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Brady Corp
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Good day, ladies and gentlemen and thank you for standing by. Welcome to the Q2 2018 Brady Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes.
It is now pleasure to hand the conference over to Ms. Ann Thornton, Chief Accounting Officer. Ma’am, the floor is yours.
Thank you, Brian. Good morning and welcome to the Brady Corporation fiscal 2018 second quarter earnings conference call. The slides for this morning's call are located on our website at www.bradycorp.com.
We will begin our prepared remarks on Slide 3. Please note that during the call, we may make comments about forward-looking information. Words such as expect, will, may, believe, forecast, and anticipate are just a few examples of words identifying a forward-looking statement.
It's important to note that forward-looking information is subject to various risk factors and uncertainties, which could significantly impact expected results. Risk Factors were noted in our news release this morning and in Brady's fiscal 2017 Form 10-K, which was filed with the SEC in September of last year.
Also, please note that this teleconference is copyrighted by Brady Corporation and may not be rebroadcast without the consent of Brady. We will be recording this call and broadcasting it on the Internet. As such, your participation in the Q&A session will constitute your consent to being recorded.
I’ll now turn the call over to Brady's President and Chief Executive Officer, Michael Nauman.
Thank you, Ann. Good morning, and thank you all for joining us. This morning we released our fiscal 2018 second quarter financial results and I am proud to report our 10th consecutive quarter of improved year-on-year profitability. We increased pretax earnings by 20.4% compared to the second quarter of last year.
Total sales growth was 7.4% in the quarter which was made up of 3.2% organic growth and an increase of 4.2% from foreign currency. These positive trends are direct results of the focus and dedication of the entire Brady team on the execution of or strategy. This was Brady strongest quarter of organic sales growth since the first quarter of fiscal 2012 which was 25 quarters ago.
As we have stated previously, our first priority was to strengthen the foundation of our business to improve profitability and cash flow in order to invest more significantly in R&D to generate sustained long-term sales growth. Having turned our overall business around from negative growth to flat and now to growth above U.S. GDP rate, we are now pushing to make sure that we drive consistent and strong profitable growth.
Our priorities remain the same, which are developed high quality innovative products to serve our customers extremely well, to drive efficiency to auto manufacturing facilities and to streamline our SG&A structure. Maintaining focus on these key priorities is working as this quarter marks 2.5 straight years of year-on-year pretax profit growth.
We have made a great deal of progress on operating efficiency and we continue to identify new opportunities from our manufacturing facilities to our back office activities. We are building momentum as an entire organization. We continue to invest in research and development were our expenses were up another 19% this quarter. I am really excited about the work we are doing in R&D. We have a team of creative engineers, who in conjunction with our product management teams, sales force, and most importantly our customers are constantly challenging themselves to develop better solutions for end users.
Our Identification Solutions business continues to be strong, posting its third consecutive quarter of organic sales growth. We grow in all three regions and we are gaining positive momentum throughout this business. Although, the Healthcare segment of this business is still challenging, this portion of the business is expected to improve in the second half of the year. The team is executing truly well, capturing the sales opportunities, and ensuring that we are providing the highest level of customer service.
Our Workplace Safety business reported a strong profit improvement of 16.4% compared to the second quarter of last year. Our European WPS business continues to be leading this divisions results. This leadership team is effective and efficient and consistently drives our strategy and delivers organic sales and profit growth. Pricing pressures continued to be a challenge primarily in the WPS business in Americas and we don't expect that to change anytime soon.
We are addressing these challenges by providing additional value to our customers with our industry leading safety and compliance expertise by offering customized and proprietary products in identification and Workplace Safety spaces by delivering excellent customer service by improving our customer experience to advanced digital platforms and by upgrading our manufacturing capabilities. This strategy and our approach of providing significant value to our customers has been working and our turnaround of the WPS business is progressing.
This quarter's profit and sales improvement is an important milestone in our turnaround. We remain focused on the long-term by taking action today that will result in sustained process improvement. Our focus for this fiscal year is consistent which is to continue to serve our customers, drive efficiency to every function of our business, and improve our underperforming businesses.
We are driving organic sales growth every single day and we believe we are making the right investments today to deliver consistent organic sales growth in both of our divisions. The result of our efforts is achievement of our financial goals and delivering long-term value to our shareholders, and I am proud to report 2.5 years of quarterly profit improvement.
Now I’ll turn the call over to Aaron to discuss our financial results for the second quarter then I will be back to provide specific commentary about our Identification Solutions and Workplace Safety businesses. Aaron?
Thank you, Michael, and good morning, everyone. The financial review starts on Slide number 3. Sales increased 7.4% to $287.8 million in the second quarter, which consisted of organic sales growth of 3.2% and an increase of 4.2% from foreign currency translation.
We remain committed to R&D, in this quarter we once again increased our investments in new product development. R&D expense was $11.3 million which is an increase of 19.3% over the second quarter of last year. We continued our trend of increased earnings this quarter as pretax earnings were up 20.4% to $35 million compared to $29.1 million in last years second quarter. This profit improvement was primarily driven by organic sales growth in IDS and profitability improvements in both our IDS and WPS businesses along with our constant focus on driving efficiencies throughout our G&A structure.
Net earnings finished at $4.3 million this quarter compared to $25.3 million last year. In last year’s second quarter, we benefited from a lower than normal income tax rate of 13%, which was caused by certain one-time tax benefits from a large cash repatriation. This year, we recognized additional tax expense of $21.1 million or approximately $0.40 of EPS as a result of the U.S. tax legislation that was enacted in December. Without this tax charge, our EPS would have been $0.48 this quarter.
Lastly, cash flow from operating activities was $7.7 million this quarter, compared to $19.3 million in last year’s second quarter and free cash flow was $3 million this quarter, compared to $16 million in last year’s second quarter.
Slide number 4 details our quarterly sales trends, again total sales grew 7.4% and organic sales grew 3.2% versus the second quarter of last year. This quarter marks our third consecutive quarter of total company organic sales growth. We're gaining momentum and we're focused on executing our strategy to continue this trend of growth for the rest of the fiscal year.
On Slide number 5, you'll find an overview of our gross profit margin trending. Our gross profit margin was 49.9% this quarter, which is a decrease of 20 basis points compared to last year's gross profit margin of 50.1%. We're continuing to identify and execute efficiency opportunities throughout our global operations, which is effectively offsetting pricing challenges in certain product categories.
Moving along to Slide number 6, you'll find our SG&A expense trending. SG&A was $97.6 million this quarter, compared to $94.7 million in the second quarter of last year. This increase was entirely due to foreign currency translation. In fact in constant currencies, our SG&A expense was down approximately $1 million or 1%. We remain focused on improving our processes and driving out waste throughout our SG&A structure.
We're reinvesting a portion of these savings back into direct sales and marketing resources that will help drive future sales, while the remainder of the efficiency gains are helping to deliver accelerated bottom line growth.
Slide number 7 details our increased investment in R&D. We've increased our R&D expenditures both in absolute dollars and as a percent of sales again this quarter. Our commitment to growing organic sales over the long-term involved the steady introduction of highly innovative proprietary products.
We believe that investing back in Brady to the development of innovative new products that add significant value to our customers are the investments that will have the highest rate of return and are essential to our long-term success. R&D expense was up 19.3% this quarter and we expect this trend to continue with our full fiscal year 2018 expense expected to be up approximately 15% when compared to last year.
Turning to Slide number 8, you'll see the trending of our earnings per share and our net earnings. As I mentioned, our results were significantly impacted by tax reform that was enacted during the quarter, which reduced diluted EPS by approximately $0.40.
In last year's second quarter, we realized a lower than normal tax rate of 13%, primarily from a cash repatriation of over $125 million to the U.S. This transaction benefited our deluded EPS by $0.09 last year. So if you exclude the two tax related items, our EPS would have been $0.48 this quarter, compared to $0.40 in last year's second quarter.
To move beyond the noise in our tax rate and see Brady's true earnings trends it makes much more sense to look at earnings before income tax, which is the chart in the lower left hand corner of this page. Specifically, you can see that our pre-tax earnings have shown an impressive run as well with our streak of year-over-year pre-tax earnings growth reaching 10 quarters with growth of 20.4% this quarter, all of which while increasing our investments in R&D.
This brings us to Slide number 9, which provides a summary of our cash generation. We generated $7.7 million of cash flow from operating activities this quarter compared to $19.3 million in last year's second quarter, contributing to the lower free cash flow of this quarter was a slight increase in CapEx, combined with cash outflows for the payment of our annual incentive based compensation and an increase in accounts receivable as a result of our stronger organic sales this quarter.
Looking at this chart, you can see the cash flow from operating activities typically runs well above net earnings and we expect this to continue into the future. We consistently approach every decision with a cash focused mindset and expect to continue generating free cash flow in excess of net earnings over the long-term.
Moving along to Slide number 10, you will find the trending of our net cash position as well as the summary of our of our debt structure at the end of the quarter. At January 31, we were in a net cash position of $44.1 million, compared to a net debt position of $37.7 million at this time last year. This is an improvement of over $80 million in the last 12 months. As we look at deploying our cash, our approach to capital allocation is disciplined and patient.
First, we use our cash to fund organic growth opportunities throughout the cycle, which includes funding investments in new product development, IT improvements, capability enhancing, capital expenditures, et cetera.
Second, we focus on returning cash to our shareholders in the form of dividends, which we've consistently increased every year since going public. After funding organic growth investments and dividends, we've been patiently deploy our cash in a disciplined manner for acquisitions where we believe we have strong synergistic opportunities.
And we use our cash to improve shareholder returns through opportunistic share purchases. At January 31, 2018 we had 2 million shares authorized for purchase. Overall, our cash generation has been strong. Our balance sheet is strong and we are focused on driving long-term value to our shareholders through a disciplined allocation of capital.
Before getting to our updated guidance, let me provide some comments on our income tax rate and what we expect the impact of the new U.S. tax legislation to be in our future financials which is outlined on Slide number 11. In total we took a non-cash tax charge of $21.1 million in this quarter the key phrase is that these are non-cash charges for Brady.
Although the legislation is quite complicated and there are numerous items that will impact our future tax rates there are three main items to point out. First, a major part of the U.S. tax bill passed in December is a one-time tax on deem to repatriations. Brady’s cash outlay from this provision is expected to be zero. Again, we won't have any out of pocket cash or expense from this provision. Second, we need to revalue our U.S. deferred tax assets and liabilities and our current earnings to reflect the new lower U.S. tax rates. And third, we need to assess the recoverability of the remaining deferred tax assets primarily our foreign tax credit carryforwards.
The summary of the impact of all of these items along with a reassessment of our assertion related to permanently invested foreign earnings makes up our tax charge of $21.1 million. As we look at our future tax rates there are also a few items to point out. First, the way that the tax bill was written is such that there are certain aspects that get phased in for non-calendar year and companies such as Brady.
This includes the reduction in tax rates. As such our U.S. federal tax rate this year will jump in the statutory rate of 35% to $26.9 then on August 1, 2018 our U.S. federal tax rate will further drop to the headline rate of 21%. The impacts of this rate reduction and the provisional expense that we booked this quarter may also require further refinements to our tax expense later this fiscal year.
Also there are numerous pieces of tax legislation that don't become effective for Brady until August 1, 2018. As such the tax rate that we'll see in our third and fourth quarters of this year will not necessarily be indicative of our ongoing future tax rates. Excluding the impact of the tax charges recorded this quarter and any further non-cash adjustments in Q3 or Q4 related to this legislation.
We expect that our tax rate will be approximately 27% to 29% for the full-year ending July 31, 2018. And then beyond this fiscal year we expect that our longer term tax rates will decline from our historical ranges of 27% to 29% to a new range of 25% to 27%.
Slide number 12 summarizes our guidance for the full fiscal year ending July 31, 2018. We're updating our full-year diluted EPS guidance range from our current range of $1.85 to $1.95 to our new fiscal 2018 guidance range of $1.90 to $2 per share exclusive of the tax charge that I just mentioned.
Our increased guidance as a result of two primary factors; first, is to reflect our stronger operating results as organic sales have improved and we continue to make strides in driving efficiencies throughout our business. Embedded in these improved operating results are further increases in our R&D spend as we now anticipate R&D cost to be up approximately 15% this year.
Second, we anticipate benefiting from that weakened dollar against certain other major currencies including the euro. Although weaker dollar versus currency such as the Chinese yuan can be a negative for us in general Brady benefits from a weaker dollar. Included in our F 2018 guidance is low single-digit organic sales growth which will be driven by continued strength in our ID solutions business.
Our guidance is based on foreign currency exchange rates as of January 31, 2018 and includes other key operating assumptions including depreciation and amortization expense of approximately $26 million and capital expenditures of approximately $20 million. Our capital expenditure plan decreased as we no longer expect that the purchase of certain strategic facilities will occur this year. We are not anticipating any restructuring charges and we are not excluding any one-time items from this guidance other than the $21 million of tax charges that I just mentioned.
I’ll now turn the call back to Michael to cover our divisional results. Michael?
Thank you, Aaron. Slide number 13 summarizes the Identification Solutions second quarter financial results. IDS sales increased by 8.1% this quarter finishing at $206.4 million with organic sales improving 4.7% and with foreign currency translation increasing sales by another 3.4%. Organic sales growth was led by EMEA and Asia with both regions posting growth in the high single-digit, while organic sales increased in the Americas in the low single-digits in the quarter. Sales growth in Europe was stronger than Western Europe, and in our product ID, wire ID, and safety and facility ID product lines.
The team is focused and dedicated and continues to win new business, while growing sales with our existing customer base. Organic sales grew throughout the IDS Americas region with the strongest growth in our wire product, and product ID product lines. We are gaining momentum and growing both sales and profit within most of our key product lines in this region. Mid single-digit sales growth within our U.S. industrial customers was partially offset by decline in organic sales in our healthcare product line.
We continue to face pricing pressures due to factors specific to the healthcare market which includes consolidation of group purchasing organizations and large healthcare organizations, and the uncertainly presented in the legislative direction of healthcare in the U.S. We are addressing these pricing pressures to our continued investment in R&D. In fact, we've increased our investment in healthcare R&D projects by 28% in the second quarter compared to the same quarter last year.
Our new product development process remains a key area of focus for us for partnering with our customers to better understand their needs and we are incorporating their feedback into our planned new product launches and updates. I am excited about the work that we are doing in R&D and I am looking forward to new product releases in the upcoming quarters.
IDS finished the second quarter with $34.1 million of segment profit which is an increase of 17.7% over the second quarter of last year. This is a direct result of the team's focus on growing organic sales, while identifying efficiencies to auto manufacturing facilities and SG&A. As a percentage of sales, segment profit improved to 16.5% this quarter compared to 15.2% last year.
Our expectations for this business for the full fiscal year of 2018 remain unchanged, which is low single-digit organic sales growth and segment profit in the mid to high-teens as a percentage of sales. We expect to continue to invest in R&D and our efficiency activities in our facilities and throughout our SG&A structure should continue to provide benefits that will more than offset our investment in innovation.
Moving along to Slide number 14, you'll find our Workplace Safety review. Sales increased by 5.6% which consisted of organic sales decline of 0.5% and an increase from foreign currency translation of 6.1%. In fact, if you exclude the impact of our small Welco business that we sold in June of 2017, organic sales would have been slightly positive for the Workplace Safety division in Q2. Sales growth continued to be led by our European business which makes up 50% of total WPS revenue.
This business continued streak of organic sales growth by posting low single-digit growth in the quarter. Online sales continue to be the driver of growth in the region and we saw high single-digit growth again this quarter. The European team has identified new sales opportunities, while expertly managing the catalog to digital shift has been underway for several years. Pricing pressures impact the European business just as they do the U.S. business, but these challenges are more than offset by efficiency and improvement in our SG&A cost structure in this business.
Our Australian business increased organic sales on the low single-digit, while adding solid profit improvement as well. The team is identifying new sales opportunities and growing sales for the existing customers. We are gaining momentum in Australia. We are executing our strategy and we are delivering consistently improved financial results. Our North American business is turning the corner at the rate of sales decline is slowed to the low single-digits compared to last year.
Our average order size continue to increase or gain momentum that we expect to continue throughout the back half of this fiscal year. We continue to face pricing pressures, which are compressing margin in our less proprietary product offerings, but our strategy in this business is to focus our energy on our proprietary product offerings and our custom capability both of which are our strengths. We believe this will help to further stabilize margins and return the business to consistent profitable growth.
We're continuing to take action to improve the WPS businesses organic sales growth through a three priorities. First, we're working to improve the buying experience for our customers, so that it is simple as possible, reaching our customers the way they would like to be reached, whether it's online, mobile, catalog or in person is essential to gain market share and grow this business.
Second, we’re increasing our customer interaction to provide more value than simply fulfilling orders. This allows us to understand what our customers are dealing with from a safety and identification standpoint and to better serve those needs by offering our compliance expertise and complete solution.
Third, one of our strength is our ability to customize and quickly turn orders around to our customers. So we’re improving our portfolio of products by increasing more customized and proprietary products at our customers’ needs, while providing them with our extensive safety and compliance expertise.
Segment profit in a WPS business was $7.1 million compared to $6.1 million in last year's second quarter, an increase of 16.4%. As a percentage of sales segment profit was 8.7% this quarter, compared to 7.9% in last year's second quarter.
We continue to address our cost structure throughout the global WPS segment and we're investing in sales generating resources for streamlining processes and reducing the cost produced orders at the same time. These are the drivers of our improved financial results this quarter.
Our expectations for WPS financial performance for the full-year are unchanged, we expect organic sales be approximately flat and that segment profit will continue to be in the high single-digits as a percentage of sales.
I'm proud of what we've accomplished halfway through fiscal 2018 is off to a good start and we're gaining momentum. We've delivered three straight quarter’s organic sales growth and 10 straight quarters of pre-tax profit growth and we're capitalizing a new opportunity every single day.
That's a trend, but we have more work to do. We need to keep improving on underperforming businesses and we need to invest in selling and R&D resources while at the same time driving operational excellence through operating.
We believe we will continue to face pricing pressures in both our WPS and our health care product lines and IDS, which makes our investments in innovation and new products all more important to our long-term success.
We continue to push decision making further into the company and the impact of this culture shift is apparent in our financial results, reducing complexity in our global structure and removing barriers so that our local managers can think, decide and act on their feet on a daily basis has been empowering and motivating for the team.
We’re constantly working to identify and eliminate non-value added activities they are not part of designing new product, making a product or serve any our customers or directly in support of those efforts.
I'm proud of our results halfway through fiscal 2018, but we're not letting up as an organization. I'm motivated to push for more and I know that the entire Brady team is motivated and excited for what the future will bring. I know that we can exceed our goals and continue to deliver what we promised to our customers, for our employees, and our shareholders.
I’d now like to start the Q&A. Operator, would you please provide instructions to our listeners.
Yes sir, my pleasure. [Operator Instructions] Our first question will come from the line of George Staphos with Bank of America Merrill Lynch. Your line is now open.
Hi, thanks for taking my question. This is actually Molly Baum sitting in for George. My first question, could you just provide a little bit more detail on the digital growth in both – in WPS and both Europe and the United States, have transgenic celebrating here?
Although we don't get into very deep details on the call on this we actually have been seeing very positive trends in that regard and particularly in Europe WPS we seeing very strong strength across the board as you know that's actually made up of a number of markets and we're seeing all of those markets do very well and really a lot of the strength of their growth there is in that area.
Thanks for that. My next question WPS organic sales looks like be accelerated as trends were down 0.5% in fiscal second quarter versus 1% decline for the first six months. Could you just provide a little bit more color on what's been going well here?
As I stated in the commentary we've really been doing a much better job of customizing our products to our customer's needs and we're developing new products and taking advantage of our new innovative products to accelerate focus in that market. We've also really been getting a lot closer to our customers and we had in the past and that's generating both large order sizes and also a stronger order patterns.
Both in actual sales and in backlog which is a trend for WPS that is new and we haven't seen in a long time. So absolutely the difference makers for us are our ability to quickly provide unique and customized products introducing of new products in the marketplace and focusing more directly on making a significant impact in our customer's ability to provide safety solutions.
Thank you. And I have one last question on IDS. Could you remind us which products were particularly benefit from a pick up and infrastructure facilities and capital spending? And what are the implications for your product innovation and for mix? Thank you.
Any of our IDS safety facilities identification products are going to do very well with infrastructure changes. Anything that's involving literally taking a look at either changing the configuration of a manufacturing space to make it leaner we do quite well with in addition any time that we actually build everything from pipe market capabilities to our sorbent abilities across the board we tend to pick up quite well.
All right. Thank you very much.
Thank you. And our next question will come from the line of Joe Mondillo with Sidoti & Company. Your line is now open.
Hi, guys. Good morning.
Good Morning.
Good morning.
Just wondering on the IDS segments, so you continue to guide towards the solo single-digit growth or sorted in the mid single-digits for the first half of the year and seems like end markets are trending well and you've always talked about how at sort of segment and sort of maybe at GDP times. Two type of the business which would sort of trend that sort of the mid single-digits. So I am just wondering is there any reason to be cautious heading into the back half of the year regarding organic growth of IDS?
We are optimistic about our IDS business we definitely feel strongly that we are putting in place the right type of new product development to continue our growth curve. I believe that we've actually spoken about GDP plus two not times to rates of growth in that business, but that doesn't mean that we aren't optimistic at all to the contrary we believe that the economy is getting stronger and that we have the products to take advantage of that and continue to grow at a rate above GDP.
Okay. And I asked the question regarding the balance sheet last quarter you guys continue to sort of maintain sort of this discipline/patient mentality. Just wondering you know the balance sheet continues to improve cash flow as you noted in your commentary looks like it's going to continue to trend really well. So the balance sheets are continued to improve. You're operating at sort of an insufficient or inefficient capital structure just wondering if there's any update regarding your thinking on the balance sheet.
We fundamentally believe that our approach to capital allocation is a strong one for the long-term we take a look at first and primarily we investing in the business and as you can see we've been reinvesting in the business and we will continue to do that whether it's R&D which although a large portion does hit our bottom line includes capital and strong capital, whether it's in our facilities and making it more efficient, whether it's in purchasing facilities that will believe our key to our long-term future.
We are doing more and more of that as we are able not from a cash perspective, but to make sure that we have the bandwidth and are making wise decisions. In addition, our dividend payouts remain strong and we remain willing to acquire stock as it makes sense for the company. As far as using cash in other ways such as acquisitions, although we absolutely have a strong analysis of this, we are patient.
We need to make sure that we're not buying businesses that don't add significant to the company. I've always said that we'll keep our commitments. One of the commitments that I stated unequivocally about is if we acquire, we will acquire for synergistic technological reasons.
In other words, a company must have a technology that we cannot develop in a timely and cost effective way. We must help that company when we require them and they must help us. So we are patient. That does not mean that we don't think that we'll deploy the capital. We do feel strongly, we will. Timing is not one that we will state because we believe that that's actually negative to our shareholders best interest.
Okay. And then Michael, last question for me. It's been a few years now since you’ve been working on improving the productivity of the company efficiencies, trying to get SG&A as a percent of sales down. Just wondering looking back to what you've done and looking at the company today, how much room do you think that there is improvement? I mean SG&A is still fairly high as a percent of sales, so just wondering looking a year or two ahead in terms of productivity and sort of just the overall cost structure of the company, how much more improvement do you think that is possible?
Well, I'd like to say, intrinsically we do have a business that does require more SG&A in that. We are small volume high mix proprietary niches. That said, I feel strongly that we have excellent opportunities to continue to improve our SG&A structure. One of the monsters, I've always use is lower the water, you'll see the rocks. And really the entire corporation is bought into that as they see more opportunities. I'll give you a great example, that isn't directly related to SG&A, but is very visual.
I went to one of our major facilities and challenged them with an audacious amount of space that they would have to open up. And the head of the operations literally said six months later that he thought I was insane.
However, six months later, he'd already been able to open up half that amount of space, [indiscernible] to three quarters and admitted he could do three quarters. And then when I challenged him, said yes, he actually had plans to do all that space. If we literally just take a look at what we see today are people often aren't seeing all the opportunities, but as we continue to improve, we're seeing more and more opportunities.
There are a lot of things that we're working on today. I know our organization never even thought was possible just a year plus ago. So I'm very confident. We can continue to do it. I have line of sight. Our team leaders have line of sight or our managers have line of sight on specific actions we're taking to continue the path. So I definitely feel as good about that as they did when we started it.
Okay. Great. Thanks for taking my questions. Appreciated.
Thank you, sir.
Thank you. [Operator Instructions] And our next question will come from the line of Charlie Brady with SunTrust Robinson. Your line is now open sir.
Hi. Thanks. Good morning.
Good morning.
I just want to clarify, certainly you commented on the FX impact on SG&A, was there an impact on the – at the segment level on the operating income of those segments or at the gross margin levels for the corporation?
Charlie, this is Aaron. I can answer that question. From a gross margin percentage perspective, it was very negligible. So we're still at the 49.9%. And if you break it down further and you look at it by each of the two divisions, ID solutions as a percentage, it was relatively negligible as well. And our Workplace Safety business does have a much higher percentage of overseas business than ID Solutions. So they did see a slight improvement in their operating profit as a percent of sales, but it was very slight.
Okay, thanks. It’s helpful. Can you quantify, I guess to try to say what the headwind is on pricing and if there's a new product development, is that helping you counteract some of that from legacy products or is it just the pricing as a whole of process, the board is just pretty tough even to new product?
While we can – as we need to bifurcate that between the two areas that we're seeing the biggest challenge Charlie, one is WPS Americas and the other is our healthcare portion of IDS. And the drivers for those are different. In WPS Americas, you’re effectively looking at a less opaque pricing structure in the marketplace and so that does create more challenges.
That said, by driving more proprietary products by really providing complete solutions, we're giving our customers things that other companies really aren't and can't do. That result means we can overcome that, but obviously on the one-off in the more commoditize space that pricing pressure is stronger.
Now let’s flip over to IDS and the healthcare space. What you're looking at there is a consolidation of buying groups. You're looking at consolidation of healthcare providers, whenever you see that the leverage that they can maintain of a pricing is higher than before.
And as a result of that with our less proprietary products, we once again are facing more of a challenge. In this case once again by creating unique proprietary products that we're pretty excited about that actually not only add value, but often create a price point that's exciting for the hospital in addition and yet give us greater total revenue at better margins, it's a win-win for both our customer base, the buying groups and Brady overall. So yes, developing these proprietary products in the type of products we're doing does have a definite positive impact in overcoming that.
I wonder if you could give us an example of when you’re saying about more customization or complete solutions, just to help us better understand exactly kind of what that means in general stuff you've done?
Sure. So if you give an example and somebody wants a stock sign that has definitely a more commodity feel to it. However, if somebody comes in, it's putting together an entire new building and we can work with them on their safety needs, on their identification needs and their total package, we end up being very uniquely suited to doing that and that total package adds tremendous value to them and also adds significant more value to us.
Thanks.
Thank you.
Thank you. And our next question will come from the line of Keith Housum with Northcoast Research. Your line is open.
Good morning, everyone. My question for you in terms of the WPS segment and they move more towards proprietary products. Can you speak about the level of proprietary products versus commodity product now and perhaps what was a year-ago and I guess, we anticipate the mix being a year from now?
Good morning, Keith by the way. Although, we don't breakout the actual mix, I will tell you that we've spoken about the percentage I believe Aaron of manufacturing, which is about 50%. We are planning to move that up. We see in the longer term being able to get another 20% out of that.
We obviously do want to maintain a healthy portfolio of products that we don't necessarily have expertise to develop and manufacture to provide complete solutions. But we are uniquely positioned in our space to really provide though most of the solutions at self.
It has been fascinating as we've been really working on both new products and looking at the products we make at the ability of the group to see differently how they should be positioned and what they should manufacture and what they show in it. So we're confident. We're going to move ahead as I said to those numbers and more importantly though as we add that percentage more of those products will be ones that are truly differentiating to the Brady organization and WPS specifically.
And do you have the capacity and the equipment to do – to increase that manufacturing or that be included in traditional CapEx increases?
As far as specific of equipment that is a case-by-case basis. But as I mentioned in my earlier statement about challenging, one of our larger facilities to open up audacious amounts of space. One of the things that the leader of that group has done is in the middle of that space which is significant, put signs and said, this space reserved for future manufacturing and sales.
So yes, we have the capacity. We have in many cases the equipment, and so we can leverage this quite effectively believe. Now as we manufacture new product, we are investing in significant equipment, automated equipment, state-of-the-art capabilities as well manufacture those products that we weren't manufacturing before, but are clearly within our technology wheel house, and I know we should have been.
Okay. If I could squeeze one more here. Michael you referenced that the second half of the year you will see some new healthcare products out there. The R&D efforts on the yield have been stepped up for several years now. Are we seeing new products that are – when born from your recent R&D efforts are hitting the markets? Are they contributing the growth now? Or is that still a few quarters away outside of healthcare?
Well, overall I would tell you that we are achieving our targets on all of our new products and that's a big change over just a few years ago. Significantly a few years ago, we had a minority of our products that were hitting their numbers. Now we are literally seeing our numbers plus in all of our products that we're developing.
So we have a much more robust process in bringing to market and our pipeline is much stronger for the future. So you will be seeing in this year and coming forward more products executing more effectively and driving more sales yes. I don't believe I made an actual statement related to healthcare products coming out, but we do have healthcare products coming out as well. So you are correct, but I just want to clarify, I don't believe I actually made that statement, but they're definitely coming out.
Okay. Great. Thank you.
Thank you. And our next question will come from the line of Joe Mondillo with Sidoti & Company. Your line is now open.
Hi, guys. Thanks. Just have a couple of follow-up questions. When you look at your commodity like product offering at WPS specifically in the U.S., have you started to see any sort of slowdown in the headwinds that you’ve seen in the trends there or is that just sort of consistently continuing at a certain rate?
Well, I would like to say a couple things. One in our commodity products, in many cases we've eliminated some that just don't make sense in our portfolio. Actually, the extent over the last couple of years of tens of millions of dollars in revenue. So what you're seeing as results, our net of us illuminating a lot of products that absolutely didn't make any sense.
So to that point without question, we're seeing less headwinds. If it was a product that was commoditized that we really shouldn’t have been selling, we aren't selling it anymore, and therefore, we're not literally trying to roll upstream. But in general, because we are moving more to customized and proprietary, we're able to include those products as total package set and the end result of that total package set is less – a less pressure on pricing. But the final issue is I do think we're seeing more stabilization in the base value of those commodity products as well. But we don't expect to see that go away entirely.
Okay. And then in terms of the European part of WPS, do you anticipate any sort of – the best way to put it is just a sort of Amazon effect where that market in a few quarters or at some point in time you sort of see headwinds that you just haven't seen compared to the America portion of the business?
We are looking at our markets there, very closely and carefully I mean we've mentioned in the past for instance, our UK operations that have more challenges, we're doing better there. Overall, we actually see very strong positions and our ability to both niche and to provide significant value there. We are absolutely aware of the pricing pressures in all of the markets, but fundamentally I would tell you we're confident that we can continue to execute in Europe.
And just lastly, in terms of currency, how – in terms as the way currency affects the model, why don’t you see any – it doesn't seem like you see – saw much effect to the bottom line in this quarter and is that going to remain constant? Should we not expect much currency effect in this current quarter, the coming quarters, given that the certain rates that we're seeing?
When I was referring to currencies, I was talking in percentages of sales. If you look at our bottom line, we did have a – we absolutely had a benefit of pretax income from currency. So our topline was up 4.2% as a result of currency and our bottom line was up slightly more than that as a result of currency. So it is flowing through to the bottom line.
Okay, and that – sort of remain constant if rates stay constant?
Correct, it just doesn't meaningfully change the – it hasn't meaningfully change the percentages of sales.
Okay, I misinterpreted.
No.
Okay, thanks for saying that. Appreciate it.
Thank you.
End of Q&A
Thank you. And I'm showing no further questions in the queue at this time. So it's my pleasure to turn the conference back over to Mr. Michael Nauman, Chief Executive Officer for some closing comments and remarks. Sir?
Thank you. I'd like to leave you with a few concluding comments this morning. We're halfway through fiscal 2018 with growing sales and both IDS and WPS are steadily improving. We're focused on improving the businesses that are not meeting our expectation and driving growth in these businesses, which includes the WPS business in North America where we believe we're turning the corner.
We're facing pricing pressures, but we're compensating for this to efficiencies in our manufacturing processes and through our SG&A structure. Growing our pipeline of new products is essential to our long-term success and our commitment to R&D unchanged with our increased investment of 19.3% this quarter.
We're creating a winning culture that allows us to achieve our goal and to continue to deliver improved result for our shareholders, for years to come through our focus on new product development and high quality customer service while driving local ownership and accountability.
As always if you have any questions, please contact us. Thank you all for participating today and have a great day. Operator, you may disconnect the call.
Thank you, sir. Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude our program and you may all disconnect. Everybody have a wonderful day.