Brady Corp (BRC) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Brady Corporation earnings conference call. My name is Whitley and I will be your operator for today.

(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 FY14 fourth-quarter earnings conference call. During the call this morning, you'll hear from Michael Nauman, Brady's President and CEO; Tom Felmer, President of Workplace Safety; and Matt Williamson, President of Identification Solutions.

After the prepared remarks, we will 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 expect, believe, 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 FY13 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.

And I'll now turn the call over to Michael. Michael?

Good morning and thank you for joining us. It's great to be on the call with you today. Let me first say that I am honored to be leading the Brady Corporation.

As a customer of Brady products for the past 25 years while working in the electronics industry, I've always associated Brady with innovation, quality, and reliability. Over the last 100 years, Brady has developed a powerful brand of innovative products and lasting customer relationships. I look forward to using the strengths as a core foundation to help make Brady even stronger and increase its industry leadership over the next 100 years.

Over the past 30 days, I have been meeting and spending time with many Brady employees, visiting facilities and customers, and working with the executive team to review the strategy and execution plans in detail for all of our business segments. Over the next 60 days, I will continue to visit many of Brady's facilities around the world in order to speak with employees and meet with customers.

There will be changes in our focus in the upcoming months as we increase strategic alignment and work on the fundamentals of execution. For instance, the businesses where we've dedicated to prioritizing around a key set of business objectives that is directly linked with driving organic growth and profitability improvements. I expect to elaborate on this set of business objectives during next quarter's conference call.

Tom Felmar and I have been working together closely during this transition and I have been very impressed with Tom's passion and leadership. Tom is a talented executive who has been with Brady for more than 25 years, and I'm very pleased that he is accepted the challenge to lead and continue the turnaround of the Workplace Safety Group.

Effective immediately, Tom will focus all his efforts as the President of the Workplace Safety Group. This focus is very important for us to make sure that the growth changes take place.

Taking Tom's previous role as CFO is Aaron Pearce. Aaron has been with us for more than 10 years in a number of different roles in the finance organization and I'm confident he will do an outstanding job in this role.

Let me now turn it over to Aaron for some introductory remarks on our business results and to give a bit of color as to our fourth-quarter financial results. Aaron?

Thanks, Michael. Our fourth-quarter financial results were disappointing, however, we did make progress in several areas. Organic sales growth for the quarter was 1.1%, marking the second quarter in a row of organic growth.

The BMP21-PLUS, our newest hand-held printer which launched during the third quarter, performed very well with unit volume and revenues exceeding our targets. And just after quarter end on August 1, we completed the second and final step of the divestiture of our Die-Cut business.

Fourth quarter sales growth was less than anticipated and profitability was below our expectations as a result of sales mix challenges, additional cost from facility consolidation projects, and increased operational expenses. Fourth-quarter non-GAAP EPS from continuing operations finished at $0.41.

Our Workplace Safety business returned to organic sales growth marking this as the first quarter of growth in WPS since FY12. And this business also reversed its trend of declining segment profit, finishing with segment profit equal to 18% of sales compared to 14.3% in the third quarter.

During the quarter, we incurred an impairment charge against certain intangible assets of $148.6 million, or $2.29 per share. This impairment charge was primarily driven by sales declines in the Company's People ID reporting unit.

This reporting unit includes the December 2012 acquisition of Precision Dynamics Corporation, which primarily sells identification products into the healthcare industry. PDC's organic sales declined low-single digits in FY14.

These declines were driven primarily by general contraction in the overall healthcare industry, as we believe that US hospital admission rates were down approximately 2% during our fiscal year ended July 31, 2014. We've modified our strategy within PDC to focus on the full continuum of healthcare.

We revisited PDC's organic growth plans and concluded that the growth may not materialize as expected given slower than anticipated industry growth and fewer sales synergies than originally planned. This lack of historical sales growth and reduced forecast for future sales and profit growth are the main drivers for the impairment of intangible assets.

We returned both of Brady's segments to organic sales growth and our position to post growth across the Company and FY15. Our focus on execution and providing the best possible customer experience remains unwavering. In previous quarters, we articulated focus areas in FY14, several of which remained priorities in FY15 as well.

First, we are focused on driving profitable growth in our Workplace Safety business. We returned WPS to organic growth and will continue to expand our multichannel direct marketing model with an increased focus on e-business, which Tom discussed in a moment.

Second, we are focused on growing our Identification Solutions business, primarily through the development of innovative, proprietary, new products, and a focus on penetrating specific vertical markets. Third, we are focused on reducing our cost structure through the consolidation of selected manufacturing facilities. We are consolidating facilities in Tijuana, Mexico, the US, and in Europe.

We incurred incremental costs, such as additional labor and moving costs this year, which negatively impacted our gross profit margins. Although we do expect to start to see savings in FY15, the purpose of these facility consolidations was not simply 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 FY15, and we intentionally slowed down consolidation activities to ensure the highest level 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, a continuous stream of the most innovative products, a better customer experience than all of our competitors, and a relentless focus on providing identification solutions that help our salespeople win every day. We are confident that the actions we've taken and the improvements we are now seeing will help enable future sales profitability and cash flow growth.

Let's turn to slide 4 for more detail on our fourth-quarter financial results. Overall sales from continuing operations were up 2% to $316.7 million in the quarter, and as I mentioned, this is made up of a 1.1% organic sales increase and a 0.9% increase from foreign currency translation.

Our fourth-quarter gross profit margin finished at 48.6%, down from the 50.8% gross profit margin in last year's fourth quarter. The decline in gross profit margin was the result of sales mix and the costs associated with the consolidation of our facilities during the quarter. SG&A expense was 35.1% of sales in the fourth quarter, compared to 34.4% of sales in last year's fourth quarter.

Slide 5 is an overview of our earnings per share. Non-GAAP EPS from continuing operations was $0.41 in the fourth quarter, compared to non-GAAP EPS of $0.55 in the fourth quarter of last year.

Slide 6 introduces our continuing operations guidance for FY15. We anticipate overall organic sales to show low single-digit growth, with organic sales growth in each of our two platforms. For FY15, we expect earnings from continuing operations for diluted Class A Nonvoting Common Share of between $1.50 and $1.70 per share, exclusive of restructuring charges and other nonroutine items.

Included in this guidance is approximately $0.15 of incremental costs related to growth investments in our IDS segment. Half of which relates to an increased focus on penetrating certain vertical markets, including healthcare, and half of which relates to additional R&D investments to drive innovation and new product development initiatives.

And an additional $0.10 of incremental expenses as we anticipate returning to more normalized level of incentive compensation. This guidance is based on current exchange rates, a full-year income tax rate in the mid-to upper-20% range, capital expenditures of approximately $30 million, and depreciation and amortization of approximately $45 million.

We are also anticipating restructuring charges of approximately $15 million in FY15 due primarily to the ongoing facility consolidation activities. This effectively puts the midpoint of our FY15 EPS guidance range approximately 5% above our non-GAAP EPS of $1.53 in FY14, as our investments to drive long-term sustainable organic growth are expected to offset many of the profit increases coming from our anticipated organic sales growth and operational improvements.

Slide number 7 is a summary of our quarterly sales trends. In the fourth quarter, revenues finished at $316.7 million, which is our second consecutive quarter of organic growth. As I mentioned, we've seen improving sales trends in most of our businesses and we returned WPS to organic growth this quarter.

Moving along to slide number 8, you can see the trending of our gross profit margins. Our fourth-quarter gross profit margin was 48.6%. Our gross profit margin has been trending down for a number of quarters, partly due to the acquisition of PDC and challenges experienced in our WPS business.

But more recently, also due to the challenges in our IDS business from sales mix and the near-term implications of facility consolidation actions. We are focused on driving gross profit margin improvements that will result in longer-term improvements.

For instance, our facility consolidation activities degraded our gross profit margin in FY14 and in this quarter. But over the long term, these actions are expected to provide gross margin improvements. We continue to focus on and invest in analytics and tools to better manage mix in pricing, which we believe will ultimately result in margin gains.

On the right-hand side of this slide, you can see the trending of SG&A expense. SG&A expense was up from approximately $107 million in Q4 of last year to $111.3 million in Q4 of this 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 our WPS business, we increased spending in both online advertising as well as traditional catalog advertising.

Moving to slide number 9, you can see that our non-GAAP EPS from continuing operations was $0.41, which compares to our non-GAAP EPS from continuing operations of $0.55 generated in the fourth quarter of last year. As I mentioned, we are not pleased with our EPS results, as our business did not grow as much as anticipated and our gross profit margin was weaker than anticipated in the quarter.

We've summarized our cash generation on slide number 10. During the quarter, we generated $17.6 million of cash from operating activities. We spent $13.6 million on capital expenditures.

We also received $54 million of net proceeds from phase 1 of the Die-Cut sale in Q4, of which $17.3 million was returned to shareholders through dividends and share buybacks, and another $32.7 million was used to repay outstanding debt. Looking forward, our focus will be on executing business fundamentals to drive organic sales growth, while deemphasizing acquisitions in the near term.

Our EBITDA trending and net debt trending are on slide number 11. 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 1.2 to 1 at the end of the quarter.

Our total net debt position at July 31, 2014 was $181 million, compared to net debt of $222 million at July 31, 2013. This does not include the proceeds from the second phase of the Die-Cut sale of approximately $7 million since it closed after the completion of our fourth quarter.

Let me now turn the call over to Tom Felmer for an explanation of the Workplace Safety results. Tom?

Thanks, Aaron. Let's turn to slide 12 for a summary of the Workplace Safety financial results. Sales increased by a total of 2.8% to $102.3 million in the fourth quarter.

Organic sales increase 0.9% and foreign currency translation added another 1.9%. Organic sales were up versus the prior year for the first time in 10 quarters. We believe that the mid-year changes in strategy and a 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 focus on e-commerce and we have accelerated our investments in our digital capabilities. In the first half of the year, we set the foundation for growth in our staffing and dedicated digital team, while increasing our digital marketing investment and moving forward with our global platform deployment.

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 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 out industry expertise to further differentiate and enhance the value our customers receive. Fourth, we are evaluating and optimizing our value proposition.

Our business has been built on a foundation of providing expertise in the areas of regulatory compliance, facility safety, 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 that are attractive to our customers.

And fifth, we have increased our catalog investment 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 certain pricing actions, were the primary drivers of our decreased segment profitability when compared to the prior year.

These investments are producing a number of positive signs that we 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 Workplace Safety global platform was $18.4 million in the quarter, compared to $20.4 million in last year's fourth quarter. As a percent of sales, segment profit was 18% this quarter, compared to 20.5% in last year's fourth quarter. This segment profit percentage of 18% is a significant sequential improvement over the 14.3% incurred in the third quarter.

We returned the business to positive organic sales growth in the quarter and exited the fiscal year with positive momentum. Our segment profitability is improving but still not where we would like it to be due to gross margin erosion and the growth investments I just mentioned.

Accelerating sales growth will be the key to improving our segment profit margins as this business has a relatively high fixed cost structure. As we go through FY15, we expect improving trends as our sales volumes improve and as we make adjustments to our value proposition.

We anticipate single-digit organic sales growth in the WPS segment in F2015, and we also anticipate segment profit percentages to approximate what we are experiencing coming out of FY14. I'd now like to turn the call over to Matt Williamson for a review of the ID Solutions business. Matt?

Thanks, Tom, and good morning, everyone. Before getting onto our quarterly results, let me comment on one of our recent product launches, which is on slide 13.

We recently launched our next-generation portable label and wire identification printer the BMP21-Plus, which is also available in a version for the laboratory market. This printer is designed to be a super durable tool with software specific for electrical datacom laboratory and industrial applications.

This versatile printer has been well received by our distribution partners and end users alike and has performed very well during the fourth quarter coming off a strong launch in quarter 3, exceeding our expectations in terms of both sales and unit volumes. We anticipate this momentum to continue into FY15 along with additional product launches coming from our healthy pipeline of new products.

Let's turn to slide 14, which is the Identification Solutions financial review. Sales increased a total of 1.6% to $214.4 million in the fourth quarter. This growth was a combination of 1.2% organic sales growth and an increase of 0.4% due to foreign currency translation.

We've expanded our focus on industries, such as chemical oil and gas, food and beverage, laboratories, industrial OEMs, and healthcare. We've also expanded and focused geographies, such as China and central Europe. 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 BMP21 printer being a great example.

Segment profit decreased 10.4% to $43.3 million in the quarter, compared to $48.4 million in the last year's fourth quarter. As a percent of sales, segment profit was 20.2% this quarter, compared to 22.9% in last year's fourth quarter. Segment profit was lower than anticipated due to higher than expected facility consolidation related costs and product mix.

Product mix was driven by increased sales in Asia, which has a lower gross profit margin than our average businesses, increased printer sales, and increases in certain other lower margin business. We also had additional costs associated with the expansion of our sales force, primarily in North America and Europe.

As we look to FY15, we anticipate the trends of low single-digit organic sales growth to continue with growth coming primarily from our global Brady brand business. Overall, the prospects for growth throughout the businesses are positive.

Although some economy's name 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 FY15 segment profit to be comparable with what we experienced in 2014.

As we move into the next year, we will be investing in both midterm sales generation activities through our focus on industries, such as healthcare and others, and we are also expecting to increase our R&D investment to reinvigorate our new product pipeline and continue to stay ahead of our competition through the development and launching of proprietary new products. I'll now turn the time back to Michael for his concluding remarks.

As I said earlier, I'm excited to be leading the Brady organization. I will continue to meet all of our employees and visit all of our businesses as I assess the Company's long-term strategy. I want to be clear that I'm committed to executing on our current plans and improving our performance now and for the balance of FY15.

As you heard in today's call, we did not perform up to my expectations and we are addressing those issues. Let me give you a few examples. First, one of our top priorities is to return our WPS business to profitable growth.

We've seen an improvement in that business since Tom took on the leadership of that business in the third quarter, and I'm confident we will continue to see improved results under Tom's leadership of this business. Other areas that we discussed with some challenges are our facility consolidations and operational performance.

I have already put wheels in motion on a Company-wide effort to reestablish our operational excellence, delivering quality products on time to our customers in most profitable way possible. This has been a hallmark of every business that I have run.

I am confident we can improve our operation performance in the coming quarters. Brady is a quality company with a 100-year legacy of success and innovation. Having been a customer of Brady for many years, I've experience this first hand.

Over the coming months, we will work on to address the issues highlighted on the call and deliver on our strategic objectives. I will also be working with the team to deliver a long-term strategy for accelerated growth and profit.

I would now like to start the questions and answers. Whitley, would you please provide instructions for our listeners.

(Operator Instructions)

Jason Ursaner, CJS Securities.

Good morning. Just first on free cash flow. For the full year, without the Asia divestiture, is around $1 a share. Obviously, it's a noisy year.

As a percent of adjusted net income, though, it's a bit lower than years past. You at some big working capital outflows.

Just wondering how you see those looking next year? Do some of those come back or are those more ongoing investments in capital?

Yes. This is Aaron. Good question, Jason.

You are right, our free cash flow was about $1 a share in FY14. There were, I'll say, two primary drivers.

One, of course, was CapEx. We had $43 million of CapEx, much of which related to facility consolidations. And as you just saw in our guidance, we anticipate that going down to the neighborhood of $30 million next year and then returning to a, I'll say, a more normalized run rate in F2016.

And then the second piece would be the working capital changes. The primary working capital change that you see is actually in inventory, and much of that inventory growth relates to facility consolidations. So we don't see that building up again next year.

We haven't, of course, given guidance on specific line items of our free cash flow, but we certainly don't see that as a further use of cash next year.

Okay. And for Tom in WPS segment, maybe if you could just talk a little bit more about -- reiterate what the digital strategy is there? What percent of sales is coming from online at this point? And how is it mixing together with the traditional catalog business right now?

Thanks, Jason. The efforts that we've been focused on to the first half of the year, as I commented, is we have a history of all of our businesses on separate websites. So the first phase is really to get all of the businesses onto a common platform, which we're in the early stages of making that happen.

Once we, or as we get them onto the new platform, there's improvements, and I would say it's things that you would expect to see typically. It's getting all of our products working well on the websites, making it easy for customers to use the website, giving people the information that they need from a compliance standpoint.

Network is also in process. We are seeing, as I commented, digital sales are increasing. And as I look into the future, I would expect that to be the fastest part of the growth within the segment. I would expect the digital sales to increase as a percent of sales.

Okay. And in the ID Solutions segment, maybe if you could just talk a little bit about mix? You mentioned higher printer sales and how that's -- I guess my understanding is that had been one of the things weighing on margin a little bit.

So if you are showing organic growth next year and maybe have a better mix, why wouldn't you show a little bit more leverage there? As opposed to consistent operating margin?

Well, on that particular product line, that would probably be true. We sold a record number of printers this year and they are at a considerably lower margin.

And so as we would look at that particular product family next year and we would get consumables from them, that particular product family we would expect margin to increase. But in aggregate, as we're forecasting our total mix, the profitability in aggregate would be about the same.

Okay. I'll jump back in the queue. Thanks, guys.

Charley Brady, BMO Capital Markets.

Hey, thanks. Just back on WPS on the common platform question to tie onto that. Do you have a timeline as to when you expect that?

You said it's early stages, but are we looking at 12 months or longer as to when you think they're all on a common platform, it's running pretty close to optimal where you want it to be?

Yes. We're looking at getting the majority of the -- it's a, I'll say there's a long tail to the number of sites that we have. We're looking at getting the majority of the bigger sites online over the next 12 to 18 months and the rest will come on after that.

Okay. And then, Mike, I wonder if you can just talk about, you mentioned operational excellence objectives. Can you maybe get a little more granular on what you're looking?

As you come into the Company, and I know it's really early days, but as you've gone around to the various sites and you've seen what's working and what's not working, can you tie that back to what you see as the operational excellence initiatives to maybe change things to improve where it needs to be improved?

Sure. It certainly is among the earlier days, but I think you can already tell we are making changes here in the organization. I believe fundamentally Brady is a very strong brand. Loyal customers, channel partners, great people, and we have pretty strong financial fundamentals.

However, as you can tell the operational excellence, our recent financial performance hasn't met your expectations or ours, quite frankly. And as a result, I will be making specific changes. I'm still working on the process with the team to start to roll out my expectations and the needed changes, both in strategy and direction.

It's very important that I establish this internal direction with the employees prior to really sharing my vision externally, but my expectation is to be ready to share that change both in our vision, our strategy, our use of capital, and specifically, operational excellence after the end of the first quarter. I do need some time to make sure that our team is totally aligned and moving in that direction.

Yes, fair enough. Just one more question then. On the R&D spend, just so I'm clear, did I hear correctly that within the new guidance there's an incremental $0.15 a share tied to R&D and administrative costs, too?

And selling costs, yes.

So split about 50-50 between the two, so --

That's correct.

-- when you look at R&D costs as a percent of sales, obviously that's going to bump up a little bit, is that a temporary bump? Or what kind of level as a percent of sales do you see R&D spending going to? And then again, does it level out at that or does it come back down and we're at temporary bump?

I can answer that, Charley? I don't see this as just a temporary bump. Frankly, over the long term, we absolutely have to have new innovative products. That's key to our growth.

So, no, I don't see this as a temporary bump and bouncing back down. Now, beyond F2015, that's a great question. We certainly don't have -- we're not putting guidance with respect to F2016 at this point, but at this point I don't see it as a temporary bump.

Okay. Thanks.

Mig Dobre, Robert Baird.

Good morning, everyone. Michael, first and foremost, welcome. I think I'm going to try to press you maybe a little more even though I know it's early days for you with the Company.

But obviously, you've had access now to I think a lot of the internal studies that Brady has done, and I know that some strategy consultants have looked at the business in the past. And clearly, you are aware of the challenges that the business has faced over the past three years.

From your perspective as a person with a fresh set of eyes, what are you seeing the real challenges for the business are? And I want to understand if you are basically trying to continue the strategy that has been put in place? Or if we should be expecting over the next 3, 6, 12 months a new strategy with a new route versus what we've heard in the past from the Brady management team?

Mig, thanks for the kind welcome. I definitely appreciate it and I want to let you know I am, as you point out, although I am new here, I'm not somebody that lets a lot of time flow by without making decisions and moving on direction.

As I did state to the last question, it is critically important for me to make sure that the internal direction is really established with our employees first and foremost and then I'll be moving forth. I can really share with you today that we're going to be focusing our energy around a key set of business objectives that are designed to drive both organic growth and profitability improvements.

And this approach that we are taking is different from the approach that we've been taking recently. I think it will energize our efforts and help to drive us really in the execution of the fundamentals of our business in a better way. So, I appreciate the welcome and look forward to tremendous period of time with Brady.

Thank you for that. Aaron, I don't know, this might be a question for you. From a capital allocation standpoint, you're being pretty clear that there are no acquisitions currently worked on. Debt levels to me seem more than manageable and the stock is struggling today.

How is the Board thinking in terms of capital allocation? And I mean share buybacks at this point?

Our capital allocation philosophy hasn't changed with the exception of the piece that you've just articulated, which was the, I'll say, the less focus on acquisitions. And frankly, the lack of focus on acquisitions solely comes down to executing our fundamentals in our business and growing organically.

So our policy, our thoughts around capital allocation has not changed. You are right. We have very low leverage on our balance sheet, our net debt to EBITDA is about 1.2 to 1.

We look at share buybacks in an opportunistic manner. Historically, we certainly have not signaled in advance of any purchases. We don't see that changing anytime soon. So I guess all that I can say is no change in our philosophy with the exception of deemphasizing acquisitions in the near term.

Okay. And then, Matt, looking at ID Solution, I guess I'm trying to understand why we've see relatively low organic growth this quarter and why you are guiding for relatively low growth throughout the quarter?

Throughout the quarter, Eurozone PMIs have actually been decent, 52 on average, US much higher than that. So at least the head line growth numbers seem to be okay and yet that's not what we're seeing in guidance. Where is the headwind here?

Well, let me comment. Europe, we've gotten good growth and we expect the types of things that we've seen there to continue. The headwind really has been in the underperformance in PDC and in Brazil.

And you are expecting that basically to continue even though comps in theory could be getting easier?

Well, we expect the PDC business to turn around to low single-digit growth.

Okay. And then my last question, you are guiding for flat margin in ID Solutions, which to my math is, call it 21.5%. But over the past three quarters, the run rate has been about 20%, which would imply actually a pretty nice margin lift from what we've seen it in the last three quarters.

What gives you confidence that that's attainable given all the actions that you are taking, new salespeople, facility consolidation, and so on?

Well, there's several things there. There's a number of things from an operational improvement standpoint, operational savings, sourcing savings.

We do expect as we go into this year, when you look at facility consolidations, that will pick up costs in the first half of the year. But the net of our facility consolidation costs would be positive, so between those things we expect to pick up margin.

Thank you.

Joe Mondillo, Sidoti & Company.

Good morning, guys. First, Michael, welcome to the Company. My question, a couple questions. First off, the consolidation cost, can you quantify how much that amounted to within the quarter?

Yes, I can. In the fourth quarter it was about $1.5 million incremental.

And did you say, I can't recall if you said or not, do you expect any of the cost to run or amount to anything in the current year?

Yes, we actually didn't give, we didn't talk specifically about it, but we absolutely can here. And that is that we do anticipate that we will get some benefit from facility consolidations next year for sure.

And of course, we will see a bit more in the second half of the year than the first half of the year as we continue with these consolidations. So, don't expect tailwinds in the back end of the year because we should be in a pretty good shape by then.

Okay, great. And then I guess a bigger level question. One of the biggest issues is the product differentiation, and that's you are clearly trying to attack that problem via the increased R&D spend and all the initiatives that you are implementing in both segments.

Can you give us an idea of where you want new products as a percent of the whole to be? Where they are at right now? Where you want them to be?

And at what point in time do you see more of a normalized ongoing change to the product portfolio as opposed to this big leap towards more of a differentiated product right now?

Sure. By the way thank you for the warm welcome. I do appreciate that.

Fundamentally, I believe that we have to provide our customers with core value, and that we then have to make sure that that core value that they really can achieve is protected on our side. And you can see that through the increased R&D investment that that is an absolute strategy, that I know from both my history and the core history of Brady is highly successful.

So you will see us making specific moves in the direction of innovation, new product development, making sure that we are focused on addressing the needs of specific marketplaces. But even more importantly, specific customers and customer applications.

So that direction is going to be taking place. At this time, we believe fundamentally that that will be making a long-term important difference in the trajectory of our business.

And I know this whole differentiation of the product line has been something in place already. Are you going to be doing anything different with that? Or are things, do you see right now in place and maybe you need to maybe make some tweaks, or are you making some major changes with that?

Because I'm just wondering, this plan was in place maybe three quarters ago in terms of differentiation. And I'm just wondering where we are at versus that plan or are we changing plan in terms of the differentiation?

Well, I'd like to say once again that it's very important that I make sure I roll out all of the changes that we're making internally prior to externally announcing them. But I do fundamentally believe we can make improvements in this area and that we will be making improvements in this area.

The general goal of the Corporation to really create differentiable value to our customers will not be changing. That is a fundamental criteria that actually, if you look back at our long history, is something that we had been marked by.

I think we did get away from that with our acquisitive mode that defocused us from that effort as much as we should have, but I think it's important to see that before my arrival, the Company recognized that we needed to get back to our fundamental roots of what made us strong, and so that part is not going to change at all. How we actually apply that will be improving and we'll be executing on plans that I believe will make fundamentally positive differences in the long run.

Okay, great. And then just finally, the 18%. Tom or Michael, could you talk about what the major driver of that was? I think maybe you said it was mix, but can you clarify that?

And then also going forward, what are your thoughts of that 18%? Is that a run rate going forward? Orr it looks like it's certainly not going to be a run rate, but talk about the bar there that you saw in the fourth quarter?

Yes, the improvements came in several areas. We did take actions also with our value proposition. We saw margins improve in the business, so that was a big driver of the improvement.

We're getting some more leverage and we have some growth, so that leverage also helped raise the profitability and raise that percentage. What we've talked about, I believe in last call in the last quarter, was I don't necessarily see getting back to historical profit levels of the group of several years ago, but our aspirations and direction is certainly I believe it has a -- it will be number with a 2 in front of it.

We did say in the guidance that for the next year, we expect the profit to be in a similar to what we saw exiting the year.

Okay. All right. Thanks a lot.

Keith Housum, Northcoast Research

Thanks, guys. This is Dominic Rochella sitting in for Keith Housum. Aaron, I think this one might be directed towards you. Can you help us understand the higher tax rate for the quarter and any drivers in there that might be permanent?

Yes, good question. So we had a 31% tax rate in our fourth quarter, which compares to about 17% in last year's fourth quarter. And that's, of course, that's after you remove the impact of the restructuring and then also the impairment.

And frankly, as we look at next year, going into next year there certainly some tax rate challenges. And frankly, I believe most domestic manufacturers will have these exact same challenges. And that relates to the, I'll say the lapsing of the typical tax extenders.

It's the flow through of inter-Co interest, et cetera, that is now taxable, but frankly for us the bigger issue is the R&D tax credit is gone. If you look at F2014 and you strip out all of the non-routine items, so strip out the impairment, strip out restructuring, we actually had a tax rate of about 28%, which is exactly where we're guiding to next year.

We're guiding to mid- to upper-20% range. And I think that that's a good run rate going forward.

Okay, and that's -- Okay. And would you mind providing a little bit more color in terms of the PDC performance that you guys saw specifically for this quarter?

I mean, was that hospital admissions? Are you guys seeing other things in there that may be impacting growth there?

Good question. The primary thing is the admissions rates that has been declining really since we acquired the company.

This year the trailing decrease in admissions was 2.2%, although that's slightly improved more recently. But that's the main thing.

I would emphasize though that the overall profitability of the business met our expectations in the year due to executing on some cost-saving things. Another thing that's impacted that is that there are some older products in the offering that have declined faster than we anticipated. But primary thing, as we expected, the admissions rate to increase and it's declined.

You said more recently it's started to improve, so during the fourth quarter, do you guys have --

It's still declining, it's not declining as much. Based on recent numbers that we've seen.

I see, okay. And then last one, if you guys could just provide a little bit more color in terms of the geographical performance? I know you called out Asia a few times during the call, but anything else you can provide us there?

Yes. Actually, Dominic, let me jump in here, and that is, historically, we've given, I'll say a fair bit of detail underneath the platform level.

Sure.

I know we've talked about, just on this call today, we'd obviously are giving a fair bit of color with respect to PDC for obvious reasons. Very significant acquisition for us. And Matt has also talked about Brazil, which is of course, a location that we've had challenges as had many multinationals. But frankly, we're trying to get away from talking much more detailed below the platform level.

Okay, all right. Understood. Thank you.

Andrew Fleming, Heartland Advisors.

Hey, good morning, guys. Tom, first question is for you. Congrats on the turnaround here in WPS, in Workplace Safety.

Curious, as you go from 18% to the 20% you alluded to earlier, is that simply a function of operating leverage and topline growth? Or is there more to it?

Certainly in the early phases, it's going to be the operating leverage. Now, how far we go beyond that will depend on how successful we are with the digital efforts.

We said we put some additional cost into the business, or investment into the business, to accelerate our digital platform, the migration and the capabilities. And really over the course of the next 12 to 18 months, you'll begin to see and we'll learn how effective we've been there.

And if it's successful, we may be able to see something. That's what is going to be determined, how successful the business ultimately will become.

Okay. And is the catalog portion of Workplace Safety where you want it to be at this point?

Yes, I think we restored the catalog back to what I would expect from it. Catalog, if you think about long horizon, catalogs will likely become a smaller piece of the business in terms of driving sales and profitability.

But in the near term, it's still a major driver for the business and we need to optimize the catalog performance as best we can. So I'm pleased that it's taken a couple of quarters to restore that, but as I look through the plans and get more deep into the processes, I feel pretty good about what we've done over the last six months.

Okay. So with the improved position with the catalog business, going forward, is it safe to think of Workplace Safety in a tighter band of maybe that 18% to 20% operating margin going forward?

Yes, I think as you look over the course of the next year, yes.

Okay. The next question is for Michael, and congrats on the new position. Look forward to meeting you in the near term.

It sounds like we've had a slight pivot in the capital allocation strategy, slightly more disciplined approach going forward. And you mentioned in the earnings release that M&A will be deemphasized with, which clearly makes sense with the two big impairment charges that we've taken in the past two fourth quarters. Granted, those were not on your watch.

But with the stock where it's priced today, the guidance implies the Company is trading about 7 times 15 EBITDA. And with CapEx going down, it implies that free cash flow should probably be about $60 million after the dividend.

And buyback seems highly accretive right now and the balance sheets in great shape. I'm just curious your thoughts, Michael, on perhaps a more aggressive buyback now that we've hit the inflection point appears on the organic growth side in both ID solutions and Workplace Safety?

Absolutely, and thanks for the welcome, Andrew. I do look forward to meeting you as well and hopefully having conversations in the future about our direction.

In regards to our change in philosophy in regards to buybacks, at this time, we are not seeing a reason to change our philosophy at all. We are absolutely looking at all of the elements involved. And if a market position changes, we will determine at that point.

But at this point, we have no reason to change our current strategy. We believe we fundamentally have uses of capital and we will work in that direction.

Ladies and gentlemen, that concludes our Q&A. I will now turn the conference over to Mr. Aaron Pearce, CFO, for closing remarks.

Thank you. And thank you, everyone, 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.

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