Q3 2022 Brady Corp Earnings Call
Good day, and thank you Cristina by welcome to the Brady Corporation third quarter 2022 earnings Conference call.
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I would now like to hand, the conference over to your Speaker today, Ann Thornton Chief Accounting Officer. Please go ahead.
Thank you.
Good morning, and welcome to the Brady Corporation fiscal 2022 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 three.
Please note that during this call we may make comments about forward looking information words.
Such as expect will May believe forecast and anticipate are just a few examples of words identifying a forward looking statement.
It is 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'll now turn the call over to <unk>, New President and Chief Executive Officer, Russell Shallower Russell.
And good morning, and thank you all for joining US. This morning, we released our fiscal 'twenty, two third quarter financial results, which before getting too deep into the quarter results I'd like to start with a few of my views since taking the CEO role on April one.
He is a great organization with incredible brands, we have loyal customers, who place their trust in <unk> every single day, we have an expansive and relative relevant product offering a safety and identification products most of which has deep moats and create defensible competitive positions, we have an outstanding group of high.
Really innovative people, who are focused on providing excellent customer service always doing what's right and ensuring that.
All of our stakeholders, including our employees our communities and of course, our shareholders to that end. We are committed to an inclusive culture, where our employees are encouraged to take ownership and seek out solutions together.
Financially Brady is incredibly strong we are in a net cash position and we have a history of robust cash generation.
Lastly, we are well underway and transforming <unk> into a company that will consistently grow in excess of GDP. So far this year, we've grown organic sales by nearly 10%.
<unk> has a rich history of solid foundation and is financially strong. However, there are areas, where we can do better.
First while we have a fantastic culture that puts the customer at the center of all that we do and where we value and encourage innovation, we could be better at addressing the competitiveness of some of our businesses for instance, workplace safety business, we have a solid core but historically, we were too slow in adjusting our business model.
At the beginning of the third quarter. The WPS team took actions to improve profitability and you can see that in the positive results of these actions and a much improved financial results.
<unk> is our portfolio management, there are certain pieces of our portfolio, where we need to make changes, including additional acquisitions to strengthen our foundation and position us well for long term growth third as our geographic footprint, we have an opportunity to invest more in certain economies in southeast Asia and other <unk>.
That's where we are underpenetrated.
We strive to be closer to our customers and there are several areas that we see as right for expansion.
Fourth we need to be aggressive in providing solutions to our customer and shifting our portfolio into faster growing end markets, where there are clear macro tailwind for instance, industrial track and trace is an area that has several positive macro trends.
Find it and is an area, where <unk> product portfolio and capabilities definitely give us the right to win and lastly would be our uses of capital we generate significant cash.
Which gives us the ability to drive shareholder value through buying back stock, we are trading below intrinsic value and being more aggressive with acquisitions last quarter, we accelerated our buyback program as we saw a disconnect in what we believe the intrinsic value of Brady is versus our trading price.
I'd like to touch on one last item before moving into the financials and Thats ESG.
ESG is definitely a passion of mine because doing our part as both the right thing to do and can be very positive to our shareholders.
<unk> must be executed in a smart manner and must be woven into the overall fabric of our company to generate the strongest return from our environmental investments, we can't just focus internally on reducing brady's environmental footprint. We must also focus on designing products aimed at reducing the environmental footprint and improving the efficiency of our customers is.
Well.
This has been a clear focus of ours and we've launched many new products that our customers want and need that will aid in their own ESG journey, while increasing their efficiency earlier. This week, we published our 2021 ESG report I encourage you to download the report from our website and take a look at some of the great things, we're doing as we move forward on our <unk>.
<unk> journey.
Finally, I am pleased to announce that we've created and filled a new position director of ESG for a company with our complexity and scope to truly have a successful ESG program. It's clear we need someone who can see the big picture and drive accountability across the organization.
Now to our quarterly results. This morning, we released our Q3 financial results. We showed excellent sales growth and all time record high earnings per share.
I'm proud of how the team has been able to work through this challenging macro environment and deliver for both our customers and our shareholders. We grew sales by a healthy 14, 6% and we increased GAAP earnings per share by nine 9%.
This quarter, we incurred certain cost to streamline and improve the overall competitiveness of our WPS business included in these changes were severance which executed early in the third quarter, helping to improve the overall profitability of our WPS business.
If you exclude the impact of these WPS related charges and exclude amortization expense from all periods presented in our earnings per share was up even more significantly at 17, 8%. We're proud of what we've accomplished at Brady and we have a solid foundation, but we're far from done.
As we look ahead, our priorities are first and foremost to continue our evolution into a company that consistently grows in excess of GDP.
Is to continue integrating our recent acquisitions in order to improve our capabilities in the industrial truck and trailer segment.
Third is to take the necessary pricing and efficiency actions to mitigate the impacts of this inflationary environment and return to pre pandemic gross margin levels, all while ensuring that we are providing the best possible customer service and have the products available to meet customer demands and finally to effectively <unk>.
<unk> our capital in order to drive long term shareholder value, which would include organic investments acquisitions and returning funds to our shareholders.
Although we don't know what the next challenge will be I'm confident in our ability to deliver results for our customers our employees and of course our shareholders.
I'll now turn the call over to Aaron to provide some more details on our financial results then I'll return to provide specific commentary about.
Identification solutions, and workplace safety businesses, and what I see as strategic priorities for each of these businesses.
Aaron.
Thank you Russell and good morning, everyone. Please turn to slide number three for the start of her financial review.
There are five key financial highlights that we'd like you to takeaway from this quarter. One we once again had a very strong sales growth with total sales up 14, 6% to even in this challenging macro environment, we improved our gross profit margin sequentially, we improved our margin from 47% in Q2.
<unk> to 48, 4% this quarter three.
<unk>, we had record EPS this quarter non-GAAP EPS was up a full 17, 8% over Q3 of last year and.
And we also incurred increased our full year fiscal 2022, non-GAAP EPS guidance for each of our divisions performed very well Ibs grew segment profit by 13, 5%.
WPS increased segment profit by 58, 2% and segment profit as a percent of sales increased to 12%. After you exclude the non routine charges to streamline its cost structure.
Fifth and finally, we took advantage of the recent market pullback and repurchased nearly one 4 million shares this quarter and subsequent to quarter end, we repurchased more shares bringing our total share repurchases to $2 million. This year. Overall this was a very strong quarter.
Let's move to slide number four for a quarterly sales trends are.
Our nearly 15% sales increase consisted of organic growth of 9% and an increase from acquisitions of eight 6%. This was partially offset by a decline of 3% from foreign currency translation.
Organic sales grew in each of our two segments I'd solutions had robust organic growth of 11, 8% and workplace safety had organic growth of 0.9% this quarter.
Our teams are and have been focused on serving our customers extremely well we're meeting our customers' demand for high quality products provided in a timely manner, where certain of our competitors are stocked out of some products, thus, giving us the opportunity to take share through strong customer service and product availability.
Please turn to slide number five for our gross profit margin trending.
<unk> was 48, 4% this quarter, we're driving significant automation within our factories and distribution centers, which is absolutely critical in a period marked by scarcity of labor and rising costs. However, we're seeing inflationary pressures across many different cost categories from wages to utilities to shipping costs.
And everything in between and our supply chain continues to be challenged especially for critical components from Asia in general we've been overcoming these shortage shortages through the buildup of critical inventories along with the use of more expensive air freight, which is having a negative impact on our gross profit margins.
Price increases helped us improve our gross margins from Q2 to Q3 this quarter, we realized approximately four 2% sales growth from pricing that said, we don't see any signs of inflation abating, which means that we'll need to continue to drive efficiencies throughout our facilities and continued to increase prices to offset.
Increasing input costs, we're confident that we're providing our customers with significant value and as a result, we expect our gross profit margins to eventually return to historic levels in the 50% range.
On slide number six you'll find our SG&A expense trending as you can see we continued to make progress in driving down SG&A as a percent of sales GAAP SG&A was 28, 4% of sales this quarter compared to 37% in the third quarter of last year, plus if you exclude amortization.
And the non routine charges mentioned in the slides than SG&A would have declined even further declining from 33% of sales in Q3 of last year to 26, 8% of sales. This quarter you can clearly see the benefits of our focus on efficiency as we've reduced SG&A expense from over 36% of sales just to <unk>.
Half dozen years ago to less than 28, 5% of sales this quarter.
Slide number seven is the trending of our investments in R&D. This quarter, we invested $14 9 million in R&D, which equates to approximately four 4% of sales we're committed to maintaining this increased level of investment as we continue to see opportunities for R&D across our businesses, including building out a comprehensive.
<unk> 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 seven 3% on a GAAP basis.
Impacting earnings this quarter was a significant increase in amortization expense from the acquisitions completed at the end of last year as well as the non routine WPS charges that I mentioned, if you exclude these items from all periods presented in our pre tax earnings would have increased by 15, 7% to $56 8 million.
<unk>.
Slide number nine illustrates our after tax income and EPS trends GAAP diluted EPS increased by nine 9% to <unk> 78, this quarter and if you exclude the after tax impacts of the non routine WPS charges and amortization expense and our EPS would've increased by an even stronger.
17, 8% to 86 this quarter compared to 73 of non-GAAP EPS in the third quarter of last year. This quarter, our GAAP EPS of <unk> 78.
And our non-GAAP EPS of <unk> 86 were both all time record highs for Brady.
And if you look at the first nine months of this fiscal year, our non-GAAP EPS is running a full 14% ahead of last year.
On slide number 10, you'll find a summary of our cash generation, although we still increased our inventory levels to support our increased sales volumes and to ensure a steady stream of supply to our customers. The rate of increase has slowed as a result, you can see a bounce back in our cash generation cash flow from operating activities was 40.
$9 million this quarter, and we expect to finish the year with strong cash generation in Q4.
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 stepping up our share buybacks and building up inventories to ensure that we are poised to meet future customer demand on April 30, we were still in a net cash position of more than $26 million or.
<unk> 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 and foremost use our cash to fully fund organic sales and efficiency opportunities.
Throughout the economic cycle. This includes investing in new product development sales generating resources capability enhancing capital expenditures and automation focused capex, 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 and a highly opportunistic manner. When we see a disconnect between intrinsic value and <unk> trading price.
Recently, we have seen what we believe is a disconnect between our view of intrinsic value in <unk> stock price as such in Q3, we repurchased one 4 million shares for $63 2 million and subsequent to quarter end, we repurchased another 200000 shares all in between share repurchases and buybacks.
We've returned nearly $120 million to our shareholders in the first nine months of this fiscal year, which clearly illustrates our commitment to return capital to our shareholders.
Slide number 12 summarizes our updated guidance for the year ending July 31, 2022, our Q3 results were stronger than we had initially anticipated and these stronger results and positive momentum are factoring into our view on the remainder of this fiscal year as such we are increasing our non-GAAP .
<unk> EPS guidance to a range of $3 eight.
To $3 17.
From the previous range of $3 to $3 15 per share our updated guidance range implies fourth quarter non-GAAP EPS of <unk> 80 to 89 per share. This guidance range implies that we expect our full fiscal year 2022, non-GAAP earnings per diluted share to increase from 12.
To 15% when compared to our previous record EPS year of fiscal 2021 subs.
Subsequent to quarter end order intake has remained solid as such we expect our positive sales momentum to continue and we also expect this inflationary environment to remain for at least the near term. The other elements of our guidance are pretty much in line with what we shared last quarter, specifically, we expect a full year income tax rate of <unk>.
Proximately, 21% 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 $28 million to $33 million. This capex guidance range of $28 million to $33 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 April 30, and assumes continued global economic growth potential.
Potential risks risks to this guidance among others include further strengthening of the U S dollar versus other major currencies, such as the euro or the British pound worsening logistics that don't allow us to meet our commitments to our customers further lockdowns or increased inflationary pressures that we can to offset in a timely enough manner.
Sure.
With that I'll now turn the call back to Russell to cover our divisional results and to provide some closing thoughts before the Q&A Russell. Thank you Erinn slide 13 outlines the third quarter financial results for our identification solutions business.
Sales increased 21, 1% to $264 1 million organic sales in our <unk> Division were once again very strong up 11, 8% versus the third quarter of last year like most companies, we're experiencing significant inflationary pressures. However, we've been driving automation.
And efficiencies and increasing prices, where feasible to offset as much of this inflation as we can segment profit as a percentage of sales was 24%, which was down from 21, 8% last year. If you exclude the sizable increase in amortization expense from our three acquisitions last year and segment profit.
As a percentage of sales would have been 21, 8% this quarter compared to 22, 4% in last year's third quarter, our previous R&D investments are generating a steady stream of new product launches that we expect to continue to propel us above GDP sales growth in fact, we've increased our investments in R&D.
<unk>, the incremental R&D necessary to integrate our recent acquisitions, which includes building out our industrial track and trace solutions set.
Overall these acquisitions are progressing as planned and the teams have done a great job navigating through the global chip shortage and the inflationary environment, we're increasing <unk> relevance to our customers by providing complete solutions sets that solve their unique challenges and we're making critical investments in our facilities in factory automation and engineering talent.
And our sales force that will almost certainly pay future dividends.
My point is that we're making the investments necessary to keep propelling our organic sales growth forward and to move Brady into faster growing end markets, which will accelerate sales growth for the years to come.
Regionally organic sales in Asia were strong this quarter, despite periodic lockdowns in China with growth in the mid single digits, when compared to third quarter of last year organic.
Organic sales were also up more than 15% in EMEA.
Despite the macro challenges facing Europe , which include Sky high energy costs and.
<unk> organic sales growth was strong in Americas region with growth of over 11% this quarter.
Overall overall, our sales trends in <unk> are positive our margins have been slightly compressed, but we have intentionally prioritize product availability and strong customer service over pushing for every last dollar of gross margin. We believe that this is the right long term winning strategy as it results in us taking share, which bodes well for our fee.
You too.
Our strong new product lineup.
Investments to drive sales and our positive momentum in automation and efficiencies gives us confidence that we will continue to generate strong organic sales growth with healthy margins over the rest of the fiscal year and for years to come moving to slide 14, you'll find a summary of workplace safety financial performance, our WPS business finished with sales.
<unk> of $74 4 million and organic growth of 9% profitability also increased nicely growing from $5 7 million in Q3 of last year to $7 1 million in the current quarter and if you exclude the $1 8 million of nonrecurring costs that were incurred to streamline the WPS business segment.
<unk> increased 58, 2% in the quarter.
Some pieces of our WPS business are performing well and have been performing well for quite some time for instance profitability improved nicely in Europe. This quarter as the business shifted back into more sales of core workplace safety products and fewer COVID-19 related products.
On the other hand, our WPS business in Americas.
Historically has not performed quite as well however, the team is accelerating their initiatives, including optimizing their online prices to increase our competitiveness simplifying our SKU count and reducing our SG&A expense.
Which includes reducing head count and catalog distribution costs. These actions resulted in a solid profit improvement in our WPS Americas business this quarter.
The foundation of our WPS business is strong with a number of key brands in several businesses that are performing quite well in WPS. Our internally produced custom solutions provide significantly more value to our customers that are simple buy and resell items. These strong brands strong businesses and strong customer solutions.
Have been masked by some underperforming business units. We are actively working to improve looking ahead. We will continue to drive profit improvement and we will look critically at our product portfolio, even if that means walking away from unprofitable or marginally profitable skus and product offerings. The WPS team did a nice job. This.
Quarter, but we still have more work ahead of us.
Let me quickly recap our Q3 performance one more time before turning it over to questions.
First our GAAP earnings per share was an all time record high of 78.
Our non-GAAP earnings per share was also a record high at 86.
Nearly 15% above our previous record set.
We grew revenues by more than 14%. This quarter third we took actions to improve our WPS business and it resulted in meaningful improvement in profitability and for we were much more aggressive in buying back shares in fact, we fully exhausted our share repurchase authorization two days ago, Our board approved authorization.
And for us to repurchase another $100 million worth of shares which based on our current share price.
Waits to approximately $2 2 million shares in just under four 5% of total outstanding shares Brady.
<unk> performed very well this quarter. However, the pace of macro change has accelerated over the last several years and it seems like we have a new major macro event every month or so we've been dealing with stress supply chains are worn Europe more lockdowns in China increased input.
Cost increased labor shortages and overall increased inflation, while we can't predict the next event will be but in recent history has taught us anything it is that there will likely be some sort of unforeseen event in the near term our crystal balls hazy, but we're positioning ourselves to thrive regardless of what the world throws at us specific.
<unk>.
We're heavily focused on daily execution in serving our customers better than our competition, we believe that strong customer service and consistent execution are more important today than ever.
We've increased the inventory levels of critical parts to ensure that we can meet the needs of our customers. This has resulted in increased airfreight and has hurt our gross margins, but this is a tradeoff that I would make everyday.
Every time that we are able to convert a customer to Brady printers and materials. So we have the opportunity to demonstrate our superior solution set and strong customer service, which will result in a positive long term customer relationship simply stated our goal is to out execute our competitors and take advantage of this challenging macro environment to build long.
Term customer relationships.
Plus we have a strong balance sheet that affords us the opportunity to focus on long term and to focus on driving profitable growth for years to come Brady is in an enviable financial position fiscal 2021 was a record earnings per share year in so far in fiscal 'twenty, two etfs is running well above fiscal 2021.
<unk> and our revenues are up by more than 16%. So far this fiscal year. The Brady team has done an excellent job serving our customers while continuing to invest in our future. We have a solid foundation that we're transitioning into faster growing company, yes, we have significant inflationary pressures, but we will but we're still forecasting.
Casting earnings per share for the year and July 31, 2022, we're forecasting GAAP earnings per share to grow from 12% to 15% over last year's record earnings per share level, and we have positive momentum that will deliver increasing levels of shareholder value and with that I'd like to.
Start the Q&A operator would you please provide instructions to our listeners.
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Please standby, while we compile the Q&A roster.
Our first question is from George Staphos with Bank of America. Your line is open.
Hi, This is actually <unk> on for George Staphos.
Thanks for taking my questions and congratulations Russell on your new role.
Just going back to your opening remarks, you mentioned that you may want to explore some additional acquisition. So can you just talk about what opportunities are markets you might consider.
And what your appetite for this is right now just given you are still integrating some past acquisitions.
Yes.
Obviously, we're not going to comment on specific acquisition space or targets.
But I will say if you look at our industrial business I think anything that is closely related to the things that we've done so far is fair game.
And I guess, that's probably all that I would comment on that.
Okay fair enough.
And then I guess in workplace safety. It sounds like you may have had some mix benefits.
Can you just talk about particularly in which businesses were underperforming your expectations and then just in terms of streamlining the cost structure there.
Can you just detail that a little bit more than what you might expect the margin benefit.
From that moving forward.
Yes sure so.
As I mentioned earlier in the call the Americas business in particular has faced a number of challenges the move to online distribution.
<unk> certainly been a significant headwind for them as a business as we look to that portfolio.
The coming months and years, we're looking at optimizing how we serve our customers we are expanding our digital footprint and how we're addressing that im not going to predict.
The exact uplift that we would soon from that but I think the first quarter that youre seeing this year excuse me the third quarter of this year, but the first quarter, where we started to institute those changes.
Indicative of what we plan to see in the future.
Got it.
Just one final one for me.
Can you just talk about any particular volume or pricing assumptions.
Embedded in your guidance for the remainder of the year.
Yeah. So.
Right now we're clocking in some pretty heavy heavy growth.
And we foresee the fourth quarter to be essentially on track with what we were doing in the third quarter.
Barring.
Some significant new event, which I seem to read about every other month.
So I would just say more of the third quarter in the fourth quarter.
Great. Thanks, I'll turn it over.
Thank you. Our next question is from Steve <unk> with Sidoti. Your line is now open.
Good morning, Russell Erinn, Thanks for all the color on the call.
Couple of numbers I wanted to key in on obviously coming out of the last quarter.
We're seeing margin pressure with IV solutions, certainly we know that <unk>.
Rapid increase in shipping and freight costs clearly didn't get any better.
Quarter, but your margins improve.
It looks like Youre catching up on price is that how we should think about that because I know that was clearly the big concern entering the quarter.
Yes, definitely I think similar to.
Most industrial companies that sell through distribution, we have contracts in place.
Which dictate some of the terms and the speed at which we can increase our prices.
<unk> been doing them as contracts roll off or is amending terms in our contracts. So I would clearly say in the first few quarters of this year, there was a bit of a catch up effect.
I think we are.
Not finished but we've certainly made a lot of progress towards.
Reconciling our input costs, our pricing and our selling costs and you can see it in the improvement in.
In Q3 also with that said.
While freight has been a significant burden to us in the past year.
<unk>.
See that relaxing back to more normal.
Physicians less airfreight more cargo container freight.
And more realistic cargo prices.
There is there are a number of things I think that will continue to give us improvement over the coming quarters.
Great.
And then the hardest number to model every quarter for us analysts and I'm sure internally, it's challenging is that workplace safety margin, obviously much much stronger this quarter.
It looks like the Q1, a year ago and the question is the sustainability of that number versus what was one off in mix and how to think about that I know you came in and we're going to make some changes and you've seen some of that but I'm guessing that wasn't surely that margin number this quarter and just trying to think about.
Pat.
Yeah. So.
Over the last several years so of course I've been with Brady for seven years.
And being the president of <unk>, we focused on a lot of efficiency gains and positioning our portfolio to improve our margins and to improve growth.
Look to bring some of those same things to WPS over the next few quarters I do see opportunities.
To consolidate some operations elevated at Chief operating officer for our company who was.
Previously, Mike head of manufacturing and we're going through all of our operations for areas, where we can improve our cost position.
In terms of that 10% number.
That's not a reasonable number to expect in the next few quarters sustainable is it.
When you mean, 10% you mean the 10%.
<unk> of this quarter, which which tempered yes, yes exactly exactly yes.
I would certainly hope that we can be in that territory in the future if not better.
Okay Fair enough and then last one for me was just.
Well, let me ask did you give the healthcare number in terms of growth for the quarter in IV solutions.
We did not.
But I certainly I certainly cant, yes, I certainly can we grew healthcare.
By just over one.
Drew just over 1% this quarter.
And so that's not really the big contributor to the strength. There would you think thats more product development in other markets, because I would've thought health care it would've been a bigger contributor to the improvement.
Hands down the biggest contributor to is the portfolio in Ibs.
We spend a considerable amount on R&D as a percentage of sales some of which takes years to bring to market. We have launched several new products. This year, which was also contributing to our growth as well.
<unk> got a great overall business base in that and Thats, what youre seeing in the both the profit and in the growth of the Ics part of the business.
Fantastic Alright, thanks, everyone.
Thank you.
The next question comes from Morgan with Wells Fargo. Your line is open.
Hey, good morning, everybody.
Sure.
Some products some portfolio of curation.
Within workplace safety it sounds like 2020, without saying 80 20.
Wanted to get your sense.
What what or what level of substitution exists within that product portfolio or if there is as you cut some of the skus core growth wanes, a little bit and maybe what inning.
You think you are in terms of that process.
So I'm not 100% I understood. The question, but I'll give you a few answers and then you can follow up if I didn't hit it.
So what inning are we I would clearly think we're probably in the third inning.
<unk>, we've got we've got some room to move.
In terms of the Skus, it's absolutely a long tail business, but with that said with hundreds of thousands of skus, but with that said.
Some of that tail really is not marginally helpful or even profitable and so it is a significant task. When you have hundreds of thousands of Skus to go through the portfolio and decide what really isn't aligned with the profitable part because I do want to emphasize there is.
A part of WPS, a significant part of WPS that is very profitable very strong and actually frankly is growing it is clouded by a lot of the other things going on in WPS that makes it look less exciting and compelling and so as I look through.
This over the next several innings to use your analogy.
We still have a lot more work to do.
Great.
Thats all my questions.
Regarding that topic I, just moving on to <unk>.
You had an interesting press release regarding.
So technology overlap with I believe Honeywell.
Walgreens Okay.
Your initiatives.
Strategic relationships and internal R&D.
Yes, I'm Super excited to have negotiated license with Honeywell.
Brady respect their intellectual property rights, they built up a great portfolio.
Probably our cane to most of our listeners to the imaging technology based on our global shutter, but.
We see that in our high speed industrial tracking traced imaging as a pretty core technology and having that license builds on codes licenses already.
And gives us a relatively free reign to practice.
What we're looking to do over the coming years that is still very much an emerging technology we are.
At least 18 months or longer away from our full suite of products. There is a lot of engineering that needs to happen between now and then but we've got a clear path.
Essentially through 2032.
To do what we need to do from our perspective.
Great I appreciate the time.
Yes.
Our next question comes from Keith <unk> with Northcoast Research Your line is open.
Good morning, guys. Let me congratulate you Russell on the appointment to CEO .
And it's probably more of a higher level here of Russell I guess any differences with your predecessor in terms of your priorities or strategies in the near term that we should be thinking about.
Yes, I would say.
Michael did a great job of being cost focused and.
Coming into the organization and looking at a number of ways to cut costs I would say.
I am far more growth oriented and more about optimizing the portfolio.
<unk> track record as I worked for a number of years at Teledyne, where we were.
Very aggressive in terms of both portfolio shaping.
Mergers and acquisitions as well as the occasional divestiture so.
That was kind of my training and Thats, what im looking to bring to bear as CEO .
Great good to hear in terms of the WPS segment. It sounds like Youre still in the early innings of perhaps calling out some more of the WPS portfolio, that's not necessarily profitable do.
Do you see that's going to be a headwind for growth in the next year or two that you'd be satisfied. If you have no growth as long as the profitability increasing how are you thinking that on a higher level.
Yes.
I would say, it's it's all business you look to optimize your portfolio and maximize both current and future cash generation. So I'm not really going to make a lot of guidance about next year's revenue.
And whether we will or won't face headwinds, but I will say.
We're looking at every business every segment to see whether it is additive.
Through our organization for the future, which I would hope all corporations are doing.
Gotcha.
You provided some color on the ability to raise prices.
Yes, with the distributors, but perhaps can you touch on in the WPS segment in PDC, what's your ability to raise prices there.
Yes, so again it goes.
Very granular and not too surprising if you go back to your economics on if you have market power or you have proprietary positions you've got a pretty good position to raise prices. The more commoditized you are the more you have to go along with the market.
Now with that said, we do see most of the competitors in most of the solutions.
Pretty much lockstep, starting to increase prices I think a few were slow to decide how transitory. This was going to be and then of course you have a few that we take the opportunity to maybe pick up share, but I feel pretty comfortable at this point across the board in WPS and PDC that both.
Our prices as well as our competitors in fact, frankly the industry as a whole is rolling through price increases.
You see that in some of the distributors and the performance that they've.
Published over the last couple of quarters.
Got you Okay I appreciate that.
One for me and I'll jump back in terms of the supply chain issues, obviously supply chain issues have been now for several quarters.
Do you see it getting any better for you and any pockets, perhaps right at the end of the tunnel or are we still in the midst of this is tough to say.
Yes.
Like every time I thought there was a light.
Went out.
So.
We've incorporated current supply chain issues into our planning purposes, and so I would say as long as they don't get any worse, which we don't see right now they are fully baked into our performance and our strategy. We've added a solid $20 million, maybe a little bit more.
Inventory to protect us from some of the supply chain issues.
<unk> clearly has taken some cash out of our organization that I would prefer to use for other reasons.
And if we get to the point, where we're seeing more normalized particularly shipping and logistics I can imagine will relax a lot of that inventory buildup.
<unk>.
So I would say right now we're hoping it is steady we seem to have gotten through the Shanghai locked down okay.
And they seem to be freeing up a little bit so.
I guess I'm going to leave it at.
Steady state for right now not better not worse.
Last question, maybe I'll just follow up on that one in terms of the impact of airfreight on your gross margins can you kind of contextualize that for us.
Yeah, so excess excess shipping rates are about 150 basis points headwind for us it's.
It's a mix of just increased container shipping as well as air freight.
We know the airfreight will come down we've been able to put a lot more because of our increased inventory we've been able in just very recently as in the last few weeks starting to convert much more too.
Cargo container as opposed to airfreight. So that is something that we see is helping us in the coming year.
I don't see us abandoning airfreight entirely.
Until supply chain is really sorted out which.
Anybody is gas, but I can't imagine will happen in the next quarter or two.
Great. Thanks, Ross I appreciate it.
Sure.
Thank you and I'm currently showing no questions at this time I would like to turn the call back over to Russell shallow for closing remarks.
Great. Thank you all for calling in and the Q&A.
I'd like to thank you all for your time and I do want to leave you with a few concluding thoughts I really am excited about taking over as CEO in the future of Brady were 107 year old company and while we live in an uncertain world.
We have a fantastic company that I see as a great long term value proposition.
Changed our profile to move faster than GDP growing the company with an increasing foothold in faster growing end markets. This quarter, we grew at 14, 6%.
Our pricing and efficiency actions are improving our gross profit margins. Subsequently, we improved from 47 <unk> in Q2 to 48, 4%. This quarter. Our ideas division continues to perform extremely well and the actions we've taken to improve our workplace safety business are working as evidenced by the significant increase.
WPS profitability this quarter, we're aggressively investing in R&D to round out our industrial track and trace product offering. These investments are moving brady into a faster growing end markets and making us much more relevant to our customers.
And are creating a paradigm shift in our long term profit profile.
And finally, we have a strong balance sheet, which enables us to keep investing in both organic and inorganic growth. While also returning funds to our shareholders our balance sheet and strong cash generation make Brady a safe port from future market turbulence.
And even though the future is the macro economy is uncertain I'm optimistic about the future of Brady.
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.
Okay.
Yes.
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Okay.
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