Brady Corporation Q3 2023 Earnings Call
Speaker 1: Thank you for standing by and welcome to Brady Corporation's third quarter 2023 earnings conference call. At this time, all participants are in a listen only mode. For the speaker presentation, there will be a question and answer session.
Speaker 1: To ask a question during the session, you will need to press star 1 1 on your telephone. I would now like to hand the call over to Chief Financial Officer and Thornton. Please go ahead.
Speaker 2: Thank you. Good morning and welcome to the Brady Corporation fiscal 2023 third quarter earnings conference call. The slides for this morning's call are located on our website at www dot Brady Corp comm slash investors. We will begin our prepared remarks on slide number three.
Speaker 2: 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.
Speaker 2: Risk factors were noted in our news release this morning and in Brady's fiscal 2022 on 10K, which was filed at the SEC in September of 2022.
Speaker 2: 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 Schaller. Russell?
Speaker 3: Thank you, Anne, and thank you all for joining us today. First of all, I'd like to congratulate Anne for becoming Brady's new CFO . Many of you know her already as our leader for investor relations, and now I'm delighted to see Anne step up to this new challenges CFO .
Speaker 3: This morning we released our fiscal 2023 third quarter financial results, which marked another quarter of strong results throughout our global businesses.
Speaker 3: This is the direct result of the hard work and dedication of the entire Brady organization.
Speaker 3: We have a culture that focuses on innovation and puts the customer first. As a result, we have a team of fantastic professionals who are providing the best possible customer experience while delivering innovative products that differentiate us from our competition.
Speaker 3: This quarter we once again improved profitability while continuing to invest in R&D, expanding our Salesforce and improving our digital capabilities.
Speaker 3: These are the types of long-term investments that we expect will help us keep our momentum going.
Speaker 3: Let us share a few recent observations. Our ability to hire and retain high quality personnel continues to improve in most geographies, but this still remains somewhat challenging in areas such as research and development and IT where skill sets remain in high demand. International shipping rates have normalized and have nearly returned to pre-pandemic levels. Additionally, our supply chain is also returning to normal. We can see some of this in our improved gross margins this quarter.
Speaker 3: As it relates to overall inflation, although shipping rates have come down and we've seen some incredibly high semiconductor costs moderate, we're still experiencing inflation above pre-pandemic levels, which we expect to continue through the rest of this year.
Speaker 3: Wage rates continue to increase at a greater rate than we expected, excuse me, experienced before the pandemic, and certain material costs continue to increase as well. But at the same time, we are seeing a few commodities stabilize or decrease in terms of year-over-year costs.
Speaker 3: But in Southeast Asia, many of our customers are in the consumer electronics industry, and we've seen a decline in demand in this end market. If we look at order patterns throughout the quarter, we started to see a slowdown in our rate of organic sales growth each month, with April being the slowest month of growth in the quarter. One month doesn't make a trend, but we believe this is a combination of reductions in stock throughout our distribution network, as well as a slight slowdown in some of our geographies in end markets. Fortunately, the diversity of our end markets...
Speaker 3: and customers in the geographies in which we operate allow us to continue growing sales and profit, even in certain end markets aren't growing at the same pace as others.
Speaker 3: Our cash generation, balance sheet, and access to capital give us the flexibility to keep investing in organic business throughout the economic cycle.
Speaker 3: Our priorities remain unchanged.
Speaker 3: First, our number one priority is to continue our evolution into a faster growing company.
which means that we'll continue innovating and we will continue launching new products faster than ever before. We launched three new printers this quarter.
The first is the M610, which is a significant update to one of our handheld industrial label printers. This printer is a must-have for on-site asset tracking and electrical product labeling.
The M610 can print up to 4,500 labels on a single charge on hundreds of different types of materials.
The second printer is the M611, which is another significant update to one of our portable printers. Some of the unique features of this printer is that it allows the customer to store more than 1,000 different types of labels on the printer itself, and it's military grade shock resistance. It's rugged and built to last.
And the third printer is the M710 portable printer. The M710 is our fastest, most advanced portable printer yet. It's versatile, easy to use, and can be controlled using a built-in keyboard, desktop software, or with a smartphone.
There are also hundreds of material options for this printer, along with connectivity via Bluetooth and Wi-Fi.
I've been looking forward to the launch of these new printers and I'm really proud of the creativity and the level of innovation that our team has put into them.
We also have a strong pipeline of more new products that we'll be bringing to market over the next year. We have a great R&D pipeline full of products that bring value to our customers and will continue to keep us ahead of the competition.
Our second priority is to improve our capabilities to assist with our customers automation initiatives.
The acquisitions of code in Nordic ID are key in this effort.
Helping our customers improve productivity is an essential part of reshoring of manufacturing that's underway in North America and Europe .
Third is to take actions to offset the impact of the inflationary environment that we're seeing while meeting customer demand and providing our products at market competitive prices.
We believe we provide value to our customers, and we pride ourselves on our ability to customize our solutions based on exactly what our customers need.
We're navigating this challenging inflationary environment by continuing to push for operational efficiencies throughout our global business.
This has served us well for many years and we know it will continue to drive value over the long term.
And our final priority is to deploy our capital strategically in order to drive long-term shareholder value.
through organic investments, acquisitions, and returning funds to our shareholders.
We're in a great position. We're leaders in many of the niche markets where we operate. We just launched several excellent new products and we have a pipeline of highly innovative solutions on the way.
We're continuing to make investments in our future, we have a cash positive balance sheet, and we have a fantastic team that delivers for our customers each and every single day. Now I'd like to turn the call over to Anne to cover our financial results. Anne? Anne?
Thank you Russell.
This quarter we grew organic sales, we increased our gross profit margins, and we grew our bottom line nicely. Putting it all together, we reported third quarter gap EPS of 96 cents compared to 78 cents in the third quarter of last year, an increase of 23.1 percent.
And non-GAAP EPS, which is calculated as our GAAP EPS, excluding the 2.3 million after tax gain on the sale of our premises business, and the after tax impact of amortization expense, was 95 cents this quarter, which was up 10.5% over Q3 of last year. The key financial takeaways this quarter are,
another quarter of organic sales growth, nicely improved EPS, organic sales growth and segment profit growth in each of our two regions, and significantly improved cash flow.
all of which helped us overcome the year-over-year appreciation of the US dollar and deliver fantastic financial results.
Let's move to slide number four for our quarterly sales trends.
Organic sales grew 1.9% this quarter, but foreign currency translation reduced sales by 2.1% and the impact of our premises divestiture reduced sales by another 0.2%.
resulting in a sales decline of 0.4% in total.
Foreign currency had a much larger impact on our Europe and Australia segment where we saw a reduction of 4.8% from currency translation in the quarter. However, with the recent strengthening of currencies such as the Euro versus the US dollar, we expect the headwind from foreign currency to subside as we progress through our fourth quarter.
Based on April 30th exchange rates, we expect foreign currencies to have a minimal impact on Q4 and then to turn positive in Q1 of next year.
On slide number five you can see our gross profit margin trending. Our gross profit margin increased 190 basis points to 50.3% compared to 48.4% in the third quarter of last year. As we were able to offset, the majority of our input costs increased through efficiency gains, pricing actions, and reduced freight charges.
Our strong gross profit margins really show the value that we can bring to our customers. Slide number six is our SG&A expense trending.
SG&A was $91 million this quarter compared to $96.2 million in the third quarter of last year.
As a percent of sales, SG&A declined to 27% compared to 28.4% in the third quarter of last year.
If you exclude amortization expense from each of the periods presented, exclude the non-routine charges from last year's third quarter, and exclude the gain on the sale of our premises business from this quarter, then SG&A would have increased from 26.8% of sales in Q3 of last year.
to 27.4% of sales this quarter. On a year-to-date basis, we continue to reduce SG&A both in absolute dollars and as a percent of sales through our continual focus on becoming a more efficient organization.
Slide number seven is the trending of our investments in research and development.
This quarter we invested $15.7 million in R&D, which was 4.7% of sales.
We remain committed to new product development. We have opportunities throughout our global businesses, including the development of our newest lines of printers. As Russell mentioned, we launched three excellent new printers this quarter, and a pipeline of additional printers are scheduled for launch over the next several quarters.
On slide number eight, you can see that pre-tax earnings increased 23% on a GAAP basis.
Gap earnings this quarter include a pre-tax gain of $3.8 million from the sale of our premises business.
If you exclude this gain, exclude amortization expense from both the current year and the prior year, and exclude last year's non-routine charges that we recognized in our workplace safety business, then our non-GAAP pre-tax earnings would have increased by 8.6 percent, from $56.8 million in Q3 of last year to $61.7 million this quarter.
non-GAAP basis, our Q3 EPS was an all-time record high.
And on a year-to-date basis, EPS is up 23.1% versus last year on a GAAP basis, and up 10.5% over last year on a non-GAAP basis.
One other item to point out is that we did have a higher income tax rate than normal at 23.8% this quarter.
Whose higher than normal tax rate was due to certain statute lapses that occurred last year and didn't repeat this year. So we still expect that our annual tax rate will be approximately 21% And we still expect that our long-term tax rate will be approximately 21% as well.
On slide number 10, you'll find a summary of our cash generation.
Operating cash flow increased substantially this quarter from $40.9 million in Q3 of last year to $72.5 million this quarter.
For the quarter, operating cash flow was 151% of net income and free cash flow was 141% of net income.
So if you look at the first three quarters of this year, operating cash flow was up nearly 100%.
over the prior year to 129.9 million. And we expect to finish the year with another strong quarter of cash generation in Q4.
Turning to slide number 11, you can see the impact that Brady's historical cash generation has had on our balance sheet.
We're currently in a net cash position of $84.9 million.
To put this in perspective, even with returning more than $23.3 million to our shareholders in the form of dividends and buybacks this quarter, we still reduced our outstanding debt by more than $26 million and we increased our net cash position by more than $53 million.