Q2 2025 Brady Corp Earnings Call
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Borden: I would now like to hand, the conference over to your speaker today and Borden.
Speaker Change: Please go ahead.
Borden: Thank you.
Speaker Change: Good morning, and welcome to the Brady Corporation fiscal 2025 second quarter earnings Conference call.
Speaker Change: Slides for this morning's call are located on our website at www Dot <unk> Dot com slash investors, who will begin our prepared remarks on slide number three.
Speaker Change: Please note that during this call we may make comments about forward looking information words, such as expect will may leave forecast and anticipate are just a few examples of words identifying forward looking statements.
Speaker Change: It's important to note that forward looking information is subject to various risk factors and uncertainties, which could significantly impact expected results.
Speaker Change: Risk factors were noted in our news release this morning, and in Brady's fiscal 2024 Form 10-K, which was filed with the SEC in September.
Speaker Change: Also please note that this teleconference is copyrighted by Brady Corporation and May not be rebroadcast without the consent of Brady.
Speaker Change: We will be recording this call and broadcasting it on the Internet.
Speaker Change: Such sharp participation in the Q&A session will constitute your consent to being recorded.
Speaker Change: I'll now turn the call over to Brady's, President and Chief Executive Officer, Russell Shallower Russell. Thank you Anne and thank you for joining US today, we released our fiscal 2025 second quarter financial results. This morning, and I'm pleased to report another quarter or organic sales growth and improved profit.
Speaker Change: We grew organic sales to 6% sales from acquisitions were up 10, 2% and we grew adjusted earnings per share by seven 5% in the quarter.
Speaker Change: Our Americas and Asia region reported another extremely strong quarter with organic sales growth of four 3% and adjusted operating income growth of 12%.
Speaker Change: I'm incredibly pleased with our organic sales growth in Americas, and Asia, especially in light of the current macroeconomic or industrials.
Speaker Change: Our Europe, and Australia region is operating in a tough environment as well, which were reflected in our results with a slight organic decline of 8% in the quarter.
Speaker Change: Our teams are executing and we continue to invest in new product development with our focus on long term sales growth.
I've been looking forward to the announcement of a very exciting new printer this quarter, which is our <unk> 7500 industrial label printer.
Speaker Change: This printer is the first of its kind for Brady because it's designed for both high volume and high mix labeling the I 7500, <unk> ability to print on over 4000 individuals stock labels parts and ribbons as well as on more than 80 unique adhesive materials.
Speaker Change: Its primary incorporates <unk> proprietary label sense technology, which automatically calibrate to the machine for the wide variety of adhesive materials that can run through it which means the user who is next to zero setup time and no wasted labels.
Speaker Change: 7500 includes the seven inch touch screen the guidance to users through the label printing process, making the printer incredibly easy to use for a wide variety of printing applications ranging from high performance heat resistance labels that can withstand solvents and extreme temperatures to customize QA inspection labels and factory sales to aerospace.
Speaker Change: Base grade wire identification and many more this is the fastest and most versatile printer. We've designed to date and we believe it will be an incredible efficiency tool for our customers in a wide variety of end markets.
Speaker Change: We have more exciting new products planned for this year and next year, which we believe will continue to add to our growth into the long term. This quarter. We grew adjusted earnings per share, while increasing our investments in both research and development and in our sales force R&D increased by more than 11% this quarter, which came from investment in both our.
Speaker Change: Our organic business as well as from the acquisition of grab attack.
Speaker Change: Where we've identified some excellent opportunities from a product development standpoint, now I will turn the call over to Anne to provide more details on our financial results and thank.
Anne: Thank you Russell.
Anne: Organic sales were led by growth of four 3% in the Americas, and Asia region, which was partially offset by a slight organic sales decline of 8% and our Europe and Australia region for total organic sales growth of two 6% in the corner.
Anne: We also grew adjusted diluted earnings per share from <unk> 93 per share last Q2 to $1 per share this quarter, which was an increase of seven 5%.
Anne: We took some actions in the quarter to address our cost structure in three specific areas in response to the performance of certain businesses as well as economic conditions.
Anne: First we announced the closure of our manufacturing facility in Beijing, China.
Anne: Given the decline in economic activity in China, as well as our sales decline. This plant closure will reduce our cost structure and our overall footprint in China.
Anne: We announced the closure of our manufacturing facility in Buffalo New York.
Anne: Gradually reduce production within this facility over the last several years and they plan to move the remaining product lines to our headquarters in Milwaukee.
Anne: And third we took actions to reorganize our overhead structure in Europe, which resulted in head count reductions our goal with these actions is to operate with a more efficient reporting structure, while further integrating the operations of our grab a tech acquisition.
Anne: In total we recognized facility closure and other reorganization costs of $5 7 million in the second quarter and we believe these actions will allow us to operate more effectively and efficiently going forward.
Anne: We will start on slide number four which details our quarterly sales trends.
Anne: Organic sales grew two 6% this quarter acquisitions added 210, 2% and foreign currency translation reduced sales by two 2% our total sales growth of 10, 6% in the quarter.
Anne: Slide number five details our quarterly gross margin trending.
Anne: Our gross profit margin was 49, 3% this quarter compared to 52% in the second quarter of last year.
Anne: The facility closures in Beijing, and Buffalo, New York that I, just mentioned resulted in incremental expense of $2 $3 million in the second quarter without.
Anne: Without this incremental expense our gross profit margin would have been 50% this quarter or only 20 basis points below the second quarter of last year.
Anne: Our gross profit margin continues to be strong as we realized benefits from our sales growth being led by higher gross profit margin products.
Anne: Turning to slide number six you'll find our SG&A expense trending SG&A was $105 9 million this quarter compared to $91 3 million in the second quarter of last year.
Anne: As a percentage of sales SG&A increased to 29, 7% compared to 28, 3% last Q2.
Anne: If you exclude amortization expense of $4 7 million and facility closure and other reorganization costs of $3 4 million this quarter and SG&A would have been 27, 4% of sales in the second quarter of this year compared to 27, 6% in the second quarter of last year as a percentage of sales, which would be a deal.
Anne: <unk> of 20 basis points.
Anne: We continue to identify efficiencies throughout our sales support function as well as other administrative support functions, which allows us to continue to invest in growth by expanding our sales force enhancing our digital capabilities and broadening our omnichannel strategies.
Anne: Slide number seven details the trending of our investments in research and development. We continue to increase our investment in R&D throughout Brady and through our acquisition of gravel pack.
Anne: R&D expense was $18 7 million this quarter, which was an increase of 11, 2% from $16 8 million in last year's second quarter.
Anne: As a percentage of sales R&D was consistent at five 2% in both periods.
Anne: We continue to demonstrate our commitment to new product development with the launch of the I 7500, being a Prime example of the results of this increased investment.
Turning to slide number eight you'll find the trending of our pretax earnings.
Anne: Pre tax earnings on a GAAP basis decreased from $55 8 million to $52 million in the quarter.
Anne: If you exclude amortization from both periods as well as the facility closure and other reorganization charges, we incurred in the current quarter pre tax earnings increased seven 2% from $58 2 million to $62 4 million.
Anne: On slide number nine you'll find the trending of our net earnings and earnings per share.
Anne: Our GAAP net income decreased due to the incremental acquisition amortization from our acquisitions as well as from the facility closure and other reorganization cost that we incurred in the quarter as previously mentioned.
Anne: Reported GAAP diluted earnings per share was <unk> 83, compared to <unk> 90 per share in the second quarter of last year.
But if you exclude amortization from both periods as well as the facility closure and other reorganization charges from the current period. Our adjusted net income increased from $45 4 million to $48 1 million, which was an increase of five 9%.
Anne: And our adjusted diluted EPS increased from 93 per share to $1 per share, which was an increase of seven 5%.
Anne: Turning to slide number 10, you'll find a summary of our cash generation.
Operating cash flow was $39 6 million in the second quarter of this year compared to $36 1 million in the second quarter of last year.
Anne: Free cash flow was $32 5 million in Q2 of this year compared to a negative $13 5 million in last year's Q2.
Anne: Capital expenditures were higher than normal last year due to the purchase of previously leased facility along with the construction of a new facility.
Anne: We expect our capex to return to more normalized level. This year, which is what youre seeing in our results.
Anne: Slide number 11 details the impact that our historical cash generation has had on our balance sheet.
Anne: As of January 31st we were in a net cash position of 50, $850 8 million, which was an increase of $21 7 million since the first quarter and full fiscal year.
Anne: Our approach to capital allocation is consistent which is to first use our cash to fund the organic sales growth and efficiency opportunities. This includes investing in new product development sales generating resources and capability enhancing capex.
Anne: Our historically strong cash generation gives us the ability to invest throughout the economic cycle. So that we're always positioned to drive future sales growth and improvement in profitability.
Anne: And second we focus on consistently increasing our dividends this fiscal year, we announced our 39th consecutive year of annual dividend increases, which continues to be a street that we're incredibly proud of.
Anne: After funding organic investments and dividends, we then deploy our cash in a disciplined manner for acquisitions, where the synergies are clear and for opportunistic share buybacks.
Anne: Our balance sheet puts us in a position to be able to continue to increase our investment in organic sales opportunities and invest in new product development to acquire companies that are a strategic fit with our core business and to return funds to our shareholders through dividends and share buybacks.
Anne: Slide number 12 details our fiscal 2025 guidance, we are increasing the low end of our full year fiscal 2025, adjusted diluted EPS guidance range from $4 40 per share to $4 70 per share.
Anne: And moving that range to $4 45 per share to $4 70 per share.
Our GAAP EPS guidance range was updated for the facility closure and other reorganization charges incurred to date and we now expect the GAAP EPS range of $3 99 per share to $4.24 per share.
Anne: Our adjusted diluted EPS range represents a range of growth of between five 5% to 11, 4% compared to fiscal year 2024.
Anne: We also anticipate organic sales growth in the low single digit percentages for the year ending July 31 2025.
Anne: Other elements of our guidance include depreciation and amortization expense of approximately $40 million capital expenditures of approximately $35 million and we now expect our full year income tax rate of approximately 21%.
Anne: Our income tax rate generally tends to be slightly lower in the fourth quarter and our full year expectations based upon our historical profit mix and the expected timing of other discrete adjustments.
Anne: Potential risks to our guidance among others include potential strengthening of the U S. Dollar inflationary pressures that were unable to offset in a timely enough manner or an overall slowdown in economic activity.
Anne: Now I'll turn the call back over to Russell to cover our regional results and to provide some closing thoughts before Q&A travel slide 13 details the financial results of our Americas and Asia region sales were $233 $8 million this quarter and organic sales growth was strong once again at four three.
Anne: Percent.
Anne: Acquisitions increased sales seven 6% and foreign currency decreased sales by one 4%, resulting in total sales growth of 10, 5% this quarter.
Anne: We continue to grow within our wire I'd safety and facility I'd and product identification product lines, which was partially offset by decline in our healthcare business, we're generating high single digit sales growth in our printer consumable product offering and we continue to identify new use cases and expand our wallet share with our customers.
Anne: Our business in Asia had another strong quarter with organic sales growth of 11, 3%, which was driven by growth in every country, except China, which declined three 5% in the quarter. This means that outside of China, our business combined for 24% organic sales growth, our growth leaders, where Japan and India This quarter.
Anne: While we continue to build momentum and identify new opportunities.
Anne: Our reported segment profit in the Americas, and Asia increased four 8% to $46 million and segment profit as a percentage of sales was 19, 7%. If you exclude the impact of the amortization in both the current quarter and last year's Q2, as well as the facility closure and other reorganization costs in the quarter.
Anne: Segment profit increased 12% compared to the prior year.
Anne: We continue to execute to our strategic plan, which includes taking actions in non core areas of the business to set ourselves up for more profitable growth in the future.
Turning to slide 14, you'll find the results of our Europe, and Australia region.
Anne: Sales were $122 8 million this quarter acquisitions added 15, 1%, while organic sales declined 8% and foreign currency translation decreased sales by three 6%, resulting in total sales growth of 10, 7% in the region this quarter.
Anne: Our European business reported flat organic sales in our Australian business reported an organic sales decline of six 4%.
Anne: Our businesses in both Europe, and Australia operating in challenging conditions at the moment and we expect that the reorganization actions taken in the quarter will allow us to operate more efficiently as we move forward.
Anne: Our reported segment profit in Europe in Australia declined 24, 4% in the quarter to $11 4 million and segment profit as a percentage of sales was nine 3%. If you exclude the impact of amortization in both the current quarter and last year's Q2, as well as the reorganization costs incurred in the current quarter.
Anne: Segment profit increased three 9% compared to the prior year.
Anne: Despite the slow economic conditions, we were able to grow organically in eastern Europe, which offset our decline in western Europe.
Although our presence is not as large in eastern Europe, We do see this geography is an opportunity for future growth in the region.
Anne: I'm pleased with the first half of this year, our cash generation was strong we took actions that will help us operate more efficiently and both near and long term most of all I'm looking forward to more exciting new product launches in the future reminders, the current geopolitical and trade environment like all other multinational companies and we are evaluating the potential impact on <unk>.
Anne: Right.
Anne: Meanwhile, we will maintain our focus on what we can control and will adapt where we can as circumstances developed.
Anne: With that I'd like to turn it over for Q&A, Operator would you please provide instructions to our listeners.
Speaker Change: As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Anne: These standby, while we compile the Q&A roster.
Anne: Okay.
Speaker Change: Our first question comes from Keith <unk> with Northcoast Research Your line is open.
Keith: Good morning, guys I appreciate it hey, Russell in terms of the tariffs that are perhaps pending here with Mexico, and Canada can you provide perhaps a little bit thoughts about if they go into place what the impact might be on you guys. Both from a cost as well as perhaps a threat to your revenue potential there.
Speaker Change: Yeah. So.
Speaker Change: We've looked at it I think a lot depends on what the percentages.
Speaker Change: And whether it's a.
Speaker Change: Stays at 25% or it's 10% or something else.
As a practical matter, we have some ability to move our production around and ship to and from different countries. So I'd.
Speaker Change: I'd love to give you an exact answer but I think it would be really premature because I've heard so many things bandied about now I will say that we have the ability, particularly for our higher profit margin products.
Speaker Change: To manufacture them locally so we could very easily and some of these cases manufacture the product in the U S and sidestep the tariffs because some of the raw materials are actually manufactured in the U S as well so.
Speaker Change: There are things that we could do to mitigate the effects of tariffs depending on what happens I think our bigger concern is that if there are significant tariffs. It's just more of a global economic slowdown.
Brady: What we're particularly hit Brady.
Brady: Got you in terms of your ability to move products.
Brady: Do you guys have typically advise there where you can move fairly quickly or whether there'd be a delay of several months or quarters in order to get that done.
Brady: So the really high value products, which are our printer materials.
Brady: We could move those incredibly quickly those for the most part our hand assembly and small workstations.
Brady: If the tariff was protracted for a long period of time, we would have to think about where some of our machinery sits in what we would move that would that would take longer but those products are much lower profit and much lower asps. So we could kind of cherry pick off the top ones very quickly.
Speaker Change: I appreciate that with the facility closures the headcount reductions that you guys were talking about here I guess, one is that contemplated in your guidance and perhaps can you kind of size what that might be the savings might be for us and is it more current period are going to be more drug out over the next several quarters.
Brady: So we anticipate that I'm going to say anticipate.
Brady: Because there is still some things going back and forth in Europe, but we anticipate having all of this cleaned up in this fiscal year.
Brady: And that will give us a better run rate in the future. So.
Brady: If you think about it when we originally restructured Brady right after I became CEO.
We had a kind of a two step plan.
Brady: <unk> the prior divisions like WPS.
Brady: And making it a more regional structure and so the first bite we took.
Brady: A couple of years ago, and then this is kind of the second step in doing that and combined with that allows us with gravitas to make some additional.
Brady: Office consolidations and some smaller things, but as you can imagine doing those things in Europe always takes quite a bit longer than it takes in the United States, but our goal is to have most of this done and complete in the year.
Brady: Okay, and then the closure in Buffalo and in China, where we see.
Brady: The increase in cost of goods and gross margins or that kind of embedded in there already.
Brady: I think youre going to see both both of them become kind of a drag on our.
Brady: Our overall financial performance, both in terms of growth and in gross margins.
Brady: I know a few people have been commenting on WPS three years about doing away with it.
Brady: We did did away with it by name and now were somewhat doing away with it.
In their last plant. So I do think it will be beneficial it won't be hugely beneficial, but it's the right step and it makes us more importantly, it consolidates some product lines into a single location for better efficiency.
Speaker Change: Okay, if I could ask one more question here it sounds like we I 7500 is an exciting new product for you I guess first is there a potential that cannibalize any of your existing sales.
Speaker Change: As you kind of think or perhaps even hope is this a product that contribute singles and millions of dollars of revenue.
Up to speed or it could be tens of millions of dollars, how do you kind of scope that out yes.
Speaker Change: Yes, so I could dream of tens of millions.
Speaker Change: Yes.
Speaker Change: I don't know it is unlike anything out on the market whatsoever. So it appeals to a certain customer base that is somewhat unique to Brady. These are people that print on a lot of different materials, it's not really a <unk>.
Speaker Change: Great fit for say a distribution center, where you are printing on the same thing over and over again, but a lot of our customers are constantly changing over label stock.
Speaker Change: Which if you've ever watched it happen it can take minutes to a half hour to dial the printer in.
Speaker Change: We were talking to one customer who said that they could see an ROI of about three months by changing over all of their printers from I'll, just say brand X to Brady printers simply because of how much faster.
Speaker Change: Sets up and changes over so.
Speaker Change: Like I said, it's unique it's not for everybody, but for some customers they immediately see it.
Speaker Change: I'd love to see it north of 10 million, but we'll see how the traction.
Speaker Change: Is in the marketplace.
Speaker Change: Okay, I'll stop there and turn it over thank you I appreciate it.
Steve: Thank you. Our next question comes from Steve <unk> with Sidoti Your line is open.
Steve: Good morning, Russell morning.
Speaker Change: Wanted to ask obviously FX headwinds became much more intense this quarter.
Speaker Change: Yet you're raising the low end of guidance.
Speaker Change: Did something help offset that in terms of your view for the year did something go better than expected.
Speaker Change: <unk> actually just raise the low end, despite clearly more intense FX headwinds that don't appear to be going away.
Speaker Change: Sure, Steve, Yes, Youre right, absolutely FX is a headwind.
Speaker Change: For sure.
Speaker Change: As we sit here today, the Americas and Asia region is is is performing better than expected I mean coming in this quarter with four 3% organic growth is.
Speaker Change: Is it is a very nice result, and basically offsets the impact of what we see just sitting here as we sit here today are basically looking at our forecast at January 31st FX rates is pretty much being offset by the Americas and Asia performance.
Speaker Change: Okay.
Speaker Change: Those are doing well the flip side being Australia, which clearly got worse. This quarter can you give us any kind of color on what's going on there.
Speaker Change: Sure.
Speaker Change: I would say their economy.
Speaker Change: Which is to some extent based on being able to export to other countries, particularly China.
Speaker Change: It is just not in a great place after having done well for several years.
Speaker Change: You were clearly seeing a blow back from China, and China purchasing.
Speaker Change: And then.
Speaker Change: As a country they are somewhat depressed because a lot of what they do is royal excuse me raw material extraction and ship into other countries.
Speaker Change: All of which is not doing awesome right now because there are other big trading partner of course is Europe.
Speaker Change: And you know the story in Europe's GDP isn't great.
Speaker Change: The countries that we're seeing that are growing are kind of decoupled from that whole China Europe trade.
Speaker Change: The rest of our southeast Asia did fantastic Middle East did fantastic.
Speaker Change: And we're seeing it but.
If you are the back and forth between China and anyone not great place right.
Speaker Change: Right right.
Speaker Change: You mentioned Europe, you've continued to outperform at flat there.
Speaker Change: Any shifts with given tariff talk geopolitical concerns post election have you seen any <unk>.
Slowdown or have you seen any indications that would.
Cause you to be a little bit more cautious.
Speaker Change: Well.
Speaker Change: What are the big things that I think I've commented on it several times before Germany.
Speaker Change: He has really done a disservice to themselves with energy prices.
Speaker Change: Which has been a huge headwinds to their overall economy.
Speaker Change: I don't know at this point, how or when they're going to get it sorted out.
Speaker Change: Because they are their.
Speaker Change: They're large manufacturers are really struggling you've seen all kinds of headlines about layoffs at some of their major manufacturers are shuttering or partially changing plant. So.
Speaker Change: I'm not enthusiastic about Europe until they can get to a better energy position, maybe that will happen sooner than later.
Speaker Change: But I think in till the time being or at least for the time being.
Speaker Change: Fortunately America's GDP and some of the other pockets or are doing well for us.
Speaker Change: Thats kind of where we're doubling down and then hoping the other ones just don't get any worse.
Speaker Change: Brian.
Speaker Change: Last one for me.
Speaker Change: Hopefully I've done my math right here, but it looks like you saw a nice sequential bump in the Americas and Asia from Crab attack are you gaining more traction outside of Europe with gravitas, you're doing something particular to drive it.
Speaker Change: Yes.
Speaker Change: Grab a tech story is very very early.
Speaker Change: There are some.
Speaker Change: It has a core technology that we wanted and we like but there's still a lot we need to do to make it integrated and kind of be what we would consider a brady easy to use product we've got a roadmap.
Speaker Change: I don't think youre seeing a ton yet.
Speaker Change: We've had a couple of wins, but I think that story is still a few quarters out.
Speaker Change: Okay.
Hey, Chris.
Speaker Change: You launched the more the code embedded products can you talk about now the success of that a couple of three years since the acquisition now that you've really embedded technology and just general outlook on track and trace.
Speaker Change: Yes.
Speaker Change: Hi.
Speaker Change: It's about where we had expected given the current economic climate what are the things that we did not expect certainly three years ago. When we started on this journey with just how.
Speaker Change: I almost want to use more of it for lack of a better word industrial automation investment has been over the last few years.
Speaker Change: We had a thesis that it was there was going to be more money poured into capital expenditures. Then there certainly has been on Brian at some point, we believe that will happen. So I'm going to say the product is doing as well as to be expected in the environment that it's in.
Speaker Change: We just we just wish the environment was better.
Speaker Change: But we do love the products.
Speaker Change: We love to use cases, we are.
Speaker Change: Our thesis was always being able to cross sell using readers to be able to sell printers in using printers to be able to sell readers.
Speaker Change: To some large accounts, where we've done that but the overall I think investment in industrial automation is just.
Speaker Change: Just been pretty.
Speaker Change: Pretty sad I think would be the best description.
Speaker Change: Fair enough great. Thanks, Russell Thanks, Dan.
Speaker Change: Thank you.
Russell Sheller: Thank you I'm showing no further questions at this time I would now like to turn it back to the Russell Sheller for closing remarks.
Speaker Change: Thanks, everyone for your time and your questions. This morning, we're midway through 2025, and we have delivered to our fiscal year plan. We're in a great financial position with a balance sheet that allows us to continue to invest in our organic business, while being opportunistic with M&A and share buybacks, which gives us the ability to fund all of our capital allocation.
Speaker Change: Simultaneously throughout the economic cycle and increase shareholder value over the long term, we still believe that the potential for increased industrial capital investment presents a great long term opportunity for Brady. Meanwhile, we'll continue to monitor the geopolitical and trade environment, we will take actions where necessary.
Speaker Change: As this situation develops.
Speaker Change: The macroeconomic environment has consistently changing.
Speaker Change: But our approach is to control what we can while focusing on our formula for success, which is investing in our organization to create new products that make our customer's life better while delivering a positive return to our investors I am looking forward to the future and I know that our team has the ability to overcome challenges solve problems creatively.
Speaker Change: And continue to deliver results.
Speaker Change: You for your time this morning and for your interest in Brady Operator, you may disconnect the call.
Speaker Change: This concludes today's conference call.
Speaker Change: You for participating you may now disconnect.
Speaker Change: Okay.
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