Q1 2023 Brady Corp Earnings Call

November 17, 2022

Okay.

Good day and thank you for standing by welcome to the Q1 2023 Brady Corporation earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to you.

Speaker today, Ann Thornton Chief Accounting Officer. Please go ahead.

Thank you good morning, and welcome to the Brady Corporation fiscal 2023 first 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.

We'll begin our prepared remarks on slide number three.

Please note that during this call we may make comments about forward looking information words, such as expect will may believe forecast and anticipate are just a few examples of words identifying a forward looking statement.

It's important to note that forward looking information is subject to various risk factors and uncertainties, which could significantly impact expected results.

Risk factors were noted in our news release this morning, and in Brady's fiscal 2022 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 will.

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

I'll now turn the call over to Brady's, President and Chief Executive Officer, Russell Sheller Russell. Thank you Anne and thank you all for joining US today. This morning, we released our fiscal 2023 first quarter financial results, which was another quarter marked by solid execution across all of our businesses.

Overall, we had a good quarter with organic sales growth of six 9% much of this organic growth was ultimately offset by foreign currency translation, resulting in total sales growth of 3%.

Although we can't control currency translation, we can control organic sales and we can control our cost structure in an effort to offset currency headwinds and that is precisely what we did which led to our strong GAAP earnings per share growth of 17, 9%.

We once again improved profitability, while investing in R&D, expanding our sales force and improving our digital capabilities I'm proud of how the entire Brady team work together through this challenging macro environment, all the while delivering for both our customers and our shareholders.

More specifically as it relates to the macro environment, we're starting to see some changes for instance, hiring is improving.

It still remains somewhat challenging we are seeing more qualified candidates and we're filling open positions quicker than we had in the past.

International shipping rates have monitored moderated and our supply chain is improving there.

There are still certain products that are challenging to source in a cost effective manner, but for the most part the supply chain has loosened up to the point, where we're getting the critical parts that we need to meet our customer demands.

However, these positive signs have not yet translated into reduced inflation.

We're experiencing increased energy costs increased wage rates and weaker currencies in relation to the U S dollar, which are squeezing margins in regions outside of North America.

While there are a number of economic uncertainties, we continue to experience a solid demand environment for these products and our team continues to do a great job serving our customers.

We've effectively manage these marketplace disruptions in supply chain constraints to ensure that we could serve our customers.

However, it's made supply chain, it's more expensive.

And lead times have been elongated versus pre pandemic periods.

Which you can see in our increased inventory levels, our balance sheet gives us the flexibility to withstand these type of macro events and ensure that we can meet the needs of our customers by supplying them with the products they need to get their jobs done.

I can't tell you what the macroeconomic future holds my view of the future is form based on the data that many of UC as well as what im hearing from our customers our suppliers and the <unk> sales force.

Even though our order patterns currently remain robust we are prepared for a softer calendar 2023.

Three of these priorities remain clear first and foremost is to continue our evolution into a faster growing company.

Second is to improve our capabilities to ensure our customers automation initiatives, which is an area that we believe will give us a tailwind for years to come.

Third is to take the necessary actions to offset impacts of this inflationary environment overall.

All the while meeting customer demands and providing the best possible service.

Fourth is to reinforce Brady's culture of operating sustainably with a long term view, which encompasses our approach to ESG and ensuring that we're supporting all of our stakeholders from our customers to our employers to our communities and of course our shareholders.

And finally, we're focused on deploying our capital in order to drive long term shareholder value.

Be it organic investments acquisitions or returning funds to our shareholders.

We are in a position of strength our printer lineup is strong and we have a pipeline of highly innovative printers on the way, placing printers in the marketplace is incredibly important for Brady as this result in repeat purchases and deepens our customer relationships.

We're continuing to make investors investments in our future we have a rock solid balance sheet and we have a fantastic team at Brady that is delivering for our customers every single day.

I'll now turn the call over to Aaron to provide more details on our financial results. Then I'll return to provide more specific commentary about our identification solutions business in our workplace safety business.

Erin Thank you Russell and good morning, everyone. This quarter, we once again had strong organic sales growth, we reduced SG&A expense as a percent of sales and we grew our bottom line nicely each of our two divisions performed well ideas grew segment profit by five 5% while at WPS grew segment profit.

By 178% this quarter and we took advantage of recent market pullbacks by repurchasing another 280000 shares.

Putting it altogether, we reported first quarter GAAP EPS of <unk> 79.

Compared to 67 in the first quarter of last year, and non-GAAP EPS, which is calculated as our GAAP EPS less the after tax impact of amortization expense was 84 this quarter compared to <unk> 72 in Q1 of last year.

So the key financial takeaways. This quarter are strong organic sales growth nicely improved EPS solid performance in each of our two divisions and a continued commitment to returning funds to our shareholders all of which helped us overcome the substantial appreciation of the U S dollar and deliver another very strong.

Quarter, let's.

Let's move to slide number four for a quarterly sales trends organic sales grew in each of our two segments, but with the stronger U S. Dollar foreign currency translation reduced total company sales by six 6%, thus, bringing total sales growth to 0.3% the impact of foreign currency reduced the Ids sales by <unk>.

Five 5% and reduced WPS sales by 10, 3%. The reason for the outsized foreign currency impact on WPS is because approximately half of WPS sales are in western Europe , and another 20% of WPS sales are in Australia, even with this significant.

Oren currency challenge, our WPS business still performed extremely well this quarter.

On slide number five you'll see our gross profit margin trending our gross profit margin decreased 10 basis points to 48, 1% compared to 48, 2% in the first quarter of last year.

Looking at gross profit margin on a year over year basis, we were able to offset nearly all of our input cost increases. However sequentially input cost increases are still running above our price increases which was one of the drivers of our reduced sequential gross profit margin.

Even though conditions are improving we continue to experience scarce labor in certain geographies and were still seeing inflationary pressures continue across many different cost categories from energy costs to raw material costs and everything in between although markets seem to be getting a bit better with respect to product availability and people availability.

We haven't seen it translate into reduced inflation quite yet and.

And even though price increases are partially offsetting inflation, we're still experiencing some lags between input cost increases and price increases as such we would expect to continue to see a bit of choppiness in our gross profit margins over the next several quarters. This quarter, we realized approximately five 6% sales grow.

Both from pricing.

On slide number six you'll find our SG&A expense trending SG&A was $89 $9 million this quarter compared to $96 7 million in the first quarter of last year as a percentage of sales SG&A was 27, 9% this quarter compared to 31% in the first quarter of last year, if you <unk>.

Excluding amortization expense than SG&A would have declined from 28, 9% of sales in Q1 of last year to 26, 8% of sales this quarter.

In addition to our continual focus on becoming a more efficient organization SG&A expense also benefited from reduced incentive based compensation expense reduced health care costs and a reduction in SG&A expenses due to foreign currency translation.

Slide number seven is the trending of our investments in research and development. This quarter, we invested $13 9 million in R&D, which equates to about four 3% of sales a steady stream of new product launches is critical to our growth strategy. Accordingly, we remain committed to new product development as we see opera.

<unk> across our businesses, including our newest lines of printers and the building out of a comprehensive industrial track and trace platform that encompasses our printers high quality materials, RFID scanners and barcode scanners. This quarter's R&D spend was a bit less than we would expect in future quarters due to the timing of prop.

<unk> spend and a reduction in incentive based compensation.

On slide number eight you can see that pre tax earnings increased to 12, 6% on a GAAP basis. If you exclude amortization expense from both the current year and the prior year and our non-GAAP pre tax earnings would have increased by 11, 3% increasing from $48 5 million in Q1 of last year.

To $54 million this quarter.

I'd number nine shows the trending of earnings and EPS on an after tax basis. When you look at these charts you can see that the general trend of up and up and to the right. As we've now had two consecutive years of record EPS and we're off to a good start once again this year.

On slide number 10, you will find a summary of our cash generation operating cash flow increased this quarter, despite accelerating the timing.

The timing of our annual incentive based compensation payments into the first quarter and increasing inventories to both support our increased sales volumes as well as to ensure that we can support our customers in the event of further supply chain challenges.

As it relates to incentive based comp.

Last year, we made our annual payments in the second quarter, whereas this year. We made these payments which were approximately $24 million in the first quarter. Accordingly, we expect our second quarter cash generation to be quite a bit stronger than what we experienced last year.

Now if you'll turn to slide number 11, you can see the impact that <unk> historical cash generation has had on our balance sheet, even after stepping up our share buybacks and building up inventories over the last year or so on October 31, we were still in a net cash position of $15 5 million or <unk>.

The capital allocation is to first and foremost use our cash to fully fund organic sales and efficiency opportunities. This includes investing in new product development sales generating resources capability enhancing capital expenditures and the automation focused capex despite the economic uncertainty.

We will continue to deploy capital to drive productivity and sales growth, especially in our businesses, where we expect enhanced growth from secular tailwind and second we focus on consistently increasing our dividends we've increased our dividend every single year since going public.

After fully funding organic investments and dividends, we then deploy our capital in a disciplined manner for either acquisitions, where we have clear synergistic opportunities or for buybacks and a highly opportunistic manner. When we see a disconnect between <unk> intrinsic value and brady's trading price, our enviable balance sheet positions us well.

To execute additional value enhancing activities, including investing in R&D, completing acquisitions and returning funds to our shareholders.

As we look to the future we're confident that the actions we've taken set us up for success, but of course, we can't control the macro economy, and we can't control foreign currency rates based on exchange rates as of October 31, the strengthening of the U S. Dollar is expected to reduce our sales by approximately 5% for the full.

Full fiscal year, ending July 31, 2023 to put this in perspective, when we provided our initial fiscal 'twenty three guidance just a few months ago, we expected our full year foreign currency headwinds of approximately three 5% and it's now increased to a headwind of 5%.

As it relates to EPS the impact of foreign currency is expected to reduce our fiscal 'twenty three EPS by approximately <unk> <unk> per share when compared to last year's foreign currency exchange rates. This.

This brings us to our fiscal 'twenty three guidance, which is articulated on slide 12 of the deck.

Even with these increased foreign currency headwinds, we are maintaining our full year fiscal 2023 previously established EPS guidance range of $3 30 to $3 60 per share on a non-GAAP basis, and $3 13 to $3 43 per share.

On a GAAP basis, our outlook is based on October 31 exchange rates and we expect continued economic expansion, while we acknowledge that market conditions remain uncertain and we're certainly hearing and feeling increased concern over the future we have not yet seen a meaningful slowdown in our order patterns and we continue to have positive.

<unk> momentum as such we expected organic sales growth will remain consistent with our initial guidance range of mid to high single digit percentage growth for the year ending July 31 2023.

The other elements of our guidance range are also unchanged and include an income tax rate of approximately 20% depreciation and amortization expense of approximately $32 million to $34 million and capital expenditures of approximately $32 million as for capital allocation, we don't foresee any major change.

And our strategy will keep investing in our in our organic business yesterday, we announced our quarterly dividend and will be opportunistic with buybacks. We're looking for acquisitions, where the price is right and the strategic fit is clear we have a strong balance sheet and we'll use it as a tool to drive long term shareholder value potential risk.

<unk> to this guidance among others include further strengthening of the U S. Dollar inflationary pressures that we can to offset in a timely enough manner through price increases or an overall slowdown in economic activity.

I'll now turn the call back over to Russell to cover our divisional results and to provide some closing thoughts before Q&A Russell. Thank you Erinn slide 13 outlines the first quarter results for our identification solutions business.

<unk> sales were $256 4 million this quarter and organic sales growth was eight 6% in <unk>.

We continue to invest in innovation and R&D. The vast majority of the $13 9 million of R&D This quarter within our <unk> Division, where our goals are to continue the steady stream of new product launches with a particular focus on combining product software and services that help our customers become more efficient and help.

<unk> get their jobs done in a more cost effective manner.

For instance, in our lockout tagout product offerings, we provide comprehensive programs customized to meet each of our customers unique requirements. These programs combined.

<unk> service focus with our proprietary link $3 60 software, our printers are durable materials, and our industry, leading blackout and tagout devices, along with our unique safety locks to deliver a complete solution that improves our customers' safety experience.

All the while improving their productivity as well.

These type of comprehensive customer experiences that said Brady apart from its competitors.

We believe that we will have the secular tailwind for years to come as companies continue to push for efficiency gains and increased employee productivity.

Thus, increasing Brady is increasing demand for <unk> productivity solutions.

Segment profit as a percentage of sales improved 21% this quarter compared to $19 six last quarter.

As we manage through this inflationary period, we expect to continue to see quarter to quarter fluctuations in our segment profit margins due to the timing of pricing actions. Our goal is to remain price competitive while offsetting the negative impact of input cost inflation to deliver continued sales growth in <unk>.

<unk> profitability.

Regionally sales continue to grow in Asia, Despite periodic lockdowns in China, driven by their zero Covid policy.

Asia organic growth was 7% this quarter.

In Europe , our organic sales were up in the mid teens this quarter, our European team did an excellent job of driving sales growth, while managing their cost structure in this very challenging environment and in the Americas, we had organic growth of approximately 5% this quarter.

Our expanded new product lineup investments to drive sales and our expansion into untapped markets.

Give us confidence that we will continue to generate above GDP organic sales growth for the years to come in our <unk> business.

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

<unk> sales declined nine 1% this quarter entirely due to significant appreciation of the U S. Dollar if you strip out foreign currency, our WPS business had organic sales growth of one 2%. This marks our fourth consecutive quarter of organic sales grew.

And it's the continuation of major profitability improvement, we've been generating over the last several quarters segue.

Segment profit increased from $2 3 million in the first quarter of last year to $6 4 million this quarter.

This is a more than two and a half fold increase in profitability, even with the major foreign currency headwinds we're facing.

Looking at our WPS business geographically, we saw continued organic growth in Europe , and Australia, where our businesses in the U S contracted this quarter.

We've been focused on a three pronged approach to ensure that our WPS business is sustainably improving.

First we are ensuring our products are relevant with a focus on identifying skus that provide the most value to our customers.

Second we're enhancing the value of WPS by helping our customers choose the right product and third we're driving efficiencies and reducing overhead cost, including personnel and catalog distribution costs, all while increasing spend on our website and our on our online advertising to accelerate our.

Shifting away from catalogs.

With our heightened level of focus the foundation of our WPS business is improving with a number of key brands and several businesses that have been performing well.

Our internally produced custom solutions, along with our consultative selling provide significantly more value to our customers and simple catalog items.

Looking ahead, we'll continue to drive profit improvements and we'll continue to look critically at our products and our business portfolio.

Although WPS comparable is get more challenging in the back half of the year. This team is focused on ensuring that our improved business results are sustainable.

Brady performed very well this quarter and we clearly have positive momentum building across the organization. We're in an enviable financial position, we're coming off two consecutive record earnings per share years, and we just realized 17, 9% increase in earnings per share in the first quarter.

In the near term demand looks solid, but our current viewpoint reflects growing caution in the macroeconomic outlook as such we will be proactively drawing down inventory levels in certain businesses and initiating cost containment measures where appropriate.

Given our ability to generate healthy cash flow even during challenging economic times, we have the ability to continue to invest in research and development geographic expansion and improve our capabilities, while serving our customers as they work through their automation journey with.

With these initiatives, we expect to have tailwind for years to come as companies work to shorten their supply chain increase automation and drive efficiencies.

With that I'd like to start the Q&A session. Operator would you please provide instructions to our listeners.

As a reminder to ask a question you will need to press star one one on your telephone please stand by while we compile the Q&A roster.

Our first question comes from the line of George Staphos from Bank of America Securities.

Yes, hi, good morning. This is actually cash sitting in for George This morning.

So maybe just talk about your demand trends throughout the quarter just month to month, and then I guess coming out of the first quarter what has been generally the trajectory here in the second quarter.

Yeah sure so.

We've seen some lumpiness in order patterns more so than would be historically normal I think a lot of our customers in the distribution channel is still searching for what is the right level of inventory.

<unk>.

What is the demand that they're seeing from some of their use cases so.

We had a brief period in September that I thought was unusually weak and then as we got into October virtually all of that got filled up and I'm speaking of the Americas right now Europe has actually been pretty steady.

And the rest of the world has been pretty steady. So we are going into Q2 with basically the way we left Q1, which is in a pretty strong place.

Okay. That's helpful and then I guess in order.

Organic growth was pretty strong even on a strong comparison, so I guess ultimately what was driving that.

More so pricing or can you just give us a sense of that and then maybe just demand trends at.

At a product level as well.

So obviously pricing is playing a role and there is part of the growth having to do with pricing and also having to do with organic demand.

We have been I want to say pleasantly surprised.

Our order book continues to be very strong.

<unk>.

Like I said I think going into.

Q2, we're seeing no degradation of our performance from Q1.

Yes.

Okay got it and then I guess, just on the track and trace spelled out.

Did these acquisitions call it a.

A year and a half ago, you've lapped through those I guess last quarter. So I guess, where do we stand now in terms of building out that comprehensive track and trace solution what needs to be done and I guess I was wondering what are the mile markers, we should be looking for.

Over the next several quarters, yes.

So we knew this we knew this was and is a long journey, we feel very comfortable with the acquisitions that we've made there now on our own internal systems, which is important we're melding the R&D teams across all three businesses.

The next step here is really kind of twofold.

Some of the businesses I'll take Nordic was a little more focused on retail than we are as a corporation and so we're making more industrial versions of some of their products Youll see those in the marketplace in the next few quarters and in code, which was more focused on healthcare we would.

Also doing the industrial type solutions. So there are more robust they are more suited to an industrial environment. So we had a long.

Journey, where we expected to industrialize these products and make them look and feel and interchangeable with each other and our operating systems and our printers. So at this point. It is really just a matter of engineering and getting.

Getting the products to work together.

Don't really need much of in the way of an epiphany or.

Additional.

Sure.

Additional acquisitions to make this happen.

Okay. Thanks, I'll turn it over.

Thank you one moment for our next question.

Our next question comes from the line of Steve <unk> from Sidoti.

Good morning, Russell Erinn, Thanks for all the detail on the call.

Alright, I want to dig into a little bit about what your comments on the guidance range.

There's obviously a lot of moving parts here, specifically you pointed out the.

The stronger dollar than it was three months ago and the factors that would have a 20 cent impact.

Sort of lead to why isn't the guidance coming down unless something else more positive offset it and I didn't hear that and just give us your comfort level on that range and what sort of needs to happen to get to that lower versus the higher end sort of a complicated question sorry I know.

So coming coming into the year when we provided our original guidance, we had provided foreign currency headwinds somewhere in the neighborhood of 15% to 18% and of course, that's translation as well as any margin compression that we would get from the stronger U S. Dollar. So it clearly got a bit worse, but frankly, it hasnt been that significant and we.

<unk> been able to overcome it with continuing to push push efficiency gains of course pricing, we talked about as well.

Frankly sales have held in there pretty good and as Russell mentioned order patterns remained strong. So we remain very confident that we will hit this guidance range even with the.

Which seems to be never ending foreign currency headwind from the stronger U S dollar.

What gets you to the higher end as opposed to the lower end what needs to take.

Just to work out.

Well for Brady as you know with our 50% gross 50% ish gross profit margin sales are super important and continuing to make the investments that we need to to drive the topline. So of course without our topline growth, we're not going to hit the top end of our of our guidance range, but again, we're confident that we will hit that we will hit our.

Our guidance range.

As you know WPS has improved quite substantially on the bottom line and we need that to continue as well. So great is a pretty complicated $1 $3 billion business with a lot of moving parts.

And a summation of a lot of smaller businesses and just like always we need to execute and we need to continue to make the investments to drive the topline.

Okay. That's helpful.

When I think about.

You covered the train on the gross margin softening sequentially, largely offset by much lower SG&A sounded like just some one offs there in terms of the lower SG&A this specific quarter.

How can we think about that.

Yes, there definitely were coupled they're relatively minor however, we've been experiencing some I'll say some nice reductions in healthcare expenses.

Which which certainly matters for us we call that out and we have had a reduction in incentive based compensation a bit as well.

That we would expect to continue.

So over and then of course, the bigger component of all of this is foreign currency much like foreign currency hurts, our top line and certainly drives down our SG&A expense as well. So you can basically take.

The 5% ish reduction that we anticipate in revenue and apply that to SG&A expense as well so.

Foreign currency exchange rates stay where they were at October 31 for the remainder of this year you should see SG&A expense go down as well and then of course that is partially then offset by the continued investments that we're making in our sales force and marketing expenses et cetera.

Great. Thanks for that if I could get one more and I saw the announcement.

Pictures from the ribbon cutting for code in Utah can you talk a little bit about what that means and how that all sort of fits in the process of bringing those acquisitions.

Yes.

First it's not Super significant I mean, it's a relatively small distribution channel, but we continue to look at supply chain, onshoring, where possible getting products hub to closer to the customers.

If we were to look at pre pandemic.

Shipping global shipping in global Transportation was a pretty drama free event.

As we've.

Went through the pandemic and we had uncertainty in shipping time shipping rates it caused us to rethink how we deploy some of our products and what opportunities we have to have them hub to closer to our customers.

In the case of this particular.

Location, we used to hub.

In Asia, and partially in Malaysia, partially in Singapore, and by bringing it back to the U S.

Becomes obviously much closer to the customer since that's the principle.

That's principally where this product is sold and it gives us a little bit faster lead times, and we were able to do it in this case.

We continue to look at all of our deployments throughout the globe and how we have products situated where we have our inventory and I think we have a general desire to both to manufacturing and have our inventory as close to our customers as possible and this was part of.

That strategy.

So should we expect to see more of these types of <unk>.

<unk>, yes.

It will be gradual and again, we don't have like a block upgrade where we're saying we're going to move huge part of Chinese manufacturing to the U S for instance, but.

We are comprised of literally dozens of locations in dozens of distribution centers.

We look through this and one of the reasons why we actually have now a chief operating officer is to look at all of our locations and say are they really appropriate for the business and the business model. We're running so like we did with this co distribution center, which again is pretty small in the scheme of thing.

<unk>.

I can imagine other small ones.

Future results towards being both more operationally efficient driving down our cost position as well as making sure that we're serving our customers optimally.

Alright, Thanks, Russell Thanks, Sarah.

Thank you.

As a reminder to ask a question you will need to press star one one on your telephone.

Our next question comes from the line of Keith <unk> from Northcoast Research.

Good morning, guys just following up on the previous question Russell was there any changes to your incentive comp plan in the quarter I noticed you've mentioned about R&D and SG&A that it was a contributor to the decline in expense this quarter compared to last quarter.

Yeah, no there's been no change to our plan.

In terms of kind of the total envelope we have made it.

I will say slightly easier to get a little bit of incentive compensation and definitely harder to Max out on the incentive compensation. We think that is more indicative to the current environment, where there is more uncertainty if you look back to Brady.

A few years ago, you could draw a ruler across some of the businesses in terms of gross margin and operating profit and what have you.

I think our.

Scheme now is more reflective of.

I will say changes in dynamics.

Now I will say at the 100% level. So the nominal bonus structure that hasnt changed a penny year over year. So we're keeping the base the same but we are kind of stretching it out low and high now we do like I think most companies every quarter, we true it up and when we look at it last year was.

Absolutely phenomenal and we were at the very high end of the range of the bonus structure.

We're coming into this fiscal year, we think it's going to be a lot tougher to hit some of those targets and so we revised it down so you do see it.

Impact from Q4 to Q1, but I think we are.

Nominally we're going to get back into what I'll consider a more stable range is just the swing from Q4 to Q1.

Is that based on revenue and gross profits or bottom line can you give me a super big contract for US based on yes. So it really the two principal.

Parts of it are.

No surprised topline revenue growth and bottom line operating income.

Got it helpful. Thank you I appreciate it and then in terms of like your price increases.

I know that your commentary that you're still lagging the raw material increases.

Our contributors to gross margins.

So.

How far along do you think you guys are in the price increases. So for example, if you are inflation kind of came to a halt today.

The price increases still had to go through for the next several quarters.

If inflation literally stopped today I would say our price increases essentially would stop now there might be a couple of small places here and there that we'd still look at.

But right now we are.

Sure.

We are anticipating future future price increases because we're also anticipating future increases in raw materials.

It takes us about.

Two months to three months from when we make a decision to actually do it and get into our customers because theres notification periods.

And this year effort to go through hundreds of tens of thousands of Skus at least and change pricing as a non trivial process.

Because there is some nuance in how we do it but.

Right now we are anticipating a price increase in most of our products in January .

We're still.

We're making the decision right now that thats going to happen, but we could always back-paddle. If all of a sudden we saw a significant change in inflation.

Great I appreciate it thank you.

Thank you at this time I would like to turn the conference back to Russell Shayler, President and CEO for closing remarks.

Perfect. Thank you all very much for your time today and for your thoughtful questions. Brady is a business that is positioned to perform well regardless of which direction the economy heads.

We now have a proven history of being faster than GDP growing company, our pricing and efficiency actions are expected to help us stay in the upper 40% to near 50% in gross profit margin. Our Rds Division continues to perform well and the actions we've taken to improve our workplace safety.

<unk> are clearly working.

And we have a fortress balance sheet, which enables us to keep investing in both organic and inorganic growth. While also returning funds to our shareholders given.

Even though the future of the macro economy is uncertain I'm very optimistic about brady's future. 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.

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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Good day and thank you for standing by welcome to the Q1 2023 Brady Corporation earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and.

Answer session to ask a question. During this session you will need to press star one one on your telephone.

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

I'll 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 2023 first quarter earnings Conference call.

Bids for this morning's call are located on our website at www Dot <unk> Dot com slash investors, we will begin our prepared remarks on slide number three please.

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 2022 Form 10-K, which was filed with the SEC on September <unk>.

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

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>, President and Chief Executive Officer, Russell Challis Russell. Thank you Anne and thank you all for joining US today. This morning, we released our fiscal 2023 first quarter financial results, which was another quarter marked by solid execution across all of our businesses.

Overall, we had a good quarter with organic sales growth of six 9% much of this organic growth was ultimately offset by foreign currency translation, resulting in total sales growth of 3%.

We once again improved profitability, while investing in R&D, expanding our sales force and improving our digital capabilities I am proud of how the entire Brady team work together through this challenging macro environment, all the while delivering for both our customers and our shareholders.

More specifically as it relates to the macro environment, we're starting to see some changes for instance, hiring is improving.

But it still remains somewhat challenging we are seeing more qualified candidates and we're filling open positions quicker than we had in the past.

International shipping rates have monitored moderated and our supply chain is improving there.

However, these positive signs have not yet translated into reduced inflation, we're experiencing increased energy costs increased wage rate and weaker currencies in relation to the U S dollar, which are squeezing margins in regions outside of North America.

While there are a number of economic uncertainties, we continue to experience a solid demand environment for <unk> products and our team continues to do a great job serving our customers.

We've effectively manage these marketplace disruptions in supply chain constraints to ensure that we could serve our customers. However, it's made supply chain is more expensive.

And lead times have been elongated versus pre pandemic periods.

I can't tell you what the macroeconomic future holds my view of the future is form based on the data that many of UC as well as what im hearing from our customers our suppliers and the Brady Salesforce ease.

Even though our order patterns currently remain robust we are prepared for a softer calendar 2023.

<unk> priorities remain clear first and foremost is to continue our evolution into a faster growing company.

Second is to improve our capabilities to ensure our customers automation initiatives, which is an area that we believe will give us a tailwind for years to come.

Third is to take the necessary actions to offset impact of this inflationary environment all.

All the while meeting customer demands and providing the best possible service.

Fourth is to reinforce Brady's culture of operating sustainably with a long term view, which encompasses our approach to ESG and ensuring that we are supporting all of our stakeholders from our customers to our employers to our communities and of course our shareholders.

And finally, we're focused on deploying our capital in order to drive long term shareholder value.

Be it organic investments acquisitions or returning funds to our shareholders.

We're continuing to make investors investments in our future we have a rock solid balance sheet and we have a fantastic team at Brady that is delivering for our customers every single day.

By 178% this quarter and we took advantage of recent market pullbacks by repurchasing another 280000 shares.

Putting it altogether, we reported first quarter GAAP EPS of <unk> 79.

Compared to <unk> 67 in the first quarter of last year, and non-GAAP EPS, which is calculated as our GAAP EPS less the after tax impact of amortization expense was 84 this quarter compared to 72 in Q1 of last year. So the key financial takeaways this quarter.

Our strong organic sales growth nicely improved EPS solid performance in each of our two divisions and a continued commitment to returning funds to our shareholders all of which helped us overcome the substantial appreciation of the U S dollar and deliver another very strong quarter.

Let's move to slide number four for our quarterly sales trends organic sales grew in each of our two segments, but with the stronger U S. Dollar foreign currency translation reduced total company sales by six 6%, thus, bringing total sales growth to 0.3% the impact of foreign currency reduced the Ids sales by <unk>.

Foreign currency challenge, our WPS business still performed extremely well this quarter.

On slide number five you'll see our gross profit margin trending our gross profit margin decreased 10 basis points to 48, 1% compared to 48, 2% in the first quarter of last year looking at gross profit margin on a year over year basis, we were able to offset nearly all of our input cost.

The increases however sequentially input cost increases are still running above our price increases, which was one of the drivers of our reduced sequential gross profit margin.

Even though conditions are improving we continue to experience scarce labor in certain geographies and we are still seeing inflationary pressures continue across many different cost categories from energy costs to raw material costs and everything in between although market seem to be getting a bit better with respect to product availability and people availability.

We haven't seen it translate into reduced inflation quite yet.

Even though our price increases are partially offsetting inflation, we're still experiencing some lags between input cost increases and price increases as such we would expect to continue to see a bit of choppiness in our gross profit margins over the next several quarters. This quarter, we realized approximately five 6% sales growth.

<unk> from pricing.

On slide number six you'll find our SG&A expense trending SG&A was $89 $9 million this quarter compared to $96 7 million in the first quarter of last year as a percent of sales SG&A was 27, 9% this quarter compared to 31% in the first quarter of last year if you.

Glued amortization expense than SG&A would have declined from 28, 9% of sales in Q1 of last year to 26, 8% of sales this quarter.

In addition to our continued focus on becoming a more efficient organization SG&A expense also benefited from reduced incentive based compensation expense reduced health care costs and a reduction in SG&A expense due to foreign currency translation.

<unk> across our businesses, including our newest lines of printers and the building out of our comprehensive industrial track and trace platform that encompasses our printers high quality materials, RFID scanners and barcode scanners. This quarter's R&D spend was a bit less than we would expect in future quarters due to the timing of.

<unk> spend and a reduction in incentive based compensation.

On slide number eight you can see the pre tax earnings increased to 12, 6% on a GAAP basis.

You exclude amortization expense from both the current year and the prior year and our non-GAAP pre tax earnings would have increased by 11, 3% increasing from $48 5 million in Q1 of last year to $54 million this quarter.

Slide number nine shows the trending of earnings and EPS on an after tax basis. When you look at these charts you can see that the general trend of up and up and to the right. As we've now had two consecutive years of record EPS and we're off to a good start once again this year.

On slide number 10, you will find a summary of our cash generation operating cash flow increased this quarter, despite accelerating the timing.

Now if you'll turn to slide number 11, you can see the impact that <unk> historical cash generation has had on our balance sheet, even after stepping up our share buybacks and the building up inventories over the last year or so on October 31, we were still in a net cash position of $15 5 million.

Our approach to capital allocation is to first and foremost use our cash to fully fund organic sales and efficiency opportunities. This includes investing in new product development sales generating resources capability enhancing capital expenditures and automation focused capex. Despite the economic on.

Certainty, we will continue to deploy capital to drive productivity and sales growth, especially in our businesses, where we expect enhanced growth from secular tailwind and second we focus on consistently increasing our dividends we've increased our dividend every single year since going public.

After fully funding organic investments and dividends, we then deploy our capital in a disciplined manner for either acquisitions, where we have clear synergistic opportunities or for buybacks and a highly opportunistic manner. When we see a disconnect between <unk> intrinsic value and <unk> trading price, our enviable balance sheet positions us well.

To execute additional value enhancing activities, including investing in R&D, completing acquisitions and returning funds to our shareholders.

Full fiscal year, ending July 31, 2023 to put this in perspective, when we provided our initial fiscal 'twenty three guidance just a few months ago, we expected a full year foreign currency headwinds of approximately three 5% and it's now increased to a headwind of 5% as.

This brings us to our fiscal 'twenty three guidance, which is articulated on slide 12 of the deck.

Positive momentum as such we expected organic sales growth will remain consistent with our initial guidance range of mid to high single digit percentage growth for the year ending July 31 2023.

As for capital allocation, we don't foresee any major changes in our strategy, we will keep investing in our in our organic business yesterday, we announced our quarterly dividend and will be opportunistic with buybacks, while looking for acquisitions, where the prices right and the strategic fit is clear we have a strong balance sheet and we'll use it as a <unk>.

Tool to drive long term shareholder value potential risks to this guidance. Among others include further strengthening of the U S. Dollar inflationary pressures that we can to offset in a timely enough manner through price increases or an overall slowdown in economic activity.

<unk> sales were $256 4 million this quarter and organic sales growth was eight 6%.

In Ics, we continue to invest in innovation and R&D. The vast majority of the $13 9 million of R&D This quarter within our <unk> Division, where our goals are to continue the steady stream of new product launches with a particular focus on combining products software and services that help our customers become more efficient and.

Help them get their jobs done in a more cost effective manner.

For instance, in our lockout tagout product offerings, we provide comprehensive programs customized to meet each of our customers unique requirements. These programs combined.

<unk> service focus with our proprietary linked <unk> 360 software our printers are durable materials, and our industry, leading blackout and tagout devices, along with our unique safety locks to deliver a complete solution that improves our customers' safety experience.

All the while improving their productivity as well. It's these type of comprehensive customer experiences that said Brady apart from its competitors.

We believe that we will have the secular tailwind for years to come as companies continue to push for efficiency gains and increased employee productivity, thus, increasing brady's increasing demand for Brady productivity solutions.

Segment profit as a percentage of sales improved 21% this quarter compared to $19 six last quarter.

Strong profitability.

Regionally sales continue to grow in Asia, Despite periodic lockdowns in China, driven by their zero Covid policy.

Asia organic growth was 7% this quarter.

In the Americas, we had organic growth of approximately 5% this quarter.

Our expanded new product lineup investments to drive sales and our expansion into untapped market.

It gives us confidence that we will continue to generate above GDP organic sales growth for the years to come in our Ids business.

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

And it's a continuation of major profitability improvement, we've been generating over the last several quarters.

<unk> profit increased from $2 3 million in the first quarter of last year to $6 4 million this quarter.

This is a more than two five fold increase in profitability, even with the major foreign currency headwinds we're facing.

Looking at our WPS business geographically, we saw continued organic growth in Europe , and Australia, where our businesses in the U S contracted this quarter.

We've been focused on a three pronged approach to ensure that our WPS business is sustainably improving <unk>.

First we are ensuring our products are relevant with a focus on identifying skus that provide the most value to our customers.

Second we are enhancing the value of WPS by helping our customers choose the right product and third we're driving efficiencies and reducing overhead cost, including personnel and catalog distribution costs, all while increasing spend on our website and our on our online advertising to accelerate our.

A shift away from catalogs.

With our heightened level of focus the foundation of our WPS business is improving with a number of key brands and several businesses that have been performing well.

And our internally produced custom solutions, along with our consultative selling provide significantly more value to our customers and simple catalog items.

Looking ahead, we'll continue to drive profit improvements and we'll continue to look critically at our products and our business portfolio. Although WPS comparable is get more challenging in the back half of the year. This team is focused on ensuring that our improved business results are sustainable.

With these initiatives, we expect to have tailwind for years to come as companies work to shorten their supply chain increase automation and drive efficiencies.

With that I'd like to start the Q&A session. Operator would you please provide instructions to our listeners.

As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from the line of George Staphos from Bank of America Securities.

Yes, hi, good morning, this is actually cash and sitting in for George This morning.

Yes sure so.

<unk>.

What is the demand that they're seeing from some of their use cases so.

And the rest of the world has been pretty steady. So we are going into Q2 with basically the way we left Q1, which is in a pretty strong place.

Okay. That's helpful and then I guess in order.

Organic growth was pretty strong even on a strong comparison, so I guess ultimately what was driving that.

Morris, how pricing or can you just give us a sense of that and then maybe just demand trends at.

At a product level as well.

Yes, so obviously pricing is playing a role and there is part of the growth having to do with pricing and also having to do with organic demand.

We have been I want to say pleasantly surprised.

Our order book continues to be very strong and.

Like I said I think going into.

Q2, we're seeing no degradation of our performance from Q1.

Yes.

Okay got it and then I guess just on the track and trace build out.

These acquisitions call it.

A year and a half ago, you've lapped through those I guess last quarter, So I guess.

Where do we stand now in terms of building out that comprehensive track and trace solution what needs to be done and I guess I was wondering what are the mile markers, we should be looking for.

Several quarters, yes.

The next step here is really kind of twofold.

Also doing the industrials type solutions. So there are more robust or more suited to an industrial environment. So we had a long.

<unk> journey, where we expected to industrialize these products and make them look and feel and interchangeable with each other and our operating systems and our printers. So at this point. It is really just a matter of engineering and getting.

Getting the products to work together.

Don't really need much of in the way of an epiphany or.

Additional.

Sure.

Additional acquisitions to make this happen.

Okay. Thanks, I'll turn it over.

Thank you one moment for our next question.

Our next question comes from the line of Steve <unk> from Sidoti.

Good morning, Russell Erinn, Thanks, Rolf Dieter.

On the call.

Alright, I wanted to dig into a little bit about would you comment on the guidance range because it didn't move there's obviously a lot of moving parts here, specifically you pointed out.

The stronger dollar than it was three months ago and factors that would have a 20 cent impact.

That's okay, so coming coming into the year. When we provided our original guidance, we had provided foreign currency headwinds somewhere in the neighborhood of 15% to 18% and of course, that's translation as well as any margin compression that we would get from the stronger U S. Dollar. So it clearly got a bit worse, but frankly, it hasnt been that.

And we've been able to overcome it with continuing to push push efficiency gains of course pricing, we talked about as well and frankly sales have held in there pretty good and as Russell mentioned order patterns remained strong. So we remain very confident that we will hit this guidance range even with the.

What seems to be never ending foreign currency headwind from the stronger U S dollar.

What gets you to the higher end as opposed to the lower end what needs to take.

To work out.

Well for Brady as you know with our 50% gross 50% ish gross profit margin sales are super important and continuing to make the investments that we need to to drive the top line. So of course without our topline growth, we're not going to hit the top end of our of our guidance range, but again, we're confident that we will hit that we will hit our <unk>.

Guidance range.

Plus as you know WPS has improved quite substantially on the bottom line.

And we need that to continue as well so <unk> is a pretty complicated $1 $3 billion business with a lot of moving parts.

And a summation of a lot of smaller businesses and just like always we need to execute and we need to continue to make the investments to drive the top line.

Okay. That's helpful.

When I think about.

You covered the train on the gross margin softening sequentially, largely offset by much lower SG&A sounded like just some one offs there in terms of the lower SG&A. This specific quarter, how can we think about that.

There definitely were coupled they're relatively minor however, we've been experiencing some I'll say some nice reductions in health care expenses.

Which certainly matters for us we call that out and we have had a reduction in incentive based compensation a bit as well.

That we would expect to continue.

The 5% ish reduction that we anticipate in revenue and apply that to SG&A expense as well so.

Foreign currency exchange rates stay where they were at October 31 for the remainder of this year you should see SG&A expense go down as well and then of course that has partially been offset by the continued investments that we're making in our sales force and marketing expenses et cetera.

Great. Thanks for that if I could get one more and I saw the announcement.

The pictures from the ribbon cutting for code in Utah can you talk a little bit about what that means and how that all sort of fits in the process of bringing those acquisitions.

Yes.

If we were to look at pre pandemic.

Shipping global shipping in global Transportation was a pretty drama free event.

As we've.

Through the pandemic and we had uncertainty in shipping time shipping rates and it caused us to rethink how we deploy some of our products and what opportunities we have to have them hub to closer to our customers.

In the case of this particular location, we used to hub it in.

In Asia, and partially in Malaysia, partially in Singapore, and by bringing it back to the U S.

Becomes obviously much closer to the customer since that's the principle.

That's principally where this product is sold and it gives us a little bit faster lead times, and we were able to do it in this case.

We continue to look at all of our deployments throughout the globe and how we have products situated where we have our inventory and I think we have a general desire to both do manufacturing and have our inventory as close to our customers as possible and this was part of that.

Strategy.

So should we expect to see more of these types of.

Developments.

It will be gradual and again, we don't have like a block upgrade where we're saying we're going to move a huge part of Chinese manufacturing to the U S for instance, but.

We are comprised of literally dozens of locations in dozens of distribution centers and we look through this and one of the reasons why we actually have now a chief operating officer is to look at all of our locations and say are they really appropriate for the business in the business.

Model, we're running so like we did with this code distribution center, which again is pretty small in the scheme of things I can imagine other small ones.

In the future result towards being both more operationally efficient driving down our cost position as well as making sure that we're serving our customers optimally.

Great. Thanks, Russell Thanks Erin.

Thank you.

As a reminder to ask a question you will need to press star one one on your telephone.

Our next question comes from the line of Keith <unk> from Northcoast Research.

Yeah, no there's been no change to our plan.

In terms of kind of the total envelope we have made it.

I will say slightly easier to get a little bit of incentive compensation and definitely harder to Max out on incentive compensation. We think that is more indicative to the current environment, where there is more uncertainty if you look back to Brady.

A few years ago, you could draw a ruler across some of the businesses in terms of gross margin and operating profit and what have you.

I think our <unk>.

Scheme now is more reflective of.

I will say changes in dynamics.

I will say at the 100% level. So the nominal bonus structure that hasnt changed a penny year over year. So we're keeping the base the same but we are kind of stretching it out low and high now we do like I think most companies every quarter, we true it up and we look at it last year was.

Absolutely phenomenal and we were at the very high end of the range of the bonus structure as well.

We're coming into this fiscal year, we think it's going to be a lot tougher to hit some of those targets and so we revised it down. So you do see impact from Q4 to Q1, but I think.

Nominally we're going to get back into what I'll consider a more stable range. It's just the swing from Q4 to Q1.

Is that based on revenue and our gross profits our bottom line. What can you give me just further contact course based on yeah. So it really the two principal.

Parts of it are no surprised topline revenue growth and bottom line operating income.

Got it helpful. Thank you I appreciate it and then in terms of like your price increases.

Your commentary that you're still lagging the raw material increases.

Contributors to gross margins.

So.

How far along do you think you guys are in the price increases. So for example, if your inflation kind of came to a halt today it would be.

Price increases still had to go through for the next several quarters.

If inflation literally stopped today I would say our price increases essentially would stop now there might be a couple of small places here and there that we'd still look at.

But right now we are we.

We are anticipating future future price increases because we're also anticipating future increases in raw materials.

It takes us about.

Two months to three months from when we make a decision to actually do it and get into our customers because theres notification periods.

And this year effort to go through hundreds of tens of thousands of Skus at least and change pricing as a non trivial process.

Because there is some nuance in how we do it but.

Right now we are anticipating a price increase in most of our products in January .

We're still.

We're making the decision right now that thats going to happen, but we could always back-paddle. If all of a sudden we saw a significant change in inflation.

Great I appreciate it thank you.

Thank you at this time I would like to turn the conference back to Russell Shayler, President and CEO for closing remarks.

Perfect. Thank you all very much for your time today and for your thoughtful questions. Brady is a business that is positioned to perform well regardless of which direction the economy heads.

We now have a proven history of being faster than GDP growing company, our pricing and efficiency actions are expected to help us stay in the upper 40% in near 50% in gross profit margin. Our Rds Division continues to perform well and the actions we've taken to improve our workplace safety business.

<unk> are clearly working.

And we have a fortress balance sheet, which enables us to keep investing in both organic and inorganic growth. While also returning funds to our shareholders.

Even though the future of the macro economy is uncertain I am very optimistic about brady's future. 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.

Q1 2023 Brady Corp Earnings Call

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