Q2 2022 Brady Corp Earnings Call

February 17, 2022

Good day, and thank you for standing by and welcome to the second quarter 2022, 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 this session you will need to press star one on your telephone please.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today important Chief Accounting Officer. Please go ahead.

Good morning, and welcome to the Brady Corporation fiscal 2022 second 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 three.

Please note that during this call we may make comments about forward looking information.

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 2021 Form 10-K , which was filed with the SEC in September .

Also please note that this teleconference is copyrighted by Brady Corporation and May not be rebroadcast without the consent of Brady.

We will be recording this call and broadcasting it on the Internet as such your participation in the Q&A session will constitute your consent to being recorded.

I will turn the call over to Brady's, President and Chief Executive Officer, Michael Nauman, Michael Thank you and good morning, and thank you all for joining us today.

This morning, we released our fiscal 2022 second quarter financial results, which showed very strong sales growth and improved EPS. We have been successfully navigating challenging supply chain issues in a highly inflationary environment in order to manufacture and deliver the products that our customers need.

Need and have come to expect from Brady.

Route of how the team has been able to work through this difficult environment and deliver for both our customers.

And our shareholders. This quarter, we grew sales by a very robust 19, 6% and we create increased GAAP earnings per share by 10, 2%. If you exclude the impact of amortization than our EPS was up even more significantly.

At 14 point.

8%.

Along with this strong revenue growth and improving EPS, we have an extremely solid balance sheet, even after returning $45 million towards shareholders in the form of dividends and buybacks in the first two quarters of this year and intentionally building up our inventories we are still in a net.

Cash position of more than $64 million as.

As of January 31.

This quarter. We also returned our WPS business to organic sales growth earlier than originally anticipated even with tough comparables due to strong COVID-19 related product sales in the prior year organic sales growth increased by five 2%.

In our WPS business this quarter.

In our identification solutions business, we continued to post excellent results with organic sales growth of 16% and a total sales growth of 26%.

Over the last several years, we've built a strong foundation for success and this foundation is propelling Brady's performance first well worked out and removing structural inefficiencies improving execution, simplifying our business and rejuvenating leadership accountability and focus you can clearly see that.

Benefits of this effort as we produce SG&A expense from over 36% of sales just a half dozen years ago to 29, 1%. This quarter second we reinvigorated innovation through significant investments in R&D marketing automation and our website we incur.

Brady is relevant to our customers by providing complete solutions sets that solve their unique challenges and we've made critical investments in our facility in factory automation and engineering talent and in our sales force that will pay future dividends.

Third we've used our strong balance sheet to expand into faster growing end markets through the acquisition of code nor to guide and Magic card.

These actions are transforming Brady from a product company with solid profitability, but modest organic growth into a solution provider that is growing in excess of GDP. It is poised for excellent future sales growth due to the strong foundation and positive momentum, resulting from the many investments made.

Over the past five plus years.

We're proud of what we've accomplished at Brady, but we're far from done as we look ahead, our priorities are to <unk>.

First and foremost drive organic sales growth in insurance, we're serving our customers extremely well during this ongoing public health crisis and period of challenging supply chain second is to take the necessary pricing and cost actions to mitigate the impact of this inflationary environment and returned.

Pre pandemic gross margin levels, while continuing to invest in our future.

Third is to integrate our recent acquisitions in order to accelerate our systems approach, which is leading to higher revenue.

And profit growth and finally.

Our capital effectively in order to drive long term shareholder value.

In our IV solutions business, we're embracing these priorities by increasing our investments in R&D, including the incremental R&D necessary to integrate our recent acquisitions were also improving our online presence by upgrading our websites and investing in digital marketing talent, all while expanding our sales force.

And expanding geographically into underserved markets and.

In WPS, we're focused on providing more internally produced custom solutions and working with more automated interactions with our customers to provide quicker and more reliable responses that they desire and value.

And we're continuing to drive significant automation within our factories and distribution centers, which is absolutely critical in a period marked by a scarcity of labor and rising costs.

Our strong new product lineup investments to drive sales that our positive momentum in automation efficiency gives us confidence.

That we will continue to generate strong organic sales growth with very healthy margins over the rest of this fiscal year and for years to come.

We're also integrating the three acquisitions that we completed in the fourth quarter of last year, which includes building out our industrial track and trace solutions set.

Much of the increased R&D that you see relates to the investments necessary to build out a comprehensive solution that will help us move into faster growing end markets and accelerate sales growth for years to come. However, we are seeing significant inflationary pressure across many different cost categories.

From wages to utilities to shipping costs, and raw materials, and we've had challenging challenges cost effectively securing certain products or our supply chain originates in Asia in general we've been overcoming these shortages, but it has resulted in increased material costs and the use of <unk>.

<unk> more expensive airfreight.

Even with these inflationary pressures our gross margins are still an enviable 40%, 47%. This quarter, we're putting through additional price increases across many of our product lines to try to catch up to the increased cost that said.

We believe that this inflationary environment will be with us for a while and that our gross margin challenges will remain until continued price increases will be able to catch up with input cost increases. We are confident that we provide our customers with significant value as a result, we expect gross profit margin.

To improve over time back to historic levels.

Even in this challenging logistical and inflation driven environment Brady is well positioned for success as we look to the rest of this fiscal year and beyond I'm confident in our ability to deliver results for our customers our employees and of course for our shareholders I will now turn the call over to Aaron to give a bit.

More detail on our financial results, then I'll return to provide specific commentary about our identification solutions and workplace safety businesses Erin. Thank.

Thank you Michael Good morning, everyone and thank you for joining US. This morning, I'll start the financial review on slide number three.

Sales in the second quarter were $318 1 million, which was an increase of 19, 6% when compared to the same quarter last year and GAAP pre tax earnings increased six 7% to $42 million impact.

Impacting earnings this quarter was a significant increase in amortization expense from the acquisitions completed at the end of last year. If you exclude the amortization expense from all periods presented than our pre tax earnings would have increased by 12, 4% to $45 8 million.

GAAP diluted EPS was <unk> 65.

Which was an increase of 10, 2% over last year's second quarter, and if you exclude amortization expense and EPS would have increased by 14, 8% to 70 this quarter compared to 61 in the second quarter of last year. So financially Q2 was another very strong quarter. Despite the.

Challenges in the inflationary pressures that Michael just mentioned.

Moving to slide number four you'll find our quarterly sales trends or nearly 20% sales increase consisted of organic growth of 13, 1% and an increase from acquisitions of eight 6%. This was then partially offset by a decline of two 1% from foreign currency translation organic.

<unk> grew in each of our two divisions IV solutions had robust organic sales growth of 16% and workplace safety returned to growth clocking organic growth of five 2% this quarter.

Turning to slide number five for our gross profit margin trending our margin was 47% this quarter compared to 48, 7% in the second quarter of last year as Michael mentioned, we're experiencing inflationary pressures in nearly all cast all cost categories, but we're automating across our sites we're driving it.

<unk> throughout the entire organization and we're putting through selected price increases to offset these cost increases on.

On slide number six you'll find our SG&A expense trending when comparing to last year's Q2 SG&A of $82 2 million. This year's SG&A of $92 5 million. There are two main items impacting comparability first the amortization expense from the three acquisitions completed at the end of fiscal 'twenty one added.

$2 4 million of expense and second the remaining SG&A expense from these three acquisitions added another $5 3 million. Excluding these acquisitions SG&A was up approximately 3% in Q2 versus the same quarter of last year.

And as a percentage of sales SG&A was 29, 1% this quarter compared to 39% in the second quarter of last year, which illustrates how we are able to continue to squeeze leverage out of our SG&A structure, plus if you exclude amortization from both the current year and the prior year than SG&A would have declined.

Even more declining from 34% of sales last year to 27, 9% of sales. This year, we continued to make progress in driving down SG&A as a percent of sales and believe that we still have numerous opportunities ahead of us slide number seven is the trending of our investments in research and development.

This quarter, we invested $14 million in R&D, which equates to about four 4% of sales we're committed to maintaining this increased level of R&D investment as we continue to see opportunities for R&D across our businesses, including building out a comprehensive industrial track and trace platform that encompasses our printers.

High quality materials, RFID scanners, and barcode scanners. These investments in R&D are critical to sustaining our increased growth rate over the long term.

Slide number eight illustrates our pre tax income trends pre tax earnings increased six 7% on a GAAP basis and increased to 12, 4%. If you exclude amortization expense from all periods.

Slide number nine illustrates our after tax income and EPS trends as I mentioned, our GAAP EPS increased 10, 2% this quarter and if you exclude the after tax impact of amortization expense, our EPS would've increased by an even stronger 2014, 8%.

Last year was a record EPS year for Brady and even with last year's tough comparable year to date, our EPS. Excluding amortization is a full 12, 6% ahead of last year at this time.

On slide number 10, you will find a summary of our cash generation. This quarter, we intentionally increased our inventory levels to ensure that we have the materials available to meet the future needs of our customers. This quarter, we had a cash outflow of $17 $8 million related to a building of inventory levels. Although we are still working to secure a larger.

Certain critical products, we don't anticipate the ramp up in our inventory levels to continue at this pace other than to support the increasing sales levels. We also paid out our fiscal 2021 incentive based compensation this quarter, which had a negative impact on our cash generation as a result of these two significant cash outflows.

We finished with cash flow from operating activities of negative $3 $2 million this quarter as we move into the back half of this fiscal year, we expect our cash flow to improve significantly as our intentional building of inventories subsides now.

Now if youll turn to slide number 11, you can see the impact that <unk> historically strong cash generation has had on our balance sheet, even after returning funds to our shareholders and building up inventories to ensure that we are poised to meet future customer demand on January 31, we were still in a net cash position of more than 64.

<unk>.

Our strong balance sheet puts us in a fantastic position to execute additional value enhancing activities, including investing in R&D, completing additional acquisitions and returning funds to our shareholders. Our approach to capital allocation is to first use our cash to fully fund organic sales and efficiency opportunities throughout the year.

Economic cycle. This includes investing in new product development sales generating resources, it improvements capability enhancing capex and automation focused capital expenditures, we will absolutely keep funding these investments where it makes sense and where the investments are ROI positive and second we focus on returning cash.

To our shareholders in the form of dividends, we've now increased our annual dividend for 36 consecutive years.

After fully funding organic investments and dividends. We then deploy our cash in a disciplined manner for either acquisitions, where we have strong synergistic opportunities or for buybacks. When we see a disconnect in our view of intrinsic value versus Brady is trading price. This quarter, we returned $14 5 million to our shareholders in the <unk>.

Dividends and share buybacks and in the first half of this year, we returned a total of $45 million to our shareholders, which illustrates our commitment to return capital to our shareholders subsequent to our quarter end on January 31, we repurchased another $9 million worth of shares bringing our total share buybacks from August one.

2021 through today to $30 7 million, which was just over 612000 shares.

As we look to the back half of this year and assuming current market conditions persist, we expect to continue using our share buybacks as a tool to return funds to our shareholders.

Slide number 12 summarizes our updated guidance for the year ending July 31 2022.

Although organic sales growth was strong our gross profit margin. During the six months ended January 31, 2022 was a bit weaker than we had originally anticipated as cost of increases increased faster than expected. We expected. These cost pressures to continue to impact our gross profit margin for at least the short term.

For price increases and efficiency actions are able to offset these inflationary forces in the second half of fiscal 2022, we expect our gross profit margins to improve from the 47% realized last quarter, but we don't expect our margins to fully return to pre pandemic levels as such we are adjusting our diluted EPS.

<unk>, excluding amortization guidance from our original range of $3 12 to $3 32 per share to a new range of $3 to $3 15 per share. This equates to a revised GAAP EPS guidance range of $2 78.

To $2 93 per share this revised.

This guidance range implies that we expect fiscal 2022 GAAP earnings per diluted share to increase from 13% to 19% when compared to our previous record EPS year in fiscal 2021, and if you exclude amortization and nonrecurring charges incurred last year, we expect to EPS.

To improve by 9% to 15% for the full year ending July 31 2022.

Included in our GAAP earnings per share guidance is an increase in after tax amortization expense of approximately $6 million.

After tax amortization increased from about $5 5 million in fiscal 2021 to about $11 5 million in fiscal 2022, which is a delta of approximately <unk> 12 per share. The other elements of our guidance are pretty much in line with what we shared last quarter, specifically, we expect a full year <unk>.

<unk> tax rate of approximately 20% and depreciation and amortization expense to range from $34 million to $36 million.

Capital expenditures, excluding any future facility purchases are expected to range from $27 million to $32 million. This capex guidance range of 27% to $32 million is inclusive of the $8 million of facility purchases, we already incurred in the first half of this year. This guidance is based on foreign currency exchange rates as of.

January 31, 2022, and assumes continued economic growth as.

As we look forward to the rest of this fiscal year, we will 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 as for capital allocation will keep investing in our.

<unk> business will keep investing in our industrial track and trace initiatives will continue to return funds to our shareholders through dividends and through buybacks. If the price is right and lastly, we'll continue to look for acquisitions with a strategic fit is clear we have a strong balance sheet and we'll use it as a tool to drive long term shareholder value.

Risks to this guidance among others include the strengthening of the U S dollar versus other major currencies, such as the euro or the pound worsening logistics that don't allow us to meet our commitments to our customers further lockdowns or increased inflationary pressures that we can't offset in a timely enough manner.

I'll now turn the call back to Michael to cover our divisional results and provide some closing comments before the Q&A session. Michael. Thank you Erinn slide number 13 outlines the second quarter financial results for our identification solutions business.

Ids sales increased 26, 1% to $245 million organic sales alright. Its division were once again very strong up 16% versus the second quarter of last year.

On the cost side.

Drove numerous automation and efficiency projects that partially offset that.

Input cost inflation that we've been experiencing segment profit as a percentage of sales was 18%, which was down from 21% last year. However, if you exclude the sizable increase in amortization that Aaron mentioned, then segment profit as a percentage of sales would've been 19 five.

Percent this quarter compared to 27% in last year's second quarter.

Regionally.

Organic sales in Asia were once again very strong this quarter with growth of nearly 15% compared to the second quarter of last year. This is the fifth consecutive quarter of Asian organic sales growth in excess of 10%.

Organic sales were also up more than 15% in the EMEA region. Despite several lockdowns continuing throughout most of the second quarter and organic sales growth was just as strong in the U S with growth of over 15% as well this quarter, we saw growth in nearly all product lines in all key geographies.

Including health care, our organic sales growth was approximately 6% overall.

Overall, our sales trends in Ids are very positive, yes, our margins are temporarily challenge, but we are growing our customer base and taking share this bodes well for our future.

Our R&D investments remain a high priority, we have ratcheted up our investments to build an industrial track and trace solution and we're already experiencing stronger than anticipated synergies from our recent acquisitions, which we expect to only increase from here through the complementary nature of code Magic card in.

<unk> I'd product portfolios. These acquisitions are performing approximately as expected and bring us valuable technologies that help round out our product offerings and make Brady more valuable to our customers. We're devoting a significant amount of time and money to all aspects of R&D from software.

<unk> printers and materials, our previous R&D investments are now, resulting in a steady stream of new product launches that we expect to continue to propel us to above GDP sales growth. Our newest line of printers are all about making the lives of our customers easier and are designed to be better for the environment.

As an example, we've upgraded our line of Raptor partners, making them much smaller while improving functionality. These wire identification partners are capable of both printing label and automatically applying it to the wire thus saving valuable time for our customers. In addition partners such as the <unk>.

300, industrial label printer are easier for our customers to use and have a distinct environmental advantage over our competitors products. Our printers are incredibly simple to setup as there is no calibration process, which saves our customers time and frustration and our printers print.

On the first label with zero waste, which is completely different than our competitors' products. Our competitors printers typically require a calibration process that almost always result in numerous wasted labels before printing to first usable label costing time money and environment.

Italy detrimental scrap.

It's a combination of our best in class printers, plus our high performance materials set Brady apart from our competition. Our R&D pipeline is strong and we continue to launch innovative new solutions that help our customers solve problems and be more effective.

Efficient.

I'm also excited about how the acquisitions of code <unk> and Magic card are moving us into faster growing end markets. Our increased presence in the industrial track and trace market combined with our strong core Ids business.

We have clear positive momentum positions <unk>, well for outsized future organic sales growth.

These positive revenue trends combined with our cost discipline efficiency focus and future price increases will help offset inflationary pressures and paint a bright future for our <unk> Division.

Moving to slide number 14, you'll find a summary of our workplace safety financial performance.

WPS returned to organic sales growth this quarter more than offsetting the challenging comparables caused by strong COVID-19 related product sales last year coming into this quarter, we were not anticipating organic sales growth in our WPS Division. However, our WPS team performed.

<unk>, well and returned to organic sales growth faster than we anticipated our WPS business experienced strong organic sales growth of five 2%, finishing with sales of $73 1 million this quarter organic sales growth in our European WPS business was more than 7%.

This quarter, our Australia business also performed well growing nearly 6% organically while revenue in our North American WPS business were effectively flat this quarter.

In our Americas business, we have been working to optimize online prices to increase our competitiveness and acquire new customers, while reducing our SG&A expense structure, which includes reducing head count and catalog distribution costs.

We will continue to routes SG&A expense and streamline our manufacturing costs in our WPS business, while capitalizing on our common web platform and strong marketing intelligence to adjust prices up and down and modify our online advertising based on the specific market dynamics in an effort to maximize.

The return on advertising spend WPS segment profit increased approximately 30% to $44 5 million this quarter compared to $3 5 million in last year's second quarter. This improved segment profit as a direct result of increased sales volumes net of inflationary impacts.

On our cost structure, we will continue to modify our marketing campaigns to reach new customers will continue to adjust prices to acquire more customers online and we will continue to work hard to address the underperforming businesses within WPS. This will result in additional reductions in SG&A expense.

As we progress through the back half of the year as we build a streamlined foundation from which to grow and from which to improve profitability.

Unfortunately, this pandemic is not over and the financial impact stemming from the pandemic are certainly not over throughout the pandemic, we invested in growth and efficiency and its continued level of investment that it will enable us to keep the strong positive momentum as new products are launched and factory automation is brought on.

Online <unk>.

Brady is in an enviable financial position.

Fiscal 2021 was a record EPS here and so far in fiscal 2020 to EPS is running well above fiscal 2021 levels.

Organic sales were up 13% this quarter and total sales were up nearly 20% our earnings are up and our balance sheet is strong we will continue to invest in R&D sales generating resources and capability enhancing capex all of being tight and non revenue generating expense.

And aggressively working to global logistics issues and inflationary challenges.

I am proud of how our team performed throughout this challenging period. The Brady team has done a great job, serving our customers while continuing to invest in our future. We have a solid foundation and a great platform for outsized future growth, we're transitioning into a faster growing customer company.

And we're continuing to streamline our cost structure and drive efficiencies, which will result in improved future profitability yes.

Yes, we have short term gross margin challenges that resulted in our decision to adjust our EPS guidance for the remainder of the fiscal year. However, we are still forecasting record GAAP EPS for the year ending July 31, 2022, we are forecasting GAAP EPS growth.

From 13% to 19% over last year's record EPS levels, and we are expecting total sales to increase by more than 12%. This year, we have positive momentum that will deliver increasing levels of shareholder value.

With that I would like to start the Q&A operator would you please provide instructions to our listeners.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from Michael Mcginn with Wells Fargo. Your line is open.

Yeah.

Hey, good morning, everybody.

Good morning, Michael.

So starting with pricing pricing was noted I think selective was the term used but inflation is broad base. So why not be more aggressive and can you also address the differential in pricing strategies between devices and consumables do consumables have.

Less upside given their higher starting point on margins.

First of all I think the wording was careful and Michael I would say this we have actually been aggressively increasing.

Broad depth and amount of our price increases and we plan to continue to do so so that there are a few minor areas that we are facing challenges competitively in the environment of some what I would call it irrational price decisions by <unk>.

Some of our competitors, but as you know we have a very broad based competitors depend.

On the product and so effective we have been raising prices across the board in our units.

With a few exceptions.

That said.

We feel strongly that we provide significant value to our customers.

And we are looking to increase prices going forward.

More rapidly and more significantly.

In all areas consumables and non consumables.

And can you maybe walk us through the price on the cost front, where you guys recognize inventory LIFO FIFO weighted average cost between the two separate segments.

I'm sorry, Mike can you can you ask that question again.

When is your accounting methodology.

Inventory between the two segments okay.

We have portions of our U S business that are on LIFO.

And it is mostly our identification solutions business. So clearly we're recording inventory LIFO in Ibs and workplace safety is not unlikely.

And as far as the first piece of your question regarding cost increases we are seeing cost increases across lots of different categories. Let me just put it in perspective, because I don't think we gave a ton of detail on the call I'm sorry in the prepared remarks. So if you look at our gross margin and gross margin declined 170 basis points in total.

Freight alone was up 150 basis points as a percent of sales.

You add in direct materials, another 40 basis points.

Cost increases as a percent of sales direct labor another 10% increase as a percent of sales. So just those three categories alone with two was 200%.

200 basis points excuse me of sales now of course, we've had we've been driving many efficiency gains that Michael mentioned as well and will continue to drive those down to offset wherever we can as well as price increases, but the inflationary environment is absolutely real and freights the biggest the biggest contributor.

I want to add a little more color action of that even Michael fragrance contributor for a couple of factors.

Across the board freight rates are increasing I don't care, whether it's trucking I don't care whether it.

Redistribution shipping, but the biggest factor for us in the short term is airfreight, our commitment to our customers remains priority number one and as a result, we've been air freighting.

Nick again amount of our products that we would never normally airfreight and that in results has been.

Tremendous pressure on our cost the good news about that is that as we're driving our facilities that is an element that we can take down when.

When the market isn't necessarily going to take down overall freight cost. So we do have an upside to that in the near future as we drive back to a more traditional traditional shipping lanes and we know that the shipping lanes still remain a tremendous challenge to us.

But numbers for instance in the port of Los Angeles are coming down not to pre pandemic.

Pandemic levels, but have come down tremendously as far as wait times. So we're going to see some compression in that area as well, but the biggest opportunity as I said is moving back from air freight to sea freight.

Okay, just to put a bow on this line of questioning Ibs's LIFO and then workplace safety is.

In the U S is LIFO ideas outside of the U S is not and the remainder of our businesses playful.

Okay. So that's kind of what I'm getting at so the majority of your business being outside of the U S is realizing.

Our real time pricing against the easiest cost of goods sold comps.

Just trying to confirm that whereas but inside the U S. You have the largest.

It's not matched up yet so there is more price cost tailwind.

Potentially going forward in the U S, but maybe not so internationally.

I'm not so sure that Thats im not so sure I would draw that conclusion quite yet.

No.

Alright, and then I guess on the <unk>. The next one next question can you.

On the WPS margin snapback nice to see.

Can you just talk about the general tailwind relative to FQ, one that didn't see and then also the tailwind from in sourcing and removing a layer of outside gross profit what percentage of in sourcing has been completed to date and does inflation kind of accelerate that trend.

Yes, it certainly does it point that our direction is correct that not only are we in sourcing for cost, but we're really in sourcing primarily or flexibility and speed to our customers the ability to customize to differentiate and to respond very very well.

Rapidly you're exactly correct, though a another great benefit that is is it a margin improvement and as we've seen inflation go up we've seen the benefit of that but we've also been driving that are harder without giving specific numbers, we still have a lot of opportunity to go there.

We've put out a target and a challenge to our teams there that goes through 2026.

<unk> going to increase the percentage of in sourcing I will tell you we will never be 100%.

Because there is a certain amount of products that are required that our commodities that have super high competitive pressures from other suppliers to keep their price to us law and that we need to provide as part of a package total solution. All of that said, we still to your point have a lot of opportunity in that space.

To drive internally and are doing cell, particularly.

In Europe , we have some great opportunities there.

As well as Australia, and North America.

Alright, I appreciate it I'll pass it along.

Thank you Michael appreciate it.

Thank you. Our next question comes from Steve ceremony with Sidoti Your line is open.

Great. Thanks, Thanks, so much for all the detail I'll turn the call everyone.

Do you want to ask a little bit about the acquisitions and where you think the integration stands versus in your guidance versus when you first closed those deals I know you said $96 million in sales are expected in the first in fiscal 'twenty two it looks like you put about 46 in the first half.

You also talked about margins would be slightly higher than historic Prady can you just walk us through where those businesses are now versus where you thought it would be when you close the acquisitions.

Steve Thanks for the question appreciate it if you were right on track, we feel very good about those acquisitions.

As you know people always worry about acquisitions, because the real success is in your ability to integrate them and your ability to drive the synergy I can tell you that I have.

Interacted, particularly I made sure I got over to Europe , which as you know has been a challenge the teams are strong they're capable.

They see the benefits of being part of the Brady organization and vice versa, we're seeing a lot of benefits of them.

I believe long term there are more benefits than we actually anticipated, which particularly with a lot of acquisitions I've seen over the years is not necessarily true in this case I do feel very good that right now we're on track we had a two year outline of when we're going to be able to integrate everything put us.

Software umbrella over it we're also on track with that.

And like I said the good news is we believe the outcome will be even stronger than we anticipated in our original models. When we acquired the company and considering we did this in the heart of Covid without being able to really get our feet on the ground nearly as much as we wanted to normally.

Think it's been a very very successful.

First start and very excited not only about the capabilities, but more importantly about the teams that are helping us to drive our success for the future. So.

Obviously, you are not unique in terms of building up inventory. The question is how quickly you think about do you think you're staying at an elevated level for multiple quarters. When do you think that starts drawing down I'm just trying to think about how this will affect full year because obviously.

The first half wasn't.

Strong on the cash flow level, but it looks like primarily due to the inventory bill.

Correct, Steve you've cut out a little at the beginning but I believe your question was totally around inventory build if there was more to what you may have to add the first part of that question, but no.

Got it.

The key to the inventory build is that yes, we made a strong decision to first and foremost support our customers and we.

Strategically have had the cash to be able to do that without hurting our few other future investments. So that's a very important statement.

We therefore believe we primarily put us in a position and we can show that through our online delivery through our customer satisfaction that we arent missing shipments and we do see competitors, who are missing shipments delaying shipments and a variety of other factors. So that has been very important that said.

With the exception of a few significant categories.

We don't believe will be significantly building going forward.

Timing of release also depends on the timing of things like shipping lanes.

Obviously, if you can take an 18 week cycle and bring it back down to a six week cycle that will take tremendous pressure off of our inventory levels.

I don't have a perfect crystal ball on that I believe right now that you can model off keeping our inventory levels, where they are today with possible slight increases or decreases depending on mix and accountability, but it won't be a significant drive anywhere other than growth of sales.

Okay.

Thanks, Michael and thanks, everyone. Thank you Sir appreciate your time.

Thank you. Our next question comes from Keith <unk> with Northcoast Research. Your line is open.

Good morning, guys and great job on the top line there Michael just trying to dissect our top line a little bit further.

If you look at the growth that you guys saw how much of that would you say it was from your pricing actions that you guys took in the quarter.

It was three 8% Q3, 8% was price the remaining nine three of organic was.

The mix volume et cetera.

Didn't see significant sales growth real organic sales growth.

It's a great organic growth number for you guys.

Now in terms of your guidance didn't change your topline growth guidance for years at least 12%, but you're obviously last quarter this quarter significantly.

Above that.

Is this about where conservatism that raising that number or do you see anything in the second half of the year that may propose the challenge to really exceeding that number by a good margin.

Yes, there are two items impacting our revenue guidance and our decision to leave it out.

Above 12% and number one was of course, we did have very strong organic sales growth this quarter, but unfortunately offsetting that was a bit of FX headwind and to put it in perspective in Q1.

FX was actually a tailwind of <unk>, 7% Q2 headwinds of $2, one and as you know about half of our business is overseas. So that can that can have a pretty significant impact.

So is that sort of a combo of those two items.

Okay.

Michael you guys are you talked in the past about micro business is not coming back in.

Third quarter is usually a strong quarter for you guys and the micro business aside usually incremental gross margins and obviously, we got a lot of things going on now for gross margins, but how do you feel about micro businesses right now and its ability to help the third quarter.

Yes.

Interesting we are seeing.

And introduction of businesses into the economy, you can look at the number of startups as registered but we're not seeing yet is those businesses turn into what I'll call real businesses.

E. The number of zero employee businesses that have started in the last six months is significantly higher than the normal percentage so until those businesses turn into by real businesses business as an employee.

Some number of people.

Still going to see a challenge there Keith so I wouldn't anticipate that being a major lifter in the third quarter and literally just because of that dynamic the rest of that business is actually functioning better than before we've made some significant changes to streamline efficiencies and cost and so we are a little.

Currently at a point that as we watch those businesses really recover a green come out with.

They said, what I'll call real businesses, you'll see that happen and you do have to bifurcate out the zero employee businesses to see that.

Yeah got it and then you guys did.

Large automated store here in Milwaukee facility I think it was last quarter I guess.

I'll touch on that automation, there and it's delivering results that you expected and that was a full quarter benefit or was the first full quarter benefit from that operation.

Current quarter.

We'll still continue to see benefits over the next quarter from that Keith.

These things are very complex, it's amazingly effective system, it's Scott and.

An ability I'm not a giant fan of massive inventory systems by and large because they often have a bottleneck and breakout point, we don't have that with this so instead of being a serialized approach.

As bottlenecks, it's a massive parallel approach off which really gives us a lot of different advantages, but as a result, the programming the performance upgrades actually build upon themselves over time, and so we're going to continue to see more and more efficiencies coming out of that but certainly the next quarter and Frank.

We have next generation plans for that system. So we expect to drive more performance gains from that approach over the next year plus.

Great. Thanks, guys I appreciate it thank you Sir.

Thank you and Thats all the questions in the queue I would like to turn the call back to Michael Nauman for closing remarks.

Thank you so much I would like to leave you with a few concluding comments this morning.

We're certainly in a new phase of the COVID-19, pandemic, we're seeing stress supply chains increased input costs labor shortages and overall increased inflation.

We're working through this effectively and growing sales rapidly taking share and serving our customers well, but we are experiencing gross margin compression that we expect to continue for the remainder of this fiscal year.

I don't know what the future holds for the global economy, but I do know that Brady is well positioned to thrive.

<unk> of which direction the economy heads we've changed our profile to a faster than GDP growing company with an increasing foothold in faster growing end markets. We have a strong balance sheet and strong cash generation, which enables us to keep investing in both organic and inorganic growth. While also returning significant funds to.

Our shareholders in the form of dividends and buybacks.

And once our pricing and efficiency initiatives catch up to cost inflation, our strong sales growth and improved gross margins will drive significant bottom line growth.

Please stay safe. 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.

Okay.

[music].

Yes.

Thanks.

Okay.

[music].

Good day and thank you for standing by welcome to the second quarter 2022, 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 this session you will need to press star one on your telephone please.

Please be advised that today's conference is being recorded I would now.

Now I'd like to hand, the conference over to your Speaker today important Chief Accounting Officer. Please go ahead.

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 forward looking statements. 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 2021 Form 10-K , which was filed with the SEC in September .

So 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.

Now I'll turn the call over to Brady's, President and Chief Executive Officer, Michael Nauman, Michael Thank you and good morning, and thank you all for joining us today.

Need and have come to expect from Brady.

Proud of how the team has been able to work through this difficult environment and deliver for both our customers.

At 14, 8%.

Along with the strong revenue growth and improving EPS, we have an extremely solid balance sheet, even after returning $45 million to our shareholders in the form of dividends and buybacks in the first two quarters of this year and intentionally building up our inventories we are still in a net cash.

Cash position of more than $64 million as of January 31.

This quarter. We also returned our WPS business to organic sales growth earlier than originally anticipated even with tough comparable due to strong COVID-19 related product sales in the prior year organic sales growth increased by five 2%.

In our WPS business this quarter.

Our identification solutions business, we continued to post excellent results with organic sales growth of 16% and a total sales growth of 26%.

Over the last several years, we've built a strong foundation for success and this foundation is propelling Brady performance first well worked out and removing structural inefficiencies improving execution, simplifying our business and rejuvenating leadership accountability and focus you can clearly see that.

Benefits of this effort as we've reduced SG&A expense from over 36% of sales just a half dozen years ago to 29, 1%. This quarter second we reinvigorated innovation through significant investments in R&D marketing automation and our web site, we incur.

Brady has relevance to our customers by providing complete solutions that solve their unique challenges and we have made critical investments in our facility in factory automation and engineering talent and in our sales force that will pay future dividends.

Third we've used our strong balance sheet to expand into faster growing end markets through the acquisition of code Nordic IV and magic card.

Over the past five plus years.

We're proud of what we've accomplished at Brady, but we're far from done as we look ahead, our priorities are to <unk>.

Pre pandemic gross margin levels, while continuing to invest in our future.

Third is to integrate our recent acquisitions in order to accelerate our systems approach, which is leading to higher revenue.

And profit growth and finally to deploy our capital effectively in order to drive long term shareholder value.

And expanding geographically into underserved markets and.

And we're continuing to drive significant automation within our factories and distribution centers, which is absolutely critical in a period marked by scarcity of labor and rising costs.

Our strong new product lineup investments to drive sales that our positive momentum in automation efficiencies gives us confidence.

That we will continue to generate strong organic sales growth with very healthy margins over the rest of this fiscal year and for years to come.

We're also integrating the three acquisitions that we completed in the fourth quarter of last year, which includes building out our industrial track and trace solutions set.

From wages to utilities to shipping cost and raw materials, and we've had challenging challenges cost effectively securing certain products or our supply chain originates in Asia in general we've been overcoming these shortages, but it has resulted in increased material costs and the use of <unk>.

A much more expensive airfreight.

We believe that this inflationary environment will be with us for a while and that our gross margin challenges will remain until continued price increases will be able to catch up with input cost increases. We are confident that we will provide our customers with significant value as a result, we expect gross profit margin.

To improve over time back to historic levels.

More detail on our financial results, then I'll return to provide specific commentary about our identification solutions and workplace safety businesses Erin. Thank.

Thank you Michael Good morning, everyone and thank you for joining US. This morning, I will start the financial review on slide number three.

Sales in the second quarter were $318 1 million, which was an increase of 19, 6% when compared to the same quarter last year and GAAP pre tax earnings increased six 7% to $42 million impact.

Impacting earnings this quarter was a significant increase in amortization expense from the acquisitions completed at the end of last year. If you exclude amortization expense from all periods presented in our pre tax earnings would have increased by 12, 4% to $45 $8 million.

GAAP diluted EPS was <unk> 65.

Which was an increase of 10, 2% over last year's second quarter, and if you exclude amortization expense than EPS would've increased by 14, 8% to 70 this quarter compared to 61 in the second quarter of last year. So financially Q2 was another very strong quarter. Despite the.

Challenges in the inflationary pressures that Michael just mentioned.

Moving to slide number four you will find our quarterly sales trends or nearly 20% sales increase consisted of organic growth of 13, 1% and an increase from acquisitions of eight 6%. This was then partially offset by a decline of two 1% from foreign currency translation organic.

<unk> grew in each of our two divisions IV solutions had robust organic sales growth of 16% and workplace safety returned to growth clocking organic growth of five 2% this quarter.

<unk> throughout the entire organization and we're putting through selected price increases to offset these cost increases on.

And as a percentage of sales SG&A was 29, 1% this quarter compared to 39% in the second quarter of last year, which illustrates how we're able to continue to squeeze leverage out of our SG&A structure, plus if you exclude amortization from both the current year and the prior year than SG&A would have declined.

High quality materials, RFID scanners, and barcode scanners. These investments in R&D are critical to sustaining our increased growth rate over the long term.

Slide number eight illustrates our pre tax income trends pre tax earnings increased six 7% on a GAAP basis and increased to 12, 4%. If you exclude amortization expense from all periods.

Last year was a record EPS year for Brady and even with last year's tough comparable year to date, our EPS. Excluding amortization is a full 12, 6% ahead of last year at this time.

On slide number 10, you will find a summary of our cash generation. This quarter, we intentionally increased our inventory levels to ensure that we have the materials available to meet the future needs of our customers. This quarter, we had a cash outflow of $17 8 million related to a building of inventory levels. Although we are still working to secure a larger.

I have certain critical products, we don't anticipate the ramp up in our inventory levels to continue at this pace other than to support the increasing sales levels. We also paid out our fiscal 2021 incentive based compensation this quarter, which had a negative impact on our cash generation as a result of these two significant cash outflows.

<unk>.

Our shareholders in the form of dividends, we've now increased our annual dividend for 36 consecutive years.

After fully funding organic investments and dividends. We then deploy our cash in a disciplined manner for either acquisitions, where we have strong synergistic opportunities or for buybacks. When we see a disconnect in our view of intrinsic value versus brady's trading price. This quarter, we returned $14 5 million.

To our shareholders in the form of dividends and share buybacks and in the first half of this year. We returned a total of $45 million to our shareholders, which illustrates our commitment to return capital to our shareholders subsequent to our quarter end on January 31, we repurchased another $9 million worth of shares, bringing our total share buybacks.

<unk> from August one 2021 through today to $30 7 million, which was just over 612000 shares.

As we look to the back half of this year and assuming current market conditions persist, we expect to continue using our share buybacks as a tool to return funds to our shareholders.

Slide number 12 summarizes our updated guidance for the year ending July 31 2022.

Price increases and efficiency actions are able to offset these inflationary forces.

In the second half of fiscal 2022, we expect our gross profit margins to improve from the 47% realized last quarter, but we don't expect our margins to fully return to pre pandemic levels as such we are adjusting our diluted EPS, excluding amortization guidance from our original range of $3 12 to $3 32.

Share to a new range of $3 to $3 15 per share. This equates to a revised GAAP EPS guidance range of $2 78.

To $2 93 per share this revised.

To improve by 9% to 15% for the full year ending July 31 2022.

Included in our GAAP earnings per share guidance is an increase in after tax amortization expense of approximately $6 million.

<unk> tax rate of approximately 20% and depreciation and amortization expense to range from $34 million to $36 million.

Of January 31, 2022, and assumes continued economic growth.

Ganic business will keep investing in our industrial track and trace initiatives will continue to return funds to our shareholders through dividends and through buybacks. If the price is right and lastly, we will continue to look for acquisitions with a strategic fit is clear we have a strong balance sheet and we'll use it as a tool to drive long term shareholder value.

I'll now turn the call back to Michael to cover our divisional results and to provide some closing comments before the Q&A session. Michael. Thank you Erinn slide number 13 outlines the second quarter financial results for our identification solutions business.

<unk> sales increased 26, 1% to $245 million organic.

Organic sales Alright, Yes division were once again very strong up 16% versus the second quarter of last year.

On the cost side.

Drove numerous automation and efficiency projects that partially offset.

Percent this quarter compared to 27% in last year's second quarter.

Regionally.

Including health care, our organic sales growth was approximately 6% overall.

Overall, our sales trends in Ibs are very positive, yes, our margins are temporarily challenge, but we are growing our customer base and taking share this bodes well for our future.

Our R&D investments remain a high priority, we have ratcheted up our investments to build an industrial tracking trade solution and we're already experiencing stronger than anticipated synergies from our recent acquisitions, which we expect to only increase from here due to the complementary nature of code Magic card and.

As an example, we've upgraded our line of Raptor printers, making them much smaller while improving functionality. These wire identification printers are capable of both printing and our label and automatically applying it to the wire thus saving valuable time for our customers. In addition partners such as <unk>.

On the first label with zero waste, which is completely different than our competitors' products. Our competitors printer typically require a calibration process that almost always result in numerous wasted labels before printing to first usable label costing time money and environment.

Italy detrimental scrap.

I'm also excited about how the acquisitions of code <unk> and Magic card are moving us in the faster growing end markets. Our increased presence in the industrial track and trace market combined with our strong core ideas business, where we have clear positive momentum position us well for outsized fuel.

<unk> organic sales growth.

These positive revenue trends combined with our cost disciplined efficiency focus and future price increases will help offset inflationary pressures and paint a bright future for our Ibs Division.

Moving to slide number 14, you'll find a summary of our workplace safety financial performance.

Exceedingly well and returned to organic sales growth faster than we anticipated our WPS business experienced strong organic sales growth of five 2%, finishing with sales of $73 1 million this quarter organic sales growth in our European WPS business was more than seven <unk>.

This quarter, our Australia business also performed well growing nearly 6% organically while revenue in our North American WPS business were effectively flat this quarter.

We will continue to routes SG&A expense and streamline our manufacturing costs in our WPS business, while capitalizing on our common web platform and strong market intelligence to adjust prices up and down and modify our online advertising based on the specific market dynamics in an effort to maximize.

The return on advertising spend WPS segment profit increased approximately 30% to $44 $5 million this quarter compared to $3 5 million in last year's second quarter. This improved segment profit is a direct result of increased sales volumes net of inflationary impacts on.

Our cost structure.

We will continue to modify our marketing campaigns to reach new customers will continue to adjust prices to acquire more customers online and we will continue to work hard to address the underperforming businesses within WPS. This will result in additional reductions in SG&A expense as we progress through the back half.

A year as we build a streamlined foundation from which to grow and from which to improve profitability.

Fortunately this pandemic is not over and the financial impact stemming from the pandemic are certainly not over throughout the pandemic, we invested in growth and efficiency and its continued level of investment that it will enable us to keep the strong positive momentum as new products are launched and factory automation is brought on.

<unk> Brady.

Brady is in an enviable financial position.

Fiscal 2021 was a record EPS here and so far in fiscal 2020 to EPS is running well above fiscal 2021 levels.

And aggressively working to global logistics issues and inflationary challenges.

I'm proud of how our team performed throughout this challenging period. The Brady team has done a great job, serving our customers while continuing to invest in our future. We have a solid foundation and a great platform for outsized future growth, we're transitioning into a faster growing customer company.

And we're continuing to streamline our cost structure and drive efficiencies, which will result in improved future profitability yes.

With that I would like to start the Q&A operator would you please provide instructions to our listeners.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from Michael Mcginn with Wells Fargo. Your line is open.

Hey, good morning, everybody.

Good morning, Michael.

Less upside given their higher starting point on margins.

First of all I think the wording was careful and Michael I would say this we have actually been aggressively increasing.

Some of our competitors, but as you know we have a very broad based competitors depend.

Depending on the product and so effectively we have been raising prices across the board in our units with a few exceptions.

That said.

We feel strongly that we provide significant value to our customers and we are looking to increase prices going forward.

More rapidly and more significantly.

In all areas consumables and non consumables.

And can you maybe walk us through the price on the cost front, where you guys recognize inventory LIFO FIFO weighted average cost between the two separate segments.

I'm sorry, Mike can you can you ask that question again.

When is your accounting methodology.

Inventory between the two segments okay.

We have portions of our U S business that are on LIFO.

And it is mostly our identification solutions business. So clearly we're recording inventory LIFO on ideas and workplace safety is not unlikely.

And as far as the first piece of your question regarding cost increases we are seeing cost increases across lots of different categories. Let me just put it in perspective, because I don't think we gave a ton of detail on the call I'm sorry on the prepared remarks. So if you look at our gross margin and gross margin declined 170 basis points in total.

Freight alone was up 150 basis points as a percent of sales.

You add in direct materials, another 40 basis points of cost increases as a percent of sales direct labor another 10% increase as a percent of sales. So just those three categories alone with two was 200%.

I want to add a little more color action of that even Michael fragrance contributor for a couple of factors.

Across the board freight rates are increasing I don't care, whether it's trucking I don't care whether it.

Redistribution shipping.

But the biggest factor for us in the short term is airfreight.

Our commitment to our customers remains priority number one and as a result, we've been air Freighting, a significant amount of our products that we would never normally airfreight and that in results has been tremendous pressure on our cost. The good news about that is that as we're driving our <unk>.

<unk> that is an element that we can take down.

When the market isn't necessarily going to take down overall freight cost. So we do have a upside to that in the near future as we drive back to a more traditional shipping lanes and we know that the shipping lines still remain a tremendous challenge to us.

But numbers for instance in the port of Los Angeles are coming down not to pre.

Pandemic levels, but have come down tremendously as far as wait time, so we're going to see some compression in that area as well, but the biggest opportunity as I said is moving back from air freight to sea freight.

Okay, just to put a bow on this line of questioning Ivs's LIFO and then workplace safety is.

<unk> in the U S is LIFO ideas outside of the U S. As is not and the remainder of our businesses cycle.

Okay. So that's kind of what I'm getting at so.

The majority of your business being outside of the U S is realizing.

Real time pricing against the easiest cost of goods sold comps.

I'm trying to confirm that whereas but inside the U S. You have the largest.

It's not matched up yet so there is more price cost tailwind.

Potentially going forward in the U S, but maybe not so internationally.

I'm not so sure that Thats im not so sure I would draw the conclusion quite yet.

Oh.

Alright, and then I guess on the <unk>. The next one next question can you on.

On the WPS margin snapback nice to see.

Can you just talk about the general tailwind relative to FQ, one that Ibs didn't see and then also the tailwind from in sourcing and removing a layer of outside gross profit what percentage have been sourcing has been completed to date and does inflation kind of accelerate that trend.

Yes, it certainly does it point that our direction is correct that not only are we in sourcing or cost, but we're really in sourcing primarily or flexibility and speed to our customers the ability to customize to differentiate and to respond very very.

We've put out a target and a challenge to our teams there that goes through 2026 of continuing to increase the percentage of in sourcing I will tell you we will never be 100%.

There is a certain amount of products that are required that our commodities that have super high competitive pressures from other suppliers to keep their price to us law and that we need to provide as part of a package total solution. All of that said, we still to your point have a lot of opportunity in that space.

To drive internally and are doing cell, particularly.

In Europe , we have some great opportunities there.

As well as Australia, and North America.

Alright, I appreciate it I'll pass it along.

Thank you Michael appreciate it.

Thank you. Our next question comes from Steve ceremony with Sidoti Your line is open.

Great. Thanks, so much for all the detail I'll turn the call everyone.

Then you also talked about margins would be slightly higher than historic Prady can you just walk us through where those businesses are now versus where you thought it would be when you close the acquisitions.

Steve Thanks for the question appreciate it yes, you were right on track, we feel very good about those acquisitions.

As you know people always worry about acquisitions, because the real success is in your ability to integrate them and your ability to drive the synergy I can tell you that I have.

Interacted, particularly I made sure I got over to Europe , which as you know has been a challenge. The teams are strong they're capable they see the benefits of being part of the Brady organization and vice versa, We're seeing a lot of benefits of them.

I believe long term there are more benefits than we actually anticipated, which particularly with a lot of acquisitions I've seen over the years is not necessarily true in this case I do feel very good that right now we're on track we had a two year outline of where we are going to be able to integrate everything caught us.

Software umbrella over it we're also on track with that and like I said. The good news is we believe the outcome will be even stronger than we anticipated in our original models. When we acquired the companies and considering we did this in the heart of Covid without being able to really get our feet on the ground.

Nearly as much as we wanted to normally.

It's been a very very successful.

First start and very excited not only about the capabilities, but more importantly about the teams that are helping us to drive our success for the future. So.

Sure.

Strong on the cash flow level, but it looks like primarily due to the inventory bill.

Got it.

The key to the inventory build is that yes, we made a strong decision to first and foremost support our customers and we.

Strategically have had the cash to be able to do that without hurting our few other future investments. So that's a very important statement.

With the exception of a few significant categories.

We don't believe will be significantly building going forward.

Timing of release also depends on the timing of things like shipping lanes.

Obviously, if you can take an 18 week cycle and bring it back down to a six week cycle that will take tremendous pressure off of our inventory levels.

Don't have a perfect crystal ball on that I believe right now that you can model off keeping our inventory levels, where they are today with possible slight increases or decreases depending on mix and accountability, but it won't be a significant drive anywhere other than growth of sales.

Okay.

Thanks, Michael and thanks, everyone. Thank you Sir appreciate your time.

Thank you. Our next question comes from Keith <unk> with Northcoast Research. Your line is open.

Morning, guys and great job on the top line there Michael just trying to dissect the top line a little bit further if you look at the growth that you guys saw how much of that would you say it was from your pricing actions that you guys took in the quarter.

It was three 8% Q3, 8% was price the remaining nine three of organic was.

The mix volume et cetera, but we did see significant sales growth real organic sales growth.

It's a great organic growth number for you guys.

Now in terms of your guidance didn't change your topline growth guidance for the year I still say at least.

12%, but you're obviously last quarter this quarter significantly above that.

So about a conservatism that raising that number or do you see anything in the second half of the year that may propose the challenge to really exceeding that number by a good margin.

Yes, there are two items impacting our revenue guidance and our decision to leave it at just above 12% and number one was of course, we did have very strong organic sales growth this quarter, but unfortunately offsetting that was a bit of FX headwind and to put it in perspective in Q1, FX was actually a tailwind of <unk>, 7% Q2 headwind.

A $2 one and as you know about half of our business is overseas. So that can that can have a pretty significant impact.

So I'm not sure it's a combo of those two items.

Okay.

Michael you guys are you talked in the past about it.

<unk> business is not coming back in our third quarter is usually a strong quarter for you guys and the micro business aside usually incremental gross margins and obviously, we got a lot of things going on now for gross margins, but how do you feel about micro businesses right now and its ability to help third quarter.

Yes.

Correct and we are seeing.

And introduction of businesses into the economy, you can look at the number of startups as registered but we're not seeing yet is those businesses turn into what I'll call real businesses I E. The number of zero employee businesses that have started in the last six months is significant.

A higher than normal percentage, so until those businesses turn into by real businesses businesses that employ some number of people you are still going to see a challenge there Keith so I wouldn't anticipate that being a major lift or in the end.

The third quarter and literally just because of that dynamic the rest of that business is actually functioning better than before we've made some significant changes to streamline efficiencies and cost and so we are literally at a point that as we watch those businesses really recover a green come out with.

As I said, what I'll call real businesses, you'll see that happen and you do have to bifurcate out zero employee businesses to see that.

Got it and then you guys have the large automated store here in Milwaukee facility I think it was last quarter I guess.

Perhaps touch on that automation, Meredith, but deliver them re <unk>.

That you expected and that was a full quarter benefit of our work in the first full quarter benefit from that operations here. This current quarter.

We'll still continue to see benefits over the next quarter from that Keith.

These things are very complex, it's amazingly effective system, it's Scott.

And ability I'm not a giant fan of massive inventory systems by and large because they often that bottleneck and breakout point, we don't have that with this.

So instead of being a serialized approach where there's bottlenecks. It's a massive parallel approach off which really gives us a lot of different advantages, but as a result, the programming the performance upgrades actually build upon themselves over time, and so we're going to continue to see more and more efficiencies coming of that.

Out of that but certainly the next quarter and frankly, we have next generation plans for that system. So we expect to drive more performance gains from that approach over the next year plus.

Great. Thanks, guys I appreciate it thank you Sir.

Thank you and Thats all the questions in the queue I would like to turn the call back to Michael Nauman for closing remarks.

Thank you so much I would like to leave you with a few concluding comments this morning.

We're certainly in a new phase of the COVID-19, pandemic, we're seeing stress supply chains increased input costs labor shortages and overall increased inflation.

I don't know what the future holds for the global economy, but I do know that Brady is well positioned to thrive regardless of which direction. The economy heads we've changed our profile to a faster than GDP growing company with an increasing foothold in faster growing end markets, we have a strong balance sheet and strong cash.

Generation, which enables us to keep investing in both organic and inorganic growth. While also returning significant funds to our shareholders in the form of dividends and buybacks.

And once our pricing and efficiency initiatives catch up to cost inflation, our strong sales growth and improved gross margins will drive significant bottom line growth.

Please stay safe. 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.

Q2 2022 Brady Corp Earnings Call

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