Good day and thank you for standing by. Welcome to Brady Corporation's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, this conference is being recorded. I would now 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. The slides for this morning's call are located on our website at www.bradycorp.com/investors. We will begin our prepared remarks on Slide number 3. 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 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 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 Shaller. Russell?

Thanks, Ann, 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 50.2%. We improved our pre-tax earnings by 15.1% and we grew our non-GAAP earnings per share by 14.8%. These results wouldn't 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. The progress we've made and the opportunities we've identified continue to excite and motivate me every single day. It has absolutely contributed to our improved earnings and cash flow. And just as importantly, 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. Combining our businesses within our regions has brought our teams together and cultivated 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. We have some exciting new products to launch 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. I'll now turn the call over to Ann to provide more details on our financial results. Ann?

Thank you, Russell. We grew organic sales 1.6% this quarter, while once again improving our gross profit margin and our overall profitability. This resulted in GAAP EPS of $0.9 per share, which was up 18.4% compared to the second quarter of last year. Non-GAAP EPS was just calculated as our GAAP EPS excluding the after-tax impact of amortization expense was $0.93 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 1.2% and increased segment profit by 9.3% compared to last year's second quarter. And our Europe and Australia region grew organic sales 2.5% 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 continued organic revenue growth despite slowing against 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 4 for our quarterly sales trends. Organic sales grew 1.6% and foreign currency translation increased sales 0.8% this quarter while the impact of divestitures reduced sales by 3.5% resulting in a total sales decline of 1.1%. Slide number 5 outlines our quarterly gross profit and gross margin trending. Our gross profit margin improved by 220 basis points to 50.2% compared to 48% in the second quarter of last year. The 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 6, 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 percent 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 7 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 5.2% 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 8, 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 9 details earnings 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 last year to $36.1 million this quarter. Capital expenditures increased this quarter because we purchased one of our facilities that had been previously leased, resulting in negative free cash flow due to this one-time purchase. We have been looking forward to closing this transaction because it secures a primary manufacturing location for us for the long term. On Slide number 11, you'll find the impact that our consistently strong cash generation has had on our balance sheet. We're currently in a net cash position of $95.8 million. So even as returning over $19 million to our shareholders in the form of dividends and share buybacks this quarter, the facility purchase and reducing our debt we are still in a net cash position. This gives us an incredible amount of flexibility in our capital allocation decisions. Our approach to capital allocation 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 throughout the economic cycle, and we focus on consistently increasing our dividend. This fiscal year, we announced our 38th consecutive annual increase in our dividends. After fully funding 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 incredibly strong balance sheet puts us in a position to execute additional growth opportunities through our R&D investments and sales resources, to acquire companies strategically when the synergies are clear and the price is right, and to return funds to our shareholders through dividends and share buybacks. On Slide number 12, you'll find our fiscal 2024 guidance. We are increasing the bottom end of our full year fiscal 2024 EPS guidance range of $3.70 to $3.95 on a GAAP basis and $3.85 to $4.10 on a non-GAAP basis to our new range of $3.80 to $3.95 on a GAAP basis, and $3.95 to $4.10 on a non-GAAP basis. Our outlook is based upon January 31 foreign currency exchange rates and it assumes continued economic expansion. Macroeconomic conditions do continue to slow in certain end markets and parts of Europe. So we now expect that organic sales growth will be in the low single digits for the full fiscal year 2024. The other elements of our guidance remain consistent with an income tax rate of approximately 22%, depreciation and amortization of approximately $30 million to $32 million and capital expenditures of approximately $75 million, which is inclusive of approximately $55 million of CapEx for the purchase of the previously leased facility, which I mentioned, as well as the build-out of a new facility which will allow us to combine two leased locations into one owned location. Potential risks to our guidance, among others, include potential strengthening of the US dollar, inflationary pressures that we're unable to upsell to offset in a timely enough manner for an overall slowdown in economic activity.

I'll now turn the call back over to Russell to cover our regional results and to provide some closing thoughts before Q&A. Russell? Thanks, Ann. Our Americas and Asia regional results are detailed on Slide 13. Sales were $211.6 million this quarter and organic sales growth was 1.2%. The impact of divestitures reduced sales by 5.1% in the region and the result including the impact of foreign currency was a total sales decline of 3.8%. We were able to grow consistently in our major product lines and end markets despite some weakness we're seeing in industrial automation as well as project delays. Our core businesses are performing well. The area where we saw some weakness within our healthcare identification product line, which declined in the quarter. The impact of lower reimbursement rates for healthcare providers coupled with a decrease in overall hospital admissions continues to reduce demand for our identification products in the healthcare segment. For analyzing our product offering, we have some new products in development that we're looking forward to launching in the next few quarters to mitigate this trend. Outside of healthcare, growth was excellent throughout our remaining key product areas as our identification and Safety Solutions did well for the quarter. Our business in Asia turned the corner on growth and recovered nicely in the second quarter with 5.1% organic sales growth. We grew sales throughout the region with mid-single digit growth in China along with another incredibly strong quarter in India, where we saw just over 21% sales growth. Our business in India has been a clear growth leader in our Asia business for several years, so we're excited about the future in India. Segment profit in Americas and Asia increased 9.3% to $43.9 million and segment profitability improved from 18.3% of sales to 20.7% of sales this quarter. Our continued improvement in gross profit margin resulted in this 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 2.5% and foreign currency increased sales by 2% for a total growth of 4.5%. 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 was 2.3% and organic growth in Australia was 3.7% in the quarter. Our organic sales growth resulted in solid increase in segment profit for the quarter from $13.5 million to $15.1 million. And as a percentage of sales, segment profit increased from 12.7% to 13.6%. Although we're 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 continue to be identified by our team. I'm 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, we'd like to start the Q&A. Operator, would you please provide instructions to our listeners?

And our first question is from Steve Ferazani 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 we issued it, you expected the high-end of EPS was achievable if you hit the high-end of your sales guidance. So we've seen you now go to the lower end, but you're raising the low-end of guidance and not moving the high-end. So I guess what I'm trying to reconcile is what else is going right to enable you to move the guidance to the higher end? Sales clearly is not growing at the same pace?

Yeah. So there's a couple of things going on. The areas that are a little bit weaker in terms of sales growth fortunately are our least profitable businesses, and the ones that continue to be growing quite nicely and actually are at plan or above plan are more profitable businesses. So the consequence of which you're seeing some of that in the improvement in 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 then project that into the next two, that has a lot to do with why we feel we could not do even though the top line wasn't quite there.

So it's a geographic and product mix is what you're saying or are there costs taken out?

You know, like any good manufacturer, there's always slight areas that we can improve operational efficiency and we continue to do so. But a lot of it has to do with the mix and the fact that our higher margin businesses are outperforming our lower margin businesses.

Okay. On the sales number this quarter, the 5% impact on that regional divestiture. The only one I recall is premises, which was last March and was not having that big of an impact. Can you give a little touch on that line?

Yeah. So we also divested another small business, which really wasn't a good fit with our portfolio. It's called Personal Concepts. Again, not a significant growth vector for us. And as I said when I took over as CEO nearly two years ago, we're going to look at our portfolio and decide what businesses really fit with us on an ongoing future basis. On that both the access control and Personal Concepts just didn't really fit our business. And we thought there were better ways for our portfolio to move forward.

And that acquisition did close last quarter, Steve, the second one I just mentioned. But the total impact to the financials was immaterial. So we are calling it our organic sales growth and then the impact of divestitures. So that's where you're seeing it this quarter.

Okay, okay. How much is taking out these lower-performing businesses contributing to margin? So I don't recall you ever doing above 50% gross margin in the seasonally slower Q2 before. It's a very strong number?

Yeah. So ironically, the businesses we divested, Personal Concepts, was a high gross margin. It was also a high sales organic business. So the net profit wasn't a big deal. Yeah. I think as I've kind of spoke to in prior calls 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 and our cost structure. So I'm looking to see more of that in the future.

If I go just one more. In terms of obviously a full year strong cash flow number, you're in great shape moving forward. What's the pipeline looking like? How developed is it at this point? Where are you on M&A?

On M&A? Okay. So yeah, we 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 by something we buy, then we made a mistake. These have to be clear either direct or adjacent businesses that are additive to our overall strategy. So anything 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 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 at Brady, we want 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 way is to look to an acquisition.

Okay. Thanks, Russell. Thanks, Ann.

Thank you.

Thank you. And our next question is coming from the line of Keith Housum from Northcoast Research. Your line is open.

Good morning, guys. Hey, Russell, as we look at the Americas growth, obviously this is the one that's probably the weight around your neck, how much of that growth or the performance was impacted by PDC this quarter? I know you guys said 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, the PDC kind of took away from, 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 happened were a combination of cyclical and some shocking 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 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. It's still very much a work in progress. It has been a great performer at Brady for several years, but I think with our integrated business of merging the America business together, it gives them some additional strength and we're relooking at both their product portfolio and some of their go-to-market strategies where they can benefit from a larger organization.

Sure. I appreciate that. Remind me in terms of your end markets. So much of your sales are driven by OpEx spending, some more of a consumable versus capital expenditure driven?

Yeah, we probably don't break that down into that kind of resolution. But…

Did the line drop? Hello?

Please standby.

Operator, is this my issue, or is the company issue?

Please standby while we get the speakers to reconnect. One moment please.

Thank you.

Ladies and gentlemen, please standby. Ladies and gentlemen, thank you for your patience. Please standby.

Hello, Lydia, this is Brady Corporation?

Yes, we can hear you now. Please resume.

Wonderful. Thank you.

CapEx or OpEx driven sales. Russell had just started to answer the question and it went out.

I apologize for the interruption. If you examine Brady's businesses, we have essentially three types of consumables or fixed hardware. It's probably more helpful to view our business in this manner. A significant portion of our operations is in the MRO sector, where we produce safety and facility ID locks, among other products. These items are semi-consumable, as they are not designed to last indefinitely and may last a few years or even less. This leads to a consistent refresh cycle with our customers, who frequently repurchase as they upgrade their facilities. Next, we have our printer consumables, which constitute another important segment of the business and are used regularly. These are akin to the razor blade that accompanies our printers, which represents the final area of focus, printer sales. Printers generally last anywhere from three to seven years, depending on usage, before needing replacement. While our products are durable, none are made to last forever. Depending on the category, we experience a fairly regular refresh rate in our business. I hope this clarifies your questions.

Yes, it does. It helps to frame it up. Appreciate that. I guess final question from me. It's been several years now. We've been hearing the excitement around R&D and it always feels like the growth coming the next step is the next step. I guess help translate that excitement to the numbers that we're seeing. What do we see that we're close to 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's probably two things that I want to say about the R&D. The first thing is we are in a long journey for us where we devote money to R&D. It takes roughly three years to develop a new printer, a little bit less for refreshes. And so we have a number of new product launches in the next few quarters. I'm super excited about them, but it does take time. And like a lot of industrial products, what you're also seeing is that they're slower adoption. It's not like an iPhone where the new generation of iPhone pops out and everybody runs to the store and buys them. You know these have been very regular cycles. We typically see, again depending on the product category, peak revenue something between four to five years after a product is launched. So, it’s a much different cycle than you'd see in a consumer product. At the same point, I think our R&D has absolutely had an effect and our new products that had an effect in terms of our ability to price, our ability to not be commoditized, and our ability to maintain our gross margins and return on capital. So, you are seeing those things come into play because at the same time in some of our more commoditized products or even the ones we divested are 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 on our overall growth and profitability which I think you're already seeing.

Okay. Thanks Russell. Appreciate it.

Thank you. And our next question is coming from the line of an unidentified analyst from Bank of America. Your line is open.

Yes, hi guys. Good morning. Thanks for taking my questions. I just wanted to get back to the organic growth guidance for the year. So, for the back half of the year can we expect continued 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 back half of the year here?

Yes, we obviously don't have a magic crystal ball, but we work closely with our customers. And we have literally thousands of touchpoints with through our distributors and our direct sales. I think in the past few quarters the economy has been interesting, with a lot of people originally 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's some murky investments that have demands. And then of course you had the US 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 are reporting significant declines year-over-year in sales, something that we are 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 there’s nobody quite like Brady, but are in similar products and product categories. So you take all these factors into account, we felt comfortable with our guidance, and so barring something new, I think we're going to be good for the second half.

Okay. Makes sense. And just trying to peel 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 I would say December for us was a good week. 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 if you know January is predictive of the two months together, well I would say we're just okay. But 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 anything else you're doing to that end besides just adding additional headcount across your regions?

Yeah. So we do, I’m going to kind of take out some of my closing comments. And we are actually in, I think like everybody else, we're looking at new sales tools, how to automate our sales tools. We certainly have some experiments with Generative AI which is fascinating, interesting and occasionally confusing, depending on the answer that it comes up with. But you know, 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, what are the most important things we can do and help our customers in getting them to the right SKU quickly in a knowledgeable way? And I see the large language models and 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 update on the industrial track and trace and what I guess are the next kind of mile markers or targets that we can be looking for over the next couple of quarters here?

Yeah. You know as I'm sure hasn't been lost on you a couple of the big companies in the space had a pretty bad quarter, last quarter in the year-over-year comps. We're definitely seeing some slowdown in some push outs of projects and 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 of industrial automation is fantastic, particularly with labor rates and labor availability. But right now if there's a little bit of pause and adoption with some of the end users, that actually works to our advantage as we get the rest of our portfolio shored up.

Thank you.

I'm showing no further questions in the queue at this time. I will now turn the call back over to Mr. Russell Shaller for closing remarks.

Thank you all for being here today. We appreciate your understanding regarding the brief interruption. I want to conclude by stating that the first half of 2024 has been strong for us. We are effectively executing our initiatives and I am extremely satisfied with the outcomes of our regional reorganization implemented last year. We have made more progress in bringing our teams together than I anticipated, and we are continually seeking opportunities for improvement. Our financial position is also very robust, allowing us flexibility to invest in our current businesses through research and development, sales resources, to uphold our dividend commitments, and to pursue share buybacks and acquisitions. Our ability to generate cash enables us to fund all of our capital allocation priorities concurrently, which is our strategy to enhance shareholder value in the long run. I have been consistently impressed with Brady's adaptability to changing macroeconomic conditions and technologies. As I mentioned earlier, generative AI will have an impact on Brady, our customers, and the solutions we provide in the future. I am personally enthusiastic about several of our trial initiatives that I believe will allow Brady to better serve our customers down the line. Our ongoing priorities are to invest and grow our organic sales, further develop our product offerings with innovative roadmaps for new products, achieve operational efficiencies, improve profitability, and effectively allocate our capital to enhance long-term shareholder value through organic investments, acquisitions, and returning funds to shareholders via dividends and buybacks. While macroeconomic conditions may pose challenges, I am confident that our team is well-equipped to navigate these challenges and deliver for our shareholders. Thank you for your time today and for your interest in Brady.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.