Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2019 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, this conference may be recorded. I would now like to turn the call over to Ann Thornton, Chief Accounting Officer. You may begin.

Thank you. Good morning and welcome to the Brady Corporation fiscal 2019 fourth quarter earnings conference call. The slides for this morning's call are located on our website at www.bradycorp.com/investors. We will begin our prepared remarks on slide number 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 2019 Form 10-K, which was filed with the SEC this morning as well. 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. This morning we released our 2019 fourth quarter financial results. We have a lot to be proud of this year. We continue to improve our manufacturing processes, we rebuilt our new pipeline to our focused investment in R&D and we’re driving operational efficiencies throughout our organization. All of this has resulted in increased organic sales, reduced SG&A expenses and increased profits. This quarter marks our ninth straight quarter of organic sales growth which was driven by our focus on new product development and consistent execution of our strategy. We sold the business during last year’s fourth quarter and recognized a gain of $4.7 million on that sale. When we exclude this one-time gain, pretax income increased 16% which marks our 16th consecutive quarter of profit improvement. I’m incredibly proud of the entire team at Brady for hitting this milestone. The ability to improve quarterly pre-tax profit for three years takes a great deal of focus on our consistent set of priorities, which are to develop and deliver innovative new products that solve our customer's problems to drive operational efficiencies throughout our business to improve the businesses that are not performing as well as they should be and most importantly, to ensure that the actions we take today are the right decisions for the long term. Organic sales growth of 1.7% was driven by our Identification Solutions business, which posted organic sales growth of 3.3% this quarter, the strongest growth continues to come from the U.S. we're growing in most end markets and almost every major product line. We've launched some exciting new products this quarter and I'm pleased to report that our health care product line grew organic sales in the mid-single digits this quarter. Our investments in…

Thank you, Michael. And good morning, everyone. The financial review starts on slide number three. Sales were $295.3 million in the fourth quarter, which consisted of organic sales growth of 1.7% a decrease of 1.9% from foreign currency translation, and a decrease of 0.5% from the sale of our Runelandhs business which we finalized in the fourth quarter of last year. Net income finished at $36.6 million compared to $35 million in last year's fourth quarter. If you would exclude last year's onetime gain on the sale of a business, net income would have increased by 20.9%. Diluted EPS was $0.68 this quarter, compared to $0.66 in last year's fourth quarter. The sale of Runelandhs increased the EPS by $0.09 per share last year, so excluding this onetime gain from last year, diluted EPS increased 19.3% this quarter. Cash generation, which is a hallmark of Brady and a never ending focus area, continues to be strong. Cash flow from operating activities were $65.3 million this quarter compared to $53.8 million in the fourth quarter of last year, an increase of more than 20%. On slide number four, you'll find our quarterly sales trends. Our Identification Solutions business continues to grow nicely with organic sales growth of 3.3% while our WPS business experienced an organic sales decline of 2.6% this quarter. Turning to slide number five, you'll find our gross profit margin trending. Our gross profit margin was 49.6% this quarter, which was consistent with last year's fourth quarter. We continue to see cost pressure in both IDS and WPS, but we've been successful in offsetting these increases through selected price increases and our constant focus on process improvements, and manufacturing efficiencies across all of our facilities. Slide number six outlines our SG&A expense trending. SG&A was $89.1 million this quarter…

Thank you, Aaron. Slide number 14 summarizes the fourth quarter financial results prior for our Identification Solutions business. IDS sales increased 1.8% finishing at $221.8 million with organic sales growth of 3.3% while foreign currency translation decreased sales by 1.5% this quarter. Organic sales increased in the low single digits in all three regions. They also increased organically in the majority of our key product lines, but the strongest growth in safety and facility identification. As I mentioned earlier, I'm pleased to report that our healthcare identification product line increased organic sales in the mid-single digits this quarter. The additions we've made to our sales force as well as the products we've added to our new product pipeline are starting to result in organic sales growth and profit improvements. We finished fiscal 2019 with positive momentum that will carry into next year. Organic sales increased in the low single digits in IDS Europe this quarter. We're increasing sales in most major product lines in Europe, but we believe there's been an overall reduction in the industrial economy, which caused our growth rate to slow from mid-single digits last quarter across most geographies and product lines to the low single digit rate, we saw this quarter. In Asia, we experienced low single digit organic sales growth even though we've clearly seen a decrease in demand in certain end markets, such as electronics in China, and automotive in India. In general, our growth rates have slowed throughout Asia and there appears to be economic weakness in China, which is our largest Asian market. IDS segment profit increased 25% to $45.6 million in the fourth quarter compared to the fourth quarter of last year. As a percentage of sales, segment profit improved to 20.6% this quarter compared to 16.8% last year. Our improved…

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

Hi. This is actually Molly Baum sitting on for George. Congrats on the quarter. I just wanted to start by asking a quick question about margins in IDS. You mentioned process improvement and efficiency gain. Sorry. But can you provide more detail on maybe some of the specific actions that you've been taking that have really driven such strong incremental margin in the second and particularly in your fiscal fourth quarter. Thank you.

Thank you, Molly. Glad to have you on the call this morning. As we take a look at our portfolio, we have really focused strongly on not only making our products relevant to our customers as we go forward, but also making sure our factories in particular are an avenue for us to provide a very positive customer experience. And that starts with making sure we get the products out faster to the customer. By doing that, it inherently has us looking at automation, more EDI interfacing, direct communications between our software and our machinery and therefore having the right machinery to be able to do all of that. That has been coming through this quarter as you can see, and we have more projects on the road in the future but it's definitely had a significant impact.

Thank you for that. And then, my second question. You mentioned, some slides following in IDS in both Europe and Asia. Can you talk about, how those two regions trended through the quarter. And when we're looking at you know guidance for the segment that organic growth of 2 to 3 percent what are your assumptions for how each region as you expect it to trend for the year? Thank you.

So obviously, there are a lot of dynamic issues going on in Asia, particularly in China. If I had a crystal ball, I would give it to you. I think there are a lot of pieces in action there. We will hope for the best in our trade negotiations throughout the world. But at the same time we are prepared to make sure we're the most efficient and effective supplier. And as you've seen, I think we've held up pretty well in Asia and China despite the headwinds that we've seen. We are, as an organization planning for further headwinds, but I don't think that it's been getting significantly worse. I think, it's just a challenging environment. Now if we flip to Europe on the other hand, we've got a lot of pieces moving there. Some of those pieces are once again related to the situation in Asia. If you take a look at countries like Germany where they export a ton of machinery and equipment, and they are the backbone of the industrial heartland of Europe, you will -- you'll see that that economy is struggling mightily right now. And as a result, that is having an impact on our business. And we see that will continue to have an impact. At the same time, we've got the Brexit situation there. The outcome, once again is unknown and uncertainty often drives for market challenges and that situation has been deteriorating in the U.K. but also it has a great effect on Europe. As an example, if you take out U.K. from the EU, they are literally a major trading partner with Germany once again as an example. So those situations, Italy is seeing some issues and even France is having some issues creates a dynamic, where we've actually been doing a good job I believe, our teams they're very proud with the introductions of our new products, with really getting to our customers faster and really interacting with them more have been able to overcome those headwinds, but I don't see that changing in the next quarter.

Thank You. I’ll turn it over.

Thank you. And our next question comes from Allison Poliniak of Wells Fargo. Your line is now open.

Hi guys. Good morning.

Good morning, Allison.

I just want to test a new product. You know, you mentioned quite -- in a quite a few of your remarks, new products benefiting organic growth. You've obviously been putting a lot of effort into R&D. Is there any way to help us quantify or directionally what that benefit is, Is it a point of growth, is it growth above market? Just any color, there?

So Allison, I will say what you should see is specifically what we mentioned you know two new printers in our healthcare space. Those figures are a significant move forward. As you know we made an acquisition a number of years ago in healthcare and we've now really positioned ourselves to integrate the capabilities that I think have been hoped for with the capabilities Brady has. And so yes, that is making a significant difference. We don't quantify the actual breakouts and the reason for that is, as you know we have so many segments and so many different product lines that it varies by the product line and the investments we're making. But we are making broad investments. We've talked about lock out tag out with you. We've talked about our capabilities for wire marketing they've been improving. We've talked about our wrapping capabilities, automated wrapping capabilities and now we’re talking about integrating printers into our health care space. So we do see internally, a product-by-product changes to our growth rates as a fact. But we don't break that out.

Got it. And then just R&D another on there you know entering 2020. Is the fiscal 19 a good run rate from a dollar amount, that we should be thinking about for 2020, or is that going to go up again?

You know expected to go up a little, we are being challenged in that area as in all areas with the tightening market. We are not seeing significant turnover. We really do believe we are a great place to work, a great place to have a career and challenge yourselves in a positive way. So we think that has a big impact on the longevity of our workforce. But at the same time, when we are looking to fill roles, it is -- it is a little more challenging. All of that said, yes, we do expect to increase our R&D specifically key talent strengths that we want to work on.

Got it. So should we be thinking at sort of keeping that 4% of sales this range, just under that?

Yes, you can certainly.

Perfect. Thank you.

Thank you.

Thank you. And our next question comes from Joe Mondillo of Sidoti & Company. Your line is now open.

Hi, good morning everyone.

Good morning, Joe.

Just on IDS on the quarter itself, just wondering as far as with all these new products that are coming out and as I understand, I think a lot of these are much more value add, higher margin. So I imagine sort of product mix and just the higher volumes itself is definitely driving volume. I'm just wondering how much is that driving the operating margin growth that we saw, because operating margin growth was actually slowing on a year-over-year basis in the first three quarters. And then it really accelerated strong in the fourth quarter. So how much is it based on that, versus operational, productivity improvements?

Joe, if we take a look, because you know we have very good margins on our products. We grew in all core, in all three regions that had an impact. But the biggest impact was out of our healthcare growth, specifically.

Okay. And like I said, the sort of the way, that the year sort of progressed, we saw a huge spike up in the fourth quarter. Can you give us more color exactly what happened in healthcare, what with that those two printers and those added to the sales and the product mix. Well what happened in the fourth quarter and is it sustainable over the next few quarters?

As you -- first of all, it is sustainable. Second, as you recall from previous calls, the healthcare had been our biggest challenge in the IDS space and had not been growing in fact had been declining. We were able to turn that around, and that turn around on a healthy margin business with new types of products that are strong products for our future, has been the most significant fact. I do not want to understate though the growth in all three regions because of the strength of our general margins has had a big impact as well. And we do expect the healthcare part of that to maintain and we do expect the regions to continue to grow. So yes.

Okay. And, perfect. Now that definitely I clarified. Thank you. I also wanted to ask regarding these new tariffs that are coming online this fall. Is that going to affect any of your business, do you think?

We do have business that exports out of China. We also have imports into China. We're a multinational company with 70 plus locations in 31 countries. So those dynamics can be complex. We are working hard to overcome the dynamics. The good news is most of our revenue, because of the type of products we make our local right. The reason we have so many locations and so many even manufacturing locations is to provide local capability and local sourcing to our customer base. It doesn't mean, we won't be impacted in some of our product lines, and we've already had to pass on significant price increases to some of our channel partners and end users. They have accepted those increases, not happily, but they have accepted them, because they understand the reality. We all hope that there is an end to this situation in a positive light for all participants, but we are planning as though that won't change for the foreseeable future.

Okay, great. And then last question. The non-operating income doubled for the year, year-over-year compared to last year, and it was higher than I was expecting in the fourth quarter. Just wondering, what is driving that line there? And then in terms of the guidance, I guess for fiscal 20, how do we think about that in terms of the drivers there?

Yes. In the non-operating lines, we basically have interest income and interest expense. Those are by far the two biggest components. Interest expense, as you know it's been relatively consistent because we have the one piece of debt outstanding, which we intend to pay off at the end of May of next year. And interest income has been growing, and it's been growing because of the cash that we have on our balance sheet today. We're in a very enviable balance sheet position. So we anticipate that interest income will continue to be strong unless we deploy it, unless we deploy that capital. So as you look forward, I would definitely anticipate that non-operating items would continue to be positive into F-20.

Okay. So that other, that other income line is mainly interest income then?

That's correct.

Okay. All right. Thanks a lot.

Thank you.

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

Good morning guys and congratulations on the turnaround of the healthcare business.

Thank you, Keith good morning.

Good. Absolutely. So in terms of the CapEx investments, if I heard you right, you guys are investing in machinery which is consistent with you guys in the past, but also it may sound like you guys are investing in some new buildings as well. In terms of your progress along that front, are -- are you seeing some of that in the operating in the lower SG&A now in anticipation that we'll continue to see a decline next year as some of the stories come online, and you can get rid of some of these payments and what not?

We do as Keith you're aware, it is financially more advantageous for us to own and lease, but the biggest reason for us owning, it really -- we really have a couple of reasons, one, as we build buildings we can customize them for our particular applications. Two, as we go down the road, we are not reluctant to invest properly in those big buildings, because we aren't going to be double hit by landlords, telling us what a terrific new building they have because of our investments. And then three, the actual soft side as this relates to our people. It is amazing the positive comments I've received from people who have been in buildings that we've leased for 25 years. When they found out, we were buying the building or building a new building and the comment about the commitment of the company and how strong that makes their commitment to the company. It's an interesting dynamic that frankly is even much stronger than I expected, but one that is so positive I pointed out to you. But those are the real reasons, and you're absolutely correct. The financial difference between leasing and owning is real. But that's not really the driver or us doing it. We need the buildings to be able to be configured in the way we want them, when we want them, and we want to make sure that people are treating the buildings in the high quality manner that we expect. I just have a fundamental belief, that if you are working in and walking into a building that is a well-run, efficient, clean you will end up making a better more effective product. And that's also showing. So there's a lot of -- there's a lot of benefits to this. Just beyond the accounting treatment.

Got you. I appreciate that. And can you walk me through I guess your guidance. You know it’s the puts and takes that you guys are thinking about at the midpoint of the EPS range because you are only 2% above where you were for this year, but yeah, it looks like you're SG&A improvements are really you know kind of stepped up especially as you closed out the year. So what's kind of I guess offsetting some of that SG&A guidance, we're not seeing more of the fall to the bottom line.

I can, I can take that question Keith. I mean, as we look at our guidance -- it's the major -- the major components are relatively consistent with what we've talked about in the past. As we look at gross margins, we have very very strong gross margins at nearly 50% as you know. We're not anticipating massive changes in our gross profit margins. And in fact, we're quite happy where we're at. And the efficiencies that we've put in place have been offsetting actually effectively all of the cost increases we saw in the fourth quarter. We do continue to make improvements in SG&A as you saw in the fourth quarter actually as you saw throughout this year and the last two previous years as well. And Michael mentioned that we will be investing back into R&D as well. So R&D you should expect to see that as an increase in cost next year in addition to R&D when we look at our tax rate, we anticipate that our tax rate would be in the low 20% range this year. So overall, I’d say that one item that I fail to mention is foreign currency. This continues to be a headwind for us as the U.S. dollar just continues to strengthen against most of the major currencies as well. So the major headwinds if you will versus EPS would be foreign currency continued and our continued investment back into our R&D expense.

Okay. Thanks. And then I guess Michael, last question I have for you. If I think the historical conversations, there's always a kind of thought process that Brady's performance kind of lag the overall macro economy it is by one to two quarters. Is that still a valid assumption? Or you think it's more immediate response to the macro economists?

Well as you know, we don't have a large backlog. But the -- a lot of our industrial products are toward the -- are used in building construction, used for new layout, new spaces. So we do find that the later end of a economic upturn, we tend to do better, that would be absolutely correct. And if you look at our history, we didn't go down as far, during the down last recession, as the overall economy did. And we don't see that situation changing either, because a lot of our products are needed regardless of the revenue stream at the moment. We certainly aren't immune. As you well know, but we do see a little less sharp decline when we have a big recession and we do see a bigger improvement at the end of a cycle. That said, I also believe we have a strategy now for where we're financially deploying ourselves in a very consistent manner that as we come out of a recession I feel fundamentally very good, and I'm not predicting one by the way, so don't take that the wrong way, but we think this way long term because you asked long term, we think that we'll have a ability to grow better than our competition coming out of the recession because of our continuous investment in R&D and our very close effort to contact and deal with our end users.

Great. Thank you.

Thank you.

Thank you. And we do have a follow up question of George Staphos of Bank of America Merrill Lynch. Your line is now open

Hey, thanks for taking my follow up. The first, just two additional questions. The first one, Can you talk about kind of what you're seeing in terms of the lockout tagout regulatory landscape? I saw an article come up that trade groups are talking up potentially changing, you know potentially some of the current OSHA regulations. So just wanted to know what you're seeing in that sense. And then the second just to follow up on Joe's question about IDS. Can you just, again. And sorry if I missed this, highlight what the biggest driver of the margin improvement was? Whether it was the mixed benefit from healthcare growth or you know the cost that that you talked about earlier reduction SG&A etcetera? Thank you.

Molly. Molly, Absolutely. Let me start with the lockout tagout. We're developing a variety new products in that space both anticipating change and leading the change. We are absolutely a driver in that space and we feel it's fundamentally a great space both for us and our customers. What I challenge our employees with is we make the world a better and safer place every day. And there are darn few companies and people who can say that and the lockout tagout we push our leadership in that area to make sure we're doing an even better job of that. So these things take time, as you are well aware, but we believe that if changes do come about we are well-positioned to handle all of them. The second question you have relates to our margins. And the biggest element of that was our healthcare growth. Absolutely, followed by our regional growth.

Thank you.

Thank you.

Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Michael Nauman for closing remarks.

Thank you so much. I'd like to leave you with a few concluding comments this morning. We reported another strong year in 2019. We're growing our organic sales while continuing to generate strong gross margins and reduce SG&A expenses. We're investing in capital expenditures in our facilities to upgrade machinery and to improve our level of automation and we're purchasing or building certain critical manufacturing sites, where it is a strategic fit and makes financial sense. New products launched in 2019 were the results of our increased investment in R&D over the last several years, and we have more exciting products in our pipeline for future development. Our team is motivated, and are motivated to carry this momentum into 2020 and beyond. Even in this tough economic environment, we expect to grow organic sales, drive efficiencies to the organization and grow earnings. I'm proud of what we've accomplished so far and I know that we're making the right decisions today to set us up for to improve, long term financial situation. As always, if you have questions, please contact us. Thank you all for participating today, and have a great day. Operator, you may disconnect the call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect.