don’t want to depart in anyway. So yes you will see over time continued catalog optimization, but I don’t know that you’re going to see giant step functions you’ll see a slow justification and rationalization of our catalog spend as we go along. As far as the seasonality, that is a revenue, that is a trend that we have seen forever. It absolutely takes place as people are deep focused possibly by the holidays and on the other things and usually then you see an upward trend after you come out of that time period because they have to get back and doing the things that they do very effectively. So, we don’t expect the overall trend to change at all as far as seasonality.

I just wonder, can you parse out on WPS on the margin performance in the quarter? Can you just parse out the improvement you’ve got from the lower catalog sales versus the operational efficiencies that you cited in the queue?

We don’t break out that type of information, but we obviously have told you that we did receive benefits from both of those efforts.

Okay. And let me…

WPS tends to have been both strongly in both efforts, we can say that.

Okay, fair point. I was wondered, it’s on the $1.10 to $1.30 your guidance. Could you just maybe frame for us, your thinking, or your expectations to get you to, one extreme or the other on that? And you’re talking, organic sales down a little bit more than you thought it was going to be, and the margins looking actually a little bit better, the guidance is unchanged. So just kind of what your thinking is on kind of the ranges of that guidance?

Yes, I can answer that Charlie. Well, I mean, frankly the ranges are what you see, it’s the $1.10 to $1.30 and what we’ve factored in is, basically just what we said which is, we absolutely expected our revenues will not come in where we had originally anticipated, but some of the efficiency gains that we experienced in Q1 will continue throughout the rest of this year, so, I mean, frankly it just so happens, but as we balance those two out, that we still end up within the range. Now clearly things, of course could happen in the future that would push us to either above or below that range. However, the best view that we have today lands us within that range. I’m not sure how else to answer that question.

Yes, I guess what I’m really trying to understand is it’s $0.20 range, the pretty wide range between low and high. We got one quarter under the belt already. I guess, I’m just trying to understand, what would it take to get us to the low end, what would it take to get to the high end, relative to kind of your mid range thought process on that? Instead of sales going down slightly, sales down double-digits or up double-digits, what’s the swing factor that goes into the thinking to construct this guidance range?

Clearly our biggest swing factor is organic sales. No, question about it. As we look into the future and frankly as we look at what some of our channel partners have recently come out with and what some of our customers have come out with as well, I think, that there’s a fair bit of, I’d say a fair bit of challenge in really pinning down what our organic sales are going to look like for the back half of this year. The low single-digit decline that we mentioned for the back half of – I’m sorry, for the last three quarters of this year, which is within our range. I don’t really want to get specific with respect to what type of organic sales would get us out of that range because there’s so many variables that could factor into that, including what we do from a cost side, et cetera and a mix perspective as well. So…

That’s fair, that’s fair.

The big question is organic sales.

Yes, the question helpful. I have one more and I’ll get back in the queue. The R&D expense was down about $1 million citing timing differences can you just – is that going to be up ratably over the remaining three quarters, or is it kind of pop back up to normal here in Q2?

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, and materials and things like that, but even that has been fundamentally based 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 it ever been there in this recent years before we acquired it, because of the nature of their previous owner and even after we acquired it, as an example.

Thanks.

Absolutely.

Our next question comes from the line of Mig Dobre with Baird. Please proceed.

Good morning, gentlemen.

Good morning.

May be trying to drill on what Charlie was asking in a little more, Aaron, if I look at your guidance, and I look at what you guys managed to do this quarter, basically it implies that you’ve had roughly 30% of earnings, a full year earnings at the midpoint generated in the first quarter. If I look historically that’s actually not what normally happens with Brady. You typically have, call it 25% to 27% of earnings in the first quarter. And really the only years in which I can find you coming close to this 30% mark, are you is in which, your business really struggled, whether we had the deterioration in WPS, whether you had inefficiencies and cost that were flowing through? So my interpretation of your guidance is that, you are in fact telling us that there is going to be some drag somewhere as the year progresses, and it’s unclear to me how that is the case given that you’ve had at the quarter. And most of the issues surrounding facility consolidations are behind you. So what it gives here?

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 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 operate 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.

Okay. So maybe you can help me think of it this way. If we’re looking, leaving FX to decide, if we’re looking at organic growth, and maybe talking through on IDS, you now expect to be down slightly for the year. How do you see organic growth progressing here? Should we kind of brace ourselves for maybe a pretty challenged January quarter, I mean, to be that will be consistent with what a lot of folks in the industrial space for instance are expecting, is that the messaging here?

Well, I want to be careful not to give quarterly guidance, but I will say that our second quarter is typically our lowest performing quarter from a seasonality perspective. And if you combine that seasonality with some of the order pattern 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 is a fair amount of questions surrounding what’s happening from an industrial economic perspective. And that’s factoring into our top-line challenges anticipated growth or lack thereof.

Well, and I understand you’re not providing quarterly guidance. I just want to make sure that we have some proper ranges out there because as I look at your guidance right now, to me it implies sort of trends that are fairly similar to what we’ve seen this quarter. And I want to make sure that I get that straight.

When you say trends in this quarter, you mean organic sales declines and improvements in…

Organic sales – I mean, organic sales declines that are relatively modest, and I want to make sure that that’s kind of how you guys are thinking to you’re not thinking, a call it a meaningfully kind of worse, call it the second and third quarter would have rebound, say for instance in the fourth, because if that’s the case…

No, that is absolutely not. Good and fair question. That is absolutely not how we’re thinking about it.

Okay.

We’re not thinking about [indiscernible] going to bounce back.

Okay. And then, can you maybe give us some color on the inefficiencies that you’re still experiencing in ID solutions, because to be very upfront about it, I thought you guys had a really nice quarter there and you’ve done far better margin wise than I would have guessed based on your comments last quarter, in terms of inefficiency stretching. So what still going on there and what kind of drag are you experiencing?

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 operational improvement areas across the board still, labor efficiency, materials efficiency, all of the type of elements you had 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.

Got it.

To be clear we do see more improvements available.

I appreciate that Michael. And maybe my last question would be that if you were to sort of frame the inefficiencies, and say for instance on a scale of one to ten, the first quarter was ten. Do you see those inefficiencies dropping to five or to two next quarter? How can you think about that?

I like your question, I think, it’s problematic to answer in that, we continue to expect improvements, I don’t want to characterize it on one to ten 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 time scale than you possibly anticipated. And we have some of those still available to us, without characterizing 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.

Great. Thank you.

Thank you.

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

Hi, guys. Good morning.

Good morning, Joe.

Good morning.

So first question, I know someone asked about cash flow generation, and the first quarter was one of the strongest quarters in terms of cash flow generation. I just wanted to sort of follow-up on sort of the working capital and inventory question that was asked before. It seems to me that if you're in an environment where sales are sort of slightly even flat to slightly down you just made all of these plant consolidating and we haven't really seen in terms of the restructuring over the last year or so. We haven't really seen tremendous improvements or actually sources of cash through inventory. I would think there would be a lot more room to actually see inventory as a source of cash, especially in this year coming off the year where you made all of those consolidations of the plants. I was just wondering why you held back from sort of thinking that inventory is going to be a source of cash?

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’re 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 model it’s a huge improvement in working capital. We obviously are striving to drive down inventories. We all strive on cash flow and 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.

Okay, in terms of use of cash, obviously I think CapEx and dividend are one and two. Stock repurchases, obviously you just announced another program. Just wondering how much you have of that in the guidance if at all, the EPS guidance?

Yes, we – our typical practice is not to include any sort of share purchases in our EPS guidance so zero.

Okay.

Zero beyond what we’ve already completed

Okay and then just in terms of the administrative cost line. We've done a really good job of bringing that down over the last six quarters or so on a year-over-year perspective. I imagine that continues to come down especially – or do you expect that to continue to come down? And do we get under $100 million on an annual run rate or how you’re thinking about that administrative cost line?

Yes, 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 are actually have been increasing and that’s effectively been offset with some of the efficiencies in other areas. Now, as far as, I’ll say guidance on this line item for the rest of the year. I’m not going to give that that level of granularity. But clearly this is an area we’re focused on, it’s an area we’ve made improvements on. It’s an area we anticipate making future improvements on. But not at the point where I want to put out, I’d say formal guidance with respect to what this year is 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. fiscal 2016 range.

Okay and just lastly, depreciation and amortization, you maintained the $40 million target. That seems to be very lumpy. So number one, why is that so lumpy on a quarter-to-quarter basis? And then number two, if you hit $40 million that does imply about a $2 million increase on a quarterly basis throughout the rest of the year compared to the first quarter what you realized. So just wondering if you could provide any color on that?

I can. So we put out the D&A guidance back in September at $40 million. As we – obviously to your point we incurred less than that in Q1. Now as we look at, 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 guidance – what could affect our actual D&A in the future is really the timing of our capital expenditures. If we complete our $25 million of CapEx earlier – in the year, we will hit 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 make to your point come in slightly below that based on the timing of CapEx.

Okay. And in regard to the CapEx, what are you exactly spending on CapEx outside of sort of a maintenance spend?

Well, we actually don’t look at CapEx breaking it out between maintenance growth, et cetera. The main components of our CapEx will be continued, 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 Brady. In addition to that, it’s continuing to provide better, more efficient equipment within our factories, which 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.

Okay. And so the increase to D&A would be related to the equipment side of things?

And IT.

And IT. Okay, okay, thanks a lot.

Thank you.

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

Good morning guys, thanks for the question. Michael, if you don't mind, can you provide a little bit of color on the different sub segments within IDC? I know you guys stepped away from providing a lot of detail but I know PDC is sort of based on an area of yours that you've been focusing on improving. Can you provide little bit of color in terms of you know it being a little bit close to better than the others and perhaps your thoughts about those going forward?

Yes, 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’re looking at some 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.

All right, thanks, and are you willing to talk about like the wire market space and the people and other segments as well?

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 keep fundamental areas as you know lockout/tagout, wire ID, labels, printers et cetera in the IDS 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. We don’t have any anticipated plans to do anything, but to continue some, actual stronger investments than we’ve been doing in the recent years in all of those areas.

Okay, thanks. And then just a follow-up for you, Aaron. In terms of foreign currency translation, is it – pertains to the bottom line, is that a relatively neutral impact on the bottom line?

No, no it’s definitely is not neutral impact on the bottom line, we’re hit from two aspects, one is, normal translation, so the strengthening of the U.S. dollar and the impact on our foreign financial statements. And then, in addition to that we are a net exporter out of the U.S. particularly 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.

And how much do you think it was for this quarter on an EPS perspective?

The translation is very easy to calculate, the transaction side is a little more tricky, but we anticipate – but we, our calculation is somewhere in the neighborhood of $0.05 to $0.06 in total, so very significant for the organization.

All right, thank you.

Thank you.

Our next question comes from the line of George Staphos with Bank of America Merrill Lynch. Please proceed.

Thanks for taking the follow-up, just two quick ones, one on the Europe, seems to be holding a fairly well for both businesses, if you can just talk about what you’re seeing there, what are some of the drivers and what you’re hearing from your customers with regards to Europe?

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 organization and our products sets 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 and that they’ve been fairly weak for a while.

Understood and then just last one Mike, you spoke a little bit about innovation and investing behind that, despite in light of the macro headwinds, and then I think, on the last call you also mentioned taking a look at the product portfolio and maybe eliminating some skews that might not meet the return threshold, so I was just curious to see your thoughts on how you balance those two within the organization?

Well, I want to make it clear, we’re 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 under developed. 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 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 spending on the space, into our OEM efforts and to 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’re 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 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’re actually adding engineers to our organization for the specific purpose of innovation that we already know we want to do and we have targeted.

Thanks.

Thank you.

Our next question comes from the line of Charley Brady from SunTrust Robinson Humphrey. Please proceed.

Hey, thanks. Just a quick follow-up, back to your earlier comments Michael on the sales trends you saw in the quarter, the first couple months, I guess, sound like they were up and then you saw a drop off in October. Could you maybe give us a little more granularity and kind of a cadence of sales/orders in the quarter? And then second question on the guidance, what exactly is your FX expectation for sales that’s embedded in the current 2016 guidance?

Well, let’s start Charley 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, I believe the 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 industrial space.

I’m sorry, Charley that relates to the FX, the expectations that we’ve 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 top line 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 towards the end of our second quarter last year. So you’ll see a big impact in Q2, significantly moderated in Q3 and Q4.

Thank you.

There are no further questions in queue.

Thank you. We thank you for your participation today. If you are listening on the Internet, we do understand that we lost audio for a few minutes at the end of Michael’s remarks and just at the very beginning of the Q&A. So just as a reminder the full audio and slides for this morning’s call will be available on our website at www.bradycorp.com. The replay of this conference call will also be available via the phone, beginning at 2:30 Central Time today, November 19. The phone number to access the call is 1-888-286-8010. International callers can dial 617-801-6888. And the pass code is 57380138. As always, if you have questions, please feel free to contact us. Thanks and have a nice day. Operator, could you please disconnect the call?