Aaron Pearce - Chief Financial Officer Michael Nauman - President and Chief Executive Officer

Allison Poliniak - Wells Fargo Securities Jason Ursaner - CJS Securities Mig Dobre - Robert W. Baird George Staphos - Bank of America Merrill Lynch Charley Brady - BMO Capital Markets Joe Mondillo - Sidoti & Company Keith Housum - Northcoast Research Andrew Fleming - Heartland Advisors Ben Alexander - Alexander Capital

Good day, ladies and gentlemen and welcome to the Q1 2015 Brady Corporation’s Earnings Conference Call. My name is Whitley and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct the question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Aaron Pearce, CFO. Please proceed, sir.

Thank you, Whitley. Good morning and welcome to the Brady Corporation’s fiscal 2015 first quarter earnings conference call. The slides for this morning’s call are located on our website at www.bradycorp.com. The prepared remarks will begin on Slide #3. Please note that during this call, we may make comments about forward-looking information. Words such as expect, believe, forecast and anticipate are a few examples of words identifying the 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 2014 Form 10-K, which was filed with the SEC in September of 2014. Also, please note that this teleconference is copyrighted by Brady Corporation and may not be rebroadcast without the consent of Brady. We will be recording this call and broadcasting it on the Internet. As such, your participation in the Q&A session will constitute your consent to being recorded. Thank you. And I will now turn the call over to Brady’s CEO, Michael Nauman. Michael?

Good morning and thank you for joining us. Both of Brady’s segments generated organic sales growth during the first quarter and are well positioned to continue this trend for the remainder of fiscal 2015. I’ve traveled extensively over the last 100 days and my observations are that Brady has a strong team, solid customer relationships and an organization built with great passion for improvement. We’re also dedicated to executing everything we do in a world class manner and providing the best possible customer spirit. As we look at the remainder of our fiscal year, we’re working hard to get back to the basics that made Brady so strong in the past. We are driving significant improvement in six key areas. First, we will complete the consolidation of selected manufacturing facilities to build a more efficient global footprint and a reduced cost structure. We’re consolidating facilities in North America, South America and Europe. The purpose of these facility consolidations is not simply to save costs. Our goal in reducing the number of manufacturing sites is to create the scale and consistent global processes that will enable us to better serve our customers and further differentiate us from our competition. We’ve reduced our facility consolidation efforts and our remaining facility consolidation activities will be executed in a manner that will allow us to maintain the highest service levels and the least amount of disruption to our customers while still achieving efficiency gains over the long run. We incurred incremental costs in our first quarter such as additional labor, outsourcing cost, increased supplies and moving cost, which had negative impacted our profit margins. We expect these incremental costs to continue in the near term as we work to complete these consolidation activities by the end of fiscal 2015. Our second focus area is to pursue operational excellence. As our global footprint becomes more efficient and operational processes more standardized, we will be well positioned to continue to improve our ability to deliver an unrivaled customer experience in every interaction from the moment we quote a customer to the final collection of cash. The third area we will be working on is driving innovation, new product pipeline to both incremental investments in R&D and by identifying emerging technologies and aligning them with opportunities within our target markets as validated by our customers. It is critical that we remain ahead of our customers' needs and expectations. Fourth, we’re driving an enhanced innovative development process which will result in a more efficient method to prioritize and allocate resources towards high value, high impact products and solutions coupled with quicker timeframe from inception, to ideas, to market launch. This effort will also include the creation of a more robust system to track and evaluate our process. The fifth area we will be working on is focused market sales strategy. Our sales and marketing teams are driving comprehensive efforts to create and implement plans in high opportunity markets such as chemical, oil and gas, food and beverage, healthcare, aerospace and mass transit. These plans begin with an understanding of the overall current and future needs in these markets and the expectations of specific customers. They’re also being tied directly to our product in emerging technology efforts in order to accelerate our launch of innovative new products with a much higher success rate. Finally, we’re putting significant resources into implementing our one digital platform strategy which will enable us to sell more products to more customers. This will be achieved through the creation of a standardized product content management system across all of Brandy’s digital platforms that will enhance the overall customer experience and significantly accelerate our ability to offer one standard global web platform. The end result would be faster and more cost effective catalog production, more growth oriented websites and a better mobile experience for our customers. We are confident that the dedicated focus on few priorities directly tied to the core elements of our business will improve our execution and enable future sales, profitability and cash flow growth. Let me now turn it back to Aaron to discuss the first quarter financial results. Aaron?

Please turn to Slide 4 for more detail on our first quarter financial results. Overall sales from continuing operations were up 0.9% to 310.2 million. Organic sales growth for the quarter was 2.4%, while as a result of the strengthening U.S. dollar, foreign translation negatively impacted sales by 1.5% when compared to the prior year. Our first quarter gross profit margin was below our expectations finishing at 48.4%, down from 51.3% gross profit margin in last year’s first quarter. The decline in gross profit margin was mainly attributable to additional costs from facility consolidation projects along with continued sales mix challenges when compared to the first quarter of last year. SG&A expense was 35.2% of sales in the first quarter compared to 36.7% of sales in last year’s first quarter. Non-GAAP EPS from continuing operations was $0.36 in the first quarter compared to non-GAAP EPS of $0.43 in the first quarter of last year. Impacting our Q1 financial results was a higher than normal income tax rate of approximately 36%. If our income tax rate was normalized to our historical income tax rate of 28%, our non-GAAP EPS would have been $0.40 this quarter. Slide #5 reconfirms our non-GAAP EPS guidance from continuing operations for fiscal 2015. We continue to anticipate low single-digit organic sales growth with organic sales growth in both the ID Solutions platform and the Workplace Safety platform. For fiscal 2015, we expect earnings from continuing operations for diluted Class A common share of between $1.50 and $1.70 exclusive of restructuring charges and other non-routine items. Consistent with our initial guidance, we anticipate approximately $0.15 of incremental costs related to growth investments in our IDS segment, half of which relates to an increased focus on vertical markets, including healthcare, and half of which relates to additional R&D investments to drive innovation and new product development initiatives. We also anticipate an additional $0.10 of incremental expenses as we plan to return to a more normalized level of incentive compensation. This guidance is based on currency exchange rates, a full year income tax rate in the mid to upper 20% range, depreciation and amortization of approximately 45 million and capital expenditures of approximately 30 million. Slide #6 is a summary of our quarterly sales trends. In the first quarter, revenues finished at 310.2 million, which is our third consecutive quarter of organic growth. As Michael mentioned, we experienced organic growth in both our IDS and our WPS segments and we saw nice organic sales trends throughout the quarter as our weakest months of the quarter was August and our strongest month was October. Moving along to Slide #7, you can see the trending of our gross profit margins. Our first quarter gross profit margin was 48.4%. The recent declines in our gross profit margin have been primarily due to increased cost in Identification Solutions business from the near term implications of the facility consolidation actions and secondarily from sales mix. We are focused on driving gross profit margin improvement that will result in longer-term improvements. Our facility consolidation activities negatively impacted our gross margins more than we had originally anticipated during the quarter as our commitment to maintaining the highest level of service and quality to our customers has resulted in additional operating costs due to outsourcing of duplicate labor, duplicate facilities, et cetera. But over the longer term these actions are expected to provide gross margin improvements. We anticipate these challenges from facility consolidations to continue throughout the next several quarters with the consolidations being complete by the end of this fiscal year. On the right hand side of this slide you can see the trending of SG&A expense. SG&A expense was down from approximately 112.7 million in Q1 of last year to 109.3 million in Q1 of this year. This decline was driven mostly by reduced administrative expenses as well as a reduction in amortization expense when compared to the first quarter of last year. Selling related expenses were up slightly and reflect the increased investment in sales personnel in our ID Solutions business and increased spending in both online advertising as well as traditional catalog advertising in our Workplace Safety business. Moving on to Slide #8, you can see that our non-GAAP EPS from continuing operations was $0.36 when compared to our non-GAAP EPS from continuing operations of $0.43 generated in the first quarter of last year. As I mentioned, this profitability decline was primarily driven by our weaker than anticipated gross margin and a higher than anticipated tax rate in the quarter and this was partially offset by a reduced SG&A expense. Again, if we would normalize our tax rate to a comparable rate with the prior year of 28%, our non-GAAP EPS would have been $0.40. We've summarized our cash generation on Slide #9. During the quarter we generated 18.6 million of cash from operating activities compared to 25.6 million in last year’s first quarter. This 7 million decline in cash flow from operating activities was primarily driven by a 7.7 million reduction in earnings of our discontinued operations. We spent 11.5 million in capital expenditures and 10.2 million was returned to shareholders through dividends in the quarter. Overall, our net debt position was reduced by 7.2 million in the quarter, further strengthening our balance sheet. Looking forward, we expect to take a prioritized approach to capital allocation, whereby our priority will be to invest in organic growth opportunities, which includes funding the incremental investments in R&D, the incremental selling resources to drive growth in selected vertical markets, as well as completing our facility consolidation projects and delivering on operational improvements to execute our key business fundamentals to drive organic sales growth. Our second priority for capital deployment is to return cash to our shareholders in the form of dividends and we have increased dividends for 29 consecutive years. Third, we view share buybacks as a way to further return cash to our shareholders in an opportunistic manner. Our fourth and final use of cash would be for acquisitions. However, we do not anticipate acquisitions to be a significant use of cash in the near-term as we are currently focused on driving the key initiatives that Michael just outlined. We believe that we have significant opportunities to drive shareholder value by improving our organic business and exercising a disciplined capital allocation approach. Our EBITDA and net debt trending are on Slide #10. Our balance sheet is strong, giving us flexibility to fund future growth opportunities or return funds to our shareholders. Our net debt to EBITDA was approximately 1.221 at the end of the quarter. Our total net debt position has been trending down ever since we acquired PDC in December of 2012 and at October 31, 2014 our net debt position was down to 174 million compared to net debt of 210 million at the same time last year. Let me now turn the call back to Michael to cover the platform results. Michael?

Thank you, Aaron. Let’s turn to Slide 11 for a summary of the first quarter Identification Solutions financial results. Sales increased a total of 1.2% to 212.1 million in the first quarter. This growth consists of an increase of 2.4% from organic sales and a decrease of 1.2% from foreign currency translation. We have been expanding our focus in industries such as chemical, oil and gas, food and beverage, laboratories, industrial OEMs and healthcare. We have also expanded in focused geographies such as China and Central Europe. We believe that these resources are beginning to generate positive results. Additionally, the key to success in ID Solutions hinges on consistently exceeding the expectations of our customers by providing an unrivaled experience supported by strong industry expertise, excellent relationships with our distribution partners, critical interactions with OEMs and a steady stream of innovative new products that our customers value. During the quarter, the areas of greatest growth were in our wire ID and safety and facility ID segments. And although we contracted slightly in healthcare ID, the rate of decline slowed as we are starting to see improving trends with respect to U.S. hospital admissions. Segment profit decreased 14.7% to 43.5 million in the quarter compared to 51 million in last year’s first quarter. As a percentage of sales, segment profit was 20.5% this quarter compared to 24.3% in last year’s first quarter. Segment profit was impacted by higher than expected facility consolidation related costs, as previously mentioned, as well as product mix. We anticipate the trends of low single-digit organic sales growth to continue throughout the remainder of fiscal 2015, with growth continuing from our global Brady brand business. Overall, the prospects for growth around our business are positive. Although some economies may not be growing at a robust rate, our sales force expansion and our investments in organic sales initiatives are expected to help drive future revenue increases in the near-term. Looking at future profitability trends, we expect our fiscal 2015 segment profit to be comparable with our run rate as we exited fiscal 2014, which was approximately 20%. As I have already mentioned, our facility consolidation activities are anticipated to be an ongoing drag on profitability in the near-term as we are committed to maintaining the highest levels of service and quality to our customers. We have also invested in both mid-term sales generation activities in focused industries such as healthcare and increasing our R&D investment to reinvigorate our new product pipeline to continue to stay ahead of competition through the development and launching of proprietary new products which are just beginning to show returns. Let’s now turn to Slide 12 to the Workplace Safety financial review. Sales increased by a total of 0.2% to 98.1 million in the first quarter. Organic sales increased 2.4% and were partially offset by a 2.2% decline from foreign currency translation. Organic sales growth is trending well as we’ve experienced organic growth in each of the last two quarters. We believe that our strategy along with the strong focus on execution have shown positive results in stabilizing the business and creating a foundation for future sustainable growth. Our efforts are focused on improving business fundamentals and our WPS strategy is concentrated in five main areas. First, we are expanding our e-commerce effort. We continue to invest in digital capabilities as customers are increasingly buying over the web. Last year we created the foundation by staffing our dedicated digital team while increasing our digital marketing investment. We are continuing to build on this momentum in fiscal 2015 and are focused on getting to one global digital platform as quickly as possible without disrupting customer service. Second, we are expanding our offering of ID workplace safety products. By expanding the scope of products offered, we can leverage our broad customer reach and compliance knowledge to provide greater opportunities for organic growth around the world. While the broader offering is important to our customers, we are focusing on adding more differentiated and customized identification products to make up the core of our product offering. Third, we are driving the segment of our business where we can add the most value and we’re continuously enhancing our industry expertise to further differentiate and create value our customers receive from us. These segments include businesses and workplace safety critical industries such as chemical, oil and gas and process industries such as food and beverage where the environment is harsh and employee safety is critical. Fourth, we are continuously evaluating and optimizing our value proposition. Our business has been built on a foundation providing expertise in the area of facility safety, compliance and a broad range of unique and customized identification solutions. We’ll continue to build on this foundation of high service levels and a broad offering of unique and customized products that are attractive to our customers. Lastly, we continue to invest in our catalogs which serve high value customers that have historically made up this business and the core data elements of our one digital platform program will help us to create catalogs faster in a more cost effective manner. Catalogs will continue to be an important component of our multichannel strategy. These investments are the drivers behind organic growth in the quarter and we anticipate that they will also drive value over the long term as we continue to add new customers and increase our digital traffic and digital revenues. Segment profit in the Workplace Safety global platform was 15.5 million in the quarter compared to 18.4 million in last year’s first quarter. As a percentage of sales, segment profit was 15.8% this quarter compared to 18.8% in last year’s first quarter. We’ve returned the business to organic sales growth with positive momentum. Our segment profitability is improving, but still not where we’d like it to be due to the growth investments I just mentioned, including increased catalogs this year when compared to the prior year. Organic sales growth is a key component to us improving segment profit margins as we have a relatively high fixed cost structure. So as sales increase or decrease, it has a magnified impact on our bottom line. Overall, we’re pleased with the trending of the WPS sales through the quarter as October was our strongest month of the quarter. As we progress through fiscal 2015, we expect improved trends in our sales volumes as we continue to optimize our value proposition. We anticipate low single-digit organic sales growth in the WPS segment in fiscal 2015. And although Q2 is typically our weakest profitability quarter of the year, we anticipate segment profit percentages to improve in the back half of the year and get back to, or above, what we experienced as we exited fiscal 2014. Before turning the call over to the Q&A session, let me provide a few concluding comments. To be clear, the Company has not been performing up to my expectations and we are addressing these issues. We’ve discussed some challenges of facility consolidation and operating performance. Our top priority is to maintain the highest level of service and quality to our customers as reestablish our operational excellence. We’ve adjusted our facility consolidation plans and we expect to finish this process by the end of fiscal 2015. In the meantime, we do expect ongoing gross margin challenges until we near completion of these facility consolidation actions later in the fiscal year. As I’ve now had more than 100 days at Brady, I would like to briefly reiterate some of my observations and focus areas. I have been able to travel to a large number of Brady facilities. The business teams and the workforce are strong, passionate and committed to serving our customers in delivering value. That being said, I believe we have to do a better job at simplifying our management structure and empowering the business teams closest to the customer to take actions and make decisions. For the remainder of this fiscal year, we will be working on the following key items: finalizing facility consolidations, delivering operational excellence to our customers, developing a robust new product pipeline based on innovative emerging technologies with a more efficient process to focus on high value opportunities and markets and to accelerate the time to market, executing our one digital platform strategy, expanding our sales opportunities in focused vertical markets and lastly, the key element that will allow us to succeed is in developing our people and enabling them to pursue excellence in everything that they do. I would now like to start the Q&A. Operator, would you please provide instructions for our listeners?

(Operator Instructions) Our first question comes from the line of Allison Poliniak with Wells Fargo. Please proceed.

On the operating gross margin, I know you referenced obviously the facility consolidation related costs as well as mix. Is there any way to help us quantify, was the mix more of an initiative there or was it really the costs of the facility's consolidation?

Allison, this is Aaron. The facility consolidation was a significantly bigger impact than sales mix, much bigger piece of it.

And then facility consolidation, I am just trying to make sure I understand this right. Did you just stretch it to I guess encompass the entire fiscal '15 to help I guess with some customer issues or are we pushing some of those into fiscal '16?

Allison, we are not planning to push any of those into fiscal '16. Two-pronged answer to your question. One, we are making sure that the consolidations are going in a positive manner for our customers and the end result is that it's taking longer than had been originally anticipated. And we have eliminated some that we were expecting to do originally before I came on board. In analyzing myself that they were some strategic locations that we did not want to exit. To the contrary, over the long haul, we wanted to be in and the savings that could result couldn’t match the potential opportunities in the future.

And then just last one, a longer-term perspective. Looking back at -- Brady's been able to grow organically to recycle, say, 4%, 5-ish%. Has there anything structurally changing your market that would sort of limit you getting back to that point obviously with the macro health?

Once again, this is Michael. With macro health, we don’t believe there is anything structurally changing our marketplace to allow us to that. We feel strongly that if we get back to the fundamentals of business that we are and have shown to be good at, we will continue to be able to execute that long-term growth in profit pattern.

Your next question comes from the line of Jason Ursaner with CJS Securities. Please proceed.

Just first question on the WPS division in terms of the markers to measure progress on realization of the turnaround there. In the short term, it's been pretty clear that the priority is getting back to organic growth and you achieved that again this quarter. But just looking at the segment margin, it decked down to under 16%. So when you’re looking at the spending there, just wondering maybe you could break down in more detail the amount of be the atypical expense and the investment spending going into building up the digital platform versus what investors might consider more transient spending on catalogs and just sort of buying sales growth in the short term without full margin.

I can attempt to answer that, Jason, and that is if you look back on F'14, we invested about 13 million in our digital areas and that would include of course online advertising as well as infrastructure spend. Much of that is continuing, in fact virtually all of that is continuing this year and we would expect that a lot of that would continue into the future. Now what you saw in the first quarter of this year compared to say the fourth quarter of last year was that there is some timing of some of our advertising so we actually had more advertising frankly both online and offline in our first quarter of this year versus Q4 of last year. So trying to pin that down to an exact number obviously is very difficult. But much of the -- I just want to be clear that much of the 13 million as you’ve seen in the past with respect to our increased digital spend, that will continue into the future.

But the key is that, as we mentioned, the fixed costs in that business allow us to substantially change the profit model if we’re able to increase our revenue. That’s the drive right now. We’re starting to see that take place. In fact, it’s a different trend than we’ve seen for a substantial period of time. So for our second quarter we’ve grown, we’re looking forward to continuing that in the future and therefore you will see a larger percentage of the revenue hit our bottom line definitely.

And just maybe staying with that in terms of positioning the eventual transition to digital. The web-based sales that grew in the quarter, could you have maybe attach a growth rate to that or how close it is towards moving to the intermediate term target of closer to 20% of sales?

At this time we’re not giving specific numbers in that regard. I will tell you that we continue to see good growth in our digital platform.

And in the ID Solutions segment, there were a couple of factors that dragged down profit margin in the quarter. Just wondering how much of the product mix and development initiatives were within the healthcare ID category for PDC?

We don’t divide that out, so I wouldn’t be able to comment on that specifically.

I guess relative to the other major categories would it have been a drag on margin or -- I mean, it's been one of the segments that is having challenges. So I'm just trying to determine...

Can you rephrase that question? You say it’s a drag on our margins? Can you be a bit more specific to help us?

I am sorry?

I am sorry. Can you just get a bit more specific with the question? I just want to make sure that we answer it properly.

I am just trying to understand how much of the margin impact in ID Solutions would have related to PDC.

Well, the majority of the margin decline that you see is the facility consolidation cost that we mentioned, as well as a bit of sales mix of course as we mentioned as well. And for the most part, the facility consolidations don’t directly relate to PDC. Now, as we talked about in previous calls, we are consolidating facilities in Tijuana. And in Tijuana we had both historical PDC facilities as well as historical Brady facilities. But as you try to look and divide up where your incremental cost is, is it related to PDC, is it related to the historical IDS sites, and frankly it's virtually impossible to bifurcate the two.

And I wouldn't regardless equate that to PDC per se, because it’s really about our consolidation effort across the board as opposed to a marketplace or product set. I hope that helps.

And just last question, the wire ID business in IDS, just wondering maybe if you can comment there in terms of what you are seeing for growth.

That is a good business segment for us, as we highlighted. Without getting into specific percentages, we can tell you we believe it is strong and will remain strong.

Your next question comes from the line of Mig Dobre with Robert Baird. Please proceed.

Maybe a little clarification on guidance. The way I am interpreting and looking at what you guys put out, you basically maintained your top-line guidance, you maintained your earnings guidance, but your segment margin guidance is down in both segments. So I am trying to understand how exactly we are getting to unchanged earnings guidance here.

You are absolutely right. We have slightly reduced our guidance with respect to IDS in particular and then also very slightly with respect to WPS as well. Where we have been seeing some savings of course have been in the SG&A area. And when you add it all together, we are still within our guidance range.

To specifically answer the question, I do believe we have been able to do a much better job of controlling our expenses that are not directly related to the business segments themselves and that is a tribute to the team really being focused on what’s critical, what adds value as opposed to what might be good but not necessarily something that is important for the success of our long-term future.

I think that that was the case. I guess if I am to look at the Workplace Safety segment specifically though and your margin guidance there, I am looking to clarify that you are basically telling us that there will not be any margin improvement in the second quarter. And can you flush it out, should we expect margin to contract on a year-over-year basis there as well? And then I guess the follow-up here would be, what is it that happened this quarter to have altered your margin expectation for the full year? Because I understand that your ad spend might vary from one quarter to another, but structurally you have lowered the full year guidance.

Actually if I go back and look at the guidance that we gave at the end of Q4, we said that our segment profit in Workplace Safety would approximate the rate that we exited '14 at and now we've changed our guidance that by the end of the year we will be at that rate or above, or at that percentage or above. So what’s structurally changed? First of all in our first quarter, our gross margin was not where we had anticipated it. And this is not of course just WPS related, this was company related. Biggest driver of course was our facility consolidation cost. So frankly that was the biggest driver of the changes that you see in our segment profit guidance.

So you are saying the facility consolidation impacted Workplace Safety as well?

Absolutely.

Absolutely.

Okay. And then the last question for me, and this one is for you, Michael. I am looking through your fiscal '15 priorities and a lot of the items that are mentioned here are things that I have heard Tom and prior to him Frank discuss as well. So I guess I am looking to understand how your strategy is different from theirs and what are you looking to sort of achieve going forward that might be taking Brady on to a new path?

I honestly can’t comment to our past strategies or our past efforts. I can tell you in coming in here, I believe that there is a tremendous opportunity for excellence by getting back to the fundamentals of the business. We understandably have had a lot of distractions through acquisitions over the last few years. And I believe that we can, by focusing on the key priorities that have made a success years ago, we will become a success again and that is to execute in the areas of product development to move forward -- for instance as an example of the digital platform, that is significantly different than the efforts that we’ve tackled before. First of all, it’s a three-pronged attack, not a one-pronged attack. It was going before after increasing some of our web presence. Fundamentally, this is now refocusing on selling our products as a primary effort through improving our ability to generate in a timely manner and cost effectively catalogs because we saw the substantial base and we will have a substantial base of customers. And at the same time, that effort will be allowing us to drive much more efficient customer interface platforms on the Internet. And then finally, we have not even tackled at all the consideration of mobile space and mobile applications before this effort and this should be allowing us to reach and penetrate the next generation of users that is already using mobile applications and that we were behind. Frankly, as an example, I believe we are fundamentally behind in that area and our effort is to work dramatically to move to par up to superior performance with our customers in that regard in all three spaces. I hope that answers the question.

Your next question comes from the line of George Staphos with Bank of America Merrill Lynch. Please proceed.

I guess the first question I had, it sounds like for both Workplace Solutions and IDS that the trends over the course of the fiscal first quarter strengthened as the quarter went on. Can you comment as to how November has been trending thus far recognizing we're only a few weeks into it?

I can tell you that, George. Actually November has started out quite well, although I have to tell you our second quarter is tough to read at times because of course you have significant holidays particularly in the U.S. of course with Thanksgiving and whatnot. But our November has started out well.

Next question I had and I want to come back to the incremental costs from the facilities consolidation and recognizing that it was more than you expected. I’d like to know why it was more than you expected in terms of the cost to serve why your consolidating facilities -- could your teams have planned better or would the demand surprise you to the upside? We understand it was more than you expected, but I’d like to understand why it was more than you expected.

I would tell you, having done many consolidations throughout my career, one of the things that we should have anticipated far better was the upside that always comes when you are transitioning. And I equate this to notifications to customers that you are moving and them placing a variety of orders in anticipation of that that therefore create a peak just as the introduction of a new product by one of our customers creates a peak, our announcement that we’re moving, and I’ve seen this before many times. We should have done a better job of anticipating that. The other job is, issue is that many of these facilities that we were moving happened to be ones that we’ve acquired over the years. As such, their systems and processes weren't as integrated as one would expect from a Brady organizational structure. I don’t think we did a good enough job of really understanding that upfront and anticipating that. Therefore, the end result is that it was a more painful, costly and time consuming process than people had anticipated. I think in the future if we looked at this, we would have a, for any reason driving consolidation, we would have a much more proactive look at the overall impacts to customers, the uniqueness of the facilities and expected market changes prior to initiating the change.

Michael, thank you for that, I guess once question I had related to one of the first points you made. So you had a surge in orders as customers were understandably perhaps planning and maybe just planning ahead of any potential supply outages as you’re moving. Should that then decay over the rest of the year? In other words, you're only moving in certain of your facilities once. It doesn’t keep happening in the same facility. So should that impact not lessen over the next several quarters? Why or why not?

Well, it is going to lessen. But at the same time, we have two other factors going on. We are growing our sales. And in fact in one of the units, and I’d rather not break out units, we saw a double impact ordering by the customers. And our sales force has done a tremendous job simultaneously of driving outsized sales beyond expectations. Certainly something that I am not going to criticize them for. But once again, since we knew we were putting sales growth efforts in place, we should have been much more proactive about anticipating that they would be successful. However that said, as we move out of this cycle, you will see us be able to build inventory at somewhat of a higher cost initially because we’ll be using overtime and other factors to make sure we get ourselves out of this position and then be able to pull that inventory down. So you are correct.

My last question and I’ll turn it over. So at the end of the day, you gave us your new margin targets. We understand the factors behind the revision relative to your prior margin target. If you had to think about each segment and the two things that make you most confident, most convinced that you’re going to hit your margin targets from here on out, what would they be for both?

I would say actually the first one is we are starting to get a handle on our consolidation efforts and we expect as the second half of the year starts, we will see steady progress in that regard to the end of the year. So that in and of itself will be a major driver on the margin target. And the other one is we’re seeing fraction -- as you see, I mean WPS, if you look at the history of that group, having two quarters in a row with growth is bucking a trend that we’ve had for a significant period of time. And the fact that we are starting at two points is not necessarily a strong trend, but we see the pipeline, we see November, what’s happening there and the anticipation is that that will continue to go. So those two factors are probably the biggest drivers in our margin confidence.

Your next question comes from the line of Charley Brady with BMO Capital Markets. Please proceed.

Just on the additional cost from the facility consolidations, can you just tell us what the margin impact was? Was it 400 basis points or 300 or what the number was on the headwind there?

Well we rather not give that specific of a number. It certainly was not to the tune of the two you just mentioned from a percentage perspective. But it was a pretty significant number.

So excluding, if you would not had those costs, would margins still have been down year-on-year?

Yes, and that’s I actually why I’d mentioned the mix issue as well, because we clearly did have some sales mix.

So on the R&D spend you’ve been coming in about 3% of sales for a while. You are talking about putting more into R&D. I'm probably trying to understand are you looking at that percentage of sales on R&D moving higher or just the dollars go higher because sales go higher but the percentage is about still rough 3%?

Yes I can answer that, Charley and that is, we don’t necessarily look at it just as a percentage of sales. We look at it as -- for instance as we came into this year, we assessed where we want to go with new products, where we see opportunities, et cetera, and that’s where we came up with the increase that you see in absolute dollars.

So it will be up in absolute dollars…

Yes, it will.

And then just on the SG&A expense, I mean that was a good job on the control there. I mean that was significant delta from kind of where we had modeled that into. Have you taken that down to a new lower level run rate on kind of the corporate expense side stuff that you saw that big drop or is there going to be creep that comes back into that number?

My anticipation is we’ve taken it down. We are going to have costs that come up that we do have to anticipate and handle. So we’re not willing to completely commit to a totally revamped position point this early of my tenure. But we definitely are focusing with a different philosophy on how we allocate our overhead costs and how we make investments in overhead, not taking that as though people took it lightly before, but there is definitely a different perspective now on our resource allocation and just the mentality behind what we do and why we do it.

And just one more kind of on pricing I guess broadly speaking and I guess really specifically on workplace safety too. Can you comment on what the pricing environment looks like in I guess both segments, but particularly in Workplace Safety?

The pricing is actually looking solid for us. We believe that we’re able to generate good price points right now. As we said, the margins on that business are very solid and we believe fundamentally that will remain so. The key to us is to get the revenue up and get the onetime costs out. And once that happens, we believe we will be able to go back to the fundamentals that you’ve enjoyed in the past.

Your next question comes from the line of Joe Mondillo with Sidoti & Company. Please proceed.

Michael, my first question is for you. I was just wondering, over the last 100 days now that you've sort of been able to get a grasp of the challenges that Brandy has had over the last two years and I imagine you had to start from a couple of years ago to understand what’s really going on and what they’ve done over the last 12 months to 15 months with their turnaround strategy and where they are at sort of now and maybe establishing even more sort of add-ons to that turnaround strategy. I am wondering, what do you see, what are the one or two biggest highlights that you can highlight in terms of the challenges with Brady?

I think there is a couple of major challenges. One, we have 80 locations worldwide. That’s not a structure that I can just change, nor at this point am I signaling we are going to change it. But that means that at $1.2 billion, it’s a fairly complex structure and organization, a lot of brand names, a lot of opportunity there. So I would say the biggest challenge is to make sure we have the right model for direct accountability. I think that we need to be driving decisions down in the organization to the lowest level that they're truly accountable and can make the decision impacts and we need to be doing that much more effectively. And I think the changes of simplification over the last couple of years really ended up pulling us away from that ability to react as quickly as we needed to and probably pulled us up too high in the organization for decision making, i.e. too far away from so many facilities. I think the other thing is the acquisition model that we have been under for a few years required a tremendous amount of resources and distracted us from the basic execution of business. So the earlier question relates to this somewhat. By being able to position our focus on the fundamentals of our core businesses and the businesses that have been driving our success, we will be able to execute much more effectively than we had in the past.

Okay. And just in response to that number two point that you made in terms of resources, are you talking about both labor and capital? Is that a combination of both of those?

That’s the combination. Obviously you've heard the statement from Aaron that we look at acquisitions as our fourth priority of cash and capital. Since we are making a statement that we will not be focused on acquisitions in the short-term, that is certainly going to be true. And in the future my general philosophy on acquisitions, they need to be technology based, we need to be able to have a fundamentally additive approach to the potential of the acquiree and the acquirer any time we look at an acquisition as oppose to a more traditional market share approach to acquisitions.

Same sort of topic in terms of the challenges with Brady. One of the things that I have always sort of thought and have focused on has been the product portfolio and the value add that you guys create and sort of in relation to the margin degradation you have seen over the last few years, how do you look at Brady’s R&D process, where they are right now in terms of developing new products and maybe if there is anything that you are doing to implement to try to increase the value add within the product portfolio?

I would say I agree with you strongly. My knowledge of Brady in the past, the reputation of Brady, the brand value of Brady is tremendous. But part of that is from our innovative history and our culture. I believe we had gotten away from that somewhat and one of our key focal points for the year is to create a robust pipeline development process and actual physical pipeline of new products much more so that before. A good example is we are working on a much more cohesive refresh rate for our core printer products. So instead of historically waiting till a platform aged, we are looking at cycle refresh times for everything from the software to the firmware to the hardware, which are all different refresh cycles and we are being proactive about how we establish those. That’s just one example.

So to give us a little bit more perspective, the last several conference calls going back at least a year, you've talked about these printers, you've talked about WPS adding I think 15,000 SKUs. When you looked at -- is it sort of a case in point when you look at it sort of they were doing a good job or going to continue to do that and then you can add on a few things, or we've got to step it up, we've got to do a lot more things at this point in time. When you come in and see it, where are...

We have to step up our filtration process dramatically. So if it hasn't been apparent, I will make that more apparent. We are focusing on fewer more significant things. I think in the past we may have worked on way too many things in parallel. The end result, we weren’t able to be as effective or efficient or timely in accomplishing any of them. And particularly in the area of product development, which we've focused on, our goal is to create a much better filter process to be working on the true differentiators and to be proactive on refreshing our core products. So those are very new philosophies or at least new within the foreseeable past.

Your next question comes from the line of Keith Housum with Northcoast Research. Please proceed.

First thing, looking at your CapEx guidance for FY15 of $30 million, it’s significantly less than the past two years. And understanding that there's facility consolidation cost especially last year, how do you reconcile the decrease in that investment especially since consolidation costs are expected to occur for the rest of the year?

I can answer that, Keith. You’re hitting on the topic and that is that the facility consolidation activities -- last year we incurred 43 million, which frankly the level that we were running at with respect to CapEx over the last couple of years have been elevated versus our historical run rate of about 2% of sales. So the reason you see the decline this year is simply that. It's because we are completing the facility consolidation activities. And actually if you look at our first quarter, that’s actually an elevated rate as well and that’s because we’re right in the heart of some of these consolidations. So as we go through the year, you will see a decline in our CapEx. And again, it’s solely related to the facility consolidation activities.

And then Michael, you’ve been here over 100 days. As you looked at some of the I guess the issues that the Company's had in terms of the consolidations and things of that nature, are you comfortable that you have the right management team in place or do you need to make additions or subtractions going forward to address all the priorities you want to address?

I would say the key is that we need to be focused and accountable in everything that we do. We need to drive more focus and more accountability. And how we do that takes on various forms and permutations. But if you consider those as two of the fundamental cores that I am looking to change, you can see where we’re going as far as the direction of making sure that we provide true value back to our shareholders and to our entire company and employee base.

So it’s more of holding people accountable as opposed to perhaps replacing or adding to the existing staff?

That is what the message I certainly want to send is that, the key is that we have good people throughout the organization. We have a long solid history. Most people really are looking for what it is they should be focused on and how we expect them to be measured and accountable. I challenge you, you often get exactly what you incentivize people to do, we need to make sure we’re incentivizing to do the right things and then we’re holding them accountable to that.

Your next question comes from the line of Andrew Fleming of Heartland Advisors. Please proceed.

Congratulations on hitting an inflection point on the top line in Workplace Safety and I appreciate the full year guidance that you provided. And my question is more geared towards the medium term. And I am curious, as you look three years out, what do the operating margins look like in each segment and the growth rates in each segment, understanding that we’re dealing with kind of one-year transitory short-term headwinds with the consolidation costs and ramping up the catalog spend. So I am curious as we look three years out, what do you anticipate the growth rates for each segment to be and the operating margins for each segment?

Andrew, I will tell you in general -- and by the way thank you for congratulating me on my 100 days. I’ve been focused on building the fundamentals of the business and making sure we’ve got the core pieces in place to accelerate our growth over the medium to long term. And so, I do appreciate that question greatly. That said, I would deflect a speculation on longer term margins. I will say in the regard of growth though, I do expect us to accelerate our growth over the next two to three years. That would absolutely be a anticipated outcome without certainly deteriorating our margin platform. I am a strong believer that growth has to be profitable. There is no such thing as good growth at all costs. It has to be solid margins, solid business opportunities for the long term.

So do you think mid single-digit growth is doable given the end markets that we’re participating in?

I certainly think it’s doable. Once again, I would like to forego that question for a brief period as we continue to build our fundamental base. I wouldn't want to speculate on something that still has some opportunity for adjustment. But I definitely think that that is in the realm of reasonable possibility. And we shouldn't anticipate -- in fact we should drive to maximize our growth portfolio as much as possible with profit always underlying that. I have to reiterate that because it is easy for people to lose the way if they think growth is the only model. It has to be profitable growth.

Well, appreciate the renewed focused on organic growth.

Thank you very much. We’re looking forward to it. I think you will see that it continues to be a focus of the organization.

Your next question comes from the line of Ben Alexander with Alexander Capital. Please proceed.

Could you talk about maybe the top three out of the five areas that you think are for growth opportunity with your company, an organic growth opportunity?

Ben, that's certainly true. If we take a look -- what I would like to actually focus you on are the actual markets. We have an incredible assortment of products to date and those products are ones that we can absolutely drive more successfully in the marketplaces such as oil and gas, food and beverage, chemicals, healthcare, those are the markets that we believe were under-penetrated significantly. We also believe that our products offer a differential advantage and will also allow us to develop new product that we can then send into our other marketplaces as well.

Can you say anything about the types of products that would address these industrial verticals?

Absolutely, our basic core products of marker systems, our core products of sorbents. As we take a look at all of the different identification capabilities that we’re offering and moving into, we’re doing much more in the interactive identification space. In critical infrastructures like oil and gas and the chemical industries, that is going to become more and more significant. And we not only have passive, but interactive identification systems that help their product offerings.

I have one follow-up. Could you comment on PDC? In the past you’ve talked about hospital admissions hurting that business, where you said that hospital missions have been trending down. Can you talk what the trends you’re seeing in that business?

I believe we said earlier that they’ve stabilized in the conversation, or we believe they have. I am reticent to speculate about future trends in that area. As you know, it’s a rapidly changing trend profile, but they have definitely stabilized and we’re seeing the positive benefit of that.

That concludes our Q&A. I will now turn the call back over to Mr. Pearce for closing remarks.

Thank you for your participation today. As a reminder, the audio and slides from this morning’s call are also available on our website at www.bradycorp.com. The replay of this conference call will be available via the phone beginning at 11:30 AM Central Time today. The phone number to access the call is 1-888-286-8010 or 617-801-6888 and the passcode is 66704310. As always, if you have questions, please contact us. Thanks and have a nice day. Operator, can you please disconnect the call?

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.