Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2020 Brady Corporation Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Ann Thornton, Chief Accounting Officer. Ma'am, you may begin.

Thank you. Good morning and welcome to the Brady Corporation fiscal 2020 first 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 #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 the words identifying forward-looking statements. 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 2020 first quarter Form 10-Q, which was filed with the SEC this morning. 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 2020 first quarter financial results this morning. I’m pleased to report another quarter of profit improvement and strong cash generation. This quarter we increased pretax income by 4.2%, increased net income by 22.4% and increased earnings per share by 20.7%, all while continuing to generate strong cash flows in excess of earnings. Total organic sales declined by 0.4% this quarter. We are seeing the effects of a challenging industrial economy in several geographies around the globe including Europe, the Middle East and China, which resulted in a slight decline in organic sales in both our Identification Solutions and Workplace Safety businesses this quarter. The organic decline in IDS was only 0.2%, but this is a reversal of the growth trend that we've enjoyed for the last several years. This was driven by the macroeconomic challenges that we've experienced outside of the United States. Organic sales in our WPS business decreased by 0.8% this quarter, modest growth in Europe was offset by the low single-digit declines in North America and Australia. The economic backdrop in Europe and Australia has certainly impacted our WPS business as well, but we're working hard to take share wherever we can to offset these challenges. At the same time, we continue to see improvements in our North American business as already decline has steadily improved. We're pleased with this progress as we push to return this business with steady revenue and profit growth. To combat this sluggish economic environment, we're controlling what we can with the consistent execution of our key priorities which are to invest in sales generating resources and new product development and to serve our customers extremely well, all while driving sustainable efficiency gains throughout our business.…

Thank you, Michael, and good morning everyone. The financial review starts on Slide 3. Sales in the first quarter were $286.9 million which consisted of an organic sales decline of 0.4% and a decrease of 1.7% from foreign currency translations. Pretax income increased 4.2% while net income was up 22.4% to $37.5 million this quarter compared to $30.6 million in the first quarter of last year. Diluted EPS increased 20.7% to $0.70 compared to $0.58 in last year's first quarter and cash flow from operating activities was $38.8 million this quarter which is more than double the $18.8 million we realized in last year's first quarter. Overall, our earnings growth and cash generation were quite solid, especially given the economic challenges that Michael mentioned. Turning to Slide #4, you will find our quarterly sales trends. IDS organic sales decreased 0.2% and WPS organic sales decreased 0.8%. The decline in IDS organic sales was due to macro challenges in several of our foreign businesses in Europe and Asia. We saw growth in most product lines in North America, but this was not enough to bring the entire IDS division to organic growth this quarter. The decline in WPS organic sales was driven by our North American and Australian businesses. As Michael mentioned, growth in our European business wasn't quite enough to offset the low single-digit declines in North America and Australia. Slide #5 is our gross profit margin trending. Our gross profit margin was 49.3% this quarter, which is a decrease of 70 basis points from last year's first quarter. We're seeing input cost pressures in both IDS and WPS with our largest areas of cost pressure being labor and certain raw materials. We're focused on aggressively driving process improvements throughout our manufacturing facilities in an effort to offset these cost…

Thank you, Aaron. Slide # 13 outlines the first quarter financial results for our Identification Solutions business. IDS sales declined 1.4% finishing at $215 million with an organic sales declined of 0.2% and a decrease from foreign currency translation of 1.2% this quarter. Organic sales increased in the low single digits in the Americas region. We've continued to see solid organic growth in the U.S. with our strongest growth in safety and facility identification products. Organic sales decreased in the mid-single digits in Europe and in the low single digits in Asia this quarter. We've started to see an overall reduction in organic growth rates in the back half of last year and these softer economic conditions continued in our first quarter resulting in an organic sales declined in both Europe and Asia. IDS segment profit increased 2.1% to $42.4 million this quarter. As a percentage of sales segment profit was 19.7%, which was an improvement over the same quarter last year's segment profit of 19.1%. We improved the profitability compared to the prior year even though we had a modest organic sales decline and foreign currency headwinds. This profitability improvement was the result of ongoing process improvements and efficiency gains that we've been pushing throughout our business. The soft industrial economy outside of the U.S. makes our process improvement initiatives that much more important as we continue to drive reductions in SG&A. We will remain committed to our investment in R&D. This quarter we launched several high tech materials with a suit of full variety of manufacturing applications. For instance, we launched thermal transfer printing polyimide labels which is designed for circuit board and electronic component pre-process labeling and process labeling in manufacturing. These labels are resistant to chemicals, heat, corrosion, and humidity and meet a wide range of…

Thank you. [Operator Instructions] And our first question comes from Keith Housum from Northcoast Research. Your line is open.

Good morning, guys. Thanks for the opportunity. Mike, just a little bit on your expectations for how the quarter went, the results versus expectations, and then second with the decline here in IDS more specifically, what gives you the confidence that you will be able to keep your annual growth rate to 3%?

Good morning, Keith. I would say a couple of factors are very important this quarter. We saw across the board, an incredibly slow August, unanticipated in household was - and we then saw - we were able to build on that in September and October. So we do believe that despite the extremely slow start to last quarter, the trend is better than the overall quarterly results indicated.

Great. And then switching over to the gross margins, 70 basis point decline year-over-year, it's probably the most you've guys have had in a while and I think that's the lowest gross margins I've seen over the past several years. Your confidence in the ability for your automation efforts to keep up with some of the pressures that you're seeing with your raw inputs and your wages, any color on that?

Yes, we actually are continuing to move forward across the board in that effort. I think as you may know, part of our culture it's through an annual communications meeting with all our facilities at the beginning of our year. So our senior leadership gets eyes on at all our facilities, what we should be doing, what we are doing. Having just finished that process, I can tell you, I'm extremely pleased not only with the projects that are finishing up, but the pipeline of new projects that are coming forward and are being introduced right now. We have a lot of opportunity to move forward. By the way, Keith this is not just good for productivity improvements. It's good for our employee base. As we shift generationally, the interactive nature of our employees changes of how would they like to interact with manufacturing, manufacturing equipment, and our new sealed systems, our new automated technology fit in line with the desires of our continuing employee base.

Great, thanks. I appreciate it. Good luck.

Thank you, sir.

Thank you. [Operator Instructions] And our next question comes from Joe Mondillo from Sidoti. Your line is open.

Good morning, Joe.

Good morning. It's Brian actually on for Joe. Thanks for taking my question sir.

Hi, Brian.

Just real quick – I had a couple questions and the first one on IDS specifically in the U.S. organic growth is still solid, what's really driving that, any particular end markets or divisions or things like that?

Our facility and Safety ID is our strongest driver in that market, Brian, but I'd also tell you, as you've been listening to the calls over the last few quarters our cadence of new product development, of active patented proprietary products have been growing strongly. In the industrial marketplace, that takes a little longer to develop into revenue than in other marketplaces, but we are starting to really see that take hold. In addition to that, we're doing a much better job of connecting with our end users, the Brady brand, the Brady product set has a great reputation. But the more interactively we can work with our end user sets, the better they can really take advantage of that and we are seeing that as well.

All right, great, thank you, and then transitioning over to Healthcare. Looks like sales were kind of flattish in the quarter, any update there on how that business is trending as far as profitability and things like that?

We feel very good about that businesses. As I think I mentioned last quarter, we did foretell a little choppiness as we came out into growing, and we're seeing exactly what we expected to see. We've got a great new sales force that we've really increased in that area. New product sets, printer families that are really generating some energy within our customer base. So we do see that continuing to move in the right direction and are pleased with where we're at this point.

All right, great. Then also moving over to the workplace safety, specifically with digital sales it looks like those were up organically. Any concern that what happened in North America and the recent quarters could potentially happen in that segment as well?

We're looking very hard at all times throughout our global footprint for WPS seeing if there are any bleed overs. As you know, we did have a disconnect on our digital platform a year ago June, which drove us in the wrong direction for several months before it became apparent as to the root causes. We have been moving in the right direction since approximately January, February of this year. So that part we're confident we have addressed and are moving in the right way. We do and work hard to bifurcate our markets in Europe and places like that to really hit our customer needs. We still feel fundamentally that the European customer mentality is different, not only from the U.S. mentality, but within countries and even regions of countries. And so our approach to that marketplace is somewhat different. Just as in Australia, we have headlined that we've been working to expand into different industry segments from our original primary segment of mining, and have done an effective job of that. So overall, economic issues are always a challenge, both in Europe and in Australia.

All right. And then last one from me here, just on the refinancing of the credit facility earlier, was that just based on the maturity or was there something else involved? And then just, you know, you touched on M&A a little bit in your prepared remarks, but how is that pipeline look anything specifically we should be aware of or looking forward to?

Brian this is Aaron, I'll answer the credit facility question. It actually was due to expire within a year and we typically like to extend our credit facilities when we get about a year out. So that's, that's really the main reason that we did it. There are no other extenuating circumstances.

In regards to the M&A, as a public company, we certainly can't for foreshadow or foretell M&A activity. What I can tell you is that as you look back over or Aaron and my tenure, we have created a philosophy of building, of building on the fundamentals and the foundation and I have been talking to you about the fact that we're moving strongly into an ability to execute M&A in a logical technology driven way at this point in our juncture, whether that happens or not depends on a lot of factors. We deal with private companies in many cases. It is as important that they're at the right spot as it is we're in the right spot. But you can know that we are looking at key opportunities that will help us drive our technology forward to really create a better growth platform in the future. And that we are actively, always at this point in discussions with different individuals to see whether we can combine for one plus one equals three. It's very important to us that our acquiring companies win just as much as it is that we win; we both got to win in these transactions to be long-term viable, and it's got to be based not just on market share, but on our real differentiation and advantage through technology and product sets that will really enable us to move forward. But you can be assured we are continuing to focus more effort in that area.

All right, well, I appreciate it. Thanks for taking my questions and congrats on another solid quarter.

Thank you, sir. I appreciate it.

Thank you. Our next question comes from Michael McGinn from Wells Fargo. Your line is open.

Thanks. This is Mike on for Allison. I just had a couple quick questions. Michael, you mentioned August was particularly weak. I was wondering if you could talk about whether you saw any channels destocking from distributors. I know you guys have some shorter lead times and is that now in the rearview and you're going to see better growth going forward especially IDS, if you can just give us a little color there that'd be great?

Good morning Mike. We did experience across the board, all regions, all businesses, a dramatic down tick in August that was weaker than any of our teams expected. The unique part about it was it was very consistent in that it was across the board. And but as I said, and I want to be clear, within thought progress through September, particularly the second half of September, going through October we have experience in Europe as an example, we believe in many cases, Brexit related changes in stocking patterns. And at this point, although we think that we are through that, as we are not through Brexit, there is no guarantee that that is an absolute case. But we do believe that we are through the initial strong stocking and then de-stocking situations.

Got it. Thank you. And then if I could just ask a little more of a longer term question. Michael, I hear you on the more patented targeted approach to R&D. Can you give us a little perspective on is there a fine line between maybe an aggressive 80-20 approach to and then still being able to offer a plentiful amount of SKUs with like a good, better, best product offering? How do you toe that line going forward?

That is actually very true. As we take a look at where we're going, I'm going to talk about both product sets to give you an idea. We - for instance in WPS are a value-added distributor at about 50% manufactured products, 50% buy and resell. We believe that moving that up to about 70% is the ideal point. That still is a significant amount of buy and resell, but those are all the products will we don't add value or don't add enough significant value or possibly are the sheer point the lower costs. In addition to that, we do look at providing our customers with alternative cost value points for them. That doesn't mean the products aren’t proprietary. What it does mean is not all feature sets, not all durability levels are needed for all our customers. If you look at Floor Markings is a great example. We've introduced new levels of tough stripe, super tough stripe materials. We have regular grade floor marking materials. We can take a customer through very temporary and basic needs to the highest durability level of floor markings, and really give them and explain those options to them. That doesn't mean how we do it. In all cases it can't be proprietary and/or patented. But it does mean that we're providing them with differentiated products for their level of need. And I think that's something Brady does very, very well. We are super high durability in many of our applications, but we also have levels of that, really depending on what the user case is. So I think your point is very valid. We do evaluate that not only as we introduce a new product, but as we think about the development of new products. What does the customer really need and is there bifurcation in the market need base? And we are doing that and provide that. So I agree that that's something that is very important and we do keep that in mind.

Thank you. I appreciate the time. I'll pass it along.

Thank you, sir.

Thank you. And I am showing no further questions from our phone lines. And I'd like to turn the conference back over to Michael Nauman for any closing remarks.

Thank you very much. I'd like to leave you with a few concluding comments this morning. We reported a good start to fiscal 2020. Looking forward, I believe that Brady is in a very enviable position despite weakness in the industrial economy. Over the last several years, we've made increased investments to develop high quality, innovative new products and those new products are now coming to market. We've improved our customer service and support, which is making more loyal customers. We have healthy gross profit margins and we've been aggressively driving sustainable efficiency gains, which you can see in our continued reductions in SG&A expenses. All of this has made us a more efficient and effective organization that is better able to react and adapt to change. These improvements combined with our solid balance sheet that is in a net cash position of $245 million, really puts Brady in a position of strength as we can continue to invest in our future or aggressively targeting the customers of our competitors. So that when our end markets recover, we will be in an even stronger position and emerged with even stronger financial results. Our team is motivated and I'm motivated to keep our positive momentum alive. 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 we're making the right decisions today to set us up for improved long-term financial results. As always, if you have any 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 does conclude the program and you may all disconnect. Everyone have a wonderful day.