Good day, and thank you for standing by. Welcome to the Q3 2025 Brady Corporation Earnings Conference Call. At this time, participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. I would now like to hand the conference over to your speaker today, Ann Thornton, CFO. Thank you.

Good morning, and welcome to the Brady Corporation 2025 Third Quarter Earnings Conference Call. The slides for this morning's call are located on our website at www.brady.com/investors. We will begin our prepared remarks on Slide 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 that 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 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.

Thank you, Ann, and thank you for all joining us today. We released our fiscal 2025 third quarter results this morning, and I'm pleased to report another quarter of record high adjusted earnings per share. We grew organic sales 1.6%, acquisitions grew sales 10.5%, and we grew adjusted earnings per share by 11.9% in the quarter. Our Americas and Asia region reported excellent organic sales growth of 5.4% and adjusted operating income growth of 20.2%. Our Europe and Australia region is operating in a tough macro environment this quarter, which was reflected in our organic sales decline of 5.4%. However, adjusted operating income increased 3.8% in the quarter, in large part due to restructuring actions we've taken to lower our cost structure in that region. We are in the position to drive future earnings growth in Europe due to the efficiency actions we've taken this fiscal year. We once again grew adjusted earnings per share while increasing our investment in R&D by more than 8% this quarter. This was the result of our ongoing investment in our organic business as well as from our acquisition of Gravitec at the beginning of this fiscal year. We continue to integrate our R&D functions and build out combined new product roadmaps that now include direct part marking technologies. I'm especially happy to announce the acquisition of Funai's microfluidic business, based in Lexington, Kentucky, with their main production facility in The Philippines. Funai has been a supplier to us for specialty ink cartridges, and they further round out our portfolio to enable custom part marking. In light of the uncertainty presented by global trade and tariffs, I'd like to spend a moment on the topic and provide additional details about some elements of our manufacturing footprint and our supply chain. Slide four provides an overview of our global operations, as well as our revenue by geography through the first three quarters of 2025. For the most part, we manufacture our products in the country of the ultimate sale. The three primary exceptions to this are specialty adhesives materials, which are produced in the US, our printers, which are produced in Malaysia, and a variety of specialty identification products that we produce in Mexico. We distribute these product lines to our other locations globally for sale within their countries. And from a sourcing perspective, we import goods from China to the US for a few specific product lines, which represent approximately $50 million in annual sales. The majority of our operations in China are for customers in China. Moreover, we do have some ability to use our global footprint to change either the sourcing country or the location of the product's point of substantial conversion if one country has a particularly onerous tariff rate. Although we've been impacted by incremental tariffs and expect to continue to be impacted, we do believe that our largely in-country operations and our geographic and end-market diversification help mitigate much of the impact of these tariffs. As far as our revenue by geography, through the first three quarters of this fiscal year, 52% of our revenue was generated in the US, 30% in Europe, 8% in Asia, with the remaining 10% in Australia and the rest of the Americas. Breaking Asia down further, 3% was in China and 5% was in the rest of Asia. Now I'll turn the call over to Ann to provide more details on our financial results.

Thanks, Russell. In the third quarter, organic sales were led by growth of 5.4% in the Americas and Asia region, which is partially offset by an organic sales decline of 5.4% in Europe and Australia, resulting in total organic sales growth of 1.6%. We also grew adjusted diluted earnings per share from $1.09 per share last Q3 to a new record high of $1.22 per share. This is an increase of 11.9%. We took further actions this quarter to address our cost structure in two primary areas: in response to the performance of certain businesses as well as economic conditions. First, we reduced headcount in several of our locations in China. Given the decline in economic activity in China, we believe this action was necessary to lower our headcount to reflect the decrease in sales and our growth outlook in the region. And second, we took further actions to lower headcount in Europe in order to operate with a more efficient structure while further integrating the operations of our Gravitec acquisition. In total, we recognized facility closure and other reorganization costs of $3.9 million in the third quarter. We believe these actions will allow us to operate more effectively and efficiently going forward. Turning to slide number five, this details our quarterly sales trends. Organic sales grew 1.6% this quarter, acquisitions added 10.5%, and foreign currency translation reduced sales by 0.7%, resulting in total sales growth of 11.4% in the quarter. Slide number six details our quarterly gross margin trending. Our gross profit margin was 51% this quarter compared to 51.6% in the third quarter of last year. The restructuring actions that I just mentioned resulted in incremental expense of $1.1 million in cost of goods sold in the third quarter. So if we exclude this expense, our gross profit margin would have been 30 basis points higher or 51.3%. We continue to generate sales growth from our highest gross profit margin products. Moving to Slide seven, this details our SG&A expense trending. SG&A was $108.7 million this quarter compared to $95.8 million in the third quarter of last year. As a percent of sales, SG&A increased to 28.4% compared to 27.9% last Q3. If you exclude amortization expense of $4.8 million and facility closure and other reorganization costs of $2.8 million this quarter, SG&A was 26.4% compared to 27.2% in the third quarter of last year, which was a decrease of 80 basis points. We continue to identify efficiencies throughout our sales support function as well as other administrative support functions. The restructuring actions that we took last quarter are already paying off. This allows us to invest in better growth opportunities in geographies such as Southeast Asia and to support additional growth opportunities for our high-performance printing solutions. Slide number eight details the trending of our investments in research and development. We continue to increase our investment in R&D, and through our acquisitions of Gravitec and the inkjet solutions business unit of Funai, we're investing in new product development more than ever. R&D expense was $19.2 million this quarter, which was an increase of 8.5% from $17.7 million in last year's third quarter. We are very excited about our new product roadmap along with two new products that we launched in the quarter, which Russell will describe in a moment. On slide number nine, you'll find the trending of our pretax earnings. Pretax earnings on a GAAP basis increased from $64.4 million to $65.7 million in the quarter. If you exclude amortization from both periods as well as the facility closure and other charges from the current quarter, pretax earnings increased 11.5% from $66.8 million to $74.4 million. On Slide number 10, you'll find trending of our net earnings and earnings per share. Our GAAP net income increased from $50.9 million to $52.3 million, and our GAAP diluted earnings per share increased from $1.05 to $1.09 in the third quarter. If you exclude amortization from both periods and the facility closure and other charges from the current period, our adjusted net income increased from $52.7 million to $58.8 million, an increase of 11.6%, and our adjusted diluted EPS increased from $1.09 per share to $1.22 per share, which was an increase of 11.9% to a new company record quarter. Moving to slide number 11, you'll find a summary of our cash generation. Operating cash flow was $59.9 million in the third quarter of this year, compared to $72.7 million in the third quarter last year. Free cash flow was $55.6 million in Q3 of this year compared to $64.4 million in last year's Q3. Slide number 12 details the impacts that our cash generation has had on our balance sheet. As of April 30, we were in a net cash position of $49.3 million, and in the quarter, we returned $44.5 million to our shareholders through the form of dividends and share buybacks, and we funded the acquisition of the microfluidic solution business in April. Our approach to capital allocation is consistent, which is first to use our cash to fund organic sales growth and efficiency opportunities. This includes investing in new product development, sales-generating resources, and capability-enhancing CapEx.

Our consistently strong cash generation gives us the ability to invest throughout the economic cycle so that we're positioned to drive future sales growth and improve profitability. And second, we focus on consistently increasing our dividends. At the beginning of this fiscal year, we announced our thirty-ninth consecutive year of annual dividend increases, which is a streak that we're very 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. This quarter, we purchased Funai's microfluidics solution business for $11.6 million, and we purchased 476,000 shares for $33.2 million, which was an average price of $69.64 per share. Our balance sheet allows us to continue to increase our inorganic sales opportunities, to invest in new product development, to acquire companies that are a strategic fit with both our core business and our capabilities, and to return funds to our shareholders through dividends and opportunistic share buybacks. As for the financial impact of tariffs, we realized approximately $3 million in incremental tariff expense in the third quarter, or about $0.05 of diluted earnings per share. As we look ahead to the fourth quarter, we expect continued exposure to high-demand materials while at the same time mitigating some of the impact through targeted price increases, strategic sourcing alternatives, analysis of our supply chain, among several other actions. But the situation is rapidly changing, and we estimate incremental tariffs to impact our fourth quarter in the range of potentially $3 million to $5 million net of mitigating actions. This is an estimate based upon current tariff rates and scope, which have been changing rapidly, and the actual outcome may change depending upon trade policy developments, as well as the timing of our mitigating actions. As a result of this uncertainty, combined with the fact that we've entered the fourth quarter of our fiscal year, we are tightening our adjusted diluted EPS guidance range from our previous range of $4.45 per share to $4.70 per share, to a range of $4.48 to $4.63 per share. Other elements of our guidance include our organic sales growth in the low single-digit percentages for the year ending July 31, 2025, depreciation and amortization expense of approximately $40 million, capital expenditures of approximately $25 million, and a full-year income tax rate of approximately 20%. Our income tax rate generally tends to be slightly lower in the fourth quarter compared to our full-year expectation, which is due to our historical profit mix and the expected timing of certain tax adjustments. Potential risks to our guidance, among others, include strengthening of the US dollar, inflationary pressures, continued changes in tariffs or other downstream impacts of global trade disruption, or an overall slowdown in economic activity. Now I'll turn the call back over to Russell to discuss some new product launches and cover our regional results before Q&A. Perfect. Thanks, Ann. This quarter, we launched our I6100 industrial desktop label printer, which is a mid-sized printer that can handle mid to high volume printing on a wide variety of Brady's specialty materials. It offers a number of enhancements, including faster print speeds and an intuitive user interface to change print settings. Like all our new industrial printers, it comes with Brady Workstation and our Wire ID software suite with built-in templates for fixed text or preform label design options. As always, setup is incredibly easy, it's sturdy, and it's built for industrial environments. We also launched our HH86 handheld RFID reader. This is an all-in-one device that can scan barcode to NFC, HF, and UHF RFID labels. Featuring an ergonomic grip, extended battery life, an IP65 rating, and the ability to withstand a five-foot drop, it has been purposely designed to withstand challenging industrial environments. Additionally, with the capability to read over one RFID tag per second, plus the ability to run Android applications natively, our reader can help our customers modernize their high-speed production workflows. We continue to see the benefit of our R&D investments with these and many new products we will launch over the coming year. Our goal remains to have a complete integrated solution that enables our customers to mark and identify their parts with all common methods. I'm really proud of our new products this quarter and this year, and our products in the pipeline for the coming year will be excellent additions to our portfolio. Now I'll provide some details of the financial performance of our regions. Results for the Americas and Asia region are shown on slide 14. Sales are $253.7 million this quarter, and organic sales growth was once again strong at 5.4%. Our Americas and Asia region grew 5.0% organically year to date, acquisitions increased sales to 8.6%, and foreign currency decreased sales by 1.1% for a total sales growth of 12.9% this quarter. Our Wire ID, Safety and Facility ID, and Product ID product lines continue to lead our top line, and our healthcare identification business grew in the low single digits this quarter. Our Asia business continues to exceed our expectations with organic sales growth of nearly 23% this quarter. We returned to growth in China following a year of decline, while our business in Japan and Southeast Asia continues to grow as they benefit from manufacturing expansion growth in our printer product lines throughout the region. Our reported segment profit in the Americas and Asia increased 15% to $57.2 million, and segment profit as a percentage of sales was 22.5%. If you exclude the impact of amortization in both the current quarter and last year's Q3, as well as facility closure and other reorganization costs in the current quarter, segment profit increased 20.2% compared to the prior year. Sales growth in our specialty identification products and the optical reader technologies that we acquired several years ago continue to drive both top and bottom line. The actions we're taking in noncore areas of our business also set us up for more profitable growth in the future. Turning to slide 15, this details our results for Europe and the Australia region. Sales were $128.9 million this quarter, acquisition sales added 14.2% while organic sales declined 5.4%, and foreign currency translation decreased sales by 0.1%, resulting in total sales growth of 8.7% in the region. Our businesses in both Europe and Australia are operating in a challenging economic environment for industrial manufacturers. We saw a decline in this end market as well as within most of our major product lines. We took additional actions in the quarter to lower our cost structure in both regions, and the reorganization actions we took last quarter contributed to the improvement in our segment profit for this quarter. Our reported segment profit was down 10.5%, but if you exclude the impact of amortization in both the current quarter and last year's Q3, as well as the recognition of costs incurred in the quarter, segment profit increased by 3.8% compared to the prior year. We're setting ourselves up for increased profitable growth in the future. I'm pleased with our results this quarter. We've been navigating the ever-changing global tariff situation, and we're working through mitigating as quickly as we can. Meanwhile, we'll continue to invest in the new product development throughout our business, including Gravitec, with our newest acquisition of microfluidic solutions. We need to keep our momentum going through the end of the year and ensure that we're positioned for long-term profitable growth, and we'll do that by staying focused on our strategy and controlling what we can control. With that, I'd like to turn it over for Q&A. Operator, would you please provide instructions to our listeners?

Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions. Our first question comes from Keith Housum with Northcoast Research. You may proceed.

Good morning. Thanks, guys. I appreciate it. In terms of the tariff, I appreciate the color on potential expense there. But Russell, can you perhaps provide a bit of color? Are you seeing any impact on the top line, either demand destruction or actually additional revenue as people are starting to talk and actually make some actions on moving manufacturing around?

Yeah. You know, so a couple of things to that entire question. No, we haven't seen any tariff-related demand destruction at this point. However, I think both Brady as well as a lot of the industrial companies carry a couple of months' worth of inventory. So you haven't really seen the effect of tariffs just yet. You know, a lot of what we're shipping was manufactured pre-tariff, and now we did get hit a little bit certainly towards the end of the quarter. But by and large, you haven't by any means seen the full effect of tariffs. So I don't think there has been much recognition one way or another about the tariffs' long-term impact. And, you know, as anybody that follows this, it changes literally on a daily basis in terms of both the amount and what's included and what isn't included. So ultimately, if you assume that we're going to wind up with a little bit more tariffs than what we had, I would expect to see some price increases rolling through from both ourselves as others look to recapture most, if not all, of the tariff changes that have come through. Now will that ultimately be inflationary? Will that turn out to be demand destruction? Or will people just yawn? I think it depends on the amount of the tariff and which countries in particular get hit and whether it turns out to be substantially more than 10% at any one country.

Okay. Great. I appreciate it. Your commentary on adjusted SG&A, I think, was insightful. It appears probably one of your lowest quarters in all those core in recent memory. How sustainable are those actions? So I guess are there one-time items there that perhaps were artificially low for the quarter, or is this kind of a new general run rate we should be thinking about going forward?

Yeah. So of course, the future is always a little uncertain. But no, Brady has had a long-term journey that's lasted for years to keep driving down SG&A. And we continue to look for ways of operational efficiency. You know, so there is always a little bit of bounce around the data points. So, you know, if it could tick up maybe a couple hundred basis points or down a couple hundred basis points in any one quarter, it wouldn't particularly surprise me. But our goal year over year is to continue to drive out costs. You know, as Brady looks at their footprint and how we serve our customers, we're continuously looking for ways to be more efficient and really spread our G&A over a much larger organization. So the goal is absolutely to continue that. There will be a little bit of noise on a quarter to quarter. If you look at a multiyear trend, yeah, we absolutely are driving down SG&A.

Great. Great. And then finally, I guess last question for me. You went through the acquisition that you guys did in April pretty quick. Do you mind just kind of walking through again, like, the opportunity that this acquisition provides you guys? And were they already a supplier for you guys?

Yeah. So Funai has a very long history stretching back to the original inventions at IBM, and then it took a turn at Lexmark before it became Funai. And now it's part of Brady, where I hope it's going to be forever. So what they do is, you're very familiar I'm sure with a commercial inkjet cartridge that might sit in your office printer. They make the industrial version of that, which is more tailored towards high-performance inks and very particular use cases. And we've known them and worked with them for at least a half dozen years. Their product is integrated into our inkjet printer, which is how we originally came to know them. They also sell inkjet cartridges to other companies in a host of what I'll call very niche applications for industrial print-on-demand applications. So, you know, we see this technology and a great group of guys in Lexington. Very, very smart. A number of PhDs and people who have been doing this for years. So we see this as a huge opportunity for a growth vector for Brady to round out along with lasers, our ability to do direct part marking. It has always been a little bit of a gap. We had, of course, labels for an eternity, and now we have lasers and inkjet that we can control so we can go to customers with a complete solution, basically providing the ability to mark the part how they want to market. And, again, it's going to take a couple of years to get fully integrated and everything up and running. But I'm super happy that we were able to make this acquisition.

Great. Thanks. Good luck. Appreciate it.

Thank you. Our next question comes from Steve Ferazani with Sidoti. You may proceed.

Morning, Russell. Morning, Ann. Appreciate the detail on the call. Russell, I did want to ask about the Q4 guide. If Americas and Asia was up 5% year over year in 3Q, and Europe was down 5%, but your guide is for Americas and Asia to grow only low single digit in Q4 and Europe to be flat. I'm just trying to figure out why these two are going in opposite directions in April.

Yeah. You know, so we're still anticipating a bit of a headwind due to tariffs in America. It's as yet we haven't seen it. But at some point, we feel like this is going to be a little bit of a headwind in the Americas. And so we're estimating the magnitude of that. Your guess is as good as mine where we're going to wind up by the end of the quarter. And then on Europe, if you look at Europe, the first two quarters in Europe were essentially flat year over year. The third quarter definitely saw a deterioration. What we're hoping and we actually expect as we look through our business forecast is that we're going to see enough of a recovery in Q4 that we're basically going to get back to flat. So, you know, that's where you see the mix. I know there's a lot of moving pieces in there to pick apart, but, you know, we're hoping that Europe doesn't get any worse and actually has a moderate recovery. And that the US probably will experience a bit of headwinds in the coming quarter.

How much of that is the impact from the old WPS? I know that's still pretty significant for that part of Europe. Less so in the Americas. That has typically been or used to be when you would report it, a lot more volatile for you. How much is that impacting?

Yeah. So a couple of things. So the WPS in America is almost down to it's not nothing, but it's getting there. So the WPS factor in America is minor and not really part of it, which is, again, probably why they grew 5%. In Europe, the WPS business, with the exception of the UK, has always been pretty strong. So if you remember in years back, it's a very fragmented market, and some of the dynamics that exist in the US that make a WPS business model tough don't really exist as much in Europe. But I think you're seeing in the European numbers, and if you look at industrial production particularly in Germany, you're seeing some just staggering year over year declines that really started in 2019 and continue to go down. So we're tracking that because, of course, we're in the heavy industrial sector as well as automotive and some other areas. I think the epicenter of the problem really is Germany with some collateral damage to some of the other industrialized countries in Europe. So again, we're expecting that to flatten out at this point versus the quarter over quarter declines we've seen for the last several quarters. But again, we're just cautious. And this is another reason we took costs out of the European organization in particular, because if you look at it, even with the decline in sales adjusted for our reorg costs, we were able to improve profitability by 3.8%. So, you know, I feel like our organization is absolutely the right size to service the market as it stands now. And, of course, if anything happens in the future, Brady has shown a willingness and ability to act very quickly to respond to market dynamics, both up and down, which I would expect in the future.

Okay. Can I ask about what you're seeing in China?

Yeah. For us, particularly, China has always been a tough market and has become more tough. If you look at most of Southeast Asia, our customers are multinationals. We never did a tremendous amount of business with indigenous Chinese companies. Very tough to crack, particularly from a safety and facility ID business. But the multinationals, on the other hand, like the ability to have the same look and feel of their manufacturing worldwide. And, you know, we benefit from that. But if you look at the relative either underinvestment or outright exodus of China for multinationals, we're basically following right along. So the reason that is the reason we shut down our Beijing facility, which we no longer felt was scale or even necessary. We do have three plants still in China, which I think is the right footprint for us for the foreseeable future. We're not planning on doing anything additional in China. But remember, most all of our China business is indigenous to China. So we manufacture in China for Chinese customers, and it now is only about 3% of our corporation's revenue. So pretty small. On the flip side, you know, gains outside of China throughout the region. And I think you're seeing, again, some exodus from China, which is why you're seeing such a pickup in some of the other countries that we serve.

Yep. Pretty consistent over the last several quarters. If I could get in a couple of quick modeling questions. Ann, can you break out that $3.9 million facility closure and reorg cost to segments? And the other question would be just on the acquisition. I know it's very small, but any guess how that contributes to revenue just for our model?

Sure. Sure. Yeah. The reorg costs were split basically pretty much evenly between the two regions. You can just call it so $3.9 million in the restructuring was basically pretty much right down the middle for the items that Russell mentioned. And then the acquisition's relatively small. So carved out effectively of the parent, Funai, and so we're still in early stages. It's relatively small, which is why you didn't see a press release regarding the acquisition. $11.6 million in purchase price, and we're estimating first-year sales within the realm of $15 to $20 million.

Perfect. Okay. Russell. Thanks, Ann.

Thank you. I would now like to turn the call back over to Russell Schaller for any closing remarks.

Perfect. Thanks, everyone, for your time this morning. We've delivered strong results. You know, I think it's a challenging environment. And I am particularly pleased with the performance of the teams here at Brady to do that. So, you know, we've recorded record adjusted earnings per share. Our financial position is excellent. Our balance sheet gives us the ability to continue to invest in our organic business. We can close on strategic M&A and still return funds to our shareholders through dividends and share buybacks. Meanwhile, our ability to generate cash allows us to fund all capital allocation priorities and generate shareholder return essentially simultaneously. The current tariff environment adds a new level of uncertainty for any global manufacturer as well as to the overall economy. And although we do expect to continue to be impacted by incremental tariffs, we believe that our global manufacturing presence and our geographic diversification help to mitigate some of this potential impact. The situation changes almost daily, if not hourly, and we're monitoring it closely like any other global manufacturer. But in the meantime, we're controlling what we can control so that we can continue to deliver on our priorities, which are to invest in our top-line growth, develop our product offering to support our customers' identification needs, execute operational efficiencies to ensure profitable growth, and effectively deploy our capital to drive long-term shareholder value through organic investment, strategic acquisitions, and returning funds to our shareholders through dividends and share buybacks. Although the current environment is uncertain, I am super optimistic about our future, and I know we're making the right moves today to overcome near-term challenges and continue to deliver long-term results. Thank you for your time this morning. Operator, you may disconnect the call.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.