Earnings Call Transcript - BRC Q4 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q4 2024 Brady Corporation 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ann Thornton, CFO.

Ann Thornton, CFO

Thank you. Good morning, and welcome to the Brady Corporation fiscal 2024 fourth 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 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 this morning. Also, please note that this teleconference is copyrighted by Brady Corporation, and may not be re-broadcast 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 Shaller, CEO

Thank you, Ann, and thank you all for joining us today. We released our fiscal 2024 fourth quarter financial results this morning, and I'm thrilled to announce another company record high EPS for both the quarter and the year. We grew organic sales this quarter, and we also generated record high cash flow from operating activities. This quarter was an excellent finish to another great year. Our 2024 non-GAAP EPS of $4.22 was another all-time record high following three consecutive years of all-time record highs. Our GAAP EPS of $4.07 was also an all-time record high. This year, we grew organic sales by 2.6%, with growth driven by both of our regional segments. We improved our gross profit margin to 51.3%, an increase from 49.4% last year. We closed the acquisition of Gravotech on August 1, and we returned $117 million to our shareholders through dividends and share buybacks. I'm incredibly proud of the entire Brady team for creating our results this year. It's a testament to their efforts that our profitability improved while we increased our investment in R&D. We are using these investments to increase our portfolio of engineered products to help make our customers' lives easier. Meanwhile, we're expanding our sales force and investing in our digital capabilities to put ourselves in the best position to generate consistent organic sales growth. Our priorities for the next year remain the same: generate top-line growth in excess of GDP and continue our evolution into a faster-growing company; target niche opportunities by developing unique product offerings to support our customers, particularly in the area of workplace automation, which we believe is a growth opportunity for years to come; deliver operational improvements to increase profitability as we grow to integrate the Gravotech acquisition and identify combined sales growth opportunities; and effectively deploy our capital to drive long-term shareholder value, which includes organic investments, acquisitions, returning funds to our shareholders through dividends and share buybacks. We demonstrated our commitment to returning funds to our shareholders this year as we repurchased nearly 3% of our diluted share count and we announced an additional $100 million share buyback authorization. Additionally, we announced an increase in our dividend yesterday, representing the 39th consecutive year of annual dividend increases. We are committed to returning cash to our shareholders while delivering a strong shareholder return. I'll now turn it over to Ann to provide more details on our financial results.

Ann Thornton, CFO

Thank you, Russell. We had a strong quarter and an excellent finish to 2024. Our organic sales growth was 1.6% this quarter. Our gross profit margin improved to 51.6%. We increased our investment in R&D, and we reduced SG&A as a percentage of sales. This resulted in earnings growth and another quarterly record GAAP EPS of $1.15 per share, which was up 15% compared to the fourth quarter of last year. Our non-GAAP EPS, calculated as our GAAP EPS excluding the after-tax impact of amortization expense, was $1.19 per share this quarter, which was up 14.4% over the fourth quarter of last year. Both regions performed well this quarter. Our Americas and Asia region grew organic sales by 3.4%, and increased segment profit by 6.7%. Our Europe and Australia region declined 1.8% organically compared to last year's fourth quarter, which follows an impressive streak of 13 straight quarters of organic sales growth. The macro-environment in Europe has become more challenging over the last several months and quarters, but even despite the slight decline in organic sales, we were still able to increase operating income by 4.6% in the region, driven by continued improvement in gross profit margin and ongoing efficiency gains throughout our cost structure in Europe. The key financial takeaways this quarter are record high EPS, record high cash flow from operating activities, continued strong financial performance within both our regions, and a continued commitment to return funds to our shareholders. Let's move to Slide number 4, for our quarterly sales trends. Organic sales grew 1.6% this quarter. The recent strengthening of the U.S. dollar versus other major currencies decreased sales by 0.8%, and divestitures decreased sales by 1.5%, for a total sales decline of 0.7% in the quarter. Moving to Slide number 5, you'll find our quarterly gross margin trending. Our gross profit margin continues to be strong, with an increase of 80 basis points to 51.6% compared to 50.8% in the fourth quarter of last year. We continue to realize benefits from our sales growth coming from higher gross profit margin products as well as stabilizing input costs compared to last year. Slide number 6 details our SG&A expense trending. SG&A was $93.3 million this quarter compared to $97.5 million in the fourth quarter of last year. As a percentage of sales, SG&A declined to 27.2% compared to 28.2% of sales last Q4. Excluding amortization expense from each of the periods presented, SG&A would have decreased from 27.5% of sales in the fourth quarter of last year to 26.5% of sales this quarter. We've made significant progress in optimizing our cost structure, reducing our SG&A expense from more than 36% of sales eight years ago to 28.1% in fiscal year 2024. At the same time, we've continued to invest in growth by expanding our sales force, enhancing our digital capabilities, and broadening our omni-channel strategies, all while identifying savings throughout our sales and other support functions. Moving to Slide number 7, you'll find the trending of our investments in research and development. This quarter, we once again increased our investment in R&D, finishing at $17.5 million, which was 5.1% of sales. We know that the investments with the best ROI are almost always organic investments, and particularly our investments in research and development. We remain committed to new product development, and we have another exciting lineup of products set to launch in fiscal 2025. On Slide number 8, you can see that pre-tax earnings increased 6.9% on a GAAP basis from $63.8 million to $68.2 million. If you exclude amortization from both periods, pre-tax earnings increased 6.6% on a non-GAAP basis from $66.2 million to $70.5 million. Slide number 9 details the trending of earnings and EPS. Here you can see a clear trend of increasing earnings, and you can also see that the fourth quarter is our strongest quarter on record. On both a GAAP and a non-GAAP basis, our fourth quarter EPS was an all-time record high. This quarter's GAAP EPS increased 15% compared to last year, and if you exclude the after-tax impact of amortization from both periods, our fourth quarter non-GAAP EPS increased 14.4% compared to last year. Turning to Slide number 10, you'll find a summary of our cash generation. Operating cash flow increased from $79.3 million in Q4 of last year to $84 million this quarter, and free cash flow continues to be strong at $73.2 million this quarter, compared to $73 million in last year's fourth quarter. Operating cash flow was 151% of net income and free cash flow was 132% of net income this quarter. Slide number 11 details the impact that our historical cash generation has had on our balance sheet. As of July 31, we were in a net cash position of $159.2 million. Our approach to capital allocation is consistent, which is to first use our cash 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. We have the ability to continue to invest throughout the economic cycle so that we're always putting ourselves in the best position to drive future sales and profit growth. Secondly, we focus on consistently increasing our dividends. Yesterday, we announced our 39th 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 we have clear synergies, and also for opportunistic share buybacks when we see a disconnect between intrinsic value and Brady's trading price. Our strong balance sheet puts us in a position to continue to increase our investment in R&D and other organic sales opportunities, acquire companies strategically when the price is right, and return funds to our shareholders through dividends and share buybacks. Slide number 12 provides an overview of our financial results for the full year ended July 31, 2024. Organic sales grew 2.6% and foreign currency translation increased sales 0.2% while the impact of divestitures decreased sales by 2.1% this year. We finished fiscal 2024 with all-time record high GAAP EPS and non-GAAP EPS. These strong earnings results were even after increasing our investment in R&D by more than 10% this year, resulting in the largest annual investment in R&D in company history. We're confident that our actions this year and our consistent priorities will set us up for success in the future, which takes us to our guidance for next year, shown on Slide number 13. We're forecasting GAAP EPS to range from $4.20 to $4.45 per share in fiscal 2025, which would represent an increase of between 2% and 9.3% compared to fiscal 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 an income tax rate of approximately 20%, depreciation and amortization expense of $38 million to $40 million, and capital expenditures of approximately $35 million. Potential risks to our guidance, among others, include potential strengthening of the U.S. dollar, inflationary pressures that we’re unable to offset in a timely manner, or 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 Shaller, CEO

Thanks, Ann. Slide 14 details the financial results of our Americas and Asia region. Sales were $22.85 million this quarter and organic sales growth was 3.4%. Divestitures decreased sales by 2.2% and foreign currency translation reduced sales by another 0.8%, resulting in total sales growth of 0.4% this quarter. Our growth was driven by our product identification, wire identification, and safety and facility identification product lines. We finished the year on a high note in July. We saw a meaningful recovery in our Asia business this quarter with organic growth of 12.3%. We're seeing growth throughout Asia with the exception of China, which declined just over 6% organically this quarter. At approximately 20% organic revenue growth, our expansion in India is driving some of the best numbers at Brady. Meanwhile, the remainder of our operations in Southeast Asia are also performing well. Segment profit in Americas and Asia increased 6.7% to $53.4 million and segment profit as a percentage of sales increased from 22% to 23.3% this quarter. We are delighted with these results, which were generated by a lot of hard work combined with several industry-leading product launches. Turning to Slide 15, the performance of our Europe and Australia region showed sales of $114.9 million this quarter. Organic sales declined 1.8% and the impact of foreign currency translation decreased sales 1.2% for a total decline of 3%. This quarter marked the first decline in organic sales in 13 quarters in our Europe and Australia region, which ended in an impressive streak. Despite the decline in organic sales in Europe and Australia, we still grew segment profit by 4.6% to $19.3 million, and we improved segment profit from 15.6% of sales to 16.8% of sales. We continue to identify opportunities for efficiencies following our regional re-organization that became effective halfway through last year, and we've been able to offset increased pressures through manufacturing efficiencies and targeted price increases. Given the weak macroeconomic picture in that region, I'm incredibly proud of the team's multi-year performance. We believe the long-term prospects in the region are great, and we'll continue to invest in sales resources and geographic expansion through new distributor partners. Our creative approach to solving unique customer problems with our niche solutions will ensure we remain on a positive trajectory in Europe and Australia. Looking ahead to fiscal 2025, we have a lot to look forward to, including several new initiatives that will improve our customers' experience. For instance, our printer cartridges are now enabled with label sense technology. This enables a seamless print experience for our customers where the printer can sense the specific material and print without waste or worry about unique printer configurations. We have fully enabled voice-to-print for our Bluetooth-enabled handheld printers, allowing the technician to simply talk to their phone and print a label without the need to manually enter data. These technology improvements are great examples of product enhancements that help make our customers' lives easier. I'd also like to add background to our acquisition of Gravotech, which we recently closed on August 1. Over half of Brady's business is related to part marking and identification. A key gap in our portfolio was the ability to directly mark on parts without the use of a label. With Gravotech, we now have the ability to direct laser mark in addition to scribing and dot peen marking solutions. These technologies round out our reader printer and labeling solutions to provide a single resource for industrial part identification. Gravotech is headquartered in Lyon, France, and has an international presence in the U.S., Latin America, Europe, and Asia. In fiscal 2025, we're forecasting sales of approximately $125 million, with an EBITDA of approximately $13 million from Gravotech, excluding integration-related costs. Gravotech's high-quality, precision direct marking products fill a gap in identification offerings within Brady's product portfolio. I'm looking forward to expanding our customer reach and providing a more complete set of solutions for our customers with the addition of Gravotech. With that, I'd like to turn it over for Q&A. Operator, would you please provide instructions to our listeners?

Operator, Operator

Our first question comes from Cashen Keeler with Bank of America. Your line is open.

Cashen Keeler, Analyst

Yeah. Hi. Good morning, Russell and Ann. Congrats on the quarter, and thanks for taking my questions. So I guess first off, can you help us a little bit with the cadence of earnings throughout the year? Maybe how that will vary from the first half versus the second half, and then maybe also with that, how can we think about organic growth overall? Is there anything we should be mindful of that will be reasonably consistent throughout the year? And then maybe also with that, can you parse a little bit on organic growth? How much will be coming from underlying demand growth and maybe pricing as well?

Russell Shaller, CEO

There's a lot of questions there. So first, I give the caveat that my crystal ball is not necessarily better than anyone else's out there. So I'll give kind of my personal take. I think we are dealing with a fair amount of industrial investments sitting on the sidelines, depending on which way elections go and what U.S. Energy Policy becomes. We are trying to thread the middle range of possible outcomes, which means we see relatively slow GDP growth in the United States and Europe. To take a step back a bit, Brady traditionally is very dependent on the overall economic health of the underlying countries that we serve. Not too surprisingly, if countries are doing well, there's typically an investment in industrial production and capacity, and we come along with that overall spending since we tend to be a percentage of manufacturing investment in the customers we serve. So what we're looking at in the coming year is more of the same of what we've seen over the past year. It has been, I would say, a little bit of a month-to-month roller coaster. I think some of the distributors and some of our customers are still very tentative in how much capital they're willing to deploy. Certainly, we don't see anybody deferring maintenance or necessary capital expenditures, but at the same time, we don't see too many customers that are all in and deciding to make really significant capital investments. Again, we are waiting to see how the outcome of some of the elections both in Europe and America. So as I look to the future, I think even with a relatively low GDP growth rate, I'm pretty excited about the products we're launching and some of the initiatives we are taking. Our industrial products group, a subset of the overall Americas and Europe, has been clocking in some pretty good numbers. We are looking at mid to high-single digit growth rates, I think, in a relatively stagnant macro environment. So where are we getting that growth? A lot of it is expanding wallet share on the part of our customers. We have been able to continue to sell them and upgrade them and provide new and better use cases. So I believe a lot of our growth continues to come from customers we have, which is most of the industrial companies out there, and getting them to use more Brady products essentially to make their lives easier. Because in many cases, the Brady solution is simply a more effective and efficient way to get the job done, and we are seeing growth. We have a very modest guidance for the coming year. What would make it better is, I think, lower energy prices, particularly in Europe. We see that as a significant headwind for industrial capacity utilization in Europe. To the extent they can get lower energy prices or get their energy under control, we see a better outlook. France, which is traditionally a little more energy-independent than some of the other countries in the region, is experiencing some of our best organic sales growth rates. A significant part of the picture is where energy goes and what is the level of optimism on the part of our customers for overall expansion in their capabilities and industrial production.

Cashen Keeler, Analyst

Got it. Appreciate that. Yeah. Thanks. And then just on Gravotech, what needs to be done to integrate that? And then I think you said the $13 million of EBITDA was excluding integration costs. So is there a figure we can think about in terms of costs associated with integrating that business?

Russell Shaller, CEO

Yeah. So first of all, Gravotech is a very successful company, and that's part of the reason we like it. We're not buying something that requires significant fixes. We're not looking at consolidating operations or anything major. There are a lot of opportunities that Gravotech pursues that Brady traditionally hasn't and vice-versa. We are looking for new customers we can help Gravotech get to and what new customers Gravotech can pull us into. We are definitely seeing that in some of the use cases. Yes, there are always some minor things that need to happen in terms of consolidating back office operations and ensuring they are on the same ERP system, etc. In the grand scheme of things, those are relatively small issues. I don't anticipate any consolidation of major operations. There will be tweaks here and there. At the same time, what we're excited about is we believe we can bring some R&D to Gravotech and enhance their capabilities with some of the core software that Brady has already developed. Like any acquisition, I think the first 12 to 18 months is a little bit slow as you get all the pieces put together. But after that, we see a really strong business case for the combined entity.

Cashen Keeler, Analyst

Got it. Understood. And then the last one, if I can, just on buybacks. Is there a specific number you're looking to target next year? And then maybe also on that, what opportunities do you have in front of you in terms of capital deployment from an organic perspective? And I know you just did Gravotech, but maybe any areas in the portfolio you'd look to grow inorganically as well?

Russell Shaller, CEO

Yeah. Sure. So the stock buybacks are almost a double-edged sword. In some regards, we don't want them because that means that the market perceives our share price as undervalued. Do we have a target? Yes, we've authorized $100 million in share buybacks. However, as in the past, we've been very disciplined in using that money. If the stock goes to a certain trading range, we'll start buying shares. But if we consider it's fairly valued or not much of a discount to our cash flow, we'll keep our money. Again, my overall preference, unless the share price is significantly devalued, is to reinvest in the company, either organically or through M&A. We continue to look at it. It will certainly be in either the materials space, as we use our materials capability to drive a lot of our unique product differentiation, or in areas that enhance our ability to do part marking and part identification. If opportunities become available at a price that meets our financial objectives, then we could very well see acquisitions in the future.

Operator, Operator

Thank you. Our next question comes from Keith Housum with Northcoast Research. Your line is open.

Keith Housum, Analyst

Good morning, guys, and congratulations on a solid quarter. Russell, in terms of the Track & Trace initiatives you are working on. I know that earlier this year, the V4500 came out as a data scanner. Can you talk about the progress of that initiative? Perhaps, can you give some insight on the early adoption or acceptance by the market?

Russell Shaller, CEO

Yeah. We feel very good about the adoption of the product. For us, it's building out a complete portfolio, which now will include lasers too. Our goal, and if you take a step back at what manufacturing needs to do, is to be able to identify a part, uniquely trace it through the manufacturing floor, and read it at various steps along the way before it’s incorporated into another product or sent out the door to a customer. We want to be there at every step of that journey; while distribution is not our core business, we aim to support the entire manufacturing process. In our industrial products, we are doing well overall. Our products are designed to work seamlessly with one another, similar to the Windows Office experience. We aim for immediate out-of-the-box usage. Many products require extensive software integration and setup, while our goal is to allow all of our products to plug and play and be used in minutes with minimal skill. I am excited about the launch of more products that will enhance this ease of use for our customers.

Keith Housum, Analyst

With the printers and cartridges being a big part of your business, do you anticipate that these will accelerate the refresh cycle for printers currently in use, as well as expand the addressable market?

Russell Shaller, CEO

Yes. Virtually all of our printers have been refreshed and now work with Label Sense technology, certainly all of our core products. Label Sense technology allows the printers to identify unique materials without requiring extensive setup from our customers. This can save customers a significant amount of time and effort, reducing waste and improving efficiency. We've put significant effort into our R&D and product management teams to make sure this works across numerous material and printer combinations.

Keith Housum, Analyst

Is there a Rule of Thumb in terms of price increase for this technology compared to the prior generation?

Russell Shaller, CEO

We are not pushing the price with this. The products are fantastic, and I think the value proposition for our customers is strong. We're not trying to extract more from them. Our goal is to get customers excited and make it easier for them to use our products. I believe we are most successful when it is a win-win situation, enabling our customers to perform their jobs more easily while maintaining a fair economic environment.

Keith Housum, Analyst

One more question, if you don't mind. Your SG&A was at its most efficient level for you this fourth quarter. Was there anything unique in this quarter that suggests this trend won't repeat in FY '25?

Russell Shaller, CEO

There were some small fluctuations, but overall, we expect SG&A to generally improve as we work through our efficiency initiatives. Ann, do you have any commentary on that?

Ann Thornton, CFO

Yes. There was nothing unusual in this quarter or this year. We expect to continue working on our initiatives, which may cause minor fluctuations in SG&A but overall a downward trajectory as we identify further efficiency opportunities.

Keith Housum, Analyst

Right. And this all excludes Gravotech, of course. That will change the dynamics a little.

Ann Thornton, CFO

Exactly.

Steve Ferazani, Analyst

Good morning, Russell. Good morning, Ann. I want to ask about your progress in Southeast Asia and India. Given back two to three years, those were practically greenfield opportunities for you. Can you give us a sense of how much traction you've gained and what the potential might look like over the next three to five years?

Russell Shaller, CEO

Yes. Starting about 10 years ago, India began as a very small opportunity for us. Thanks to the leadership team in both India and Southeast Asia, they are benefiting from some relocation out of China and the overall economic growth in those regions. Over the last few years, we've added a second plant in India. We are seeing positive results from these investments, with growth of approximately 20% year-over-year. This is on top of a low double-digit growth trajectory. We continue to invest in China as well. If we maintain this growth trajectory, it's possible we will open a third plant there. Overall, we feel very optimistic about our growth in both India and Southeast Asia.

Steve Ferazani, Analyst

Do you have to customize the products by market? What they might buy in Vietnam or India might differ from what is purchased in the U.S. or the UK?

Russell Shaller, CEO

Absolutely. However, it's less about unique products for each country and more about modifying the product mix based on the local market needs. Brady has a large portfolio of products, around 2,000 that we actively sell, with many others that are less common. For instance, in India, demand for glow-in-the-dark signage and tapes has increased due to energy concerns. Our automation solutions tend to sell more in higher-cost regions compared to lower-cost areas. Each country chooses products based on their unique needs and the economic landscape.

Steve Ferazani, Analyst

That’s helpful. If we could flip over to Europe, the results were a bit surprising in 3Q as Europe was particularly strong. Can you provide more insight into the difference between 3Q and 4Q, and how that may affect your strategy moving forward?

Russell Shaller, CEO

Yes. The variability we see from quarter to quarter can lead to shifting results. Our third-quarter results exceeded expectations, while the fourth-quarter results were lower than predicted. Overall, the results are reflective of the European economy's performance for the year. We have seen significant variances in performance among countries. For instance, France has performed well, while Germany and the UK are experiencing some challenges. Despite the decline in the fourth quarter, I'm optimistic for continued growth in Europe. Our management team there is well-equipped and experienced in navigating these fluctuations, and I am excited about the upcoming opportunities.

Steve Ferazani, Analyst

Great. You're guiding for CapEx to drop down to $35 million, which again is reasonable to expect cash conversion is back towards 100% or more. Ann?

Russell Shaller, CEO

Yes. The only fluctuations usually come from acquisitions. Last year, we had significant expenditures from converting a rental property to an owned one. However, our capital needs are quite modest, so we expect cash generation to correlate closely to profit generation.

Steve Ferazani, Analyst

If guidance plays out, you will build cash quickly again this year. You bought back stock at around $56. Given the current price, are you comfortable with building up your cash position if that is how it plays out?

Russell Shaller, CEO

Yes, the cash has to go somewhere. I don’t want it burning a hole in our pocket. I'm not going to buy something at a P/E of 25. My preference is to maintain a zero or minimal debt position. That said, I will not throw money away either. Our history shows we are disciplined in cash deployment. If capital builds up and there are no acquisition opportunities available, I am comfortable maintaining that cash reserve. Nonetheless, we are prepared to capitalize on significant acquisition opportunities should they arise.

Operator, Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Russell Shaller, President, and CEO, for closing remarks.

Russell Shaller, CEO

Great. Thanks everyone for your time and your questions. We performed well this year with another record quarter and record year of earnings per share and cash generation. We're investing in our organic business through our sales force and made the largest investment in R&D in the company's history this year. We expect these investments will continue to drive sales growth into the long term. We're also in an incredibly strong financial position. Fiscal '21, '22, '23, and now '24 were all record years for EPS, and we are once again guiding to another strong year in 2025. The macroeconomic landscape constantly changes, but our approach is to control what we can while focusing on our success formula, 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 confident in our global team's ability to overcome challenges, think creatively, and continue delivering results. Thank you for your time this morning and for your interest in Brady. Operator, you may disconnect the call.

Operator, Operator

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