Q2 2024 Brady Corp Earnings Call
Yeah.
Good day.
Thank you for standing by welcome to many corporations second quarter 'twenty 'twenty four earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. Johnson question. During the session you will need to buy star one on your telephone you will get an automatic miss advising Yohanan suite.
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I would now like to turn the conference over to Ann Thornton CFO and Treasurer Brady Corporation. Please go ahead.
Thank you.
Good morning, and welcome to the Brady Corporation fiscal 2024 second quarter earnings Conference call.
The slides for this morning's call are located on our website at Www Dot Brady Corp. Dotcom 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, its 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 it.
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, Thanks, Anne and thank you all for joining US today, we released our 2024 second quarter financial results. This morning, and I'm pleased to report another quarter of organic sales growth and improved profit.
This quarter, we increased our gross profit margin to 52%, we improved our pre tax earnings by 15, 1% and we grew our non-GAAP earnings per share by 14, 8%. These results wouldnt be possible without the hard work and dedication of our entire global team.
Credibly proud of the effort the team has put in to ensure the success of our regional reorganization, which became effective at this time last year. The progress we've made and the opportunities. We have identified continue to excite motivate me every single day. It is absolutely contributed to our improved earnings and cash flow and just as.
It's creating an environment, where we're encouraging our teams to think differently about what they do every day.
Which to me is the best part.
A binding our businesses within our regions has brought our teams together its cultivating more innovative thoughts and we're all working together better than ever.
This quarter, we once again grew earnings per share, while increasing our investment in both research and development and our sales force, we increased our R&D spend by nearly 10% in the second quarter and we added a number of new salespeople throughout our global business.
Have some exciting new products that to watch over the next several quarters and a strong future pipeline of innovative new products.
Which are essential to drive sales growth over the long term.
Now I'll turn the call over to Ed to provide more details on our financial results Dan.
Thank you Russell.
We grew organic sales one 6% this quarter, while once again, improving our gross profit margin and our overall profitability.
This resulted in GAAP EPS of <unk> 90 per share, which was up 18, 4% compared to the second quarter of last year.
non-GAAP EPS, which is calculated as our GAAP EPS, excluding the after tax impact of amortization expense was <unk> 93 per share this quarter, which was up 14, 8% compared to the second quarter of last year.
Our Americas and Asia region grew organic sales, one 2% and increased segment profit by nine 3% compared to last year's second quarter.
And our Europe, and Australia region organic sales, two 5% and increased segment profit by 11, 9% compared to last year's second quarter.
We are executing extremely well in Europe, despite a macro environment with minimal growth.
We continue to integrate our businesses and identify opportunities to grow sales with existing customers as well as to convert new customers to our high performance solutions.
Our key financial takeaways this quarter are.
Organic revenue growth despite slowing macroeconomic trends.
non-GAAP EPS growth of 14, 8%.
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.
<unk> sales grew one 6% and foreign currency translation increased sales, 0.8% this quarter, while the impact of divestitures reduced sales by three 5%, resulting in a total sales decline of one 1%.
Slide number five outlines our quarterly gross profit gross margin trending.
Gross profit margin improved by 220 basis points to 52% compared to 48% in the second quarter of last year.
This significant improvement in our gross profit margin was the result of several factors, but with the primary being favorable product mix.
Turning to slide number six you'll find our SG&A expense trending.
SG&A was $91 3 million this quarter compared to $92 3 million in the second quarter of last year.
As a percentage of sales SG&A was consistent with last year at 28, 3%.
We're funding additional selling resources, while reducing overall SG&A expenses through ongoing efficiency initiatives throughout our global businesses.
Slide number seven details our investments in research and development. This quarter. We once again increased our investment in R&D from $15 4 million to $16 8 million, which was five 2% of sales.
We're fully committed to our R&D efforts and we have several innovative new products planned for launch in the second half of this fiscal year.
Moving to slide number eight you'll find our pre tax earnings, which increased 15, 1% on a GAAP basis from $48 5 million to $55 8 million in the second quarter.
Excluding amortization from both periods pre tax earnings increased 12, 4% on a non-GAAP basis from $51 8 million to $58 2 million.
Slide number nine details earnings and EBIT and EPS.
Our trend of increasing earnings on a quarter over quarter basis continued this quarter.
Our GAAP EPS increased by 18, 4% and excluding the after tax impact of amortization from both periods, our second quarter non-GAAP EPS increased 14, 8% compared to last year.
Turning to slide number 10, you'll find a summary of our cash generation.
Operating cash flow increased from $29 4 million in the second quarter of last year to $36 $1 million this quarter.
Capital expenditures increased this quarter, because we purchased one of our facilities that had been previous that we'd previously released resulting in negative free cash.
Several years, so we're excited about the future in India.
Profit in Americas, and Asia increased nine 3% to $43 9 million and segment profitability improved from 18, 3% of sales to 27% of sales. This quarter. Our continued improvement in gross profit margin resulted in a significant increase in segment profit.
Slide 14 details the performance of our Europe, and Australia region sales were $111 million. This quarter organic sales growth was two 5% and foreign currency increased sales by 2% for a total growth of four 5%.
Despite slowing economic conditions in Europe, we were still able to grow well above GDP in our key geographies and end markets through our focus on use cases that require a specialized solution, which is absolutely ideal for Brady products organic growth in Europe, with two 3% and organic growth in.
<unk> was three 7% in the quarter.
Our organic sales growth resulted in solid increase in segment profit for the quarter from $13 five to $15 1 million and as a percentage of sales segment profit increased from 12, 7% to 13, 6%.
Although we are facing cost pressures, we were able to more than offset them through operational efficiencies and targeted price increases we continue to integrate our businesses.
In Europe in particular, and the opportunities to grow sales with current customers as well as provide solutions for new customers continued to be identified by our key.
Im really proud of the progress we've made our execution in Europe, and Australia has been incredibly strong.
We had another great quarter, and first half of the year and I'm definitely looking forward to finishing the second half of the year on a high note as well with that wed like to start the Q&A operator would you. Please provide instructions to our listeners.
Ladies and gentlemen asked a reminder to ask a question you will need to Westar one one on your telephone and wait for an aimed to be announced to withdraw. Your question simply question. One again, please standby, while we compile Kenny roster.
Sure.
And our first question coming from the line of Steve <unk> with Sidoti Your line is open.
Thanks, Good morning, Russell and thanks for the detail on the call.
I wanted to start by asking about the guidance because I know when you issued it.
Do you expect at the high end of EPS was achievable. If you hit the high end of your sales guidance.
So we've seen you know go to the lower end.
But you are raising the low end of guidance and not moving to high and so I guess, what I'm trying to square the two what else is going right to enable you to do it.
To move the guidance to the higher end sales clearly.
We're not growing at the same pace.
Yes. So there is a couple of things going on.
The areas that are a little bit weaker in terms of sales growth Fortunately, our least profitable businesses and the ones that continue to be growing quite nicely and actually are are at plan or above plan, our more profitable businesses. So the consequence of which youre seeing some of that in the <unk>.
And our gross margin is that we feel comfortable with the range and the adjustment that we made again all things being equal if we look at how we performed in the first two quarters and project that into the next to.
That has a lot to do with why we feel we can nudge it even though the top line wasn't quite there.
So it's a geographic and product mix. This is what you're saying or are there cars that were taken out.
Like any good manufacturer there is always slight areas that we can improve operational efficiency and and we continue to do so but an awful lot of it has to do with the mix and the fact that are higher.
<unk> businesses are outperforming our lower margin businesses.
Okay.
On the sales number this quarter.
The 5% impact on that regional on divestiture, it's the only one I recall as premises, which was last March and was not having that big of an impact can you give a little touch a little bit on on that on that line.
Yes, so we also divested.
Other small business on which really wasn't a good fit with our portfolio is called personal concepts.
Again, not as significant growth vector for us and as I've said when I took over as CEO.
Almost two years ago is that we're going to look at our.
Portfolio and decide what businesses really fit with us on an ongoing and future basis.
Both the access control as a personal concepts.
Didn't really fit our business and we thought there are better ways to.
For our portfolio to move forward.
That acquisition did take a close last quarter Steve.
Okay.
I will just mention.
But the total impact to the financials was was immaterial.
But yeah, we call out our organic sales fell from on the impact of tariffs, So that's where you're seeing it yes quarter. Okay. Okay.
How much is taking out these <unk>.
Lower performing businesses contributing to margin because I don't recall you ever doing a fifth above.
Above 50% gross margin in the seasonally slower Q2 before I mean, it was a very strong number.
Yes.
Ironically the businesses, we divest the business, we divested personal concepts.
Was the high gross margin. It was also with high sales Oh go ahead business. So the net profit one okay.
Wasn't a big deal Yeah, I think as I've kind of.
Spoke to in prior calls you know that 50% gross margin. We feel is a good place for us with our product mix as it stands right now and I think that is a reasonable target given the current inflationary conditions in our cost structure. So.
Im looking to see more of that in the future.
Okay. If I can just one more in terms of obviously.
Full year of strong cash flow number youre in great shape moving forward.
Is the pipeline looking like.
How developed is it at this point where are you.
On M&A.
Oh, one M&A, okay. So yeah.
Yes.
Have a clear idea of what we're looking for in terms of M&A. There are a tremendous number of properties I think again as I've said before if anybody is surprised that something we buy then we've made a mistake these have to be clear.
<unk> direct or adjacent businesses that are additive to our overall strategy. So.
That we do or make in this space will be in the identification of products people and things, which is really the core of our business so not.
Not a tremendous number of properties I will say that the valuations are getting to a point, where we feel much more comfortable than we did even a year ago. So.
We've always said, we'd Brady we wanted to be good stewards of our cash and sometimes the best use of our cash is to buy back our own shares and sometimes the best is to look to an acquisition.
Great. Thanks.
Thanks, Russell Thanks, Sam.
Thank you.
Thank you.
And our next question coming from the line of Keith Hudson from Northcoast Research. Your line is open.
Good morning, guys, Hey, Russell as we look at the Americas growth. Obviously this is the one thats probably the weight around connect.
How much of that growth or the performance was impacted by PDC. This quarter I noticed you guys said.
In decline, but can you give us the context of the size of that decline.
Yeah, I'm going to say everything that the identification group did well PTC kind of took away from <unk>.
No.
Which is unfortunate, particularly given the size of PDC compared to the rest of that business.
I do think that some of the things that happens were a combination of cyclical and some stocking trends, we see with some of our.
Distributors I don't foresee that level of headwinds in the next couple of quarters and I think more importantly, because we get the question about the business like why do you have it.
I think we have a good idea of where we can take the business in the next couple of years.
Still very much a work in progress it has been a not a great performer at Brady for several years, but I think with our integrated business.
Emerging the America business together it gives them some additional strength and we're really looking at.
Both of our product portfolio and some of their go to market strategies, where they can take where they can benefit from a larger organization.
Alright, I appreciate that.
Find me in terms of.
Of your end markets how much of your sales are driven by Opex spending some more of a consumable versus capital expenditure driven.
Yes.
We probably don't break that down into that kind of resolution but.
Good aligned drop.
Hello.
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Later is my issue or is the company issue.
Yeah.
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Sure.
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Ladies and gentlemen, please standby please.
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Speakers please resume.
Hello, Olivia This is Brady Corporation.
Yes, we can hear you now please resume.
Wonderful thank you.
Ask that question regarding Capex or Opex driven sales Russell has just started to answer the question it went out.
Yeah, I apologize for that and.
Yes.
National cell phone a problem right now and I gave a great answer.
But albert.
Yes.
So.
If you look at Brady's businesses, we have really three difference.
Call. It consumables are fixed hardware and I think it's probably a better way of thinking about or looking at our business we like.
A significant portion of our companies in the MRO space, where we do safety and facility I E locks, what have you and those products I'll call them systemic consumables, because theyre not tended to last forever. They might have they might last a couple of years they might last what's in that and so that gets a regular refresh.
Right with our customers because we.
Most of our customers will continue to buy from us as they redo their facilities and what happens.
Then you get to our printer consumables, which makes up the next.
Significant part of the business and of course, those get used on a regular basis, they're essentially the razor blade that goes with our razor, which is the last part of our printer in printer sales and the printers time the lab, depending on the use case something between three and seven years for the for the refreshed.
So while our products are durable on none of them are really intended nor do they last forever. So there's again depending on the category.
You get a pretty regular refresh rate.
In our business and so that's that's how we look at it hopefully that answers your question to kind of help me.
Yes. It does it helps to frame it up I appreciate that I guess final question for me.
It's been several years now we've been here and the excitement around R&D and abates. It always feels like the growth coming as the next step is the next step I guess, how translate that excitement to the numbers that we're seeing.
Do we see that we're close to the acceleration of growth I mean, what gives you the confidence that the R&D is producing what you need to do or will do it.
Yes. So there is probably two things that I wanted to say about the R&D you know that.
First it is a you know we're in a long journey for us when we devote money to R&D. It takes roughly three years to develop a new printer little bit last cycle of refreshing and so.
We have the number of new product launches in the next few quarters I'm Super excited about that.
But it does take time and like a lot of industrial products, which are also seeing is.
Uh huh.
They're slower adoption is it is not like an iPhone, where the new generation of iPhone top saga and everybody runs to the store and buys them. These have a very regular cycle.
We typically see and again, depending on the product category peak revenue something between four to five years after product launch so much different cycle than you'd see in a consumer product at the same point.
I think our R&D has absolutely had an impact and our new products that added an effect in terms of our ability to price our ability to not be commoditize and our ability to maintain our gross margins and return on capital. So you are seeing those things come to play and because at the same time here some of our.
More commoditized products or even the ones, we divested or just not part of the story anymore. So will you see explosive growth from any of our product introductions no. That's not really the way Brady works, but we are absolutely looking for them to nudge the needle aligned our overall growth and profitability, which I.
I think you're already seeing.
Okay, all right. Thanks, Ross I appreciate it.
Thank you.
And our next question coming from the line of kitchen killer.
Killer with Bank of America. Your line is open.
Yes, hi, guys. Good morning, Thanks for taking my questions just wanted to get back to the organic growth guidance for the year.
So for the back half here can we kind of expect.
Low single digit growth.
On that end and I guess, what gives you confidence in your revised guidance, particularly as your comps on organic growth get a little bit tougher in the backup theater here.
Yes.
Obviously, we don't have a magic crystal ball, but we worked closely with our customers and we have literally thousands of touch points through our distributors and our direct <unk>.
Direct sale I think the past few quarters of the economy has been.
Interesting with a lot of people originally projected predicting a recession, which doesn't seem to have happened in a lot of our regions and countries, but at the same time I think there are some murky.
Investments in demands with then of course, you have the U S election, which also might give some people pause, but when we put all of this together I look at what has happened in the industrial space.
And some of the other companies, which are reporting significant declines in year over year sales.
Something that we're not seeing in fact again because of the breadth of our offering we're seeing I think a much stronger comparison than a lot of the other companies that are similar I think anybody's quite like Brady, but are in similar products and some more product categories. So if you take all these factors into account.
We felt comfortable with our guidance and.
And so we're barring something new I think we're going to be good for the second half.
Okay makes sense.
Just trying to Peel it back a little bit more I guess now that we're almost two months into the quarter here.
Are you able to comment at all just what you're seeing quarter to date in terms of kind of demand.
Across your end markets or regions.
Yeah. So so I would say our December for US was a was weak and we are not 100% certain if there wasn't some distributor rebalancing and what have you but January for us ended very well.
And so January is predicted the two months together, but I would say were just okay, but if the if January is predictive of the future we feel very very good.
Okay makes sense and in terms of just adding sales generating resources is there any anything else youre doing to that end, besides just adding additional head count across.
Your regions.
Yeah, So Joe I'm going to kind of take out some of my closing comments.
We are actually and I think like everybody else, we're looking at new sales tools, how to automate our sales tools on we certainly have some experiments with generative AI, which is.
Is both fascinating interesting and occasionally confusing depending on the answer that comes up but you know I.
I can see absolutely in terms of investment for Brady that.
Sales augmentation tool because whenever you have a portfolio of thousands of different Skus you know one of the most important things, we can do and help our customers and getting them to the right SKU quickly and are knowledgeable way and and I see.
The large language models or what have you as having a great opportunity to improve our interaction with our customers.
Got it got it and just last one for me.
Are you able to provide any just update on the industrial track and trace and.
What are I guess or the next.
Mile markers.
Our targets that we can be looking for over the next couple of quarters here.
Yes.
Sure hasn't been lost on US a couple of the big companies in this space.
<unk> had a pretty bad.
Quarter.
Last quarter and the year over year comps.
We're definitely seeing some slowdown into the pushout of projects up for us because it's a much smaller percentage of our revenue it wasn't a tremendous headwind and it actually I think is good for us because we have some product launches coming up in the next few quarters I do believe that the long term trend the industrial automation is.
Fantastic.
Particularly with labor rates and labor availability, but.
Right now if there's a little bit of a pause in adoption with some of the end users that actually works to our advantage as we get the rest of our portfolio shored up.
Okay. Thank you.
Thank you.
I'm showing no further questions in the queue at this time I will now turn the call back over to Mr. <unk> for closing remarks.
Thanks, everyone and thanks for your time today and again, we apologize about the brief interruption that we had but I do want to end with we're saying that our first half of 2024 was strong we are executing our initiatives I am incredibly pleased with the results of our regional reorganizations that we put.
Got into place last year, we made progress we've actually made more progress than I would've hoped on bringing the teams together and we continue to identify opportunities to improve every single day. Our financial position is also incredibly strong and our balance sheet provides us with flexibility to continue to invest in our existing businesses through.
R&D and sales resources to remain committed to our dividend and to execute opportunistic share buybacks as well as M&A, our cash generation gives us the ability to fund all of our capital allocation priorities simultaneously, which is exactly what we will do in order to generate shale shareholder value.
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Good day, and thank you for standing by.
Come to Brady Corporation's second quarter, 'twenty 'twenty four earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to buy star one on your telephone.
We'll get an automatic bezeq.
Sweet.
As a reminder, this conference is being recorded.
And I'd like to turn the conference over to Ann Thornton CFO and Treasurer of Brady Corporation. Please go ahead.
Thank you.
Good morning, and welcome to the Brady Corporation fiscal 2024 second quarter earnings Conference call.
Slides for this morning's call are located on our website at Www Dot Brady Corp. Dotcom 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 believe forecast and anticipate are just a few examples 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, its 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 decree.
We will be recording this call and broadcasting it on.
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 shelter Russell, Thanks, Anne and thank you all for joining US today, we released our 2024 second quarter financial results. This morning, and I'm pleased to report another quarter of organic sales growth and improved.
This quarter, we increased our gross profit margin to 52%, we improved our pre tax earnings by 15, 1% and we grew our non-GAAP earnings per share by 14, 8%. These.
These results wouldnt be possible without the hard work and dedication of our entire global team.
I'm incredibly proud of the effort. The team has put in to ensure the success of our regional reorganization, which became effective at this time last year.
<unk>, we've made and the opportunities we've identified continue to excite motivate me every single day. It is absolutely contributed to our improved earnings and cash flow and just as important is creating an environment, where we're encouraging our teams to think differently about what they do every day, which to me is the best path combining our busy.
This is within our region has brought our teams together its cultivating more innovative thought and we're all working together better than <unk>.
This quarter, we once again grew earnings per share, while increasing our investment in both research and development and our sales force, we increased our R&D spend by nearly 10% in the second quarter and we added a number of new salespeople throughout our global business. We have some exciting new product that to watch over the next several quarters and a strong future.
Your pipeline of innovative new products.
Which are essential to drive sales growth over the long term.
Now I'll turn the call over to Ed to provide more details on our financial results and thank.
Thank you Russell.
We grew organic sales one 6% this quarter, while once again, improving our gross profit margin and our overall profitability.
This resulted in GAAP EPS of <unk> 90 per share, which was up 18, 4% as compared to the second quarter of last year.
non-GAAP EPS, which is calculated as our GAAP EPS, excluding the after tax impact of amortization expense was 93 cents per share in fourth quarter, which was up 14, 8% compared to the second quarter of last year.
Our Americas and Asia region grew organic sales, one 2% and increased segment profit by nine 3% compared to last year's second quarter.
And our Europe, and Australia region organic sales, two 5% and increased segment profit by 11, 9% compared to last year's second quarter.
We're executing extremely well in Europe, despite a macro environment with minimal growth.
We continue to integrate our businesses and identify opportunities to grow sales with existing customers as well as to convert new customers to our high performance solutions.
All of our key financial takeaways. This quarter are continued organic revenue growth despite falling macroeconomic trends non.
non-GAAP EPS growth of 14, 8%.
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 a quarterly sales trends.
Organic sales grew one 6% and foreign currency translation increased sales, 0.8% this quarter, while the impact of divestitures reduced sales by three 5%, resulting in a total sales decline of one 1%.
Slide number five outlines our quarterly gross profit gross margin trending high.
Our gross profit margin improved by 220 basis points to 52% compared to 48% in the second quarter of last year.
This significant improvement in our gross profit margin was the result of several factors.