Brady Corporation

Good day and thank you for standing by. Welcome to the second quarter 2022 Brady Corporation earnings conference call. At this time, all participants 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'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ann Thornton, Chief Accounting Officer. Please go ahead.

Thank you. Good morning and welcome to the Brady Corporation Fiscal 2022 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 2021 form 10-K, which was filed with the SEC in September. 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, Anne. Good morning, and thank you all for joining us today. This morning, we released our fiscal 2022 second quarter financial results, which showed very strong sales growth and improved EPS. We have been successfully navigating challenging supply chain issues and and a highly inflationary environment in order to manufacture and deliver the products that our customers need and have come to expect from Brady. I'm proud of how the team has been able to work through this difficult environment and deliver for both our customers and our shareholders. This quarter, we grew sales by a very robust 19.6%, and we increased gap earnings per share by 10.2%. If you exclude the impact of amortization, then our EPS was up even more significantly at 14.8%. Along with this strong revenue growth and improving EPS, we have an extremely solid balance sheet. Even after returning $45 million to our shareholders in the form of dividends and buybacks in the first two quarters of this year and intentionally building up our inventories, we are still in a net cash position of more than $64 million as of January 31st. This quarter, we also returned our WPS business to organic sales growth earlier than originally anticipated. Even with tough comparables due to strong COVID-related product sales in the prior year, organic sales growth increased by 5.2% in our WPS business this quarter. In our identification solutions business, we continue to post excellent results with organic sales growth of 16% and a total sales growth of 26%. Over the last several years, we've built a strong foundation for success, and this foundation is propelling Brady's performance. First, We worked on removing structural inefficiencies, improving execution, simplifying our business, and rejuvenating leadership, accountability, and focus. You can clearly see the benefits of this effort as we've reduced SG&A expense from over 36% of sales just a half dozen years ago to 29.1% this quarter. Second, we reinvigorated innovation through significant investments in R&D, marketing, automation, and our websites. We increased Brady's relevance to our customers by providing complete solution sets that solve their unique challenges, and we've made critical investments in our facilities, in factory automation, in engineering talent, and in our sales force that will pay future dividends. Third, we've used our strong balance sheet to expand into faster-growing end markets through the acquisition of Code, NordicID, and MagiCard. These actions are transforming Brady from a product company with solid profitability but modest organic growth into a solution provider that is growing in excess of GDP and is poised for excellent future sales growth due to the strong foundation and positive momentum resulting from the many investments made over the past five-plus years. We're proud of what we've accomplished at Brady, but we're far from done. As we look ahead... Our priorities are to first and foremost drive organic sales growth and insurance for serving our customers extremely well during this ongoing public health crisis and period of challenging supply chains. Second is to take the necessary pricing and cost actions to mitigate the impacts of this inflationary environment and return to pre-pandemic gross margin levels while continuing to invest in our future. Third is to integrate our recent acquisitions in order to accelerate our systems approach, which is leading to higher revenue and profit growth. And finally, to deploy our capital effectively in order to drive long-term shareholder value. In our ID Solutions business, we're embracing these priorities by increasing our investments in R&D, including the incremental R&D necessary to integrate our recent acquisitions. We're also improving our online presence by upgrading our websites and investing in digital marketing talent, all while expanding our sales force and expanding geographically into underserved markets. In WPS, we're focused on providing more internally produced custom solutions and working with more automated interactions with our customers to provide quicker and more reliable responses that they desire and value. and we're continuing to drive significant automation within our factories and distribution centers, which is absolutely critical in a period marked by scarcity of labor and rising costs. A strong new product lineup, investments to drive sales that are positive momentum and automation efficiencies gives us confidence that we will continue to generate strong organic sales growth with very healthy margins over the rest of this fiscal year end for years to come. We're also integrating the three acquisitions that we completed in the fourth quarter of last year, which includes building out our industrial track and trace solution set. Much of the increased R&D that you see relates to the investments necessary to build out a comprehensive solution that will help us move into faster going in markets and accelerate sales growth for years to come. However, we are seeing significant inflationary pressure across many different cost categories, from wages to utilities to shipping costs and raw materials. And we've had challenges cost-effectively securing certain products where our supply chain originates in Asia. In general, we've been overcoming these shortages, but it has resulted in increased material costs and the use of much more expensive air freight. Even with these inflationary pressures, our gross margins are still an enviable 47% this quarter. We are putting through additional price increases across many of our product lines to try to catch up to these increased costs. That said, we believe that this inflationary environment will be with us for a while and that our gross margin challenges will remain until continued price increases will be able to catch up with input cost increases. We are confident that we provide our customers with significant value. As a result, we expect gross profit margins to improve over time back to historic levels. Even in this challenging logistical and inflation-driven environment, Brady is well positioned for success as we look to the rest of this fiscal year and beyond. 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 bit more detail on our financial results, then I'll return to provide specific commentary about our identification solutions and workplace safety businesses.