Good day, ladies and gentlemen and welcome to the Brady Corporation Q2 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, today's conference call is being recorded. I would now like to turn the conference over to Ms. Ann Thornton, Director of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to the Brady Corporation fiscal 2016 second 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 three. 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 today. I am pleased to report that Brady's fiscal second quarter profit exceeded the prior year's results. This marks our second consecutive quarter of improved financial performance. These results are being driven by our team's continued focus on growing organic sales and relentlessly working to create a more efficient and effective organization. Specifically, we are seeing efficiency gains in both our manufacturing sites with improved gross margins and in lower selling, general and administrative costs. We are particularly proud that this quarter our organic sales grew despite a very tough economic environment, but we also experienced a 30%-plus increase in GAAP EPS and more than 400% in operating cash flow when compared to same quarter last year. With our entire organization focused on organic sales, efficiencies and excellence in everything we do, we continue to find opportunities to improve our profitability. It is important to note that improving Brady is not just about short-term financials. For instance, our customer service metrics are improving across the board with lead time shrinking, on-time deliveries increasing and our quality metrics continuing to improve. We focus on these metric each and every day in order to provide the best possible experience for our customers. I am proud of the consistent efforts and positive results from the Brady team, but we still have more work to do and customer service will continue to be a top priority in the second half of this fiscal year. We have now shown six consecutive months of positive financial results demonstrating a level of consistency we have not seen in many years. Up until this year, we have always seemed to have distractions or financial challenges and such issues ranging from facility consolidation related expenses to inventory…

Thank you Michael and good morning everyone. Please turn to slide number three for an overview of our second quarter financial results. Our revenues were heavily impacted by the much stronger U.S. dollar when compared to last year's second quarter. Total revenues were down 5% to $268.6 million when compared to the second quarter of last year. Organic sales increased 0.4% and foreign currency translation reduced sales by 5.4%. On a GAAP basis, our EPS grew 30.4%. Diluted earnings per share was $0.30 in the quarter compared to GAAP EPS of $0.23 in the second quarter of last year. Last year, we completed our restructuring plans and we also completed the sale of our Die-Cut business. As such, our fiscal 2016 financial results are not impacted by discontinued operations, restructuring charges or any other items for that matter that would need 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 $0.29 in last year's second quarter, which compares to our diluted EPS on a GAAP basis of $0.30 in the current quarter, so an increase of 3.4%. Having these restructuring activities and discontinued operations behind us not only provides much clear financial results, but it has eliminated many distractions and is enabling our team to focus on strong customer service, organic sales growth and operational efficiency and you are now seeing these benefits in our reported results. Slide number four is a summary of our quarterly sales trends. In the second quarter, revenues finished at $268.6 million and as I just mentioned, total company organic sales increased 0.4% and there were significant foreign currency headwinds which were…

Thank you Aaron. Let's turn to slide 11 for a summary of the identification solutions financial results for the second quarter. Organic sales increased by 0.7% while foreign currency translation decreased sales by 4.4%. In total, IDS sales were down 3.7% to $184.9 million in the second quarter. Our European IDS business had solid organic sales growth in the second quarter, improving by mid-single digit compared to last year. We have a strong team in Europe and they have been doing an excellent job of driving sales in Western Europe. IDS organic were weakest in our Americas and Asian regions. We continue to be impacted by the macro economy in Brazil as well as a slowdown in the U.S. and Canada. Our end-customers, channel partners are seeing a reduction in revenues which has had an impact on Brady and we expect it to continue in the near future. In Asia, our reduced sales are mostly coming from the economic slowdown in China where we are finding the growth is very hard to come by across the entire Asia-Pacific region. Along with improving our customer service metrics, one of the primary areas of focus this fiscal year is enhancing the effectiveness and efficiency of our R&D department. We have an extremely talented group of engineers at Brady and we are working hard to focus their efforts towards high value innovative products that solve problems for our customers. We have launched the new BPP35 and BBP37 multicolored sign and label printers at the end of our first quarter. These desktop printers combine a touchscreen, multicolor printing and shape cutting capabilities which allow our customers to customize signs and labels on a variety of high-performance materials for multiple applications. The BPP35/37 printers have sold quite well, surpassing our expectations in both the Asia-Pacific…

[Operator Instructions]. Our first question comes from the line of George Staphos of Bank of America Merrill Lynch. Your line is now open.

Hi. Good morning. It's actually Alex Wong, sitting in for George. Thanks for all the details.

Good morning Alex.

Good morning. With regards to trends in IDS and WPS, it sounds like things are quite positive in Europe. I believe this is consistent with the past couple of quarters. Can you just discuss which end markets or product lines are really driving this trend? And then on a related note, with regards to the Americas, what was the organic growth rate in the quarter? And if you could just talk a little bit about what you are hearing from your channel partners whether it may be inventory destocking or something else?

Great. Alex, glad that you asked those questions. I think as you know, although I think you would like to know more detail on our product breakdowns within Europe for your first question, we don't provide that level of granularity. However, I can tell you that it is a broad based performance. I think a lot of that has to do with the product sets that we do offer in Europe, our ability to drive those through our channel partners and directly and also the fundamentals of our structure there continue to improve. Although we did not receive the benefits from the consolidation as far as our cost pattern that we had anticipated three years or four years ago now, we certainly are working very, very hard to be an efficient supplier within that region and that is paying off. As far as the Americas are concerned, the second question, I really believe that our performance there continues to improve and we continue to become more effective. We have got an awful lot of effort going into the IDS region with new leadership, making sure that we are actually focusing teams on what's critical to the business. And I think that's a big change.

Yes. And Alex, you had specifically asked the question of what was our organic sales growth in the Americas, specifically for IDS. We intentionally didn't talk about it too much in the script because frankly it's only slightly negative. Europe, of course, was our star performer for several quarters now. You have Asia on the other end of the spectrum from a decline perspective. And the Americas business was just slightly down.

We are quite pleased with the internal progress that we are making in the Americas region. Your third question, Alex, if you could repeat that again?

No, that was really the two questions. I appreciate those responses. Maybe just switching gears a bit on gross margin, nice to see the improvement there. How much more improvement do you expect from the lessening of these facility consolidation costs for fiscal 2016?

Excellent. Alex, I do actually remember your third question now and I will answer that first. Channel partners, as far as the information that we are receiving from our channel partners as to the cause, there are some partners that are large to us and significant in the industrial space that are actually contracting their sites and so that clearly has an impact, both in the short term and in the long term, it may make them more efficient and effective, but as they have inventory distributed throughout their ecosphere and they are consolidating those sites, that gives them an opportunity to reduce that inventory. Clearly that has a short term impact on us. In addition, as their footprint does decline, although that may make them more efficient and profitable, it does have a probable outcome of some reduced revenue. Hence that should push back up their stream. So I did want to answer that question before we did that. Aaron?

And then on your second question with respect to gross profit margins, as we look at the back half of this year, we certainly anticipate improvements over last year, particularly in the fourth quarter. If you think back to last year's fourth quarter, we had a fair amount of one-time charges, if you will, that came through related to facility consolidation costs. So we actually feel pretty decent with respect to where we are headed with gross profit margins. Now beyond that, I obviously don't want to pin down to a percentage because our gross profit margin improvements have been an ongoing work in progress.

But there should be no doubt that we are focused on that on a longer term.

Thank you. And one last one and I will turn it over. I believe on the last conference call, you talked about making some moves to optimize the catalog spending. Can you just discuss where we are in that process? Are you making any changes in terms of how the sales team is targeting the right customer? If you can provide some color there.

Absolutely. We are really looking to integrate our total customer experience in a much more effective way than we were ever able to do before. We talked about creating viable and strong industry leading digital sites, but that in and of itself is not sufficient. We need to be and are blending that into our catalog experience and our actual direct customer touch experience. So that through all three avenues, we are driving a combined sales effort. So as we look at the catalog subset of that, we actually are able to pinpoint our applications to our customers more effectively than we were in the past and we are seeing that although we have some decline in revenue through that medium as a result of reduced catalog expenditures, the profitability from that has actually gone up because we are no longer supporting inefficient catalog screens that we had been in the past as a result of looking at all three directions of focusing on our customer and making sure that we are really driving the right type catalogs to the right customers at the right time synergistically with our direct touch model and our digital presence.

Thanks very much for the thoughts. I will turn it over.

Thanks Alex. Appreciate your time.

Thank you. Our next question comes from Charley Brady of SunTrust. Your line is now open.

Hi guys. This is Patrick Wu, standing in for Charley. How are you?

Good morning, Patrick.

Thanks for taking my question. I guess you guys talked a lot about innovations and organic growth and we just wanted to get a better sense of what are you guys have thoughts on new product vitality is, in terms of what percentage of sales is coming from your new products over the past two to three years? And is there a general target you guys want that percentage to be at moving forward?

Great question. Our history as a company, if you look back on the strength of Brady over the long haul from our very beginning and what made us great, it was product innovation. I believe that we went through prolonged period where we had defocused on that in a drive for growth, but that growth mainly came because of the strong, strong drive for growth through acquisitions. And by pulling our eye away from the ball, so to speak, we really weren't as strong in product development. Although we have the key capabilities, as we should have been. We have refocused strongly on that. As you know the new leader of IDS in particular, which is our largest engine for development of products, is technical in background and has a strong history of innovative products. And you are going to see that come out of the pipeline. Actually we were reviewing over the last week our new product pipelines for all of our platforms and all of our product lines in IDS as an example. And I feel very, very encouraged. Although we are not giving numbers publicly as to the percentage of revenue that we are driving from that at this point, we are increasing our expectation in that area and we are obviously seeing the products to do that. I would add a little more color to that. In addition to that, we are pushing a strong mentality of business connected product development that had been missing. I believe, for a few years so that all of our businesses are being challenged with innovating and creating product sets for their futures and being an active and interactive part of that. That will pay huge dividends down the road as well. So thanks, Patrick, for that question.

Okay. Great. I wanted to touch a little bit about catalog expense, just following up on that and it's trended down for two quarters in a row and obviously you guys talked about effective management moving forward. Is that going to be more of a permanent downtick in terms of catalog spending? And also on the digital side, sales increased quite well at 25%, I think you said, in the quarter. What are your expectations of that moving forward?

The 25% that we quoted was in Western Europe. As obviously we have another 12 sites, so our original goal was over 20 sites for the fiscal year 22 sites that we were going to bring mobile first. So we have 12 more to go. Effectively that means that as we are seeing this tremendous growth increase from that and we are just coming online with a lot of those sites and many of those site haven't come online yet, we absolutely expect a stronger presence there. We are also looking at other units to do this as well with. So we continue to see a large dividend coming from that. As far as your catalog question, our focus now historically had been much stronger and a pure catalog sell. We are not eliminating that mentality. We are integrating that mentality into a direct touch mobile first catalog approach. That means we can be more specific in our catalog distribution, in our timing, in our quality and in our methodology to go after the customers for the specific products they want and how they want them. And as we are moving in the future to a more digital approach to actually the catalog as well, we can make sure that the pages and the information are much more directly targeted. So yes, we expect to be able to continue to have more focused spend that is actually generating more profitability for less actual catalog expense. And we have targeted that. We have actually benchmarked it. We beta tested it. And we feel confident in that approach.

All right. Thank you.

Thank you, sir.

Thank you. Our next question comes from Joe Mondillo of Sidoti. Your line is now open.

Good morning guys.

Good morning, Joe.

So just to sort of jump on the last couple of questions that were related to WPS. The 200 to 300 basis point margin expansion that we saw at that segment in the first two quarters of the year, could you summarize what actually really drove the margin there? And in regard to the restructuring and the upside to margin, where are we in the ballgame, if you will, regarding the margin expansion that you see potentially?

That was a very positive directional change, as you know. But I think you also see as we look back that we were building to that as an organization. And although it may not have been apparent as the numbers hit out in the last couple of quarters, we have been moving in that direction. So we do expect that to be sustained and it comes from a variety of factors. We are really looking hard at making sure in that space and in fact all our spaces you are seeing this that people are asking and challenging themselves with the questions, what does my effort have to do with designing the product, selling the product, manufacturing the product and shipping the product. And quite frankly, it's amazing the opportunities that you find to refocus people when those are your criteria. And so in the big picture, we have literally been focused on making the basics of business happen. We have been directing our money in a much more targeted manner and we are doing a much, much better job of beta testing what we do before we do it. I think in the history before the last year-and-a-half approximately we would take more broad brushes, approach quicker and we were being much more deliberative about what we do with the end result, we were getting better results with a lower cost profile. And we do expect that to continue.

Okay. And then regarding the administrative costs, over the last six or seven quarters you have done a really good job at bringing those down. What are your thoughts on the administrative cost? Where we are sequentially and year-over-year? For this past quarter that you reported, it was actually sort of flattish. Is that just a pause in the transition of the cost structure that you have been going through? Or is the cost structure at the administrative level in place? Is that a run rate? Or how are you looking at those costs?

Yes. I will answer this question, Joe and if Michael wants to jump in afterwards, he can. So as we look at this quarter, we finished at $26.8 million and actually if you adjust for currency, that would actually be up versus the prior year second quarter. I wouldn't worry about that. It's effectively timing of various charges, et cetera. The key is that the trend continues. And the general trend is down. It's not going to go down in a linear matter, that's for sure. And in fact, you have seen that over the last couple of quarters. I think I had used the phrase that our G&A expense is sometimes lumpy and it is. But the general trend absolutely should continue into the future. We are definitely not where we want to be as an organization as far as G&A expense. We do see more room to run, more room to drive this down. So I wouldn't sweat the flat results in Q2.

Absolutely. I would say that I like to say internally, this is the gift that will keep on giving. We have an awful lot of opportunity to just become more focused in how we view business. We are training our business leaders to think as strong results business leaders. We are training our organization to make sure that their decisions are specifically aligned to thinking long-term and acting short-term and that's very important. A key example of that, as you heard earlier in the call, we are actually increasing feet on the street. We are increasing direct engineers. We are actually putting our foot down on the gas pedal and pushing it harder as far as direct people that are going to have key results with our customers. So therefore what are we eliminating? We are eliminating an awful lot of the groups that were thoughtful, but not necessarily thoughtful in the direction of making sure our results were going to come forth now and the future. I think we had too much redundancy of thought and honestly at times that create a lot more work with truly less results. And I think that the case of Brady, absolutely the case. So firmly backup Aaron's comments, we are strongly positioned to grow in the future, while simultaneously making sure that our overhead resources continue to go down as a percentage of sales and effectively in total cost. On top of that, I want to send once again the unequivocal message, people doing the work, operators, engineers, salesmen are increasing throughout our organization.

And just to follow up, do you have any sense or where you would think the ideal SG&A as a percent of sales or the admin costs as a percent of sales, do you have any idea of what that should ideally be, given the size of the company?

Throughout my career, I have learned not to speculate too far on that and the reason is, I equate it to peeling an onion. When you peel a layer back, you get an incredible opportunity to look at the next layer and you often find wonderful things that you didn't expect and you find great opportunities to become even more efficient. So as we peel back each layer, it will become more and more apparent what we are able to do. Just in a recent example, we saw some tremendous inefficiencies in our organization. When we peeled that back, we found out that we are able to unleash some very, very strong talent that had really been focused in areas that were not as beneficial for us. We think we are going to continue. In fact, we know we are going to continue to find that. So we are not going to speculate at this moment on how far we can go down because we want to make sure giving the diversity of our business units that we are applying the proper amount of structure to each one of those units. And we do have a broad breadth of units with different requirements in each.

Okay. Makes sense. And then just lastly, I was just wondering, in regard to the manufacturing footprint in the company, now that we have been a couple of quarters through following the consolidation of those plans that you did last year, what is your just general viewpoint on the manufacturing footprint? I know you have a lot of facilities around the globe.

Let me start with that one. It all starts with leadership and I am extremely pleased with the leadership changes we have been able to make very recently in that regard. Extremely exciting because our leadership is now metric focused. It is a technically based that is driving our organization for true accountability based on the actual results. That's a huge change. So now they are able to take some great facilities and really improve the overall performance. I will just talk about our sorbents group. We went in New Jersey from three autonomous buildings that were old and not designed to do what they were doing and actually large distances apart for a continuous flow process into a facility. I literally just visited this week in Louisville, Kentucky that allows the material to come in off railcars instantly through our processes automatically straight out the other end with very little intervention. What does that lead to? Much higher quality. Much higher efficiency. Lower scrap rates. Faster production to our customers. Just a much better overall experience. Does that mean we are done? Not even close. In places like Tijuana, we continue to have very, very large opportunities to drive more efficiency. But that said, I need to take my hat off to that organization as well. Over the last year, they have absorbed a tremendous amount of work and they continue to improve every day, every week, every month and every quarter. And we literally are looking at the improvements that steadily. And so, although we are not, as Aaron has said, nearly where we want to be, what I am seeing is a pattern of performance improvement, a culture of winning and a culture of hunger that comes from seeing the improvement and winning and wanting more. And so quite frankly, you will see that hit the bottom line. You are going to see it hit the bottom line in reduced scrap. You are going to see it hit the bottom line in labor efficiency, in making sure we move products into the right positions in the right location. So I will give an example. This week we historically hadn't really focused on scrap as a breakout element as much as you might. That's a big important factor to me that's just total lost money. Our groups are looking at a brand new facility that we are more efficient than we ever have been in the past with the fact that because the location of equipment, we can drive scrap out by literally just moving heads, moving stations around and you will see effectively a very low cost of capital that are free cost for infrastructure and people drive to even more improvements at that facility is one example.

Okay. Yes, that was good color. But I just was wondering more so on the actual footprint regarding, do you feel comfortable with the actual floor space of your manufacturing around the globe as opposed to the efficiency improvements? However it does sound like you are doing a really good job on the efficiency improvements.

Well, let me say this. As we improve the efficiency our floor space becomes more of an opportunity for revenue growth. So we definitely have a footprint that is solid. We definitely have opportunities to make sure we utilize that more effectively. I do not have any short-term plans to consolidate the footprint because we are working very hard at this point to make sure that we avoid the distractions that have really taking us away from making sure that we are truly an efficient and effective organization. That does not mean we won't be looking at that in the long term. But my bigger challenge for the group is, we have got a great footprint mix today. Let's make sure we fill that up because every dollar revenue we add to that existing footprint has a much greater incremental margin impact.

Okay. Sounds good. Thank you.

Thank you. Appreciate your time.

Thank you. Our next question comes from Keith Housum of Northcoast Research. Your line is now open.

Good morning everyone. Thanks for taking my question. A lot of them have already been answered, but let me jump in. Aaron, can you remind me how much is gross margin impacted by the fluctuation in volume?

Well, our volume, we generally don't go into detailed discussions on price versus volume. But I can tell you this, organic sales were up, I will say, very modestly at 0.4%. And we have not had very much in the way of pricing activities this quarter. So you can deduce that it's mostly volume. Now when you look at our business, when we get into a period of organic sales growth, we drop a significant amount to the bottomline. Over the last couple of years, of course we saw the negative of that. But our contribution margin, direct margin, however you want to look at it from every incremental dollar of sales is very, very significant. Certainly, it's north of our gross margin of 50%, quite far north of that. But beyond that, it gets really, really difficult to truly articulate exactly what it is because of amount of SKUs we have, because of the diversity in our end customers, because of the diversity geographically. It really varies significantly. So I know that's a big non-answer but it's a real challenge for us to even calculate it ourselves to be quite candid.

And I will tell you that we have a lot of infrastructure, since it is required to build the base product. As we sell incremental revenue, you are literally talking material costs is by far the more significant driver at that point, once you have that infrastructure, which you can extrapolate to understand it means very positive results.

Absolutely. Thanks. And then, Michael, if you will perhaps talk a little bit about the cadence of sales for the quarter? If I remember back to the last quarter, it was definitely weak. You were much more skeptical, I guess, of the quarter's results than what you actually reported. Did things strengthen throughout the quarter?

Keith, that's a great question. I think I made a specific comment that we have improved every month for six months. I think that is the actual result. We certainly have historically had a more challenging second quarter than any other quarter. As you can imagine, November is our shorter month, December is not only a shorter month, but in some regions an extremely distracted month for large periods of time. Depending on the culture you can start the Christmas holidays as early as probably October 1. But realistically, literally the middle of the month in some cases, you just see the customer activity shut down in some regions. So I would say that we look to the second quarter based on our knowledge of history and months ended up being uniformly better than our history would dictate. But still December is a top month always and certainly that pattern isn't going to change, as an example.

Got you.

I just want to add one comment. And that is, if you take a step back, we obviously look at it on a days basis, we look at it versus the prior year, of course. We did not see a massive increase or decrease in January.

In days.

In days, correct.

I think it's a very good indicator, because that takes out your holidays, your shorter months. And so we just saw it steady, which is good given the economy.

Correct.

I think that the positive is that the economy certainly worked against that.

Great. Thanks. And then just to narrow it down a little more on your R&D discussions. During the quarter, were you guys adding more SKUs than perhaps you have added in previous quarters? Or how would you talk about new product introductions based on what you have been able to do versus, say, two quarters ago?

So I think if you recall, we talked in previous quarters about our focal points. For this year, it's the seven areas that we as a company are working on. Product optimization is one of those. So actually we have been taking a look at our SKUs that make no logical sense within the company. So net-on-net, we are offering fewer SKUs today. Areas like WPS and IDS, we have actually driven our total SKU count down. That has not impacted our revenue. But it certainly is making everything from our catalog focus to our distributor discussions to our actually end customer discussions much more efficient and effective. At the same time, we continue to introduce new products. But I would say, you will see the impact of a lot of our product development focus taking longer than a couple of quarters. Typically that's a two to three year window of where you are going to see a real revenue uptick and a one to one-and-a-half year window of where you are going to see products come in. But we are not focusing on SKU count or the number. We are actually working hard on the effectiveness of the products that we will bring forth. We just had a rejuvenation exercise in our IDS division and it was amazingly effective at introducing a number of very low effort products that we are seeing actually shorter term revenue increases than we would normally expect. So we are looking at business a lot, lot differently in the area of product development than we ever had before. And yet simultaneously with those type of projects, we are spending a lot more time facing our end users and making sure we not only understand our current needs, but even more important for our long-term their future needs and are designing our products proactively. So I think that is, as part of a layered process that we are doing, you are gong to see a lot more dividends from that in the medium to longer term.

Great. Thank you.

Thank you. And our next question comes from George Staphos of Bank of America Merrill Lynch. Your line is now open.

Hi. Thanks for taking the follow-up. Just two quick questions. One on the guidance, I guess just piggybacking off a previous question regarding your outlook previous quarter and the quarter coming in a little better. It sounded today like the outlook for a lot of regions outside of Europe remains challenging, but you increased the guidance. So how should we think about that in relation to what you are seeing? And is it purely just better efficiencies relative to Brady's internal targets? Or if you could provide some framework around that?

I think this speaks to, George when we first started talking a year-and-a-half ago about what I wanted to see out of the organization and I said it in my points, you need to be able to perform and overcome in good times and in bad. And I think our guidance is specifically directed at our ability to now start delivering what we have been starting to believe. And so frankly, the guidance for the future has more to do with our belief in the strength of what we are doing internally than the macro challenges. The macro challenges we still believe are pretty significant. We have shown you we overcame those last quarter and the guidance reflects the fact that we believe we will, to some degree, overcome them. But we are not overly confident that we can totally overcome them because they are real. And there is no doubt in our minds based on our channel partners and the industrial customers that we have that we are going to face some macroeconomic pressure on revenue as people are finding any way and every way to put off expenditures right now for a variety of reasons that you probably know as well as we do.

Thanks for that. And then just last question on uses of cash and I appreciate the remarks on capital allocation and recognizing the announced buyback program. Can you just talk about your appetite for M&A? Are there any product lines or end markets that an acquisition might make sense to fill a strategic gap more quickly? But relative to your earlier comments, it sounds like there are much more internal opportunities and you would like to not have any distractions within the organizations, but would appreciate any thoughts there.

I appreciate that. I think, hopefully, as you have observed it over the last year-and-a-half, we take a very measured and disciplined approach when we move forward on anything and as a result I announced early on that we did not, as a culture, have a strong M&A mentality or platform with which I was comfortable moving forward on. I still believe we have an awful lot of opportunities to create more discipline within our organization. As we create that discipline, as we drive down strategy, thought and development in each of our business lines and units, at that point, we can then move forward to the actual units looking at what is a measured approach within our philosophy for acquisitions. FYI, just being the one plus one equals three approach. In other words, if we have a technology that we are really missing, that by filling it into our portfolio will allow us to do better than we do on our own and the company we are acquiring doing better than they would have on their own, then we are very interested in looking at that. But we are far more interested in looking at niches in that regard over the long-term than we are at all looking at market share or regional pipes of plays that I believe Brady and most companies historically have found to be extremely costly and you clearly can see from the previous write-offs and other indicators not as effective as people had anticipated. So I would not expect our model to change into driving large acquisitions, but I would believe over time that if we see a truly technology-based product that we can bring into our portfolio, particularly consuming our capacity and our infrastructure that we have, that is something that as we are prepared we will absolutely be doing. But in a measured way and certainly you are not going to be looking at big market share gobble as a philosophy.

Thanks very much.

Thank you.

Thank you. Our next question comes Mig Dobre of R. W. Baird. Your line is now open.

Good morning guys. This is Joe Grabowski, on for Mig.

Good morning Joe.

Good morning. Most of my questions have been answered. I don't think this has been addressed yet though. If you look at the dollar versus the Euro, we are getting to the point where it's fairly comparable to where it was a year ago. And I was wondering if that's the way you guys are seeing it? Should FX be less of a drag on the top line going forward? And if so, just any impact there might be on margins from currencies being more in line, year-over-year?

Yes. The answer is, you are absolutely right. The Euro is effectively flat from where it was last year at, call it, $1.10, $1.11. So you will not see even remotely close to the magnitude of the impact that you saw in the first half of this year. However, when you look at some of the other currencies, so you look at some of the currencies of the emerging economies, as an example the Brazilian Real, the Peso, the Chinese Yuan, those will continue to provide a headwind, if all stays the same between now and the end of the year. As we look at the back half of the year, we anticipate that FX will provide about a 3% headwind. And again that's assuming nothing changes. 3% headwind on the topline.

Okay. That's very helpful. And again, most of my other questions have been answered. So thanks very much.

That's great. Thank you.

Thank you.

Thank you. And I am showing no further questions at this time. I would like to turn the conference back over to Ms. Thornton for closing remarks.

We thank you for your participation today. As a reminder, the audio and slides from this morning's call are also available on our website at www.bradycorp.com. The replay of this conference call will be available over the phone beginning at 12:30 PM Central Time today, February 19. The phone number to access the call is 1-855-859-2056. International callers can dial 404-537-3406 and the passcode is 33673711. As always, if you have questions, please contact us. Thank you and have a nice day. Operator, could you please disconnect the call.