Ladies and gentlemen, thank you for standing by. And welcome to the Q1 2021 Brady Corporation Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session [Operator Instructions] I would now like to shift this conference call today, Ms. Ann Thornton you may begin ma'am.

Thank you. Good morning, and welcome to the Brady Corporation fiscal 2021 first quarter earnings conference call. The slides for this morning's call are located on our website at www.bradycorp.com/investors. 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 2020 Form 10-K, which was filed with the SEC in September. 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. I will now turn the call over to Brady's President and Chief Executive Officer, Michael Nauman. Michael?

Thank you, Ann. Good morning, and thank you all for joining us. This morning we released our fiscal 2021 first quarter financial results. Even in this challenging environment caused by the COVID-19 virus, we were able to increase operating income and increase pre-tax earnings this quarter. And our cash flow was extremely strong with operating cash flow growing by more than 60% over the first quarter of last year. There are four key messages that we want you to take away from our release this morning. First, our Workplace Safety business performed extremely well. Our teams have shown outstanding entrepreneurship as they have developed many new products to help both existing and new customers fight COVID-19. They've expanded their marketing campaigns to reach new customers and grow their customer base, and they've leveraged their multi-channel approach to ensure that we bring value to every customer. This increase in our customer base is critical to maintaining momentum and our positive momentum even after COVID-19 related product sales subside. And our strong gross margins in WPS are driving strong earnings growth as can be seen by our nearly 55% increase in segment profit on just under 10% in sales growth. Second, our IDS solutions revenue trends continue to improve month after month as revenues were down only 7.8% this quarter. Even with the decline in revenue segment profit as a percentage of sales increased in our IDS business as the team did a great job managing their cost structure and driving sustainable efficiency gains. These steady improvements combined with our investment in sales, marketing and R&D give us reason to be quite optimistic about the future of this business. Third, our reduced cost structure enabled us to increase operating income and pre-tax earnings this quarter. We've been on a multiyear journey to…

Thank you, Michael. We'll start with the financial review on slide number 4. Sales in the first quarter were $277.2 million, which consisted of an organic sales decline of 4.9% and an increase of 1.5% from foreign currency translation. Operating income increased 3.2% and pre-tax income increased by 1.6% when compared to the first quarter of last year. In last year's first quarter, we had an unusually low tax rate of 9.8% compared to a tax rate of 20.3% this quarter. Last year's lower than normal tax rate was primarily due to the impact of a favorable audit settlement and the realization of tax benefits from equity-based compensation. Diluted EPS finished at $0.64 this quarter compared to $0.70 in last year's first quarter. If our tax rates would have been consistent between the first quarter of this year and the first quarter of last year, our EPS would have increased by approximately $0.02. Moving to slide number 5, you'll find our quarterly sales trends. Total sales declined 3.4% this quarter. If you exclude currency and just look at organic sales, you'll see that our Identification Solutions division declined to 8.4% while organic sales in our Workplace Safety division grew 5.5%. Organic sales in our WPS business were driven by sales of products directly related to supporting the fight against the COVID-19 virus. Our WPS team moved quickly to customize existing product offerings for social distancing and personal safety, and did an excellent job reaching new customers and delivering strong value. Turning to slide number 6, you'll see our gross profit margin trending. Our gross profit margin was 48.9% this quarter compared to 49.3% in the first quarter of last year. This slight decrease was mainly due to reduced sales volumes in our ID Solutions business, combined with product mix in…

Thank you, Aaron. Slide number 13 outlines the first quarter financial results of our Identification Solutions business. IDS sales declined 7.8% finishing at $198.2 million with an organic sales decline of 8.4% and an increase of 0.6% from foreign currency translation. Overall, organic sales in our IDS division continued to improve at a modest, but consistent pace as we progress through each of the last six months. This quarter's organic sales decline was a major sequential improvement over the 21.7% decline experienced during the quarter ended July 31, 2020. And on the cost side, our strong focus on efficiencies led to a 60 basis point increase in segment profit as a percentage of sales when compared to the first quarter of last year. Regionally, organic sales in Asia performed better than both the Americas and Europe. In Asia, our organic sales decline was quite modest, whereas declines were larger in both the Americas and Europe. Overall, our sales volume and order patterns somewhat followed, where the impacts of the pandemic were the greatest on the economy as Asian countries appear to be coping better with the pandemic, whereas countries in Europe and the Americas, continue to deal with relatively large numbers of coronavirus cases, while some countries have once again entered various states of lockdown. Demand in our health care business is clearly getting better, but also remains challenged this quarter. Elective surgeries and hospital admissions are down significantly compared to normal pre-pandemic levels. Sales in the healthcare product line declined by approximately 8% year-on-year this quarter, which is an improvement from the nearly 25% decline we saw in the fourth quarter of last year. On the cost side, we continue to focus on driving efficiency activities and keeping our cost structure lean, while never sacrificing sales-generating investments. IDS segment…

[Operator Instructions] Our first question comes from Michael McGinn with Wells Fargo.

Good morning everybody.

Good morning, Michael.

Sorry, if I missed this. Did you guys give an order or a monthly sales cadence that -- I know you're not giving guidance really uncertain, but any kind of incremental data points with -- I know things are changing rapidly here?

Sure. We actually did -- we talked about our sequential improvements in IDS in particular. Every month we've improved from our worst-case decline in the late spring. And so we have seen a very good steady pattern of improvement in that space. In addition, the WPS business although the COVID-related products have declined, they still remain very strong and that business still remains very strong.

Okay. And then within WPS, can you help us frame what kind of the differential is on COVID product versus non-COVID product? I know some of the distributors are saying safety PPE up 30-plus percent, but obviously you don't have masks and some of the other ancillary stuff they're selling. So any variation with that segment you can point us towards?

Well in our WPS space, we actually do sell masks. We sell Gel, as they call it in the EU. We sell a lot of products that are related to helping protect our first-line workers in particular. So yes, we do sell those products, but we sell a lot of core products such as signage, floor marking tapes that are doing extremely well and we've been modifying a lot of products. We have a few that we're quite proud of. We've been able to pivot lockout tag out products that are patented into COVID-related products. They are different from our lockout tagouts, but we've used some of the core components. We've modified the tooling, modified assembly and are able to do things like cover our water fountain throughout the world so that our people are more protected from them. So we have been selling a large variety of what I would say identification and safety-related products specifically and clearly into the COVID space. We are not breaking out products that aren't clearly COVID related. So when we say that's increase from COVID, we're looking at part numbers and looking at the specificity of what they're going into and why and differentiate it from floor marking tape as an example that we've always sold.

Got it. Appreciate your time. I'll pass it on.

Absolutely. Thank you, Michael.

Our next question comes from Keith Housum with Northcoast Research.

Good morning guys, and congratulations on a good quarter relatively.

Good morning, Keith. Thank you so much.

Absolutely. I think we're all uncertain in terms of where the next few months will hold us. But as we think about the potential for additional lockdowns or what it may be, can you kind of walk us through how the business has changed from like a sales perspective? And we do go back to a lockdown strategy in some of the U.S. and some of Europe. How have you guys changed your sales ability to kind of prevent any further decline?

Excellent. So Keith, first of all, looking at it from an internal perspective, we are in lockdowns and have been in lockdowns in a variety of locations. Some work at home situations never ended. Others have gone back to where they were a couple of months ago. But we've already proven that we're very lithe at keeping our factories opening and running because we service critical industries, but also in keeping our employee base motivated and challenged around our concept our real -- our drive around making the world a better and safer place. So our people are able to be very efficient in that. We do see difficulty in some product sets in being able to really interact with the customers the way we would like to. But in other product sets, we're able to overcome that through our digital campaigns, through our e-mail campaigns, through our telephone campaigns. We really take a very strong and proactive effort in making sure that our customers hear from us. And although we've highlighted WPS' direct sales growth, we've had the same experience, although not to the extent in IDS as far as bringing on new customers. So we're actually using it as an opportunity to bring in customers that aren't getting the service and the products that they need from other parties.

Got you. Appreciate it. And then I want to review the comment you made regarding WPS and the customer expansion. What's giving you the confidence that you're going to be able to retain those customers when we're past the COVID issues?

So it's a very data driven business as you know. And the comments that we really see, we're getting a lot of non-COVID business from those customers. Actually we're getting more non-COVID business from the customer than we're getting COVID, although it was clear the initial entry into Brady was through COVID. And we already are seeing the repurchase patterns are as strong or stronger than any of our typically historical customers.

Got you. Is it stronger in Europe than it is in North America? Is that geographically limited, or is it across the board?

It is across the board. Our European business as you know has been stronger. But as you also know North America is actually better in its core than it looks because of one of our businesses that really has been hurt dramatically through the decline in micro businesses in North America.

Got you. Thanks, Mike and good luck.

Thank you, Keith. Have a great day.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Michael for any closing comments.

Thank you. I'd like to leave you with a few concluding comments this morning. We're living in unprecedented times and we're dealing with uncertainty and disruption on a daily basis. Our focus at Brady remains unchanged. We will deliver what we promise to our customers. We will invest in R&D and sales-generating resources to drive growth. We will constantly invest in automation and efficiencies and we will take care of our amazing employees. We don't know when this pandemic will subside and when demand will ultimately return to pre-COVID levels but we're doing what we can to increase our customer base today and we're controlling what we can from a cost perspective. This quarter our WPS business grew nicely over the prior year. Our IDS business continued its trend of sequential revenue improvements and strong profitability. Our reduced cost structure and efficiency focus enabled us to grow pre-tax earnings. And we had another quarter of very strong cash generation and are in a net cash position. We're making sure that we're doing what we can to help our customers, our employees, communities and the world through this pandemic. At the same time, we're maintaining our focus on the long term and we'll make the right investments and we'll continue to make the right decisions today that will set us up for long-term success. Making the world a safer and better place every day is not a slogan for Brady. It's our focus and our reality. Please stay safe and thank you for your time this morning. Have a great day. Operator, you may disconnect the call.

Ladies and gentlemen, this does conclude today's presentation. You may all disconnect and have a wonderful day.