Good day, and thank you for standing by. Welcome to the Q2 2025 Brady Corporation 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. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded.

Thank you. Good morning, and welcome to the Brady Corporation's fiscal 2025 second quarter earnings conference call. Supplies for this morning's call are located on our website at www.bradycorp.com/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. Words such as expect, will, may, believe, forecast, and anticipate are just a few examples of words identifying a forward-looking statement. It's important to note that forward-looking information is subject to various risk factors and uncertainties, which could significantly impact expected results. Risk factors were noted in our news release this morning and in Brady's fiscal 2024 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 Schaller. Russell?

Thank you, Ann. 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 of organic sales growth and improved profit. We grew organic sales 2.6%, sales from acquisitions were up 10.2%, and we grew adjusted earnings per share by 7.5% in the quarter. Our Americas and Asia region reported another extremely strong quarter with organic sales growth of 4.3% and adjusted operating income growth of 12%. I'm incredibly pleased with our organic sales growth in the Americas and Asia, especially in light of the current macroeconomic environment for industrials. Our Europe and Australia region is operating in a tough environment as well, which was reflected in our results with a slight organic decline of 0.8% in the quarter. Overall, our teams are executing, and we continue to invest in new products. I've been looking forward to the announcement of a very exciting new printer this quarter, which is our I7500 industrial label printer. This printer is the first of its kind for Brady because it's designed for both high volume and high mix labeling. The I7500 has the ability to print on over 4,000 individual stock labels, parts, and ribbons, as well as on more than 80 unique adhesive materials. This printer incorporates Brady's proprietary label sense technology, which automatically calibrates the machine for the wide variety of adhesive materials it can run through. This means the user has next to zero setup time and no wasted labels. The I7500 includes a seven-inch touchscreen that guides the user through the label printing process, making the printer incredibly easy to use for a wide variety of printing applications. Ranging from high-performance heat-resistant labels that can withstand solvents in extreme temperatures to customized QA inspection labels and factory seals, to aerospace-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. We have more exciting new products planned for this year and next year, which we believe will continue to add to our growth in 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 organic business as well as from the acquisition of Gravitech. Where we've identified some excellent opportunities from a product development standpoint. Now I'll turn the call over to Ann to provide more details on our financial results. Ann?

Thank you, Russell. Organic sales were led by growth of 4.3% in the Americas and Asia region, which was partially offset by a slight organic sales decline of 0.8% in our Europe and Australia region for total organic sales growth of 2.6% in the quarter. We also grew adjusted diluted earnings per share from $0.93 per share last Q2 to $1.00 per share this quarter, which was an increase of 7.5%. 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. First, we announced the closure of our manufacturing facility in Beijing, China. 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. Second, we announced the closure of our manufacturing facility in Buffalo, New York. We have gradually reduced production within this facility over the last several years, and we plan to move the remaining product lines to our headquarters in Milwaukee. And third, we took actions to reorganize our overhead structure in Europe, which resulted in headcount reductions. Our goal with these actions is to operate with a more efficient reporting structure while further integrating the operations of our Gravitech acquisition. 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. We'll start on slide number four, which details our quarterly sales trends. Organic sales grew 2.6% this quarter, acquisitions added 10.2%, and foreign currency translation reduced sales by 2.2% for total sales growth of 10.6% in the quarter. Slide number five details our quarterly gross margin trending. Our gross profit margin was 49.3% this quarter compared to 50.2% in the second quarter of last year. 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 this incremental expense, our gross profit margin would have been 50% this quarter, only 20 basis points below the second quarter of last year. Our gross profit margin continues to be strong as we realized benefits from our sales growth being led by higher gross profit margin products. 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. As a percent of sales, SG&A increased to 29.7% compared to 28.3% last Q2. If you exclude amortization expense of $4.7 million and the facility closure and other reorganization costs of $3.4 million this quarter, 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 decrease of 20 basis points. 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. Slide number seven details the trending of our investments in research and development. We continue to increase our investments in R&D throughout Brady, and our R&D expense was $18.7 million this quarter. This was an increase of 11.2% from $16.8 million in last year's second quarter. As a percentage of sales, R&D was consistent at 5.2% in both periods. We continue to demonstrate our commitment to new product development with the launch of the I7500 being a prime example of the results of this increased investment. Turning to slide number eight, you'll find the trending of our pre-tax earnings. Pre-tax earnings on a GAAP basis decreased from $55.8 million to $52 million in the quarter. But 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 7.2% from $58.2 million to $62.4 million. On slide number nine, you'll find the trending of our net earnings and earnings per share. Our GAAP net income decreased due to the incremental asset amortization from our acquisitions as well as from the facility closure and other reorganization costs that we incurred in the quarter as previously mentioned. Our reported GAAP diluted earnings per share was $0.83 compared to $0.90 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 5.9%, and our adjusted diluted EPS increased from $0.93 per share to $1.00 per share, which was an increase of 7.5%. Turning to slide number ten, 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. Free cash flow was $32.5 million in Q2 of this year compared to a negative $13.5 million in last year's Q2. Capital expenditures were higher than normal last year due to the purchase of a previously leased facility along with the construction of a new facility. We expect our CapEx to return to a more normalized level this year, which is what you're seeing in our results. Slide number eleven details the impact that our historical cash generation has had on our balance sheet. As of January 31st, we were in a net cash position of $50.8 million, which was an increase of $21.7 million since the first quarter of this fiscal year. Our approach to capital allocation is consistent, which is 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. 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. And second, we focus on consistently increasing our dividends. This fiscal year, we announced our thirty-ninth consecutive year of annual dividend increases, which continues to be a streak that we're incredibly proud of. 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. Our balance sheet puts us in a position to be able to continue to increase our investment in organic sales opportunities, invest in new product development, acquire companies that are a strategic fit with our core business, and return funds to our shareholders through dividends and share buybacks. Slide number twelve 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 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 a GAAP EPS range of $3.99 per share to $4.24 per share. Our adjusted diluted EPS range represents a range of growth of between 5.5% to 11.4% compared to fiscal year 2024. We also anticipate organic sales growth in the low single-digit percentages for the year ending July 31, 2025. Other elements of our guidance include depreciation and amortization expense of approximately $40 million, capital expenditures of approximately $35 million, and we now expect a full-year income tax rate of approximately 21%. Our income tax rate generally tends to be slightly lower in the fourth quarter than our full-year expectations based upon our historical profit mix and the expected timing of other discrete adjustments. Potential risks to our guidance, among others, include potential strengthening of the US dollar, inflationary pressures that we're unable to offset in a timely manner, or an overall slowdown in economic activity. I'll turn the call back over to Russell to cover our regional results and provide some closing thoughts before Q&A.

Thanks, Ann. Slide thirteen details the financial results of our Americas and Asia region. Sales were $133.8 million this quarter, and organic sales growth was strong once again at 4.3%. Acquisitions increased sales 7.6%, and foreign currency decreased sales by 1.4%, resulting in total sales growth of 10.5% this quarter. We continue to grow within our wire ID, safety and facility ID, and product identity healthcare ID business. We're generating high single-digit sales growth in our printer and consumable products offering, and we continue to identify new use cases to expand our wallet share with our customers. 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 3.5% in the quarter. This means that outside of China, our business combined for a 24% growth. Our growth leaders were Japan and India this quarter, and we continue to build momentum in these regions. Our reported segment profit in the Americas and Asia increased 4.8% 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, segment profit increased 12% compared to the prior year. We continue to execute 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 fourteen, you'll find the results of our Europe and Australia region. Sales were $122.8 million this quarter. Acquisitions added 15.1%, while organic sales declined 0.8%, and foreign currency translation decreased sales by 3.6%, resulting in total sales growth of 10.7% in the region this quarter. Our European business reported flat organic sales, and our Australian business reported an organic sales decline of 6.4%. Our businesses in both Europe and Australia are 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. Our reported segment profit in Europe and Australia declined 24.4% in the quarter to $11.4 million, and segment profit as a percentage of sales was 9.3%. 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, segment profit increased 3.9% compared to the prior year. Despite the slow economic conditions, we were able to grow organically in Eastern Europe, which offset our decline in Western Europe. 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 in both the near and long term. And most of all, I'm looking forward to more exciting new product launches in the future. We are mindful of the current geopolitical and trade environment like all other multinational companies, and we're evaluating the potential impact on Brady. Meanwhile, we'll maintain our focus on what we can control, and we'll adapt where we can as circumstances develop. With that, I'd like to turn it over for Q&A. Operator, would you please provide instructions to our listeners?

As a reminder, to ask a question, please press star one one on your telephone. Wait for your name to be announced. To withdraw your question, please press star one one again. Please standby while we compile the Q&A roster. Our first question comes from Keith Housum with Northcoast Research. Your line is open.

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 of thoughts about if they go into place, what the impact might be on you guys? From a cost as well as perhaps a threat to your revenue potential there? Yeah. So, you know, we've looked at it. I think a lot too, and whether it stays at 25% or it's 10% or it's something else, you know, as a practical matter, we have some ability to move our production around and ship to and from different countries. So, you know, 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, to manufacture them locally. So we could very easily in some of these cases, manufacture the product in the US and sidestep the tariffs. Because some of the raw materials are actually manufactured in the US as well. So, you know, 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 than what would particularly hit Brady.

Gotcha. In terms of your ability to move products, do you guys have duplicate lines there where you can move that fairly quickly or would there be a delay of several months or quarters in order to get that done? So the really high-value products, which are our printer materials, we could move those incredibly quickly. Those, for the most part, are hand assembly and small workstations. If the tariff was protracted for a long period of time, you know, we would have to think about where some of our machinery sits and what we would move. 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.

Okay. Appreciate that. With the facility closures and account reductions that you guys are talking about here, 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 this more, you know, current period or is it going to be more, you know, dragged out over the next several quarters? So, you know, we anticipate, and I'm going to say anticipate, because there's still some things going back and forth in Europe, but we anticipate having all of this cleaned up in this fiscal year. And then that will give us a better run rate in the future. So, you know, if you think about it, when we originally restructured Brady right after I became CEO, we had a kind of a two-step plan of dissolving the prior divisions like WPS and making it a more regional structure. And so the first bite we took a couple of years ago, and then this is kind of the second step in doing that. And combined with that, it allows us with Gravotech to make some additional 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.

Okay. And then the closures in Buffalo and in China, will we see an increase in cost of in gross margins, or is that kind of embedded in there already? I think you're going to see, you know, both have become kind of a drag on our overall financial performance, both in terms of growth and in gross margins. You know, I know a few people have been commenting on WPS for years about doing away with it. We did away with it by name, and now we're 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.

Okay. If I could ask one more question here. It sounds like the I7500 is an exciting new product for you. I guess, first, is there a potential that it cannibalizes any of your existing sales? And then as you kind of think or perhaps even hope, you know, is this a product to contribute, you know, single millions of dollars of revenue that it might get up to speed, or it could be tens of millions of dollars? How do you kind of scope that out? Yeah. So I could dream of tens of millions. You know, 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 great fit for, say, a distribution center where you're printing on the same thing over and over again. But a lot of our customers are constantly changing over label stock. Which if you've ever watched it happen, it can take minutes to a half hour to dial the printer in. You know, 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 this sets up and changes over. So it's like I said, it's unique. It's not for everybody. But for some customers, they immediately see it. You know? I'd love to see it north of ten million, but we'll see how the traction is in the marketplace. Okay. I'll stop there and turn it over. Thank you. Appreciate it.

Thank you. Our next question comes from Steve Ferazani with Sidoti. Your line is open.

Morning, Russell. Morning, Ann. Wanted to ask, obviously, FX headwinds became much more intense this quarter. Yet you're raising the low end of guidance. Did something help offset that in terms of your view of the year? Did something go better than expected? That enables you to actually just raise the low end despite clearly more intense FX headwinds that don't appear to be going away.

Sure, Steve. Yeah. You're right. Absolutely. FX is a headwind. For sure, as we sit here today. The Americas and Asia region is performing better than expected. I mean, coming in this quarter with 4.3% organic growth is a very nice result and basically offsets the impact of what we see just sitting here. As we sit here today, we're basically looking at our forecast at January 31st FX rates. It's pretty much being offset by the Americas and Asia performance.

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?

Sure. Steve, just a Yeah. I would say, you know, their economy, which is to some extent based on being able to export to other countries, particularly China, is just not in a great place after having done well for several years. I think you are clearly seeing a blowback from China and China purchasing. And then, you know, as a country, they're somewhat depressed because a lot of what they do is raw material extraction and shipping to other countries. Yep, all of which is not doing awesome right now. Because their other big trading partner, of course, is Europe. And you know the story in Europe's GDP isn't great. The countries that we're seeing that are growing are kind of decoupled from that whole China-Europe trade. You know, the rest of ourselves is Asia did fantastic. Middle East did fantastic. And we're seeing it. But it's if you're the back and forth between China and anyone, not a great place.

Right. Right. You mentioned Europe. You've continued to outperform at flat there. Any shifts with given tariff talk, geopolitical concerns, post-election, have you seen any slowdown or have you seen any indications that would cause you to be a little bit more cautious?

Well, you know, one of the big things I think I've commented on it several times before, you know, Germany has really done a disservice to themselves with energy prices, which has been a huge headwind to their overall economy. I don't know at this point how or when they're going to get it sorted out. Because, you know, their large manufacturers are really struggling. You've seen all kinds of headlines about layoffs at some of their major manufacturers, or shuttering or partially changing plans. So I'm not enthusiastic about Europe until they can get to a better energy position. Maybe that will happen sooner than later. But I think for the time being, or at least for the time being, you know, fortunately, America's GDP and some of the other pockets are doing well for us. And, you know, that's kind of where we're doubling down. And then hoping the other ones just don't get any worse.

Right. Last one from me. You know, hopefully, I've done my math right here. But it looks like you saw a nice sequential bump in the Americas and Asia from Gravitech. Are you gaining more traction outside of Europe with Gravitech? And are you doing something particular to drive it?

Yeah. You know, the Gravitech story is very, very early. There's some, I mean, it has a core technology that we've 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 road map. Don't think you're seeing a ton yet. You know, we've had a couple of wins, but I think that story is still a few quarters out.

And, actually, that raises the you launched the more the code embedded products. Can you talk about now the success of that a couple of three years into the acquisition? Now that you've really embedded that technology and just general outlook on track and trace?

Yeah. You know, so it's about where we had expected given the current economic climate. You know, one of the things that we did not expect certainly, three years ago when we started on this journey, was just how, I almost want to use morbid for lack of a better word, industrial automation investment has been over the last few years. You know, it just we had a thesis that there was going to be more money poured into capital expenditures than there certainly has been. Right. At some point, you know, 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. You know, we just wish the environment was better. But we do love the products. We love the use cases. Our thesis was always being able to cross-sell using readers to be able to sell printers and using printers to be able to sell readers. We can point to some large accounts where we've done that. But the overall, I think, investment in industrial automation has just been pretty sad. I think would be the best description.

Fair enough. Great. Thanks, Russell. Thanks, Ann.

Thank you.

Thank you. I'm showing no further questions at this time. I'll now turn it back over to Russell Schaller for closing remarks.

Thanks, everyone, for your time and your questions this morning. We're midway through 2025, and we've 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. This gives us the ability to fund all of our capital allocation priorities 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'll take actions where necessary as the situation develops. The macroeconomic environment is consistently changing, 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 customers' lives better while delivering a positive return to our investors. I'm looking forward to the future, and I know that our team has the ability to overcome challenges, solve problems creatively, and continue to deliver results. Thank you for your time this morning and for your interest in Brady. Operator, you may disconnect the call.

This concludes today's conference call. Thank you for participating. You may now disconnect.