Q2 2021 Brady Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q2 'twenty 'twenty One Brady Corporation earnings Conference call. At this time, all participants lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press.
Star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, and Thornton Chief Accounting Officer. Thank you. Please go ahead Madam.
Thank you good morning, and welcome to the Brady Corporation fiscal 2021 second quarter earnings Conference call.
Slides for this morning's call are located on our website at Www Dot Brady Corp, Dot com slash investors, we will begin our prepared remarks on slide number three.
Please note that during this call we may make comments about forward looking information words, such as expect will may believe forecast and anticipate are just a few examples of words identifying a forward looking statement.
It's important to note that forward looking information is subject to various risk factors and uncertainties, which could significantly impact expected results for us.
These 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 of 2020.
Also please note that this teleconference is copyrighted by Brady Corporation and May not be rebroadcast without the consent of Brady, we will be recording this call and broadcasting it on the Internet as such your participation in the Q&A session will constitute your consent to being recorded I'll now turn the call over to Brady's, President and Chief Executive Officer, Michael Nauman.
Michael Thank you Ann good morning, and thank you all for joining us on this beautiful winter day.
This morning, we released our fiscal 2021 second quarter financial results. This was another strong quarter in a challenging economic environment.
The Brady team is doing a good job navigating through these unprecedented times and it's executing well innovating for our customers and providing many of the products that are needed to help fight this pandemic.
I'm proud of the accomplishments for the entire Brady team our priority continues to be the safety of our employees and ensuring that we're providing the products that our customers need. So they can continue to operate and keep their employees and their customers safe.
We're proud to support small businesses and frontline workers all around the globe, including first responders health care workers food processing companies logistic companies retail establishment schools and virtually every essential industry.
The macro environment certainly remains challenging in this global pandemic is far from over.
Even with the positive news on the vaccine front, we believe that several of our end markets will continue to be challenged in the near term for instance, and her ideas business, who you sell into many small niche identification markets aimed at it didn't find people in the workplace and entertainment venues and other events such as concerts we.
Spec these markets to be depressed for a longer period of time, whereas our general industrial business is certainly coming back much faster.
<unk> has been and will continue to be to control what we can in the short term by keeping our employees safe serving our customers extremely well and delivering strong financial results at the same time, we're investing heavily in order to accelerate our growth as we exit this challenging period.
This strong focus on executing now while investing in the long term has enabled us to improve our business fundamentals.
We've driven a comp improvement in our cost structure, which will help drive even stronger profit and cash flow as our businesses increased revenues, we'd been working on a multiyear effort to become a leaner organization, which can clearly be seen in our financial trends as our gross margins are strong interest G&A.
<unk> continues to trend downwards, our focus on efficiency and effectiveness is not over and as we look for the future. We certainly see many additional opportunities to continue to streamline.
Becoming a leaner and more efficient organization is certainly important however, what's more important at this juncture in our history is ensuring we're taking the appropriate actions to accelerate sales growth.
We've been upgrading our website, improving our marketing capabilities developing new products investing in capacity enhancing machinery, and making the marketing investments necessary to grow our top line as we come out of this downturn and into the future profitable sales growth is our number one priority.
For instance, in IV solutions business, we've been increasing our R&D spend and seeing positive results as we are launching new products at an increasing rate and we're continuing to distance ourselves from our competitors, who don't have the scale to invest as heavily in R&D. We're also expanding our sales force and expanding.
<unk> in the underserved markets with strong future growth potential, including India and other markets in Southeast Asia and Eastern Europe. We're also improving our online presence by operating our websites throughout the globe and investing more in digital marketing talent.
Our strong new product lineup combined with investments in sales marketing and online presence gives us confidence that our ideas solutions business grow at a faster rate as our end markets improve.
In our workplace safety business, we're also making significant investments to accelerate our sales growth.
Throughout the pandemic ratcheting up our online marketing campaigns, helping us to reach many new customers and expand our customer base.
We completed our migration to a common word pop for them, giving us much stronger market intelligence and the ability to quickly adapt to changing market dynamics, we've increased our investments for new product development and increase the number of proprietary new products that our customers want and need today to keep their employees and customers safe.
And we're adding new salespeople around the globe to accelerate our sales even further.
The actions, we're taking today combined with our recent expanded customer base will result in a strong future for our workplace safety business.
I'm very confident that Brady will see revenue growth in the upcoming quarters, which will increase as a result of the strong focus on growing organic sales combined with a rock solid balance sheet and strong cash flow, which gives us significant dry powder to accelerate growth through further R&D efforts and business acquisitions.
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Our strong balance sheet also allows us to keep investing and to keep returning funds to our shareholders, which will enable us to generate outside shareholder reserves.
Returns in the future as we put our balance sheet to work for.
<unk> is well positioned as we enter calendar 2021 today, we are providing earnings guidance for the back of our fiscal 2021, where we expect to return to healthy revenue and earnings growth overall I'm confident in our ability to deliver results for our customers our employees and of course.
For our shareholders I'll now turn the call over to Aaron to give a little more detail on our financial results and then I'll return to provide specific commentary about our identification solutions and workplace safety businesses Aaron.
Thank you Michael Good morning, everyone. All sorts of financial review on slide number for <unk>.
Sales in the second quarter were $265 8 million, which was a decline of three 9% and pretax income was $39 4 million, which was a decrease of 7% when compared to the second quarter of last year diluted EPS finished at 59 cents this quarter compared to last year's second.
Quarter EPS of <unk> 62 cents.
We also had solid cash generation again this quarter net cash provided by operating activities was a very strong $36 1 million, which is more than 150% higher than the $14 3 million of operating cash flow generated in the second quarter of last year.
Moving to slide number five you'll find our quarterly sales trends total sales were down three 9%, which consisted of an organic sales decline of six 3% and an increase from foreign currency translation of two 4% organic sales continued to improve sequentially in our IV solutions business.
Organic sales finished down six 9%, which was an improvement over the previous two quarters.
Workplace safety after two consecutive quarters of solid organic sales growth. We saw a decline of four 8%. This quarter, we experienced weakness in one of our U S businesses that primarily sells into very small companies that have been heavily impacted by government mandated shutdowns. We also saw a reduction in the sale of products.
Specifically aimed at fighting the COVID-19 virus.
We were unable to fully offset through increased sales into our core industrial clients.
Turning to slide number six you'll see our gross profit margin trend in our gross profit margin was 48, 7% this quarter compared to 53% in the second quarter of last year. This 160 basis point decline was primarily due to reduced sales volumes combined with product mix challenges in our workplace safety business.
<unk>, both of which were partially offset by our continued focus on driving efficiencies in our factories.
On slide number seven you'll find our SG&A expense trending SG&A was once again down nicely to $82 2 million this quarter compared to $87 4 million in the second quarter of last year and as a percent of sales SG&A ticked down to 39% from 31, 6%.
In the same period of last year.
The majority of our SG&A declined was the result of the efficiency actions, we've been driving over the last several years combined with a reduction in discretionary spend R.
Our SG&A continues to trend downwards, but this does not mean that we are cutting back on investments not at all we are absolutely investing in sales and marketing resources, where it makes sense to drive our top line, while at the same time, becoming more efficient in our non customer facing areas.
Moving to slide number eight you'll find the trending of our investments in research and development. This quarter, we invested $9 9 million in R&D, we continue to have opportunities to invest in new products and we're committed to increasing these investments while at the same time, ensuring that we get the most out of every dollar spent our R&D spend was down.
Slightly when compared to the second quarter of last year as a result of reduced head count and the timing of project spend but again, we remain committed to R&D as it is absolutely critical to our long term success.
Slide number nine illustrates our pretax income trends pretax income declined 7% from $42 4 million last year to $39 4 million in the second quarter of this year. This decline was driven by a reduced sales volumes and a lower gross profit margins, partially offset by efficiency gains in our SG&A structure.
Sure.
Slide number 10 illustrates our after tax income and EPS trends as I mentioned diluted EPS was 59 cents this quarter compared to 62 in last year's second quarter.
On slide number 11, you'll find a summary of our cash generation, which continues to be extremely strong we generated $36 1 million in cash flow from operating activities and free cash flow was $30 9 million when compared to last year's second quarter. This represents a 153 per cent increase in cash for.
So from operating activities and a 247% increase in free cash flow.
Cash flow from operating activities was equal to 117% of net income this quarter, helping drive our strong cash generation was a sizable reduction in the amount of annual bonuses paid this quarter when compared to the same quarter of last year and strong working capital management, However, even without the reduction in incentive based.
Compensation payments cash generation would have still been up nicely compared to last year, which is a testament to our strong quality of earnings and our disciplined cash based decision making.
Turning to slide number 12, you'll find the trending of our net cash position on January 31, we had $277 6 million of cash and no debt outstanding this quarter, our cash balance increased 21 3 million, even after returning $12 3 million to our shareholders in the form of dividend.
Ends and buybacks.
Our approach to capital allocation is consistent and the patient first we use our cash to fully fund organic sales and efficiency opportunities throughout the economic cycle, where funding investments in new product development sales generating resources, it improvements capability enhancing capital expenditures and Capex to <unk>.
Further automate our facilities, we will absolutely keep funding these investments where it makes sense and where the investments are long term ROI positive and second we focus our return we focus on returning cash to our shareholders in the form of dividends and fiscal 'twenty, one marks our 35th consecutive year of annual dividend increases.
After funding organic investments and dividends, we then deploy our cash in a disciplined manner for either buybacks or acquisitions, where we believe that we have strong synergistic opportunities.
Let's move along to our outlook for the rest of fiscal 'twenty 'twenty, one which is articulated on slide number 13.
Although vaccines are being rolled out around the globe and governments are certainly taking actions to prop up the economy. We neither expect an immediate economic recovery, nor a nice steady economic recovery quite the contrary, we do expect to recovery, but we expect it to be quite choppy as cities and countries around the globe moving into.
And out of various states of Lockdown, but again as we establish our earnings guidance. We do anticipate the economy to continue to improve as we progress through the next six months as Michael mentioned, we're controlling what we can control, we're staying disciplined on costs and we're investing to drive sales growth.
Given our current view of the macro economy, we expect to finish our fiscal year ending July 31, 2021 with diluted EPS in the range of $2 48.
For $2 58 per share, which equates to a range of $1 25 to $1 35 per share in the second half of our fiscal year.
This guidance range implies that we expect the EPS to improve somewhere in the range of 58% to 71% in the second half of this fiscal year when compared to the second half of last year. This guidance is of course contingent contingent upon continued macroeconomic improvements we're confident that we've taken and will continue.
To take the right actions today to overcome any economic headwinds and enable us to deliver a strong second half to our fiscal year ending July 31, 2021, regardless of what the economy throws at US we'll continue to make the investments necessary to drive organic sales growth will continue to search for acquisitions.
That advance our strategies and will continue to drive sustainable efficiency gains while being tight on non revenue generating expenses Brady strong balance sheet and strong cash generation combined with our focus on growth position us extremely well for the future.
I'll now turn the call back over to Michael to cover our divisional results and provide some closing comments before the Q&A session. Michael. Thank you Aaron Slide number 14 outlines second quarter financial results for our identification solutions business overall, our I'd solutions business continued its steady improvement volume initial shock.
From the pandemic nearly 10 months ago, we continued to generate strong early earnings and cash flow, while making the investments necessary to realize outsized growth. Once this pandemic subsides Ibs sales declined five 4%, finishing at $194 2 million with an organic.
Sales decline of six 9% and an increase of one 5% from foreign currency translation overall organic sales for Ids division continuing to improve each quarter as this quarter's organic sales decline of six 9% is a sequential improvement over the eight 4% decline experienced.
During the quarter ending October 31, 2020 and.
And on the cost side, our strong focus on efficiencies led to a 30 basis point increase in segment profit as a percentage of sales when compared to the second quarter of last year.
<unk> organic sales in Asia were strong this quarter with growth of just over 10% compared to the second quarter of last year overall, our sales volumes and order patterns in Ibs somewhat followed for the patterns of the pandemic for the greatest.
Economy as Asian countries appear to be coping better with the pandemic, whereas countries in Europe and the Americas continue to deal with relatively larger numbers of coronavirus cases, with many European countries and areas in the U S still in various states of Lockdown day.
And our health care business is improving but it's not yet back to pre pandemic levels elective surgeries and hospital admissions are still down significantly compared to normal pre pandemic levels sales in our health care product line declined approximately 6% year on year this quarter, which is an improvement from the 8% decline.
We saw in the first quarter of this year, we continue to focus on driving efficiency activity and keeping our cost structure lean while never sacrificing sales generating investments, we're investing in sales and marketing personnel research and development activity and selected geographic expansion, we believe that these investment.
So necessary to emerge from this pandemic stronger than our competitors.
<unk> segment profit was $39 million compared to $40 7 million in last year's second quarter segment profit as a percentage of sales increased from 19, 8% of sales last year to $20 one per cent of sales each quarter. This increase illustrates how our team was able to quickly adjust our cost.
Sure and keep the cost outlook. This continual improvement and profitability is a testament to the hard work of the entire IV solutions team as it constantly work to become more efficient and profitable organization. As a result, our decremental margin was only 15% of segment profit was down only one point.
$7 million, while sales were down 11, 1 million our commitment to R&D remains a top priority and we launched two high performance materials in our Ids business, we launched a new commercial grade wire marker called the B 312 permits leap day.
Heat shrink tubing can be run through a variety of Brady printers, and as many applications and electrical wire and cable labeling. It's an extremely high performance material that is resistant to chemicals corrosion humidity and UV. We also launched labels intended for temporary applications called the B 521.
Removable polypropylene labels. These labels are ideal for use during in process manufacturing, where solvent resistance and print performance are required. These labels are designed did here when required while not leaving behind any residue upon removal, they're intended for barcode applications such as electronic components.
King and other general purpose applications that require good Sullivan resistance heat resistant and clean move ability. These products demonstrate brady its utility to <unk> ability to engineer a high performance materials for a wide range of applications. Our R&D pipeline is strong.
And we continue to launch innovative new products that help our customers solve problems and be more efficient and effective.
I'm excited about what we're doing in our IV solutions business, we're improving our customer service investing in our future and are streamlining the rest of our cost structure as the economy improves and our growth initiatives pay off we should realized strong revenue growth and generate strong profitability on every incremental.
Dollar of sales.
These positive revenue trends combined with our strong cost discipline definitely bodes well for the future of our IV solutions business.
Moving to slide 15, you'll find a summary of our workplace safety financial performance.
<unk> sales grew 4%, which consisted of organic sales decline of four 8% and foreign currency growth of five 2%. The decline was driven by our North American business, which decreased in the mid teens. This quarter one of our businesses in North America sales, primarily to micro companies and it continues.
To struggle as to their customers and they took another step back this quarter as the pace of small business shutdowns continues at an elevated rate for.
Work and deliver strong value for our current customers and we're taking actions to reach new customers. So that we can return this business to profitable growth.
Despite new shutdowns in the U K, France, Germany, and other countries in Western Europe, Our European business was still able to grow in the low single digits. This quarter. Our team has done an outstanding job of increasing its customer base and for those customers, who initially came to Brady for Covid related products. Our team has done a nice.
<unk> job, providing these same customers our core safety and identification products as well overall, we're quite pleased with how these newly acquired customers are performing as we're supplying essential products at many companies need during this critical time.
Our Australia business declined in the low single digits this quarter as the pace of Covid related product sales slowed over the last several quarters, we substantially increased our Australian customer base and we continue to find opportunities to enhance our digital marketing approach to ensure that we turned on new customers in the long term repeat customers.
Our workplace safety team continues to focus on new product offerings and this quarter, we launched a variety of new custom signage and floor markings to helping the administration of COVID-19 vaccine. These products include vaccine store signage and other for markings and science are easy to customize our Seton Dot com.
For the Medco dotcom websites, we believe for continuing to invest in the launch of proprietary new products that we manufacture while many of our competitors hunker down to preserve cash will keep driving US ahead of our competition will keep protecting our strong gross margin and we will keep improving a bit.
This over the long term <unk>.
WPS segment profit was $3 5 million this quarter compared to $5 5 million in last year's second quarter. This decrease in segment profit with drill.
Driven by the revenue decline in our North American business, along with product mix and some of our strongest growth margin businesses declined this quarter for some of our low gross margin businesses grew this quarter. Our WPS team is listening to their customers to identify what they need they are modifying their marketing campaigns to reach.
Entirely new customers in entirely new industries, and they're working hard to address underperforming businesses within the portfolio. We've learned a lot through the pandemic and we're going to continue to serve our new and existing customers extremely well to ensure we're set up for growth.
We're through this challenging time.
I'm proud of the role that Brady is playing in the fight against COVID-19, we're delivering products aimed at helping companies for social distancing, we're delivering products aimed at keeping people away from the areas, where there's a high likelihood of virus spread and we're providing many safety and identification products that are used by frontline workers all over the globe.
The macro environment remains highly uncertain and even with the vaccine Rollouts started in December we certainly aren't willing to declare a victory over this virus quite yet for.
<unk> is in an enviable financial position our cash flow was up at our balance sheet is incredibly robust we will continue to invest in R&D sales generating resources and capacity enhancing capex or being tight and non revenue generating expenses and we're looking to further.
Put our balance sheet to work by returning funds to our shareholders and adding technology based growth inorganically through strategic acquisitions.
Again, I'm very 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 has really set a solid foundation for Brady future with that I'd like to now start the Q&A operator.
Could you please provide instructions to our listeners.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press, the pound or hash cake and please standby, while we compile the Q&A roster.
Your first question comes from Allison pollen pulling in that.
Sorry power linear with Wells Fargo.
Good morning.
Good morning Allison.
Talk a little bit you know you guys have been pretty consistent in terms of reinvesting in R&D sales effort and you know the macro secondly, masking maybe some of those benefits is there a way that you can help maybe quantify whether it's the returns you're getting on those investments now or what kind of traction in terms of share gains that you think you guys are getting you know any color around.
Matt Yeah, Allison I can I can give you one thing that May help you know I think when we started talking about reinvigorating our R&D pipeline I spoke of timeline, because we do sell into very industrial applications, we actually don't see most of our new.
New products ramping up.
Full revenue.
For for two or even five years. So there is a long pipeline and we are marching up that pipeline, but because we've actually for.
<unk> invested heavily and you really didn't see any output for the first year or so of that.
And then we started introducing and had been accelerating those product introductions youre going to see a larger rise.
In the next couple of years out as a result of that then you solve for the period going on and you're right.
Denmark has definitely impacted some of our product spaces. Some of our products, we're able to continue to sell very effectively virtually other products do require a hands on interaction to sell as effectively and so you are seeing some degradation of our ability.
To grow those products because of that situation, but specifically you will see a larger ramp because of the fact that many of our products literally take for five years to hit full revenue fruition.
Great. Thanks, and then just a question on I D. S. In terms of the margin you guys have done obviously, a great job on stemming those decrementals in this environment, how should we think of incrementals coming out of that relative to what historically, you've been able to deal in that segment.
We think we'll be able to continue to do quite well, we think because of the proprietary nature of our many of our new products, we should be able to increase that in fact over the last couple of years, we've really pared back.
Our non proprietary products, which have lower margins also that has led to some.
Lower growth rates as a result of us pare those back during that time period, but in the end, we think that makes us a much stronger company both from potential future growth for synergies and also from from our margins.
Got it and if I can sneak one more and you referenced some of your products you know related to the events side of things and obviously a lot of that still shut down.
Is there a way or can we quantify how much as a percent of revenue that could be just in this instance, a hopeful hopeful reopening as we head towards the back half of this year you know Alison I will say I think it's pretty understandable that a lot of our businesses that are around events are around people getting together.
Our around introducing new people into communities to businesses.
Many of US are not meet particularly I hate loud noise, even though I talk loud.
Many of US love going to concerts in those venues those are definitely.
Tom.
Still seeing extremely large declines in many of our big events have pushed out now from the spring to the fall and one would ask you know are they going to push out again or not I will say this allison we can't quantify the actual per cent for you, but I can tell you that we.
Believe fundamentally when they do come back they're going to come back at a much more rapid rate.
Very confident that the world has superb pent up exam, a day band well, let me just give you a couple of examples that I really believe in hotels and theme parks Sea infrastructure cruise lines. The infrastructure is there. The ships are there the rights are there the buildings are there.
The limit will be are redeploying and retraining personnel.
But that is probably the least restrictive limit and I think youre going to see some very very rapid a reintroduction of people to those situations I do think that there are some large scale of Vince.
That that may be a little riskier that would take a little longer for people to deploy capital to but overall I think that area. We will see a very strong bounce back when it comes in you'll see the impact on Brady.
Great. Thanks, I'll pass it along thank you. Thanks, so much for your time Allison.
Your next question comes from Steve Farmer is that.
Parents zani with Sidoti.
Well, thank you very much.
The one number that stood out to me that kind of surprised me that he was hoping to get a little bit more detail on I know you said it was product mix, but the margin within workplace safety, where there any other additional costs, we should be aware of higher shipping cost to go head to head count or was it purely product mix.
Tied to the lower <unk>.
We're kind of starting to monitor glad to have you on the call.
Good day, good to have the questions in regard to cost there are certainly shipping challenges out there in the world, we're not going to deny.
That you know right now oil prices are up for instance, so that does impact shipping.
How they remain up may depend how my southern family fairs through the oil refinery shutdowns and things like that but overall I would not say that that has been a significant impact on Brady. We were happy to we're work around timing you choose we're happy to work around.
For instance, port congestion issues, but overall I don't want to say that it is definitely been a mix issue as some of our strongest margin products or more are.
Industrial customer base.
Company based a lot of things like that particularly those companies that have really suffered dramatically I wanted to say this so steve.
We fundamentally see this as a case of a.
Forest fire and when you get done with that Forest fire. All these poor small businesses it looks black and dark right is it looks a dark is suddenly you will see green popping up everywhere that is what happens after a massive downturn in the economy to small businesses. We fundamentally believe there is.
I'm going to be a lot of opportunity for people to start small businesses again, particularly in North America, where.
For the appetite for entrepreneurial Ism is still very strong and when that happens we're going to really benefit from that re growth and what look pitch black will suddenly look green when that exactly happens I cannot tell you because it will depend on a mass confidence level coming out of <unk>.
The pandemic.
But it is definitely mix.
Okay got it and then I just wanted to ask another really really strong quarter for cash flow.
As you start thinking about the second half of the year any sense on the Capex and then how much you can manage working capital as you start going back into a revenue growth just general thoughts on on cash flow.
Yeah. So so as we look at the back half of the year typically for Brady, our third and fourth quarters are our strongest cash generating quarters, and we would expect that to continue this year. So if you go back in history to last year in our third and fourth quarter. Unlike many companies, we actually intentionally built up inventories, which of course was a use of cash.
And we did that to ensure that we had a steady supply of products and we didn't let any of our customers down. So we will we will obviously be lapsing that from this from the standpoint of a comparable perspective, then as we look at Capex.
Over the longer term, we would expect our capex to continue to be in this you know call. It 2% of sales range. However, we've we've talked about this a couple of quarters now we are looking at purchasing slash constructing a couple of our strategic manufacturing facilities. However, every time that we build or or.
Purchase a manufacturing facility rest assured it's always a ROI positive.
Versus our lease option and it secures our future. So I don't know the timing on some of those are for potential facility actions, but that could potentially skew our capex in the near term, but again over the long term, we're looking at somewhere in the neighborhood of 2% of sales for Capex.
The EPS guidance I know you've talked about the recovery being lumpy are you thinking about soft guidance as being a ramp per Ecu went to <unk>.
We would we would expect our fourth quarter to be a bit stronger than our third quarter. As we continue to come out of this pandemic, particularly if you're comparing against the prior year yeah for us are our lowest our lowest point was Q4 of last year.
Great. Thanks, so much for fun.
Appreciate the time.
Your next question comes from Keith Hughes with Northcoast research.
Good morning, guys.
Okay.
Can you just expand a little bit on your digital sales strategy I think we've heard anything about that on this call. Obviously WPS continues to be challenged in terms of organic growth, but I know that's one of the areas that really are focused on turning that around especially in North America. How is your progress getting digital customers this quarter.
Per with what you guys are hoping to do.
Just as far as strategy I'll start with that and then hone in on the quarter.
Just a few years ago, we really didn't have a digital sales presence that was significant particularly with our ivs space, but across the board our health care products will everything you looked at was what's much.
Free antiquated in or even in our approach to websites. We now believe and have compared ourselves and look at industrials. We believe we're in the the upper 10 plus percent of of industrial companies and able to provide a great digital interaction for our customers. We think that has been we know.
That has been crucial in gaining the great customer base, we have we continue to gain new customers from that.
But also it's been great at helping us to sell add on products not just the initial products and customers that come in for but for other products that we do a very good job of supplying our customers with and then it's helped us to become a site that people want to come back to so in the last quarter, we've continued to upgrade that.
Are all of our our WPS sites are now on common platforms. What does that mean, we're able to upgrade them much faster, we're able to customize that very very effectively for each market. Each location. The backend is able to be sustained or cyber security.
Our stronger and more robust across the board we are a much much stronger company in regards to our digital presence and we were even six or nine months ago before the pandemic started but the good news is we were far ahead of most of our competition, even when the pandemic started so yes.
It continues to develop.
We still have a lot of great opportunities just got done having a view on that with the teams and I feel very very good that we understand.
It is not a destination. It is a continual progression that we have to be looking for and I also think that many of our or our competitors still arent, even seeing it that way and so not only do we believe we're ahead of a lot of people, we believe that our mentality.
We will be critical for us to staying ahead of a lot of people and the fact that we're willing and able to invest properly remember the fact that we have so many groups and organizations that we can.
Combined under one umbrella allows us to be more cost effective as well and many people can.
So do you think youre at a point now where youre seeing good year over year digital sales growth is that now at a point, where it's equal to or more than what you're doing from catalog sales.
Yes.
I mean, yes, we do believe we will see continued strong growth now let us talk about the catalog sales versus the digital growth.
We also believe it's a combination strategy that it's critical that one probably for the foreseeable future.
So we see a large amount of contact through our website yet majority of purchases are still offline.
So why is that.
It has to do with purchasing systems has to do with controls by companies, but having that ability to combine proactive sales personal sales with a strong digital presence with an offline EZ connect.
Connectivity for instance, electronic sales, we don't consider digital sales some of our companies you'll see out there include electronic sales as digital sales they've been out there for 30 years.
We we disconnect that because it's important for us to get a really healthy understanding of how strong our actual digital sales are that said, we do see very much where they enter how they make decisions and the fact that they are buying offline afterwards does reiterate for us.
It's not a one approach that's necessary. It is a multi legged stool that's critical in southern with Pete we have direct sales efforts. We have direct sales follow up we have strong digital presence, we have electronic data transferring for orders and we have a strong offline ability to work with customers.
That have systems that are arent able to or don't want to.
Purchased digitally.
I appreciate that thanks, if I can just follow growth change gears here to M&A M&A has been more of a focus for you guys for several years now and I'm sure I'd just look at many deals.
Over that time period have you been able to refine your strategy in terms of <unk>.
Where youre looking to do a deal berkley as well as geographically and perhaps as a size and just give us a little bit of color about what your how your strategy has developed over the past two or three years.
Keith you worked with for US long enough to know that we're deliberate we're often working on an area below the water line for a period of time before it ever shows up and what it does show up you see the change rapidly.
We had been working below the water line I think as you're aware I'd.
Making sure that when we get back into the market and we are there to.
To be quite clear that we're doing it in a way that is thoughtful and that is reflective of our overall strategy and fits into our overall strategy. We're not looking to grow through acquisitions, we're looking to use acquisitions as part of our strategy and our strategy is for significant profitable growth.
But yes, we've defined.
Key.
Industries key technologies that are very important to us we have a company that we really are excited about and have relationships with and that although you can never guarantee had particular success or particular timing, we're confident that we're positioned to do a good job.
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And having that make a significant long term difference to Brady.
Greg you guys I appreciate it. Thank you. Thank you.
Your next question comes from George Staphos with Bank of America.
Hi, everyone. This is actually talking to on behalf of George Staphos. So are you already see here for me.
J how are you.
I'm just wondering why are you comfortable in the mid single digit organic sales growth in the second half considering some tougher comps in WPS and Relatedly, what kind of growth is required and the idea is to generate aggregate performance in the second half for the company.
Yeah, we we get confidence in as we of course run our own internal forecasts, that's effectively where we shake out we would expect it to ramp as we go throughout the year and much of it comes down to some pretty I'll say, some pretty challenging times that we had basically starting in April of last.
At year as a result of the pandemic. So just looking just looking at the results, particularly in the IV solutions, where we saw some pretty significant declines last year. So just just to put this in perspective last year in our fourth quarter I'd solutions had an organic sales decline of 21, 7% which of course.
This is quite substantial and as we model out continued.
Modest and frankly choppy improvement in the economy, we come out with some relatively relatively strong organic sales growth in the back half of this year now youre right in WPS. It's we have some pretty challenging comparables, particularly in our fourth quarter, where we gained many many new customers through the sale of.
Covid products WPS I will most likely be down in the fourth quarter, and but we'll make up for us in our I'd solutions business.
Got it that's helpful. And then I guess are you able to discuss at all whether inflation for any sort of headwind or tailwind for the company and kind of what you're seeing beyond any freight and logistics that you commented on earlier.
You know as I said the good news about US is we're not as commodity driven as a lot of companies and so as I mentioned, we do have a couple of businesses that are influenced by oil for what is a great example, but precious metals aren't a major driver for us.
Like that trade.
Transportation clearly, we're a large user of transportation and so it was a secondary factor oil with transportation and fuel costs.
But I'd also just the amazing uptick in in people chipping everything for themselves versus two to stores has really created a challenge for everyone. But overall, we think between our efficiencies that we can drive in operations and in our logistics patterns.
We're working very hard on doing a lot that will come out in the second half of this fiscal year and logistics internally that.
That we should be able to overcome anything that hits us, but one of the keys is for us.
A lot of those inflationary factors are secondary not primary drivers of our costs.
Okay got it and then just one quick final one you commented that you're able to reduce some discretionary spending but just wondering how much of that for the snapback could come back as you see some more normalized conditions and kind of the timing with regards to that.
Obviously, there are some things like incentive compensation they will have some pressure.
But overall, we've shown a long track record now of approximately five years quarter after quarter of driving costs out of our organization.
We've done that at the same time that we've increased sales and increased R&D. So it won't be quite clear we've done both halves of that that effort. We've been increasing anything that long term will increase revenue while decreasing the optional costs. So I think the answer to that is our.
Confidence comes from our track record and for knowing that we don't drive out costs.
Through with risks or things like that that are temporary or across the board cost reduction requirements, we drive them out by taking down to the fundamentals of our organization and saying how can we change.
We're doing to make it more efficient effective and that is what we've been doing throughout this pandemic. We wanted to be clear you can look at how we handle the downturn, we did not panic and as a result, a lot of other costs that we continued to drive out we're not panic or knee jerk responses how.
Can I show that to you when most people were shutting down all the inventory we realized our most critical thing to do as logistics, we're becoming extremely.
Questionable was to Frontload, our key are critical elements.
Level of inventories that example in all of our locations right by our customers as a result, we did not create a disruption to our customers very key for their long term respect for us but also it shows that the things. We do are designed around making sure that we don't ever cut cost for the short term.
That will hurt us in the long term so to be clear on my answer back I believe none of our cost reductions.
Were temporary in nature.
Thank you.
I'm showing no further questions at this time I would like to turn the call back to Mr. Michael Nauman.
Thank you very much Cindy I'd like to leave you with a few concluding comments this morning.
We are living in unprecedented times, and we're dealing with uncertainty disruption.
And unfortunately oftentimes tragedy.
We will keep prioritizing the safety of our amazing employees and delivering the products that help keep our customers.
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This quarter, our I'd solutions business continued to improve its performance and once again increased segment profit as a percentage of sales our workplace safety business continued to enhance its digital presence and serve its customers extremely well further strengthening our already strong foundation for future growth.
And we had another quarter of incredibly strong cash generation up 153% were in a net cash position, which gives us tremendous flexibility to add incremental shareholder value. We're doing all that we can to help our employees customers community and.
The world through this pandemic at the same time, we're maintaining our focus on the long term and are making the right investments today that will set us up for long term success.
Making the world a safer better place.
Every day.
There's not a slogan for Brady.
Our focus.
And our reality and making the world and equitable place.
For our employees.
For our communities and for all the people.
Is critical for our long term success for.
Prioritizing investments in growth and we're confident that Brady is well positioned to capitalize on global market trends as.
As we put calendar 2020 in the rearview mirror and focus on calendar 2021, Brady is well positioned for a strong year, where we generate significant value for both our customers and.
And our shareholders. Please stay safe. Thank you for this time. This morning have a great day operator, you may disconnect the call.
Ladies and gentlemen, this does conclude today's conference call. Thank you. So much for participating you may now disconnect.
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Peter.
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