Good day, ladies and gentlemen, and welcome to the Second Quarter Brady Corporation's Earnings Conference Call. My name is Britney, and I'll be the operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Director of Investor Relations, Aaron Pearce. Please proceed, sir.

Thank you, Britney. Good morning, and welcome to the Brady Corporation's Fiscal 2014 Second Quarter Earnings Conference Call. During the call this morning, you'll hear from Tom Felmer, Brady's CFO and Interim CEO and President. You will also hear from Matt Williamson, President of Identification Solutions. After Matt's And Tom's prepared remarks, we'll open up the call to questions. The slides for this morning's call are located on our website at www.bradycorp.com. The prepared remarks will begin on Slide #3. Please note that during this call, we may make comments about forward-looking information. Words such as expect, believe, forecast and anticipate are 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 form -- fiscal 2013 Form 10-K, which was filed with the SEC in September 2013. 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 Tom Felmer. Tom?

Good morning, and thank you for joining us. Our second quarter financial results from continuing operations did not meet our internal expectations as organic sales declined 1.1%, driven by a decline of 6.8% in Workplace Safety. EPS, excluding restructuring charges, finished at $0.25 per share. Although I'm not happy with our financial results this quarter, we are making progress with initiatives that are aimed at setting Brady up for long-term success. Specifically, we are focused on 5 key initiatives. First, we are focused on returning our Workplace Safety business to organic growth. We are expanding our multichannel Direct Marketing model by providing a broader set of identification of Workplace Safety products with an increased focus on e-business. We are making significant investments in this business, which are negatively impact to profit segments this year. However, we are laying the groundwork for scalable business models that we believe will return this business to organic sales growth with a solid profit margin. In Q2, we saw an increase in the absolute number of orders placed, and we also saw an increase in new-to-file customers, which are both positive signals that our strategies to return to growth are starting to take hold. Second, we are focused on growing our Identification Solutions business, primarily through sales force and geographic expansion. Year-to-date, organic sales are up 2.9%, and we see a path to accelerate this growth. Specifically, we are increasing our sales force in the U.S. and Western Europe and expanding our focus on strategic accounts and focused industries, including health care. We also remain focused on providing the most innovative products into both established geographies as well as faster-growing geographies such a Central Europe, the Middle East, Africa and selected countries in Asia. Third, we are engaged in the process to divest our Die-Cut…

Thanks, Tom. Let's turn to Slide #4 for more detail on our second quarter financial results. Overall, sales from continuing operations were up 6.8% to $291.2 million in the quarter. This is made up of a 1.1% organic sales decline. Sales from the PDC acquisition added an incremental 8.5% and foreign currency translation decreased sales by 0.6%. Our second quarter gross profit margin finished at 48.9%, down from the 52.0% gross profit margin in last year's second quarter. SG&A expense was 38.3% of sales in the second quarter compared to 40.3% of sales in last year's second quarter. And EPS from continuing operations, excluding restructuring charges, was $0.25 in the current second quarter compared to non-GAAP EPS of $0.38 in the second quarter of last year. The tax rate on continuing operations, net of restructuring, was approximately 30% in the second quarter compared to 25% in last year's second quarter. As we mentioned in last quarter's conference call, we were expecting a higher tax rate in both the first and second quarters of this year, and we expect a lower tax rate in the second half of this year, with the full year income tax rate still finishing in the mid-20% range. Slide #5 is our updated full year guidance for fiscal 2014. Our full year EPS from continuing operations guidance is $1.55 to $1.75, exclusive of restructuring charges. Our previous guidance was for full year fiscal 2014 EPS to range from $1.80 to $2 per share. This reduction in our EPS guidance is primarily caused by our WPS business, where organic sales have been less than we had originally anticipated and profitability has also been below what we had previously anticipated. Also, to a lesser extent, in our IDS business our facility consolidation actions have resulted in increased costs…

Thanks, Aaron, and good morning, everyone. I'd like to start by sharing a few of the new products that we've launched in the second quarter, and these are captured on Slide 11. We launched enhancements to several important software and system products in addition to expanding our line of proprietary ToughWash sign and label materials for the food and beverage market and other harsh environment applications. Next quarter, we begin shipping our new BMP21-plus handheld printer, our next-generation portable printer for the wire identification market, which we started to introduce to our distributors last month. We're very excited about this new product, which is a significant improvement to our popular BMP21 printer. Now let's turn to Slide 12 for the ID Solutions financial review. Sales increased 15.8% to $194.7 million in the second quarter. The acquisition of PDC contributed 13.8% to sales. Foreign currency translation decreased revenues by 0.5% and organic sales increased by 2.5%. Looking deeper into our second quarter results, our Brady Brand business in the U.S. experienced slightly positive organic sales when compared to the prior year as we experienced a slowdown in order patterns from our distributors in January. U.S. grew for a 10th consecutive quarter, albeit by a slower rate with growth coming from all major product lines. We saw particular strength from the product ID labels sales to our OEM customers, a theme common to other Brady regions. We also feel positive about our increased volume from our wire marking printer systems, which is offset by slower-than-anticipated sales in some other products. Mexico is a highlight, with double-digit growth, while Canada was slower-than-expected this quarter but still reporting modest growth for the fiscal year. Our business in Brazil is approximately flat this quarter when compared to the second quarter of the prior year. As…

Thanks, Matt. Please turn to Slide 13 as I will comment on the Workplace Safety financial results. Sales decreased 7.7% to $96.5 million in the second quarter. Foreign currency translation reduced revenues by 9/10 of 1% and organic sales declined 6.8%. Looking deeper at our results, our Australian business experienced an 8% organic decline in the second quarter. While our Australian business serves many diverse industries, we have a higher concentration of manufacturing, non-residential construction and most importantly, mining, all of which struggled in the quarter. We have taken actions to reduce our cost structure in Australia and focus our sales efforts on taking share in this challenging but slowly improving economy. The WPS business in the Americas experienced an approximate 9% organic sales decline in the second quarter, while our EMEA business, which is primarily in the established Western European country economies, experienced an organic sales decline of approximately 5% this quarter. We continue to test all elements of our promotional plans and value proposition. We are seeing improvements in new customer creation in order volumes and will work to continue these trends. We will also build on what we have learned in first half of the year and adjust our focus on investments in order to provide the best value and experience for our customers, which we believe will lead to long-term profitable growth in our business. We reiterate that we have refined our strategy by focusing on and investing in the key items outlined in Slide 14. In addition to improving our business fundamentals across all geographies, our strategy involves 5 main focus areas. First, we are expanding our focus in e-commerce. We've accelerated our investments in digital capabilities as customers are increasingly buying over the web. The first half of the year, we've set the foundation…

[Operator Instructions] And your first question comes from the line of Jason Ursaner with CJS Securities.

Just for the strategic focus initiatives, sort of walking down the list on the first 3. For the WPS segment returning to organic growth. Tom, you mentioned a couple of the leading indicators, such as customer files. Just wondering if you could expand on any other factors you see that provide confidence in the second half or later in this year, returning organic growth? And would that growth be more of a short-term boost from the traditional catalog because of increased investment there or is it from the e-business initiatives?

Jason, it's a little bit of all of those. From the actions that we took in the first half of this year, we've commented that we're seeing an increase in new customers and orders, which is positive. And we will be increasing the investment in -- really, in the online advertising portion of our e-business strategy. We'll be adding -- increasing our catalog spend to near historic levels, which is above what we have done in the first half of the year. And then the other part that I commented on is we've increased our focus on our highest-value products. In the first half of the year some of our focus was on the new products, some of which were to expand our offering and were resale [ph] items. And what I want to do is I want to see the focus back on the highest-value products, which I think, should also help our business.

Okay. And in Europe for Direct Marketing, in years past, I think you've benefited occasionally from weather bundles. I know weather here has been pretty wild, don't keep up as much as it's -- in terms of over there. But was there any impact, one way or the other, in the quarter from that area of product, or would you expect any impact, maybe in Q3?

Actually, the snow fell in the wrong region of the world. So we did not experience any snow or any harsh weather in Europe this winter. So we're seeing less sales of weather-related products this year compared to last year.

Okay. And in the ID segment, I guess, just focusing on the PDC portion. You guys provided the first year effect of revenue for $23 million of the acquisition. What was the full quarter? Or that was...?

Jason, this is Aaron. The full quarter -- you're talking for PDC?

Yes.

Yes, the full quarter was, I believe, $39.3 million for PDC.

Okay. And now that you're past the 1-year mark, internally, how are you kind of evaluating the acquisition, returns on capital and the outlook for flat growth in admissions? As an outsider it appears somewhat disappointing in the short term. So just wondering, longer term, how you're looking at the success of the acquisition?

Well, the number one thing is growth of the business and meeting the profit expectations. And right now, the growth is going to drive the profit. We've gotten good cost out of the business. We're going to get some more out as we consolidate the facilities in Tijuana. And so the main thing that we're focused on right now is driving growth, and that will get the profit for us.

And just another comment on that, Jason. Right now, in the short term, we do not see admissions returning in the hospital segment. But there are still other segments of health care that we feel positive about, the alternative health care facilities. And then there are a number of other take-share initiatives that they're focusing on to try and drive growth to offset the reduction in admissions.

Okay. And then just last, Asia Die-Cut, looks like another good quarter. Is this giving it momentum into a sale, or is there maybe some more fundamental change underlying the business that could impact positively what people might be willing to pay for it?

I mean, actually, the results were in line with what we had expected as we've gone through the process. So we still feel very good about the process. It's a very engaged process. And we said, we hope to have more comments on it in the third quarter.

And your next question comes from the line of Charley Brady with BMO Capital Markets.

So on the Workplace Safety business, you talked about new orders and customers. And I guess I'm just trying to get to the profitability level that you're seeing being generated by those new customers and those new orders. And along with that, the comment that on the e-commerce business, I guess -- I think you said it was up single digits and that you expected that to double by the end of fiscal '14. What gives you the confidence you're going to see that kind of rapid growth in that part of the business?

Yes. As we look at the first half of the year, most of the investments had really been on infrastructure. And right now we're just in a position where we can increase the investments that customers would see that would drive the growth. And we're able to do testing, and we've done some, I guess, focus work on some segments. And we're seeing positive results, and it's those early results that give us confidence that the increased investment in the advertising portion of what we're doing is going to have an impact in the second half of the year.

Okay. And then just on the ID Solutions business. You commented in the U.S., I think you said you saw some declines in the last few weeks of January. Has that -- is that turned around at all in the first couple of weeks of February?

Yes. We basically see a similar trend in the month of February.

All right. One more, and I'll hop back in the queue. Just on SG&A expense in raw dollar terms. Can you give us -- and I'm sorry if I missed this if you already mentioned it -- a sense of what second half SG&A spend looks like? Is it kind of on a normalized run rate we've been seeing $111 million, $112 million, or do you see that ticking up or down back half of the year?

Yes, Charley, we would actually see that ticking up a little bit. During our first quarter call, we had commented that we would expect about $113 million per quarter. We obviously came in a bit below that this quarter, but we certainly would expect that it would tick back up in Q3 and Q4.

And your next question comes from the line of Mig Dobre with Robert Baird. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: If I recall, your initial fiscal '14 guidance included a $0.20-plus headwind from incentive comp. Does this new guidance include the same headwind, or has there been an adjustment there?

There's still incentive comp included in the forecast that we have given you. It's not at the same level, but there's -- it still includes some incentive comp in the forecast.

Yes. It has come down a bit. And actually, if you look at our second quarter as well, our incentive compensation was effectively in line with last year, so it's not a comparability issue in Q2. But It did come down a bit for Q3 and Q4. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then, can we sort of go back to ID Solutions. I know you provided some commentary on the margin there, but maybe you can provide us a little more color as to exactly what's driving the margin contraction, excluding PDC, and how we should be thinking about that going forward.

Yes. Well, the main factors were around a number of expenses associated with facility consolidation. That was roughly around $2 million in the first half of the year here and some additional costs associated with the sales team that I brought up. It was close to $0.5 million in the quarter. So -- and we would expect those to continue at that rate the rest of the year. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: No impact from pricing or anything like that then?

No. I mean, we had some price increases in the business. But I would say, relative to the rest of our products, there's not anything material. We've had some price increases, we've had some price decreases in selected products, but nothing from a pricing standpoint other than that. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then my last question on Workplace Safety...

One -- just one other comment that I'll just touch on. When you look at our mix of products, a very positive thing was that our most popular products are -- in terms of systems -- are our portable products. And the volume increase in these is very encouraging. And the printer sales were always out in front of the consumable sales, and that's something else that contributed to the margin. But we feel very good about that because these are essentially putting little salespeople in the field by creating printers that people are going to use and generate higher profit as they're used. So that was a contributor, but it'll be a long-term benefit for us. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Okay. Thanks for the color there. Last question is Workplace Safety, the margin outlook there. I appreciate the comment for this year. But I guess I'm wondering, we're hearing more and more about additional investment, whether it's catalog, whether it's online. We all see what the volume challenges are. I wonder, as you look beyond the next couple of quarters, at what point should we expect margin to stabilize here given the fact that you continue to invest in expenses, continue to build it that segment?

I would say, the incremental spend is mostly set for this year, and then it should it stabilize. We may look at pulling back some of the e-spend as a lot of it is being put into the infrastructure. We don't have that quantified for -- or we haven't talked about quantifying that yet for next year. I would see that as a possibility. The positive thing about the increased catalog expense is that we believe that, that will actually have a positive impact on our profitability as we go through the year. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: So is next year a reasonable sort of time frame to expect some stabilization in margins? Or is that too optimistic at this point?

We would look for it to be next year.

And your next question comes from the line of George Staphos with Bank of America Merrill Lynch.

Operator, can we move to the next caller?

And your next question comes from the line of Joe Mondillo with Sidoti & Company. Joseph Mondillo - Sidoti & Company, LLC: A couple of questions. I first wanted to ask though, the restructuring costs, are those included in the segment profitability that you provide?

Yes, it's there. Joseph Mondillo - Sidoti & Company, LLC: Can you distribute -- can you clarify how those are distributed in the first and second quarter, if you have that?

Yes, could you repeat the question again, Joe? Joseph Mondillo - Sidoti & Company, LLC: The restructuring cost, I was just wondering if that's included in the segment profitability numbers that you provide?

Yes, sorry Joe, we misunderstood. There's -- the restructuring amount that you see on our income statement are not included in the segment profit numbers. However, there are some facility consolidation costs that don't go into the restructuring line that are included in the segment profit numbers. So basically, the $2 million that Matt just mentioned, those would be in the segment profit numbers. But if you're looking purely at our P&L at the restructuring charges of $4.3 million this quarter, those are not in the segments. Joseph Mondillo - Sidoti & Company, LLC: Okay. And then, so the $2 million is only in the IDS then?

The $2 million that Matt referred to is only in IDS. Now there are some facility consolidation costs in Workplace Safety, but, frankly, they're not at the same level of IDS, which is why we didn't give that number. It's a much smaller number. Joseph Mondillo - Sidoti & Company, LLC: Okay. And just lastly, related to this. Was there anything in IDS that maybe should be looked to be excluded in the first quarter?

I don't think so.

Joe, when you say excluded, do you mean facility consolidation costs? Joseph Mondillo - Sidoti & Company, LLC: Yes, yes. Such as that. Maybe looked at as onetime?

Yes. Not at the same level as we saw in Q2, which is why we didn't have much discussion in Q1. Joseph Mondillo - Sidoti & Company, LLC: Okay. So I guess, one of the things that I wanted to ask is about the Workplace Safety then. You provided some information on why we're seeing such large contractions in a margin, but I was wondering if you can maybe provide just a little more color given that -- is this just you saw, I guess, increased costs related to e-commerce and other such things that created the margin to be so far down compared to just the first quarter with a similar sales base? Or if you could provide more color on why we're seeing such large reductions just from the first quarter alone -- let alone, year-over-year.

Yes, there are a number of elements. We've seen a mix in our product shift where we launched a lot of products that had lower margins and that was the focuses of some of the promotions, so we had a mix issue there. We did have -- and we talked about making some price changes where we reduced prices in an effort to raise volumes. And we saw, I guess, a more negative impact from those prices than was anticipated. So that's something that we're looking to address in the second half of the year. We may not able to address them in the catalogs until the fourth quarter but that's clearly an element of it. And then there are a couple of one-time items that had some contribution to the reduced margins. But I think those are the primary contributors. Joseph Mondillo - Sidoti & Company, LLC: Okay. And then -- so in terms of pricing, that's something that you sort of indicated that you felt like was sort of set in place in the first quarter, and it seems like that's maybe not necessarily the case at least through the second quarter. We're continuing to see sort of headwinds there. I know also that you're trying to implement a pricing sort of, I guess, software system to be a little more accurate in terms of setting pricing. Could you just talk about just overall pricing and how confident are you that we don't see further price reductions in the second half?

The price reductions in many of the businesses were going into place in the first quarter of the year as we said, and we did see some of the impact in Q1. We saw a more full impact in Q2. And as we read the results from the volume changes, and I guess the whole mix from the value proposition, we look to make adjustments and corrections right in the catalog in the second half of the year. As far as using the software tool that you referenced, that's just being tested right now and that's primarily in our call centers for quoting purposes and customers that we're dealing with on the phones. And we expect to see that really just be piloted in the third quarter and not be rolled out anywhere until the fourth quarter and into next year. Joseph Mondillo - Sidoti & Company, LLC: Okay. So, I guess, one of my biggest overall questions is regarding the guidance. And considering where we fell in the second quarter at WPC [ph] at 15% or so. I guess, looking for a modest improvement in the back half of the year there and then, I guess, maybe sort of flat to slightly up margins at IDS for the back half of the year. It seems like the midpoint of the guidance -- I'm just having a tough time sort of deciphering that. So if -- maybe if you could provide some color on sort of your assumptions on the guidance.

You captured many of the primary elements. We do see -- we still see a challenging WPS, perhaps, in the third quarter, but improving as we go into the fourth quarter. And we do expect to see improvements in the IDS business as we go throughout the year. Joseph Mondillo - Sidoti & Company, LLC: Okay. And then I guess, just -- I was just going to say, lastly, my last question, I guess, is regarding WP -- Workplace Safety, the average order volume you mentioned is declining. And you mentioned there's ways that you can maybe try to fix that. Could you talk about that and exactly how you're able to do that?

Yes. There are 2 main parts are adjusting price, again more likely in the fourth quarter, and then the other one is really what we focus on -- as far as what products we focused on. So our promotions are going to focus more heavily on products that we manufacture, products that are differentiated. Through the first half of the year, we had a fair amount of attention on the new products, which did have lower margins in an attempt to increase volumes within the business. And as we're looking at our results, I think it's just spending more time in our catalogs and increasing the investment in a traditional advertising methodologies. We think all of those are going to contribute to higher average order values. Joseph Mondillo - Sidoti & Company, LLC: Okay. And then just lastly, administrative cost, are you expecting any significant changes there going forward, or is it sort of a $30 million quarterly run rate, is that fair?

You're referring to our segment table at the $30 million? Well, we've commented on SG&A in the aggregate, that we would anticipate it to tick up a bit from the $111 million this quarter. But we haven't given any specific guidance on just the G&A line.

And your next question comes from the line of Charley Brady with BMO Capital Markets.

On Workplace Safety, in terms of the revenue guidance -- in Q3, I know you're saying it's negative organic growth. But are you expecting it to be, on a revenue basis, up sequentially from Q2? Or does the actual number decline again sequentially?

Sequentially, we're looking for an improvement.

Okay. And then I want to go back -- on the IDS [ph] , just so I understand, the low-single-digit organic revenue growth guidance. If PDC is seeing a low- to mid-single digit top line decline, that sort of implies that other part of the business are doing better than low single-digits. And can you just give us some granularity on which businesses might be up in the mid- to possibly high-single digits?

Yes. Going back to my comments and when you look at the rest of the world, we're getting that sort of performance out of Europe, okay, in terms of positive mid-single digits and better than that in Asia, where we've had double-digit growth. So -- particularly in China, it has been very positive for us. And we expect that sort of performance to continue and then offset where we have the decline in PDC.

Okay. And on the restructuring expenses, that $8 million that's slipping into '15, is there -- can you give us a sense of -- is that going to be all first half? Is that ratably across 1Q and 2Q? And beyond that incremental that slid to the right, the $8 million, is there -- do you expect incremental additional restructuring spends in '15 and can you give a sense of what magnitude that might be?

We haven't given guidance to F '15 yet, but we'd expect that simply to slide forward and most of that to take place in the first half of the year.

Your last question comes from the line of Jason Ursaner with CJS Securities.

Just a follow-up to the last question on the ID Solutions segment. The new products there, maybe, what's growing faster than some others. One thing you didn't mention is the cloud-based software with AssetGuard. I guess I'm just wondering, is this the first cloud-based product that you've had from a software offering perspective?

Yes -- no, that isn't. That's actually a product that was launched in Workplace Safety. One of the major products that they have in Workplace Safety are our asset tags. So this is a product that's used to essentially bring that into their system versus a manual system. And so it's their first cloud-based product for that specific application.

Okay. And would it compare with an offering from Hart Systems? I mean, would you guys consider that a contender? Or is it measuring data on different assets in a facility?

Yes, that's a good question. I'm not familiar with that. I would actually be somewhat similar to a product that we're selling in Workplace Safety, which is about inspection and tracking and asset tracking. So we have a similar product, but I'm not sure about the company you're bringing up.

And I will now turn the call over to Aaron Pearce for further remarks.

Thank you for your participation today. As a reminder, the audio and slides from this morning's call are also available on our website at www.bradycorp.com. The replay of this conference call will also be available via the phone beginning at 11:30 a.m. Central Time today, February 20. The phone number to access the call is 1 (888) 286-8010 and the passcode is 96735259. As always, if you have questions, please contact us. Thanks. Have a great day. Britney, can you please disconnect the call?