Q1 2026 Brady Corp Earnings Call

Speaker #1: Good day, and thank you for standing by. Welcome to the Q1 2026 Brady Corporation earnings conference call. At this time, all participants are in a listen-only mode.

Speaker #1: After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *11 on your telephone.

Speaker #1: You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.

Speaker #1: I would now like to hand the conference over to your speaker today, Ann Thornton, CFO. Please go

Speaker #1: ahead.

Speaker #2: Thank

Speaker #2: Good morning, and welcome to the Brady Corporation fiscal 2026 first quarter earnings conference call. The slides for this morning's call are located on our website at www.bradycorp.com/investors.

Speaker #2: We will begin our prepared remarks on slide number three. Please note that during this call, we may make comments about forward-looking information. Words such as "expect," "will," "may," "believe," "forecast," and "anticipate" are just a few examples of words identifying a forward-looking statement.

Speaker #2: 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 2025 Form 10-K, which was filed with the SEC in September.

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.

Speaker #2: 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.

Speaker #2: Russell?

Speaker #3: Thank you, Ann, and thanks everyone for.

Speaker #3: Joining us today. This morning, we released our fiscal 2026 first quarter financial results. We had a good start to the year with organic sales growth of 2.8% and adjusted earnings per share growth of 8%.

Speaker #3: Our Americas and Asia region reported strong organic sales growth of 4.7%, and our Europe and Australia region reported a significant improvement in adjusted segment profit of 15%.

Speaker #3: This was a direct result of the actions we took to streamline our cost structure in the region last year. Our team executed well, and we have started the year on a positive note.

Speaker #3: Before we go into Brady's financial details, I want to talk a bit about our connected products. Brady has spent the last several years building out a marketing and tracing solution that is uniquely easy to use for our customers.

Speaker #3: As an example, is our fantastic new app called BradyScan, which is available in Android and Apple versions. It is an industrial barcode scanning app that consolidates the entire scanning workflow and communicates seamlessly with our printers.

Speaker #3: You can instantly generate scannable barcodes with both image-to-barcode and speech-to-barcode technology. A built-in security check monitors for malicious QR codes, and error correction automatically repairs damaged QR codes, resulting in maximum readability.

Speaker #3: You can scan and input barcode values directly into Google Sheets with no download or export required, and every geo-tagged scan allows for complete traceability with location accuracy.

Speaker #3: Our goal with this app is to make barcode reading, barcode generation, and barcode printing an entirely seamless experience for our users, making track and trace easier than ever before.

Speaker #3: With this software, our customers can use their phones to create barcodes, instantly send those barcodes to a Brady printer, print them on our high-performance adhesive labels, and create a time and location stamp with our geo-locator.

Speaker #3: This is one of the many steps we are taking to integrate our lasers, readers, and printers into a single, easy-to-use platform. Now, I'll turn it over to Ann to provide more details on our financial.

Speaker #3: results. Ann? Thank you,

Speaker #2: Russell. We had a good start to the year. Organic sales grew 2.8% in the quarter, which was led by our Americas and Asia region with organic growth of 4.7% in the quarter.

Speaker #2: We also reported strong growth in our adjusted pre-tax income, as well as our adjusted diluted earnings per share in the quarter, while funding a significant increase in R&D.

Speaker #2: And we finished the quarter in a net cash position, which continues to give us the ability to invest in both organic opportunities and strategic acquisitions in the future.

Speaker #2: Slide number four details our quarterly sales trends. Organic sales are up 2.8%, acquisitions added 3.2%, and foreign currency translation increased sales by 1.5%, for a total sales growth of 7.5% in the quarter.

Speaker #2: Turning to slide number five, this details our quarterly gross margin trending. Our gross profit margin was 51.5% this quarter compared to 50.3% in Q1 of last year.

Speaker #2: In last year's first quarter, we closed on the acquisition of Gravitech, which requires purchase accounting adjustments to recognize the fair value of inventory acquired.

Speaker #2: These adjustments reduced last year's reported gross profit margin by 110 basis points related to the acquisition. So, without this adjustment, gross profit margin was 51.4% last year.

Speaker #2: Our gross profit margin continues to be strong as we realize the benefits from our sales growth coming from our engineered products. Turning to slide number six, you'll find our SG&A expense trending.

Speaker #2: SG&A was $117.6 million this quarter compared to $111.8 million in the first quarter of last year. As a percent of sales, SG&A was 29% compared to 29.7% in Q1 last year.

Speaker #2: If you exclude amortization expense from each of the periods presented, as well as other non-recurring acquisition-related costs incurred in last year's first quarter, then SG&A was 27.7% of sales in the first quarter, compared to 28.3% of sales in last year's first quarter, which is a decline of 60 basis points.

Speaker #2: We continue to invest in growth through acquisitions to our sales, or, excuse me, through additions to our sales force, as well as selected geographic expansion in Southeast Asia.

Speaker #2: Which were more than funding with efficiencies throughout our SG&A support functions. Slide number seven details the trending of our investments in research and development.

Speaker #2: We continue to increase our investment in R&D within both our organic business as well as our acquisitions. R&D expense last quarter was $23.3 million, or 5.7% of sales this quarter.

Speaker #2: Which was an increase from 18.9 million, or 5% of sales last year. We funded a 23% increase in R&D in the quarter and still grew the bottom line.

Speaker #2: We've proven over time that our best ROI comes from our engineered products. We have a very exciting lineup of products set to launch this year. Russell just discussed our new app, BradyScan.

Speaker #2: Turning to slide number eight, this shows the trending of our pre-tax earnings. Pre-tax earnings on a GAAP basis increased 16.5% from $58.8 million to $68.5 million in the quarter.

Speaker #2: If you exclude amortization from both periods and eliminate other acquisition-related charges we incurred in last year's Q1, pre-tax earnings increased 7.6%, from $68.6 million to $73.8 million.

Speaker #2: Slide number nine details the trending of our net earnings and earnings per share (EPS). Our net income increased 15.3% in the quarter, from $46.8 million to $53.9 million.

Speaker #2: Excluding amortization from both periods, as well as the other acquisition-related charges from last year, our net income increased 7.1%, from $54.2 million to $58 million.

Speaker #2: Gap-diluted earnings per share was $1.13 compared to $0.97 per share last year. Excluding amortization from both periods and the acquisition-related charges from last year, our adjusted diluted earnings per share improved from $1.12 per share last year to $1.21 per share, which was an increase of 8%.

Speaker #2: We had another strong earnings quarter, resulting from our organic sales growth and the cost reduction actions that we took last year in selected parts of our business.

Speaker #2: Slide number 10 details our cash generation. Operating cash flow increased 42.5% to $33.4 million in the first quarter of this year compared to $23.4 million in the first quarter of last year.

Speaker #2: And free cash flow increased 38.8% to $22.4 million in Q1 of this year, compared to $16.1 million in last year's Q1. We're constantly focused on making the best cash-based decisions throughout our organization, which gives us the ability to invest in our business and return funds to our shareholders through share buybacks and dividends.

Speaker #2: Turning to slide number 11, you'll find the impact that our historical cash generation has had on our balance sheet. As of October 31st, we were in a net cash position of 66.8 million.

Speaker #2: Our approach to capital allocation is consistent, which is to fund organic sales growth and efficiency opportunities. This includes investing in new product development, sales-generating resources, capability-enhancing CapEx, and automation-focused CapEx.

Speaker #2: We have the ability to invest throughout the economic cycle so that we're always positioned to drive future sales growth and profit improvements. And we're focused on consistently increasing our dividends.

Speaker #2: In September, we announced our 40th consecutive year of annual dividend increases, which was an incredible milestone and is a streak that we're very proud of.

Speaker #2: From here, we're disciplined and opportunistic for both acquisitions and share buybacks. We're focused on Brady, and we have the ability to fund identifying acquisitions with clear synergies to our organic business, our dividend, M&A opportunities, and share buybacks.

Speaker #2: We repurchased 55,000 shares for $4.1 million in the first quarter, which was an average price of $73.69 per share. Slide number 12 outlines our fiscal 2026 guidance.

Speaker #2: full-year fiscal 2026 previously announced adjusted diluted We're increasing the bottom end of our EPS guidance range from $4.85 per share to $5.15 per share.

Speaker #2: To the new range of $4.90 per share to $5.15 per share, we have seen a 5 cent increase to the bottom end. Our gap EPS guidance range was updated to reflect acquisition-related amortization, as well as to increase the bottom end also by 5 cents.

Speaker #2: Which we now expect to range from $4.57 per share to $4.82 per share. Our adjusted diluted EPS guidance range represents a range of growth of between 6.5% to 12% over 2025.

Speaker #2: We expect organic sales growth in the low single-digit percentages for the full year ending July 31, 2026. Other elements of our fiscal year 2026 guidance include an income tax rate of approximately 21%, depreciation and amortization expense of approximately $44 million, and capital expenditures of approximately $40 million.

Speaker #2: Potential risks to our guidance, among others, include potential strengthening of pressures that we're unable to offset in a timely enough manner, the US dollar, inflationary pressures, or an overall slowdown in economic activity.

Speaker #2: Now I'll turn it back over to Russell to cover our regional results and to provide some closing thoughts before Q&A. Russell? Thanks, Ann. Slide 13 details the financial results of our Americas and Asia region.

Speaker #2: Sales were $268.9 million this quarter, which were up 9.6% from Q1 last year. Organic sales growth was 4.7%, and acquisitions added the remaining 4.9% of our growth.

Speaker #2: We saw growth in most of our major product lines with significant growth of nearly 19% in the wire identification product line. Wire ID has been leading our organic sales growth company-wide for the last three years, with data centers being a key end market.

Speaker #2: Our high-performance adhesive materials are ideal for the critical laboring requirements in data centers. Our Asia business performed well with total organic sales growth of 11.9%, which was led by our business in Japan.

Speaker #2: We saw growth throughout the region, including China, where we grew slightly by 0.8%. This means that our business outside of China combined for nearly 20% growth in the quarter.

Speaker #2: Asia also contributed a significant amount of growth in segment profit in the Americas and Asia region in the quarter, which was a result of both organic sales growth and the cost reduction actions that we took in China last year.

Speaker #2: Our reported segment profit in the Americas and Asia region increased 9% to $59.9 million, and segment profit as a percentage of sales was 22.3%. If you exclude the impact of amortization in both the current quarter and last year's Q1, as well as our other non-recurring acquisition-related expenses last year, segment profit increased 6.3%.

Speaker #2: Similar to past years, we are increasing our investment in R&D, which is the driving factor of our organic sales growth, both now and in the future.

Speaker #2: We are experiencing a tariff headwind in the U.S. compared to last year's Q1. While we continue to take steps to reduce their impact, last quarter we projected a net incremental expense of between $8 million and $12 million for fiscal 2026.

Speaker #2: As of the end of Q1, we are now projecting full-year impact to be at the low end of this million. Slide 14 range so approximately $8 details the financial results of Europe and Australia region.

Speaker #2: $136.4 million this quarter. Sales were organic sales declined 0.8%, and foreign currency translation added 4.3%, for total growth of 3.5% in the region this quarter.

Speaker #2: Both Europe and Australia continue to operate in challenging macro conditions. For industrial manufacturers, yet we nearly returned to organic sales growth in the quarter.

Speaker #2: Sales declined in our people identification and safety and facility identification product lines, but we saw growth in our wire ID products in the quarter.

Speaker #2: Organic sales in Europe declined 0.9% and increased slightly by 0.3% in Australia. Despite the 0.8% decline in organic sales, segment profit in the region.

Speaker #2: We reported a significant improvement in reported segment profit in Europe and Australia, which increased 42.8% in the quarter to $18.7 million, and segment profit as a percentage of sales was 13.7%.

Speaker #2: If you exclude the impact of amortization in both the current quarter and last year's Q1, as well as other non-recurring acquisition-related expenses from last year, segment profit increased 15% compared to the prior year.

Speaker #2: We took several actions last year to reduce our cost structure in both Europe and Australia, and we're seeing this payback in our profit results this year.

Speaker #2: We started the year with some solid momentum; we're growing organic sales mid-single digits in America and Asia, and we're nearly returned to growth in Europe and Australia.

Speaker #2: Even with a subdued global macroeconomic environment for industrial companies, I am super excited about the business we acquired over the past year, as well as the fantastic technology that we are adding to our portfolio, such as the Brady Scan app. I truly believe that the addition of our direct part marking product line and the ease-of-use features we are adding throughout our product portfolio enable us to help our customers improve their productivity.

Speaker #2: With that, I'd like to turn it over for Q&A. Operator, would you please provide instructions to our

Speaker #2: listeners? As a

Speaker #3: To ask a question, please press star 11 on your telephone and wait for your name to be announced. To remind you, to withdraw your question, please press star 11 again.

Speaker #3: Please stand by while we compile the Q&A roster. Our first question comes from Steve Ferrazzani with Sudoty. Your line is

Speaker #3: open. Good morning, Russell.

Speaker #4: Good morning, Ann. I appreciate the detail on the call. Russell, I was a little bit surprised on the strength of the gross margin, better than it was in the second half, sort of flat versus, if you adjust the year-ago quarter, but the year-ago quarter didn't include tariff impacts.

Speaker #4: So I'm trying to figure out, one, is it getting better compared to three and four Q because you're more effectively offsetting with price? Or was it just a particularly strong mixed quarter?

Speaker #4: If you can help us out a little more detail on the gross

Speaker #4: margin.

Speaker #5: Yeah, the

Speaker #5: The biggest impact was both price and working on our supply chain and moving things around a little bit. As a truly global manufacturer, we do have some ability to move things around and to look at which companies or countries, excuse me, we should be producing and sourcing from.

Speaker #5: So, I think like any good manufacturer, you do what you can to offset macroeconomic effects. And that's basically what we're doing. I am happy to say we were projecting $8 to $12 million; I think through a lot of efforts from a lot of people at Brady, we're headed towards the very low end of that range.

Speaker #5: And that was also contributed to why we bumped the bottom end of our guidance up $0.05.

Speaker #4: Got it. That's helpful. The higher R&D we've seen over the last couple of quarters— is this a more reasonable run rate? And is that primarily because of the acquisitions you've made, or do you feel like there are better returns that can be made from some of these products?

Speaker #5: So certainly the 5, 7 or so that we're at right now is due to the acquisitions, and over time, probably there's overlapping R&D efforts.

Speaker #5: There's probably some at the margin. I would consider 5.5, give or take, kind of the situation we should be in for the next few quarters.

Speaker #5: So, there will be a little bit of streamlining of that effort—not really significant. We did have some one-time events in R&D, but as you point out, or as I point out in the call, R&D continues to be the absolute best investment we can make organically.

Speaker #5: And I don't really have a per se target on where it should be, but we can say directionally $5.5 million or the next year or so.

Speaker #4: Okay, that's helpful. When you're thinking about the cost-out actions you took last year, did we see most of it this quarter, at the plant?

Speaker #1: Or is there more to come?

Speaker #2: would say Yeah , I there's probably 80% plus you've seen in Q1 . There's still more some things that we're going to get .

Speaker #2: We certainly don't need to and take any won't additional restructuring charges . We have nothing anticipated at this point But , you know , like again , everybody that's managing their company , we continue to look for ways to our improve efficiency and drive a little bit more to the line .

Speaker #2: bottom I'm going to 80% done . Still a little bit more to say .

Speaker #1: Excellent . Thanks for that . And if I could just ask on briefly cash conversion , it was better than it was the ago .

Speaker #1: Quarter . Typically Q1 is your lowest , but are you expecting you can cash get conversion back closer to this year , a little 100% bit too much of a or is that reach ?

Speaker #3: Oh , reasonable . That's a reasonable target , Steve . And , you know , good observation on your part that usually it is a little bit lower for us in Q1 than due to of annual incentive timing and things like that .

Speaker #3: But but we're definitely pleased with the improvement in Q1 . We expected that to come last year was Q1 . A lot of that typically see conversion was a bit little than we and our year .

Speaker #3: But but we're definitely pleased with the improvement in Q1 . We expected that to come last year was Q1 . A lot of that typically see conversion was a bit little than we and toward the end out a little So more timing kind of that's a reasonable expectation to to see cash that that conversion level improve year .

Speaker #1: If the inventory still seems pretty high, is it because of the acquisitions or the consolidation? Is that one of a few things?

Speaker #3: A few things , honestly , due to the little bit acquisitions , but they're not overly very large either . So we made some decisions a few years to ago to stock our more of absolutely highest running products .

Speaker #3: You know , that's a few years ago . But , you changes in our supply chain , we did move know , some production of several printer lines .

Speaker #3: As planned quite a while ago, Malaysia also requires higher inventory levels. So, it's a little bit of everything kind of around the edges that's causing that increase in inventory.

Speaker #3: And , you know , we're always looking for to , to opportunities work on those levels . But we would we would and we expect it to , you know , probably not increase too terribly much from here .

Speaker #3: And and kind of normalize capital to more of a neutral level .

Speaker #2: I would say , if I could add one more piece of color , you know , a lot of the traditional Brady businesses , the signage and , you know , the identification products are very quick conversion the time we get an order to through manufacturing and , and selling it .

Speaker #2: so you don't need to have as And much inventory say , a as , laser or a reader , which really is a finished So , good .

Speaker #2: you know , all things equal , we're , absolutely we're will be in a higher inventory position than what traditional Brady would have been .

Speaker #2: lot Not a higher because that's still a small percentage sales . But that is going to of our add a couple points to our overall inventory .

Speaker #1: Got it . Russell . Thanks , Thanks . An .

Speaker #3: problem . Thanks , No Steve .

Speaker #4: Thank you . Our question next comes from Keith Housum with North Research . Your open .

Speaker #5: guys . Good morning Hey noticed your Russell , I guide for the Australia and Europe and Australia suggests low perhaps single digit growth by year end .

Speaker #5: But you guys have slight decline this quarter . Anything that you're there that gives you seeing out further confidence that that segment will be able to turn it around , you know , based on some of the challenges in the they have environment , macro as we see today .

Speaker #2: Yeah . So , you know , I'm basing this what on I read in a lot of economists that have said that the year calendar of 2026 is supposed to better than be calendar year of 2025 .

Speaker #2: Frankly, we really haven't seen much. It hasn't gotten any worse over the last several quarters, but we haven't seen what euphemistically are called "green shoots."

Speaker #2: the services sector , which we don't participate in , seems to be doing a little bit better in Spain . And some of the vacationing countries .

Speaker #2: But if you look at core manufacturing in Germany, France, and the UK, there just is not a lot seeing movement. We're not getting better.

Speaker #2: if we're going to turn the quarter , it's at 1 or 2 quarters out least from now .

Speaker #5: Great . Thank you . And in terms of Brady scan . First off congratulations I know it's been on your on your list of things to get done for a while now .

Speaker #5: Is it out now . And I guess perhaps any color you can provide in terms of who you think the target audience would be for the for that is your entire base , or is there a certain segment ?

Speaker #5: And then finally , you know how many of your products will be , you know , or be linked to able to benefit from scan Brady ?

Speaker #2: Yeah . So there's two parts to it . One is being we're I think , good friends to the economy in general . So the Brady Scan has app a consumer version that has no adware , no bloatware and isn't take trying to your data backhauling it to wherever .

Speaker #2: So, that's a version for free: 50 scans or so a month, which I think for most consumers is more than enough.

Speaker #2: The industrial version is actually going to form part of the backbone of connecting our products. Right now, it works seamlessly with our printers and our readers, which I talked about. The next step will be to get it to engage directly with our lasers.

Speaker #2: And our other marketing technology . So it's , you know , I'm going to say we're about halfway through it . There's still a lot more software that needs to get done .

Speaker #2: But I love the first iteration . I think it's it's a very clean and easy to use app . Understanding this really more tailored towards industrial users .

Speaker #2: just kind of We threw in the consumer users as a as a nice freebie for some of our customers and friends , but you're you're encouraged to download it .

Speaker #2: It's it's got an version and it's Apple got a Android version . And as of this weekend , it just gone up . And we only had five star reviews .

Speaker #2: So there you go .

Speaker #5: Congratulations . You know , it's been a year since you've great tech . You guys , added Meco . Hopefully I'm saying that right .

Speaker #5: You know, earlier this quarter, any line of sight to revenue synergies coming from, you know, I guess both of the then just acquisitions and the progress you've made over the past year.

Speaker #2: Yeah . So a couple of things we've absolutely gone through a product roadmap and decided , you know , which business is focusing on which end markets .

Speaker #2: With that said , you know , I think they are working in a very tough fact environment . In , more than Brady as a whole , because the core segment that we're looking for them to excel at is heavy industrial manufacturing , which is amongst the weakest segments currently out there .

Speaker #2: So, the fact that they're doing okay in what I think is a pretty awful environment is good. We really need that to turn around.

Speaker #2: One of their key customers is the automotive and automotive supply chain. Not a great place right now, but it'll come back.

Speaker #2: We're very confident, and more importantly, we're confident in going after mid-size manufacturers, which is really kind of the heart of Brady's business.

Speaker #2: So we feel good very , very early . You Brady know , makes long term strategic bets . We have a core thesis that we believe everything is ultimately going to get marked in production .

Speaker #2: And this is ensures that we have that capability over the next 5 to 10 years . So still a work in progress . We feel good initially , but a lot more to go .

Speaker #5: Great . Appreciate that . And final question for me , gross margins . Another solid quarter guys . Even with the for you headwinds .

Speaker #5: I know you guys are hesitant to suggest that margins can be gross above that 50% range, but yet you've been able to deliver that despite the challenges that you had.

Speaker #5: And I know you also , you're merging . You know , your your growth coming from your emerging products . Any more thoughts about gross margins and where the Going crafts can go ?

Speaker #5: forward ?

Speaker #2: So Yeah . and I sound like I'm very repetitive on this because I answered all always the same way . Our engineered products , all things being equal , are probably 60% gross margin versus our more commodity products or 40 ish .

Speaker #2: So the more we have engineered products , the more our gross margin will expand . But we don't have a target because all of these products are delivering significant cash flow and return on invested capital .

Speaker #2: So yeah , our bit little help to of due there's a portfolio as it slowly changes right now , of course , you know , offsetting effect the has been some tariffs that hasn't helped by any stretch .

Speaker #2: But you know, I do not have a target. We know we could push pricing higher to expand our gross margins at the expense of demand reduction.

Speaker #2: So we're really trying to spend most of our time getting more products into more people's hands because, even at our gross margins, the money flows down to the bottom line.

Speaker #2: So we need to keep pushing on growth more than margin expansion.

Speaker #5: Luck. Great. Thank you. Good.

Speaker #2: Thank you .

Speaker #4: Thank you. I have no further questions at this time. I would now like to turn it over to Russell Shaller for closing remarks.

Speaker #2: Thank you for your time today and for your questions. Brady is on a journey to help create a safe and productive workplace for our customers.

Speaker #2: Our visual safety and facility identification portfolio , combined with productivity Brady's solutions , our help customers a wide with variety of comply regulations , including the upcoming GS1 standards and new European Union product labeling requirements .

Speaker #2: Even with a challenging tariff regime and a tough manufacturing macro environment, we are seeing sales and increasing profitability. As we keep our focus on what we can control, we continue to move forward with long-term consistency in mind.

Speaker #2: Our increased investment in R&D is a direct reflection of our view on the long term. As our engineering products have proven to be the primary driver of our growth pride.

Speaker #2: We ourselves on diversity of our the end markets and our R&D investment gives us the ability to engage with an ever broader set of customers .

Speaker #2: We do expect to continue to be impacted by incremental tariffs, but we believe that our global manufacturing presence and largely in-country manufacturing, as well as our geographic diversification, helps us to mitigate some of this effect.

Speaker #2: We're being creative and we're adapting quickly, and I am very proud of the team and their tireless efforts in changing this environment. I'm optimistic for the rest of the year and for the long term regarding Brady's ability to continue to deliver improved results for our shareholders.

Speaker #2: Thank time you for your this morning . Operator . You may disconnect the call .

Speaker #2: . concludes