Q3 2021 Brady Corp Earnings Call
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Good day and thank you for standing by welcome to the third quarter 2021, Brady Corporation earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
To ask a question during the session you'll need the press star 1 on your telephone please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your speaker today and for it and Chief Accounting Officer. Please go ahead.
Thank you.
Good morning, and welcome to the Brady Corporation fiscal 2021 third quarter earnings Conference call. The 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 3.
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 risks.
The risk factors were noted in our news release, this morning, and and Brady's fiscal 2020 form 10-K, which was filed with the SEC and 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 and as such for your participation and the Q&A session will constitute your consent of being recorded.
I'll now turn the call over to Brady's, President and Chief Executive Officer, Michael Nauman. Thank you and good morning, and thank you all for joining US today. This morning, we released our fiscal 2021 third quarter financial result, which was a very strong quarter in a challenging but improving economic environment. The Brady.
Team is executing well innovating for our customers and providing many of the products that are needed to help fight this pandemic.
Proud of the accomplishments of the entire Brady team.
Although this pandemic isn't yet quite behind us as Covid cases are still high and many countries around the globe and businesses continue to have many people working remotely demand has increased our sales people are starting to travel again and there are pockets for our business is growing beyond 2019.
The cost side of this recovery has definitely been Swift and is absolutely resulted and inflation areas such as the resin freight paper based materials and wages as you can see we continue to maintain a healthy gross profit margin of around 50% as we've never slowed down or pushed to automate our facilities and.
Drive sustainable efficiency gains, which when combined with targeted price increases are offsetting input cost increases.
Driving efficiencies as the never ending focus for us at Brady. However, what's more important at this junction is ensuring that we're taking aggressive actions to accelerate sales growth. We're upgrading our website, we're improving our marketing capabilities. We are developing new products and we are investing in capacity enhancing machinery.
And we're making the investments necessary to grow our top line now and into the future profitable sales growth is our number 1 financial priority for instance, and our IV solutions business, we've been increasing our R&D spend and we're seeing the positive results as we launch new products at an increasing rate and where can.
<unk> the 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 geographically into underserved markets with strong future growth potential, including India as well as certain other markets in southeast Asia and Eastern Europe.
We're also improving our online presence by upgrading our websites and investing more in digital marketing talent.
Our strong new product line up combined with our investments and sales marketing and online presence gives us confidence that our IV solutions business will continue to accelerating growth as we've progressed for the rest of the fiscal year and into fiscal 2022.
And of workplace safety business, we're also investing and accelerated sales growth throughout the pandemic, we ratcheted up our online marketing campaigns.
Which helped us reach many new customers and expand our customer base, we're capitalizing on our common web platform by using a much stronger market intelligence to quickly adapt to changing market dynamics, we're increasing our investments and new product development and we're increasing the pace of new product launches and an effort to increase.
The percentage of proprietary high value products sold to our customers.
And we're adding new salespeople around the globe to accelerate our sales even further.
Our focus on serving our customers extremely well and aggressively working to increase our customer base throughout the pandemic is paying off as we returned to healthy organic sales growth. This quarter. We also believe that we will eventually see another leg and this organic growth of some of our other end markets improve for instance, and our IVF business, we sell and.
And many small niche identification markets aimed at identifying people and the workplace and at entertainment venues. These markets have remained depressed and the Vietnam.
Not yet recovered quite like our core industrial markets have in addition, our product offering focused on micro businesses have remained depressed as these businesses have been impacted the most so when these markets bounce back, which we believe they will we should see another level of acceleration and organic sales growth and <unk>.
<unk> of our focus on driving organic sales growth. We're also and the process of working through the acquisition of Nordic I'd, which is summarized on slide number for Nordic ideas, a small publicly traded company and Finland and specializes in the RFID readers scanners and associated software to help power track and trace applications.
Brady is firmly positioned as the leader in high performance niche application industrial printers, and materials and Brady also as the leading position and aerospace RFID tags until now we use off the shelf RFID readers, which can sometimes compromise the performance of the RFID.
Tag with the addition of Nordic I'd technology will create a portfolio of the industrial readers that are fully integrated with our printers and our software driven by the adoption of industry for all of the RFID market is growing quickly as the result of emerging use cases to provide better workflow.
Visibility.
The acquisition of Nordic IV, when completed will submit Brady as a full service provider and these niche applications, where we can marry our strong printer and material expertise with Nordic IV scanners and software, thus, giving us the ability to expand and this faster growing segment of variety of solutions business and the.
Core of Brady for and identification company focus on industrial markets, our vision and to expand and diversify our presence and RFID into attractive new markets with faster organic growth rates north of the Nordic I'd fits squarely within this vision by filling of no GAAP and our product portfolio.
We are approaching Nordic IV as the strategic growth area for Brady, we're not trying to extract every last cost synergy in fact, the only significant cost synergies are of moving the cost of being a publicly traded company and Finland, and some minor of back office synergies the value of Nordic I'd comes from its strong technology.
<unk> and complementary products that will help the to expand and track and trace applications within industrial settings, we tend to increase the R&D efforts at Nordic IV to help accelerate new product introductions and help us expand this product offering outside of Europe. The vast majority of Nordic IV sales are currently in Europe.
So there are natural synergistic opportunities.
When we combine them with Brady global footprint.
We're very excited about how the acquisition combined with additional R&D efforts will help us to develop the complete global solutions and the industrial track and trace space.
And as I've mentioned, we're not buying Nordic I'd with a short term goal of immediately extracting as much value as we can our goal is to further invest and this technology and to help expand our product offering and industrial track and trace applications.
Brady is in an enviable financial position or cash flow was the up our earnings are up and our balance sheet is incredibly strong we will continue to invest in R&D and sales generating resources and capacity enhancing capex all of being <unk>.
And we intend to further per our balance sheet to work by returning funds to our shareholders and growing inorganically through strategic acquisitions again, I'm very proud of how our team has performed throughout this challenging period their ability to deal with the uncertainty think of 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 would you please provide instructions for our listeners.
Thank you as a reminder, task of question you'll need the press star 1 on your telephone to withdraw your question press the pound key.
Our first question comes from Michael.
And again with Wells Fargo. Your line is open.
Hey, good morning, everybody and nice quarter. Good morning. Thank you.
Very welcome I, just wanted to start with the comment on north of that guys and the dilution just wanted to confirm that was in the Ids segment comment also regarding the.
The strong operating margin performance you put up in that segment and it is going to be you mentioned the cost out synergies are going to be somewhat muted and youre going to grow into this business. It seems like does that mean Q3 is going to be the high watermark for Ibs profitability for the next.
A couple of quarters.
I can address the I can address this.
Nordic I'd will absolutely be in the I'd solutions segment.
I would not I would not anticipate the Q3 would be the high watermark.
If you look at the size of Nordic I'd compared to the I'd solutions segment. It's very small now it's very small that doesn't mean, it's not important to us. It absolutely is we think it's a very well run organization with great technology, and we're very excited to have them in the Brady portfolio, but to be quite candid, it's not big enough to.
And the move the needle outside of this Q4 period, where we have these acquisition related costs.
And so.
Switching gears from the gross margin good number there. If you were you mentioned a couple of highlights automation investments some recovery and some important markets.
And then pricing if you were to bucket the.
The big items within your gross margin inflection how would you rank order of those any color there would be great debt.
Greg Michael 1 thing I want to mention let's start with automation and I believe that's had the largest impact on Brady being able to really.
The enhance our margins and maintain our margins and this is the journey we've been on for approximately 4 years. We saw ahead of the curve that labor around the world was going to become more and more expensive, but more important than the expenses the difficulty to procure labor now.
Honestly I didn't anticipate the global pandemic that has accelerated debt labor shortage, but the fact that we were ahead of the curve and my mind of really driving and that area has made a significant difference and I want to be clear awesome and we have the question how far along in this process are you, it's never ending and fab.
<unk> I've not only challenged our teams to double down on automation efforts, because we're working on some very large ones right now, but I've asked them to work to accelerate to a next generation of automation as we go forward, so really youre going to see of 1.2 punch going forward in that.
Projects for working on Im challenging of parallel approach versus the serial approach and I'm asking and our teams think even larger and bigger as we go forward. The good news and that areas, we're already thinking that way as a company. We're philosophically in line with that so as many of our competitors are literally just looking at different ways to <unk>.
Automate not just manufacturing, but the start to the finish of the process. We're on.
Already well along the intellectual curve and in many ways. The physics curve of getting there. So that was the big determining the second factor is we have done a very good job of taking a look at our price opportunities for we have them and taking advantage of them in a way.
It is positive to us long term, we always wanted to look at the value. We add we always want to look at the pressures that we have with different material sets you know anything related to oil is up significantly right now as an example, so we've been able to marry that 1 as well and do it.
Very very good job of that and.
And the.
And but we take a look at that and realized that we have to marry of them together, we have good price control and that we provide great value to our customers, but we also never tried to take advantage of our customers during difficult times. The other thing that I would highlight is our ability to reduce material use.
<unk> and I think that's another area that not only our automation and helped with but our focus on becoming a more efficient and effective and environmentally sustainable organization I'm, a big believer of you need to put in programs that drive real sustainable change and 1 of the best ways, We can help our <unk>.
Cost structure and help the world is by driving our material usage down and that's the really the third area that I'd actually highlight and answering that question for you.
And.
And if I could sneak 1 more and the capital allocation strategy.
Understanding you of the cash to do self fund a lot of.
The.
All of that.
Be it seems like this is more of an evolution versus revolution that debt.
When you look towards inorganic growth are you also looking and mirroring that with divestitures or do you feel comfortable with the portfolio of the 2 segments you have in place right now.
We have definitely looked at.
Of divesting parts of our business and the past, we got out of the furniture business, which.
I think was a wise move on our part, particularly at the time and we've got a great.
The value for those businesses and hopefully those businesses and add value to their new owners.
But we're always looking at that and I think thats an area that we need to continue to look at making sure that we're really focused on the businesses that will be strongest for Brady and the future. So although there is.
I'm not signaling anything by saying that I am telling you that that is definitely an active part of our mentality, we want to be focusing on the best businesses to Synergistically work together I'm, not a big believer and conglomerates and that if we don't find reasons to be together to help each other and there's probably a better owner for them.
That business.
Got it I appreciate the time.
Thank you Sir appreciate your time.
Thank you. Our next question comes from Keith Hudson with Northcoast Research. Your line is open.
Good morning, guys and I want to echo that kind of good job on the quarter of Scripps sales gross margins. Thank you.
If I can go almost every line of the expanding on the gross margins a little bit more.
And I have a lot of puts and takes this quarter and especially with the WPS macro business being down and the fact to see your gross margins and I understand the automation and your prior comments after that but really I guess the question is do we have the capability going forward as the gross margin expansion or is it really more just the flooding off all of the price pressures you have from.
And which costs freight and raw materials and elsewhere.
Keith as I think I've said in the past we are very proud of our margins. They shows solid and fact excellent differentiation and industrial space showing that our customers see real value and the Brady products.
That said we are seeing.
Cost pressures I listed a lot of the areas, but the cost pressures are definitely real the inflation. We're seeing is definitely real and we believe it will be sustained.
The good news about that is we're also projecting that we'll be able to maintain our margins plus or minus of hair going forward. We think that we maintain those because of our excellent position with our customers and.
And also our ability to continue to be more efficient and effective and how we approach our business. So we're not projecting a margin expansion, but we are projecting despite inflationary pressures to be able to maintain those as we grow revenue therefore, hitting our total dollar mark.
<unk>.
And as an increase.
Great I appreciate it and then turn it over to the Nordic I'd.
Apologize if I missed this did you cover how much revenue you expect Medicare I'd to bring and for you guys.
We didn't we expect to have a little over 2 months of revenue.
And to put it in perspective their calendar 2020 sales were $6.7 million euros.
So.
And take a sixth of the $6.7 million of ago, So not that significant understood understood and was that business growing for them or of the stagnant.
Yes, the business is growing but more importantly, the combination of Brady and that business is an ex home growth opportunity by creating umbrella tying and software between the 2 groups, creating a synergistic sale. We are very confident and twofold..1 we will expand the customer base.
Period, but 2 we of the North American marketplace, where we see an awful lot of opportunity to grow their product set but remember the reason. We're excited is the technology combined with our technology I E. The total product offering to our customers is 1 that we are.
Confident.
We will do very very well with and our customers will really appreciate.
Understood and if I could squeeze 1 of more on here does not work are the.
Manufacture their own goods and if they don't where you plan on sort of some of our you maintain the same manufacturing process, we're not making any public comments at this time on their manufacturing to say Brady always looks at the best way to manufacturer of products of new know that if we believe we can add more value to our customer by doing.
Now we are of manufacturing company, but at the same time we.
No there are things that we do very very well and things that other people do very very well so I.
I can't speak specifically to what we will do with Nordic I'd, but I can tell you the biggest opportunity by far is taking this very talented team Marion them with our very talented team, they're great products with ours, and putting an umbrella of software over the 2 and really creating a.
<unk> growth driver, that's where I'd focus on Nordic I'd is that this is an engine for growth.
Great and fair enough. Thanks, I appreciate you and I appreciate your time. Thank you.
Thank you. Our next question comes from Steve <unk> with Sidoti Your line is open.
Good morning, everyone and good morning, Tom.
So and you talked a little bit about the end markets, we know arent really recovered.
Workplace, I'd addressing hospital and health care and I'd.
Deviation oil and gas from cash to talk back. So a lot of these end markets haven't recovered and can expect those to grow over the next few quarters net <unk>.
Revenues of course pre COVID-19 levels on a quarterly basis. So I'm, just trying to get a better indication of.
And where the strength is coming from the offsetting all of those areas.
Instead of kind of yes.
And you hit it very well.
Sorry, Steve I didn't mean and Europe, you hit the area very well.
And that Hasnt recovered I would say the best markets are and general industrials extremely strong and but.
But the other thing Steve and I think is important we really know we have grown because we brought out the products they really need right now.
Particularly let's talk about some of our wrapping products again that we've brought out these products literally eliminate labor.
It's not once again shifts and equation of saving the money.
1 of the things that our people go in and say can you get the people to do this work no well then.
Is it an issue of saving money or the issue of getting your products out that you need to get out. So the fact that we have really created some great industrial products. During this time when a lot of people were pulling back that are exciting to our end markets has made a big big difference to us, but specifically again biggest changes in debt.
<unk> markets.
That's helpful and.
Did you mention how where do you see.
And the hospital and healthcare area right now versus where its been do you see some improvement and I'm guessing still.
And that so I think I mentioned and my comments the areas, where we really arent seeing as much is the areas where people are getting together.
<unk>, we are seeing basically recovered and be back where we were close.
Pre pandemic.
People have put off surgeries as much as they can people, who literally worked probably going in to hit surgeries. They desperately needed are going in the hospitals are having to come back and are feeling comfortable coming back and their focus on COVID-19 as you look of the numbers go down dramatically.
<unk> been able to pull away where the.
Thankful for that as a society of.
But we're grateful for that as the company, obviously, because our products are definitely more geared although we did tremendously well with COVID-19 products I would far rather sell a product to to help the world be healthier place and general. So we are clearly answer your question, Yes, we are.
Seeing that market.
Coming back to pre pandemic levels.
And then just on the last quarter obviously.
<unk> you have the issues and product mix on the workplace safety and that bounce straight talk in terms of March and back to more of a normalized level, which I think you were expecting can you just talk a little bit of both of the dynamics there.
The mix more place for sure I mean, the Covid products were at lower margins period.
But you know as a human being that doesn't bother me at all.
Because we got out products people really need it for nobody.
And in many cases, we are the only person able to provide of so I feel very very good about what those products did to help the Brady employees get through this help our customers get through this helped the we will get through this but the margins on our core products are superior and as we convert even though we're not right now.
To convert.
Total revenue to the extent of the decline.
I feel very good that the margins that will end up with with this customer base are in line with the margins that we've historically gotten off of our core our core products. So that's which will be good for margin and the customer base that we brought and will be very good for Brady and they do appear to be as solid or even more.
More solid.
As far as being recurring customers.
And as our historical basis.
And just 1 more given how quickly.
The recovery on the I'd side, and you talked about labor shortages and did you have to push off any work and the quarter and.
Is that of risk going forward if activity continues to pick up.
And what Super proud of what Brady has been able to do.
And regards to getting our products out in a timely manner, our Roc numbers, although we don't publish them are excellent and on time delivery and has not deteriorated. There are some areas that are for ciccarelli.
Our oil based that debt have been somewhat super challenged but we've been able to keep making everything work on a very tight schedule and so although our labor in particular.
Is the area that drives the most concern.
So far we've been able to.
Use of combination of efficiency, great employees and.
And new hires.
To meet the needs. There is no question that it's a whole wall dietz up the economy heats up that'll become more and more of a challenge.
Thanks, So much appreciate for the time thank.
Thank you Sir.
Yeah.
Thank you. Our next question comes from cash and Keeler with Bank of America and your line is open.
Hydro and this is Patrick John Batten of George Staphos cash.
Cash and.
Hi, Michael Congrats.
Congrats on the quarter. So so first off youre raising guidance, but youre, obviously seeing some more inflation. So I guess is it possible to quantify or breakout.
And what benefit you expect the yet from volumes versus some price actions with customers.
I'd like to say, yes, and no.
And we can we have such a good mix, we do have good control over our costs. As you know we do have good control over our pricing, but it is but it would be very hard to break that out as the as an indicator for you for a for a model, particularly for others, but I can tell you this and I.
And we'll repeat it for us and Thats.
Speaking of anybody else inflation is real and there is no doubt the deflation is here and I don't see it as a very temporary blip.
Understood. That's helpful. And then I guess going back to Nordic I'd and noted that you intend to increase R&D efforts there I.
And I guess can you just talk about that a little bit more and.
I guess, what specifically do you expect to spend on sure exactly what I'm talking about this if you take their scanners with our printers, we need to create and eco spear between the 2 so it's.
There's a lot of software involved with that but also.
Want to make sure that they have the the products that fit our industrial mindset and mentality more of the American market et cetera. So you will see of hardware, but the biggest lift is going to be and the software area.
Yeah.
Thank you and I'm showing no further questions and the queue I'd like to turn the call back to Mr. Michael Nauman for.
And for any closing remarks.
Thank you very much I'd like to leave you with the few concluding comments this morning.
Certainly living in interesting times.
While we are still on the back half of a global pandemic. The economy appears to be accelerating at the same time, there is significant geographic and end market dispersion and we're seeing inflationary pressures all around us regardless of the macroeconomic changes ahead of us I am very confident that.
Brady will continue to thrive as a result of our strong team and the actions we've taken to ensure that we have a strong foundation.
And we're committed to come out of any downturn stronger than our competition and we are doing that.
This quarter, we experienced excellent sales and profitability growth. In fact, this was a record EPS quarter for Brady, our I'd solutions business returned to strong organic sales growth and once again increased its profit as a percentage of sales our workplace safety business continued to <unk>.
And the digital presence and service the customers extremely well further strengthening its already strong foundation for future growth and we had another great quarter of tremendous cash generation with free cash flow up more than 40%.
And our net cash position, which gives us tremendous flexibility to add incremental shareholder value.
For priority prioritizing investments and growth and we're confident that Brady is well positioned to capitalize and global market trends, we will finish our fiscal 2021 with strong momentum thus setting ourselves up for an even stronger fiscal 2020.
And 2 we are very well positioned to generate significant value for both our customers and our shareholders. Please stay safe and thank you for your time. This morning have a great day operator, you may disconnect the call.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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