Brady Corp (BRC) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2014 Brady Corporation earnings conference call. My name is Michelle, and I will be your operator today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to Mr. Aaron Pearce, director, investor relations. Please go ahead, sir.

Thank you, Michelle. Good morning, and welcome to the Brady Corporation fiscal 2014 third-quarter earnings conference call. During the call this morning, you'll hear from Tom Felmer, Brady's CFO and interim CEO and President. You'll also hear from Matt Williamson, President of Identification Solutions. After the prepared remarks, we'll open up the call to questions.

The slides for this morning's call are located on our website at www.BradyCorp.com. The prepared remarks will begin on slide number 3. Please note that during this call we may make comments about forward-looking information. Words such as expects, beliefs, forecast and anticipate are 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 2013 Form 10-K, which was filed with the SEC in September 2013.

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. I'll now turn the call over to Tom Felmer. Tom?

Good morning, and thank you for joining us. We've made significant progress in many areas in the third quarter. We've returned to organic growth this quarter, posting organic growth of 2.5%.

We launched a number of exciting new products including our newest handheld printer, the BMP21 Plus, which we expect to be another successful printing system for us. We signed an agreement with Tego Incorporated, a leader in next-generation RFID solutions, to jointly develop a smart RFID label, flexible in design intended for high-performance in harsh environments.

During the quarter, we repurchased approximately 893,000 shares of Brady stock at an average price of $26.14 per share. And just after the quarter end on May 1, we received $53 million of cash as we completed the first step of our divestiture of our die-cut business.

Our third-quarter financial results from continuing operations showed significant improvement over our second quarter. Organic sales growth was 2.5%, and it was worth noting that we had a relatively weak February and first half of March, especially in the US, but gained momentum as we progressed through the quarter.

Organic sales grew by 4.8 % in our identification solutions segment and declined by 1.9% in workplace safety. EPS from continuing operations excluding restructuring charges finished at $0.43 per share.

We're making progress with our plans to return both the Brady segments to profitable organic sales growth, and we are forecasting that both identification solutions and workplace safety will post organic sales growth in the fourth quarter. Our focus on execution in providing best possible customer experience remains unwavering.

In previous quarters, we highlighted five areas of focus for fiscal 2014. First, we are focused on returning our workplace safety business to organic growth. We are expanding our multi-channel direct marketing model with an increased emphasis in e-business. We made significant investments on our websites and our digital capabilities this year, which we believe are starting to show results.

We are also expanding our offering of identification workplace safety products with a heightened focus on proprietary and customized product offerings. We are laying the groundwork for a scalable business model that we believe will return this business to organic sales growth.

Although organic sales were down 1.9% this quarter, Q3 marked the second quarter in a row where we saw an increase in the absolute number of orders placed and an increased number of new customers, which we believe are both positive signals that our strategies to return to growth are starting to take hold.

Second, we are focused on growing our identification solutions business primarily through sales force expansion and the development of innovative and proprietary new products. Specifically, we have increased our sales force in the US, and we're expanding our efforts on strategic accounts and target industries including healthcare.

We also remain focused on providing the most innovative products in both established as well as faster growing geographies such as Central Europe, the Middle East, Africa and selected countries in Asia.

Organic sales in our IDS business were up 4.8% this quarter, partly driven by these actions and the launch of several new products including the BMP21-PLUS handheld label printer.

Third, we engaged in the process to divest our die-cut business. The first phase of this transaction closed on May 1, and we expect the remaining pieces of this business, which are primarily in China, to close sometime before July 31, 2014. Once our die-cut business is sold, we will have an ID solutions business in Asia that is 100% focused on customers requiring our high-quality identification solutions.

We have started to see benefits from having an Asia team focused solely on identification solution products, as our Asian IDS business has grown nicely this year.

Fourth, we are focused on reducing our cost structure through the consolidation of selective manufacturing facilities. We are consolidating facilities in Tijuana, Mexico, the US and in Europe. We have been incurring additional costs such as duplicate labor and moving costs this year, which has negatively impacted our profit margins. Although we do expect to see savings starting in fiscal 2015, the purpose of these facility consolidations was not only to save costs. Our goal is to reduce the number of manufacturing sites to give us better scale and consistent global processes that will enable us to better serve our customers and further differentiate us from our competition.

We anticipate these facility consolidation activities to continue throughout F2015 as we intentionally slow down certain consolidation activities this year to ensure the highest levels of quality and delivery throughout the transition.

And finally, we continue to focus the organization on delivering what has differentiated Brady for nearly 100 years: the continuous stream of the most innovative products in our markets, a better customer experience than all of our competitors, and a relentless focus on providing identification solutions that help our salespeople win every day.

Assuming all major economies in which we operate remain stable, we are confident that the actions that we've taken and the improvements we are now seeing will enable us future growth and sales profitability and cash flow.

Let me turn it back to Aaron, who will walk through the financials.

Thanks, Tom. Let's turn to slide 4 for more detail on our third-quarter financial results. Overall, sales from continuing operations were up 2.3% to $309.6 million in the quarter. This is made up of a 2.5% organic sales increase and a 0.2% decline from foreign currency translation.

PDC has now reached its one-year anniversary with Brady and is now fully included in our organic sales figures. PDC had approximately 1% organic sales growth in the quarter.

Our third-quarter gross profit margin finished at 50.1%, down from the 52.7% gross profit margin in last year's third quarter but up sequentially from our second-quarter gross profit margin of 48.9%. SG&A expense was 37.7% of sales in the third quarter, compared to 37.0% of sales in last year's third quarter. EPS from continuing operations, excluding restructuring charges, was $0.43 in the third quarter, compared to non-GAAP EPS of $0.55 in last year's third quarter.

The tax rate on continuing operations net of restructuring charges was approximately 18.5% in the third quarter of fiscal 2014, compared to 21.7% in last year's third quarter. As we mentioned in previous conference calls, we were expecting a lower tax rate in the second half of this fiscal year due to the lapsing of statute of limitations in certain geographies and the associated reversal of certain tax reserves. The tax rate this quarter was consistent with our expectations, and we continue to expect a full-year income tax rate in the mid-20% range.

Slide number 5 is our guidance for the fourth quarter of fiscal 2014. We are expecting earnings per diluted share, exclusive of non-routine items such as restructuring charges, to range from $0.45 to $0.55 during the fourth quarter. Included in our fourth-quarter guidance is low single-digit organic sales growth from continuing operations. This guidance is based on current exchange rates and unchanged full-year fiscal 2014 estimates for depreciation and amortization of approximately $45 million to $50 million. Full-year fiscal 2014 restructuring charges of approximately $22 million, a tax rate in the mid-20% range exclusive of non-routine items, and full-year fiscal 2014 capital expenditures of approximately $40 million. As is our historical practice, we expect to provide our fiscal 2015 guidance in conjunction with our fourth-quarter earnings release in September.

Slide number 6 is a summary of our quarterly sales trends. In the third quarter, revenues finished at $309.6 million. We've seen improving sales trends in most of our businesses. And although our WPS business did not post organic sales growth this quarter, its rate of decline has significantly slowed, and we are expecting to see growth in the fourth quarter.

Moving to slide number 7, you can see the trending of our gross profit margins. Our third-quarter gross profit margin was 50.1%. We continue to focus on driving gross profit margin improvements that will result in longer-term improvements. For instance, our facility consolidation activities declined or resulted in reduced gross profit margin slightly -- resulted in a slightly reduced gross profit margin this quarter; but over the long-term, these actions are expected to provide gross profit margin improvements.

Our IDS gross profit margin was down slightly versus the prior year primarily due to the sales mix from increased printer sales and facility consolidation related costs. However, the biggest contributor to our reduced gross profit margin was in WPS, where price adjustments and sales mix resulted in a reduced continuing operations gross profit margin when compared to the 52.7% gross profit margin generated in last year's third quarter.

On the right-hand side of this slide you can see the trending of SG&A expense. SG&A expense was up from approximately $111.9 million in Q3 of last year to $116.7 million in Q3 of this year. Although general and administrative expenses were down versus the prior year, we intentionally increased selling expenses in both IDS and WPS this quarter.

In IDS, we made investments in sales people in multiple geographies including the US, while in the WPS business we increased spending in both online advertising as well as traditional print advertising.

Moving on to slide number 8, you can see that our diluted EPS from continuing operations excluding restructuring charges was $0.43, which compares to our non-GAAP EPS from continuing operations of $0.55 generated in the third quarter of last year.

Incentive compensation had a significant impact on our reported results this quarter. In Q3 of last year, incentive compensation was actually negative, i.e. a benefit to our Q3 income statement as we reversed employee bonuses that were expensed in the first two quarters of the year whereas in the current year, incentive compensation was an expense. The net result of these differences is that incentive compensation accounted for an approximate $0.10 decrease in earnings per share when compared to the third quarter of fiscal 2014 to the third quarter of last year.

The other factor driving the $0.12 decline in our non-GAAP EPS was the reduced profitability in our WPS business. Although our profitability levels in workplace safety are below fiscal 2013, we are making progress in improving the top line in this business, which we expect will ultimately result in improved profitability.

We summarized our cash generation on slide number 9. During the quarter, we generated $34 million of cash from operating activities. Consistent with our stated capital allocation philosophies, we invested $12.2 million in capital expenditures, we returned $10.1 million to our shareholders in the form of dividends and we repurchased 893,000 shares of Brady stock for $23.3 million.

Also, as Tom mentioned, we closed phase one of the die-cut sale on May 1 and received gross proceeds of approximately $53 million just after quarter end. After expected cash tax costs of approximately $4 million and direct closing costs of another $4 million, we expect to net approximately $45 million from the first closing of the die-cut transaction. We have not yet determined how we will deploy this cash beyond general corporate purposes including dividend payments, share buybacks and principle reductions on debt.

We anticipate free cash flow to approximate 100% to 120% of net earnings from continuing operations for the full year ending July 31, 2014. At this point, we are focusing our energy on driving organic sales growth and executing our facility consolidation activities. And accordingly, we do not anticipate any major uses of cash for acquisitions in the near-term.

Our EBITDA trending and net debt trending is on slide number 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 position was approximately 1.3 to 1 at the end of the quarter. Our total net debt position at April 30, 2014 was $221 million, compared to net debt of $261 million at April 30, 2013. Again, this does not include the proceeds from the first phase of the die-cut sale since it closed after the completion of our third quarter.

So today, with the additional cash from the die-cut sale, our balance sheet is even stronger than what you see here as of April 30.

I'd now like to turn the call over to Matt Williamson for a review of ID solutions. Matt?

Thanks, Aaron, and good morning, everyone. Before getting into our quarterly results, let me share a few exciting new innovative products, some of which are located on slide 11.

We launched our next-generation portable label and wire identification printer, the BMP21-PLUS. This printer was designed to be a super durable tool with software specific for the electrical, datacom and general industrial applications. This versatile printer has been well received by our distributor partners and end-users alike and is the second printer launched to this market this year; the other being a BMP41.

This new printer is a significant improvement over our popular BMP21, and we expect this to be one of our best selling units. We are also very excited about a new version of the 21-PLUS specific to the laboratory market.

Additionally, we are optimistic about a new printer called TrustSense launched in our PDC business. This is a wireless printer for patient ID wristband and labels. It's a complete mobility to help improve patient safety at the point of care and meet electronic medical record requirements.

Lastly, our People ID business introduced new access control software called RACK ARMOR, launching us into a new market for providing security for computer server access.

Earlier this year, we also entered two potentially significant long-term relationships. First, we entered into an agreement with Thin Film Electronics ASA. Thin Film has established itself as a leader in commercializing integrated printed electronic systems. We are working with Thin Film to bring our customers these breakthrough innovations. Our initial work with Thin Film is focusing on electronic timing and sensing for applications -- for electric sensing and timing applications. This technology will complement our existing industry-leading products and applications such as visitor and patient management. Dynamic intelligent identification has the potential to be an important part of our product offering, and we see potential for Thin Film's technology in multiple product segments.

Second, as Tom mentioned, Brady and Tego jointly developed an innovative smart RFID label, flexible in design and intended for use on both metal and non-metal aircraft parts. We see this offering as a springboard into other industries beyond aerospace, where we'll marry our high-performance materials with Tego's technology to provide RFID solutions in harsh environments where performance is critically important.

Now let's turn to slide 12 for the ID solutions financial review. Sales increased a total of 4.6% to $206.4 million in the third quarter. This growth is a combination of 4.8% organic sales growth and a decrease of 0.2% due to foreign currency.

Looking deeper into our third-quarter results, our Asian business once again saw very strong double-digit growth driven by sales of product identification to OEM customers, particularly in China. We also saw positive growth in our MRO products as we diversify our customers and markets in Asia.

We are investing in the growth of potential in this region as we expand our production capacity and capabilities as we focus on building partnerships with key strategic customers and distributors. Our business in EMEA continued its positive trend of delivering mid-single-digit organic sales growth this quarter and is slowly recovering economic environment. This growth was driven by our business in established Western European economies as well as Central Europe across our full product range including strong growth in safety and product ID plus our recently launched printers.

We remain optimistic about our prospects for growth in Europe, and we expect to see nice future pull-through of consumables given our strong printer sales this year.

Our Brady brand business in the US experienced low single-digit organic sales growth when compared to the prior year. The January slowdown in order patterns from our distributors that we discussed last quarter continued throughout February and early March. In mid-March, there was a noted increase in order patterns which then returned to a more normalized pattern and growth rate in April.

We saw particular strength in product ID labels to OEM customers, a theme common to other regions. Additionally, we also feel positive about increased volume from our wire market printing systems and our safety products, which were partially offset by slower than anticipated sales in other products.

Mexico, albeit significantly smaller than the US, was a highlight with double-digit growth for the second quarter in a row. And Canada saw a bit of a bounce back with an excellent quarter of double-digit growth.

Revenues in Brazil were approximately flat this quarter when compared to the third quarter of last year. Our Brazilian business is demonstrating signs of improvement with OEM customers and our ongoing growth with our MRO business. Signs of improvement continue to be seen in our customer service, product quality and overall business development. Even with these improvements, we still remain cautious about the near-term growth and profitable trends -- profitability trends. We are further reviewing our Brazilian cost structure to ensure that our business is appropriately sized to the current business environment.

PDC, which is predominately focused on the healthcare industry, had sales of $41 million in third quarter, which was up approximately 1% from the same period in the prior year. PDC's healthcare business correlates to the US hospital admissions rates, which we believe were down approximately 2% on a year-on-year basis in the third quarter. We're seeing steady improvement in our products tied to electronic medical records, offset by products tied to older medical record systems.

Looking forward, we do not anticipate a near-term rebound in US hospital admission rates. Thus, our plans for growth in healthcare will come from taking share with new innovative products in sales programs as well as expanding the type of healthcare facilities we serve. We will also continue leveraging sales synergies across US and Western Europe, primarily with our existing People ID brands.

In addition to our expansion in industries, such as healthcare and focused geographies such as China and Central Europe, we expanded our sales force in the US and most recently in Western Europe. And our team of -- including our team of sales professionals focused on strategic accounts.

We believe we are on the front end of these resources beginning to generate results. Additionally, the keys to success in ID solutions hinge on consistently exceeding the expectations of our customers by providing an unrivaled customer experience supported by strong industry expertise, strong relationships with our distribution partners and introducing a steady stream of innovative new products., our BMP-21PLUS and TrustSense printers being great examples.

Segment profit decreased 5.3% to $44.3 million in the quarter compared to $46.8 million in last year's third quarter. As a percent of sales, segment profit was 21.5% this quarter, compared to 23.7% in last year's third quarter. As Aaron mentioned, segment profit was materially impacted by changes in incentive compensation this year.

In last year's third quarter, RDS financials benefited from the reversal of $3.5 million of incentive compensation, compared to $1.4 million of expense in Q3 of this year. The net difference is a year-on-year increase in compensation in Q3 of approximately $4.9 million.

Incentive compensation was consistent between Q3 of F2013 and Q3 of this year; segment profit would have increased $2.4 million. Segment profit was also a bit lower than anticipated due to higher than expected facility consolidation related costs, which include inventory write-downs. We also had additional costs associated with the expansion of our sales force. We expect similar facility consolidation and sales force expansion to cause headwinds into the fourth quarter as we continue to move forward with these initiatives.

As we look to the fourth quarter of 2014, we anticipate the trends of low single-digit organic sales growth to continue, with growth coming from our global brand Brady products. Overall, the prospects for growth throughout our business are positive. Although some economies may not be growing at a robust clip, our sales force expansion and our investments and organic sales initiative are expected to help drive future revenue increases.

I'd now like to turn the time back to Tom Felmer, who will report on workplace safety and provide his closing comments. Tom?

Thanks, Matt. Please turn to slide 13 for the workplace safety financial results. Sales decreased by a total of 1.8% to $103.1 million in the third quarter. Foreign currency translation increased revenues by 0.1%, and organic sales declined 1.9%.

Although organic sales were down versus the prior year, this quarter's sales result was a significant improvement over previous quarters, as our rate of decline was substantially improved and we exited the quarter on a positive note with slight organic sales-per-day growth in April.

Looking deeper at our results, Europe, which makes up approximately 50% of total workplace safety sales, experienced low single-digit organic sales growth in the quarter, improving from a 5% decline in the second quarter. The substantial improvement was driven by increases in new customer creation and order volumes as the positive trends that we started to see last quarter continued into Q3, helping fuel our increased sales volumes.

Similar to our IDS business, our WPS business in the US had a sluggish start to the quarter. February and the first half of March were weak, followed by improving order patterns in the last six weeks of the quarter ended April 30. Overall, our American WPS business still finished with a mid-single digit organic sales decline, but the trend coming out of the quarter was positive.

Our Australian business also experienced mid-single-digit organic sales declines. While our Australian business serves many diverse industries, we have a higher concentration of manufacturing, non-residential construction and, most importantly, mining, all of which struggled in the quarter.

Our cost structure was adjusted in prior quarters, and our teams are focused on numerous initiatives to drive top- and bottom-line growth in future quarters. Although this business has struggled over the last 8 quarters, we believe that we are on track to deliver growth again in Australia.

To reiterate, we have refined our strategy by focusing on and investing in key items outlined on slide 14. In addition to improving our business fundamentals across all geographies, our workplace safety strategy involves five main focus areas. First, we are expanding our focus on e-commerce. We have accelerated our investments in digital capabilities as customers are increasingly buying over the Web.

In the first half of the year, we set the foundation for our growth, staffing our dedicated digital team while increasing our digital marketing investment and moving forward with our global platform deployment. In the third quarter, we saw sales growth of 12.8% over the Internet.

Second, we are expanding our offerings of identification workplace safety products. By expanding the scope of products offered, we can leverage our broad customer reach and compliance expertise to provide greater opportunities for organic growth around the world. So far this year, we've added approximately 9000 workplace safety related SKUs to our product offering. While a broader offering is important to our customers, we are focused on adding more differentiated and customized identification products that make up the core of our product offering.

Third, we continue to focus on the segments of our business where we can add the most value, and we are building our industry expertise to further differentiate and enhance the value that our customers receive.

And fourth, we are evaluating and optimizing our pricing and value proposition. Our business has been built on a foundation of providing expertise in the areas of facility, safety compliance and a broad range of unique and customized identification solutions. We will continue to build on this foundation of high service levels; a broad offering of unique and customizable products in a range of prices that are attractive to our customers.

And fifth, we've increased our catalog investments in all geographies to regain more of the high-value customers that have historically made up this business.

The cost to implement the above strategies, along with the degradation of gross margin, are the primary drivers for our decreased segment profitability this quarter.

However, these investments are producing a number of positive signs that we expect to see -- expect to drive value over the long-term. Specifically, new customers continue to increase, and our digital traffic and digital revenues are growing.

Segment profit in the workplace safety global platform was $14.8 million in the quarter, compared to $23.5 million in last year's third quarter. As a percent of sales, segment profit was 14.3% this quarter, compared to 22.3% in last year's third quarter. Although we have not yet seen organic sales growth this year, we anticipate organic sales growth in the fourth quarter, which will provide momentum as we enter F2015.

Our segment profitability is not what we would like it to be in this business due to gross margin erosion and the growth investments I just mentioned. Sales growth will be a key to improving our segment profit margin, as this business has a relatively high fixed-cost structure. So as sales increase or decrease, it has magnified the impact on our bottom line.

The actions we are taking appear to be working, but I don't anticipate any significant profitability improvements in Q4. However, as we go through F2015, we expect improving trends as our sales volumes improve and as we make adjustments to optimize the value proposition.

Before moving to questions, let me summarize the highlights of the quarter. We returned to organic growth this quarter, posting organic sales growth of 2.5%. Sales improvements were seen in both our IDS and WPS businesses. We are especially encouraged with the progress that was made in our WPS business.

We launched several exciting new products, including the newest handheld printer, the BMP21-PLUS.

During the quarter, we repurchased 893,000 shares of Brady stock at an average price of $26.14 per share. And just after quarter-end on May 1, we received gross proceeds of $53 million as we completed the first phase of our die-cut divestiture.

While we made progress on many fronts this quarter, we still faced short-term investment headwinds that we expect to result in profitability below prior-year levels. For instance, we are still incurring incremental cost from our facility consolidation actions, and this is anticipated to continue throughout the rest of the fiscal year.

We also expect that the elevated levels of catalog advertising and digital investments in our WPS business will continue in the near-term. And as Matt mentioned, we have increased selling expenses in certain pockets of IDS to drive future growth.

I am encouraged by our results and believe that our continued focus on the fundamentals that helped Brady thrive for nearly 100 years are highly valued by our customers and will be the foundation for our future success.

We will continue delivering a broad range of innovative and differentiated identification and safety solutions, providing a better customer experience than all of our competitors; and driving process rigor and execution, with 7000 Brady employees focused on helping our salespeople deliver value to our customers and win every day.

I believe that we are on the right path, as we have seen stabilization, and I expect the trend of growing sales to continue, which will ultimately turn into improved profitability and cash flow.

Let's now start the Q&A. Operator, can you please provide instructions for our listeners?

(Operator Instructions) Charley Brady, BMO Capital Markets.

This is actually Patrick Woo standing in for Charley. I just wanted to focus on the WPS side very quickly. You mentioned the investments just now. I was wondering how much are you guys looking at in terms of -- can you guys quantify the investments and sort of over what time period? And when do you expect to realize some of these investments? And what kind of returns are you guys expecting from that?

Thanks for the question, Patrick. We haven't quantified the investments. We do see that in the quarter and throughout much of the year our consolidated expenses -- we have had increased selling expenses in WPS, and this has been primarily in our digital efforts. You can see it through those lines. And we expect those to continue.

The digital expense -- the big piece of that right now is tied to migrating to a common platform. We talked -- we have maybe 30 different platforms that our WPS business operates on today, much of it through acquired business and so forth. We were working to get down to common platform, and we expect that migration to take -- to continue at least through the end of F2015.

Got you. Maybe could we drill down a little bit more on how much you guys are expecting for the catalog advertising expense to increase and what kind of impacts it may have on the margins as well?

I couldn't understand -- could you repeat the question, please?

Yes, sorry. Can you possibly quantify what the catalog advertising spend would be increasing by in terms of what you guys are expecting?

Patrick, I can answer that, actually. If you compare our catalog advertising in Q3 of F2013 to Q3 of this year, we've increased our catalog advertising by about $1.5 million. And we would expect some of that to continue into the future.

Okay. Staying here for one second. You guys mentioned the price adjustments as well as the (inaudible) of mix sort of having a contribution on the impact of the margin. Can you quantify what each of those two might be so we can get better clarity on that?

Yes, we haven't gone into quantifying the price impact as we've gone through the year. Clearly, you saw the significant degradation in margins in the business that we've talked to. A big piece of that is likely tied to the pricing initiative. And we talked about modifying our value proposition. And we started making some adjustments as we ended Q3, and we will continue to monitor those and make adjustments throughout Q4 and as we enter F2015.

Great. Just hopefully last one, if I could just squeeze one last more in there.

Earlier in the year, you guys mentioned that WPS will be up year over year in the second half versus the previous year. Knowing what you guys know about Q4, do you guys still expect that to be the case?

Patrick, actually at the -- I guess in our second-quarter conference call, we changed that and basically stated that we will be up in Q4, not the full year. I'm sorry -- not the second half of the year. And, as Tom articulated, we still anticipate being up in Q4.

Okay. Thanks. That's all I have for now. Thank you.

Thanks, Patrick.

Jason Ursaner, CJS Securities.

This is actually Jack O'Brien calling in for Jason. I've got a couple of questions. First, in regard to the WPS segment. I was just wondering how performance there compared with your internal expectations or if there's going to be -- if you guys could elaborate on the changes in the overall strategy in terms of focus or magnitude of internal investment.

I guess as we came out of Q2, we talked about being able to deliver growth in Q4, and I would say we're still on track with that. We didn't talk specifically about our expectations for Q3. But as we saw business improve throughout the quarter, I think we did comment that on a sales-per-day basis WPS actually grew up in the last month of Q3. So that would suggest that we are pretty much right on track with what we had anticipated.

Okay. And moving over to the IDS segment, can you guys talk about how PDC performed within the context of that division?

Overall, of course, the sales increase was about 1% in total, and the strength of the business was overall growth internationally. That was a highlight with lower performance in the leisure and entertainment part of the business. PDC is primarily in the healthcare business. There's also a nice piece of business that we have for patron identification in leisure and entertainment environments. And right now, we are being hurt with our accounts there where, due to some inclement weather last summer they maintained some inventory. So the types of sales that we expected to kick off the new season for those sorts of events is lower than we anticipated.

Okay. Thanks. And then finally, I know this may be a little difficult to comment on, but I was wondering if there's any update on the CEO decision from the Board? If there's a timeline in mind of any sort or any color you guys can give on that.

The process is still moving forward, and there's no additional news.

Okay. Thank you very much for your time.

Joe Mondillo, Sidoti & Co.

So I hopped on late. I was just wondering quickly, could you update us on the closing consolidating facilities and what the benefits that you're expecting there?

Yes, the process is moving forward. We talked about it earlier in the, I think it was in the second quarter that we are slowing down the execution. The entire plan is still intact. But while we had intended for much of it to be done this year, we moved a portion of that into F2015. So the total savings that we announced at the time is still intact. It's just that the time frame is pushed out.

And that was -- at the time, it was $20 million, I believe, in 2015, but that's going to be pushed out? Is that the latest update? $10 million, right? (multiple speakers)

Yes, exactly. $10 million. And, yes, that is being pushed out. This year, we are actually incurring costs. We've incurred about $2 million through the second quarter, and we anticipate similar amounts in the second half of the year. So we'll start to get benefits next year; but to Tom's point, we have had some delays. So we certainly will not see the whole $10 million of savings next year.

Okay. And then in terms -- so it sounds like you're bringing on a lot of salespeople on both sides of the businesses. You're also bringing on a lot of additional cost catalog and e-commerce on the WPS side of the business. I'm just wondering on a cost basis looking at the third quarter, are we at a run rate going forward, or is there additional costs coming online in the fourth quarter to think about?

Speaking for IDS, in the third quarter we had approximately $500,000 in costs due to the salespeople that we've added. And that number is ramping up; we've added a number of people here in -- over the course of the quarter. And so it will be a little higher number as we go into the fourth quarter. It could be more representative, then, of what we would expect going into next year. I'd have to get you the fourth-quarter number, though.

Okay. And then WPS, how does that cost situation look compared to the third quarter?

We'll continue to invest in catalogs and the digital investment, as I mentioned earlier. But costs typically do come down in Q4 due to seasonality. We mail less catalogs particularly in Europe as we get lower response rates in their summer period. So we do expect them to come down a little bit in Q4.

How about going into fiscal 2015? Are we still sort of implementing additional costs, or is it -- are we sort of consistent with the plan right now?

I would say that we're on a consistent run rate now. So as you look at it, the additional costs that we have is really the incremental investment that we have consolidating our websites and the digital investment that you see -- or that you saw as we went throughout this year. But we do not see a ramp up in spend there next year.

Okay. On the administrative cost line, I don't know if you look at it like that or if you just look at it as SG&A as the total. But the administrative line was consistent with the second quarter, around $29 million. Is that -- looking at that cost base, is that consistent with what we are expecting going forward?

Yes, it's certainly in the ballpark, Joe. And by the way, we do look at it that way. We cut the data every way you could possibly imagine. So, yes, that is relatively consistent in the $29 million range or so.

Okay. So I guess just lastly in terms of the guidance, the $0.45 to $0.55 for the fourth quarter. So you're bringing on a little additional cost in IDS. I guess maybe WPS is flat to maybe slightly down because of seasonality at catalogs. But you're saying sort of WPS margin, don't expect a ton of improvement in the fourth quarter versus the third, and we're only sort of looking for modest improvement on the top line.

I'm just trying to reconcile how you get to the pretty good improvement on the earnings from the third quarter to the fourth quarter. And do you have any share repurchases baked in?

I can certainly answer the last part as far as share repurchases. And the answer is, no, we generally do not bake those into our guidance. When we look at guidance for such a short period out -- and frankly, share repurchases wouldn't have a huge impact anyway. So we typically use a constant share count in our guidance.

And then as it relates to our forecast for the fourth quarter and our guidance -- as basically everything that you just articulated is consistent with what we just said. And when you roll it up, it falls within that range.

Okay. All right. I'll hop back in queue. Thanks.

Mig Dobre, Robert W. Baird.

This is Joe Grabowski for Mig this morning. Congratulations on a solid quarter. Maybe starting out with workplace safety. You guys have talked the last several quarters about attracting new customers. And I was just wondering if you had a sense -- the catalyst for the new customers, is it the enhanced digital capabilities? Is it the increased sales force? Is it the expanded product offering? Just maybe all of the above. What do you think is bringing new customers to the platform?

In workplace safety, we haven't added a lot of new salespeople. It's been primarily driven over the Internet, and the new products have contributed somewhat to that. But I think it's really the enhanced effort that we're putting into our digital efforts.

Okay. And do you have any metrics as far as sort of repeat purchases from the new customers, profitability from the new customers, just sort of how sticky they are?

Clearly, we monitor that very closely. We've never talked about it publicly. But right now, one of the things that we have said is that as we've evolved with our digital efforts is they have not been as sticky as catalog customers. And probably the reason that we ramped up our catalog spend again is we still believe that we can advertise profitably through our catalog and continue to build and sustain that business and then look at the Internet as additive to that.

Okay. And the increase in the catalog investment, when does that stabilize maybe sequentially or stabilize year over year? When do you kind of get to a back to steady-state on that?

I think our Q3 was largely in line with what our expectations are now. It might be a little (inaudible). As we go into the first half of Q4, it might be a little bit of an uptick, but we drop off at the end of the quarter. But we are materially in line with what our expectations would be.

Okay, great. And switching to ID solutions, I just had a question -- I guess Zebra Technologies recently announced the acquisition of Motorola's scanner business. And I was just wondering if you guys had a sense for how this combination was going to affect the competitive dynamics of the business.

The competitive dynamics of Zebra?

Yes, right, Zebra as combined with Motorola's scanner business.

Right. Yes, that's a good question. They been primarily focused on printing systems and the labeling associated with those printing systems and some RFID systems. And this completely launches them into a full provider of auto ID solutions. And so they'll be more of a force with regard to providing barcode and RFID solutions to end-users and into their channels. So they'll be able to take the mobile technologies and the reading technologies that they get with Motorola and go with a much broader product line into their channel partners and into their end-users.

So it will be interesting to see how that plays out with their channel partners. But certainly is a clear indication that they wanted to offer a broader solution into the marketplace.

Yes, okay. No, that's very helpful. Thank you. I just have a couple more quick ones. Does incentive comp continue to be a negative headwind in the fourth quarter versus last year?

Not near to the level that you saw in the third quarter. It should actually be relatively consistent. We did have some incentive comp last year in Q4.

The big issue we had in the third quarter was a reversal last year. The comp this year has been pretty evenly spread throughout the year.

Okay, all right. And then last one for me. Any sense for how much the gross and net break proceeds from the second half of the die-cut sale are going to be?

Yes, I think we announced that the total purchase price was about $60 million. We received the majority of that already. So there's not a lot that remains.

Okay, great. Thanks, guys. Good luck in the fourth quarter.

Keith Housum, Northcoast Research.

Can you guys remind me what the product mix is of the proprietary versus third-party products in the WPS segment is?

Yes, remember -- I don't know whether we've ever talked about proprietary versus non-proprietary. We have about the mix of make versus buy is about 50% each. It's a little higher mix of make than buy in the US and Europe it's the inverse, but on average it's about half is made by Brady and half is sourced. So that's where we've talked about it in the past.

And as you are adding new SKUs, is there -- are you leaning more toward the make versus buy?

In the first half of the year in a lot of the SKUs that we added, the vast majority of them were buy items. And as we talked in the second quarter, we are converting that to -- and as we go forward, we're trying to get that balance back. And we'll be adding many more make products going forward and trying to find ways that we can customize and personalize the products that we do have, whether they are make or buy. So we're increasing the amount of customized and proprietary differentiated elements (inaudible) whether they be make or buy going forward.

Got you. And then as you add new SKUs, is there a ramp-up period from which they start having an impact on sales? Or are they impactful perhaps immediately?

No, they ramp up and they usually hit a peak in about their third year, so it's a steady ramp. We see a pickup in year one; continues to accelerate in year two; and by the third year they seem to plateau.

Got it, got it. And then changing gears maybe slightly. This quarter you guys obviously repurchased shares for the first time in several quarters. What's the thought process we should be thinking about in terms of share repurchases going forward?

Our position has always been to repurchase -- when we look at our uses of cash, and we've talked about continued increases in dividends, and we've done that through -- since we went public, 28 consecutive years. So we'll continue to do that.

From a share repurchase, we've been opportunistic when we think there's a good value. And in the quarter we saw an opportunity to -- we thought the shares were a good value for us, so we made that purchase. And then acquisitions continue to be part of our strategy. But we've said throughout the year that our focus has been on integrating PDC and getting that fully operational within the Company before we make any material new additions through acquisition.

Okay. Final question for you. You guys have used a term in the past, I think, dynamic pricing. And trying to relate that to your comment, I think you had some changes to your pricing in the third quarter. When I think about the dynamic pricing, I think the fact that they change more often on the Web -- how should we think about pricing in the WPS segment? Is that what you're talking about?

Yes, that is what we are doing. And as we look at different segments -- and we're building capabilities so that we can have more directed pricing for different segments that have different characteristics. And we may not be at a point where we're changing prices hourly; we're certainly testing more pricing both online and off-line and with different segments with their different buying capabilities.

Do you think your ? it will ever come to a point where you'll be adjusting prices on a daily or a regular basis? And if so, how long do we see that?

Well, clearly, we have that ability online. I don't think that we have the same -- quite the same sensitivity that you might have to date that you might see in the consumer business. But with some of the tools that we are putting in place, we will have that in -- we'll have the ability to do that on our new platforms.

Okay. Thanks.

You know, with the breath of our product offering, I don't know that we'll be at a point that we'll be monitoring them on a daily basis for a while yet, though.

Okay. Thank you, I appreciate it.

Joe Mondillo, Sidoti & Co.

I just have a couple of follow-up questions, and they are sort of related to the previous questions. First off, in terms of pricing at WPS, have we seen the end, in the near-term at least, of pricing being a headwind? Was pricing a headwind in the third quarter? Do we expect it to be in the fourth quarter? Where are we sort of on the comfort level of pricing at the moment?

I think we've seen the -- the biggest headwinds are behind us. We talked about making adjustments in the second-quarter call; we have been making them. And we should see improvements from pricing going forward.

So you expect some upside in pricing? Or a slow-down from the huge extent that we've seen?

I think as we've seen, we'll see sales -- we already said that we expect sales to improve. And pricing will have a -- pricing may be a part of that growth that we see.

Okay. And then in terms of differentiation of the product, that's, I think, one of your four basic strategies at WPS. What kind of vision do you have in terms of time line? I know you've talked about 15,000 SKUs. Where are we in terms of that 15,000? And what is the sort of the vision in terms of this time line of really differentiating it to finally start making a difference in profitability and top-line demand?

I think we said earlier we added about 9000 SKUs year to date. So we've added quite a few, but they have been -- I also mentioned most of those products have been resale items and have been at margins that are below our average.

Since the -- we've gone into a third quarter; we've changed our focus. And as we start launching products, really with the catalogs in the cycle that go into F2015, we'll see more proprietary products and more make products that should -- it should have a -- it should impact our sales but should also improve profitability compared to products that we added in the first half of this year.

Okay. So is this sort of -- you think this is sort of a, I don't know, 24- to 30-month sort of strategy? We've got 9000 and the 15,000 SKUs 30 out there. You're going to implement the higher-margin self-manufactured SKUs in the fourth and first quarter, probably; and then as they gain traction for the next 12 months beyond that. So is that sort of the time line of the benefits of this? I guess the big movements of the benefits?

We'll see -- we see some impact already from the products we have in the first half. And I don't expect any step change in any one quarter. I think it will just add to the growth as we start going forward. We'll see the products that we added in the first half of this year had more of an impact on -- you see the revenue; the margin is below our average. So you see that in our results. And the products that we add going forward should be more in line with our historical margins.

So we'll see both an impact on the top line and more of an impact on the bottom line than we saw from products we added in the first half.

All right, great. Thanks a lot.

Charley Brady, BMO Capital Markets.

This is actually Patrick again. I just wanted to get your expectations for gross margins and SG&A as a percentage of sales in the fourth quarter.

We mentioned the G&A amount from a previous question. We typically don't get down into that level -- that level of detail, if you will. But as you heard Matt in the IDS business anticipate some increased selling expenses as a result of new sales personnel that have been added and will be added. And as Tom mentioned, on the selling line in workplace safety it's primarily due to timing. Catalogs -- timing of catalogs, that we would anticipate those costs to be down slightly in Q4 versus Q3. And beyond that, we haven't given much in the way of guidance on our gross profit margin.

Okay. Well, do you expect it to be a -- maybe look at it another way -- to have sequential or even year-over-year improvement over the previous year? (multiple speakers) gross margin line?

Well, we certainly would not anticipate year-over-year improvement, particularly because of -- well, because some of the WPS headwinds that Tom mentioned as well as the facility consolidation costs. We do still anticipate that we will have some costs in Q4 versus benefits. So we would still continue to expect a year-on-year decline in gross profit margin.

Okay. Thanks.

At this time, I would like to turn the call over to Aaron Pearce for closing remarks.

We 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, May 22. The phone number to access the call is 1-888-286-8010 or 617-801-6888, and the pass code is 48693554.

As always, if you have questions, please call us. Thanks, and have a nice day. Michelle, could you please disconnect the call?

Thank you. Ladies and gentlemen, thank you for participation in today's call. This concludes the presentation. You may now disconnect. Thank you for joining, and enjoy the rest of your day.