Q2 2023 Brady Corp Earnings Call

February 24, 2023

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Okay.

Good day and thank you for standing by welcome to the Q2 2023 Brady Corporation earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.

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Today's conference is being recorded and I would now like to hand, the conference over to your speaker today, Ms Ann Thornton Chief Accounting Officer.

Please go ahead.

Thank you.

Good morning, and welcome to the Brady Corporation fiscal 2023 second quarter earnings Conference call.

For this morning's call are located on our website at Www Dot Brady Corp, Dot com slash investors we.

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 forward looking statements.

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

Risk factors were noted in our news release this morning, and in Brady's fiscal 2020 to Form 10-K, which was filed with the SEC in September of 2022.

Also please note that this teleconference is copyrighted by Brady Corporation and May not be rebroadcast without the consent of Brady, we will be recording this call and broadcasting it on the Internet as such your participation in the Q&A session will constitute your consent to being recorded.

I'll now turn the call over to Brady's, President and Chief Executive Officer, Russell Sheller Russell.

And thank you for all for joining US today. This morning, we released our fiscal 2023 second quarter financial results, which represented another solid quarter of results across our businesses.

This quarter marks our eighth consecutive quarter with at least 6% organic sales growth. This streak is a testament to the hard work of the entire Brady team, who are focused on providing the best possible customer experience, while delivering highly innovative proprietary products that our competition just.

Cannot provide.

And so foreign currency continues to be a headwind we still grew earnings per share by 16, 9% this quarter.

We once again improved profitability, while investing in R&D, expanding our sales force and improving our digital capabilities, which should keep us on this upward trajectory.

I am proud of how the entire Brady team work through this challenging macro environment, all while delivering for both our customers and our shareholders.

<unk> global footprint and sales into many and industrial markets gives us a unique view of the macro environment for instance.

Is improving in most geographies, but still remains somewhat challenging in areas, such as research and development and <unk>.

Were these skill sets seem to always be in demand in general we're seeing more qualified candidates and we're filling open positions quicker than we've had in the past.

But we remain in.

In a tight labor market.

International shipping rates have returned to pre pandemic levels and our supply chain is improving however.

However, there are still certain products that are a challenge to source in a cost effective manner, specifically for our printers and scanners were getting the critical parts that we need to meet customer demand, but some chip and circuit board prices are still quite elevated.

As it relates to inflation and the rate of cost increases seems to have slowed in certain geographies, including the U S. But we are.

Still experiencing inflation and we expect it to continue for a period of time as.

As it relates to Europe , thankfully the energy crisis doesn't seem to be as bad as many predicted but we are still experiencing increased costs and increased wage rates in most of Europe , which is forcing companies such as Brady to increase prices to offset these inflationary forces.

While there are a number of economic uncertainties and a lot of talk of a pending recession. We continued to experience solid demand environment for <unk> products as demonstrated by another quarter of strong growth.

At this point, our cash generation balance sheet and access to capital give us flexibility to keep investing in our organic businesses throughout any foreseeable economic environment.

These priorities remain.

So first and foremost continue our evolution into a faster growing company as I mentioned, we have now logged eight consecutive quarters of organic sales growth north of 6% and we're well on our way second is to improve our capabilities to enable our customers automation initiatives. This is an area, where we expect tailwind.

For years to come.

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

All while meeting customer demands and providing the best possible service. This includes pricing actions as well as evaluating our supply chain suppliers.

Fourth is to reinforce brady's culture of operating sustainably and with a long term view, which encompasses our approach to ESG and ensuring that we are supporting all of our stakeholders.

Our customers to our employees 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.

Theater organic investments acquisitions or returning funds to our shareholders. We are in a position of strength, our industrial printer line is world class and I'm, especially proud of our <unk> hundred 11 portable printer launch, which has been greeted with an overwhelmingly positive customer response.

We are leaders in many of our niches and we have a pipeline of highly innovative products on the way.

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

I'll now turn the call over to Aaron to provide more details on our financial results.

I'll return to provide specific commentary on our identification solutions and workplace safety businesses as well as our geographic performance Erin.

Thank you Russell and good morning, everyone. This quarter, we once again grew organic sales in each of our two divisions. We increased our gross profit margins, we reduced SG&A expense as a percent of sales and we grew our bottom line nicely each of our two divisions performed very well Rds grew segment profit by seven four.

4%, while WPS segment profit by 38, 4%.

It altogether, we reported second quarter GAAP EPS of <unk> 76.

Compared to <unk> 65 in the second quarter of last year, an increase of 16, 9%.

And non-GAAP EPS, which is calculated as our GAAP EPS less the after tax impact of amortization expense was 81 this quarter compared to <unk> 70 in the second quarter of last year.

So the key financial takeaways are another quarter of healthy organic sales growth nicely improved EPS organic sales and segment profit growth in each of our two divisions and significantly improved operating cash flow and free cash flow all of which helped us overcome the year over year.

<unk> of the U S dollar and deliver another very respectable quarter.

Let's move to our sales trends on slide number four organic sales grew six 3% this quarter, but with the stronger U S. Dollar foreign currency translation reduced sales by three 7%, thus, bringing total sales growth to two 6% the impact of foreign currency reduced the Ids sales by.

3% and reduced WPS sales by six 2% 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 foreign currency.

See challenge, our WPS business still performed extremely well this quarter on slide number five you can see our gross profit margin trending our gross profit margin increased 100 basis points to 48% compared to 47% in the second quarter of last year, we were able to offer.

Set the majority of our input cost increases through efficiency gains and pricing actions and as Russell mentioned inflation is not gone and we are still experiencing some legs between input cost increases and price increases because of this we expect to continue to see a bit of choppiness in our gross profit margins over the next several quarters.

<unk>.

On slide number six you'll find our SG&A expense trending.

SG&A was $92 $3 million this quarter compared to $92 5 million in the second quarter of last year as a percent of sales SG&A was 28, 3% compared to 29, 1% in the second quarter of last year, and if you exclude amortization expense than SG&A would have declined.

From 27, 9% of sales in Q2 of last year to 27, 3% of sales this quarter.

In addition to our continued focus on becoming a more efficient organization SG&A expense also benefited from reduced equity based compensation and foreign currency translation.

Slide number seven is the trending of our investments in research and development. This quarter, we invested $15 4 million in R&D, which equates to about four 7% of sales we remain committed to new product development as we have opportunities across our businesses, including the development of our newest lines of printers.

On slide number eight you can see that pre tax earnings increased to 15, 4% on a GAAP basis.

If you exclude amortization expense from both the current year and the prior year than our non-GAAP pre tax earnings would have increased 13, 1% increasing from $45 8 million in Q2 of last year to $51 $8 million this quarter.

Slide number nine illustrates the trending of earnings and EPS on an after tax basis. When you look at these charts you can see the general trend of up into the right fiscal 'twenty. One was a record EPS year at $2 47. We then followed this up with another record year in fiscal 'twenty two of $2 90 and.

So far this year EPS is up another 17, 4%.

On slide number 10, you will find a summary of our cash generation operating cash flow increased substantially this quarter jumping from a cash outflow of $3 2 million last year to a cash inflow of over $29 $4 million this quarter a year over year increase of $32 6 million.

Timing of our annual incentive based compensation payments factored heavily into this significant year over year improvement last year, we paid our annual bonuses in the second quarter, whereas this year they were paid in the first quarter.

If you look at the first six months of this year the timing of incentive based comp payments had no year over year comparability impact year to date operating cash flow was up a full 135% to $57 4 million and we expect cash flow to further strengthen in the second half of the year.

Now if you'll turn to slide number 11, you can see the impact that <unk> historically strong cash generation has had on our balance sheet.

We are currently in a net cash position of $39 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 expenditure.

Yours and 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.

And every single year since going public.

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

<unk> additional value enhancing activities, including investing in R&D and other organic sales generating activities completing acquisitions that the price is right and the synergies are clear and returning funds to our shareholders as we look to the future. We're confident that our strong balance sheet and our positive momentum set us up for further.

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

We're raising the low end of our previously established full year fiscal 2023, EPS guidance range of $3 30 to $3 60 per share to our new range of $3 40 to $3 60 per share on a non-GAAP basis, and we're increasing our GAAP guidance range from the previously established.

The range of $3 13 to $3 43 per share to a new range of $3 23 to $3 43 per share. Our outlook is based on exchange rates as of January 31, and continued economic expansion. Although we're certainly concerned about the stability of the global economy, we are still experiencing.

Nice organic sales growth in most geographies outside of China.

As such we expect full year organic sales growth to be in the mid single digit percentages for the year ending July 31 2023.

Other elements of our guidance include an income tax rate of approximately 21% depreciation and amortization expense of approximately $32 million to $34 million and capital expenditures of approximately $22 million, we've reduced our capex guidance as a result of delays in the start of certain facility projects.

We had originally anticipated starting these projects earlier in fiscal 'twenty, three and we will now be starting these projects towards the end of this fiscal year.

As for capital allocation, we don't foresee any major changes in our strategy, we will keep investing in our organic business, we just announced another quarterly dividend and will be opportunistic with buybacks, while 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 <unk>.

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 I'll now turn the call back to Russell to cover our divisional results and to provide some closing.

Thoughts before Q&A Russell. Thank you Erinn slide 13 outlines the second quarter results for our identification solutions business Eylea sales were $255 $7 million this quarter and organic sales growth was seven 4%.

In Ics, we continue to invest in innovation and R&D. The vast majority of our global R&D spend is in the Ics Division, where our goals are to continue the steady stream of new product launches with a particular focus on providing complete solutions that combine products software and services to help our customers improve.

Safety and get their jobs done in a more cost effective manner.

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

Increasing demand for <unk> productivity solutions.

Segment profit as a percentage of sales improved to 18, 5% this quarter compared to 18% last quarter excuse me last year regionally organic sales declined in the high single digits in Asia, which was primarily due to periodic disruptions in China, and China, driven by the spread of Covid along with the <unk>.

Timing of Chinese new year.

Outside of China, and the rest of Asia business grew in the low single digits this quarter.

In Europe organic sales were up in the mid single digits. This quarter, our European team. Once again did a great job of driving sales growth and is working hard to manage their cost structure as we progress through our realignment to our regional reporting structure.

And in the Americas, we grew organic sales by approximately 11% this quarter.

Our expanded new product lineup investment to drive sales and our expansion into underserved markets gives us confidence that we will continue to generate organic sales growth for years to come in our Ids business.

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

WPS sales declined three 4% this quarter entirely due to year over year appreciation of the U S. Dollar if you strip out foreign currency, our WPS business had organic sales growth of two 8%. This marks our fifth consecutive quarter of organic sales growth and is continuing.

<unk> of the major profitability improvements, we've been generating over the last year.

Segment profit increased from $4 5 million in the second quarter of last year to $6 $2 million this quarter.

This is a 38% plus increase in profitability, even with a major foreign currency headwinds.

Looking at our WPS business geographically, we saw continued organic growth in Europe and Australia.

Whereas our business in the U S contracted.

We've been focusing 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.

We're enhancing the value of WPS by helping our customers choose the right product and pricing our products appropriately.

Third, we're driving efficiencies and reducing overhead cost, including personnel and catalog catalog distribution costs, all while increasing spend on our website and on our online advertising to accelerate our 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 quite well.

And our internally produced custom solutions, along with consultative selling provide more value to our customers than simply buy and resell items.

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

Although WPS comparables will become more challenging now that we've fully lapsed the period of weak WPS performance. The team is focused on ensuring our improved business results are sustainable.

In the slide deck. We've also included what our new geographic segments will look like.

And we provide a more granular view of our quarterly results in a separate press release this morning.

We've been in the process of transitioning to a new regional structure since we announced this intention on December one.

Our change to a geographically aligned organization is all about creating a structure that sets us up for future sales growth by aligning our organization to our customers.

We have always believed being close to our customers and listening to their needs is a key strategic pillar of Brady.

Additionally, this new structure will help us accelerate our growth by taking advantage of the synergies that exists between our current divisions.

By utilizing our best go to market strategies in each of our key geographies and by using our increased geographic scale to accelerate new product development, while delivering tailored solutions that meet the unique needs of the region.

And although cost reduction was not the primary motivator for this reorganization, we do expect to realize an improvement of 10 to 20.

And earnings per share beginning in the fiscal year of 2020 for.

This quarter, we incurred certain one time charges for employee severance mostly in Europe , but again for the full year, we expect that any.

One off severance charges will effectively be offset by reduced personnel cost.

Many of our investors have become accustomed to our <unk> solutions business in our workplace safety business segments.

We believe in being as transparent as possible. So in our future earnings releases as we talk about how our geographic regions performed we will also explain how the underlying businesses in <unk> and WEX PFS perform.

Within their geographic segment, eventually I'd solutions and workplace safety will lose their specific identities as we combine teams and realized synergies between these divisions.

However, this will take a bit of time, so we intend to provide as much visibility as we can to the underlying Ids and WPS businesses for at least the next several quarters.

If you look at our geographic performance this quarter, we performed very well in the Americas and Asia. Despite the challenges experienced in China.

At the same time, our Europe , and Australia segment showed strong organic sales growth of five 2% this quarter, but this was offset by a substantial year over year strengthening of the U S dollar versus the Aussie dollar and the other major European currencies.

Foreign currency reduced sales by eight 9% for the Europe , and Australia segment.

In total we performed very well this quarter, we've now reported at least 6% organic sales growth in each of the last eight quarters, we're coming off of two consecutive record earnings per share yield years, and we appear to be on our way to a third consecutive year of record EPS as we've.

<unk> EPS by 17, 4% in the first half of the fiscal year.

We have positive momentum, which continues to build across the entire organization.

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 to improve our capabilities, while serving our customers as they work through their automation journeys.

With these initiatives, we expect to have a tailwind for years to come as companies worked to shorten their supply chains increased automation and drive efficiencies with that I'd like to start the Q&A operator would you please provide instructions to our listeners.

Thank you.

As a reminder to ask a question. Please press star one one on your phone and wait for your name to be announced to withdraw your question. Please press star one again.

Standby as we compile the Q&A roster.

And one moment, please while first question.

Our first question will come from George Staphos of Bank of America Securities Inc. Your line is open.

Yes, hi. Thank you this is actually cash and cooler on behalf of charge. This morning. So I guess just first what ultimately gave you the confidence to raise the low end of guidance here can you just help us understand what the main drivers are particularly as it looks like you lowered your organic growth assumption for.

For the year relative to the guidance you gave last quarter.

Yes. So this is Russell shallower, we we feel pretty confident as we look at our source of supply in some of the previous headwinds in terms of shipping costs and raw material costs.

We had taken at least in the beginning of the year are relatively.

If not pessimistic at least conservative view that some of these factors would take more time to unwind and we're really seeing much more of a get back to normal in terms of shipping transportation inventory availability, which is also helping us.

At least.

If not bringing down inventory keep it flat at the current levels.

Okay got it and then I guess as we look out obviously, you're realigning the segments here. So if we think about this mid single digit organic growth assumption I guess, how would that split or breakdown.

Given your new business units.

Yes, I think it will be similar in the two different business units. They both have.

There are pros and cons historically European GDP has been slightly less than U S. GDP.

The same.

Time, the European business has had a pretty good ability to increase their market share and expand their penetration that has been slightly better than the Americas. So if we look at the regions on a go forward basis, I think it's a pretty fair horse race between the two.

In terms of their expected growth now.

The only real difference between Europe and America right now is the potential impact of energy costs.

We're cautiously optimistic.

And certainly energy costs in no way reached the levels and this is in Europe , and Norway reached the levels that some of the more dire predictions were in the beginning of the.

Year, so as long as energy holds up and there is an additional factors that hit Europe , I think they will be <unk>.

Similar in terms of performance in their currencies and again I'm not going to predict dollar to euro or dollar to pound.

So when I'm, saying the growth rates are similar that would be their constant currencies.

Okay got it and then last one if I may add there's been a lot of discussion around near shoring and reassuring trends recently, so can you just discuss what youre seeing from your vantage point on this and what this could potentially mean for Brady. If there is in fact elevated levels of industrial and manufacturing activities that are coming back.

Domestically. Thanks, Yeah, it's it will absolutely be a net positive for Brady.

Although we are manufacturing in dozens of countries and we as much as possible try to locate our manufacturing close to our customer in the country or region, they're in nonetheless.

Industrial expansion in industrial investment in general is a big positive for Brady, we get it in two particular ways typically when facilities are commissioned we're part of the process of that in terms of workplace safety signage, helping construction workers what have.

<unk>.

So whenever we see industrial construction, we see that as a positive and then on an ongoing basis, all things being equal we definitely do better in the U S and in Europe , and so whenever we hear about manufacturing continued manufacturing in those two regions.

We see it as a net positive now with that said, it's a long road to go between what happens and industrialization in the U S and in Europe .

Which is really been stagnant or gone down over two decades to see that tied really substantially turn so I do see it as a net positive or the timing of which I think will be.

Really we're looking at it.

Sustained probably the next five to 10 years, it's not going to be a one year kind of bump.

Mr Staphos.

Thank you and good luck in the quarter.

Thank you.

And one moment. Please next question.

Our next question will come from Steve <unk> Zani.

Sidoti Your line is open.

Good morning, Russell Erin.

Thanks for all the color on the call I do want to dig into too.

The <unk>.

Frozen margins in WPS.

As a business it hasn't been growing for years and it sounded like when you had taken over Russell. It. It was a shrink to grow type strategy with still sounds like what you're outlining in terms of sort of from moving the resale products and the lower margin products and we see it in the margin yes.

You are generating with.

3% growth this quarter and you've seen it for a few quarters I'm confused.

Can you help me figure out.

Good confused I'm, just trying to figure that out because it doesn't fit the shrink to grow strategy would imply shrink or maybe I misinterpreted.

<unk>.

So yes, we are absolutely.

Shrinking to grow but we've been fortunate in some of the niches that we have in the WPS and these are the ones.

We manufacture our own products because not all of WTS is.

Buy and resell and anyway. The point of that is those niches that our own manufacturing our consultative selling.

Where we're providing the value of.

How they would outfit.

Particular facility or how they would do traffic management, which are both strong businesses in Europe .

Those have been growing much better than we expected so.

It is a 100% accurate that we are shrinking parts of the business that is the undifferentiated.

Buy and resell.

We've been fortunate in I think the just general strength of the other parts of the business has made it look.

Definitely stronger than we had expected.

Yeah.

And it sounds like from guidance you expect this to at least continue through this fiscal year.

Yes, I think.

As I've spent the last year working on it and working with the teams here at Brady.

We've found definitely some more pockets of strength that we had originally anticipated.

I wanted to say, it's kind of like Declutter in your house.

It turned out to be a better house than we expected, but definitely had some clutter.

And we went through our strategy session.

This week, where we talked about which businesses had some legs behind them, which had some strong cash flow and.

<unk>.

Don't get me wrong, there are definitely some areas that we are looking.

Two.

To take us down is a smaller percentage of the business, but at the same time very optimistic about a few of the sectors and segments and so I'll give a very specific example in Europe .

We have a secure med business, which sells medical kits to small and medium sized companies and while that might sound like a undifferentiated business in.

In France due to French law, there is a very specific requirement.

About the types of things you do and don't have to have in your facility and so our team is able to create value by essentially working with these manufacturers to ensure that they have the right things to be compliant with French law.

It doesn't unfortunately translate to a lot of other countries.

But it's a super powerful niche in the country that we're operating in.

The reason I bring this up is we have a few other pockets as well that.

On the surface seem like a simple buy and resell, but because of how we positioned our salespeople and kind of the knowledge base that we're using to help with those products.

They've been remarkably.

<unk> and continue to grow so that.

That will be.

Im going to say whats formally called WPS that will be the story in the future which is are.

Are we relevant to the customers can we created differentiated advantage either through products or services.

I'm equally happy if the reason that we are relevant is because we are.

Where the knowledge expert or the service expert in that particular segment.

It is definitely going away is the simple buy and resell where were not adding value at any step in the in the.

In the stream.

Great.

Paul.

Yes.

IV solutions sort of the reopening economy story has played out you're still getting 7% organic growth I'm trying to get a sense of if you can provide any.

Increased detail in terms of.

Sector performance your key markets.

As well as how much new products are contributing to that 7% organic growth.

Yes, so its.

Interesting.

We have seen and continue to see more variability in order patterns I think all of the industrial <unk>.

Companies as well as the distributors are still trying to figure out what the right inventory levels are because.

Nobody wants to get stuck with things that.

We will take a long time to sell at the same time people don't want to stock out either.

Pre pandemic, we could draw a ruler across a lot of our order intake it was that predictable.

We're definitely seeing more swings and the reason I bring this up in particular is.

So very good about the growth that we've had and we foresee that in the coming quarters as well.

But theres a lot more lumpiness to it than what we have seen in the past and we're both optimistic but.

We tend to temper our optimism because we're seeing some of this lumpiness. So.

I think that was part of the reason why we felt very comfortable in upping, our lower end earnings guidance I think from the position. We are sitting right now and we can see a pretty clear line of sight to that happening assuming there is some major economic shock to the system.

At the same time revenue I think will be.

Interesting I think would be the best description I mean, we could we could just as easily pick up another few points.

Based on how our distributors and how our.

How their customers look at carrying inventory.

Gotcha, Okay, and then if I could have one more and just any updates on industrial track and trace efforts.

Yes that is and we've said from the beginning that is a very long journey, we feel.

Super positive with <unk>.

What we're doing in the technology, we don't see any impediments.

To where we're headed I think we have a clear product.

Product roadmap as well as IP.

To make sure that we can deliver these solutions, but at the same time and I don't want people to get too far ahead of themselves. We still have to finish the industrialization of some of our products like the code reader and the Nordic readers make sure that they are truly rugged and robust those products will be launched.

Essentially in the next in the next 12 months.

We've made great progress on redoing some of our printers also to better fit into the industrial segment.

We look at selective M&A to potentially augment that offering as well.

So I feel like we are probably in the third inning of our industrialization automation, maybe closing in on the fourth but.

But it's still it's still going to be a journey.

We feel the trends are fantastic and we look forward to it because.

There's a lot of our solutions that essentially cut labor by.

Ours are.

And in a particular use case, we've seen some of our products that essentially have the payback that could be measured in months.

Because of the labor savings they have so I think that is.

A good position to be in and I feel like we've got a great portfolio, including the 211, which we just launched.

Alright, Thanks Russell.

Thank you.

Again to ask a question. Please press star one on your phone and wait for your name to be announced to withdraw your question. Please press star one again.

One moment. Please next question.

And our next question will come from Keith Hausman of Northcoast Research Your line is.

Great. Thank you Hey, Russell just in terms of the revenue growth how much of that growth. This quarter was driven by your price increases.

I was waiting for that question that come up.

And in fact are.

Erin and I had a debate about it.

So I'm going to give you. Unfortunately are somewhat non answer and I apologize for that a lot of what we do is custom.

And it doesn't have necessarily a quarter to quarter comparison, so it's tough.

We have this question all the time like what is price and when you have a custom order, it's very difficult to compare one month, one quarter to another quarter.

Cause of the custom nature of really the majority of our products.

I can say and I guess, where I'm going to leave. This is we do look at our gross margin because if you take all of our custom products and you blend them together and you look at what.

What we're experiencing in terms of labor costs and material costs and the other factors that come into play if.

<unk> essentially treading water, we should at the very least.

Maintain our gross margin for.

Given the particular blend of products that we have in any given quarter and that does by the way change there are times when we might have slightly more in one area that has higher gross margin than another but if you look at our gross margin over the years and kind of the change in the portfolio. It has.

Held up pretty well, which would say that our pricing is covering our material costs at least directionally, if not specifically and our labor costs and productivity as well so.

Clearly pricing is part of our growth.

It's not huge we've never been a commodity based company, where we move lock step with say oil or steel or something like that.

So it's a factor, but but it's hard for us to get really specific.

Resolution on that.

Okay I appreciate that response.

Going back to the pre pandemic days your third quarter was being as you probably your best gross margin quarter in part because of the amount of business you did with small and medium size businesses.

But does the pandemic, obviously businesses didn't happen.

Do you think about the third quarter of this year should we see a spike in gross margins because of that or is that business has been lost.

You know some of the business that was very high gross margin.

Personal concepts for instance.

That business, we just see a very very weak recovery.

At the same time some of our business is actually one of our fastest growing businesses.

Unfortunately, it's one of our lower gross margin businesses year to date.

There's a lot of moving parts.

I would say that a reasonable.

Gross margin for Brady collectively is we should be able to see 50, we might not quite get there it might be 48 49, but.

That really should be the territory of Brady as a corporation again.

All things being equal if we have more software in a particular quarter.

That is of course, much higher gross margins basically 98% gross margin versus a few of our other businesses that are certainly lower.

Okay. So youre not telegraphing, 50% anytime this year, youre, saying thats more down the road when inflationary cost kind of balance everything out correct.

Yes.

If you look at our quarter to quarter gross margin.

Theres, a 100 basis points, a bounce from one quarter to another I mean thats the nature of both mix supply chain, how we recognize cost rolls purchase part variances what have you.

In any given quarter I wouldnt take too much into it.

I would look at it as kind of the long term trajectory of where we are as a company and I think <unk>.

Getting close to that 50.

<unk> is a good place for us to be and then it also.

At some point economics comes into play, we could price higher and get higher gross margins unquestionably.

The expense of overall demand, so and we've seen that that if you if you price things up too high.

Marginal customers will either do without or they'll do with slightly less.

Okay, Gotcha, and if I can ask one more here.

Prior to your vast three acquisitions.

Our D code and Magic Corp, you guys have primarily been seen as an it company IV solutions.

You mentioned productivity solutions is definitely part of the secular tailwind behind yet.

If you just take those three acquisitions that still not a very material part of your overall revenue. So I guess can you give us some other examples of some of your productivity solutions that we should be thinking about it how big is that as a part of the business that we should think about in terms of the secular tailwind.

Well printers and print material have always been a pretty significant part of the portfolio.

Really is the profit generation.

Profit generating engine of the corporation and so the reason behind the code the Nordic.

Is to ensure that we're not disadvantaged in automation placements.

If I look at some of the opportunities that we have and have had.

Traditionally, we just placed a printer with a customer but.

More often than not the customer would say well can I have the optic reader that goes along with the printer or can I have the RFID reader that goes along with the printer and we've hired a buy and resell business of some of those products for years.

Now as I look to the future that is going to be a significant part of us as having that portfolio of products.

I can imagine it's not there yet, but I can imagine that well over half the company.

We will be that portfolio of products.

Alright, Thanks I appreciate it.

Thank you.

I see no further questions in the queue I would now like to turn the conference back to Russell shallow for closing remarks.

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

We now have a proven history of organic sales growth or pricing and efficiency actions are helping to generate blended gross margins near 50%. Our Rds division continues to perform well and the actions we've taken to improve our workplace safety business are clearly working.

And we have a balance sheet that allows us to keep inventing investing in our sales growth initiatives. While also returning funds to our shareholders, even though the global economy will certainly face challenges in the future I am optimistic that our team and our company can meet any challenges that we may face. Thank.

Thank you all for your time this morning, and as always thank you for your interest in Brady have a great day, operator, you may disconnect the call.

Thank you.

This does conclude today's conference call. Thank you all for participating you may now disconnect have a pleasant day and enjoy your weekend.

Sure.

Okay.

[music].

Okay.

Good day and thank you for standing by welcome to the Q2 2023 Brady Corporation earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.

Today's conference is being recorded and I will now.

Like to handle conference over to your speaker today, Ms Ann Thornton Chief Accounting Officer.

Please go ahead.

Thank you.

Good morning, and welcome to the Brady Corporation fiscal 2023 second quarter earnings Conference call.

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.

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

Risk factors were noted in our news release this morning, and in Brady's fiscal 2020 to Form 10-K, which was filed with the SEC in September of 2022.

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

We'll 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 for all for joining US today. This morning, we released our fiscal 2023 second quarter financial results, which represented another solid quarter of results across our businesses.

Cannot provide.

And so.

Foreign currency continues to be a headwind we still grew earnings per share by 16, 9% this quarter.

We once again improved profitability, while investing in R&D, expanding our sales force and improving our digital capabilities, which should keep us on this upward trajectory I.

I am proud of how the entire Brady team work through this challenging macro environment, all while delivering for both our customers and our shareholders.

Brady its global footprint and sales into many and industrial markets give us a unique view of the macro environment for instance, hiring is improving in most geographies, but still remains somewhat challenging in areas, such as research and development and <unk>.

Were these skill sets seem to always be in demand in general were seeing more qualified candidates and we're filling open positions quicker than we had in the past, but we remain.

In a tight labor market.

International shipping rates have returned to pre pandemic levels and our supply chain is improving however.

As it relates to inflation and the rate of cost increases seems to have slowed in certain geographies, including the U S. But we are.

Still experiencing inflation and we expect it to continue for a period of time as.

While there are a number of economic uncertainties and a lot of talk of a pending recession. We continue to experience solid demand environment for <unk> products as demonstrated by another quarter of strong growth.

At this point, our cash generation balance sheet and access to capital give us flexibility to keep investing in our organic businesses throughout any foreseeable economic environment.

Break these priorities remain.

For years to come.

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

All while meeting customer demands and providing the best possible service. This includes pricing actions as well as evaluating our supply chain suppliers.

Fourth is to reinforce brady's culture of operating sustainably and with a long term view, which encompasses our approach to ESG and ensuring that we're supporting all of our stakeholders.

Our customers to our employees 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.

We are leaders in many of our niches and we have a pipeline of highly innovative products on the way.

We're continuing to make investments in our future we have a rock solid balance sheet and we have a fantastic team at Brady that is delivering for all of 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 specific commentary on our identification solutions and workplace safety businesses as well as our geographic performance Erin.

<unk> percent, while WPS segment profit by 38, 4%, putting it altogether, we reported second quarter GAAP EPS of <unk> 76.

Compared to <unk> 65 in the second quarter of last year, an increase of 16, 9%.

And non-GAAP EPS, which is calculated as our GAAP EPS less the after tax impact of amortization expense was 81 this quarter compared to <unk> 70 in the second quarter of last year.

<unk> of the U S dollar and deliver another very respectable quarter, let's.

See challenge, our WPS business still performed extremely well this quarter on.

On slide number five you can see our gross profit margin trending our gross profit margin increased 100 basis points to 48% compared to 47% in the second quarter of last year.

We were able to offset the majority of our input cost increases through efficiency gains and pricing actions and as Russell mentioned inflation is not gone and we are still experiencing some legs between input cost increases and price increases because of this we expect to continue to see a bit of choppiness in our gross profit margins over.

The next several quarters.

On slide number six you'll find our SG&A expense trending SG&A was $92 $3 million this quarter compared to $92 5 million in the second quarter of last year as a percent of sales SG&A was 28, 3% compared to 29, 1% in the second quarter of last year.

And if you exclude amortization expense than SG&A would have declined from 27, 9% of sales in Q2 of last year to 27, 3% of sales this quarter in.

In addition to our continual focus on becoming a more efficient organization SG&A expense also benefited from reduced equity based compensation and foreign currency translation.

On slide number eight you can see the pre tax earnings increased to 15, 4% on a GAAP basis.

If you exclude amortization expense from both the current year and the prior year than our non-GAAP pre tax earnings would have increased 13, 1% increasing from $45 $8 million in Q2 of last year to $51 $8 million this quarter.

Slide number nine illustrates the trending of earnings and EPS on an after tax basis. When you look at these charts you can see the general trend of up into the right.

Fiscal 'twenty, one was a record EPS year of $2 47. We then followed this up with another record year in fiscal 'twenty two of $2 90.

And so far this year EPS is up another 17, 4%.

On slide number 10, you'll find a summary of our cash generation operating cash flow increased substantially this quarter jumping from a cash outflow of $3 2 million last year to a cash inflow of over $29 $4 million this quarter a year over year increase of $32 6 million.

<unk> of our annual incentive based compensation payments factored heavily into this significant year over year improvement last year, we paid our annual bonuses in the second quarter, whereas this year they were paid in the first quarter.

You look at the first six months of this year the timing of incentive based comp payments had no year over year comparability impact year to date operating cash flow was up a full 135% to $57 4 million and we expect cash flow to further strengthen in the second half of the year.

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. We are currently in a net cash position of $39 million or.

Roche 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 uncertainty we will.

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 cash in a disciplined manner for either acquisitions, where we have clear synergistic opportunities or for buybacks in an opportunistic manner. When we see a disconnect between intrinsic value and Brady as trading price, our enviable balance sheet positions us well to <unk>.

Execute additional value enhancing activities, including investing in R&D and other organic sales generating activities completing acquisitions that the prices right and the synergies are clear and returning funds to our shareholders as we look to the future. We're confident that our strong balance sheet and our positive momentum set us up for further.

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

We're raising the low end of our previously established full year fiscal 2023, EPS guidance range of $3 30 to $3 60 per share to our new range of $3 40 to $3 60 per share on a non-GAAP basis.

And we are increasing our GAAP guidance range from the previously established range of $3 <unk> to $3 43 per share to a new range of $3 23 to $3 43 per share. Our outlook is based on exchange rates as of January 31, and continued economic expansion, although we're certainly.

Concerned about the stability of the global economy, we are still experiencing nice organic sales growth in most geographies outside of China as such we expect full year organic sales growth to be in the mid single digit percentages for the year ending July 31 2023.

We had originally anticipated starting these projects earlier in fiscal 'twenty, three and we will now be starting these projects towards the end of this fiscal year.

Term shareholder value.

The vast majority of our global R&D spend is in the Ics Division, where our goals are to continue this steady stream of new product launches with a particular focus on providing complete solutions that combine products software and services to help our customers improve safety and get their jobs done in a more cost.

Effective manner.

We believe that we have a secular tailwind for years to come as companies continue to push for efficiency gains and increased employee productivity, thus increasing demand for <unk> productivity solutions.

Timing of Chinese new year.

Outside of China, and the rest of Asia business grew in the low single digits this quarter.

In Europe organic.

Sales were up in the mid single digits. This quarter, our European team. Once again did a great job of driving sales growth and is working hard to manage their cost structure as we progressed through our realignment to our regional reporting structure.

And in the Americas, we grew organic sales by approximately 11% this quarter.

Our expanded new product lineup investment to drive sales and our expansion into underserved markets gives us confidence that we'll continue to generate organic sales growth for years to come in our Ids business.

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

<unk> of the major profitability improvements, we've been generating over the last year.

Segment profit increased from $4 5 million in the second quarter of last year to $6 $2 million this quarter.

This is a 38% plus increase in profitability, even with a major foreign currency headwinds.

Looking at our WPS business geographically, we saw continued organic growth in Europe and Australia.

Whereas our business in the U S contracted.

We've been focusing 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.

We're enhancing the value of WPS by helping our customers choose the right product and pricing our products appropriately.

Third, we're driving efficiencies and reducing overhead cost, including personnel and Cadillac catalog distribution costs, all while increasing spend on our websites and on our online advertising to accelerate our 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 quite well.

And our internally produced custom solutions, along with consultative selling provide more value to our customers than simply buy and resell items.

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

Although WPS comparables will become more challenging now that we've fully lap the period of weak WPS performance. The team is focused on ensuring our improved business results are sustainable.

In the slide deck. We've also included what our new geographic segments will look like.

And we provide a more granular view of our quarterly results in a separate press release this morning.

We've been in the process of transitioning to a new regional structure since we announced this intention on December one.

Our change to a geographically aligned organization is all about creating a structure that sets us up for future sales growth by aligning our organization to our customers.

We have always believed being close to our customers and listening to their needs is a key strategic pillar of Brady.

Additionally, this new structure will help us accelerate our growth by taking advantage of the synergies that exists between our current divisions by.

And although cost reduction was not the primary motivator for this reorganization, we do expect to realize an improvement of 10 to 20 cents in earnings per share beginning in the fiscal year of 2024.

This quarter, we incurred certain one time charges for employee severance mostly in Europe , but again for the full year, we expect that any.

One off severance charges will effectively be offset by reduced personnel costs.

Many of our investors have become accustomed to our <unk> solutions business in our workplace safety business segments.

Is there specific identities as we combine teams and realized synergies between these divisions.

However, this will take a bit of time, so we intend to provide as much visibility as we turn to the underlying Ids and WPS businesses for at least the next several quarters.

If you look at our geographic performance this quarter, we performed very well in the Americas and Asia. Despite the challenges experienced in China.

Foreign currency reduced sales by eight 9% for the Europe , and Australia segment.

<unk> EPS by 17, 4% in the first half of the fiscal year.

We have positive momentum, which continues to build across the entire organization.

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 to improve our capabilities, while serving our customers as they work through their automation journeys.

With these initiatives, we expect to have a tailwind for years to come as companies work to shorten their supply chains increased automation and drive efficiencies with that I'd like to start the Q&A operator would you please provide instructions to our listeners.

Thank you.

As a reminder to ask a question. Please press star one one on your phone and wait for your name to be announced to withdraw your question. Please press star one again.

Standby as we compile the Q&A roster.

And one moment, please while first question.

Our first question will come from George Staphos of Bank of America Securities Inc. Your line is open.

Yes, hi. Thank you this is actually cash and cooler on behalf of charge. This morning, So I guess I guess first what Ulf.

When I gave you the confidence to raise the low end of guidance here can you just help us understand what the main drivers are particularly as it looks like you lowered your organic growth assumption for.

For the year relative to the guidance you gave last quarter.

Yes. So this is <unk>.

Russell shallower.

We feel pretty confident as we look at our source of supply and some of the previous headwinds in terms of shipping costs and raw material costs.

We had taken at least in the beginning of the year are relatively.

At least.

If not bringing down inventory keep it flat at the current levels.

Given your new business units.

Yes, I think it will be similar in the two different business units. They both have.

There are pros and cons historically European GDP has been slightly less than U S. GDP.

On the same.

In terms of their expected growth now the only real difference between Europe and America right now is the potential impact of energy costs.

We're cautiously optimistic.

And certainly energy costs in no way are reached the levels and this is in Europe , and Norway reached the levels that some of the more dire predictions were in the beginning of the.

Year, so as long as the energy holds up and there is an additional factors that hit Europe , I think they will be <unk>.

Similar in terms of performance in their currencies and again I'm not going to predict dollar to euro or dollar to pound.

So when I'm, saying the growth rates are similar that would be their constant currencies.

Domestically. Thanks, yes. It is.

We will absolutely be a net positive for Brady, although we are manufacturing in dozens of countries and we as much as possible try to locate our manufacturing close to our customer in the country or region, they're in nonetheless.

We see it as a net positive now with that said, it's a long road to go between what's happened and industrialization in the U S and in Europe .

Which is really been stagnant or gone down over two decades to see that tied really substantially turn so I do see it as a net positive on the timing of which I think will be.

Really we're looking at if it's.

Sustained probably the next five to 10 years, it's not going to be a one year kind of bump.

Mr Staphos.

Thank you and good luck in the corner.

Thank you.

And one moment. Please next question.

Our next question will come from Steve <unk> Zani.

Sidoti Your line is open.

Good morning, Russell Erin.

Thanks for all the color on the call I, just wanted to dig into too.

So the <unk>.

Frozen margins in WPS.

As a business it hasn't been growing for years and it sounds just like when you hedged taken over Russell. It. It was a shrink to grow type strategy with still sounds like what you're outlining in terms of sorry from moving the resale products and the lower margin products and we see it in the margin yes.

You are generating with 3% growth this quarter and you've seen it for a few quarters I'm confused.

Can you help me figure out good.

<unk>, so I'm just trying to figure that out because it doesn't fit the shrink to grow strategy would imply shrink or maybe I misinterpreted the plan.

So yes, we are absolutely.

Shrinking to grow but we've been fortunate in some of the niches that we have in the WPS and these are the ones.

Where we manufacture our own products because not all of WTS is.

Buy and resell and anyway. The point of that is those niches that our own manufacturing, our consultative selling where we're providing the value of.

How they would outfit.

A particular facility or how they would do traffic management, which are both strong businesses in Europe .

Those have been growing much better than we expected. So it is a 100% accurate that we are shrinking parts of the business that is the undifferentiated.

Buy and resell.

We've been fortunate in I think the just general strength of the other parts of the business has made it look.

Definitely stronger than we had expected.

Yes.

And it sounds like from guidance you expect this to at least continue through this fiscal year.

Yes, I think.

As I've spent the last year working on it and working with the teams here at Brady.

We've found definitely some more pockets of strength that we had originally anticipated.

I want to say, it's kind of like Decluttering Your house.

It turned out to be a better house than we expected, but definitely had some clutter and.

We went through our strategy session.

This week, where we talked about which businesses had some legs behind them, which had some strong cash flow and again.

Don't get me wrong, there are definitely some areas that we are looking to.

Two.

To take us down is a smaller percentage of the business, but at the same time.

Ari optimistic about a few of the sectors and segments and so I'll give a very specific example in Europe , we have a secure med business, which sells medical kits to small and medium sized companies.

While that might sound like a undifferentiated business.

In France due to French law, there's a very specific requirements and about the types of things you do and don't have to have in your facility and so our team is able to create value by essentially working with these manufacturers to ensure that they have the right things to be compliant with French law.

It doesn't unfortunately translate to a lot of other countries, but it's a super powerful niche in the country that we're operating in.

The only reason I bring this up is we have a few other pockets as well.

<unk>.

It might on the surface seem like a simple buy and resell, but because of how we positioned our salespeople and kind of the knowledge base that we're using to help with those products.

They've been remarkably.

<unk> and continue to grow so that.

That will be.

I'm going to say was formerly called WPS that will be the story in the future which is are.

Are we relevant to the customers can we created differentiated advantage either through products or services, because I'm equally happy if the reason that we are relevant is because we are.

Where the knowledge expert or the service expert in that particular segment.

It is definitely going away is the simple buy and resell where were not adding value at any step in the in the.

In the stream.

Great.

Paul.

Yes.

IV solutions sort of reopening economies story has played out you're still getting 7% organic growth I'm trying to get a sense of if you can provide any.

Increased detail in terms of.

Sector performance your key markets.

As well as how much new products are contributing to that 7% organic growth.

Yes.

Interesting we.

We have seen and continue to see more variability in order patterns.

All of the industrial comp.

Companies as well as the distributors are still trying to figure out what the right inventory levels are because.

Nobody wants to get stuck with things that.

We will take a long time to sell at the same time people don't want to stock out either.

Pre pandemic, we could draw a ruler across a lot of our order intake it was that predictable.

We're definitely seeing more swings and the reason I bring this up in particular is.

Feel very good about the growth that we've had and we foresee that in the coming quarters as well.

But theres a lot more lumpiness to it than what we have seen in the past and we're both an optimistic but.

We tend to temper our optimism because we're seeing some of this lumpiness. So.

At the same time revenue I think will be.

Interesting I think would be the best description I mean, we could we could just as easily pick up another few points.

Based on how our distributors and how our.

How their customers look at carrying inventory.

Got you, Okay, and then if I could have one more and just any updates on industrial track and trace efforts.

Yes that is and we've said from the beginning that is a very long journey, we feel.

Super positive with <unk>.

What we're doing in the technology, we don't see any impediments.

To where we're headed I think we have a clear.

<unk> product roadmap as well as IP.

To make sure that we can deliver these solutions, but at the same time.

I don't want people to get too far ahead of themselves, we still have to finish the industrialization of some of our products like the code reader and the Nordic readers make sure that they are truly rugged and robust those products will be launched essentially in the next.

In the next 12 months.

We've made great progress on redoing some of our printers also to better fit into the industrial segment we.

We look at selective M&A to potentially augment that offering as well.

So I feel like we are probably in the third inning of our industrialization automation, maybe closing in on the fourth but.

But it's still it's still going to be a journey.

We feel the trends are fantastic and we look forward to it because.

There's a lot of our solutions that essentially cut labor by.

Ours are.

And in a particular use case, we've seen some of our products that essentially have the payback that could be measured in months.

Because of the labor savings they have so I think that is.

A good position to be in and I feel like we've got a great portfolio, including the 211, which we just launched.

Great. Thanks Russell.

Thank you.

Again to ask a question. Please press star one on your phone and wait for your name to be announced to withdraw your question. Please press star one again.

One moment please for our next question.

And our next question will come from Keith Hoffman of Northcoast Research Your line is.

Great. Thank you Hey, Russell just in terms of the revenue growth how much of that growth. This quarter was driven by your price increases.

I was waiting for that question to come up.

And in fact are.

Erin and I had a debate about it.

So I'm going to give you. Unfortunately, it's somewhat non answer and I apologize for that a lot of what we do is custom.

And it doesn't have necessarily a quarter to quarter comparison, so it's tough.

We have this question all the time like what is price and when you have a custom order, it's very difficult to compare one month, one quarter to another quarter.

Cause of the custom nature of really the majority of our products.

I can say and I guess, where I'm going to leave. This is we do look at our gross margin because if you take all of our custom products and you blend them together and you look at.

What we're experiencing in terms of labor costs and material costs and the other factors that come into play if we are.

<unk> essentially treading water, we should at the very least.

Maintain our gross margin for.

Given the particular blend of products that we have in any given quarter and that does by the way change you know there are times when we might have slightly more in one area that has higher gross margin than another but if you look at our gross margin over the years and kind of the change in the portfolio. It has held up pretty well.

Well, which would say that our pricing.

Is covering our material costs at least directionally, if not specifically and our labor costs and productivity as well so.

Clearly.

Pricing is part of our growth.

It's not huge we've never been a.

Oddity based company, where we move lock step with say oil or steel or something like that.

So it's a factor, but but it's hard for us to give really specific.

Resolution on that.

Okay. Okay I appreciate that response.

But does the pandemic, obviously businesses didn't happen.

How do you think about the third quarter of this year should we see a spike in gross margins because of that or is that business has been lost.

You know some of the business that was very high gross margin.

Personal concepts for instance.

That business, we just see a very very weak recovery.

At the same time some of our business is actually one of our fastest growing businesses.

Unfortunately, it's one of our lower gross margin businesses year to date.

There's a lot of moving parts.

I would say that a reasonable.

Gross margin for Brady collectively is we should be able to see 50, we might not quite get there it might be $48 49, but.

That really should be the territory of Brady as a corporation again.

All things being equal if we have more software in a particular quarter.

That is of course, much higher gross margins basically 98% gross margin versus a few of our other businesses that are certainly lower.

So youre not telegraphing, 50% anytime this year, youre, saying thats more down the road when inflationary cost kind of battled everything out correct.

Yes.

If you look at our quarter to quarter gross margin.

There is a 100 basis points, a bounce from one quarter to another I mean thats the nature of both mix supply chain, how we recognize cost rolls purchase part variances what have you.

In any given quarter I wouldnt take too much into it.

I would look at it as kind of the long term trajectory of where we are as a company and I think.

Getting close to that 50.

<unk> is a good place for us to be and then it also.

At some point economics comes into play, we could price higher and get higher gross margins unquestionably.

At the expense of overall demand so and we've seen that that if you if you price things up too high.

Marginal customers will either do without or they'll do with slightly less.

Okay got you and if I can ask one more here.

This year over year, that's three acquisitions.

Our D code and Magic Corp, you guys, primarily been seen as an it company IV solutions.

You mentioned productivity solutions is definitely part of the secular tailwind behind you.

If you just take those three acquisitions that still not a very material part of your overall revenue. So I guess can you give me. Some other examples of some of your productivity solutions that we should be thinking about it how big is that as a part of the business. We should think about in terms of the secular tailwind.

Well printers and print material have always been a pretty significant part of the portfolio.

Really is the profit generation.

Profit generating engine of the corporation and so the reason behind the code the Nordic.

Is to ensure that we're not disadvantaged in automation placements.

If I look at some of the opportunities that we have and have had.

Traditionally, we just placed a printer with a customer but.

More often than not the customer would say well can I have the optic reader that goes along with the printer or can I have the RFID reader that goes along with the printer and we've had a buy and resell business of some of those products for years.

Now as I look to the future that is going to be a significant part of us as having that portfolio of products.

I can imagine it's not there yet, but I can imagine that well over half the company.

We will be that portfolio of products.

Alright, Thanks I appreciate it.

Thank you.

I see no further questions in the queue I would now like to turn the conference back to Russell shallow for closing remarks.

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

And we have a balance sheet that allows us to keep and vending investing in our sales growth initiatives. While also returning funds to our shareholders, even though the global economy will certainly face challenges in the future I am optimistic that our team and our company can meet any challenges that we may face. Thank.

Thank you all for your time this morning, and as always thank you for your interest in Brady have a great day, operator, you may disconnect the call.

Thank you.

This does conclude today's conference call. Thank you all for participating you may now disconnect have a pleasant day and enjoy your weekend.

Q2 2023 Brady Corp Earnings Call

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