Brady Corporation

Good day and thank you for standing by. Welcome to the Q2 2023 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 that session, you'll need to press star 1 1 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Ms. Anne Thornton, Chief Accounting Officer. Ms. Thornton, please go ahead.

Thank you. Good morning and welcome to the Brady Corporation Fiscal 2023 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 2022 form 10 K, which was filed with the SEC in September of 2022. 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, Russell Schaller.

Russell? Thank you, Anne, and thank you for all for joining us today. This morning, we released our fiscal 2023 second quarter financial results. which represented another solid quarter of results across our businesses. This quarter marks our eighth consecutive quarter with at least 6% organic sales growth. This streak is a testament to the hard work of the entire Brady team, who are focused on providing the best possible customer experience while delivering highly innovative proprietary products that our competition just cannot provide. And so, Foreign currency continues to be a headwind. We still grew earnings per share by 16.9% this quarter. We want to get improved profitability while investing in R and D, expanding our Salesforce and improving our digital capabilities, which should keep us on this upward trajectory. I'm proud of how the entire Brady team worked through this challenging macro environment, all while delivering for both our customers and our shareholders. Brady's global footprint and sales into many end industrial markets give us a unique view of the macro environment. For instance, hiring is improving in most geographies but still remains somewhat challenging in areas such as research and development and IT where these skill sets seem to always be in demand. In general, we're seeing more qualified candidates and we're filling open positions quicker than we had in the past, but we remain in a tight labor market. International shipping rates have returned to pre-pandemic levels, and our supply chain is improving. However, there are still certain products that are a challenge to source in a cost-effective manner, specifically for our printers and scanners. We're getting the critical parts that we need to meet customer demands, but some chip and circuit board prices are still quite elevated. As it relates to inflation, The rate of cost increases seems to have slowed in certain geographies, including the U.S., but we are still experiencing inflation, and we expect it to continue for a period of time. As it relates to Europe, thankfully, the energy crisis doesn't seem to be as bad as many predicted, but we're still experiencing increased costs and increased wage rates in most of Europe. which is forcing companies such as Brady to increase prices to offset these inflationary forces. While there are a number of economic uncertainties and a lot of talk of a pending recession, we continue to experience solid demand environment for Brady's products as demonstrated by another quarter of strong growth. At this point, our cash generation, balance sheet, and access to capital give us flexibility to keep investing in our organic businesses throughout any foreseeable economic environment. Brady's priorities remain to first and foremost, continue our evolution into a faster growing company. As I mentioned, we've now logged eight consecutive quarters of organic sales growth north of 6%, and we're well on our way. Second is to improve our capabilities to enable our customers automation initiatives. This is an area where we expect tailwinds for years to come. Third is to take the necessary actions to offset the impacts of this inflationary environment, all while meeting customer demands and providing the best possible service. This includes pricing actions as well as evaluating our supply chain suppliers. Fourth is to reinforce Brady's culture of operating sustainably and with a long-term view which encompasses our approach to ESG and ensuring that we are supporting all of our stakeholders. from our customers to our employees to our communities and, of course, our shareholders. And finally, we're focused on deploying our capital in order to drive long-term shareholder value, be it organic investments, acquisitions, or returning funds to our shareholders. We are in a position of strength. Our industrial printer line is world-class, and I'm especially proud of our M211 portable printer launch, which has been greeted with an overwhelmingly positive customer response. We are leaders in many of our niches and we have a pipeline of highly innovative products on the way. We'll continue to make investments in our future. We have a rock solid balance sheet and we have a fantastic team at Brady that is delivering for all our customers every single day. I'll now turn the call over to Erin to provide more details on our financial results. Then I'll return to provide specific commentary on our identification solutions and workplace safety businesses as well as our geographic performance. Aaron?

Thank you, Russell, and good morning, everyone. This quarter, we once again grew organic sales in each of our two divisions. We increased our gross profit margins, we reduced the SG&A expense as a percent of sales, and we grew our bottom line nicely. Each of our two divisions performed very well. IDS grew segment profit by 7.4%, while WPS grew segment profit by 38.4%. Putting it all together, we reported second quarter GAAP EPS of 76 cents compared to 65 cents in the second quarter of last year, an increase of 16.9%. And non-GAAP EPS, which is calculated as our GAAP EPS less the after-tax impact of amortization expense, was 81 cents this quarter compared to 70 cents in the second quarter of last year. So the key financial takeaways are another quarter of healthy organic sales growth, nicely improved EPS, organic sales and segment profit growth in each of our two divisions, and significantly improved operating cash flow and free cash flow, all of which helped us overcome the year-over-year appreciation of the U.S. dollar and deliver another very respectable quarter. Let's move to our sales trends on slide number four. Organic sales grew 6.3% this quarter, but with the stronger U.S. dollar, foreign currency translation reduced sales by 3.7%, thus bringing total sales growth to 2.6%. The impact of foreign currency reduced IDS sales by 3% and reduced WPS sales by 6.2%. The reason for the outsized foreign currency impact on WPS is because approximately half of WPS sales are in Western Europe and another 20% of WPS sales are in Australia. Even with this significant foreign currency challenge, our WPS business still performed extremely well this quarter. On slide number five, you can see our gross profit margin trending. Our gross profit margin increased 100 basis points to 48% compared to 47% in the second quarter of last year. We were able to offset the majority of our input cost increases through efficiency gains and pricing actions. And as Russell mentioned, inflation is not gone, and we're still experiencing some lags between input cost increases and price increases. Because of this, we expect to continue to see a bit of choppiness in our gross profit margins over the next several quarters. On slide number six, you'll find our SG&A expense trending. SG&A was 92.3 million this quarter, compared to 92.5 million in the second quarter of last year. As a percent of sales, SG&A was 28.3% compared to 29.1% in the second quarter of last year. And if you exclude amortization expense, then SG&A would have declined from 27.9% of sales in Q2 of last year to 27.3% of sales this quarter. In addition to our continual focus on becoming a more efficient organization, SG&A expense also benefited from reduced equity-based compensation and foreign currency translation. Slide number seven is the trending of our investments in research and development. This quarter we invested $15.4 million in R&D, which equates to about 4.7% of sales. We remain committed to new product development as we have opportunities across our businesses, including the development of our newest lines of printers. On slide number eight, you can see that pre-tax earnings increased 15.4% on a GAAP basis. If you exclude amortization expense from both the current year and the prior year, then our non-GAAP pre-tax earnings would have increased 13.1%, increasing from 45.8 million in Q2 of last year to 51.8 million this quarter. Slide number nine illustrates the trending of earnings and EPS on an after-tax basis. When you look at these charts, you can see the general trend of up and to the right. Fiscal 21 was a record EPS year at 247. We then followed this up with another record year in fiscal 22 of $2.90. And so far this year, EPS is up another 17.4%. On slide number 10, you'll find a summary of our cash generation. Operating cash flow increased substantially this quarter. jumping from a cash outflow of $3.2 million last year to a cash inflow of over $29.4 million this quarter, a year-over-year increase of $32.6 million. Timing of our annual incentive-based compensation payments factored heavily into this significant year-over-year improvement. Last year we paid our annual bonuses in the second quarter, whereas this year they were paid in the first quarter. If you look at the first six months of this year, the timing of incentive-based comp payments had no year-over-year comparability impact. Year-to-date, operating cash flow was up a full 135% to $57.4 million, and we expect cash flow to further strengthen in the second half of the year. Now, if you'll turn to slide number 11, you can see the impact that Brady's historically strong cash generation has had on our balance sheet. We are currently in a net cash position of $30.9 million. Our approach to capital allocation is to first and foremost use our cash to fully fund organic sales and efficiency opportunities. This includes investing in new product development, sales generating resources, capability enhancing capital expenditures, and automation-focused CapEx. Despite the economic uncertainty, we will continue to deploy capital to drive productivity and sales growth, especially in our businesses where we expect enhanced growth from secular tailwinds. And second, we focus on consistently increasing our dividends. We've increased our dividend every single year since going public. After fully funding organic investments and dividends, we then deploy our cash in a disciplined manner for either acquisitions where we have clear synergistic opportunities or for buybacks in an opportunistic manner when we see a disconnect between intrinsic value and Brady's trading price. Our enviable balance sheet positions us well to execute additional value-enhancing activities, including investing in R&D and other organic sales generating activities, completing acquisitions if the price is right and the synergies are clear, and returning funds to our shareholders. As we look to the future, we're confident that our strong balance sheet and our positive momentum set us up for further success. This brings us to our updated fiscal 23 guidance, which is articulated on slide number 12 of the deck. We're raising the low end of our previously established full year fiscal 2023 EPS guidance range of 330 to 360 per share to our new range of 340 to 360 per share on a non-GAAP basis. And we're increasing our GAAP guidance range from the previously established range of 313 to 343 per share to our new range of 323 to 343 per share. Our outlook is based on exchange rates as of January 31st and continued economic expansion. Although we're certainly concerned about the stability of the global economy, we're still experiencing nice organic sales growth in most geographies outside of China. As such, we expect full-year organic sales growth to be in the mid single digit percentages for the year ending July 31, 2023. Other elements of our guidance include an income tax rate of approximately 21%, depreciation and amortization expense of approximately $32 to $34 million, and capital expenditures of approximately $22 million. We've reduced our CapEx guidance as a result of delays in the start of certain facility projects. We had originally anticipated starting these projects earlier in fiscal 23 and will now be starting these projects towards the end of this fiscal year. As for capital allocation, we don't foresee any major changes in our strategy. We'll keep investing in our organic business. We just announced another quarterly dividend and will be opportunistic with buybacks while looking for acquisitions where the price is right and the strategic fit is clear. We have a strong balance sheet and we'll use it as a tool to drive long-term shareholder value. Potential risks to this guidance, among others, include further strengthening of the U.S. dollar, inflationary pressures that we can't offset in a timely enough manner through price increases, or an overall slowdown in economic activity. I'll now turn the call back to Russell to cover our divisional results and to provide some closing thoughts before Q&A. Russell?

Thank you, Aaron. Slide 13 outlines the second quarter results for our identification solutions business. IDS sales were 255.7 million this quarter, and organic sales growth was 7.4%. In IDS, we continue to invest in innovation in R&D. The vast majority of our global R&D spend is in the IDS division, where our goals are to continue the steady stream of new product launches with a particular focus on providing complete solutions that combine products, software, and services to help our customers improve safety and get their jobs done in a more cost-effective manner. We believe that we have a secular tailwind for years to come as companies continue to push for efficiency gains and increased employee productivity, thus increasing demand for Brady's productivity solutions. Segment profit as the percent of sales improved to 18.5% this quarter compared to 18% last year. Regionally, organic sales declined in the high single digits in Asia, which was primarily due to periodic disruptions in China, driven by the spread of COVID, along with the timing of Chinese New Year. Outside of China, the rest of Asia business grew in the low single digits this quarter. In Europe, organic sales were up in the mid single digits this quarter. Our European team once again did a great job of driving sales growth and is working hard to manage their cost structure as we progress through our realignment to a regional reporting structure. And in the Americas, we grew organic sales by approximately 11% this quarter. Our expanded new product lineup, investment to drive sales, and our expansion into underserved markets gives us confidence that we'll continue to generate organic sales growth for years to come in our IDS business. Moving to slide 14, you'll find a summary of our workplace safety financial performance. WPS sales declined 3.4% this quarter, entirely due to year-over-year appreciation of the U.S. dollar. If you strip out foreign currency, our WPS business had organic sales growth of 2.8%. This marks our fifth consecutive quarter of organic sales growth, and it's a continuation of the major profitability improvements we've been generating over the last year. Segment profit increased from 4.5 million in the second quarter of last year to 6.2 million this quarter. This is a 38% plus increase in profitability, even with the major foreign currency headwinds. Looking at our WPS business geographically, we saw continued organic growth in Europe and Australia, whereas our business in the US contracted. We've been focusing on a three-pronged approach to ensure that our WPS business is sustainably improving. First, we're ensuring our products are relevant with a focus on identifying SKUs that provide the most value to our customers. Second, we're enhancing the value of WPS by helping our customers choose the right product and pricing our products appropriately. Third, we're driving efficiencies and reducing overhead costs, including personnel and catalog distribution costs, all while increasing spend on our websites and on our online advertising to accelerate our shift away from catalogs. With our heightened level of focus, The foundation of our WPS business is improving with a number of key brands and several businesses that have been performing quite well. And our internally produced custom solutions, along with consultative selling, provide more value to our customers than simply buy and resell items. Looking ahead, we'll continue to drive profit improvements and we'll continue to look critically at our products and our business portfolio. Although WPS comparables will become more challenging now that we've fully lapsed the period of weak WPS performance, the team is focused on ensuring our improved business results are sustainable. In the slide deck, we've also included what our new geographic segments will look like, and we provide a more granular view of our quarterly results in a separate press release this morning. We've been in the process of transitioning to a new regional structure since we announced this intention on December 1st. Our change to a geographically aligned organization is all about creating a structure that sets us up for future sales growth by aligning our organization to our customers. We have always believed being close to our customers and listening to their needs is a key strategic pillar of Brady. additionally this new structure will help us accelerate our growth by taking advantage of the synergies that exist between our current divisions by utilizing our best go-to-market strategies in each of our key geographies and by using our increased geographic scale to accelerate new product development while delivering tailored solutions that meet the unique needs of the region and although cost reduction was not the primary motivator for this reorganization, we do expect to realize an improvement of 10 to 20 cents in earnings per share beginning in the fiscal year of 2024. This quarter, we incurred certain one-time charges for employee severance, mostly in Europe. But again, for the full year, we expect that any one-off severance charges will effectively be offset by reduced personnel costs. Many of our investors have become accustomed to our IDS solutions business and our workplace safety business segments. We believe in being as transparent as possible, so in our future earnings releases, as we talk about how our geographic regions performed, we will also explain how the underlying businesses in IDS and WPS perform within their geographic segments. Eventually, ID solutions and workplace safety will lose their specific identities as we combine teams and realize synergies between these divisions. However, this will take a bit of time, so we intend to provide as much visibility as we can to the underlying IDS and WPS businesses for at least the next several quarters. If you look at our geographic performance this quarter, we performed very well in the Americas and Asia, despite the challenges experienced in China. At the same time, our Europe and Australia segment showed strong organic sales growth of 5.2% this quarter, but this was offset by a substantial year-over-year strengthening of the US dollar versus the Aussie dollar and the other major European currencies. Foreign currency reduced sales by 8.9% for the Europe and Australia segment. In total, we performed very well this quarter. We've now reported at least 6% organic sales growth in each of the last eight quarters. We're coming off of two consecutive record earnings per share yield years, and we appear to be on our way to a third consecutive year of record EPS, as we've increased EPS by 17.4% in the first half of the fiscal year. We have positive momentum, which continues to build across the entire organization. Given our ability to generate healthy cash flow, even during challenging economic times, we have the ability to continue to invest in research and development, geographic expansion, and to improve our capabilities while serving our customers as they work through their automation journeys. With these initiatives, we expect to have a tailwind for years to come as companies work to shorten their supply chains, increase automation, and drive efficiencies. With that, I'd like to start the Q&A. Operator, would you please provide instructions to our listeners?

Thank you. As a reminder, to ask a question, please press star 1 1 on your phone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Stand by as we compile the Q&A roster. And one moment, please, for our first question. Our first question will come from George Staffos of Bank of America Securities, Inc. Your line is open.

Yeah, hi, thank you. This is actually Cashin Keeler on behalf of George this morning. So I guess first, what ultimately gave you the confidence to raise the low end of guidance here? Can you just help us understand what the main drivers are, particularly as it looks like you lowered your organic growth assumption for the year relative to the guidance you gave last quarter?

Yeah, you know, this is Russell Schaller. We feel pretty confident as we look at our source of supply and some of the previous headwinds in terms of shipping costs and raw material costs. We had taken, at least in the beginning of the year, a relatively, if not pessimistic, at least conservative view that some of these factors would take more time to unwind And we're really seeing much more of a get back to normal in terms of shipping, transportation, inventory availability, you know, which is also helping us at least, if not bring down inventory, keep it flat at the current levels.

Okay. Got it. And then I guess as we look at, obviously, you're realigning the segments here. So if we think about this mid-single-digit organic growth assumption and I guess, how would that split or break down, you know, given your new business units?

I think it'll be similar in the two different business units. You know, they both have their pros and cons. You know, historically, European GDP has been slightly less than U.S. GDP. On the same time, the European... business has had a pretty good ability to increase their market share and expand their penetration that has been slightly better than the Americas. So if we look at the regions on a go-forward basis, I think it's a pretty fair horse race between the two in terms of their expected growth. Now, the only real difference between Europe and America right now is the potential impact of energy costs. You know, we're cautiously optimistic, and certainly energy costs in no way reach the levels, and this is in Europe, in no way reach the levels that some of the more dire predictions were in the beginning of the year. So as long as energy holds up and there isn't, you know, additional factors that hit Europe, I think they will be similar in terms of performance in their currencies. And again, I'm not going to predict dollar to euro or dollar to pound. So when I'm saying the growth rates are similar, that would be in their constant currencies.

Okay, got it. And then last one, if I may, there's been a lot of discussion around nearshoring and reassuring trends recently. So Can you just discuss what you're seeing from your vantage point on this and what this could potentially mean for Brady if there is, in fact, elevated levels of industrial and manufacturing activity that are coming back domestically? Thanks.

Yeah, it will absolutely be a net positive for Brady. Although we have manufacturing in dozens of countries and we, as much as possible, try to locate our manufacturing close to our customer in the country, or region they're in. Nonetheless, you know, industrial expansion and industrial investment in general is a big positive for Brady. We get it in two particular ways. Typically when facilities are commissioned, we're part of the process of that in terms of workplace safety, signage, helping construction workers, what have you. So whenever we see industrial construction, we see that as a positive. And then on an ongoing basis, all things being equal, we definitely do better in the US and in Europe. And so whenever we hear about manufacturing, continued manufacturing in those two regions, we see it as a net positive. Now, with that said, it's a long road to go between what's happened and industrialization in the US and in Europe. you know, which has really been stagnant or gone down over two decades to see that tide really substantially turn. So I do see it as a net positive, the timing of which I think will be, you know, really we're looking at if it's sustained probably the next five to ten years. It's not going to be a one-year kind of bump.

Thank you, and good luck in the quarter. Thank you.

Thank you. And one moment, please, for our next question. Our next question will come from Steve . Your line is open.

Morning, Russell, Aaron. Thanks for all the color on the call. I do want to dig into the growth and margins in WPS. You know, it's a business that hadn't been growing for years, and it sounded like when you had taken over, Russell, that it was a shrink to grow type strategy, which still sounds like what you're outlining in terms of sort of removing the resale products and the lower margin products. And we see it in the margin, yet you're generating growth With 3% growth this quarter, and you've seen it for a few quarters, I'm confused. So can you help me figure out? I'm good confused, but I'm just trying to figure that out because it doesn't seem... The shrink to grow strategy would imply shrink, or maybe I misinterpreted the plan.

So, yeah, we are absolutely shrinking to grow, but we've been fortunate in some of the niches that we have in the WPS, and these are the ones... where we manufacture our own products, because not all of WPS is buy and resell. Anyway, the point of that is those niches that are our own manufacturing or our consultative selling, where we're providing the value of how they would outfit a particular facility or how they would do traffic management, which are both strong businesses in Europe, those have been growing much better than we expected. So while it is 100% accurate that we are shrinking parts of the business that is the undifferentiated buy and resell, we've been fortunate in I think the just general strength of the other parts of the business has made it look definitely stronger than we had expected.

And it sounds like from guidance, you expect this to at least continue through this fiscal year.

Yeah, I think, you know, and as I've spent the last year working on it and, you know, working with the teams here at Brady, we found definitely some more pockets of strength than we had originally anticipated. You know, and I want to say it's kind of like decluttering your house. It turned out to be a better house than we expected, but definitely had some clutter and And we went through our strategy session this week where we talked about, you know, which businesses had some legs behind them, which had some strong cash flow. And, you know, again, don't get me wrong, there are definitely some areas that we are looking to, you know, to take down as a smaller percentage of the business, but at the same time, very optimistic about a few of the sectors and segments. And, you know, so I'll give a very specific example. In Europe, we have a Securamed business which sells medical kits to small and medium-sized companies. And, you know, while that might sound like an undifferentiated business, in France, due to French law, there's a very specific requirement about the types of things you do and don't have to have in your facility. And so our team is able to create value by essentially working with these manufacturers to ensure that they have the right things to be compliant with French law. It doesn't unfortunately translate to a lot of other countries, but it's a super powerful niche in the country that we're operating in. And the only reason I bring this up is we have a few other pockets as well. That, um, you know, might on the surface seem like a simple buy and resell, but because of how we positioned our salespeople and kind of the knowledge base that we're using to help with those products, um, they've been remarkably, uh, strong and continue to grow. So, um, that will be, and I'm going to say what's formally called WPS. That will be the story in the future. which is, you know, are we relevant to the customers? Can we create a differentiated advantage either through products or services? Because I'm equally happy if the reason that we're relevant is because we're the knowledge expert or the service expert in that particular segment. What is definitely going away is the simple buy and resell where we're not adding value at any step in the stream.

Great. That's helpful. The ID solutions, sort of the reopening economy story has played out. You're still getting 7% organic growth. I'm trying to get a sense of if you can provide any increased detail in terms of sector performance, your key markets, as well as how much new products are contributing to that 7% organic growth.

Yeah. So, you know, it's interesting. We have seen and continue to see more variability in order patterns. I think, you know, all the industrial companies as well as the distributors are still trying to figure out what the right inventory levels are because, you know, nobody wants to get stuck with things that will take a long time to sell. At the same time, people don't want to stock out either. You know, pre-pandemic, we could draw a ruler across a lot of our order intake. It was that predictable. We're definitely seeing more swings. And the reason I bring this up in particular is, you know, I feel very good about the growth that we've had, and we foresee that in the coming quarters as well. But there's a lot more lumpiness to it than what we have seen in the past. And, you know, we're both optimistic but we tend to temper our optimism because we're seeing some of this lumpiness. So I think that was part of the reason why we felt very comfortable in upping our lower end earnings guidance. I think from the position we are sitting right now, we can see a pretty clear line of sight to that happening, assuming there's some not major economic shock to the system. At the same time, revenue I think will be interesting i think would be the best description i mean we could we could just as easily you know pick up another few points um based on how our distributors and how our uh how their customers look at carrying inventory gotcha okay and then if i get one more in just any updates on the industrial track and trace efforts yeah you know that is And we've said from the beginning that is a very long journey. We feel super positive with what we're doing in the technology. We don't see any impediments to where we're headed. I think we have a clear product roadmap as well as IP to make sure that we can deliver these solutions. But at the same time, and I don't want people to get too far ahead of themselves, You know, we still have to finish the industrialization of some of our products, like the Code Reader and the Nordic Readers, make sure that they're truly rugged and robust. Those products will be launched essentially in the next 12 months. We've made great progress on redoing some of our printers also to better fit into the industrial segment. We look at selective M&A. potentially augment that offering as well you know so I feel like we're probably in the third inning of our industrialization automation maybe closing in on the fourth but but it's still it's it's still going to be a journey and you know we feel the trends are fantastic and we look forward to it because you know there's a lot of our solutions that essentially cut labor by hours. And, you know, in a particular use case, we've seen some of our products that essentially have a payback that could be measured in months because of the labor savings they have. So I think that is a good position to be in, and I feel like we've got a great portfolio, including the 211, which we just launched.

Great. Thanks, Russell. Thank you.

Again, to ask a question, please press star 1-1 on your phone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment, please, for our next question. And our next question will come from Keith Helsom of North Coast Research. Your line is

Great. Thank you. Russell, just in terms of the revenue growth, how much of that growth this quarter was driven by your price increases?

You know, I was waiting for that question to come up. And in fact, Aaron and I had a debate about it. You know, so I'm going to give you, unfortunately, a somewhat non-answer. And I apologize for that. A lot of what we do is custom. And it doesn't have necessarily a quarter-to-quarter comparison. So it's tough. We have this question all the time, like, what is price? And when you have a custom order, it's very difficult to compare one month, one quarter to another quarter because of the custom nature of really the majority of our products. What I can say, and I guess where I'm going to leave this is, You know, we do look at our gross margin because if you take all of our custom products and you blend them together and you look at, you know, what we're experiencing in terms of labor costs and material costs and, you know, the other factors that come into play, if, you know, we're essentially treading water, we should at the very least, you know, maintain our gross margin for – given the particular blend of products that we have in any given quarter. And that does, by the way, change. There are times when we might have slightly more in one area that's higher gross margin than another. But if you look at our gross margin over the years and kind of the change in the portfolio, it's held up pretty well, which would say that our pricing is covering our material costs, at least directionally, if not specifically. and our labor costs and productivity as well. So, you know, clearly pricing is part of our growth. It's not huge. We've never been a commodity-based company where, you know, we move lockstep with, say, oil or steel or something like that. So it's a factor, but it's hard for us to give really specific resolution on that.

Okay. Okay. I appreciate that response. Going back to the pre-pandemic days, your third quarter was seen as probably your best gross margin quarter, in part because of the amount of business you did with small and medium-sized businesses. During the pandemic, obviously, a lot of businesses didn't happen. How do you think about the third quarter this year? Should we see a spike in gross margins because of that, or has that business just been lost?

You know, some of the business that was very high gross margin was personal concepts for instance that business we just see a very very weak recovery at the same time you know some of our businesses actually one of our fastest growing businesses unfortunately it's one of our lower gross margin businesses here today you know if there's a lot of moving parts I would say that a reasonable it gross margin for Brady collectively is is we should be able to see 50. We might not quite get there. It might be, you know, 48, 49, but that really should be the territory of Brady as a corporation. And, again, you know, all things being equal, if we have more software in a particular quarter, that is, of course, much higher gross margins, basically 98% gross margin versus a few of our other businesses that are certainly lower.

Yep. So you're not telegraphing 50% anytime this year. You're saying that's more down the road when inflation and area costs kind of balance everything out, correct?

Yeah, I mean, if you look at our quarter-to-quarter gross margin, there's 100 basis points of bounce from one quarter to another. I mean, that's the nature of both mixed supply chain, how we recognize cost rolls, purchase part variances, what have you. So it's in any given quarter, I wouldn't take too much into it. I would look at it as kind of the long-term trajectory of where we are as a company. And, you know, I think getting close to that 50 is a good place for us to be. And then it also, you know, at some point economics comes into play. We could price higher and get higher gross margins unquestionably. at the expense of overall demand. So, and we've seen that, that if you price things up too high, some, you know, marginal customers will either do without or they'll do with slightly less.

Okay, gotcha. And if I can ask one more here, you know, prior to your last three acquisitions, you know, that being Nordic ID, Code, and Magic Corp, you guys have primarily been seen as an ID company, ID solutions. You mentioned that productivity solutions is definitely part of the secular tailwinds behind you. If you just take those three acquisitions, that's still not a very material part of your overall revenue. So I guess, can you give me some other examples of some of your productivity solutions that we should be thinking about? How big is that as a part of the business that we should think about in terms of the secular tailwinds?

Well, printers and print material have always been a pretty significant part of the portfolio and, you know, really is the profit-generating engine of the corporation. And so, you know, the reason behind the code, the Nordic, is to ensure that we're not disadvantaged in automation placement. So that, you know, if I look at some of the opportunities that we have and have had Traditionally, we just placed a printer with a customer, but more often than not, the customer would say, well, can I have the optic reader that goes along with the printer, or can I have the RFID reader that goes along with the printer? And we've had a buy and resell business of some of those products for years. Now, as I look to the future, that is going to be a significant part of us is having that portfolio of products. You know, I can imagine it's not there yet, but I can imagine that well over half the company will be that portfolio of products.

All right. Thanks. Appreciate it. Thank you. I see no further questions in the queue. I would now like to turn the conference back to Russell Schaller for closing remarks.

Perfect. Thank you all for your time today and for the thoughtful questions. Brady is positioned to perform well regardless of which direction the economy heads. We now have a proven history of organic sales growth. Our pricing and efficiency actions are helping to generate blended growth margins near 50%. Our IDS division continues to perform well, and the actions we've taken to improve our workplace safety business are clearly working. And we have a balance sheet that allows us to keep inventing investing in our sales growth initiatives while also returning funds to our shareholders. Even though the global economy will certainly face challenges in the future, I am optimistic that our team and our company can meet any challenges that we may face. Thank you all for your time this morning, and as always, thank you for your interest in Brady. Have a great day. Operator, you may disconnect the call.

Thank you. This does conclude today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day and enjoy your weekend.