Brady Corporation Price & Performance (BRC)

Words such as expect, will, may, believe, forecast and anticipate are just a few examples of forward looking statements. It's important to note that forward looking information is subject to various risk factors and uncertainties could significantly impact expected results. Risk factors were noted in our news release this morning and in Brady's Brady fiscal twenty twenty four Form 10 ks, which was filed with the SEC in September. Also, please note that this teleconference is copyrighted by Brady Corp. 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 and A session will constitute your consent to being recorded. I'll now turn the call over to Brady's President and Chief Executive Officer, Russell Schaller.

Russell? We released our fiscal twenty twenty five second quarter financial results this morning. I'm pleased to report another quarter over organic sales growth and improved profit. We grew organic sales 2.6% sales from acquisitions were up 10.2%, and we grew adjusted earnings per share by 7.5% in the quarter. Our Americas and Asia region reported another extremely strong quarter and adjusted operating income growth of 12%. I'm incredibly pleased with our organic sales growth in Americas and Asia especially in light of the current macroeconomic for industrials. Our Europe and Australia region is operating in a tough environment as well, which reflected in our results with a slight organic decline of 0.8% in the quarter. Overall, our teams are executing and we continue to invest in new product development, our focus on long term sales growth. I've been looking forward to the announcement of a very exciting new printer this quarter which is our i7500 industrial label printer. This printer is the first of its kind for Brady because it's designed for both high volume and high mix labeling. The i7500 has the ability to print on over 4,000 individual [indiscernible] labels, parts and ribbons as well as on more than 80 unique adhesive material.

Printer incorporates Brady's proprietary LabelSense technology, which automatically calibrates the machine for the wide variety of adhesive materials that can run through it. Which means the user has next to zero set of time and no wasted labels. The i7500 includes a seven inch touchscreen, that guides the user through the label printing process, making the printer incredibly easy to use for a wide variety of printing applications ranging from high performance heat resistance labels that can withstand solvents in extreme temperatures to customize QA inspection labels and factory seals, to aerospace grade wire identification and many more. This is the fastest and most [indiscernible] [indiscernible] we've designed to date and we believe it will be an incredible efficiency tool for our customers in a wide variety of end markets. We have more exciting new products planned for this year and next year, which we believe will continue to add to our growth into the long term. This quarter, we grew adjusted earnings per share, while increased R and D increased by more than 11% this quarter which came from investment in both our organic business as well as from the acquisition of Gravitech. Where we've identified some excellent opportunities from a product development standpoint.

Now I'll turn the call over to Ann to provide more details on our financial results. Ann?

Organic sales were led by growth of 4.3% in The Americas and Asia region. Which was partially offset by a slight organic sales decline of 0.8% in our Europe and Australia region for total organic sales growth of 2.6% in the quarter. We also grew adjusted diluted earnings per share from $0.93 per share last Q2 to $1 per share this quarter, which was an increase of 7.5%.

We took some actions in the quarter to address our cost structure in three specific areas in response to the performance of certain businesses as well as economic conditions. First, we announced the closure of our manufacturing facility in Beijing, China. Given the decline in economic activity in China as well as our sales decline, this plant closure will reduce our cost structure and our overall footprint in China. Second, announced the closure of our manufacturing facility in Buffalo, New York. We have gradually reduced production within this facility over the last several years and we plan to move the remaining product lines to our headquarters in Milwaukee. And third, we took actions to reorganize our overhead structure in Europe, resulted in headcount reductions. Our goal with these actions is to operate with a more efficient reporting structure while further integrating the operations of our Gravitech acquisition. In total, we recognized facility closure and other reorganization costs of $5,700,000 in the second quarter and we believe these actions will allow us to operate more effectively and efficiently going forward. We'll start on Slide number four, which details our quarterly sales trends. Organic sales grew 2.6% this quarter, acquisitions added 2.100.2% and foreign currency translation reduced sales by 2.2%.

Or total sales growth of 10.6% in the quarter. Slide number five details our quarterly gross margin trending. Our gross profit margin was 49.3% this quarter compared to 50.2 The facility closures in Beijing and Buffalo, New York that I just mentioned resulted in incremental expense of $2,300,000 in the second quarter. Without this incremental expense, our gross profit margin would have been 50% this or only 20 basis points below the second quarter of last year. Our gross profit margin continues to be strong as we realized benefits from our sales growth being led by higher gross profit margin products.

Turning to Slide six, you'll find our SG and A expense trending.

SG and A was $105,900,000 this quarter compared to $91,300,000 in the second quarter of last year.

As a percent of sales, SG and A increased to 29.7% compared to 28.3% last Q2.

If you exclude amortization expense of 4,700,000.0 and the big facility closure and other reorganization costs of $3,400,000 this quarter, and SG and A would have been 27.4% of sales in the second quarter of this year, compared to 27.6% in the second quarter of last year. As a percentage of sales, which would be a decrease of 20 basis We continue to identify efficiencies throughout our sales support function as well as other administrative support functions. Which allows us to continue to invest in growth by expanding our sales force enhancing our digital capabilities and broadening our omni channel strategies. Slide number seven details the trending of our investments in research and development.

We continue to increase our investment in R and D throughout Brady and through our [indiscernible] R and D expense was $18,700,000 this quarter. Which was an increase of 11.2% from $16,800,000 in last year's second quarter.

As a percentage of sales, R and D was consistent at 5.2% in both periods. Continue to demonstrate our commitment to new product development with the launch of the I I7500 being a prime example of the results of this increased investment. Turning to Slide number eight, you'll find the trending of our pre tax earnings. Pre tax earnings on a GAAP basis decreased from $55,800,000 to $52,000,000 in the quarter. But if you exclude amortization from both periods, as well as the facility closure and other reorganization charges we incurred in the current quarter, pretax earnings increased 7.2% from $58,200,000 to 62,400,000.0 On Slide nine, you'll find the trending of our net earnings and earnings per share. Our GAAP net income decreased due to the incremental asset amortization from our acquisitions as well as from the facility closure and other costs that we incurred in the quarter as previously mentioned. Our reported GAAP diluted earnings per share was $0.83 compared to $0.9 per share in the second quarter of last year.

But if you exclude amortization from both periods, as well as the facility closure and other reorganization charges from the current period, our adjusted net income increased from $45,400,000 to $48,100,000 which was an increase of 5.9% and our adjusted diluted EPS increased from $0.93 per share to $1 per share. Which was an increase of 7.5%. Turning to Slide number 10, you'll find a summary of our cash generation. Operating cash flow was $39,600,000 in the second quarter of this year, compared to $36,100,000 in the second quarter of last year.

Free cash flow was $32,500,000 in Q2 of this year compared to a negative $13,500,000 in last year's Q2. Capital expenditures were higher than normal last year due to the purchase of a previously leased facility along with the construction of a new facility. We expect our CapEx to return to more normalized level this year, which is what you're seeing in our results. Slide number 11 details the impact that our historical cash generation has had on our balance sheet. Position of $50,800,000 which was an increase of $21,700,000 since the first quarter of this fiscal year. Our approach to capital allocation is consistent, which is to first, use our cash to fund the organic sales growth and efficiency opportunities. This includes investing in new product development, sales generating resources and capability enhancing CapEx. Our historically strong cash generation gives us the ability to invest throughout the economic cycle, so that we're always positioned to drive future sales growth and improvement in profitability. And second, we focus on consistently increasing our dividends. This fiscal year, we announced our thirty ninth consecutive year of annual dividend increases. Which continues to be a streak that we're incredibly proud of. After funding organic investments and dividends, we then deploy our cash where the synergies are clear and for opportunistic share buybacks.

Our balance sheet puts us in a position to be able to continue to increase our investment in organic sales opportunities invest in new product development, to acquire companies that are strategic fit with our core business, and to return funds to our shareholders through dividends and share buybacks. Slide number 12 details our fiscal twenty twenty five guidance. We are increasing the low end of our full year fiscal twenty twenty five adjusted diluted EPS guidance range from $4.4 per share to $4.7 per share and moving that range to $4.45 per share to $4.7 per share. Our GAAP EPS guidance range was updated for the facility closure and other reorganization charges incurred to date and we now expect a GAAP EPS range of $3.99 per share to $4.24 per share.

Our adjusted diluted EPS range represents a range of growth of between 5.511.4% compared to fiscal year twenty twenty four. We also anticipate organic sales growth in the low single digit percentages for the year ending 07/31/2025. Other elements of our guidance include depreciation and amortization expense of approximately $40,000,000 capital expenditures of approximately 35,000,000 and we now expect a full year income tax rate of approximately 21%. Our income tax rate generally tends to be slightly lower in the fourth quarter than our full year expectations based upon our historical profit mix and the expected timing of other discrete adjustments. Potential risks to our guidance among others include strengthening of the U. S. Dollar, inflationary pressures that we're unable to offset in a timely enough manner, an overall slowdown in economic activity. Now I'll turn the call back over to Russell to cover our regional results and to provide some closing thoughts before Q and A. Thanks, Anne. Slide 13 details the financial results of our Americas and [indiscernible] Sales were hundred and $33,800,000 this quarter and organic sales growth was a strong once again at 4.3%. Acquisitions increased sales 7.6% and foreign currency decreased sales by 1.4%, resulting in total sales growth of 10.5% this [indiscernible] We continue to grow within our WireID safety and facility ID and product identification product lines which was partially offset by decline in our healthcare ID business.

Generating high single digit sales growth in our printer and consumable products offering and we continue to identify new use cases Our business in Asia had another strong quarter with organic sales growth of 11.3%, which was driven by growth in every country except China. Which declined 3.5% in the quarter. This means that outside of China, our business combined for a 24% organic sales growth.

Our growth leaders were Japan and India this quarter, we continue to build momentum and identify new opportunities. Our reported segment profit in The Americas and Asia increased 4.8% to $46,000,000 and segment profit as a percentage of sales was 19.7%. If you exclude the impact of amortization in both the current quarter and last year's Q2, well as the facility closure and other reorganization costs in the quarter, segment profit increased 12% compared to the prior year.

We continue to execute to our strategic plan, which includes taking actions in non core areas of the business to set ourselves up for a more profitable growth in the future. Turning to Slide 14, will find the results of our Europe and Australia region.

Sales were $122,800,000 this quarter, acquisitions added 15.1% while organic sales declined 0.8% and foreign currency translation decreased sales by 3.6% resulting in total sales growth of 10.7% in the region this quarter. Our European business reported flat organic sales and our Australian business reported an organic sales decline of 6.4%, Our businesses in both Europe and Australia operating in challenging conditions at the moment and we expect that the reorganization actions taken in the quarter will allow us to operate more efficiently as we move forward. Our reported segment profit in Europe and Australia declined 24.4% in the quarter to $11,400,000 and segment profit as a percentage of sales was 9.3%. If you exclude the impact of amortization in both the current quarter and last year's Q2 as well as the reorganization costing incurred in the current quarter, segment profit increased 3.9% compared to the prior year.

Despite the slow economic conditions, we were able to grow organically in Eastern Europe, which offset our decline in Western Europe. Opportunity for peer to growth in the region. I'm pleased with the first half of this year. Our cash generation was strong. We took action that will help us operate more efficiently in both near and long term. And most of all, I'm looking forward to more exciting new product launch in the future. Remindering the current geopolitical and trade environment like all other multinational companies and we're evaluating the potential impact on Brady. Meanwhile, we'll maintain our focus on what we can control and we'll adapt where we can as circumstances develop. With that, I'd like to turn it over for Q and A. Operator, would you please provide instructions to our listeners?

Our first question comes from Keith Halsam with Northcoast Research. Your line is open.

Good morning, guys. I appreciate it. Hey, Russell, in terms of the tariffs that are perhaps pending here with Mexico and Canada, Can you provide perhaps a little bit of thoughts about if they go into place, what the impact might be on you guys? Both from a cost as well as perhaps a threat to your revenue potential there? Yes. So we've looked at it. I think a lot to and whether it stays at 25% or it 10% or it's something else, As a practical matter, we have some ability to move our production [indiscernible] to and from different countries. So I'd love to give you an exact answer, but I think it would be really premature because I've heard so many things bandied about. Now I will say that we have the ability particularly for our higher profit margin products to manufacture them locally. So we could very easily in some of these cases manufacture the product in The U. S. And sidestep the tariffs. Because some of the raw materials are actually manufactured in The U. S. As well. So there are things that we could do to mitigate the effects of tariffs depending on what happens.

I think our bigger concern is that if there are significant tariffs, it's just more of a global economic slowdown than what would particularly hit Brady Got you.

In terms of your ability to move products, do you guys have duplicate lines there where you can move that fairly quickly or where there would be a delay as several months or quarters in order to get that done.

So the really high value products which are our printer materials, we could move those incredibly quickly. Those for the most part are hand assembly and small workstations. If the tariff protracted for a long period of time, we would have to think about where some of our machine resets and what we would move. That would That would take longer. But those products are much lower profit and much lower ASPs. So we could kind of cherry pick off the top ones very quickly. Okay. Appreciate that. With the facility closures, the headcount reductions that you guys are talking about here, I guess, one, is that contemplated in your guidance? And perhaps can you kind of size what that might be, the savings might be for us?

And is this more current period or is it going to be more drag out over the next several quarters? So we anticipate and I'm going to say anticipate because there's still some things going back and forth in your but we anticipate having all of this cleaned up in this fiscal year. And then that will give us a better run rate in the future. So if you think about it, where we originally restructured Brady Brady after I became CEO, we had a kind of a two step plan of dissolving the prior divisions like WPS and making it a more regional structure. And so the first bite we took a couple of years ago and then this is kind of the second step in doing that. And combined with that, it allows us with Gravotek to make some additional office consolidations and some smaller things. But as you can imagine, doing those things in Europe always takes quite a bit longer than it takes in The United States. But our goal is to have most of this done and complete in the year. Okay. And then the closures in Buffalo and in China, will we see an increase in cost of in gross margins or is that kind of embedded in there already?

I think you're going to see both both have become kind of a drag on our Overall financial performance, both in terms of growth and in gross margins. I know a few people have been commenting on WPS for years about doing away with it. We did away with it by name and now we're somewhat doing away with it in their last plant. So I do think it will be beneficial. It won't be hugely beneficial, but it's the right step and it makes us more importantly, it consolidates some product lines into a single location for better [indiscernible] Okay.

If I could ask one more question here. It sounds like the i7500 is an exciting new product for you. I guess first, is there a potential that cannibalizes any of your existing sales And then as you kind of think or perhaps even hope is this a product that contribute singles millions of dollars of revenue that might get up to speed? Could be tens of millions of dollars. How do you kind of scope that out? Yes. So I could dream of tens of millions. I don't know if It is unlike anything out on the market whatsoever. So it appeals to a certain customer base that is somewhat unique to Brady. These are people that print on a lot of different materials. It's not really a great fit for say a distribution center where you're printing on same thing over and over again. But a lot of our customers are constantly changing over label stock. We which if you've ever watched it happen, it can take minutes to a half hour to dial the printer in. We were talking to one customer who said that they could see an ROI of about three months by changing over all of their printers I'll just say Brand X to Brady Brady simply because of how much faster this sets up and changes over.

So It's like I said, it's unique. It's not for everybody. But for some customers, they immediately see it I'd love to see it north of 10,000,000 but we'll see how traction is in the marketplace. Okay.

I'll stop there and turn it over. Thank you. Appreciate it.

Our next question comes from Steve Farazani with Sidoti. Your line is open.

Good morning, Russell. Good morning, Ann.

One Dash, obviously FX headwinds became much more intense this quarter.

Yet you're raising the low end of guidance. Did something help offset that in terms of your view for the year? Did something go better than expected that enables you to actually just raise the low end despite clearly more intense FX headwinds that don't appear to be going away?

Sure, Steve. Yes, you're right, absolutely. FX is a headwind for sure. As we sit here today. The Americas and Asia region is is performing better than expected. I mean, coming in this quarter with 4.3% organic growth is very nice result and basically offsets the impact of what we see just sitting here as we sit here today are basically looking at our forecast at January FX rates is pretty much being offset by The Americas and Asia performance.

Those are doing well. The flip side being Australia, which clearly got worse this quarter. Can you give us any kind of color on what's going on there?

Sure. Dave, just a Yes. I would say their economy is to some extent based on being able to export to other countries, particularly China, not in a great place after having done well for several years I think you are clearly seeing a blowback from China and China purchasing And then as a country, they're somewhat depressed because a lot of what they do is Royal raw material extraction and shipment to other countries. All of which is not doing awesome right now, because there are other big trading partner courses Europe And you know the story in Europe's GDP isn't great. The countries that we're seeing then are growing kind of decoupled from that whole China Europe trade The rest of our Southeast Asia did fantastic. Middle East did and we're seeing it. But if you're the back and forth between China and anyone, not great place. Right. You mentioned Europe. You've continued to outperform at flat there. Any shifts with given tariff talk, geopolitical concerns, post election, have you seen any slowdown or have you seen any indications that would caused you to be a little bit more cautious?

Well, one of the big things I think I've commented on it several times before, Germany has really done a disservice to themselves with energy prices. Which has been a huge headwind to their overall economy I don't know at this point how or when they're going to get it sorted out. Because they're their large manufacturers are really struggling. You've seen all kinds of headlines about layoffs at some of their major manufacturers. Are shuttering or partially changing plants. So I'm not enthusiastic about Europe until they can get to a better energy position. Maybe that will happen sooner than later. But I think for the time being or at least for the time being, fortunately, America's GDP and some of the other pockets are are doing well for us. And that's kind of where we're doubling down. And then hoping the other ones just don't get any worse.

Right.

Last one from me. Hopefully, I've done my math right here. But it looks like you saw a nice sequential bump in The Americas and Asia from Gravitech. Are you gaining more traction outside of Europe with Gravitec and are you doing something particular to drive it?

Yes. The Gravitec story is very, very early. There's some I mean, it has a core technology that we've wanted and we like, but there's still a lot we need to do to make it integrated and kind of be what we would consider a Brady easy to use product. We've got a roadmap. I don't think you're seeing a ton yet. We've had a couple of wins, but I think it's that story is still a few quarters out.

And actually that raises the you launched the more the code embedded products. Can you talk about now the success of that a couple three years into the acquisition now that you've really embedded that technology and just general outlook on track and trace? Yes.

So it's It's about where we had expected given the current economic climate. One of the things that we did not expect certainly three years ago when we started on this journey was just how I almost want to use morbid for lack of a better word, industrial automation investment has been over the last few years. It just we had a thesis that it was there was going to be more money poured into capital expenditures than there certainly has been. At some point, we believe that will happen. So I'm going to say the product is doing as well as to be expected in the environment that it's in. We just wish the environment was better. But we do love the products. We love the use cases. We're our thesis was always being able to cross sell using readers to be able to sell printers and using printers to be able to sell readers. We can point to some large accounts where we've done that. But the overall I think, investment in industrial automation is just Just been pretty Pretty sad. Think would be the best description.

Fair enough. Great. Thanks, Russell. Thanks, Anne. Thank you. Thank you. I'm showing no further questions at this time. I would now like to turn it back to Russell Schaller for closing remarks.

Thanks everyone for your time and your questions this morning. We're midway through 2025 and we've delivered to our fiscal year plan. We're in a great financial position with a balance sheet that allows us continue to invest in our organic business, while being opportunistic with M and A and share give us the ability to fund all of our capital allocation priorities simultaneously throughout the economic cycle increased shareholder value over the long term. We still believe that the potential for increased industrial capital investment presents a great long term opportunity for Brady Brady. Meanwhile, we'll continue to monitor the geopolitical and trade environment We'll take actions where necessary as this situation develops. The macroeconomic environment is consistently changing. We but our approach is to control what we can while focusing on our formula for success, which is investing in our organization to create new products, that make our customers' life better, while delivering a positive return to our investors. I'm looking forward to the future and I know that our team has the ability to overcome challenges, solve problems creatively continue to deliver results. Thank you for your time this morning. And for your interest in Brady.

Operator, you may disconnect the call. This concludes today's conference call. Thank you for participating. You may now disconnect.