Good day, ladies and gentlemen, and welcome to the First Quarter 2018 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 be given at that time. [Operator Instructions] As a reminder, today's program is being recorded. And now, I would like to introduce your host for today’s program Ann Thornton, Chief Accounting Officer. Please go ahead.

Good morning and welcome to the Brady Corporation fiscal 2018 first 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 the 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 2017 Form 10-K, which was filed with the SEC in September of this 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’ll 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. We released our fiscal 2018 first quarter financial results this morning and I am pleased to report our ninth consecutive quarter of improved year-on-year profitability, total sales growth of 3.6% and organic sales growth of 1.7%. We increased net earnings by 14.6% compared to the first quarter of last year and diluted earnings per share increased 11.4% to $0.49. These improvements are direct result of our focus on serving our customers extremely well, developing high quality innovative products, driving efficiency throughout our global operations, streaming our SG&A structure and strengthening our culture of innovation and local ownership. We make sure that every decision we make appropriately balances the long-term and the short-term that our efficiency actions are sustainable and that we're investing in our future. This focus is demonstrated by our increased investments in research and development. R&D expenses were up 15% this quarter and we are excited about the new products and update we've had in the pipeline for this fiscal year and beyond. Our ID Solutions business continues to perform well, posting a total sales increase of 4.2% which consisted of organic sales growth of 2.9% and 1.3% benefit from currency. ID Solutions was led by our EMEA and Asian regions. Overall, IDS is posting solid organic sales growth, increasing its investments in innovation, and improving its customers buying experience which is all leading to increased profitability. In our Workplace Safety business, we realized the total sales increase of 1.9% which included a 3.3% benefit from currency and a 1.4% organic sales decline. We are seeing positive developments in our North American business and we are confident we are taking the right steps to return this business to growth. Our European WPS business continues to deliver…

Thank you, Michael, and good morning, everyone. The financial review starts on Slide number 3. Total sales increased 3.6% to $290.2 million in the first quarter, which consisted of organic sales growth of 1.7% and an increase of 1.9% due to foreign currency translation. As Michael mentioned, we’re heavily focused on driving efficiencies throughout the entire company. At the same time, we're investing in the development of innovative new products. Our investment in R&D was $10.5 million this quarter, up 15% over the first quarter of last year. Net earnings increased 14.6% to finish a $25.8 million this quarter, compared to $22.6 million last year. Diluted EPS increased 11.4%, finishing at $0.49 per share, and our cash generation continues to be strong as cash flow from operating activities was 134% of net earnings this quarter. Q1 represents a nice start to the year as organic sales are trending up and we're investing in our future by increasing our R&D efforts. All while staying focused on driving sustainable efficiency gains throughout the organization. On Slide number 4, you'll find a summary of our quarterly sales trends. As I mentioned, total sales grew 3.6% and organic sales were up 1.7%. We've now posted two consecutive quarters of organic sales growth and working to execute our strategy to continue this momentum and drive consistent organic growth for the rest of the fiscal year. Moving on Slide number 5 is an overview of our gross profit margin trending. Our gross profit margin was 50.3% this quarter, which was up slightly from the first quarter of last year. Strong performance in our identification solutions business along with efficiency gains throughout our global operations are more than offsetting pricing challenges in certain product categories. On Slide number 6, you'll find the trending of our SG&A expense.…

Thank you, Aaron. Slide number 12 summarizes the identification solutions first quarter financial results. Organic sales increased 2.9% and foreign currency translation increased sales by 1.3%. In total IDS sales increased by 4.2% finishing at $209.7 million this quarter. Organic sales in EMEA and Asia increased in a high single-digit, while organic sales in the Americas regions were effectively flat this quarter. Sales in Asia were led by China, which increased organically by nearly 15% compared to last year. We continue to win new projects, while driving increased sales from our existing customer base. Organic sales growth in our IDS business in EMEA continues to be driven by Western Europe. I am proud of the entire European team and their ability to consistently execute our strategy, which has resulted in increased sales on a per day basis for the last four consecutive quarters. In the Americas region of IDS, sales grew in the mid-single digits in Canada and Mexico were flat in Brazil and declined slightly in U.S. We realized growth across most of our traditional product categories with our strongest growth and our product identification and wire identification product lines. Sales growth in the U.S. industrial market was offset by decline in organic sales in our healthcare product line. We continue to face pricing pressure due to factors specific to the healthcare market from the consolidation of group purchasing organizations and large healthcare companies to the uncertainty presented in the legislative direction of healthcare in the U.S. We are addressing these issues through a continued investment in R&D with the specific focus on products that help our customers improve their efficiency and mitigate risk related to incorrect data and treatment errors for patients. For example, this quarter we launched a new skin marker that improves the clarity of mammogram…

Certainly [Operator Instructions] Our first question comes from the line of Joe Mondillo from Sidoti & Company. Your question please.

Hi, good morning, guys.

Good morning, Joe.

Good morning.

So my first question just related to capital description. I understand you continue to maintain sort of this “discipline and patient approach”. But I'm just wondering sort of long-term if we continue going on this rate, we had a very loss the net cash position. So long-term, just wondering what sort of your vision is? Whether acquisitions start to come into the picture? Diluted share count continues to climb up over the last several quarters? Can we mitigate that with share repurchases in the meantime just can you talk about maybe evolving the approach over the next couple years?

Sure, Joe. If we look at our philosophy, it isn't changing. However, as you know having followed us for a long time, we came from a position, years ago before I got here, of regular volume acquisitions, particularly competitors in market share acquisitions. We fundamentally don't believe that is the best way to develop a high powered growth engine with high profitability. I fundamentally believe rather that as we look at acquisitions we need to think about them as an opportunity for us to bring key technology into the corporation that we can develop in a timely and cost effective manner ourselves. Those acquisitions need to be positive both for the people we are acquiring and for our organization and really I always like to say one plus one really does need to equal three. And I know a lot of people will say that, but in the result, it really needs to be from adding something that the company truly doesn't have that will really continue to help us be a differentiating presence in the marketplace. So yes, we absolutely will be acquiring in the future but of the technology base we are not setting any expectations for dollars of acquisitions per year, what we are expecting within our organization is to make sure that we are internally very knowledgeable of the technology roadmaps where we need to head – what we need to acquire and that we work with companies that we believe would be great fits, so that when there is a good time for them and for us that we can quickly and effectively acquire them in a very positive manner. What that does mean though is that we are looking at temporary issues as much as we're looking at the long-term for our acquisition based.…

Okay. I appreciate that. Just another question, I just wanted to ask about the U.S. healthcare piece of the IDS business. Just wondering sort of I think you've been seeing pressure within this business, wondering where you think we are in terms of a trend, do you think that it's going to continue to go on for a couple quarters or as it started, can you see some stabilization there? And then I know you probably won't divulge or quantify actual margins within that business, but just out of curiosity are those above segment margins or below segment margins or sort of in line?

So first of all, yes we have certainly faced challenges. We believe it's fundamentally a strong business in the long-term. It fits in our identification space quite well. One of the areas that we've really been focused on in that business, but are farther behind in the curve than we are in the other parts of IDS is developing the key new products of that segment needs and wants. We are very excited about our pipeline of products. That said, we have said, we will continue to face some pressures in that space as we said. I said in my opening comments throughout the fiscal year and really there is a major consolidation effort and a push effort within that market space as we look at both the supply channel, but also the actual end users, the hospitals themselves are continuing to consolidate. And that always provides both challenges, but opportunities. And we believe we've actually won some good opportunities, but it takes time for that revenue to develop from those. But very clearly I want to state, it's a long-term opportunity for Brady as we develop the key products as I mentioned some of them coming out that are both mitigators are risk and mitigators are cost. Those we feel are two major elements in healthcare that no matter what comes out of legislative changes will always be crucial. If we can make sure we're providing our customers and their customers with a safer, better environment, while at the same time doing at a price points that are below current solutions, it's an absolute win. As I said on the mammography that's a great example of the products that were coming out with the do both in effective manner. So I feel very good about what we're doing and why we're doing in that market space.

And any chance that you can sort of give us an idea of profitability relative to the whole segment as a whole?

Yes. Joe, this is Aaron. I can big picture anyway. First of all this business is actually very strong. It is obviously a quite profitable business as well, but the margins are below that of the IDS average. And frankly they have been since we bought them in December of 2012. So we haven't seen major changes either direction.

Okay, great. Thanks a lot. Appreciate you taking my questions.

Thanks Joe. Have a good day.

Thank you. Our next question comes from the line of Charley Brady from SunTrust Robinson Humphrey. Your question please.

Thanks. Good morning, guys.

Good morning.

Hey. Just on – can you comment a little bit more on where you're seeing the North American growth in WPS specifically?

Sure. Charley, as we take a look at WPS, we are seeing our proprietary products really being the segment that we're growing. We take a look at a lot of opportunities that we have where we can create total solutions for our customers and that's something that's a great strength. We're viewed by our customer base as experts. And I'm not saying that because we believe it, I'm saying that because that's the number one response we get from our customers is to why they do business with us and why they like working with us. They're confident that we're not just selling more product, we're helping them solve their problems, and whether it be an OSHA areas or just non-OSHA areas of compliance and safety, we are absolutely driving a solution that will make them a better, safer and more compliant organization. So if we can give a proprietary solution or more importantly a complete solution to our customers, that's where we're seeing more of our growth.

And so how much of the segment sales today are proprietary or customized products and kind of where do you see that going over the next say two to three years?

Charley, I’d say we don't break that out specifically, but we are absolutely driving more growth in that area, so we do expect and we'll expect to see that to continue to grow as a percentage of our revenue.

Okay, thanks. I know it’s in the K, under the initiatives for fiscal 2018; you had a couple changes there. What struck was performing comprehensive product reviews to optimize product offerings. That's not part of the list this year. It’s been replaced with focusing on SG&A. And I'm just wondering should we read something into that, I mean have you gone through – it sounds to me like you're still involved in looking at your product offering and optimizing that, I am just curious as to why maybe that's not listed as an 2018 priority anymore?

I wouldn't read anything into that. I think we take parts of our organization and we will create a large global focus once we believe it is part of our DNA, we expect to continue to drive those areas. We do that in a lot of our metrics and expectations. That's an area where we needed a major shift in philosophy and structure. That shift has taken place, but to be clear, we expect it to continue as part of our regular cadence to take place within the normal functions of the businesses.

Thanks. I appreciate it.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Mig Dobre from Baird. Your question please.

Good morning, everyone. It’s Joe Grabowski on for Mig this morning.

Good morning, Joe.

Good morning. Just jumping back to Workplace Safety, kind of big picture, I guess the guidance for the year is flattish. Q1 was down 1.4%. That was kind of similar to the decline last year. So I guess kind of two questions, first of all, if you can tell us how did Q1 compare to your internal expectations, where you expect them to be down a little bit? And then again kind of big picture, what surpass the flattish? What has to improve and I assume part of that path required North America to continue to improve?

So Joe, as you heard in my comments, we’re extremely pleased with our European and Australian businesses. So to hit that path to flattish, we do expect them to continue their strong performance and that is not just a strong short-term performance. They've shown consistently that they're performing very well as organization. So we have every confidence based not only on their history, but more importantly on the products and the efforts are putting forth in marketing and in really positioning themselves that that will continue. So that's a key criteria, but one that we are very confident. So the third leg of that stool, the North American business, we did end up performing about what we expected for the quarter and we actually performed in the way that we expected and that we improved throughout the quarter and that leads us that confidence that the trajectory were on is the correct one, the approaches we're making in the market space are the correct ones and we see through the quarter indications that the path we've outlined for the year will get us to the point there where the entire business will be flat for the year.

Great, okay and then switching ideas, growth in Europe was up high single-digit. I believe the last quarter that was up low single-digits. Could you just talk a little more about what’s driving the acceleration and how sustainable it is in Europe?

We have excellent product releases throughout the globe. Europe doesn't have the healthcare mix that North America has. So that's the difference that you're really going to see in the business. They certainly are a strong team, 15 great quarters of success. We continue to see that in the future, but fundamentally we're offering products that our customers really need and want and that’s accelerating both many of our printer type products, but then the consumables that we value and they value continue to grow as a result of our printer platform strong as well. That said, that's happening in North America in that space as well. But as I said, we don't have the offset from healthcare.

Okay, that makes sense. And then final question for me, SG&A as a percent of sales were down 50 basis points, that was somewhat less than a prior few quarters and they were up in a dollar basis. You mentioned investments in additional sales generating activities. I was hoping you could elaborate on what those investments were?

Yes. I can handle that one. As we look at our SG&A, well first of all, we were up versus last year. The biggest driver of that was foreign currency. So it went from $98 million to $100 million and vast majority was foreign currency. And when we talk about investing in sales generating activities, we are effectively talking about people. So we're talking about additional marketing folks. We're talking about additional sales folks, and it's really all across the Board. So that's really what it comes down to.

And it's proportional to our sales growth in those businesses. We have a strategy for the number of sales people we have in addressable regions and we are pretty well marching exactly along that strategy.

Got it. Okay. Thanks for taking the questions.

Thank you. End of Q&A

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Michael Nauman, President and CEO. Please go ahead sir.

Thank you. I'd like to leave you with a few concluding comments this morning. We’ve had a solid start to fiscal 2018. We continue to grow sales organically in our IDS businesses and WPS is steadily improving. We're making up for pricing pressure to efficiency gains and our manufacturing processes and we're continuing to identify opportunities for savings in our SG&A structure. All of this while continuing to increase our investment in R&D by 15% this quarter and growing our pipeline of innovative new products that add value to our customers and make a standout from our competition. We're continuing to focus on improving the businesses that are not meeting our expectations, which includes our WPS business in North America and we're starting to see improvement. The entire team is focused on identifying efficiency opportunities. We're thinking long-term, but acting short-term to set ourselves up for increased organic sales and achieving permanent sustainable cost reductions. For folks who are developing innovative new products, providing the highest level customer service, driving local ownership and accountability and consistently pushing for efficiency throughout the company, we're creating a winning culture that will enable us to achieve our goals and deliver consistently improved results for our shareholders for years to come. As always, if you have questions, please contact us. Thank you all for participating today and have a great day. Operator, you can disconnect the call.

Certainly. And thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.