Q1 2024 Brady Corp Earnings Call

November 16, 2023

Good day and thank you for standing by welcome to Brady Corporation's first quarter 2024 earnings Conference call. At this time all participants are in a listen only mode. After the presentation. There will be a question and answer session to ask a question during the session you will need.

The press Star one one on your telephone Dan and you will hear a message advising your hand. This race to withdraw your question simply press Star. One again, please be advised that today's conference is being recorded I would now like to turn the call over to Brady Corporation's Chief Financial Officer and taught them.

Thank you.

Good morning, and welcome to the Brady Corporation fiscal 2024 first quarter earnings Conference call.

Slides for this morning's call are located on our website at Www Dot Brady Corp, Dot com slash investors, we will begin our prepared remarks on slide number three.

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

Such as expect will May believe forecast and anticipate are just a few examples of words identifying 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 2023 Form 10-K, which was filed with the SEC in September.

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

We will be recording this call and broadcasting it on the Internet.

Such store 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 Schaeffler Russell. Thank you Anne and thank you all for joining us today.

This morning, we released our fiscal 2024 first quarter financial result, which was another great quarter of execution and improved profitability.

Our non-GAAP earnings per share increased 19% this quarter on organic sales growth of two 7% we continue.

To invest in our business through our expanded R&D and digital capabilities, while at the same time growing earnings and strengthening our balance sheet.

Our change to a regional structure last fiscal year has increased our ability to generate improved earnings and cash flow. This reinforces our ability to focus on new products and sales generating investments. So that we can continue to grow organic sales over the long term.

This quarter, we launched an exciting new portable printer called the <unk> hundred 11.

This printer is incredibly versatile and is designed for use in a wide variety of end markets. Its Bluetooth enabled and allows simultaneous connections through an easy to use app extremely durable and waste less material because it can print edge to edge with text graphics embark codes. This printer resides.

For wire identification and Datacenters electrical laboratory settings, as well as anywhere safety and fill the identification is essential it can identify each of the hundreds of different Brady manufactured materials, which enables real time customization for the end user.

We're continuing to make investments in our future our financial position is strong and we have a fantastic team that is delivering for our customers every day.

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

Ann.

Thank you Russell.

This quarter, we grew organic sales two 7%, while improving our gross profit margin and our overall profitability. This once again resulted in earnings growth this quarter with GAAP EPS of <unk> 97 per share, which was up 22, 8% compared to the first quarter of last year.

non-GAAP EPS, which is calculated as our GAAP EPS, excluding the after tax impact of amortization expense was $1 per share this quarter, which was up 19% over the first quarter of last year.

Our Americas and Asia region grew organic sales three 3% and increased segment profit by 21, 3% compared to last year's first quarter.

We're executing well and our overall improvement in gross profit margin was primarily due to the Americas and Asia region. As we continue to execute operational efficiencies and realized benefits from manufacturing costs returning to more normalized levels.

Our Europe, and Australia region grew organic sales, one 4% with effectively flat segment profit.

The economic environment in Europe has become more challenging in this quarter, which had an impact on our rate of organic sales growth.

However, we're still investing in our sales force as well as other organic growth opportunities, while driving operational efficiencies to ensure that we're set up for the long term.

So the key financial takeaways. This quarter are continued organic revenue growth non-GAAP EPS growth of 19% significant improvement in gross profit margin and a continued commitment to return funds to our shareholders.

Now I will turn to slide number four for our quarterly sales trends.

Organic sales grew two 7% and foreign currency translation increased sales one 5% this quarter, while the impact of the divestiture from last year as well as another small noncore business that we sold this quarter reduced sales by one 3%, resulting in total sales growth of two 9%.

Turning to slide number five you'll find our quarterly gross profit margin trending.

Our gross profit margin increased 360 basis points to 51, 7% compared to 48, 1% in the first quarter of last year.

This significant improvement in our gross margin was the result of several factors in combination as we continued to execute efficiency gains throughout our manufacturing facilities globally, our product mix was favorable and we're realizing benefits from reduced manufacturing costs this quarter compared to last year's first quarter.

Slide number six details our SG&A expense trending SG&A was $96 3 million this quarter compared to $89 9 million in the first quarter of last year.

As a percentage of sales SG&A was 29% this quarter compared to 27, 9% in last year's first quarter.

Inflation and other cost increases continued impact primarily our European and European businesses, and we did see some of these effects this quarter.

We continue to work on our cost structure, and we know that we have more opportunities ahead of us, but the timing of various projects typically does vary from quarter to quarter.

Turning to slide number seven you'll find our investments in research and development.

This quarter, we once again increased our investment in R&D from $13 9 million to $15 7 million, which was four 7% of sales.

We believe that the investments with the best ROI are almost always organic investments research and development in particular.

So we're committed to new product development, and we have a great pipeline of new products set to launch this fiscal year.

Slide number eight details our pre tax earnings, which increased 18% on a GAAP basis from $50 3 million to $59 4 million in the first quarter.

And if you exclude amortization from both periods pre tax earnings increased 14, 4% on a non-GAAP basis from 54 to $61 8 million.

Moving along to slide number nine you'll find the trending of our earnings and EPS.

You can see a consistent trend of increasing earnings on a quarter over quarter basis.

This quarters GAAP EPS increased by 22, 8% and if you exclude the after tax impact of amortization from both periods, our first quarter non-GAAP EPS increased by 19% compared to last year.

On slide number 10, you'll find a summary of our cash generation.

Operating cash flow increased significantly this quarter from $28 million in the first quarter of last year to $62 3 million this quarter.

Operating cash flow was 132% of net income and free cash flow was 108% of net income in this quarter.

Moving to slide number 11, you can see the impact that our consistently strong cash generation has had on our balance sheet. We are currently in a net cash position of $123 million, so even with returning over $25 million to our shareholders in the form of dividends and share buybacks. This quarter, we still increased our net cash position by more than 21.

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Our capital allocation approach remains consistent which is to first 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 as well as automation focused capex.

We will continue to deploy capital to productivity and sales growth opportunities despite any economic uncertainty.

And second we focus on consistently increasing our dividends last quarter, we announced our 38th consecutive annual increase in our dividend, which is the street that we're very proud of.

After fully funding our organic investments and our dividend. We then deploy our cash in a disciplined manner for either acquisitions, where we have clear synergies or for opportunistic share buybacks. When we see a disconnect between our intrinsic value and our trading price.

Our strong balance sheet puts us in a position to be able to execute additional value enhancing activities, such as R&D investments and other organic sales opportunities or to acquire a company strategically when the price is right and the synergies are clear and to return funds to our shareholders through dividends and share buybacks.

Turning to slide number 12, you'll find our fiscal 2024 guidance.

We are maintaining our full year fiscal 2024 previously established EPS guidance range of $3 85 to $4 10 per share on a non-GAAP basis, and $3 70 to $3 95 per share on a GAAP basis.

Our outlook is based upon October 31, foreign currency exchange rates and assumes continued economic expansion.

Macroeconomic conditions have slowed in some end markets and in parts of Europe and China in general.

Nonetheless, we are seeing strength in other areas. So we do expect that organic sales growth will remain consistent with our initial guidance range of mid single digit percentage growth for the full year fiscal 2024.

The other elements of our guidance also remain unchanged and include an income tax rate of approximately 22% depreciation and amortization of approximately $32 million to $34 million and capital expenditures of approximately $75 million.

Our Capex estimate is inclusive of the purchase of previously leased facility as well as the build out of a new facility totaling approximately $55 million.

Potential risks to our guidance among others include potential strength strengthening of the U S. Dollar inflationary pressures that we're unable to live up to offset in a timely enough manner or an overall slowdown in economic activity.

Now I'll turn the call back over to Russell to cover our regional results and to provide some closing thoughts before Q&A, let's hope. Thanks, Anne Slide 13 details the financial results of our Americas, and Asia region sales were $221 $6 million this quarter and organic sales growth was three 3%.

The sale of a business last year as well as a small divestiture. We closed this quarter reduced sales by one 9%, resulting in total sales growth of one 4% in the region. We grew in most of our major product lines and end markets, except for our health care identification product line. The effects of the pandemic are still being felt in the <unk>.

Care ecosystem, which suffers from lower reimbursement rates, coupled with increased cost pressures.

Our Asian business reported mid single digit decline, primarily due to weakness in China as well as in consumer electronics in Southeast Asia.

The exception in Asia continues to be our business in India, which once again reported strong growth of nearly 16% in the quarter.

Segment profit in Americas, and Asia increased by 21, 3% to $49 9 million and segment profitability improved from 18, 8% of sales to 22, 5% of sales this quarter our improvement in the gross profit margin was primarily within the Americas and Asia region, where we continue to execute it.

<unk> gains throughout our manufacturing processes.

We had a favorable product mix and we're realizing benefits from reduced freight rates this year compared to last year moving to slide 14, you'll find a summary of the performance of our Europe and Australia region.

Sales were $110 4 million this quarter organic sales growth was one 4% and foreign currency increased sales by four 6% for a total growth of 6%.

Economic conditions have slowed in Europe, this quarter and our rate of organic growth reflects this environment still we were able to grow sales within our safety and facility identification product line and within most of our geographies by focusing on niche opportunities. We still believe that our European business will benefit from many of the similar.

<unk> that we're seeing in the U S such as shortening supply chains by moving manufacturing closer to Europe as well as changes challenges in finding workers.

Both of which result in consistent demand for our productivity solutions.

In Europe.

In total Europe, and Australia segment profit was effectively flat this quarter at $16 7 million inflation continues to impact Europe as its occurred slightly later than impact of inflation in the U S, which resulted in segment profit as a percentage of sales decreasing from 16, 1%.

To 15, 2% this quarter, we're actively working to address these cost pressures through operational efficiencies and selective price increases, but inflation is resulting in profitability challenges in the near term.

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

You certainly to ask a question simply press Star one one on your telephone and wait for your name to be announced to withdraw your question Press Star one again.

While we compile our Q&A roster.

And our first question comes from the line of Steve <unk> with Sidoti. Please proceed.

Good morning, Russell morning, and I appreciate the detail on the call.

Wanted to ask about the gross margin.

EPS came in significantly better than we were looking entirely on the gross margin line. It sounded like you said there was some benefit from mix.

<unk> ability of that margin and anything you can point out.

The real strength this quarter.

Yeah, Yeah. It was certainly a high watermark for Brady in the contemporary passed so we had a couple of things that were are to our benefit.

The price increases have been fully realized as well as we saw some raw material input costs go down and us.

As we mentioned shipping was also.

Down compared to where it was a few quarters ago.

The sustainability of 52% I think is probably unlikely.

We continuously guided to the 50% ish range and I think thats, where it will settle out but but for the time being.

Net benefit to us and we're excited to have it.

Yes.

When I think about the strength of this quarter at.

At least two strengths from our view trying to consider.

Came out compared to your expectations and if it was better why not raise guidance a little bit here.

Well as I said there is there is some.

Input costs that have been at a significant benefit to us.

We're continuously looking to modulate.

Our pricing and our sales growth. So while I was absolutely excited about our earnings I was a little disappointed in the sales growth and we continue to look at what is the appropriate mix of getting new accounts versus keeping gross margin.

<unk> up so obviously the long term goal is to maximize our cash and our long term profit generation and so we continue to look at that the long and short of it is.

I feel great that we got 52% gross margin I feel great about the quarter, but I would like to see a little bit more growth coming in in the future.

Okay.

Another good strong cash flow quarter.

Capex was.

Probably just private a lighter quarter based on your Capex guidance it.

It looked like you were more active buying back shares in August when the shares were under.

50, I know you tend to be more opportunistic than systematic how should we think about cash flow and share.

Share repurchases moving forward.

Yes, so we closed out the 100, the initial $100 million in authorization.

And we really started another round of share repurchasing up to $100 million.

We are opportunistic.

It's kind of a mixed bag I love buying the shares because I think they're at a discount to intrinsic value.

At the same time I'm disappointed there a discount to intrinsic value so.

We continue to look at it I would say we are.

Systematic in looking at our valuation and when we purchase so obviously if the shares get to a certain point, we will stop buying and at other times. If we feel like it is less than what we think its worth we will we'll continue purchasing.

Just got one last one in on them on that note.

What's the M&A pipeline looking like.

You know, it's it's getting better and I mean by that the valuations that we're seeing out there are getting better there.

Still.

Some disconnect between what we think something's worth and what the sellers think something is worth now compared to where it was a year ago. It is much better territory and we continue to look at.

M&A I don't think it's necessary at this point to execute our growth plans, but theres a few properties out there that I'll put it into nice to have category. So if we can close that gap between what we think something's worth and what the seller thinks something's worth.

We will selectively do M&A.

Okay. Thanks.

Thanks Russell.

Thank you one moment for our next question. Please.

Comes from the line of Keith <unk> with Northcoast Research. Please proceed.

Good morning, Ralph Good morning Ann.

Russell in terms of some of your initiatives you guys have talked about over the past year.

Adding salespeople has been one of them, perhaps can you talk about how many people you've added perhaps over the last year as well as some of our investments youre, making in driving sales growth.

Yes.

I'm not going to get into specific number of people, but you can see from our year over year change in sales we are.

In a blended way adding too.

Our resource pool, but it's not only salespeople, but its commitment.

Commitment to digital commitment to web.

We're working on AI tools as I think other companies are doing as well I see there is there is tremendous opportunity continues to be opportunity for us to make sure that we are.

Presenting products.

To our customers and the way they want to see them and I've said before and continue to say our biggest our biggest competitor is non consumption.

So having the our salespeople in front of customers and showing them a solution that they might not even know exist that is our biggest opportunity for growth.

Because.

Unfortunately, not everybody in the world buys Brady products, but we think they should.

Great I appreciate that in terms of Europe I appreciate the inflationary pressures one I assume there's inflationary pressures are primarily wage related and then two how would you.

<unk> already raised prices there so there might be a more limited impact to raising prices and offsetting some of the pressures youre seeing there.

Yes, so we.

<unk> raised prices.

Based on market conditions, and we're not a cost base prices. So we don't necessarily look at input costs as a direct correlation to increasing prices with that said some of the inflation conditions in Europe and some of the lock step increases in wages also.

<unk> customer perception about what price increases they should see so.

We do it throughout the year, we tend to be more systematic in <unk>.

January ish of the year, So we will notify some customers prior to <unk>.

Price increases.

We don't actually pull the trigger until it gets very close and so we look at a variety of factors both competitive landscape and input input costs to decide where to go so what youre seeing in Europe right now some of which is price increases that have already happened and then we will be reevaluating it.

Come the beginning of the calendar year to decide whether additional <unk>.

Increases are warranted.

Okay I appreciate that.

Next year.

Perhaps touch based on your track and trace initiatives in terms of the R&D efforts, there and how close you are to.

Commercializing our products out there.

Yes, so we're getting there.

Prototypes on my desk and.

I think we're pretty close we're still a few quarters away.

This sector right now and I think you can see it in some of the commentary of other companies I think the sector right now is a little slow.

So in some regards that's actually a positive for us because it's giving us the chance to really make sure that our offering is perfect before we launch it to the market. We're looking for probably second half of next calendar year to have essentially our full suite of products up and available for our customers.

Great and then last question for me the organic growth you did see during the quarter was that more volume based versus price.

It was volume.

Great. Thanks, guys. Good luck.

Thank you and this concludes the Q&A session for today I will turn it back to Ross's shallow for final remarks.

Great. Thanks, everyone for your time today and for your questions. Our first quarter was a good start to the year, we performed well and we have a positive momentum throughout the organization.

We're in extremely strong financial position, we increased our net cash position in the quarter, while returning funds to our shareholders through dividends and share buybacks, which provides us with continued opportunities to invest both organically and inorganically to drive long term shareholder value.

The macroeconomic is dynamic and rapidly changing so we're focused on controlling what we can control. So that we can continue to deliver on our priorities which are.

To invest and grow the topline to further develop our product offering to support our customers automation initiatives to execute operational efficiencies and ensure that we grow profitably.

And to effectively deploy our capital to drive long term shareholder value through organic investments acquisitions, and returning funds to our shareholders through dividends and share buybacks. Looking ahead, we will continue to drive profit improvements and we will continue to evaluate our products and our portfolio of businesses and I'm optimistic about the future.

<unk> I know that our team has the ability to overcome challenges and continue to deliver results. Thank you for your time this morning and for your interest in Brady Operator, you may disconnect the call.

Thank you everyone for joining our call you may now disconnect.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

<unk>.

Okay.

Yes.

Okay.

[music].

Dan and you will hear a message of advising your hand. This race to withdraw your question simply press Star. One again, please be advised that today's conference is being recorded I would now like to turn the call over to Brady Corporation's Chief financial officer and toward them.

Thank you.

Good morning, and welcome to the Brady Corporation fiscal 2024 first 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.

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

Such as expect will May believe forecast and anticipate are just a few examples of words identifying a forward looking statement.

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

Risk factors were noted in our news release this morning, and in Brady's fiscal 2023 Form 10-K, which was filed with the SEC in September.

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

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

I'll now turn the call over to Brady's, President and Chief Executive Officer, Russell Shallower Russell. Thank you Anne and thank you all for joining us today.

This morning, we released our fiscal 2024 first quarter financial result, which was another great quarter of execution and improved profitability.

Our non-GAAP earnings per share increased 19% this quarter on organic sales growth of two 7%.

We continue to invest in our business through our expanded R&D and digital capabilities, while at the same time growing earnings and strengthening our balance sheet.

This quarter, we launched an exciting new portable printer called the <unk> hundred 11. This printer is incredibly versatile and is designed for use in a wide variety of end markets. Its Bluetooth enabled and allow us five simultaneous connections through an easy to use app extremely durable and waste less material because it can print.

Hedge to edge with text graphics embark codes. This printer is ideal for wire identification and Datacenters electrical laboratory settings, as well as anywhere safety until the identification is essential and can identify each of the hundreds of different Brady manufactured materials, which enables real time.

Customization for the end user.

We have a fantastic line of printers, and custom materials with a pipeline of innovative products on the way combined with our work and the safety and identification space Brady has multiple leadership positions that deliver value to our customers. We're continuing to make investments in our future. Our financial position is strong and we have a fantastic team there.

Is delivering for our customers every day.

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

Ann.

Thank you Russell.

non-GAAP EPS, which is calculated as our GAAP EPS, excluding the after tax impact of amortization expense was $1 per share this quarter, which was up 19% over the first quarter of last year.

Our Americas and Asia region grew organic sales three 3% and increased segment profit by 21, 3% compared to last year's first quarter.

Our Europe, and Australia region grew organic sales, one 4% with effectively flat segment profit.

The economic environment in Europe has become more challenging this quarter, which had an impact on our rate of organic sales growth.

However, we are still investing in our sales force as well as other organic growth opportunities, while driving operational efficiencies to ensure that we're set up for the long term.

Now I will turn to slide number four for our quarterly sales trends.

Turning to slide number five you'll find our quarterly gross profit margin trending.

Our gross profit margin increased 360 basis points to 51, 7% compared to 48, 1% in the first quarter of last year.

This significant improvement in our gross margin was the result of several factors in combination as we continue to execute efficiency gains throughout our manufacturing facilities globally. Our product mix was favorable and we are realizing benefits from reduced manufacturing costs this quarter compared to last year's first quarter.