Brady Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2021 Brady Corporation Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ann Thornton, Chief Accounting Officer. Thank you. Please go ahead, madam.

Thank you. Good morning and welcome to the Brady Corporation Fiscal 2021 Second Quarter Earnings Conference Call. The slides for this morning's call are located on our website at www.bradycorp.com slash investors. We will begin our prepared remarks on slide number three. Please note that during this 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 2020 Form 10-K, which was filed with the SEC in September of 2020. 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. Michael?

Thank you, Ann. Good morning, and thank you all for joining us on this beautiful winter day. This morning we released our fiscal 2021 second quarter financial results. This was another strong quarter in a challenging economic environment. The Brady team is doing a good job navigating through these unprecedented times and is executing well, innovating for our customers and providing many of the products that are needed to help fight this pandemic. I'm proud of the accomplishments of the entire Brady team. Our priority continues to be the safety of our employees and ensuring that we're providing the products that our customers need so they can continue to operate and keep their employees and their customers safe. We're proud to support small businesses and frontline workers all around the globe, including first responders, healthcare workers, food processing companies, logistic companies, retail establishments, schools, and virtually every essential industry. The macro environment certainly remains challenging, and this global pandemic is far from over. Even with the positive news on the vaccine front, we believe that several of our end markets will continue to be challenged in the near term. For instance, in our IDS business, we sell into many small niche identification markets aimed at identifying people in the workplace, at entertainment venues, and other events such as concerts. We expect these markets to be depressed for a longer period of time, whereas our general industrial business is certainly coming back much faster. Our goal has been and will continue to be to control what we can in the short term by keeping our employees safe, serving our customers extremely well, and delivering strong financial results. At the same time, we're investing heavily in order to accelerate our growth as we exit this challenging period. This strong focus on executing now while investing in the long term has enabled us to improve our business fundamentals. We've driven improvements in our cost structure, which will help drive even stronger profits and cash flow as our businesses increase revenues. We've been working on a multi-year effort to become a leaner organization, which can clearly be seen in our financial trends as our growth margins are strong and our SG&A expense continues to trend downwards. Our focus on efficiency and effectiveness is not over. And as we look to the future, we certainly see many additional opportunities to continue to streamline. Becoming a leaner and more efficient organization is certainly important. However, what's more important at this junction in our history is ensuring we're taking the appropriate actions to accelerate sales growth. We've been upgrading our websites, improving our marketing capabilities, developing new products, investing in capacity-enhancing machinery, and making the marketing investments necessary to grow our top line as we come out of this downturn and into the future. Profitable sales growth is our number one priority. For instance, in ID Solutions business, we've been increasing our R&D spend and seeing positive results as we are launching new products at an increasing rate, and we're continuing to distance ourselves from our competitors who don't have the scale to invest this heavily in R&D. We're also expanding our sales force and expanding geographically into underserved markets with strong future growth potential, including India and other markets in Southeast Asia and Eastern Europe. We're also improving our online presence by upgrading our websites throughout the globe and investing more in digital marketing talent. Our strong new product lineup combined with investments in sales marketing and online presence gives us confidence that our IDS solutions business will grow at a faster rate as our in-markets improve. In our workplace safety business, we're also making significant investments to accelerate our sales growth. Throughout the pandemic, we're ratcheting up our online marketing campaigns, helping us to reach many new customers and expand our customer base. We've completed our migration to a common web platform, giving us much stronger market intelligence and the ability to quickly adapt to changing market dynamics. We've increased our investments in new product development and increased the number of proprietary new products that our customers want and need today to keep their employees and customers safe. And we're adding new salespeople around the globe to accelerate our sales even further. The actions we're taking today, combined with our recent expanded customer base, will result in a strong future for our workplace safety business. I'm very confident that Brady will see revenue growth in the upcoming quarters, which will increase as a result of this strong focus on growing organic sales, combined with our rock-solid balance sheet and strong cash flow, which gives us significant dry powder to accelerate growth through further R&D efforts and business acquisitions. Our strong balance sheet also allows us to keep investing and to keep returning funds to our shareholders, which will enable us to generate outside shareholder returns in the future as we put our balance sheet to work. Brady is well positioned as we enter calendar 2021. Today, we're providing earnings guidance for the back of our fiscal 2021. where we expect to return to healthy revenue and earnings growth. Overall, I'm confident in our ability to deliver results for our customers, our employees, and, of course, for our shareholders. I'll now turn the call over to Aaron to give a little more detail on our financial results, and then I'll return to provide specific commentary about our identification solutions and workplace safety businesses. Aaron?

Thank you, Michael. Good morning, everyone. I'll start the financial review on slide number four. Sales in the second quarter were $265.8 million, which was a decline of 3.9%, and pre-tax income was $39.4 million, which was a decrease of 7% when compared to the second quarter of last year. Diluted EPS finished at 59 cents this quarter, compared to last year's second quarter EPS of 62 cents. We also had solid cash generation again this quarter, Net cash provided by operating activities was a very strong $36.1 million, which is more than 150% higher than the $14.3 million of operating cash flow generated in the second quarter of last year. Moving to slide number five, you'll find our quarterly sales trends. Total sales were down 3.9%, which consisted of an organic sales decline of 6.3%, and an increase from foreign currency translation of 2.4%. Organic sales continued to improve sequentially in our ID Solutions business as organic sales finished down 6.9%, which was an improvement over the previous two quarters. In workplace safety, after two consecutive quarters of solid organic sales growth, we saw a decline of 4.8% this quarter. We experienced weakness in one of our U.S. businesses that primarily sells into very small companies that have been heavily impacted by government mandated shutdowns. We also saw a reduction in the sale of products specifically aimed at fighting the COVID-19 virus, which we were unable to fully offset through increased sales into our core industrial clients. Turning to slide number six, you'll see our gross profit margin trending. Our gross profit margin was 48.7% this quarter compared to 50.3% in the second quarter of last year. This 160 basis point decline was primarily due to reduced sales volumes combined with product mix challenges in our workplace safety business, both of which were partially offset by our continual focus on driving efficiencies in our factories. On slide number seven, you'll find our SG&A expense trending. SG&A was once again down nicely to $82.2 million this quarter compared to $87.4 million in the second quarter of last year. And as a percent of sales, SG&A ticked down to 30.9% from 31.6% in the same period of last year. The majority of our SG&A decline was the result of the efficiency actions we've been driving over the last several years, combined with the reduction in discretionary spend. Our SG&A continues to trend downwards, but this does not mean that we are cutting back on investments, not at all. We are absolutely investing in sales and marketing resources where it makes sense to drive our top line while at the same time becoming more efficient in our non-customer facing areas. Moving to slide number eight, you'll find the trending of our investments in research and development. This quarter we invested 9.9 million in R&D. We continue to have opportunities to invest in new products and we're committed to increasing these investments while at the same time ensuring that we get the most out of every dollar spent. Our R&D spend was down slightly when compared to the second quarter of last year as a result of reduced headcount and the timing of project spend. But again, we remain committed to R&D as it is absolutely critical to our long-term success. Slide number nine illustrates our pre-tax income trends. Pre-tax income declined 7% from $42.4 million last year to $39.4 million in the second quarter of this year. This decline was driven by our reduced sales volumes, and our lower gross profit margins, partially offset by efficiency gains in our SG&A structure. Slide number 10 illustrates our after-tax income and EPS trends. As I mentioned, diluted EPS was 59 cents this quarter compared to 62 cents in last year's second quarter. On slide number 11, you'll find a summary of our cash generation, which continues to be extremely strong. We generated $36.1 million in cash flow from operating activities, and free cash flow was $30.9 million. When compared to last year's second quarter, this represents a 153% increase in cash flow from operating activities and a 247% increase in free cash flow. Cash flow from operating activities was equal to 117% of net income this quarter. Helping drive our strong cash generation was a sizable reduction in the amount of annual bonuses paid this quarter when compared to the same quarter of last year, and strong working capital management. However, even without the reduction in incentive-based compensation payments, cash generation would have still been up nicely compared to last year, which is a testament to our strong quality of earnings and our disciplined cash-based decision-making. Turning to slide number 12, you'll find the trending of our net cash position. On January 31st, we had $277.6 million of cash and no debt outstanding. This quarter, our cash balance increased $21.3 million, even after returning $12.3 million to our shareholders in the form of dividends and buybacks. Our approach to capital allocation is consistent and patient. First, we use our cash to fully fund organic sales and efficiency opportunities throughout the economic cycle. We're funding investments in new product development, sales generating resources, IT improvements, capability enhancing capital expenditures, and CapEx to further automate our facilities. We will absolutely keep funding these investments where it makes sense and where the investments are long-term ROI positive. And second, we focus on returning cash to our shareholders in the form of dividends. Fiscal 21 marks our 35th consecutive year of annual dividend increases. After funding organic investments and dividends, we then deploy our cash in a disciplined manner for either buybacks or acquisitions where we believe that we have strong synergistic opportunities. Let's move along to our outlook for the rest of fiscal 2021, which is articulated on slide number 13. Although vaccines are being rolled out around the globe and governments are certainly taking actions to prop up the economy, we neither expect an immediate economic recovery nor a nice, steady economic recovery. Quite the contrary. We do expect a recovery, but we expect it to be quite choppy as cities and countries around the globe move into and out of various states of lockdown. But again, as we establish our earnings guidance, we do anticipate the economy to continue to improve as we progress through the next six months. As Michael mentioned, we're controlling what we can control. We're staying disciplined on costs, and we're investing to drive sales growth. Given our current view of the macroeconomy, we expect to finish our fiscal year ending July 31, 2021, with diluted EPS in the range of $2.48 to $2.58 per share, which equates to a range of $1.25 to $1.35 per share in the second half of our fiscal year. This guidance range implies that we expect EPS to improve somewhere in the range of 58% to 71% in the second half of this fiscal year when compared to the second half of last year. This guidance is, of course, contingent upon continued macroeconomic improvements. We're confident that we've taken and will continue to take the right actions today to overcome any economic headwinds and enable us to deliver a strong second half to our fiscal year ending July 31, 2021. Regardless of what the economy throws at us, will continue to make the investments necessary to drive organic sales growth, will continue to search for acquisitions that advance our strategies, and will continue to drive sustainable efficiency gains while being tight on non-revenue generating expenses. Brady's strong balance sheet and strong cash generation, combined with our focus on growth, position us extremely well for the future. I'll now turn the call back over to Michael to cover our divisional results, and provide some closing comments before the Q&A session. Michael? Thank you, Aaron.

Slide number 14 outlines second quarter financial results for our identification solutions business. Overall, our ID Solutions business continued its steady improvement following the initial shock from the pandemic nearly 10 months ago. We continue to generate strong early earnings and cash flow while making the investments necessary to realize outsized growth once this pandemic subsides. IDS sales declined 5.4%, finishing at 194.2 million, with an organic sales decline of 6.9% and an increase of 1.5% from foreign currency translation. Overall, organic sales in our IDS division continue to improve each quarter, as this quarter's organic sales decline of 6.9% is a sequential improvement over the 8.4% decline experienced during the quarter ending October 31, 2020. And on the cost side, our strong focus on efficiencies led to a 30 basis point increase in segment profit as a percentage of sales when compared to the second quarter of last year. Regionally, organic sales in Asia were strong this quarter, with growth of just over 10% compared to the second quarter of last year. Overall, our sales volumes and order patterns in IDS somewhat followed for the patterns of the pandemic were the greatest on the economy as Asian countries appear to be coping better with the pandemic, whereas countries in Europe and the Americas continue to deal with relatively larger numbers of coronavirus cases, with many European countries and areas in the U.S. still in various states of lockdown. Demand in our healthcare business is improving, but it's not yet back to pre-pandemic levels. Elective surgeries and hospital admissions are still down significantly compared to normal pre-pandemic levels. Sales on our healthcare product line declined approximately 6% year-on-year this quarter, which is an improvement from the 8% decline we saw in the first quarter of this year. We continue to focus on driving efficiency activity and keeping our cost structure lean while never sacrificing sales-generating investments. We are investing in sales and marketing personnel, research and development activities, and selected geographic expansion. We believe that these investments are necessary to emerge from this pandemic stronger than our competitors. IDS segment profit was $39 million compared to $40.7 million in last year's second quarter. Segment profit is a percentage of sales increased from 19.8% of sales last year to 20.1% of sales this quarter. This increase illustrates how our team was able to quickly adjust our cost structure and keep the costs out. This continual improvement in profitability is a testament to the hard work of the entire ID Solutions team as they constantly work to become a more efficient and profitable organization. As a result, our decremental margin was only 15% as segment profit was down only $1.7 million, while sales were down $11.1 million. Our commitment to R&D remains a top priority, and we launched two high-performance materials in our IDS business. We launched a new commercial-grade wire marker called the B312 Permasleeve. This heat-shrink tubing can be run through a variety of Brady printers and has many applications in electrical, wire, and cable labeling. It's an extremely high-performance material that is resistant to chemicals, corrosion, humidity, and UV. We also launched labels intended for temporary applications called the B521 removable polypropylene labels. These labels are ideal for use during in-process manufacturing where solvent resistance and print performance are required. These labels are designed to adhere when required while not leaving behind any residue upon removal. They're intended for barcode applications such as electronic component marking and other general purpose applications that require good solvent resistance, heat resistance, and clean removability. These products demonstrate Brady's ability to engineer high-performance materials for a wide range of applications. Our R&D pipeline is strong, and we continue to launch innovative new products that help our customers solve problems and be more efficient and effective. I'm excited about what we're doing in our ID Solutions business. We're improving our customer service, investing in our future, and are streamlining the rest of our cost structure. As the economy improves and our growth initiatives pay off, we should realize strong revenue growth and generate strong profitability on every incremental dollar of sales. These positive revenue trends combined with our strong cost discipline definitely bode well for the future of our ID Solutions business. Moving to slide 15, you'll find a summary of our workplace safety financial performance. WPS sales grew 0.4%, which consisted of organic sales decline of 4.8% and foreign currency growth of 5.2%. The decline was driven by our North American business, which decreased in mid-teens this quarter. One of our businesses in North America sells primarily to microcompanies, and it continues to struggle, as do their customers. And they took another step back this quarter as the pace of small business shutdowns continues to at an elevated rate. We're working to deliver strong value to our current customers, and we're taking actions to reach new customers so that we can return this business to profitable growth. Despite new shutdowns in the U.K., France, Germany, and other countries in Western Europe, our European business was still able to grow in the lowest single digits this quarter. Our team has done an outstanding job of increasing its customer base, and for those customers who initially came to Brady for COVID-related products, our team has done a nice job providing these same customers our core safety and identification products as well. Overall, we're quite pleased with how these newly acquired customers are performing as we're supplying the essential products that many companies need during this critical time. Our Australian business declined in the low single digits this quarter as the pace of COVID-related product sales slowed. Over the last several quarters, we've substantially increased our Australian customer base, and we continue to find opportunities to enhance our digital marketing approach to ensure that we turn our new customers into long-term repeat customers. Our workplace safety team continues to focus on new product offerings, and this quarter we launched a variety of new custom signage and form markings to help in the administration of COVID-19 vaccines. These products include vaccine storage signage and other form markings and signs that are easy to customize on our seton.com or medco.com websites. We believe to continue to invest in and launch proprietary new products that we manufacture while many of our competitors hunker down to preserve cash will keep driving us ahead of our competition, will keep protecting our strong gross margin, and will keep improving our business over the long term. WPS segment profit was $3.5 million this quarter compared to $5.5 million in last year's second quarter. This decrease in segment profit was driven by the revenue decline in our North American business, along with product mix as some of our strongest gross margin businesses declined this quarter, while some of our low gross margin businesses grew this quarter. Our WPS team is listening to their customers to identify what they need. They're modifying their marketing campaigns to reach entirely new customers in entirely new industries, and they're working hard to address underperforming businesses within the portfolio. We've learned a lot through the pandemic, and we're going to continue to serve our new and existing customers extremely well to ensure we're set up for growth when we're through this challenging time. I'm proud of the role that Brady's playing in the fight against COVID-19. We're delivering products aimed at helping companies with social distancing. We're delivering products aimed at keeping people away from the areas where there's a high likelihood of virus spread. And we're providing many safety and identification products that are used by frontline workers all over the globe. The macro environment remains highly uncertain, and even with the vaccine rollouts that started in December, we certainly aren't willing to declare a victory over this virus quite yet. Brady is in an enviable financial position. Our cash flow is up, and our balance sheet is incredibly robust. We will continue to invest in R&D, sales-generating resources, and capacity-enhancing CapEx, all while being tight on non-revenue-generating expenses. and we're looking to further put our balance sheet to work by returning funds to our shareholders and adding technology-based growth inorganically through strategic acquisitions. Again, I'm very proud of how our team has performed throughout this challenging period. Their ability to deal with uncertainty, think on their feet, and solve problems quickly, all while never compromising the long term, has really set a solid foundation for Brady's future. With that, I'd like to now start the Q&A. Operator, would you please provide instructions to our listeners?

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. And please stand by while we compile the Q&A roster. Your first question comes from Allison Poliniak with Wells Fargo.

Good morning. Good morning, Allison. Could you talk a little bit? You know, you guys have been pretty consistent in terms of reinvesting in R&D sales efforts. And, you know, the macro is certainly masking maybe some of those benefits. Is there a way that you can help maybe quantify whether it's the returns you're getting on those investments now or what kind of traction in terms of share gains that you think you guys are getting? You know, any color around that?

Yeah, Allison, I can give you one thing that may help. I think when we started talking about reinvigorating our R&D pipeline, I spoke of timeline. Because we do sell into very industrial applications, we actually don't see most of our new products ramping to full revenue for four or even five years. So there is a long pipeline, and we are marching up that pipeline. But because we've actually first invested heavily, and you really didn't see any output for the first year or so of that, and then we started introducing and have been accelerating those product introductions, you're going to see a larger rise In the next couple of years out as a result of that, then you solve the period going on. And you're right. This pandemic has definitely impacted some of our product spaces. Some of our products were able to continue to sell very effectively virtually. Other products do require hands-on interaction. to sell as effectively. And so you are seeing some degradation of our ability to grow those products because of that situation. But specifically, you will see a larger ramp because of the fact that many of our products literally take four or five years to hit full revenue fruition.

Great. Thanks. And then just a question on IDS in terms of the margins. You guys have done, you know, obviously a great job on stemming those decrementals in this environment. How should we think of the incrementals coming out of this relative to what historically you've been able to do in that segment?

We think we'll be able to continue to do quite well. We think because of the proprietary nature of many of our new products, we should be able to increase that. In fact, over the last couple of years we've really pared back our non-proprietary products, which have lower margins. Also, that has led to some lower growth rates as a result of us paying those back during that time period. But in the end, we think that makes us a much stronger company, both from potential future growth percentages and also from our margins.

Got it. And if I can sneak one more in. You referenced some of your products related to the event side of things, and obviously a lot of that's still shut down. Do you know a way or can we quantify how much as a percent of revenue that could be just in this instance of hopeful reopening as we head towards the back half of this year?

You know, Allison, I will say I think it's pretty understandable that a lot of our businesses that are around events, are around people getting together, are around introducing new people into communities, to businesses, concerts. Many of us, not me particularly, I hate loud noise even though I talk loud, many of us love going to concerts and those venues. Those are definitely opportunities. still seeing extremely large declines. Many of our big events have pushed out now from the spring to the fall. And one would ask, you know, are they going to push out again or not? I will say this, Allison, we can't quantify the actual percent for you, but I can tell you that we believe fundamentally when they do come back, they're going to come back at a much more rapid rate. Very, very confident that the world has super pent-up demand. Let me just give you a couple of examples that I really believe in. Hotels and theme parks, the infrastructure, cruise lines, the infrastructure is there. The ships are there. The rides are there. The buildings are there. The limit will be redeploying and retraining personnel, but that is probably the least restrictive limit, and I think you're going to see some very, very rapid reintroduction of people to those situations. I do think that there are some large-scale events that may be a little riskier, that would take a little longer for people to deploy capital to. But overall, I think that area, we will see a very strong bounce back when it comes. And you'll see the impact on Brady.

Great. Thanks. I'll pass it along.

Thank you.

Thanks so much for your time, Allison. Your next question comes from Steve Farzad. Farazani with Sidoti.

Thank you very much. The one number that stood out to me that kind of surprised me a bit and was hoping to get a little bit more detail on, I know you said it was product mix, but the margin within workplace safety, were there any other additional costs we should be aware of, higher shipping costs, did you add the headcount, or was it purely product mix that tied to the lower margin?

Good morning, Steve. Glad to have you on the call. Good to have the questions. In regard to cost, there are certainly shipping challenges out there in the world. We're not going to deny that, you know, right now oil prices are up, for instance, so that does impact shipping. How they remain up may depend how my southern family fares through the oil refinery shutdowns and things like that. But overall, I would not say that that has been a significant impact on Brady. We are having to work around timing issues. We're having to work around L.A., for instance, port congestion issues. But overall, I don't want to say that. It has definitely been significant. a mix issue, as some of our strongest margin products are more industrial customer-based, small company-based, a lot of things like that, particularly those companies that have really suffered dramatically. I want to say this, though, Steve. We fundamentally see this as a case of a forest fire. And when you get done with that forest fire and all these poor small businesses, it looks black and dark. Right as it looks the darkest, suddenly you will see green popping up everywhere. That is what happens after a massive downturn in the economy to small businesses. We fundamentally believe there is going to be a lot of opportunity for people to start small businesses again, particularly in North America. where the appetite for entrepreneurialism is still very strong. And when that happens, we're going to really benefit from that regrowth. And what looked pitch black will suddenly look green. When that exactly happens, I cannot tell you because it will depend on a mass confidence level coming out of the pandemic. But it is definitely mixed.

Okay. Thank you. And then I just wanted to ask another really, really strong quarter for cashflow. As you start thinking about the second half of the year, any sense on a cap X and then work, how much you can manage working capital as you start going back into a revenue growth, just general thoughts on, on cashflow.

Yeah. So, so as we look at the back half of the year, typically for Brady, our third and fourth quarters are our strongest cash generating quarters. And we would expect that to continue this year. So if you go back in history to last year in our third and fourth quarter, unlike many companies, we actually intentionally built up inventories, which of course was a use of cash, and we did that to ensure that we had a steady supply of products and we didn't let any of our customers down. So we will obviously be lapsing that from the standpoint of a comparable perspective. Then as we look at CapEx, Over the longer term, we would expect our CapEx to continue to be in this, you know, call it 2% of sales range. However, we've talked about this a couple of quarters now. We are looking at purchasing slash constructing a couple of our strategic manufacturing facilities. However, every time that we build or purchase a manufacturing facility, rest assured it's always ROI positive versus our lease option, and it secures our future. So I don't know the timing on some of those potential facility actions, but that could potentially skew our CapEx in the near term. But, again, over the long term, we're looking at somewhere in the neighborhood of 2% of sales for CapEx.

In terms of the EPS guidance, I know you talked about the recovery being lumpy. Are you thinking about that guidance as being a ramp 3Q into 4Q? No.

We would expect our fourth quarter to be a bit stronger than our third quarter as we continue to come out of this pandemic, particularly if you're comparing against the prior year. Yeah. For us, our lowest point was Q4 of last year.

Okay. Great. Thanks so much, everyone.

Thank you, Steve. Appreciate your time. Your next question comes from Keith Hewson with North Coast Research. Good morning, guys. Good morning, Keith.

Can you just expand a little bit on your digital sales strategy? I don't think we've heard anything about that on this call. You know, obviously WPS continues to be challenged in terms of organic growth, but I know that's one of the areas that is really your focus in turning that around, especially in North America. How was your progress getting digital customers this quarter and how to compare with what you guys have been hoping to do?

You know, just as far as the strategy, I'll start with that and then hone in on the quarter. Just a few years ago, we really didn't have a digital sales presence that was significant, particularly with our IDS space. But across the board, our healthcare products, really everything you looked at was much very antiquated, even in our approach to websites. We now believe and have compared ourselves and look at industrials. We believe we're in the upper 10-plus percent of industrial companies and able to provide a great digital interaction for our customers. We think that has been, we know that has been crucial in gaining the great customer base we have. We continue to gain new customers from that, but also it's been great at helping us to sell add-on products, not just the initial products that customers have come in for, but for other products that we do a very good job of supplying our customers with. And then it's helped us to become a site that people want to come back to. So in the last quarter, we've continued to upgrade that. All of our Our WPS sites are now on common platforms. What does that mean? We're able to upgrade them much faster. We're able to customize them very, very effectively for each market, each location. The back end is able to be sustained. Our cybersecurity efforts are stronger and more robust. Across the board, we're a much, much stronger company in regards to our digital presence than we were even before. six or nine months ago before the pandemic started. But the good news is we were far ahead of most of our competition even when the pandemic started. So, yes, Keith, it continues to develop, and we still have a lot of great opportunities. Just got done having a review on that with the teams, and I feel very, very good that we understand it is not a destination. It is a continual progression. that we have to be looking for. And I also think that many of our competitors still aren't even seeing it that way. And so not only do we believe we're ahead of a lot of people, we believe that our mentality will be critical for us to staying ahead of a lot of people. and the fact that we're willing and able to invest properly. Remember, the fact that we have so many groups and organizations that we can combine under one umbrella allows us to be more cost-effective as well than many people can.

So do you think you're at a point now where you're seeing good year-over-year digital sales growth, and is that now at a point where it's equal to or more than what you're getting from catalog sales?

Yes. I mean, yes, we do believe we will see continued strong growth. Now, let us talk about the catalog sales versus the digital growth. We also believe it's a combination strategy that is critical now and probably for the foreseeable future. So we see a large amount of contact through our website, yet the majority of purchases are still offline. So why is that? Has to do with purchasing systems, has to do with controls by companies, but having that ability to combine proactive sales personal sales with a strong digital presence with an offline easy connectivity. You know, for instance, electronic sales, we don't consider digital sales. Some of the companies you'll see out there include electronic sales as digital sales. They've been out there for 30 years. We disconnect that because it's important for us to get a really healthy understanding of how strong our actual digital sales are. That said, we do see very much where they enter, how they make decisions, and the fact that they are buying offline afterwards does reiterate for us that it's not a one-time thing. that's necessary. It is a multi-legged stool that's critical. And so to repeat, we have direct sales efforts, we have direct sales follow-up, we have strong digital presence, we have electronic data transferring for orders, and we have a strong offline ability to work with customers that have systems that either aren't able to or don't want to purchase digitally.

I appreciate that. Thanks. If I can just follow up and change gears on you here to M&A. M&A has been more of a focus for you guys for several years now, and I'm sure I've had a chance to look at many deals over that time period. Have you been able to refine your strategy in terms of perhaps where you're looking to do a deal vertically as well as geographically and perhaps as a size? Just give us a little bit of color about how your strategy has developed over the past two or three years.

You know, Keith, you've worked with us long enough to know that we're deliberate. We're often working on an area below the waterline for a period of time before it ever shows up. And when it does show up, you see the change rapidly. We have been working below the waterline, I think, as you're aware, on really making sure that when we get back into the market – and we are there – to be quite clear, that we're doing it in a way that is thoughtful and that is reflective on our overall strategy and fits into our overall strategy. We're not looking to grow through acquisitions. We're looking to use acquisitions as part of our strategy, and our strategy is for significant profitable growth. But, yes, we've defined key industries key technologies that are very important to us. We have companies that we really are excited about and have relationships with, and that although you can never guarantee a particular success or particular timing, we're confident that we're positioned to do a good job of acquiring and having that make a significant long-term difference to Brady.

Great, guys. Appreciate it. Thank you.

Thank you. Your next question comes from George Staphos with Bank of America.

Hi, everyone. This is actually Cash McKeeler on behalf of George Staphos.

How are you today?

Good to hear from you. Great. How are you? Just wondering, why are you comfortable in the mid-single-digit organic sales growth in the second half considering some tougher comps in WPS? And relatedly, what kind of growth is required in IDS to generate the aggregate performance in the second half of the company?

Yeah, we get confidence as we, of course, run our own internal forecasts. That's effectively where we shake out. We would expect it to ramp as we go throughout the year. And much of it comes down to some pretty, I'll say some pretty challenging times that we had basically starting in April of last year as a result of the pandemic. So just looking at the results, particularly in ID Solutions, where we saw some pretty significant declines last year. So just to put this in perspective, last year in our fourth quarter, ID Solutions had an organic sales decline of 21.7%, which, of course, is quite substantial. And as we model out continued modest and, frankly, choppy improvement in the economy, we come out with some relatively strong organic sales growth in the back half of this year. Now, you're right. In WPS, we have some pretty challenging comparables, particularly in our fourth quarter where we gained many, many new customers through the sale of COVID products. WPS will most likely be down in the fourth quarter, but we'll make up for it in our ID Solutions business.

Got it. That's helpful. And then I guess, are you able to discuss at all whether inflation creates any sort of headwind or tailwind for the company and kind of what you're seeing beyond any freight or logistics that you commented on earlier?

You know, as I said, the good news about us is we are not as commodity-driven as a lot of companies. And so, as I mentioned, we do have a couple of businesses that are influenced by oil as a great example, but precious metals aren't a major driver for us, anything like that. Transportation, clearly we're a large user of transportation, and so is a secondary factor oil with transportation fuel costs. And also just the amazing uptick in people shipping everything to themselves versus to stores has really created a challenge for everyone. But overall, we think between our efficiencies that we can drive in operations and in our logistics patterns, you know, we're working very hard doing a lot that will come out in the second half of this fiscal year in logistics internally that we should be able to overcome anything that hits us. But one of the keys is for us, a lot of those inflationary factors are secondary and not primary drivers of our costs.

Okay, got it. And then just one quick final one. You commented that you're able to reduce some discretionary spending, but just wondering how much of that starts to snap back or come back as you see some more normalized conditions and kind of the timing with growth set?

You know, obviously there are some things like, you know, incentive compensation that will have some pressure. But overall, we've shown a long track record now of approximately five years, quarter after quarter, of driving costs out of our organization. We've done that at the same time that we've increased sales and increased R&D. So I want to be quite clear. We've done both halves of that effort. We've been increasing anything that long-term will increase revenue while decreasing the optional cost. So I think the answer to that is, Our confidence comes from our track record and from knowing that we don't drive out costs through risks or things like that, you know, that are temporary or across-the-board cost reduction requirements. We drive them out by digging down to the fundamentals of our organization and saying, how can we change what we're doing to make it more efficient and effective? And that is what we've been doing throughout this year. pandemic. I want to be clear. You can look at how we handled the downturn. We did not panic. And as a result, a lot of the costs that we continued to drive out were not panic or knee-jerk responses. How can I show that to you? When most people were shutting down all inventory, we realized our most critical thing to do as logistics were becoming extremely questionable was to front load our key critical elements, our A-level inventory as an example, in all of our locations right by our customers. As a result, we did not create a disruption to our customers. Very key for their long-term respect for us, but also it shows that the things we do are designed around making sure that we don't ever cut costs for the short term that will hurt us in the long term. So to be clear on my answer back, I believe none of our cost reductions were temporary in nature. Thank you.

I'm showing no further questions at this time. I would like to turn the call back to Mr. Michael Naumann.

Thank you very much, Cindy. I'd like to leave you with a few concluding comments this morning. We are living in unprecedented times, and we're dealing with uncertainty, disruption, and unfortunately oftentimes tragedy. We'll keep prioritizing the safety of our amazing employees and delivering the products that help keep our customers safe. This quarter, our IT solutions business continued to improve its performance and once again increased segment profit as a percentage of sales. Our workplace safety business continued to enhance its digital presence and serve its customers extremely well, further strengthening our already strong foundation for future growth. And we had another quarter of incredibly strong cash generation, up 153%. We're in net cash position, which gives us tremendous flexibility to add incremental shareholder value. We're doing all that we can to help our employees, customers, communities, and the world through this pandemic. At the same time, we're maintaining our focus on the long term and are making the right investments today that will set us up for long-term success. Making the world a safer and better place every day is not a slogan for Brady. It's our focus and our reality. And making the world an equitable place for our employees, for our communities, and for all the people is critical for our long-term success. We're prioritizing investments in growth, and we're confident that Brady is well-positioned to capitalize on global market trends. As we put calendar 2020 in the rearview mirror and focus on calendar 2021, Brady is well positioned for a strong year where we generate significant value for both our customers and our shareholders. Please stay safe. Thank you for this time this morning. Have a great day. Operator, you may disconnect the call.

ladies and gentlemen this does conclude today's conference call thank you so much for participating you may now disconnect