Q1 2021 Brady Corp Earnings Call

November 19, 2020

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A question during the session would be the press star one on your telephone if you require any further assistance. Please press Star then zero I would not like to disrupt this conference call. Today. Examples you may be getting Matt Inc.

Thank you good.

Good morning, and welcome to the Brady Corporation fiscal 2021 first quarter earnings conference call. The slides for this morning's call are located on our website at Www Dot Brady Corp, Dot Com slush investors, we will begin our prepared remarks on slide number three.

Please note that during this call we may make comments about forward looking information words, such as expect will may believe forecast and anticipate are just a few examples of words identifying a forward looking statement. It's important to note that forward looking information is subject to various risk factors and uncertainties, which could significantly impact expected results.

Risk factors were noted in our news release this morning, and in Brady's fiscal 2020 form 10-K, which was filed with the FCC 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 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, Michael Thank you and good morning, and thank you all for joining US. This morning, we released our fiscal 2021 first quarter financial results. Even in this challenging environment caused by the COVID-19 virus, we were able to increase operate.

Net income and increase pre tax earnings this quarter and our cash flow was extremely strong with operating cash flow growing by more than 60% over the first quarter of last year.

There are four key messages that we want you to take away from our release. This morning first our workplace safety business performed extremely well our teams have shown outstanding entrepreneurship as you've developed many new products to help both existing and new customers by co. Good night team they've expanded their marketing campaigns to reach.

New customers and grow their customer base and they've leveraged their multi channel approach to ensure that we bring value to every customer. This increase in their customer base is critical to maintaining momentum and our positive momentum even after COVID-19 related product sales from side and our strong gross margins in double.

EPS are driving strong earnings growth as can be seen by our nearly 55% increase in segment profit on just under 10% sales growth.

Second our idea solutions revenue trends continued to improve month after month as revenues were down only 7.8% this quarter, even with the decline in revenue segment profit as a percentage of sales increased and our ideas businesses. The team did a great job managing their cost structure and driving.

Sustainable efficiency gains these steady improvements combined with our investment in sales marketing and R&D give us reason to be quite optimistic about the future of this business.

Third our reduced cost structure enabled us to increase operating income and pre tax earnings. This quarter, we've been on a multi year journey to become a leaner organization, which clearly can be seen in our financial trends as our gross margins are strong and our ESG operating expense is declining we're focusing on the long term while taking.

Swift cost actions in the short term, which sets us up to capture growth and drive long term shareholder value even with this reduced cost structure. We continue to upgrade our web sites improve our marketing capabilities develop new products and invest in capacity enhancing this.

Senior in equipment all of this will improve future earnings.

Lastly, we have a rock solid balance sheet. In fact, we were in a net cash position and we continue to generate strong cash flow. This allows us to keep investing and to keep returning funds to our shareholders, which will enable us to generate outsized returns in the future as we put our balance sheet to work.

Economic conditions, and the ongoing COVID-19, pandemic add tremendous uncertainty and risks to future revenues and profitability. Our response is to control what we can to reduce our cost structure to avoid letting overhead creep back into our business to invest in sales resources marketing resources and research and.

Development and to make quick decisions and to operate as efficiently as we can so that we will emerge from the pandemic has a much stronger company. Our teams have worked tirelessly to manufacture source and deliver the products that our customers need we support first responders.

Healthcare workers food processing companies logistics companies retail establishment schools and virtually every other essential industry by helping solve their safety and identification needs to ensure the day can fulfill their mission.

Brady full suite of safety and identification products are in demand and are helping the world to be a safer place. During these unique times I'm proud of how our team has performed throughout this challenging period their ability to deal with uncertainty I think on their feet and solve problems quickly all while never compromising the long term.

Term has been very impressive I will now turn the call over to Aaron to give you a bit more detail on our financial results. Then I'll return to provide specific commentary about our identification solutions and workplace safety businesses Aaron.

Thank you Michael we'll start with the financial review on Slide number four.

Sales in the first quarter were $277.2 million, which consisted of an organic sales decline of 4.9% and an increase of 1.5% from foreign currency translation on.

Operating income increased 3.2% and pre tax income increased by 1.6% when compared to the first quarter of last year in last year's first quarter, we had an unusually low tax rate of 9.8% compared to a tax rate of 20.3% this quarter last year's lower than normal tax rate was primarily due to.

The impact of a favorable audit settlement and the realization of tax benefits from equity based compensation.

Diluted EPS finished at 64 cents this quarter compared to 70 cents in last year's first quarter, if our tax rates would have been consistent between the first quarter of this year and the first quarter of last year, our EPS would have increased by approximately two cents.

Moving to slide number five you will find our quarterly sales trends total sales declined 3.4%. This quarter. If you exclude currency and just look at organic sales you will see that our identification solutions division declined to 8.4% while organic sales in our workplace safety Division grew 5.5%.

Organic sales in our WPS business were driven by sales of products directly related to supporting the fight against the COVID-19 virus. Our WPS team moved quickly to customize existing product offerings for social distancing and personal safety and did an excellent job, reaching new customers and delivering strong value turning.

Turning to slide number six you will see our gross profit margin trend in our gross profit margin was 48.9% this quarter compared to 49.3% in the first quarter of last year. This slight decrease was mainly due to reduced sales volumes in our I'd solutions business combined with product mix in our workplace safety business on.

Offset by our continued focus on driving efficiencies in our factories.

On slide number seven you will find our SGN a expense trending SGN day was down nicely to 83 million this quarter compared to $89.5 million in the first quarter of last year as a percentage of sales SGN eight ticked down to 30.0% from 31.2% in the first quarter of last year the <unk>.

George we have our EPS junaid declined with the result of our 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 our salespeople looking.

Looking at SGN, a expense sequentially comparing Q1 of this year to Q4 of last year SGN a increased from approximately $76 million to 83 million. This increase was almost exclusively in incentive based compensation last year on the fourth quarter as a result of the pandemic, we eliminated the vast majority of bonus.

His while in the first quarter of this year, we reinstated most bonuses back to normal levels.

Moving on to slide number eight you will find the trending of our investments in research and development. This quarter, we invested $10.2 million in R&D we.

We continue to have opportunities for investments in new product development, and we are 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 our.

Our R&D spend was down slightly when compared to the first quarter of last year as a result of reduced head count and the timing of project spend but was up sequentially compared to Q4 of last year.

We have no intention of backing away from our investments in R&D. These investments are critical to our long term success in fact that knowledge when investing in innovation as most important because we suspect that many of our smaller competitors don't have the financial wherewithal to continue investing throughout this economic downturn.

On slide number nine illustrates our pretax income trends pre tax income increased 1.6% from $41.6 million last year to $42.2 million in the first quarter of this year.

This improved profitability as a direct result of our reduced cost structure, which more than offset the impact from the 3.4% decline in sales as a percentage of sales pre tax income increased from 14.5% in last year's first quarter to 15.2% this quarter.

Slide number 10 illustrates our after tax income and EPS trends net income declined 10.7% to 33.5 million this quarter compared to $37.5 million in last year's first quarter and diluted EPS declined 8.6% to 64 cents this quarter compared to.

To 70 cents in the first quarter of last year as I mentioned this decrease in after tax earnings and EPS was due to an unusually low income tax rate in last year's first quarter, if our tax rate. It had been consistent between periods than our EPS would have increased by approximately 3%.

On slide number 11, you'll find a summary of our cash generation, which continues to be very strong.

We generated $62.8 million of cash flow from operating activities and free cash flow was 53.5 million. This quarter. This represents a 62% increase in cash flow from operating activities and a 72% increase in free cash flow when compared to Q1 of last year cash.

Cash flow from operating activities was equal to 188% of net income this quarter.

Helping drive our strong cash generation was an intentional reduction in the inventory levels that we had previously builds up early in the pandemic to ensure that we could meet the demands of all of our customers.

This reduction in inventories contributed 14.8 million to operating cash flow this quarter.

Our investment decision decision processes are cash based and long term focused it's this discipline that helps us consistently generates strong cash flow.

Turning to slide number 12, you'll find the trending of our net cash position on October 30, Onest, we had cash of $256.3 million and no outstanding debt. This quarter, our cash balance increased by $38.7 million, even after returning at $14.1 million to our shareholders in the form of day.

Dividends and buybacks on.

Our approach to capital allocation as disciplined and we are patient first we use our cash to fully fund organic sales and efficiency opportunities throughout the economic cycle. We continue to fund investments in new product development sales generating resources 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 and second we focus on returning cash to our shareholders in the form of dividends fiscal 21 from the 30 fiveth consecutive year of annual dividend increases after.

After funding organic investments on dividends, we then deploy our cash in a disciplined manner for either buybacks or acquisitions, where we believe that we have strong synergistic opportunities.

As Michael mentioned uncertainty is very high right now as such we are unable to provide formal fiscal 2021 guidance.

However, we do now have several quarters in a row of organic sales growth in our WPS business, where sales have been buoyed by products directly related to the fight against COVID-19 Ann.

Although the sale of coated related products continues through today, albeit at a slowing rate. We don't know how long. These sales will last the pace at which they will recede or when they will be replaced by by growth in the general industrial sector as such we lack visibility in our workplace safety business. We've also experienced improving try.

Men's and our I'd solutions business over the last couple of quarters. However, we are uncertain if or at what pace. This recovery will continue into the future as you can see in our results were clearly recovering in Q1, we exceeded pre pandemic operating income levels, but we were still short of pre pandemic revenue line.

Levels, we're seeing reduced demand for products, specifically designed to help in the fight of COVID-19, and there are macroeconomic challenges caused by additional government locked on that when combined with normal seasonality will impact our financial results for the quarter ending January 30, Onest 2021.

Regardless of what happens in the macro economy, we will continue to make the investments necessary to drive organic sales growth and we will continue to drive sustainable efficiency gains while being tight on non revenue generating expenses.

Although there continues to be near term economic headwinds Brady strong balance sheet and strong cash generation combined with our organic growth investments and our focus on efficiencies position us extremely well to generate outsized returns as industrial production improves around the globe.

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 13 outlines the first quarter financial results of our identification solutions business I'd.

I'd sales declined 7.8%, finishing at 198.2 million with an organic sales decline of 8.4 per 10, and an increase of 8.6% from foreign currency translation overall.

Overall organic sales in our idea division continued to improve at a modest but consistent pace as we progress through each of the last six months. This quarter's organic sales decline was a major sequential improvement over the 21.7% decline experienced during the quarter ended July.

31, 2020 and on the cost side, our strong focus on efficiencies led to a 60 basis point increase in segment profit has a percentage of sales when compared to the first quarter of last year.

Regionally organic sales in Asia performed better than both the Americas in Europe and Asia on organic sales decline was quite modest Where's the declines were larger in both the Americas and Europe overall, our sales volume and order pattern somewhat followed for the impacts of the pandemic, where the greatest on the economy as Asian countries appear to be coping better with.

Pandemic or as countries in Europe, and the Americas continue to deal with relatively large numbers of Kuroda virus cases, while some countries have once again in various states of lockdown demand.

Demand in our health care business is clearly getting better but also remain challenged this quarter elective surgeries in hospital admissions are down significantly compared to normal pre pandemic level sales in the health care product line declined by approximately 8% year on year this quarter, which is an improvement from the nearly 25%.

Decline, we saw on the fourth quarter of last year.

On the cost side, we've continued to focus on driving efficiency activity and keeping our cost structure to lean while never sacrificing sales generating investments.

Segment profit was $40.3 million compared to $42.4 million in last year's first quarter segment profit as a percentage of sales increased from 19.7% of sales last year 20.3 percentage sales in this year's first quarter. This increase illustrates how our team was able to quickly adjust our cost structure Ann.

On key these costs out this continual improvement in profitability is a testament to the hard work of the entire I'd solutions team as it constantly work to become a more efficient and profitable organization. As a result, our decremental margin was only 13% as segment profit was down only two.

Point $2 million, while sales were down $16.8 million.

Our commitment to R&D remains a top priority and we launched several exciting new products. This quarter for instance, we just launched the I 7100 file able applicator printer. This princeton automatically files labels to vials in tubes. So the technicians don't have to fumble with labels it significantly faster more efficient.

And much more reliable than writing or hand, applying labels. It saves lab technicians, both time and money. We also launched the Brady jet J 1000 industrial prior this partner is designed for customers, who Mark terminal blocks and control panel components. The combination of the Brady J 1000 printer.

From our workstation software and our high performance materials resulted an easy to use solution that streamlined a quite intricate process. These niche applications, where we're able to marry our printers materials software and strong customer service is where were really separate ourselves from our competitors who don't.

Operating the entire solution set.

Our R&D pipeline is strong and we remain committed to developing innovative new solutions to help our customers solve problems and be more efficient and effective although I don't know what the future holds the economy I'm excited about what we're doing in our I'd solutions business, we are improving our business customer service continuing to invest.

On our future and our streamlining the rest of our cost structure as the economy improves.

On a growth initiatives pay off we should continue to generate strong profitability.

On even ex the incremental dollars sales. These positive revenue trends combined with our strong cost discipline definitely bode well for the future of our ideas business.

Moving along to slide number 14, you'll find a summary of our workplace safety financial performance, our WPS business reported another impressive quarter in the midst of this pandemic WPS sales grew 9.8% annual.

And organic sales grew 5.5% this growth was driven by our European business with organic growth in the upper single digits. This quarter. Our team did an excellent job supporting our does to existing customers and gaining new customers by supplying the initial.

Essential products that they need during this critical time much like last quarter, we benefited from the sale of coated related safety and identification products, our Australian business performed extremely well for the third quarter in a row with over 10% organic sales growth this quarter the rate of organic sales growth in Australia was highest.

For the beginning of quarter and taper down each month to month sequentially, but we do continue to grow organically and increased profitability as his team find ways to grow our customer base and provider customers with a very high level of service.

Organic sales in North America declined in the low single digits this quarter, which was a slight improvement over the client experience last quarter, one of our business sells primarily to microbe companies. This business continues to struggle as do their customers, but they have right sized our cost structure and our operating profit.

Finally at these reduced revenue levels.

Our workplace safety team continued to launch new products, specifically designed for the fight against COVID-19, and we launched numerous other new products aimed at the general industrial market, including the Seaton easy protect safety barrier, which is a fully collapsible indoor and outdoor barrier. It is patent pending.

And proprietary to Brady is easily portable easy to store and enables the simple display of standard a customized total safety messages. This product is superior to other barriers on the market as is highly durable prints portable and store is significantly better than comparable product is.

This type of innovation that our customers have come to expect and appreciate from Brady.

We believe that continued to invest in and launch proprietary new products that we manufacture while many of our competitors hunkered down to preserve cash we'll keep driving US ahead of our competition.

Protecting our strong gross margins and we will keep improving our business over the long term.

WPS segment profit was $8 million this quarter compared to $5.2 million in last year's first quarter. This represents a very strong incremental margin of 40% as we increased segment profit by $2.8 million on net sales increase of $7.1 million, our WPS team pulled on.

Together and delivered another strong quarter, they listen to their customers to identify what they needed they modified marketing campaigns to reach entirely new customers in entirely new industries. They delivered what they promised and they launched many new products along the way ideas were generated throughout all levels of the organ.

Position and with an all departments. The team showed a tremendous entrepreneurial spirit and delivered results on.

I'm proud of the role that Brady is playing on the fight against Covidien 18, we've launched many new products and we continue to generate new product ideas every day, we've been serving our customers extremely well, increasing our customer base and we continue to make investments necessary to keep our positive momentum.

The macroeconomic environment its highly uncertain as many can come countries are once again locking down and it is clear that COVID-19 is far from behind us as a global economy.

We also don't know how long demand will continue for Covidien 18 related products in our workplace safety business, but we're confident that many of our newly acquired customers will remain with Brady.

The future is uncertain, but we're controlling what we can we are in extremely strong financial position earnings are up cash flow is up and our balance sheet is incredibly robust we will continue to invest in R&D sales generating resources capacity enhancing capex and efficiency.

Opportunities all while being tight on non revenue generating expenses and we will look to put our balance sheet to work through both returning funds to our shareholders and growing inorganically through value added accretive acquisitions.

With that I would now like to start to today, operator would you please provide instructions to our listeners.

Ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then one key on your Touchtone phone from if your question is when answering machine with yourself from the queue. Please press the balance sheet.

Our first question comes from Mike will begin with Wells Fargo.

Thanks.

Morning, everybody on any Michael.

Sorry, if I missed this did you guys did in order or a monthly sales cadence that I know you are not going on guidance really on certain but any kind of incremental data points on with I know things are changing rapidly here.

Sure we actually did report.

We talk about our sequential improvements.

In I'd EPS in particular.

Every month Weve improved from our worst case decline in the late spring and so we have seen a very good steady pattern of improvement in that space. In addition, the WPS business, although the coal would related products.

Have declined they still remain very strong and that business still remains very strong.

Okay, and then it within WPS can you help us frame what.

How did the differential is on hold.

Whole blood product versus non cobot product I know some of the distributors are saying.

EPS 30, 30 plus percent, but obviously you don't have masks some of their other ancillary stuff, they're selling so any variation on that segment you can point us towards well on our WPS space, we actually do sell mass we sell Todd channel as they call. It in the E U how we sell a lot of products that are real.

Weighted to helping protect our first line workers in particular, so yes, we do sell those products, but we sell a lot of core products such as signage for marking tapes that are doing extremely well and weve been modifying a lot of products.

We have a few that were quite proud of how we've been able to pivot lockout tagout products that are patented into co bid related products. They are different from our lockout tag outs, but we view some of the core components. We've modified the tooling modified assembly and are able to do things like cover our.

Water fountain through the the world so that our.

Our people are more protected from that so we have been selling a large variety of what I would say identification and safety related products is specifically and clearly into the cobot space, we're not breaking out products.

That are clearly Cobra related so when we say that to increase from co bid. We're looking at part numbers and looking at the specificity of what Theyre going into one why has differentiated from four marketing Cape is an example that we've always sold.

Got it appreciate I'll pass it along absolutely. Thank you Michael.

Our next question comes from Keith Housum with Northcoast research.

Good morning, guys and congratulations on a good quarter relative.

Good morning, Keith Thank you so much I absolutely.

I think we're all on certain in terms of where the next few months will hold on us, but as we think about the potential for additional lockdowns or or what may be can you kind of walk us through how the business has changed from a sales perspective, and if we do go back to a locked on strategy and some of you have from some of Europe. How are you guys changed your sales have been.

Moving to kind of.

Provided further decline.

Excellent so Keith first of all looking at it from an internal perspective, we are in lockdowns than had been in lockdowns in a variety of locations some.

Work at home situations.

Never ended others have gone back to where they were a couple of months ago, but we've already proven that we're very live at keeping our factories opening and running because we service critical industries, but also keeping our employee base motivated and challenge around our concept on our real.

Our drive around making the world a better and safer place. So our our people are able to be very efficient in that we do see a difficulty in some product sets in being able to to really interact with the customers. The way, we would like to but another product sets are were able to overcome that through our day.

Digital campaigns through our E mail campaigns through our telephone campaigns, we really take a very strong and proactive effort in making sure that our customers hear from us and although we've highlighted WPS is.

Direct sales growth we've had the same experience, although not to the extent in I'd EPS as far as bringing on new customers. So we're actually using it as an opportunity to bring in customers that aren't getting the service on the products that they need.

From other parties.

Gosh I appreciate it is now on or even a comment you made regarding WPS and the customer expansion, we're giving you the confidence that you'll be able to retain those customers. When this recast the current issues.

So it's a very data driven business as you know and the comments that we really see how we're getting a lot of noncovered business from those customers actually we're getting more non covance business from the customer that we are getting cultivated although it was clear the initial entry into Brady with two cash.

David and we already are seeing the repurchase patterns are as strong or stronger than any of our typically historical customers.

Josh It is a stronger in Europe. There is North America is that geographic we limited or is across the board.

It is across the board our European business as usual has been stronger but as you also know on North America is actually better in its core.

Matt that it looks because of on one of our businesses that really has been hurt dramatically through the decline in micro businesses in North America.

Gotcha. Thanks back on good luck. Thank you Qi it have a great day.

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And I'm not showing any further questions Tom I'll turn the call back over to Michael for any closing comments.

Thank you I'd like to leave you with a few concluding comments. This morning, we're.

We are living in unprecedented times, and we're dealing with uncertainty and disruption on a daily basis on.

Our focus at Brady remains unchanged, we will deliver what we promise to our customers, we will invest in R&D and sales generating resources to drive growth, we will constantly invest in automation and efficiency and we will take care of our amazing employees.

We don't know when this pending infosys side and when demand will ultimately return to pre covered 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 this quarter, our WPS business grew nicely over the prior year on.

India business continued its trend of sequential revenue improvement and strong profitability, our reduced cost structure and efficiency focus enabled us to grow pre tax earnings and we had another quarter of very strong cash generation entering a net cash position.

We're making sure that we're doing what we can to help our customers our employees community and the world through this pandemic at the same time, we're maintaining our focus on the long term and we'll make the right investments and we will continue to make the right decisions today that will set us up for long term success.

Making the world a safer and better place every day is not a slogan for Brady, it's our focus and our reality per.

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 does conclude todays presentation you may all disconnect from have a wonderful day.

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Ladies and gentlemen, thank you for standing by.

The Q1 2021 Brady Corporation earnings 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 the question. During the session. Please press star one on your telephone if your quality further assistance. Please press star zero I would not want to disrupt yourself. It's called the names that you may begin.

Thank you.

Good morning, and welcome to the Brady Corporation fiscal 2021 first quarter earnings conference call. The slides for this morning's call are located on our website at Www Dot Brady Corp that Tom Slashing Busters, we will begin our prepared remarks on slide number three.

Risk factors were noted in our news release this morning, and on Brady's fiscal 2020 form 10-K, which was filed with the FCC 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 assets that share participation in the queuing day session will constitute your consent to being recorded.

I'll now turn the call over the Brady is president and Chief Executive Officer, Michael Donovan, Michael Thank you and good morning, and thank you all for joining US. This morning, we released our fiscal 2021 first quarter financial results. Even in this challenging environment caused by the COVID-19 virus, we're able to increase operating.

The income and increased pre tax earnings this quarter and our cash flow was extremely strong with operating cash flow growing by more than 60% over the first quarter of last year. There are four key messages that we want you to take away from our release. This morning first our workplace safety.

Business performed extremely well our teams have shown outstanding entrepreneurship, they've developed many new products to help both existing and new customers fight COVID-19, they've expanded their marketing campaigns to reach new customers and grow their customer base and they've leveraged their multi channel approach to ensure that we bring by.

Every customer.

This increase on our customer base is critical to maintaining momentum and our positive momentum even after COVID-19 related product sales from side and our strong gross margins in W.P. assets are driving strong earnings growth assets can be seen by our nearly 55% increase in segment profit on just under.

10% in sales growth.

Second our idea solutions revenue trends continued to improve month after month as revenues were down only 7.8%. This corner, even with the decline in revenue segment profit as a percentage of sales increased and our ideas business. The team did a great job managing their cost structure and dry.

Moving sustainable efficiency gains these steady improvements combined with our investment in sales marketing and R&D give us reason to be quite optimistic about the future of this business.

Sure our reduced cost structure enabled us to increase operating income and pre tax earnings. This quarter, we've been on a multi year journey to become a leaner organization, which clearly can be seen on our financial trends assets or gross margins are strong interest from DNA expense is declining we're focusing on the long term while taking suite.

Moving to cost actions in the short term, which sets us up to capture growth and drive long term shareholder value even with this reduced cost structure. We continue to upgrade our website improve our marketing capabilities develop new products and invest in capacity enhancing machine.

From an equipment all of this will improve future earnings.

Economic conditions on the ongoing COVID-19 endemic add tremendous uncertainty and risks to future revenues and profitability. Our response is to control what we can produce or cost structure to avoid letting overhead creep back into our business to invest in sales resources marketing resources and research.

On development and to make quick decisions and operating as efficiently as we can so that we will emerge from the pandemic as a much stronger company. Our teams have worked tirelessly to manufacture source and deliver the products that our customers need we support first response.

Health care workers food processing companies logistics companies retail establishment schools and virtually every other essential industry by helping solve their safety and identification need to ensure that they can fulfill their mission.

Term has been very impressive I'll now turn the call over to Aaron to give you a bit more detail on our financial results. Then I'll return to provide specific commentary about our identification solutions and workplace safety businesses Aaron.

Thank you Michael we'll start with the financial review on slide number for sale.

Sales in the first quarter were $277.2 million, which consisted of an organic sales decline of 4.9% and an increase of 1.5 per cent from foreign currency translation.

Operating income increased 3.2% and pre tax income increased by 1.6% when compared to the first quarter of last year.

On last year's first quarter, we had an unusually low tax rate of 9.8 per cent compared to a tax rate of 20.3%. This quarter last year's lower than normal tax rate was primarily due to the impact of a favorable audit settlement and the realization of tax benefits from equity based compensation delays.

Organic sales on our WPS business were driven by sales of products directly related to supporting the fight against the COVID-19 virus.

WPS team moved quickly to customize existing product offerings for social distancing and personal safety and did an excellent job, reaching new customers and delivering strong value turning.

Turning to slide number six you will see our gross profit margin trend in gross profit margin was 48.9% this quarter compared to 49.3% in the first quarter of last year. The slight decrease was mainly due to reduced sales volumes in our I'd solutions business combined with product mix in our workplace safety business on.

Set by our continual focus on driving efficiencies in our factories.

On slide number seven you will find our SGN a expense trending SGN day was down nicely to 83 million this quarter compared to $89.5 million in the first quarter of last year as a percentage of sales SGN, a tick down to 30.0% from 31.2% in the first quarter of last year.

You already have our EPS junaid declined with the result of our ongoing benefits from the efficiency actions, we've been driving over the last several years combined with the reduction on discretionary spend including travel through our salespeople looking.

Looking at SG any expense sequentially, comparing Q1 of this year to Q4 of last year SGN a increased from approximately $76 million to 83 million. This increase was almost exclusively in incentive based compensation last year on the fourth quarter as a result of the pandemic, we eliminated the vast majority of bonus.

While in the first quarter of this year, we reinstated most bonuses back to normal levels.

Moving on to slide number eight you'll find the trending of our investments in research and development. This quarter, we invested $10.2 million in R&D we.

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 our.

Our R&D spend was down slightly when compared to the first quarter of last year as a result of reduced headcount and the timing of project spend but was up sequentially compared to Q4 of last year.

We have no intention of backing away from our investments in R&D. These investments are critical to our long term success in fact acknowledged when investing in innovation as 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 illustrates our pretax income trends price.

Tax income increased 1.6% from $41.6 million last year to $42.2 million in the first quarter of this year.

70 cents in the first quarter of last year as I mentioned this decrease in after tax earnings and EPS was due to an unusually low income tax rate in last year's first quarter. If our tax rate had been consistent between periods than our EPS would have increased by approximately 3%.

On slide number 11, you'll find a summary of our cash generation, which continues to be very strong.

We generated 62.8 million of cash flow from operating activities and free cash flow was 53.5 million. This quarter. This represents a 62% increase in cash flow from operating activities and a 72% increase in free cash flow when compared to Q1 of last year cash.

Cash flow from operating activities was equal to 188% of net income this quarter, helping drive our strong cash generation was an intentional reduction in the inventory levels that we had previously built up early in the pandemic to ensure that we could meet the demands of all of our customers.

This reduction in inventories contributed 14.8 million to operating cash flow this quarter.

Our investment decision decision processes are cash based and long term focused it's this discipline that helps us consistently generates strong cash flow.

Turning to slide number 12, you'll find the trending of our net cash position on October 30, Onest, we had cash of $256.3 million and no outstanding debt. This.

This quarter, our cash balance increased by $38.7 million, even after returning at $14.1 million to our shareholders in the form of dividends and buybacks our approach to capital allocation as disciplined and we are patient first we use our cash to fully fund organic sales and efficiency opportunities throughout the economic cycle.

We continue to fund investments in new product development sales generating resources 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 and second we focus on returning.

Cash to our shareholders in the form of dividends fiscal 21 from the 30 fiveth consecutive year of annual dividend increases.

After funding organic investments on dividends, we then deploy our cash in a disciplined manner for either buybacks or acquisitions, where we believe that we have strong synergistic opportunities.

As Michael mentioned uncertainty is very high right now as such we are unable to provide formal fiscal 2021 guidance.

However, we do now have several quarters in a row of organic sales growth in our WPS business, where sales have been buoyed by products directly related to the fight against COVID-19, and although the sale of coated related products continues through today, albeit on a slowing rate. We don't know how long these sales will last the pace.

At which they will recede or when they will be replaced by by growth in the general industrial sector as such we lack visibility in our workplace safety business. We've also experienced improving trends and our I'd solutions business over the last couple of quarters. However, we are uncertain if or at what pace. This recovery will continue into.

On the future as you can see in our results were clearly recovering in Q1, we exceeded pre pandemic operating income levels, but we were still short of pre pandemic revenue levels, we're seeing reduced demand for products specifically designed to help in the fight of COVID-19, and there are macroeconomic.

Colleges caused by additional government locked on that when combined with normal seasonality will impact our financial results for the quarter ending January 30, Onest 2021.

Regardless of what happens on the macro economy, we will continue to make the investments necessary to drive organic sales growth and we will continue to drive sustainable efficiency gains while being tight on non revenue generating expenses.

I will now turn the call back over to Michael to cover our divisional results and to provide some closing comments before the QNX session. Michael. Thank you on slide number 13 outlines the first quarter financial results of our identification solutions business.

Sales declined 7.8%, finishing at 198.2 million with an organic sales decline of 8.4 per 10, and an increase of 8.6% from foreign currency translation overall.

Overall organic sales on our idea division continued to improve at a modest but consistent pace as we progress through each of the last six months. This quarter's organic sales decline was a major sequential improvement over the 21.7% decline expense during the quarter ended July.

31, 2020 and on the cost side, our strong focus on efficiencies led to a 60 basis point increase in segment profit as a percentage of sales when compared to the first quarter of last year.

Regionally organic sales in Asia performed better than both the Americas, and Europe and Asia on organic sales decline was quite modest declines were larger on both the Americas and Europe overall, our sales volume in order patterns somewhat followed for the impacts of the pandemic, where the greatest on the economy as Asian countries appear to be coping better with.

Pandemic worth countries in Europe, and the Americas continue to deal with relatively large numbers of Croda virus cases, while some countries have once again in various states of lockdown the.

Demand in our health care business is clearly getting better but also remained challenged this quarter elective surgeries in hospital admissions are down significantly compared to normal price pandemic levels sales in the health care product line declined by approximately 8% year on year this quarter, which is an improvement from the nearly 25%.

Decline, we saw on the fourth quarter of last year.

On the cost side, we continue to focus on driving efficiency activity and keeping our cost structure to lean while never sacrificing sales generating investments.

Segment profit with $40.3 million compared to $42.4 million in last year's first quarter segment profit as a percentage of sales increased from 19.7% of sales last year to 20.3% net sales in this year's first quarter. This increase illustrates how our team was able to quickly adjust our cost structure.

And keep the cost out this continual improvement in profitability is a testament to the hard work of the entire I'd solutions team as it constantly work to become a more efficient and profitable organization. As a result, our decremental margin was only 13% segment profit was down only two.

Point 2 million on sales were down 16.8 million.

Our commitment to R&D remains a top priority and we launched several exciting new products. This quarter for instance, we just launched the I 7100 file label applicator printer. This price it automatically apply on labels to vials and tubes. So the technicians don't have to bundled with labels it significantly faster more efficient.

And much more reliable than writing or hand, applying labels. It saves lab technicians, both time and money. We also launched the Brady Gen. J 1000 industrial prior this partners designed for customers, who Mark terminal blocks and control panel components. The combination of the Brady J 1000 price.

Our workstation software and our high performance materials resulted an easy to use solution that streamline to a quite intricate process.

Niche applications, where we're able to marry our printers materials software and strong customer service is where were really separate ourselves from our competitors, who don't bring the entire solution set.

Our R&D pipeline is strong and we remain committed to developing innovative new solutions to help our customers solve problems and be more efficient and effective although I don't know what the future holds for the economy I'm excited about what we're doing in our I'd solutions business, we are improving our business customer service continuing to invest in.

Our future and our streamlining the rest of our cost structure.

Economy improves.

Growth initiatives pay off we should continue to generate strong profitability.

Even ex incremental dollars as sales these positive revenue trends combined with our strong cost discipline definitely bode well for the future of our ideas business.

Moving on to slide number 14, you'll find a summary of our workplace safety financial performance, our WPS business reported another impressive quarter in the midst of this pandemic WPS sales grew 9.8%.

And organic sales grew 5.5% this growth was driven by our European business with organic growth in the upper single digits. This quarter. Our team did an excellent job supporting our distant to existing customers and gaining new customers by supplying the initial.

Central products that they need during this critical time much like last quarter, we benefited from the sale of covered related safety and identification products, our Australian business performed extremely well for the third quarter in a row with over 10% organic sales growth this quarter the rate of organic sales growth in Australia was highest.

Getting your quarter and Cape was down each month to month sequentially, but we do continue to grow organically and increased profitability as this team find ways to grow our customer base and provider customers with a very high level of service.

Organic sales in North America declined in the low single digits this quarter, which was a slight improvement over the client experience last quarter, one of our business sells primarily the microbe companies. This business continues to struggle as do their customers, but they have right sized our cost structure and our operating profit.

Probably at the reduced revenue levels.

Our workplace safety team continued to launch new products, specifically designed for the fight against Govan 19, and we launched numerous other new products aimed at the general industrial market, including the Seaton easy protect safety barrier, which is a fully collapsible indoor and outdoor barrier. It is patent pending.

And proprietary to Brady is easily portable easy to store and enables the simple display of standard customizable safety messages. This product is superior to other barriers on the market as its highly durable prints portable and store is significantly better than comparable product.

This type of innovation that our customers have come to expect and appreciate from Brady.

We believe that continuing to invest in and launched proprietary new products that we manufacture on many of our competitors hunker down to preserve cash we'll keep driving US ahead of our competition.

Keep protecting our strong gross margin and we'll keep improving our business over the long term.

Together and delivered another strong quarter, they will listen to their customers to identify what they needed a modified marketing campaigns to reach entirely new customers in entirely new industry. They delivered what they promised and they launched many new products along the way ideas were generated throughout all levels of the on them.

Position and with an all departments. The team showed a tremendous entrepreneurial spirit and delivered results.

I'm proud of the role that Brady is playing in the fight against Covidien 18, we've launched many new products and we continue to generate new product ideas every day, we've been serving our customers extremely well, increasing our customer base and we continue to make investments necessary to keep our positive momentum.

The macroeconomic environment its highly uncertain as many countries are once again locking down and it is clear that COVID-19 is far from behind us as a global economy.

Future is uncertain, but we're controlling what we can we are an extremely strong financial position earnings are up cash flow is up and our balance sheet is incredibly robust we will continue to invest in R&D sales generating resources capacity enhancing capex and efficiency on.

With that I would now like to start the acuity operator would you please provide instructions to our listeners.

Ladies and gentlemen, this you have a question or comment at this time. Please press. The Star then one key on your Touchtone telephone. If your question has been answered the question with yourself from the queue. Please press the balance sheet.

Our first question comes from Mike will begin with Wells Fargo.

Morning.

Morning, everybody on.

Morning, Michael.

Sorry, if I missed this did you guys give in order on monthly sales cadence that I know, you're not giving guidance really on certain but any kind of incremental data points on with I know things are changing rapidly here.

Sure.

We actually did we.

We talk about our sequential improvements.

In I'd asked in particular.

Every month, we have improved from our worst case declined in the late spring and so we have seen a very good steady pattern of improvement in that space in.

In addition, the WPS business, although the cobot related products.

Have declined they still remain very strong and that business still remains very strong.

Okay, and then it within WPS can you help us frame what.

How did the differential is on.

Hi, good product versus non cobot product I know some of the distributor and you are saying.

EPS 30, 30 plus percent, but obviously you don't have masks some of that other ancillary stuff, they're selling so any variation on that segment you can point us towards well on our WPS space, we actually do sell mass we sell gel as they call. It in the E U how we sell a lot of product said earlier.

Weighted to helping protect our first slide workers in particular, so yes, we do sell those products, but we sell a lot of core products such as signage for marking tapes that are doing extremely well and weve been modifying a lot of products.

We have a few that were quite proud of what we've been able to pivot lockout tagout products that are patented into coded related products. They are different from our lockout tag outs, but we view some of the core components. We've modified the tooling modified assembly and are able to do things like cover on.

Water fountains or on the the.

The world so that our.

Our people are more protected from that so we have been selling a large variety of what I would say at dinner for occasion and safety related products is specifically and clearly into the cobot space, we're not breaking out products.

That are clearly Cobra related so when we say that's increased from co bid, we're looking at part numbers and looking at the specificity of what Theyre going into it why as differentiated from four marketing Cape is an example that we've always sold.

Got it appreciate I'll pass it on absolutely. Thank you Michael.

Our next question comes from Keith Housum with Northcoast research.

Good morning, guys and congratulations on a good quarter from mix of it.

Good morning, Keith Thank you so much.

Absolutely.

I think we're all on certain in terms of where on the next few months will hold on but as we think about the potential for additional lockdowns or airway may be can you kind of walk us through that how that business has changed from a sales perspective, and if we do go back to a locked out strategy and some of you out from some of Europe. How have you guys changed your sales ability to cash.

Yes.

Providing further decline.

Excellent so Keith first of all looking at it from an internal perspective, we are in lockdowns than had been in lockdowns in a variety of locations.

Tom work at home situations.

Never ended others have gone back to where they were a couple of months ago, but we've already proven that we're very little at keeping our factory to opening and running because we service critical industries, but also keeping our employee base motivated and challenge around our concept on our real.

Our drive around making the world a better and safer place. So our our people are able to be very efficient in that we do see a difficulty in some product sets in being able to to really interact with the customers away, we would like to but another product sets are were able to overcome that through our.

Digital campaigns through our E mail campaigns through our telephone campaigns, we really take a very strong and proactive efforts in making sure that our customer share from us and although we've highlighted WPS is.

GAAP direct sales growth we've had the same ex.

Experience, although not to the extent in ideas as far as bringing on new customers. So we're actually using it as an opportunity to bring in customers that aren't getting the service from the products that they need.

From other parties.

Gosh I appreciate it and I want to even at current you made regarding WPS and yet the customer expansion, we're giving you the confidence that you'll be able to retain those customers when we recast the cobot issues.

So it's a very data driven businesses, you know and the comments that we really see how we're getting a lot of non coated business from those customers actually we're getting more non covance business from the customer that we are getting covered although it was clear the initial entry into Brady with two co.

David and we already are seeing the repurchase patterns are a stronger a stronger than any of our typically historical customers.

Josh It is a stronger in Europe, and North America that geographically limited or is across the board.

It is across the board our European businesses usual has been stronger but as you also know on North America is actually better in its core.

That it looks because of on one of our businesses that really has been hurt dramatically through the decline in micro businesses in North America.

Gotcha. Thanks, Michael Good luck. Thank you can't have a great day.

[music].

And I'm not showing any further questions Tom I turn the call back over to Michael for any closing comments.

Thank you I'd like to leave you with a few concluding comments this morning.

We're living in unprecedented times, and we're dealing with uncertainty and disruption on a daily basis on.

We don't know when this pandemic boasts a side and when demand will ultimately return to pre covered 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.

This quarter, our WPS business grew nicely over the prior year, our ideas business continued its trend of tint quintile revenue improvement and strong profitability, our reduced cost structure and efficiency focus enabled us to grow pre tax earnings and we had another quarter of very strong cash.

Generation entering a net cash position.

We're making sure that we're doing what we can to help our customers our employees community and the world through this pandemic at the same time, we're maintaining our focus on the long term and we'll make the right investment and we will continue to make the right decisions today that will set us up for long term success.

Making the world a safer and better place every day is not a slogan for Brady, It's our focus and our reality. 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 does conclude todays presentation you may all disconnect from have a wonderful day.

Q1 2021 Brady Corp Earnings Call

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