Brady Corporation

Good day and thank you for standing by. Welcome to the Q2 2025 Brady Corporation earnings conference call. At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. 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. Oh, now I'd like to hand the conference over to your speaker today, Anne Thornton, CFO. Please go ahead.

Thank you. Good morning and welcome to the Brady Corporation fiscal 2025 second quarter earnings conference call. The slides for this morning's call are located on our website at .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 can significantly impact expected results. Risk factors were noted in our news release this morning and in Brady's fiscal 2024 form 10K, 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, Russell Schaller. Russell.

Thank you, Anne. Thank you for joining us today. We released our fiscal 2025 second quarter financial results this morning, and I'm pleased to report another quarter of organic sales growth and improved profit. We grew organic sales 2.6%, sales from acquisitions were up 10.2%, and we grew adjusted earnings per share by .5% in the quarter. Our Americas and Asia region reported another extremely strong quarter with organic sales growth of .3% and adjusted operating income growth of 12%. I'm incredibly pleased with our organic sales growth in Americas and Asia, especially in light of the current macroeconomic for industrials. Our Europe and Australia region is operating in a tough environment as well, which reflected in our results with a slight organic decline of .8% in the quarter. Overall, our teams are executing and we continue to invest in new product development with our focus on long-term sales growth. I've been looking forward to the announcement of a very exciting new printer this quarter, which is our i7500 industrial label printer. This printer is the first of its kind for Brady because it's designed for both high volume and high mix labeling. The i7500 has the ability to print on over 4,000 individual stock labels, parts, and ribbons, as well as on more than 80 unique adhesive materials. This printer incorporates Brady's proprietary LabelSense technology, which automatically calibrates the machine for the wide variety of adhesive materials that can run through it, which means the user has next to zero setup time and no wasted labels. The i7500 includes a seven-inch touchscreen that guides the user through the label printing process, making the printer incredibly easy to use for a wide variety of printing applications, ranging from high-performance heat-resistance labels that can withstand solvents in extreme temperatures to customized QA inspection labels and factory seals to aerospace-grade wire identification and many more. This is the fastest and most versatile printer we've designed to date, and we believe it will be an incredible efficiency tool for our customers in a wide variety of end markets. We have more exciting new products planned for this year and next year, which we believe will continue to add to our growth into the long term. This quarter, we grew adjusted earnings per share while increasing our investments in both research and development and in our sales force. R&D increased by more than 11% this quarter, which came from investment in both our organic business as well as from the acquisition of Gravitech, where we've identified some excellent opportunities from a product development standpoint. Now I'll turn the call over to Ann to provide more details on our financial results. Ann? Thank

you, Russell. Organic sales were led by growth of .3% in the Americas and Asia region, which was partially offset by a slight organic sales decline of .8% in our Europe and Australia region for total organic sales growth of .6% in the quarter. We also grew adjusted diluted earnings per share from 93 cents per share last Q2 to $1 per share this quarter, which was an increase of 7.5%. We took some actions in the quarter to address our cost structure in three specific areas in response to the performance of certain businesses as well as economic conditions. First, we announced the closure of our manufacturing facility in Beijing, China. Given the decline in economic activity in China, as well as our sales decline, this plant closure will reduce our cost structure and our overall footprint in China. Second, we announced the closure of our manufacturing facility in Buffalo, New York. We have gradually reduced production within this facility over the last several years and we plan to move the remaining product plans to our headquarters in Milwaukee. And third, we took actions to reorganize our overhead structure in Europe, which resulted in headcount reductions. Our goal with these actions is to operate with a more efficient reporting structure while further integrating the operations of our Gravitech acquisition. In total, we recognize facility closure and other reorganization costs of 5.7 million in the second quarter. And we believe these actions will allow us to operate more effectively and efficiently going forward. We'll start on slide number four, which details our quarterly sales trends. Organic sales grew .6% this quarter, acquisitions added .2% and foreign currency translation reduced sales by .2% or total sales growth of .6% in the quarter. Slide number five details our quarterly gross margin trending. Our gross profit margin was .3% this quarter compared to .2% in the second quarter of last year. The facility closures in Beijing and Buffalo, New York that I just mentioned resulted in incremental expense of $2.3 million in the second quarter. Without this incremental expense, our gross profit margin would have been 50% this quarter or only 20 basis points below the second quarter of last year. Our gross profit margin continues to be strong as we realize benefits from our sales growth being led by higher gross profit margin products. Turning to slide number six, you'll find our SG&A expense trending. SG&A was 105.9 million this quarter compared to 91.3 million in the second quarter of last year. As a percent of sales SG&A increased to .7% compared to .3% last Q2. If you exclude amortization expense of 4.7 million and the facility closure and other reorganization costs of 3.4 million this quarter, then SG&A would have been .4% of sales in the second quarter of this year compared to .6% in the second quarter of last year as a percentage of sales, which would be a decrease of 20 basis points. We continue to identify efficiencies throughout our sales support function as well as other administrative support functions, which allows us to continue to invest in growth by expanding our sales force, enhancing our digital capabilities and broadening our omni-channel strategies. Slide number seven details the trending of our investments in research and development. We continue to increase our investment in R&D throughout Brady and through our acquisition of Gravitech. R&D expense was 18.7 million this quarter, which was an increase of .2% from 16.8 million in last year's second quarter. As a percentage of sales, R&D was consistent at .2% in both periods. We continue to demonstrate our commitment to new product development with the launch of the I-7500 being a prime example of the results of this increased investment. Turning to slide number eight, you'll find the trending of our pre-tax earnings. Pre-tax earnings on a gap basis decreased from 55.8 million to 52 million in the quarter. But if you exclude amortization from both periods, as well as the facility closure and other reorganization charges we incurred in the current quarter, pre-tax earnings increased .2% from 58.2 million to 62.4 million. On slide number nine, you'll find the trending of our net earnings and earnings per share. Our gap net income decreased due to the incremental amortization from our acquisitions, as well as from the facility closure and other reorganization costs that we incurred in the quarter, as previously mentioned. Our reported gap diluted earnings per share was 83 cents, compared to 90 cents per share in the second quarter of last year. But if you exclude amortization from both periods, as well as the facility closure and other reorganization charges from the current period, our adjusted net income increased from 45.4 million to 48.1 million, which was an increase of 5.9%, and our adjusted diluted EPS increased from 93 cents per share to $1 per share, which was an increase of 7.5%. Turning to slide number 10, you'll find a summary of our cash generation. Operating cash flow was 39.6 million in the second quarter of this year, compared to 36.1 million in the second quarter of last year. Free cash flow was 32.5 million in Q2 of this year, compared to a negative 13.5 million in last year's Q2. Capital expenditures were higher than normal last year due to the purchase of a previously leased facility, along with the construction of a new facility. We expect our capex to return to a more normalized level this year, which is what you're seeing in our results. Slide number 11 details the impact that our historical cash generation has had on our balance sheet. As of January 31st, we were in a net cash position of 50.8 million, which was an increase of 21.7 million since the first quarter of this fiscal year. Our approach to capital allocation is consistent, which is to first use our cash to fund organic sales growth and efficiency opportunities. This includes investing in new product development, sales generating resources, and capability enhancing capex. Our historically strong cash generation gives us the ability to invest throughout the economic cycle so that we're always positioned to drive future sales growth and improvement in profitability. And second, we focus on consistently increasing our dividends. This fiscal year, we announced our 39th consecutive year of annual dividend increases, which continues to be a streak that we're incredibly proud of. After funding organic investments and dividends, we then deploy our cash in a disciplined manner for acquisitions, where the synergies are clear, and for opportunistic share buybacks. Our balance sheet puts us in a position to be able to continue to increase our investment in organic sales opportunities, to invest in new product development, to acquire companies that are strategically fit with our core business, and to return funds to our shareholders through dividends and share buybacks. Slide number 12 details our fiscal 2025 guidance. We are increasing the low end of our full year fiscal 2025 adjusted diluted EPS guidance range from $4.40 per share to $4.70 per share, and moving that range to $4.45 per share to $4.70 per share. Our gap EPS guidance range was updated for the facility closure and other reorganization charges incurred to date, and we now expect a gap EPS range of $3.99 per share to $4.24 per share. Our adjusted diluted EPS range represents a range of growth of between .5% to .4% compared to fiscal year 2024. We also anticipate organic sales growth in the low single digit percentages for the year ending July 31st, 2025. Other elements of our guidance include depreciation and amortization expense of approximately 40 million, capital expenditures of approximately 35 million, and we now expect a full year income tax rate of approximately 21%. Our income tax rate generally tends to be slightly lower in the fourth quarter than our full year expectations based upon our historical profit mix and the expected timing of other discrete adjustments. Potential risks to our guidance among others include potential strength and loss of the spending of the US dollar, inflationary pressures that we're unable to offset in a timely enough manner, or an overall slowdown in economic activity. Now I'll turn the call back over to Russell to cover our regional results and to provide some closing thoughts before Q&A.

Russell. Thanks Anne. Slide 13 details the financial results of our Americas and Asia region. Sales were 233.8 million this quarter, and organic sales growth was a strong, once again at 4.3%. Acquisitions increased sales 7.6%, and foreign currency decreased sales by 1.4%, resulting in total sales growth of .5% this quarter. We continue to grow within our wire ID, safety facility ID, and product identification product lines, which was partially offset by decline in our healthcare ID business. We're generating high single digit sales growth in our printer and consumable product offering, and we continue to identify new use cases and expand our wallet share with our customers. Our business in Asia had another strong quarter with organic sales growth of 11.3%, which was driven by growth in every country except China, which declined .5% in the quarter. This means that outside of China, our business combined for a 24% organic sales growth. Our growth leaders were Japan and India this quarter, where we continue to build momentum and identify new opportunities. Our reported segment profit in the Americas and Asia increased .8% to 46 million, and segment profit as a percentage of sales was 19.7%. If you exclude the impact of amortization in both the current quarter and last year's Q2, as well as the facility closure and other reorganization costs in the quarter, segment profit increased 12% compared to the prior year. We continue to execute to our strategic plan, which includes taking actions in non-core areas of the business to set ourselves up for a more profitable growth in the future. Turning to slide 14, you'll find the results of our Europe and Australia region. Sales were 122.8 million this quarter, acquisitions added 15.1%, while organic sales declined 0.8%, and foreign currency translation decreased sales by 3.6%, resulting in total sales growth of .7% in the region this quarter. Our European business reported flat organic sales, and our Australian business reported an organic sales decline of 6.4%. Our businesses in both Europe and Australia are operating in challenging conditions at the moment, and we expect that the reorganization actions taken in the quarter will allow us to operate more efficiently as we move forward. Our reported segment profit in Europe and Australia had declined .4% in the quarter to 11.4 million, and segment profit as a percentage of sales was 9.3%. If you exclude the impact of amortization in both the current quarter and last year's Q2, as well as the reorganization costs occurred in the current quarter, segment profit increased .9% compared to the prior year. Despite the slow economic conditions, we were able to grow organically in Eastern Europe, which offset our decline in Western Europe. Although our presence is not as large in Eastern Europe, we do see this geography as an opportunity for a future growth in the region. I'm pleased with the first half of this year. Our cash generation was strong. We took actions that will help us operate more efficiently in both near and long term, and most of all, I'm looking forward to more exciting new product launches in the future. We're monitoring the current geopolitical and trade environment like all other multinational companies, and we're evaluating the potential impact on Brady. Meanwhile, we'll maintain our focus on what we can control and we'll adapt where we can in circumstances developed. With that, I'd like to turn it over for Q&A. Operator, would you please provide instructions to our listeners?

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Keith Halsem with North Coast Research. Your line is open.

Good morning, guys. I appreciate it. Hey, Russell, in terms of the tariffs that are perhaps pending here with Mexico and Canada, can you provide perhaps a little bit of thoughts about if they go into place, what the impact might be on you guys, both from a cost as well as perhaps a threat to your revenue potential there?

Yeah, so, you know, we've looked at it. I think a lot depends on what the percentage is and whether it stays at 25% or it's 10% or it's something else. You know, as a practical matter, we have some ability to move our production around and ship to and from different countries. So, you know, I'd love to give you an exact answer, but I think it would be really premature because I've heard so many things bandied about. Now, I will say that we have the ability, particularly for our higher profit margin products, to manufacture them locally. So we could very easily, in some of these cases, manufacture the product in the US and sidestep the tariffs because some of the raw materials are actually manufactured in the US as well. So, you know, there are things that we could do to mitigate the effects of tariffs, depending on what happens. I think our bigger concern is that if there are significant tariffs, it's just more of a global economic slowdown than what would particularly hit Brady.

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

So the really high value products, which are our printer materials, we could move those incredibly quickly. Those, for the most part, are hand assembly and small workstations. If the tariff was protracted for a long period of time, you know, we would have to think about where some of our machinery sits and what we would move. That would take longer, but those products are much lower profit and much lower ASPs. So we could kind of cherry pick off the top ones very quickly.

Okay, appreciate that. With the facility closures, the account reductions that you guys are talking about here, I guess one, is that contemplated in your guidance and perhaps can you kind of decide what that might be, the savings might be for us? And is this more, you know, current period or is it gonna be more, you know, drug out over the next several quarters?

So, you know, we anticipate, and I'm gonna say anticipate, because there's still some things going back and forth in Europe, but we anticipate having all of this cleaned up in this fiscal year. And then that will give us a better run rate in the future. So, you know, if you think about it, when we originally restructured Brady, right after I became CEO, we had a kind of a two-step plan of dissolving the prior divisions like WPS and making it a more regional structure. And so the first fight we took a couple of years ago, and then this is kind of the second step in doing that. And combined with that, it allows us with Gravotech to make some additional office consolidations and some smaller things. But as you can imagine, doing those things in Europe always takes quite a bit longer than it takes in the United States. But our goal is to have most of this done and complete in the year.

Okay, and then the closure in Buffalo and in China, will we see an increase in gross margins, or is that kind of embedded in there already?

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

Okay, if I could ask one more question here. It sounds like the i7-5500 is an exciting new product for you. I guess first, is there a potential that cannibalizes any of your existing sales? And then as you kind of think, or perhaps even hope, you know, is this a product that contributes, you know, singles millions of dollars of revenue or does it make it up to speed? Or it could be tens of millions of dollars. How do you kind of scope that out?

Yeah, so I could dream of tens of millions. You know, I don't know, it is unlike anything out on the market whatsoever. So it appeals to a certain customer base that is somewhat unique to Brady. These are people that print on a lot of different materials. It's not really a great fit for say, a distribution center where you're printing on the same thing over and over again. But a lot of our customers are constantly changing over label stock, which if you've ever watched it happen, it can take minutes to a half hour to dial the printer in. You know, we were talking to one customer who said that they could see an ROI of about three months by changing over all of their printers from, I'll just say brand X to Brady printers, simply because of how much faster this sets up and changes over. So it's, like I said, it's unique. It's not for everybody, but for some customers, they immediately see it. I'd love to see it north of 10 million, but we'll see how the traction is in the marketplace.

Okay, I'll stop there and turn it over. Thank you, appreciate it.

Thank you. Our next question comes from Steve Farazani with Sudoti. Your line is open.

Morning, Russell, morning, Ann. I wanted to ask, obviously, FX headwinds became much more intense this quarter, yet you're raising the low end guidance. Did something help offset that in terms of your view for the year? Did something go better than expected that enables you to actually just raise the low end despite clearly more intense FX headwinds that don't appear to be going away?

Sure, Steve, yeah, you're right, absolutely. FX is a headwind for sure, as we sit here today. The Americas and Asia region is performing better than expected. Coming in this quarter with .3% organic growth is a very nice result and basically offsets the impact of what we see. Just sitting here, as we sit here today, are basically looking at our forecast at January 31st FX rates is pretty much being offset by the Americas and Asia performance.

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

Sure, Dave, just a... I would say their economy, which is to some extent based on being able to export to other countries, particularly China, is just not in a great place after having done well for several years. I think you are clearly seeing a blowback from China and China purchasing. And then as a country, they're somewhat depressed because a lot of what they do is raw material extraction and shipment to other countries, all of which is not doing awesome right now, because their other big trading partner, of course, is Europe. And you know the story in Europe's GDP isn't great. The countries that we're seeing that are growing are kind of decoupled from that whole China-Europe trade. The rest of our South Asia did fantastic, Middle East did fantastic, and we're seeing it. But if you're the back and forth between China and anyone, not in a great place.

Right, right. You mentioned Europe. You've continued to outperform at flat there. Any shifts with given tariff talk, geopolitical concerns, post-election, have you seen any slowdown or have you seen any indications that would cause you to be a little bit more cautious?

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

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

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

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

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

Fair enough, great. Thanks, Russell, thanks, Anne. Thank you.

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

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

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