Good day, ladies and gentlemen and welcome to the Brady Corporation Third Quarter 2016 Earnings Conference Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call may be recorded. I would now like to turn the conference call over to Ann Thornton, Director of Investor Relations. Ma'am, please go ahead.

Thank you. Good morning and welcome to the Brady Corporation fiscal 2016 third quarter earnings conference call. The slides for this morning's call are located on our website at www.bradycorp.com. We will begin our prepared remarks on Slide number 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 last year. Also, please note that this teleconference is copyrighted by Brady Corporation and may not be rebroadcast without the consent of Brady. We will be recording this call and broadcasting it on the internet. As such, your participation in the Q&A session will constitute your consent to being recorded. Thank you. I will now turn the call over to Brady's President and Chief Executive Officer, Michael Nauman.

Thank you Ann. Good morning and thank you all for joining us this morning. I am pleased to report that Brady's fiscal third quarter profits once again exceeded the prior year's results. This marks our third consecutive quarter of improved financial performance. I'm proud of our teams focus on continually improving the experience of our customers while creating a more efficient and effective organization, as we're seeing continued improvement in our manufacturing processes through increased gross margins and throughout the rest of the organization in reduced selling general and administrative cost. This quarter we experienced a 27% increase in GAAP earnings per share and a 40% increase in operating cash flow when compared to the same quarter of last year. I'm impressed with the level of focus and consistency that the team is showing in driving our organizational goals and we're pushing to carry this momentum through the fourth quarter and into fiscal 2017. Through the first nine months of the year, we've been able to remove most of the distractions that impacted our financial results last year. We're no longer consolidating facilities and dealing with operational and customer service disruption. We don't have an ongoing restructuring plan and we're not impairing our assets, instead our attention is returned to what has made Brady a great company. We are developing innovative products that fulfil our need for our customers while providing excellent customer service, growing the core business while continuing to drive operational efficiencies is our number one focus and will remain our priority next fiscal year as well. Although our organic revenue decline was less than we anticipated at 0.1%, the current economic environment is making our R&D and new product developmental efforts even more important, our R&D processes are improving each and every day, which is leading to…

Thank you Michael and good morning everyone. I'll start the financial review on Slide number 3, this quarter revenues were down 1.2% to $286.8 million when compared to the third quarter of last year. This reduction consists of an organic sales decline of 0.1% and a reduction of 1.1% due to foreign currency translation. Turning to earnings, on a GAAP basis our EPS grew 27% this quarter. Diluted EPS was $0.42 in the quarter compared to GAAP EPS of $0.33 in the third quarter of last year. We have no non-GAAP items to call out this year. However, 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, discontinued operations and a one-time gain from a curtailment of a postretirement benefit plan. Non-GAAP EPS from continuing operations was $0.34 in last year's third quarter, which compares to our GAAP EPS of $0.42 in the current quarter, a solid increase of 23.5%. Slide number 4 is a summary of our quarterly sales trends. In the third quarter revenues finished at $286.8 million and as I just mentioned total company organic sales decreased by 0.1%. On a divisional basis, organic sales decreased by 0.8% in the Identification Solutions segment and increased by 1.2% in the Workplace Safety segment. Looking a bit deeper at our slight organic sales decline, we saw a declining sales in market such as Western Canada, Western Australia and parts of Texas and the Dakotas where our customer base and the economy in general has some times to natural resource extractions such as mining, natural gas or oil. At the same time we saw an improvement in geographies where there is less of tie to natural resources such as in Western Europe. This…

Thank you, Aaron. Let's turn to Slide 11 for a summary of the Identification Solutions financial results for the third quarter. Organic sales decreased by 0.8% and foreign currency translation further decreased sales by 1.1%. In total, IDS sales were down 1.9% to $197 million this quarter. Our European IDS business had solid organic sales growth in the third quarter improving by mid-single digits compared to last year. Strong sales growth in Europe has been a consistent trend, which is a testament to our team in Europe who have been executing their plan effectively, specifically in Western Europe. IDS organic sales were weakest in our Americas and Asian regions. We continue to be impacted by the economy in Brazil as well as sluggish demand in the US and in Canada. Our customers in channel partners have seen reduction in revenues which has had an impact on Brady and we expect further declines in the near term. In Asia, our reduced sales are mostly driven by China but we're also finding the growth is difficult across the entire Asia-Pacific region. We've been taking actions to drive our Asian sales including certain focused hiring's in our sales organizations. Looking at segment profits; IDS finished at $46.4 million in the quarter compared to $41.6 million in last year's third quarter. As a percentage of sales, segment profit improved to 23.6% this quarter compared to 20.7% in last year's third quarter. I'm encouraged by the increase in segment profit margin in the IDS business. These improvements are a direct result of our continued focus on efficiency to our manufacturing processes in both the Americas and Europe as well as improving efficiency levels in both our sales and R&D organization. Meanwhile, we're not backing away from investments in innovation that will drive our future. This…

[Operator Instructions] our first question comes from Mig Dobre with Baird. Your line is open.

Maybe a couple of questions on ID Solutions, I'm trying to understand the puts and takes of your margin performance in the quarter, which was quite good. If I'm to look at the third quarter and compared to your say first quarter numbers. In the first quarter, you pretty much had the same revenue as you had in the third yet you ended up with roughly $6 million more operating profit. So I'm trying to understand how much of that came from your initiatives from cost savings as opposed to mix and other items.

I can address that Mig. I'm going to take a broader step back and that is to look at our gross profit margin. So if you look at the gross profit margin improvements that we saw this quarter was effectively all in Identification Solutions as Workplace Safety was relatively flat with the prior year. So that's where the biggest benefit that you're seeing in ID solutions is coming from and frankly it's coming from primarily North America, where we've had the majority of our facility consolidation activities and we're seeing benefits literally across the board and I mean, we're seeing benefits in freight costs, we're seeing benefits in reduced personnel cost, reduced temporary labor cost, better material usage, less scrap, reduced supply purchases. The bottom line frankly is that when you look at the ID solutions performance on a profitability perspective, yes the team is doing a very nice job managing their selling expenses but the biggest benefit is coming from our gross profit margin.

Sure. You're talking year-over-year, I was really talking versus your first quarter where I'm going with this one is that, it seems to me that these benefits are really starting to kick in maybe in the third and really in all earnestness in the third quarter and going forward. Am I correct in that assumption?

You're correct. If you look at our gross margin in ID solutions it's been a nice steady improvement story.

And I do believe [ph], we conveyed that in previous quarter discussion with you [indiscernible] anticipation.

Sure, I mean your year-over-year comps are easy in this regard in the third and the fourth quarter. So I was checking that's still the case then looking at your guidance for the segment, you mentioned low single-digit decline for the year as a whole in IDS organically and margin slightly above 20%, if I look as to what that implies in the fourth quarter. It implies, call it relatively flattish revenue sequentially but the operating margin to be down sequentially and frankly not improve it whole lot year-over-year in the fourth quarter. So I'm trying to understand why you're framing the guidance that way or perhaps I'm not understanding something here.

Yes, I'll answer that one again. So when I look at the where we're year-to-date in Identification Solutions from a segment profit perspective we're at a little over 21%. So maybe it was the way that we phrased our guidance but as I think about just over 20%, I think we're actually in that range right now at that 21.4% that we finished year-to-date. So that's about where we would anticipate coming out for the rest of the year. My point is that, I don't anticipate a huge uptick or frankly or a large decline either and then shifting to organic growth year-to-date in Identification Solutions we're down 0.7% I believe and we would anticipate that perhaps could get a bit worse from a year-to-date perspective, so.

But Aaron I guess what I'm wondering here, you're not really expecting sequentially, a meaningful decline in revenue from the third quarter to the fourth in IDS. I'm wondering why you would expect your operating margin to decline then.

Yes, very good question. I'm sorry, I didn't answer that the first time. So when we look at, I'm going to back again to our gross profit margin and when we look at our, when we look at the third quarter in particular. I have to tell you, the third quarter is one of those where effectively everything went right. We didn't have much to go wrong in the way of one-off items, no one-off cost. Frankly there were no surprises in our gross profit margin and as we improve and continue to improve, where we've been seeing is that. We still do have some cost that get incurred that we need to overcome, frankly we didn't have that in the third quarter. Our third quarter margin performance in identification solutions was solid. So as we look at our fourth quarter. I mean we always expect that there will be a bit of something and again we didn't have that in the third quarter.

That's really helpful and then the last question from me is, really looking out into 2017 and so on, knowing the initiatives that you've already put through in terms of cost savings and maybe some of the other things that you have in the pipeline recognizing that the demand environment might be weak. Is it fair to assume that margins can continue to expand in IDS?

The answer to that is, yes however we're not putting out fiscal 2017 guidance at the moment as you know, but yes we absolutely believe that margins can expand in both ID solutions as well as workplace safety. The challenge that we have and why we're as cautious as we are, it really comes down to revenue and we have concerns about obviously we have concerns about the macro environments that we are operating in today, that is the real wild card that we're seeing at the moment.

Thank you for the color.

Thank you. Our next question comes from George Staphos with Bank of America Merrill Lynch. Your line is open.

Hi, it's actually Alex Wong on for George. Thanks for taking our questions. Just on the guidance, if we think about versus the previous guidance I think at the midpoint you raised it about $0.13 or so on the positive side of the ledger it looks like FX is maybe less of a headwind, you called out lower D&A I assume there is also some roll forward from the strong performance in the third quarter and then on the negative side the slightly higher tax rate, but I don't assume the necessary needle mover, but can you just maybe help us parse out maybe the raised guidance and how we should be thinking about that?

Well I think you hit on most of the components actually and then obviously the other piece to add would be the top line performance as well and when you add it all together, we do believe that we'll do a bit, I mean frankly we're anticipating that our fourth quarter will be a bit better than what we had anticipated about three months ago, which is why you see the increase in our guidance. So frankly beyond that, there is not much more to comment on SG&A continues to be an area of focus, continues to be an area that we're driving down margin performance we just talked about. So I think you just hit on, on the main components of the guidance.

I mean just to clarify, so would you say and the primary factor is really a more of a roll forward or are you saying underlying operational efficiency come in maybe better than your expectations.

We definitely saw operational improvements come in better than we had anticipated, when we gave our last guidance at the end of our second quarter. The financial that underpinned that guidance did not have the margin performance that you saw at this quarter. So clearly we've been improving our margin at a faster cliff than we had anticipated.

Appreciate that, just as a second question. It's maybe a little difficult sometimes to get visibility on some of the operational efficiency and SG&A trends until quarterly reporting. You just talked to some specific areas really across the board that you're seeing this improvement coming in ahead of your plans. Ultimately, maybe how much left is on the manufacturing efficiency related to the facility moves as we head into 2017, is it possible to quantify that versus maybe more normal improvements you're that you're trying to extract on an ongoing basis from productivity and asset utilization?

Yes, it's actually hard to parse out the two components of that Alex. We actually, we get a question quite often actually and that is what inning are you in, in your operational efficiencies and we typically answer the question. We haven't even got into the batter's box yet. I mean the reality is as we look at our operations and this isn't just our gross profit margin improvements but SG&A as well, we see a significant runway of opportunities, I mean frankly over the next several years and to parse it out between just facility consolidation related cost and I'll call it normal operational efficiencies, it becomes very difficult because frankly we've been in our consolidated facilities now for actually about a year and we're in bigger facilities, it's easier to identify operational improvements that are bigger improvements when you do identify them and you do execute them. So I know I'm not giving you a direct answer of how much is operational improvements versus facility consolidations but at the end of the day we see a pretty significant and long-term runway.

Understood and just last one before I turn it over. Europe continues I think to be a strong performer in the third quarter for both segments and then you also talked about maybe this bounce by some sluggishness in the US. Can you just talk about specific factors impacting one region versus the other whether maybe end market product mix or share gains or something else?

Sure Alex, if we take a look at our different regions we do see several different factors operating. If we walk through IDS there's no questions that the overall economy in the Americas, US, Canada and Brazil was slowing down. We did have some solid upside in Mexico and continue to see some very good and expect to see continued growth opportunities in Mexico. So the overall pattern was definitely related to the economy and particularly you can dive into areas like Houston, Western Canada where we see a lot of dependence on our oil and gas related products. You definitely see significant hits to our business in there. If you take a look at Europe on the other hand their economy is structured slightly different at this point. And as an end result, we're able to do better. We certainly have a very strong team there in IDS and they're doing a terrific job but a lot of other factors have to do with the nature of industry in Europe versus the nature of industry in the Americas. And finally, Asia really you can divide into several pieces for us. China, South eastern Asia actually Japan is differentiated from China and the GDP there, we're having mixed results with handling their entire GDP situation, we definitely though have an effort to increase some specific key sales efforts in there because we do believe, we can do a better job despite the downward trends. If we look at Americas and our WPS on the other hand, we see pretty similar trends, we would add Australia as oppose to China to that discussion and the good news there is that we're actually improving our revenue decline in Australia and we continue to see a stabilization of profits as we really leaned out the team and focused them. They are definitely undergoing some major long-term issues with commodities that are extraction industries in particular that are key to that region and key to our previous and future success there. So we have to work harder in the areas that aren't extraction related to overcome that situation but frankly that's a dominant force in their economy in the types of product that we manufacture. So that is a unique challenge to overcome with the proportion of their economy in that regard.

Much appreciated the thoughts.

Thank you. Our next question comes from Charley Brady with SunTrust Robinson Humphrey. Your line is open.

I just want to clarify a comment that Aaron made in response to question on the IDS operating margin, where the guidance being slightly over 20% for the year and year-to-date running at 21.3%. I thought I heard Aaron say that you know the 21.3% would be considered equivalent to just over 20% which seems like a pretty wide space to me. I just want to make sure, I heard you correctly on that.

You did hear me correctly.

Okay, so really you would expect year to be over 21%, rather than just over 20%.

Yes, I think that's fair.

Okay and I guess, as Aaron brought it but I know you're not giving guidance for 2018 but since Aaron kind of brought it up about the organic growth outlook. Can you talk about what you saw organic growth going just in the early part of fourth quarter and given your comments in organic growth and what you said about the ability going into 2018 and the EPS growth outlook, are you at this time expecting EPS to be up year-on-year in 2018 or do you think you would be flat?

I guess, I'll answer that. Well first of all, you're right we're not giving guidance for our fiscal 2017 and the specific question that you had with respect to how did we start our fourth quarter, I really rather not talk about that and the reason that I would not like to talk about it, is because when you look at our sales on per day basis throughout a month, it can be extremely misleading and it's hard to extrapolate in a 15 or 16-day period what the actual results will be for the month. So I guess I'd rather not comment on that and obviously as it relates to 2017 of course we anticipate increase in earnings per share, but beyond that, I'd rather not give any more color.

Okay, thanks.

Thank you, our next question comes from Keith Housum with Northcoast Research. Your line is open.

I guess my question is focused more on the balance sheet. As we look at your CapEx guidance further in the year, I think you guys pointed $25 million, you guys were down at $13 million for the year and I think you noted that just the timing of some of your projects but can you provide a little bit more color. I mean was there anything in the overall environment that's pushing out spending in the CapEx in press release projects maybe or the expansion of existing lines or facilities or any color you can give around the delayed projects?

Sure, straight out we're actually excited with our deployment of capital. We have become very disciplined in our approach, our product pipeline is increasing and becoming stronger and at the same time, we're looking at and pursuing capital equipment to help our factories become more efficient and effective and also for us to be less dependent in critical areas of sourcing. The end results is, I want to send a strong message to you that, we are actually working harder and more effectively in that area to put more into deploying proper capital, that said the timing of our use has not been exactly what we anticipated none of that is a negative for our future quite the contrary.

Great, thanks. And then as we look at your balance sheet especially your cash positions, probably the strongest I can remember being in many years and you guys have done a great job getting your net debt position down but there is been no change in your capital allocation strategy and as we look at your R&D numbers hasn't really changed much as well. So can you perhaps expand a little bit more on how you planning to put your balance sheet to work and with investing back into the business? Do you plan R&D increasing in the future or in growing the sales staff to help drive sales?

Well we're are always going to look at those factors very carefully but there is no question that we are refocused as in innovation product driven organization and that we're driving that mentality throughout our company in all of our businesses and we feel that we're making significant progress in that area but you're correct, we will be looking at some of our platforms in particular to drive a more innovative unique product centric culture but we're providing absolute differential value to our customers and at the same time providing differential value to ourselves. So yes, we would expect to see more both efficient, effective and increased efforts in the area of R&D. We also believe that our sales effort will continue to move forward as we see opportunities to expand into markets or to customer bases that we had not before, but there is an absolute effort become not just a farmer-driven mentality as an organization of sales but hunter-driven, where we go after opportunities earlier in the cycle so that we can actually provide more differential improvement.

Okay. And then I guess finally, as your cash position is growing, is there more a priority that you are going to give to share repurchases than perhaps dividends? Because I'm assuming that you are going to have more, I think, perhaps to dividend out without significantly increasing that dividend payment. I guess is there a change in the weighting you are giving in terms of your priorities for your capital allocation?

We're not changing the way we're doing our priorities specifically. We have 30 consecutive years of improving our divined, we're quite of proud of that, we believe that sends a very strong message of stability and consistency and we're not anticipating changing that model. On top of that, I think that you know I'm not a fan of programmed repurchases, we're always looking at our cash positions, our opportunities and the situation with our stock. We have purchased I believe just over $23 million worth of stock back this year a little over 1.5 million shares that is up above historical levels and certainly way above my first year here where we repurchased zero, but we believe and do believe that the price point that we purchased that was a terrific investment for our shareholders.

And just to clarify it was 1.1 million shares.

Oh, gosh I said 5. Yes, it 1.1.

And $23.5 million.

Right.

It was great guys, appreciated.

Our next question comes from Joe Mondillo with Sidoti and Company. Your line is open.

Just a jump on that, the prior R&D question just wondering how much change or benefit have you started to realize with the focus, the increased focus that you've put in place. I would imagine not a whole lot and are we expected to sort of see an accelerated amount of benefits over the next year or two.

Absolutely, that's - if we take a look at our approach on R&D you're correct, it is a longer term focus. We believe that the best way to create value for our shareholders is to truly drive it internally to create solutions, unique solutions in the nice markets that takes a while. Our marketplace tends to be slower to move in some that's good news on the back end of our product lifecycle but as you're developing products that also means it takes longer not only to introduce them to marketplace but to get traction in the marketplace, very, very positive results. We're introducing products specifically in business units that are very exciting that we have not been introducing products into in several years, that is an exact indicator to me of what we want to be doing for our future but I don't expect those products to have giant traction in the near future because it does take anywhere from 18 months to 3 to 5 years depending if it's medical space somewhere like that to actually get significant traction, but we're establishing the mentality, establishing the process and the structure, the innovative ideas and developing them to do exactly that, have a stronger, longer term path forwarding growth. As we spoke to you before, we're looking at operational efficiencies to help garner positive momentum for our value in the near term, we're looking at product innovation to help garner a much stronger value stream in the longer term.

All right and then in regards to the operational improvements IDS this year has seen, I think, a significant amount of margin improvement year-over-year as related to the easier comps with the inefficiencies related to the closing consolidation as well as the actual benefits from further improvement. WPS, could you talk about, that segment has seen a significant amount of margin expansion too, could you talk about what the drivers are there? I think it's a little different, given all the changes in restructuring that you are doing with that segment.

We are very pleased, as you saw we had growth in WPS this quarter, that in and of itself puts a tremendous positive pressure on our margins, that when we see declines because of the margin levels that we have and the fixed capital that we have in place, it definitely has a super significant impact. So being able to reverse that direction is a major player, that said we have really focused on becoming much more efficient and process driven on how that business functions, until a lot of those improvements you're seeing from the factories all the way up in our organization to the product management teams, to the development groups as we're introducing new products into that space as well, making sure that they're suited, that it works well and that we're driving efficiencies and effectiveness, so definitely seeing similar results.

So, I think a year or two ago for a matter of a few years, we were seeing a lot of competitive pressure, pricing pressures. Would you characterize it as primarily that or an inability or inefficiency of the business to sort of evolve to the market and more so an internally type of thing? And now it's really reversing that? Is it more that? Or is there still pricing pressure and you are just offsetting that with the improvements that you are making?

So you articulated it very well, it's acutely both. There has been a shift in the market in the way the market is viewed. We are now getting ahead of those shifts as oppose to being behind those shifts and we are becoming more focused on how we deliver our products in the new situations that we deal with. We're also developing more focused approaches to specific marketplaces that generate significantly more value to our customers. At the end of the day, all customers will flock into direction that provides them with the most value. We're now gaining that back and I think you're correct for a while there with the market shifts in our situation we had lost that momentum, but we're very strongly moving into the proper direction at this time, but it is absolutely both factors, it's not one or the other.

And in addition to IDS, do you still see a lot of upside in margin improvement there?

Yes, I mean the great news of that business is that. If we can hold the garner particularly revenue improvements, we'll see significant margin improvement.

Is that what it's going to take - is that the big - at this point in time, going forward, is that the big mover? You have to see organic revenue or.

That would be the biggest mover, yes. That would certainly, that certainly allows us to improve even more than operational efficiency.

So this year, we've sort of seen sort of call it flattish, maybe slightly negative organic revenue, but you saw a lot of margin improvement. You've already picked the low hanging fruit in terms of improvements and now it's sort of an organic revenue story? Is that what you are saying?

I want to be clear, we still see operational improvements for the next foreseeable future, three plus years.

For WPS?

For WPS and IDS, yes both businesses. However to be clear, revenue is a great friend of ours in WPS in regards to margin if we can improve it.

Sure, sure. Just lastly, I just wanted to ask a question on the G&A expenses. Even if you add back that $4.3 million, it looks like the year is sort of trending flattish. Is there - have you sort of, I guess, structured that cost structure to the point where you don't see any more sort of downside or was it a pause this year and you still see a lot of opportunity next year? How are you thinking about the G&A expense line?

Obviously G&A is a sticky cost that you have to pry culturally in most organization that said, we fundamentally believed that as we looked in best-in-class approaches, we still have opportunities in most of our functional areas, that's the good news. The challenge is, that takes time and it's not an issue of just cutting cost. It's an issue of thinking differently about how we do business and taking different approaches to our functions.

Okay. All right, thank you.

Thank you and we have a follow-up from George Staphos with Bank of American Merrill Lynch. Your line is open.

Thanks so much for taking a follow-up, just two quick questions. One, Aaron, can you just remind us again - so, can you comment to the extra day that impacted third-quarter? And is it possible to estimate the benefit? And how does this impact the fourth quarter?

Well one day on a quarter is about 1.5% of organic sales. So [indiscernible].

Appreciate that. And just as a second follow-up, kind of moving back to piggybacking the WPS question, you talked about some of the growth rates in digital in the quarter. It's nice to see I think this is all related to kind of consolidating the back end infrastructure that feeds into various front end displays, if I'm not mistaken. Maybe what's the next phase of digital investments required? I'm guessing it's mobile, but I would appreciate any views you could provide there.

Well I think you made some very salient comments there. It's a combination of improving our back end processes where we still have a lot of opportunities and also improving the actual front end interface and you're correct, we see a lot of headroom still in the mobile platform to improve that experience for our customers. At the end of the day that needs to be very focused experience that is very easy for them to navigate and to get to their particular need sets and purchase as quickly as possible. So we see improvement opportunities in the back end still significant and we see significant improvement opportunities in the front end interface mobile specifically.

Appreciate and would you need - just to clarify, would you need much incremental investments on that? Or much of it is the groundwork has been laid, so if there is minimal incremental investments related to improving that

Minimal incremental investments, we're anticipating having to make incremental investments.

Thanks very much, guys.

Thank you. I'm showing no further questions. I'd like to turn the call back to Ann Thornton for closing remarks.

We thank you for your participation today. As a reminder, the audio and slide 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 12:30 Central Time today May, 19. The phone number to access the call is 1-855-859-2056. International callers can dial 404-537-3406 and the pass code is 9604-2270. As always if you have a question please contact us. Thank you and have a nice day. Operator, could you please disconnect the call.