Q4 2020 Brady Corp Earnings Call
<unk> earnings Conference call.
At this time, all participants are not listen only mode. After the speakers presentation, there will be a question and answer session.
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If you acquire any further assistance. Please press star Zero I would now like to hand, the conference to your speaker today, and Thornton Chief Accounting Officer. Please go ahead ma'am.
Thank you good morning, and welcome to the Brady Corporation fiscal 2024th quarter earnings Conference call. The slides for this morning's call are located on our website at Www Dot Brady Corp. Dot com slashing Busters, we will begin our prepared remarks on slide number three please.
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.
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 EPS you see this morning.
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 and a session will constitute your consent to being recorded.
I'll now turn the call over to Bradys, President and Chief Executive Officer, Michael Nauman, My Thank you and good morning, and thank you all for joining us.
This morning, we released our fiscal 2024th quarter financial results, we continue to navigate through unprecedented times, both economically and operationally and I'm proud of how the entire Brady team has stepped up to the challenge the teams ability to deal with uncertainty think on their feet and solve problems.
Quickly Oh, well never compromising the long term has been extremely impressive.
I'm proud to work with such a focused and dedicated global group.
Before we get into our financial results first let me provide an update on our response to the coding cobot 19, pandemic and where we stand around the globe.
Brady is an essential business and although we did have minor work stoppages in several of our factory and we still have a significant number of people working remotely our manufacturing is effectively been up and running globally throughout the pandemic art.
Our team has worked tirelessly to manufacture short simple liberal the products that our customers need we support first responders health care workers food processing companies logistics companies retail establishment schools and virtually every other essential industry by helping to solve their safety and identification need.
And ensuring that they can fulfill their missions.
Our products are used to help businesses governments and schools with social distancing. Our signage is you can't provide more energetic environment. When employees returned to work and our products are used to help hospitals and laboratories identify and track samples and medical equipment and to keep patient safe Brady sapiens identification.
Our products are in demand and are helping the world to be a safer place during these challenging times.
Our priorities have remained unchanged and our strong financial position allows us to focus on the long term and ramp up our growth investments while other companies may be focused on surviving we're focused on thriving first.
First we are investing in growth, we're improving our web sites around the globe were improving our marketing capabilities. We are investing in new products and we're investing in capability enhancing machinery, we're doing whatever we can to increase customer satisfaction, because we believe the great customer service will continue.
You have to separate us from our competition.
Last quarter, we talked about the 20000, plus new customers that we added this quarter. We added an additional 27000 new customers in our workplace safety business as we quickly developed and launched many new products, including fuel markings and other types of signage and safety products specifically focused.
On helping our customers with their social distancing needs and help them safely operate their businesses.
Now, it's our job to serve all of our customers new and old extremely well. So they can keep coming back to Brady time, and time again to fulfill their safety and identification needs.
These are unusual times and we believe that if we can make our customers lives easier as they navigate the challenges presented by cobot 19, and that we will establish long term customer relationships that will pay off for years to come.
Second, we're driving efficiencies and automation terrata facilities around the globe were continuing to make ROI positive investment even if those investments may take some time before the benefits are realized for example on July 31st we went live on our common ERP system into a European locations.
The streamlining our operations and reducing <unk> costs.
These implementations were six months earlier than planned because her teams took advantage of the opportunity and pulled the men. We had time to focus on them with the least disruption to the business.
These are the types of investments that have a cost today, but will pay dividends in the future we.
We've been on a multi year journey to become a leaner organization, which can clearly be seen in our financial trends and their gross margins are strong and our rushing expenses declining. These actions have improved our long term cost structure with our impacting our ability to grow.
We're focused on the long term, while taking swift cost actions in the short term what set us up to capture growth and drive long term shareholder value.
Lastly.
We're consistently deploying our capital we are investing in our organic business for returning funds to our shareholders through dividends and buybacks yesterday, we announced our 35th consecutive year of annual dividend increases we're incredibly proud of the street.
Our strong financial position should continue to allow us to both invest in our organic business. While also returning funds to our shareholders.
Shifting gears to our financial results, our organic sales declined 13.7% this quarter as we progress throughout our fourth quarter. We saw improvements in our daily sales trends as May will start me weakest month of the quarter and July was our strongest month.
If you look at our sales trends by division sales growth was relatively consistent through the quarter and our WPS business, finishing at an organic growth of 10.8% and our ideas business, where organic sales were down 21.7 in the quarter. We saw improvements in daily sales pattern each month.
The quarter.
We still have a lot of work ahead of US is work through topline challenges Andrew.
And reduced demand in the industrial sector are.
Our responses to control, what we can reduce our cost structure to invest in sales resources and research and development to make quick decisive decisions and to operate as a fee.
As efficiently as we can so that we can emerge from the pandemic stronger than when we started we use these opportunities to improve I will now.
I'll now turn the call over to Aaron to discuss our financial results then I'll return to provide specific commentary about our identification solutions and workplace safety businesses Aaron Thank you.
Thank you Michael and good morning, everyone. The financial review starts on slide number four so.
Sales in the fourth quarter were 251.7 million, which consisted of an organic sales decline of 13.7% and a decline of 1% from foreign currency translation pre tax income before losses of unconsolidated affiliates declined 26% and diluted EPS declined.
22.1% to 53 cents compared to 68 cents in last year's fourth quarter include.
Included in this quarter's results were certain one off expenses, including severance charges. The write off of previously capitalized catalog costs and certain inventory write downs. These expenses were effectively offset by reductions in incentive based compensation, thus netting to a minimal impact on bradys overall financial results.
However, these charges did reduce the reported segment profit in workplace safety division by approximately $4 million with the offset being reductions in corporate admin expenses of $2 million and reductions in I'd EPS expenses of 2 million again, the net impact of these items was insignificant to Brady into.
Total, but it did impact our divisional results with the largest impact being in our WPS segment.
Moving to slide number five you will find our quarterly sales trends organic sales in our identification solutions division declined to 21.7% while organic sales in our workplace safety Division grew 10.8% organic growth in our WPS business was driven by approximately $16 million.
Others in sales of products directly related to supporting the fight against the Cobot 19 virus. Our WPS team moved quickly to customize existing product offerings for social distancing requirements, including floor markings with unique threed design, along with other custom signage, while continuing to source and manufacture other person.
No protective equipment for our customers.
Turning to slide number six you will see our gross profit margin trending our gross profit margin was 47.1% this quarter compared to 49.6% in last year's fourth quarter. This decrease was mainly due to our reduced sales volume this quarter combined with cost to right size, the business and product mix.
On slide number seven you'll find our SGN a expense trending.
As you know it was 75.9 million this quarter compared to $89.1 million in the fourth quarter of last year as it.
As a percent of sales SGN a remained constant at 30.2% in both the fourth quarter of this year and in the fourth quarter of last year.
A majority of our SGN a decline was due to ongoing benefits from the efficiency actions, we've been driving over the last several years combined with the reduction in discretionary spend including travel for salespeople. Although we did have certain one off expenses such as severance and the write off of capitalized catalog costs that I just mentioned these costs.
Were offset by reductions in incentive based comp in the quarter.
Moving on to slide number eight you'll find the trending of our investments in research and development.
This quarter, we invested $9.4 million in R&D, we continue to have opportunities for investments in new product development, and we're committed to increasing our investments over time, while at the same time, ensuring that we get the most out of every dollar spent on R&D are.
Our R&D spend was down due to reduced incentive based comp and reduced head count.
We have no intention of backing away from our investments in R&D. As these investments are critical to our long term success. In fact now is when investing in innovation is most important because we suspect that many of our smaller competitors don't have the financial wherewithal to continue investing throughout this economic downturn.
Slide number nine details the trending of pre tax income, which declined to 26% from 47.1 million last year to $34.9 million in the fourth quarter of this year. This quarter, we made a minority investment in a company called the reactor mogul. This Seattle based company developed a technology that allows businesses to.
Pinpoint the exact location of an employee emergency through the through the utilization of GPS Geo location and Bluetooth technology. This investment at a small loss this quarter, which is included in our income statement on the line titled equity and losses of unconsolidated affiliates.
Slide number 10 illustrates our after tax income and EPS trends net income declined to 24.4% to 27.7 million this quarter compared to 36.6 million in last year's fourth quarter and diluted EPS declined 22.1% to 53 cents to 53 cents this quarter.
On slide number 11, you'll find a summary of our quarterly cash generation, we generated 45.1 million of cash flow from operating activities and free cash flow was 39.4 million. This quarter, we consistently generate cash flow in excess of net income and this year was no exception cash flow from operating activities was equal.
Two 125% of net income for the full fiscal year ended July 30, Onest 2020.
We've maintained our focus on making the right long term cash decisions for the for the organization, which has resulted in cash flow in excess of net income year after year turning.
Turning to slide number 12, you'll find the trending of our net cash position. We finished the year with cash of $217.6 million and no outstanding debt our balance sheet is in excellent shape.
Our approach to capital allocation is consistent disciplined and were patient first we use our cash to fully fund organic sales and efficiency opportunities throughout the economic cycle, even in challenging economic times like those were experiencing today.
We continue to fund the investments in new product development sales generating resources on T. improvements capability enhancing capital expenditures and Capex to further automate our facilities, we will keep funding these investments where it makes sense and where the investments are long term ROI positive.
Second we focus on returning cash to our shareholders in the form of dividends. This year, we returned $45.8 million to our shareholders in the form of dividends and as Michael just mentioned yesterday, we announced our 30 fiveth consecutive annual increase in our dividend.
After funding organic investments and dividends, we then deploy our cash in a disciplined manner for acquisitions, where we believe we have strong synergistic opportunities and we use our cash to improve shareholder returns through opportunistic share repurchases. This year, we returned $64.5 million to our shareholders through the repo.
Purchase of approximately 1.4 million shares its due.
It's during these challenging times when companies like Brady was super strong balance sheets to consistently generate operating cash flow in excess of net income can keep investing and emerge a leaner gets stronger company.
Slide number 13 provides an overview of our financial results for the full year ended July 31, 2020 overall.
Overall organic sales declined 5.4% and we finished with pre tax earnings of 141 million of course, both our revenues and our earnings were significantly impacted by the cobot 19 pandemic in the back half of our fiscal year as we sit here today on September 16, we continue to lack visibility as to.
Revenues as to revenues or earnings for the full fiscal year ended July 30, Onest 2021, as such we are not providing formal fiscal 2021 sales or EPS guidance at this time.
However, as we look to the start of fiscal 21, we do anticipate that the trends we saw exiting last year will at least continue through the first half of Q1, specifically, we expect sales volumes in our I'd solutions business to continue to improve sequentially, but to remain below prior year levels.
The strong momentum we experienced in Q4 of last year in our workplace safety business should at least continued through the first half of Q1 as well.
In our WPS business, our fourth quarter results were buoyed by sales of products directly related to the fight against coated 19, and although these sales continue through today, we don't know how long. These sales will last when they will slow down or if there will be replaced by growth in the general industrial sector.
Friday EPS business, we saw sequential improvements each month in Q4. However, we are uncertain. If we're at what pace. This recovery will continue into the future. We are clearly in recovery mode, but we have not yet reached pre pandemic levels and are not forecasting to be back to pre pandemic levels in the near term.
As for capital allocation, we do not foresee any major changes in our capital allocation strategy, we will keep investing in our organic business I, just mentioned our announced dividend increase.
And we will be opportunistic with buybacks, while looking for acquisitions, where the price is right and the strategic fit is clear.
As it relates to capital expenditures, we may increase capital expenditures beyond our historical levels enough 21, if we get the right opportunity to own one or more of our currently leased strategic manufacturing facilities.
Our philosophy is to lease facilities that are not strategically important so think warehouses or office buildings and to own our critical manufacturing facilities. We have a strong balance sheet and we will use it as a tool to drive outsize returns. When we were when we emerge from this period of depressed industrial demand.
I'll now turn the call back over to Michael to cover our divisional results and to provide some closing comments before the Q and a session. Michael. Thank you Aaron Slide number 14 outlines the fourth quarter financial results for our identification solutions business.
I'd sales declined 22.8%, finishing at 171.2 million with an organic sales decline of 21.7% and a decrease from foreign currency translation of 1.1%. This quarter overall organic sales our ideas division improved as we progressed throughout.
The quarter May was our most challenging month this quarter for organic sales per day were down in the upper 20% range, whereas in July I'd EPS organic sales per day were down in the mid teens compared to last year our risk.
Our results improved sequentially throughout the quarter, but our topline remains challenged by reduced economic activity, primarily within the industrial manufacturing sector.
Regionally organic sales in both ideas Americas, and Europe improved as we progressed throughout the quarter, but we're still operating well below pre pandemic revenue levels.
Their handwriting business in Asia had low single digit sales growth in May and June followed by an organic sales decline in the low teens in July our Asian businesses have worked through their pent up demand have now started to realize the impact of reduced demand, resulting from the shutdowns in Europe and North America.
Demand in our healthcare business has also remained challenged this quarter.
Elective surgeries in hospital admissions are still down significantly compared to normal pre pandemic levels sales in our health care product line declined by approximately 25% year on year this quarter.
In response to these reduced levels of demand, we continue to take actions to reduce our cost structure throughout the ideas business this quarter any.
Any incremental cost we incurred such as severance were more than offset by reduced incentive based compensation in the quarter.
I'd a segment profit was $31.1 million compared to $45.6 million last quarters fourth quarter segment profit declined 240 basis points from 20.6% of sales last year to 18.2% of sales. This year's fourth quarter. This decline in profitability.
Considering the 21.7% sales decline illustrates how our team was able to quickly adjust our cost structure in response to the decline in revenues.
Our commitment to R&D remains a top priority and we launched several exciting new products. This quarter, we launched the Brady grip print on hook material, which is a label materials designed to adhere to velcro brand labeling bundles. This high tech new material is the result of a collaboration between Brady and Velcro and is.
Targeted for the Datacom market, where bundle cables can be time consuming to organize or accuracy is essential Brady grip makes that job easier and allows installation technicians and IP professionals to quickly identify and troubleshoot datacom issues this quarter.
This quarter, we also launched Dissolvable paper labels for the Brady jet 2000. These labels dissolve completely in warm water, leaving no adhesive residue and are ideal for laboratory test environments or Kim temporary applications with the easy removal helped to reduce both cleanup time and.
The waste of costly lab supplies and.
When we launched the product at our lockout Tagout product line to safely lockout pull handle valves are.
Our product provides a better fit and stays in place with a simple fold over design that locks pull handles in any position. It can also hold up to four padlocks for added safety and security the pull handle butterfly valve blackout is a versatile one piece device targeted for a variety of industries.
Kaizens, including food and beverage chemical pharmaceutical water utility and fluid process applications. Among many others are.
Our R&D pipeline is strong and we remain committed to developing innovative new solutions help our customers solve problems and be more efficient and effective.
Moving along to slide number 15, you'll find a summary of our workplace safety financial performance, our WPS business reported an impressive quarter in the midst of this unprecedented global pandemic.
Bps organic sales grew 10.8% this.
This growth was driven by our European business with growth in the mid teens in the quarter was businesses in Europe again to reopen this team did an excellent job supporting our existing customers and gaining new customers by applying the essential product that they need during this critical time, our Australian business performed extremely well.
Well for the second quarter in a row with nearly 25% organic sales growth this quarter, our team rose to the occasion and found creative ways to customized products and quickly meet the needs of our customers customers many of whom were new customers. The rate of organic sales growth in Australia is highest at the beginning of the quarter and.
For down each month sequentially. So we don't expect this level of 25% quarterly sales growth continue into the future given the trend as we finished the year.
Organic sales in North America declined in the low single digits. This quarter, which was an improvement from a mid teens decline in sales in the third quarter. One of our businesses sells primarily due primarily to very small micro companies, which continued to be impacted by government required shutdown through much of our fourth quarter, resulting in that.
Slide in sales our workplace safety team launched more new products. This quarter that are specifically designed to fight against Covidien 18, we launched watermarking for social distancing that our threed either design. So they have a high level of visual impact making that perfect for schools.
Tailors and many other applications in high traffic areas their commercial grade slip resistant and can be applied to asphalt concrete stone metal tile and other surfaces without pealing or tailing.
We also launched a drinking fountain lockout device. This quarter. This product utilizes Brady patented lockout technology, which attaches to the spout have a drink fountain to prevent use and keep hands off of the high touch area covered 19 has presented constant challenges for offices manufacturers.
Retailers schools sporting venues and countless other businesses, one of which is to reduce the potential for contamination and spread through high touch and high traffic areas, where people tend to concentrate this proprietary or Brady device turns a complex problem into a simple solution for our.
Customers.
Both of these new products are example of where our sales team increased interaction with our customers under so the problems that they were trying to solve and quickly took action to develop customized solutions to meet their needs. Both the threed full marketing signed for social distancing and the drinking fountain lockout.
Device or developed in direct response to kobin related customer needs.
WPS segment profit was 6 million this quarter compared to $6.7 million in last year's fourth quarter response rates to digital advertising increases quarter only effectiveness of traditional catalogs decreased as a shift in buying patterns from traditional catalogs to online continued to accelerate.
As Aaron mentioned earlier, we wrote off previously capitalized catalog costs in response to this shift in buying patterns of our customers. We also recognized certain inventory write offs and other costs, including severance in the fourth quarter. Excluding these one time costs totaling approximately $4 million.
Our WPS segment profit would have been approximately $10 million or 12% of sales are.
Our WPS team pulled together and delivered a very good quarter and listen to their customers to identify what they needed a modified marketing campaigns to reach entirely new customers in entirely new industry. They delivered plus a promise and they were launched several new products along the way ideas were generated throughout.
All levels of the organization and with the UN all departments. The team showed a tremendous entrepreneurial spirit and delivered.
I am so proud to be part of rural that Brady is playing in the fight against Covidien 18, we continue to generate new ideas every day and we're committed to delivering the highest quality of customer service as many of our customers deal with daily challenges that are changing constantly Brady does make the work.
Old better and safer every day the macroeconomic environment is uncertain, but we are in a very strong financial position our class cash flow remains solid and our balance sheet is very strong.
We don't know how long the demand will remain for Copa 19 related products in our WPS business. We do believe that many of our newly acquired customers will remain with Brady. We don't know when demand will return to prepayment levels in the overall industrial economy, we are prepared to perform when the buying levels.
Increase although the future is uncertain we are controlling what we can we will continue to invest in R&D sales ciner resources and capability, enhancing capex and efficiency opportunities or being extremely tight on non revenue generating expenses.
We know these are the right actions to take so we can deliver improved financial results and drive long term value for our shareholders with that I'd now like to start the queuing day, operator would you please provide instructions to our listeners.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to which.
So let's try a question press the pound key please standby will be compiled the cheminova after.
Our first question comes from Joe Mondillo with Sidoti. Your line is now open.
Hi, good morning, everyone.
Good morning, Joe.
Michael I'm wondering if you could talk about your trends that you're seeing an idea us in August and September are you mentioned what may look like in July just wondering if you know mid teen down mid teens in July did things get better in August and September could you just given this idea of the last month.
A half or so how those trends.
Absolutely Joe as I said throughout the quarter, we saw sequentially a month after month and really very consistently in an upward trend in our daily sales. We continue to see that pattern in August in early September and we're anticipating that we'll see that.
So at least the end of September we are definitely seeing a gradual and steady improvement.
So from the mid teen down mid teens in July you, but year over year declines have improved.
In August and September them absolutely.
Okay.
Couple of questions that WPS first you said the stock.
The strength at the end of fiscal 20 will continue into one Q.
What was the trend at the end of the quarter.
Similar to the overall quarter itself.
Yes, absolutely.
Really the good the issue here is we don't know when the transition from Cove at 19 related products will take place. We are confident that our customers that we've been generating are actually very strong customers in a strong customer base and as we improve in the industrial segment as that happens.
We also think that we will be able to make some gains there.
Okay, and then on the cost side at WPS.
You mentioned the $4 million related the catalog write offs and severance if you exclude that the margin would've been over 12% how do we think about sort of a normalized.
Margin at that segment and traditionally.
The fourth quarter, you do usually see stronger margins than sort of the average throughout the year. So you could could you help us understand sort of normalized margins. There. How you think about it I think Joe that youre going to see a continued positive trend.
As you probably remember very well when revenue increases we get a great waterfall. The fact, we are seeing increased revenue. We are very proud of the effort that those teams have put forth and we do not see a specific decline.
In that effort and therefore, our margins. So we think we're going to do well.
Well in that area as we go forward and with one of our micro businesses in particular.
Our businesses I apologize focused on micro industries as that improves we're going to see continued improvement in our margins.
Okay and then one last question from me regarding the acquisition of our them.
The acquisition of the minority stake of react mobile.
How much is that minority stake and then just looking forward you guys have talked about capital distribution and you've been very consistent with your wording that said you've been very quiet on the acquisition front. So should we anticipate given where you are and you know everything the progress that you've made over the years and.
Now the the very strong balance sheet should we anticipate maybe more acquisitions going forward.
Joe Weve invested just.
Invested just under 25% in in that business, we feel very good about it. It is a great technology, great group of people and we think this is the right direction in our current world to really be able to make sure that once again, we are helping to make the world a safer place.
Place for everyone. So the rack mobile investments a good one for us and as I said, just under 25% as we move forward at acquisitions, we do feel very good about our pipeline of opportunity. The real challenge right now the biggest challenge by far you're right is not capital and.
And we are seeing some good companies, it's logistics physically being able to get out and do the due diligence at the effort that we cannot get around to do.
To do a good job of being proper.
Disciplined investors, so really we are working with.
With anticipation that as a world opens up we'll be able to do some some strong efforts in that regard.
And would you characterize your hunger to land more acquisitions.
It's a bigger.
A bigger priority now maybe compared to a year or two ago, well, Joe I would say this when I first came here, we clearly have purposely shut down our acquisition effort I it.
I have not felt that that effort has been a a positive one for us and I think the street.
Investor community It felt the same way.
We needed to become disciplined again, and how we did business, but you're right I feel very good that our business now is a very disciplined.
Innovation oriented manufacturing company focused on niche markets. So, although we are not going to take our eye off that ball at all because that is would be a tremendous mistake I do think that it is a good time for us internally to be able to focus some of our.
Our efforts on looking for technologies that would really add to our strength, while externally I think the markets that we're in a better position to buy at a reasonable price.
Now if you remember our philosophy here, it's not only do we have to find a good technology that will help Brady. It. All we also have to be able to help the company, we're acquiring but we have to be able to do it at a smart and intelligent price and I think Joe you're correct. Those elements are all coming together right now.
We feel like we will have more opportunities as I mentioned before the biggest impediment to our closing a deal like that right now is literally logistics.
Okay, great well, thanks for taking my questions I'll hop back in queue. Good luck. Thanks, Joe appreciate you.
Thank you our next.
Question, Michael Mcginn with Wells Fargo. Your line is now open.
Morning, everyone might on for Allison here.
Good morning, Mike.
Morning.
I was wondering there was a lot of discussion on new customers, serving those essential industries. I was wondering if you could help us kind of frame for what sort of verticals were already core to you and sales inflected upward upward in that vertical versus what are what kind of new to the portfolio that you're seeing and how are you managing those.
Working capital needs on the receivables and inventories side it looks like there was a pre.
Pretty good step up there so just any comment there or any color there would be great.
Great. So Mike we serve literally every site C code there is and have serve those so we are incredibly broad base that said, we certainly have areas where were much stronger and have a much bigger focus the areas that weve seen a major uptick from restaurants.
Tail areas like that that are relatively small areas within brady existing portfolio.
Give us new opportunities in those marketplaces, but also we're seeing new customers across the board.
Around the world. So that has been a very good advantage for us as far as our control of credit.
I'm quite proud of our finance team and our many management teams efforts to make sure we keep our credit a very much in line with the combination of the needs of our customers, but also their ability to properly pay as far as inventory you're correct you did see an uptick in India.
Tori continued throughout the quarter. Our first priority has been to make sure. Our customers are circ one of the things that we've seen during this downturn is there have been many disconnects throughout different industries with customer.
Customers not being able to be serviced properly bread their suppliers, we did not and will not be one of those suppliers. So we did put a very large focus on not only making sure that we have the right inventory, but we for positioned a lot of inventory throughout the world that said.
That number is coming down as the world stabilizes.
Also this has given us an opportunity to once again accelerate something we're already do and that is really moving more and more products closer to our end customers and if you remember from past years, we've been talking about doing that now for about three years, we're really working to be ahead of the curve it turns out.
Because a lot of people are now looking that more and more after this pandemic situation, but for US. It was the reasoning was more about serving our customers properly. So yes. The inventory is higher as a result of that but.
But this is our a level inventory so good very high quality inventory and we are moving it down as we speak.
Great. Thank you.
Then second one for me can we just talk about the two businesses beyond the headline margin more specifically just.
Just they seem like two very different businesses and what is the EPS June a variability flex up flex South region. The gross margin differential is obviously there is a there is a large dichotomy between the two segments right now in terms of topline.
So you can just address that maybe what level of structural or temporary costs, you took out in each business and the timing for when you expect a little bit backend.
Mike This is Aaron I can handle that from a.
From a structural slash directional standpoint, our WPS business has higher gross profit margins also higher as unit expense in comparison to identification solutions, which of course is.
Result of how they go to market how they service their customers. So.
So as you look at the costs that have come out of the organization. We frankly, we struggled with once a permanent cost reduction versus a temporary cost reduction. So I'll give you. An example, our headcount is down approximately 700 people from July 30, Onest of last year to July 30, Onest of this year.
Some of those head count will most likely come back as the as the economy recovers some may not.
Our travel expenses are down quite substantially as you would imagine as well given the travel restrictions clearly our salespeople need to travel is a critical component of adding value. Some of the some of that travel will come back some won't it's actually it's very difficult to determine what cost will or won't come back, but I can tell you. This over the long term we absolutely.
We remain focused on taking costs out in the most sustainable manner that we possibly can and.
And keeping out as many costs as we can so they don't so they don't come roaring back into the organization as we sit here today, we think our cost structure is in better shape than it was this time last year.
And it just keeps getting better every single year as we become a more efficient organization and Michael mentioned, a couple of IP projects. As an example that we implemented in the fourth quarter. Those are perfect. Examples where we will continue to invest even though frankly is a cost in the short term.
But it's the right thing to do over the long term just to keep the steady March going down so.
Long winded answer, but the reality is it's really difficult to pinpoint a permanent versus temporary cost reduction.
Okay and on that gross profit WPS higher I think on slide six you said.
Correct mix was a negative but are you talking more the mix within each segment or how should I, how should I do that.
We were specifically referring to the mix within each segment.
Got it I appreciate it thank you.
Youre welcome. Thank you.
In queue. Our next question comes from Keith Hanson with Northcoast Research. Your line is now open good morning, guys.
You referenced the 26000, new customers in this quarter and I think last quarter was 20000 I'll first can you give us perspective, how does that compare to your overall customer count and then second is there any proof that any of these customers are potentially be recurring customers and theyve made an order in the fourth quarter after brand new.
Customer third quarter I'd.
I don't want to correct huge hey, doing that Keith but it was 27000 this quarter, we value every customers. So I don't want to add 1000 of those customers.
Now some of those customers so in total and by the way that trend continues I.
I would say two things about that we already know these are high quality customers. We already know that we are getting revenue out of them that goes beyond covidien and we're seeing a better than average recurrence rate for those customers. So we feel very good about both the.
Our quality of the orders that were getting from those customers and about the repeat rate that we can see out of those customers.
My apologies Tenish orasure change anybody.
Okay.
Compared to your total customer count Oh, sorry, I missed that one.
It actually is significant to us we do have a large number of customers. But this is a very uniquely high number you know we never called out those numbers.
But this is very significant.
Fair enough.
In terms of your visibility that you referenced in terms of not much beyond first half of the year. What's your normal visibility like you usually have visibility more than six months out.
You're you're right, we don't really end up having as much Vince.
Visibility is other companies so.
Some would say that say a difficulty I actually think it's an advantage because as a result, we always need to be able to react very very quickly. So we're set up to react quickly to ups and downs that said I think you can find from all of your your.
Investment base that you're looking at particularly in industrials Theres really very very little.
Open visibility in them.
Visibility in the market for instance in May.
Hi, I had projected that we it hit the bottom I was right about that so I'm going to give myself an aid for that.
Im going to give myself for a see for the next statement I thought we were going to bounce around the bottom for probably up to six months and yet we've been seeing slow and steady improvements literally throughout the process since may so.
I would love to be nostradamus or have a crystal ball on this but I think right now the visibility is more challenging than usual.
Understood and then you called out healthcare is being down 25% year over year, that's obvious isn't having a vertical for you guys and I understand that industrial as a whole is just challenged but is there one or two verticals within industrial that was just much more cash Rockford for you guys compare to others that we can kind of look to perhaps an opportunity for us.
Proved that if we want to look forward ourselves well.
Well I'll tell you that to aerospace certainly is not a bright side now maybe.
I'm, a little naive all of our leisure and entertainment business and all of that has been incredibly hit.
Down without giving a specific percentage I think you can imagine that it's been catastrophic for small suppliers that.
Betterment not diversified as we are.
That said I think some of those businesses, maybe I'm a little pie in the Sky on this one I cannot debate, but I'm pretty excited that when those businesses come back they're going to come back hard I can't tell you when that will happen, but I will tell you that when people feel safe again.
Yes.
There is a giant pent up demand for hotels for airlines for travel for amusement parks for all the things people love to do if you go out and just survey any group you're going to see they have 50 things they want to do in the future. The real key question is when will.
People feel safe, but when that happens I think it's going to happen like occurred very very quickly youre going to see a waterfall effect the limited to that will not be infrastructure it'll be personnel. It all these industries a cut back tremendously. So you know hotels are working on short staff.
Everyone is working airlines are about to do a major lay off so they will have to ramp back up good news not on infrastructure, but it will be a challenge for them. So the limit will be.
But I think you'll see some very big.
Pitch ups in that area, obviously, though if you take the other end to aerospace the actual builders.
Build use of the equipment, that's going to be a longer grind because airlines themselves have a lot of excess capacity in planes, yes.
Yes, Yes last question from me that.
In terms of the gross margin how much of the gross margin impacted by onetime items such as your inventory write offs.
Well, our margin was down about 250 basis points versus fourth quarter of last year and it was actually was pretty close to half and half between the onetime or the nonrecurring. If you will and then the other items you mentioned the mix and volume.
Great. Thanks, guys. Good luck thanks Kate.
Thank you. Our next question comes from George Staphos from Bank of America. Your line is now open.
Hi, guys. This is actually cash until they are sitting on death charge I. Just had a quick question can you speak to exit rates on volume for both the WPS and segments and then secondly, I know you talked about some new products and EPS, but is there anything else there in the pipeline that you're particularly excited about headed into 2021. Thanks.
As far as exit rates as I think I said, we're continuing to look strong we feel very good that things are moving up we don't see.
It being super rapid to getting back to where we were but we feel very very good about that as far as the pipeline.
We've been investing.
Significantly more in the last two years. So we are very excited about our pipeline of products, we obviously can't.
Speak to those ahead of time for a variety of mainly IP related issues, but we have great IP coming out we have products that are really designed to help our customers as we look we look at making our customers jobs easier every day most of our products almost all of our products aren't on bill's material.
So we not only want to make up the mic effective durable product, but we want to make products that make their lives easier and we believe we're coming out with that the other thing I'd say is that we've got pretty broad reach and that without all of our product segments. So there isn't one segment alone that I think we're developing interesting products in.
And we have interesting products in literally all of our segments. So very excited about the next year's product development.
Okay, Great and just.
Just one more what outlook from customers on on Capex are you seeing with regard to new plants or facilities and assuming no flare up and integrated over the next few months.
As facilities construction spending likely to increase or decrease do you think in 2021 well.
Well, that's not a real crystal ball that that I would honestly be able to give you a good answer on because.
Because a lot of our our equipment goes into small capex.
It goes into a production and production improvement facility improvement so as far as specific capex.
That's not really an area that that we would see a deafening or be good a good model for you to look at the future on.
Hi, guys. Thanks.
Thank you.
Thank you and next question comes from Joe Mondillo with Sidoti. Your line is now open.
Hi, guys just a couple of follow up questions I appreciate you taking them.
Yes, So you talked about how Asia saw sort of a inflection in July.
After the pent up demand Sorta Wayne.
Any indication of that happening in North America or Europe at all in August September these regions sort of lags Asia, so any indication of that happening.
Pent up demands.
Waning.
Joe This is interesting we heard.
From a lot of people that Asia was going to lead the way into the recovery and I never personally quite understood that because a large part of China's.
Economy is based on North America, and Europe, and so as.
As North American and Europe were declining yes, we are seeing Asia improve but they had had a pent up particularly for US we know they had pent up demand for our products that they had to recover from but they are long term model still is very dependent on North America, and Europe and those numbers are so.
Phil down and so we the fact that we went out and July wasn't surprising to me at all and I think that was why as opposed to a second round of coal that or anything else I think in North America and Europe, We're still seeing continued steady improvement.
Okay, and then you are.
Your decremental margins.
EPS were about 29% in the fourth quarter.
Any idea I know, how theres a lot of moving parts with the cost structure in the near term. How can we think is there any way to think about sort of a decremental margins in the near term ideas.
Yes.
I can answer that you're you're you're pretty close.
At that 30% range I think we are maybe just slightly above that when you factor out the the nonrecurring items that I mentioned.
And I don't I don't see that changing in the near term and then.
And then that of course that flips the other way with respect to our workplace safety business, where the where the.
Where the incremental margins after you adjust for the 4 million that Michael mentioned, where we're very strong north of 45%.
Okay and then just last question for me the catalog costs can you give us an idea of how much that makes up of your cost structure and.
Is there an accelerated I know this has been an opportunity over time, but is there an accelerated opportunity as the.
As the pandemic.
Forces customers on to online platform is there and its hillary opportunity to reduce the catalog costs less.
So let me answer that second half and then I'll flip it over to an errand to answer the first half yes. We believe in fact, you must have a microphone in here are to eavesdrop, we believe that.
The pandemic has accelerated transition. So if you imagine some of that is generational.
You know the millennials disease and by the way many people don't realize if the disease are five to seven years into the workforce right now up to 25 year olds.
As they move forward they are much more comfortable in an internet focused digitally focused environment, but this pandemic shifting people quickly to home really took the generations before and also moved them into a situation where they were.
More learned to be more comfortable with a different approach. So we do see that driving a faster shift forward into a digitally based approach something we've been working on very hard for several years. So we're pleased that thats happening and we're positioning ourselves to be able to accelerate in that and if you want to get the first half.
Sure as you look at catalog costs next year it shouldn't have much of an impact at all on the full year results. It may make the quarter's a little bit lumpier from an expense standpoint than normal, but it really shouldn't have much of an impact in the aggregate.
And as far as our total catalog costs, we don't actually break out total catalog cost of what we do break out as total advertising is actually in the K that we released this morning and is just north of $60 million.
Okay.
Why would you not relative to Michaels answer why would you not expect a material impact to fiscal 21, B what else are we thinking.
See what else are we thinking we're doing down.
Im sorry, what I was referring to was specifically the impact of the change in accounting.
So bye bye bye writing off the catalog costs that does not impact.
Our fiscal 21 results in any way shape or form.
Now if we mail less catalogs of course, if we produce less catalogs of course, our catalog costs will then go down.
You are just where were just referring to the lumpiness for EBIT is created by the new accounting treatment.
I understand but relative to sort of maybe total advertising dollars or maybe if you just look at catalog total costs those would be down based on sort of what Michael described it yes, yes, yes, you should expect that to continue to decline as we move more into a digital approach.
Or more to that point as our customers move more into a digital approach, we're obviously going to reflect.
What our customers want and need and how they want to be reached that is our basic philosophy, we reach our customers how they want to be reached.
Okay, and just lastly, as far as that total advertising dollar is catalog.
Over half of that or can you give us any sort of directional I always attempt is a small percentage of that more than half.
Sort of idea just in terms of size as well more than half.
Okay, all right great to Signets off number to us yep.
Okay. Thanks.
Thank you.
Thank you. Our next question comes from Michael again with Wells Fargo. Your line is now open.
I appreciate the follow up.
Understanding you're not giving guidance, but you usually give.
Capex numbered wondering I Miss that or if you have a framework for maybe the low and high end. If you complete some of those facility transaction you were talking about earlier.
Yeah, it's tough to give you a high end.
If you exclude the facilities, which are.
A bit of an unknown at the moment if you exclude that we would expect our capex for I'll say for our normal type of expenditure.
Expenditures to be in line with what it's been in the past, which is call it close to 2% of sales somewhere in the.
Somewhere in that range and that would be for specifically think machinery and equipment to either add new capabilities or to automate our facilities.
And then as far as the actual buildings themselves. We continue our structure, we talked about in the call of looking to make our critical factories our own.
The reason, we do that is it allows us to modify them easier losses to put in some investments that would not make sense in leased facilities and really allows us to control our destiny as we're looking at that we do have several big ones left that we need to do it's a matter of timing can we get the right opportunity.
Tim to actuate that in this year and that could have a significant.
Impact, but it certainly doesn't help.
Hurt our our cash position, our ability to do anything like acquisitions and dividends and buybacks.
Okay.
And on the topic of buybacks you guys are essentially debt free here. The last time you did an authorization was I think way back in 2016 so.
So half a million of the 2 million shares remaining any idea of what expectations you have from an authorization standpoint going forward.
You know, we we don't add.
Add powder until we use up our powder. So you are correct.
But the number as of the end of the quarter that we had out there we can.
We continue our same philosophy, we're opportunistic we look at a a major just can connect we don't look to set the market for our stock. We believe that's our investors job, but if we do see a major disconnect in the market. We do Opportunistically go after that.
And don't expect to change our philosophy.
Okay and last one for me if I could sneak in and.
You mentioned in ERP transition I think two actually.
A lot of companies that we've been on calls with they push these outward on smaller phases you seem to have lean then on this can you just talk about the rationale timing and what you learn from the Onboarding process and that this was a full scale convert.
Conversion or just.
Like like an add on future any comment there would be great. I know this is full scale conversion total and complete why do we do what we do.
People, sometimes say or you can trade and the answer is absolutely not we're opportunistic. So right. You know we had the bandwidth at that moment because of the downturn, where we could continue to keep our customers happy, but we wanted to make some strategic moves forward views these opportunities.
Studies to really.
Push hard against your competitors through efficiency effectiveness, new product development and this is efficiency and effectiveness and we knew by moving them in by about six months. It would allow us to move some other projects in and so we've actually not only move those projects and completed them. We have others that have moved forward.
Dramatically as well and so we're really doing is continuing our effort to becoming a much more efficient and effective organization and doing it at a time like I said.
I continually hear people say don't worry we are going to survive and I tell our people all the time, we refuse to just survive we're going to thrive and that's a critical part of that mentality is that we have the bandwidth we had the internal skill sets and we needed to do it.
So why not do it sooner than later it just puts his have put forward ahead of our competition.
Thank you appreciate the time.
Thank you.
Thank you and next question comes from Keith Hanson with nice kind of Citi Research. Your line is now open.
Thanks, guys, just one follow up Mike I'll come back to your health care comments regarding being down 25%.
It obviously has been very challenged since you guys acquired that in 2013 I think it was is there any sign that is permanently broken here or is this the downfall. This quarter really all related to just the challenges within the industry.
You know you're right Keith it has been a challenging business for us, but we work coming out of that we're starting to see good progress and the covert situation hit us hard it's an interesting market place in that.
In that you know many marketplaces really.
The.
The sales model is very strong in healthcare with the exception of I'd say cosmetic products.
There is those sales model how people come in they have a methodology of approaching business and the ramp up has been a lot slower than I would have anticipated, but it's actually pretty logical because the hospitals think a long term scheduling methodology and their customers tend.
To be older in nature, and so many of the surgeries that are elected that we make a lot of money off of.
Eight one spouse may say, the deltas felt hey, your needs are fine you can go another three months you stay out of that hospital and Thats. What we think we're seeing it just taking a lot longer and it.
Anecdotally.
You know I have a typical situation for a regular checkup, where they schedule out three month. They said its the usual three months that I thought to myself, you've got to be kidding, but they've been scheduled in two weeks. So they are still thinking as an industry. You know just a stretched out timeline and I think their customer base, which is.
Primarily predominantly older is reluctant just to come back and math.
Certainly there are people, even closer to the industry than us, but we do see pretty quick correlations because you know users.
Hospitals are users of our products and so we think the hospital industry overall is going to take longer than many would have anticipated to come back.
But no signs that you're losing any competitive share no no not at all.
At all.
Great. Thank you. Thank you Keith.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Mike on Almond for closing remarks.
Thank you so much I'd like to leave you with a few concluding comments. This morning, we're all.
We're all living in unprecedented times and that is certainly not an exaggeration, we're dealing with uncertainty and disruption in our daily basis in our lives and in our businesses. Our focus at Brady remains unchanged, we will deliver what we promise to our customers, we will invest in R&D and sales share.
Operating resources, who invest in automation and capability enhancing machinery in all of our facilities and we will execute sustainable efficiency gains we do.
We don't know when this pandemic will subside or when demand will return to pre covance levels, but we're doing what we can to increase our customer base today and we're controlling what we can from a cost perspective customer buying habits have changed and demand for many of our safety and identification product has it.
Increased and as global supply chains change it will undoubtedly present, both opportunities and challenges for us and our customers.
We won't allow ourselves become distracted or lose sight of what makes us great at what we do we'll stay focused on the long term and we'll make the right investments and the right decisions today that will continue to generate opportunities for our future we're up for the challenge.
Please stay safe and thank you for your time. This morning have a great day operator, you may disconnect the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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