Good day, ladies and gentlemen, and welcome to the Q4, 2017 Brady Corporation Earnings Conference Call. At this time, all participants are in a 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 is being recorded. I would now like to introduce your host for today Ann Thornton, Chief Accounting Officer. You may begin.

Thank you. And good morning and welcome to the Brady Corporation fiscal 2017 fourth 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 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 2016 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. I will now turn the call over to Brady's President and Chief Executive Officer, Michael Nauman.

Thanks Ann. Good morning and thank you for joining us. This morning we released our fiscal 2017 fourth quarter financial results and I am pleased to report our eight consecutive quarter of improved year-on-year profitability. We increased pretax earnings by 12% when compared to the fourth quarter of last year and we reported diluted EPS of $0.48. Both operating income and pretax earnings were up this quarter. I am proud of the team's focus and dedication to our goals. This quarter we reported organic sales growth of 3%. This was driven by our IDS business which increased organically by 4.4%, while organic sales decreased by 0.6% in WPS. We are seeing growth in all three regions of our IDS business and in two of three regions in our WPS business. This positive organic sales momentum will carry us into 2018. These continued improvements are direct result of our consistent focus on investing in a future while relentlessly pursuing efficiency gains throughout the entire Brady organization. We ensured that every major decision considers the appropriate balance between investing in our future and delivering sustainable efficiency gain and profit improvement. The focus in our future is demonstrated through our increased investment in research and development. R&D expenses were up 11% this year and we are seeing an increase in our new product pipeline and new product launches. We've some exciting new products and printer updates coming in 2018, which I look forward to sharing with our customers. We fully funded the increased investment in R&D through efficiency gains and SG&A without reducing customer facing selling resources. Instead we are working on improving our back end selling processes and as well as our G&A function such as finance, IT and HR. In fact, all of our SG&A savings in the fourth quarter came…

Thank you, Michael. Good morning, everyone. The financial review starts on Slide 3, total sales increased 2.5% to $289.2 million in the fourth quarter, which consisted of a 3% increase in organic sales and a 0.5% decline due to foreign currency translation. We are heavily focused on driving efficiencies throughout the organization and our fourth quarter results reflect this focus. At the same time, we are increasing our investment in innovation. The increased R&D spent by 19% this quarter and this is an area where we also expect to see year-over-year increases in the future. Our pretax earnings increased 12% to $35.9 million compared to $32 million in last year's fourth quarter. Last year we benefited from a lower than normal 21.5% tax rate in the fourth quarter, whereas our tax rate was 29.7% in the fourth quarter of this year. Looking forward to fiscal 2018, we expect our full year income tax rate to be in a historical range of 27% to 29%. Diluted earnings per share finished at $0.48 this quarter compared to $0.49 in a fourth quarter of last year. Our cash generation was also very strong as cash flow from operating activities was more than doubled net earnings this quarter. Overall, we finished fiscal 2017 strong as we had accelerating organic sales growth. We've realized nice efficiency gains in our G&A structure and we had strong cash generation, all while ramping up our investments in R&D. On Slide 4, you will find a summary of our quarterly sales trend. As you can see from this chart, our fourth quarter revenue was the highest we've seen over the last two years and our organic growth rate was also the highest we've seen in quite some time. Although, global currencies have recently strengthened versus the US dollar, during…

Thank you, Aaron. Slide 12 summarizes the identification solutions fourth quarter financial results. Organic sales increased 4.4% and foreign currency translation decreased sales by 0.4% and total IDS sales increased by 4% finishing at $211.3 million this quarter. We realized organic sales growth across all three regions of the IDS business. Organic sales in the Americas and EMEA regions increased in a low single digit. Our organic sales in Asia increased in the upper teen this quarter. Sales grew in every country in Asia with the strongest growth coming from China, where our organic sales increased by more than 25% from several new customer and project win along with increased activity in our existing customer base. Our organic sales growth in our IDS business in EMEA continuously driven by Western Europe. We had strong enough growth to overcome weaknesses in the Middle East where companies in the oil and gas industry continue to restrict project spending. In the Americas region of IDS, sales grew in the US, Canada and Brazil and declined slightly in Mexico. Sales increased in Canada in the mid-teens and increased in Brazil by just over 10%. Our largest business is the US where we made the turn to solid mid single digit organic sales growth across most of our traditional product category with their strongest growth in more proprietary product offerings. The strong sales growth in the US industrial market was partially offset by mid-single digit decline in our healthcare product line. This business is facing pricing pressure within certain product categories from the consolidation of group purchasing organization and large healthcare organization. We are adjusting these issues through continued investment in R&D and a strong focus on launching innovative new product particularly those that help reduce incorrect data and treatment areas for patients. For example,…

[Operator Instructions] Our first question comes from Joe Mondillo with Sidoti & Company.

Hi, guys. Good morning. So my first question, I have a couple things on WPS. So you've been doing a really good job on IDS by far. But WPS, I am just wondering first off so you are looking for sort of flat revenue. Number one, what gives you the sort of the confidence level that you can attain flat revenues? I mean no fault of your own, it seems like it's certainly an uphill battle here especially in North America. Number two, if you do achieve flat revenue what is sort of expectation on margin because it seems like the trend has been margin constrict pressures and then lastly do you see any risks to the strength that you see in your European and Australian businesses as sort of this online wave continues Alibaba et cetera in terms of the competitive pressures over there.

I'll start with the last first. We'll start with Europe and Australia. We've been incredibly pleased particularly in Europe with 14 quarters of improved results. We do expect that to continue. We have the team in place, the structure in place, the differentiation in our different market places and newer more innovative products coming into that space that excite us. In the Australian model, we are really generating growth from targeting newer market places in different market places in our traditional space in mining that had long been a staple of that business. And obviously it's not a strong at this current time in Australia. But we are fundamentally growing there. We are making sure that we are reaching out with our product holistically to the key customer sets and markets. So I have good confidence that will continue. As far as achieving flat results, that is certainly not my long-term goal. We do expect as a company to grow. But we do have to turn the corner. And the fact that we are turning the corner is significant. In North America, we have been improving or I'll say decreasing as less dramatic of a rate and we are going to continue to do that with the upside of Europe and Australia, we do expect the total package to be flat for the year. And that will be a major change for that entire business. And we are pleased with that progress that we are working to make but we are not satisfied. Now I want to make that clear. We have to continue to focus on innovative product in this space and a significant portion of our products we manufacture ourselves which is different than some of our competitors. We also have innovation as a key focus of our company in that business. And we've often created unique products that really differentiate ourselves in our spaces and we are going to be doing that more and more effectively in WPS in particular in North America. And then really creating a much more cost effective profile as we go forward is another major focus of that business, making sure as we do see margin pressure we mentioned it in our comments, that we are able to offset a lot of that margin pressure with a more efficient effective operation.

Okay. And then just a follow up regarding WPS. The product offering, I know you continued to talk about trying to add more of a value added type of a product offering. Could you talk about how much has changed over the last couple of years and what the expectation is going forward? Any sort of insight or any additional information that you can give us a sense that things are maybe changing for the better regarding the product offering.

Sure. I'd say first of all, as I said a significant portion of our revenue we do manufacture so we control key issues like our customization and we've been doing a much, much better job of really focusing on customization specifically in the North American market. And that gives us a key differential advantage with a lot of our customer base. And that is quicker way to really create some proprietary capability. However, the same time as we look at our key core of safety and identification, we are making sure that we are going out having a stronger voice of customer and coming back with products needs and then facilitating those needs in a unique way. That takes significantly longer and we really are on the path to do that. But we have a long way to go. I am excited about this path. We’re farther ahead obviously in IDS and getting that really moving effectively. In our healthcare business we come behind our traditional industrial ideas. And then finally in WPS it's a third wave of that effort. And we've actually created engineering and technology focuses that we didn't have before to do that.

Okay. And then just last question for me sort of CapEx, R&D topic to sort of based on WPS but just around the whole entire company. R&D, how the high level where you are at the company and with all the different SKUs and products and end market and such, how do -- give us an idea of how you monitor R&D and how you are confident that R&D is going in the right direction and the spending in such. And then could you comment CapEx looks like it's going up quite a bit this year. What are you spending in CapEx in terms of growth initiatives?

Certainly. Once again I'll reverse the question. Part of that CapEx is we are investing in some strategic structures, infrastructure that we believe we must own to be able to modify in a way it will be effective for our businesses and modify so that we can do more long-term customization of those facilities. So that is some -- but we are investing in proprietary technology or both product processes and new product development. I can't get into more details on that but I'll tell you that we are quite excited about the unique capabilities that we are going to be able to introduce throughout the year and actually through the next two years. Some of them take a while to develop obviously. In regards to how I monitor R&D, it's twofold. One, we do -- we have decentralized R&D to the core areas where we can fundamentally control and drive. We have certain core capabilities that remain company wide such as our codings, which are world class capabilities. But in many cases we want the unit themselves to drive that capability. And so that is pushed down. How do I monitor it? I actually have regular reviews of R&D. I have benchmarks of acceptable spending rate. And if a project gets significantly large we drive it. But I look at all of the key R&D efforts on a very consistent and regular basis for all of our units. That is a significant portion of where we see our future.

Our next question comes from Allison Poliniak from Wells Fargo.

Hi, guys. Good morning. Just want to go back to the first question in terms of Europe and Australian market outperforming in WPS versus North America. I just wanted to try to understand sort of the defensibility, is it mixed, is it lack of ecommerce? I mean is there things that you could bring to the North America market to have stabilized that a bit? Just a little more color there would be helpful.

Sure. I think the fundamental issues in North America as I -- we mentioned we do have pressure from certain large distributors that are creating a downward spiral in pricing. And that is not necessarily one that we don't or we can't overcome. In fact, we do believe we will overcome it because we have a more niche approach. So niche approach to our products making sure we really are the experts in the area having proprietary capabilities and customization that others can't match and continue to drive a more direct interface with our customers. We are doing all of that and you'll see there are players in the market, this North American market that are succeeding. And in many ways they often have a similar approach to one that we are taking. Where you have a totally general approach, a high class model and you are trying to drive generic product across the board to many, many customers, it's more problematic. That is specifically the other direction from where we were headed. Now let's talk about Europe and Australia in light of that. We are able to do and have been able to do a great job of niching those markets, making sure that they are not as commoditized in the product that we sell. Getting more closely interactive with our customers, driving real expertise into those industries and offering new innovative and creative products. And we've done that in a more effective way. So we do have confidence that we can continue that. And we also have confidence that we can drive some if not all of that in the North American market. There is no question that the North American market is larger and more homogenous than the other markets which creates some level of challenge. But as I said we fundamentally are starting to overcome that and we will continue driving that.

Okay. And then I guess going back to that just with phrasing North America, I mean given all that it sounds like that could take time as you know over in the next few quarters of you continue to push that through. Are you sensing pricing starting to stabilize? I guess one of the bigger concerns out there is sort of rate, the bottom in terms of pricing right now over here.

Well, I try not to talk too specifically about pricing. I'll say and we did say in our comments there are certain key large players that appeared to be driving volume over total profitability even with infrastructure that are very costly. And so it's my fundamental believe that will become more and more problematic for them. And as a result we need to make sure that we are always creating niches and environment that we really do add significant value. So that people aren't just price shopping. In a world of total price shopping, everyone loses. And if you want to provide some different then the customers will certainly price shop more. So our goal is to really continue to increase differentiations and expertise and customization. Very, very important for us and you are right, without that there will be continued deterioration in the overall marketplace. But I can't speak for what others will continue to do.

Great. Thanks. And just last just sort of the increase in R&D expense, we've talked about that is expected and obviously a good way to utilize investment dollars. In terms of say longer-term growth, if I look at the contribution from new products, are you looking that it could add a point or two or three points of growth or am I looking at the wrong way. Just any thoughts there.

We are not actually this time speculating on specific growth rate but I'll say unequivocally that is the engine to our future success. And we do expect to drive a better than GDP growth offers that difference. Absolutely our expectation.

Our next question comes from Keith Housum from Northcoast Research.

Great, thanks for taking my question. In terms of China now, it looks like this has been probably the third quarter in a row which China is contributing growth I think past year went significant. I guess how sustainable is that and what's the opportunity for future growth in China?

We still are a small player in China, Keith, at this point. We definitely see good opportunity even in bad market which China is and you can gain share if you are a smaller player. China is a solid market, continues to grow. We can argue the numbers but if does continue to grow and creates a lot of opportunity. Safety issues, environmental issues are becoming more and more salient and the very reliability and the durability of our products sales very, very well there. So we have good hopes for that. In addition, we have design centers there; we have local manufacturing capabilities there. We are definitely a player today and in the future.

Great. And then if I turn over to the question we get from investors a lot is Amazon, is Amazon a friend or foe to you guys? Perhaps you can talk a little bit about the relationship with Amazon. I mean how is that contributing to you in the margin profile.

Well, first of all Amazon is a great distributors of ours. We won't talk any more than that directly because we don't talk about our distributor relationships except to say that they are well run company that does an extremely good job of executing. And we've always want to be aligned with companies like that.

Great. And then final question for you the Hurricane that have been happening down in Texas and well maybe here in East Coast here very shortly, is there any exposure you guys have to the Hurricane areas in terms of manufacturing plants or large customers?

Well, first of all, I would like to say Keith that our foundation and our employees are contributing to the efforts in Texas and our sincere concerned goes out to the people of Texas as you may or may not know my family is very close in the state next door Arkansas. And so there is awful lot of ties personally and corporately to that state. And likewise we have operations in Florida. We have people in Florida. And so both our sincere concerns for all of those people and their future not only safety but livelihoods are the first and foremost in our mind. We do believe thought that we have also have products sets that it can help and we positioned them to help and awful lot of environmental areas such as absorbents are ones can be useful in very difficult water penetrated situation. So we've positioned our product to help. We positioned ourselves to make sure that we are looking after our teams and employees and once again sincerely just horrific situations that people are going through. And I really would say that our entire team is made me proud by their outreaching of concerns and questions of how we as a company and then as individual employees can help.

Great, I appreciate those comments. But do you guys have any manufacturing plants that are in a dangerous type idea?

No. We do have a plant in Florida but we are confident that situation, well, as confident one can be.

And our next question comes from Mig Dobre with Robert W. Baird

Good morning, guys. It's Joe Grabowski on for Mig this morning. I'll start with the target for exiting FY'18; you lowered the gross margin target by about 125 basis points versus where you were last year. You lowered the SG&A by 25 basis points. Yet the top line and bottom line stay the same. So are there other offsets or is it an issue where maybe it was exiting FY'18 it was $2 maybe little higher than $2, so now its little closer to $2 just your thoughts on that.

Joe, I can answer that. There is a fair amount of moving parts of course in our plan. I mean as Michael said we are absolutely committed to the target and we are certainly on track to achieve it. Our gross margin did come down which effectively is reflective of the current environment that we've been talking about on this call. And G&A is certainly trending in the right direction as well. Other puts and takes that would factor into our guidance, into our longer range planned guidance would be of course interest cost, additional R&D spent et cetera. And when you added it all up, it's still gets us to the target of $2 per share.

Great and that make sense.

And I think the message we love -- we want to make sure we send is that, we are investing strongly in R&D for the future. And that's an investment that we believe and are confident will pay off and even larger increased revenue. And if we can spin more in R&D today confidently, we are always going to do it because we know that it will generate future revenue and profitability that will make us a much stronger company.

That makes sense. And then switching to IDS, organic growth in the fourth quarter was 4.4%, the comparison kind of one and two years are fairly benign, US PMI is at six year high, PMIs around the world are quite strong and trending in the right direction. Is there an opportunity to do better than low single digit in IDS for FY'18?

We are not going to commenting anything other than our guidance except to say we as an organization have become a culture that's striving for performance. Pushing ourselves, pushing each other as I've gone through our regional sales meeting first in Asia, in North America and finally in Europe, I see a group of people in IDS that are very talented, very motivated and excited about the products that we have and the products that are coming out. So I'll say that we are absolutely going to work diligently to always improve. But at this time our guidance is our current guidance.

Fair enough. And one more last quick question. Aaron, I was just wondering is there any selling in days variances quarter-to-quarter that we should be aware of when we are building our model that might swing quarterly percent changes again throughout FY'18.

Yes, actually when you look at FY'18, thankfully there is virtually none, no changes from a daily perspective.

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

Thank you very much. Fiscal 2017 was a strong year. We've returned organic sales growth, improved gross margins, reduced SG&A expense and increased net earnings by 19%. All while significantly ramping up our investment and innovation. We are actively working to improve our businesses and outperforming up to expectation. We are investing in R&D to grow our pipeline of innovative new products that add value to our customers and separate us from our competition. We'll continue to drive sustainability, efficiency gains throughout the entire Brady organization from our manufacturing floors to our corporate offices. I am proud of what the Brady team has accomplished. We've been working on more than just driving efficiencies and increasing innovation. We've been shifting our culture. Brady foundation is a highly innovative company. We are working hard to bring our company back to what originally made us so successful. With the increase in local ownership and accountability, and with establishment of clear expectations and focus, we are creating a winning culture that will enable us to be successful for years to come. As always, if you have questions, please contact us. Thank you all very much for participating today. And have a great day. Operator, you may disconnect the call.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect. And have a wonderful day.