Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 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. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Ann Thornton, Chief Accounting Officer. Thank you. Please go ahead, ma'am.

Thank you very much. Good morning and welcome to the Brady Corporation fiscal 2020 third 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 the forward-looking statements. It's important to note that forward-looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release this morning and in Brady's fiscal 2020 third quarter Form 10-Q, which was filed with the SEC this morning. 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, Michael Nauman. Michael?

Thank you, Ann. Good morning, everyone and thank you all for joining us today. This morning we released our fiscal 2020 third quarter financial results. This is far from a normal quarter and we are not in normal times. But under the circumstances, our results were strong. Before we get too deep in, I would like to thank all the 6,000 Brady employees across the globe. The Brady team really stepped up and provided many necessary products to our frontline healthcare workers and other critical industries to support the worldwide fight of the COVID-19 virus. Brady is an essential business. We support first responders, healthcare workers, food processing companies, logistics companies, and all sixteen of the federally designated critical infrastructure sectors. Our team has worked tirelessly to help solve our customers’ problems, manufacture and deliver the products that they need and to provide the best possible service. I am extremely proud of how our products help keep the world safe and I am extremely proud of how all of our Brady employees embrace our core values each and every day. It’s our people that truly make Brady a great company. They are living our motto, making the world better and safer every day. Our products are used throughout the world to help hospitals and laboratories identify and track samples and medical equipment and to identify and keep patients safe. Our products are used to help businesses and governments with social distancing. Our signage is used all around the globe to help provide a safe work environment when employees return to work and our products are used to help companies identify and track their assets when they have employees working at home. Brady’s safety and identification products are definitely in demand during these challenging times. Brady’s operations are currently open worldwide.…

Thank you, Michael, and good morning, everyone. The financial review starts on Slide number 4. Sales in the third quarter were $265.9 million, which consisted of an organic sales decline of 6% and a decline of 2.2% from foreign currency translation. Pretax income decline 45.9%, while diluted EPS declined 60% to $0.26, compared to $0.65 in last year’s third quarter. Pretax earnings were impacted by $13.8 million of non-cash impairment charges against trade names and other long lived assets this quarter. The largest component of these charges was an impairment of trade names in one of our WPS America’s businesses where we primarily serve small companies such as restaurants, salons and other small retail shops, many of which were completely shut down in March and April. Excluding these impairment charges, our third quarter pretax earnings would have been down 12.2%. Diluted EPS was also impacted by these impairment charges which amounted to approximately $11.1 million after tax and our tax rate was higher than normal as well at 38.5% this quarter, primarily because we recorded a valuation allowance against certain tax credit carry forwards. If you exclude these impairment charges and normalize the tax rate to a projected longer-term tax rate of 20%, EPS would have been approximately $0.54 this quarter a decrease of 11.5% versus Q3 of last year. This quarter we also incurred expenses including severance charges, the write-down of previously capitalized catalogue cost and labor cost where we were paying employees who are not able to work due to stay at home orders. We also closed two small facilities and recorded the appropriate shutdown cost of this quarter. All of these incremental costs were effectively offset by reduced incentive-based compensation, which we reduced this quarter because we no longer anticipate the same level of fiscal 2020 annual…

Thank you, Aaron. Slide number 14 outlines the first quarter financial results for our Identification Solutions business. IDS sales declined 9.7% finishing at $193.2 million with an organic sales decline of 8.2% and a decrease from foreign currency translation of 1.5%. Our IDS business grew 2.2% organically through March and then declined 27.6% in April when the full impact of European and North American companies shutting down was felt. We believe that part of the growth through March was due to distributors increasing inventory levels. And we also believe that the large decline in April was partially due to some level of destocking at these same distributors. We experienced modest organic sales growth in Asia this quarter, as most of the countries in the region opened up sooner than they did in Europe and North America. Organic sales to both Europe and the U.S. grew through March and then declined by more than 20% in April. Although we started to see for it appears to be stabilization of order patterns in May, our order intake is still well below prior year levels indicating that May will also be a challenging month. A side effect of the COVID-19 pandemic in the U.S. is that elective surgery and hospital admissions were down significantly in the quarter, especially, late in the quarter. As a result, sales for our healthcare product line decreased in the low-teens this quarter. We took many cost actions in our IDS business to counteract this revenue decline in April and we incurred certain expenses in the IDS segment in direct response to these reduced revenue levels such as severance. However, these additional costs were also more than offset by reduced incentive-based compensation this quarter. IDS segment profit was $36.4 million, compared to $39.9 million in last year’s third quarter.…

[Operator Instructions] I show our first question comes from Allison Poliniak from Wells Fargo. Please go ahead.

Hi guys, good morning. I want to talk about WPS. I know one of your focus areas has been more of this consulting or full service approach. I mean, just given what’s going on, can you maybe talk about what you are seeing across Asia and then Europe and North America in terms of enquiries around that? Is that increasing for you where I think you gain better share doing this?

Good morning, Allison. What I will tell you is we mentioned our revenue just from COVID and a lot of that comes from consultive efforts and interactions is up 11 million. I want to be very clear, that is what we can determine easily and in a defined manner. We do sell a lot of products that is not intuitively guaranteed that it’s COVID. But we are seeing there’s indications that more of our business is being sustained by that as well. And that comes from our ability to – as you pointed out, consultively interact with our customers. We are also seeing improved revenue from other product lines, because of our COVID interactions and the discussions we have about a total approach to servicing their safety needs. So, we’ve actually seen an increase of COVID to this, but actually more importantly, we’ve seen an increase of non-COVID products as the customer looks at the total safety package that they need to handle as we turn to this problem. The final thing I would like to say is, the fact that we’ve – now we are up to over 22,000 new customers is not accidental. That is part of this effort and is a direct result of a disconnect in the world that allows us to really penetrate many more customers that we expect to continue to consult with and to sell to as we not only move through the transitions, but out of the transitions of this phase.

That’s helpful. And I just want to go back to your comment on inventory levels in terms of stocking and then sort of this destocking phenomenon that happen. Do you feel like you have stabilized that or are you seeing, and I would assume just given your comments around sales that maybe that’s behind us. Any color that you can provide there?

Right. So, for inventory levels, for the IDS business with their distributors, we did see what we believe was wise stocking by our distributors. If you recall that period of the pandemic around the globe, people were very uncertain about supply chains. And although Brady supply chain is extremely strong, our distributors were looking across the board and we believe we are bringing in more stock frontloading it just as we were by the way, during that time period. The end result, as they feel more confident particularly in suppliers like us, they obviously want to destock, because they have stocked up we believe for this and they want to bring it back to more normal levels. We do think that we have flattened out at this point in our ordering levels. We see a trend now that we can say we believe is a flattening. But it is obviously at April levels as opposed to higher levels.

Great. Thank you. I’ll pass it along.

Thank you, Allison.

Thank you. I show our next question comes from George Staphos from Bank of America. Please go ahead.

Hi, Michael. Hi, Aaron. This is actually Molly Baum sitting in for George Staphos, He had a conflicting call. I want to start with a question on IDS. And so, last quarter IDS in Asia was down mid-single digits and this quarter it was up modestly. Do you view Asia as an early indicator of what maybe we could expect to see as Americas or in Europe kind of as these social distancing regulations and guidelines sort of start to ease a bit? Thank you.

Thank you, Molly. Appreciate the question. It’s a crystal ball type question obviously, much of China’s sales come both internally and externally. And so, their internal economy is strengthening and they are selling more to western companies than they were obviously when they were shut down for the pandemic. There is always a concern that you could see some downturn related to western companies and they are shutdown and they are slowing down, because, obviously, a large part of that economy is dependent on that. That said, I do believe western economies are opening up. We’ve seen Europe opening up. We are seeing the United States opening up. And so at this point, we are hoping to see some stabilization that doesn’t mean, you won’t see ripples during the process.

Understood. Thank you. I appreciate the additional color there. And then my second question and I apologize probably another crystal ball one. But I appreciate the volatility in the markets right now, but it did sound like maybe you saw some stabilization in May relative to April. I was just hoping to get some additional clarification on maybe some of the trends there, the uncertainty that kind of gets you pause to your performance in the last quarter of the year and really kind of what leads you withdraw your guidance? Whether there is, what potential sources of upside or downside there might be? Thank you.

Well, Molly, as you financially lived through this crisis as the rest of us have, you watched the companies and what’s going on. I do realize industrial were one of the early indicators of April results, but April results were dramatically down for us and we are a broad indicator of the industrial economy at large. We actually sell to every SIC code there is. So, we can typically see an awful lot indicators, also, we don’t have ever a long backlog. We typically book and ship very quickly. So, in one hand I can’t tell you what July is going to look like, in the other hand, I can see the different industries that are impacted and how they are impacted. No surprise to you or anybody else on this call. Aerospace is struggling tremendously. The automotive industry is trying to get back up and going. But they are facing their challenges. Areas like leisure and entertainment that can only be described as a short to medium-term disaster. So, as the results, even though we are seeing a flattening of our bookings which is good, that we are seeing that they are stabilizing we don’t want to pre-predict how all of these different industries are going to react and as I said in the case of China, we may see ripples. That will ripple through very quickly to our Asian business as well. And although we feel very strongly that our Australian business is going to continue to do well, we aren’t sure exactly how much better they’ll do. We certainly commend them, incredible team with 30% growth last quarter. But we don’t expect that to happen again this quarter as an example.

Okay. Gotcha. Thank you. I’ll turn it over. Thanks.

Thank you, Molly.

Thank you. I show our next question comes from Joe Mondillo from Sidoti Capital. Please go ahead.

Good morning everyone.

Good morning, Joe. How are you sir?

Doing good.

Yes sir.

So, just a follow-up on Molly’s question regarding Asia and specifically China. We are hearing a little about a potential second wave and some shutdowns that are happening in part of the country. Are you feeling any of the effects from there? And what are your thoughts on what’s going on? What the economy over there given that?

Well I definitely don’t want to be a news reporter, but I believe those are the regions that are close to the Russian border and areas like that. We don’t do a tremendous amount of business in that region. So I honestly couldn’t comment specifically about those latest impacts. I can say this, I think that our team in China has done an incredible job. They got back to work very, very quickly, They brought the business back up significantly in a rapid and thoughtful manner. And I think even if we do see some downturn there again. I think it will mainly be from western business reductions as opposed to shutdowns. But once again, that is a crystal ball statement. So I want to be careful about letting you know that I certainly don’t have brilliant insights on particularly that region of China.

Okay. Understood. Your comments on bookings sort of stabilizing in May. Is that just an overall the last three weeks in May comment or when you look week-to-week and I never really want to talk week-to-week, but this thing is just changing so quickly. And so, I am just curious, was that a generalized comment on overall May? Or has anything changed over the last three weeks in May?

So, first of all, yes, I never comment on day-to-day. I never react to day-to-day issue, as you could imagine, even looking at a holiday will give you a gut-wrenching feeling that every bit of business is shutdown and then you realize Europe is on a holiday today. So, you are right. Never wise to look at the very short-term. We are looking at trends and our trends show two things. One, that we’ve been actually much more stable in the gyration. So if you looked at April, our sales were going up and down like a rollercoaster in the month of April. Much more stable in May and they stabilized at a consistent level, as we said, at approximately the revenue level of April.

Okay. Great. And then, regarding your cost reductions, just a couple questions. You mentioned headcount and facility closures. Of all of that, is there any way you can quantify what is permanent cost that you took out in the quarter?

Yes. It’s a real challenge for us to determine what’s permanent versus temporary. I mean, right now many of our cost reductions was, I’ll say, on a surface would fall into the temporary camp. So think, travel, employees on furlough, et cetera, because of course, we want to make sure that we can balance the need to drive cash flow today without harming our future. But we’ve also of course, reduce some permanent costs as well, such as the system implementation that Michael mentioned, the facility closures that I mentioned. However, right now, and frankly it’s quite difficult to comment how much is permanent versus how much is temporary. It’s a really blurry line. I mean, for instance, we don’t believe that the same level of catalogue cost that we incurred prior to COVID-19 will ever come back as an example. So, catalogue drops will definitely increase in the future, but how much and at what geographies, we just flad out don’t know the answer to that yet. So, basically as you think about our cost structure, really the key to take away is that we remain committed to driving efficiencies and as you can see in areas like SG&A, we have a strong track record of reducing costs consistently and sustainable. And frankly, we anticipate that that will continue into the future. But it’s – again, from a crystal ball standpoint, it’s really tough to determine exactly how much and when and where.

Okay. Understood. Regarding the facility closures, you guys still – you mentioned those were too small facilities even beyond that, you have a – I believe a ton of facilities around the world. Could you talk about your manufacturing footprints and if there is any further opportunities to make any sort of structural - more structural changes like that?

So, Joe, I would actually say, that’s one of our incredible strengths. As you look at this downturn, and you look at companies that struggled getting out products, we were not one of them. We have been working hard to get closer to our customers, both from a sales perspective, from a product development perspective, but also from a manufacturing perspective. So, the one thing, as we look at making sure our facilities are robust, we are not going to do and that is moved farther away from our customers. I actually think we are three years ahead of the world as a result of this pandemic in making sure that the supply line to our customers is very short and very strong. We are trying to increase our ability to supply products from two weeks to overnight in some specific cases and we were doing that before this pandemic hit and we are going to continue to do this. I will say that obviously we did shutter a couple of very small facilities. But - and we will continue to look at that, but the one thing we aren’t going to do is move farther away from our customers. I think it’s been an incredible strength of ours that we can ship overnight in some of the most challenged regions in the world and yet we were still shipping to people who are desperate for our products.

Okay. Understood. Well, thanks a lot. Thanks for taking my questions and hope everyone is well. Thanks.

Thank you, Joe. Thanks for your time.

Thank you. Our next question comes from Keith Housum from Northcoast Research. Please go ahead.

Good morning everyone. Thanks for the questions. Michael, just trying to understand a little bit more the impact that April had on IDS and WPS. I understand that perhaps the destocking impact on IDS, but there was the significant difference between the two segments. Can you provide a little bit more color about perhaps why that was? And is that $11 million that you think, plus from the COVID-19 impact, that impact more IDS or WPS?

That was almost – all right, so, the $11 million that we are actually designated was almost all from WPS. It is much, much more challenging for us to be able to determine whether it was used for COVID or not in IDS. So let me give you an example. If we look at floor markings, if the floor marking has stay away 6 feet on it, I can clearly determine that's COVID. But the vast majority of IDS' floor marking does not specifically say that, but it could very well be used for this, particularly when factories are shutdown. We just are not going to call out a number that we can stand behind. So, yes, I do though, that said, believe WPS' model of super rapid response, super innovative capabilities. In some of our locations, I was receiving updates from my – the team that was so proud, because they had reduced two day delivery during the height of the pandemic to overnight and literally, 95% of their products were going out overnight when 70% of their products had been going out in two days and their volumes were up. So, I think WPS did have a better ability through their customization, their rapid turn to really respond and to cover the holes caused by regular industrial business being down.

Got it. Appreciate it. And in Australia, just a phenomenal quarter, and I know - and I appreciate you don't expect that to necessarily replicate at those levels. But can you provide some more color about what they did previously? I understand that COVID didn't have strong of an impact there, but what else they did differently there that, I guess, is it replicable to the rest of the company?

Well, what I will tell you, they are a very tight-knit team. They are all co-located and we do have a first facility. So, I don't want to first on the call, most of them are co-located in Sydney. But they were able to do a tremendous job of leveraging all the capabilities of our other groups around the world and by the way Keith, I would say, that that's something we couldn't have done a few years ago. The cooperation between regions, between divisions, between businesses during this downturn has been extraordinary. They were also able to speed up their processes tremendously. One example is, if you look at the banner that goes on websites, they were doing stand-up meetings. So, remote stand-up meetings every two hours, because they were running out of product on a two-hour basis to change their banner, whereas normally they would do that banner change about every two weeks. So, they sped up their process. They sped up the thoughts. They sped up their ability. They also really did a great job of getting products in North America in particular. Some of the PPE products we've struggled to get in, in a way that other regions have been able to get in and Australia just did a tremendous job in everything from masks, to gowns, to first-aid kits, to gloves. I mean, you name it, they were able to provide those to their customer base, as by the way was Europe, much more to an extent, North America has been very, very challenged, not just Brady and WPS, but in general.

Great, thanks. And if I could squeeze one more in here, the impairment was related to, what I understand, trade names in terms of some of the brands you sold to the SMBs. How much of your overall business would you clarify as sold SMBs versus say large customers?

Yes, we don't look at that quite frankly. And I don't know that I'd break it out if I did look at it. I will tell you that in one particular business, which is not a large business of ours, but large enough that had a big impact, it is a significant 75% plus of that business, and when you do that, what I will tell you, incredibly proud of the way that team quickly responded, introduced new COVID-related products, really made sure they were reaching the customers they could in the way they could. And as we come out of this, I think they are going to be able to be like Phoenix rising from the ashes, well that's at least our hope because of just how well they handled it, turned and changed their approaches and philosophies. And although, we know very small businesses in North America are going to be challenged. I mean, I've heard numbers of restaurants that say 40% may not come back. Once again, I am not a news reporter, but those are the type of numbers we are hearing and if you look at retail, I've been told small retail businesses are going to be even more impacted. So it will be a challenge to come back, but we will help and support those businesses as much as we can in any way that we can as they come back to social distance, to handle hygiene, all the challenges. But the last thing is small business owner who is struggling with cash, employee issues, getting customers back, needs to worry about. Keith, I am very proud that although we don't break it out, we are a backbone of support to those type of businesses in America and around the world and that makes you proud, because our job is to make it easier and to give our customers a safer, more reliable environment.

Yes. Thanks, Michael. I appreciate. Good luck to all of you.

Thank you, sir. Have a good day. Thank you.

Thank you. Our next question comes from George Staphos from Bank of America. Please go ahead.

Hi guys. Thanks for taking my follow-up question again. So, the first question I wanted to ask and they are both kind of related to capital allocation. You guys had a pretty decent sized share repurchases this quarter and we've heard a lot of other companies in space talking about suspending share repurchase, just in light of all the uncertainty around COVID. And I am curious how you are thinking about value return through the remainder of the year until maybe we get some more clarity in terms of what's going on with the pandemic? Thanks.

Thank you, Molly. I would say, we don't change our philosophy based on temporary circumstances. We clearly haven't and won't. We have a very consistent capital allocation strategy. The strength of our balance sheet allows us to continue to do that and we are actually accelerating anywhere we can. So, our first goal is to reinvest in our businesses and I think you heard unequivocally, I have challenged every leader in our company to find ROI positive investment and to be making them and making them quickly. And the great part about that is, I've seen that actually happening. People are speeding up their processes and I look at the big ones obviously and everyone I see, I'm excited about. So, the second area that we work on is our dividend. As Aaron already reflected, we declared our dividend. We have 34 straight years of increasing that dividend. That's another area that we are looking at long-term, not short-term. And then, we take a look at the share buybacks. And as you saw, we bought back this quarter. We were getting nailed in the very peak of the cycle for two things. One, we weren't buying companies at super high multiples when they were at their highest profit level. And two, we weren't buying back Brady's stock at, I think we peaked at about $59.50. And my answer to both those questions are consistent with what I am going to tell you now, we don't value our stock. That's not our job. That's the job of our investors. Though we create value, we ask you to determine it. We do though, when we see a disconnect - a significant disconnect, like the buyback our stock as a way to improve our overall return for our shareholders. We feel very good about that. That philosophy didn't change before the downturn, isn't going to change during the downturn, and won't change after the downturn. And then the final factor which you didn't ask, but it's the end of the capital allocation is on acquisitions. Once again, we were getting nailed. That said, we are not in a hurry to spend cash. It doesn't burn a hole in our pocket. What we do care about is getting great technology in our company that we can create on our own in a cost-effective manner. And so, we have a large list of companies that we talk to, interact with and research and as the time is right and they are right, we are going to continue to work in that direction. That said, we are not going to catch a falling knife. We are not going to look to see if we can be a fixer up or special. We want strength of technology, strength of opportunity, good organization. So, Molly, I hope that answers your question. I think I added a little more to it. But it's a pretty holistic approach that we have and it's a very long-term approach that we have.

That definitely answered my question. My second one was going to be about M&A, but you answered that one as well. So I appreciate. I'll turn it over. But thank you for the detail.

Sorry about that Molly. Thank you, though.

No worries at all. Thank you.

Thank you. I show no further questions in the queue, sir. At this time, I like to turn the call over to Mr. Michael Nauman, President and CEO for closing remarks.

Thank you so much. I'd like to leave you with a few concluding comments this morning. While the timing may be uncertain, this pandemic will eventually subside and we will return to an increased level of economic activity. When this happens, it will not be business as usual. The demand for certain of our identification and safety products has increased and we believe that certain changes in buying habits have accelerated as well. We also believe that this pandemic will impact supply chains for many years to come as companies reassess their dependency on certain countries or geographies. Companies will work to eliminate situations for the supply of critical components, lack of redundancy and resiliency. We believe that we are very well positioned to benefit from these changes. Although these challenges maybe short-term, our opportunities are long-term. We have been investing in new products and we have gained many new customers. In short, we are very positive about Brady's future. Please stay safe and thank you for your time this morning. Have a great day. Operator, you may disconnect the call.

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.