00:02 Thank you for standing by, and welcome to the Q1 twenty twenty two Brady Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] As a reminder, today's conference call is being recorded. 00:21 I would now like to turn the conference to your host, Ms. Ann Thornton. Ma'am, you may begin.

00:25 Thank you. Good morning and welcome to the Brady Corporation fiscal twenty twenty two first quarter earnings conference call. The slides for this morning's call are located on our website at www.bradycorp.com/investors. 00:38 We will begin our prepared remarks on slide number three. Please note that during this call we may make comments about forward-looking information. Words such as expect, will, may, believe, forecast and anticipate are just a few examples of words identifying a forward-looking statement. 00:53 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 twenty twenty one Form 10-K, which was filed with the SEC in September. 01:11 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. 01:25 I'll now turn the call over to Brady's President and Chief Executive Officer, Michael Nauman. Michael?

01:31 Thank you, Ann. Good morning and thank you all for joining us today. This morning, we released our fiscal twenty twenty two first quarter financial results, which showed strong sales growth and profitability. Even in this challenging environment caused by the ongoing impacts of the COVID-19 virus and the associated inflation and logistical challenges, the Brady team once again performed quite well. I'm proud of how the team was able to navigate this challenging economic environment and deliver for both our customers and our shareholders. 02:08 This quarter, we grew sales by a very healthy sixteen percent and we increased earnings per share by four point seven percent. If you exclude the impact of amortization, then our EPS was up even more significantly at nine point one percent. In addition to this solid revenue and earnings growth, we have a rock solid balance sheet. This quarter we returned more than thirty million dollars to our shareholders in the form of dividends and buybacks, and we are still in a net cash position of more than ninety million dollars. 02:41 In our WPS business, sales were down by seven point eight percent. This sales reduction was almost exclusively the result of very challenging comparables. Last year, our WPS team did an excellent job of providing COVID-related products to our customers. The sale of these products, which included social distance signage and personal protective equipment has since waned, thus resulting in challenging comparables. The best way to look at our WPS business is to compare sales to the pre-COVID period of fiscal twenty twenty, which would show that our current sales levels exceeded those historic pre-COVID levels. 03:24 In our Identification Solutions business, we continue to post excellent results, with sales growth of twenty five point four percent and segment profit…

09:14 Thank you, Michael. Good morning, everyone, and thank you for joining us this morning. I'll start the financial review on slide number three. Sales in the first quarter were three hundred and twenty one point five million dollars, which was an increase of sixteen percent when compared to the same quarter last year and GAAP pre-tax earnings increased five point eight percent to forty four point seven million dollars. 09:37 Impacting earnings this quarter was a significant increase in amortization expense from the acquisitions completed at the end of last year. If you exclude amortization expense from all periods presented, and our pre-tax earnings would have increased by eleven point three percent to forty eight point five million dollars. 09:57 GAAP diluted EPS was zero point sixty seven dollars, which was an increase of four point seven percent over last year's first quarter. And if you exclude amortization expense, then EPS would have increased by nine point one percent to zero point seventy two dollars this quarter compared to zero point sixty six dollars in the first quarter of last year. So, financially, Q1 was another strong quarter even with the logistical challenges and the inflationary pressures that Michael just mentioned. 10:27 Moving to slide number four, you will find our quarterly sales trends. Our sixteen percent sales increase consisted of organic sales growth of seven percent, an increase from acquisitions of eight point three percent, and an increase from foreign currency translation of zero point seven percent. 10:44 Organic sales growth in our ID Solutions business was a robust thirteen point two percent in Q1. Our Workplace Safety business benefited from strong COVID-related product sales in last year's first quarter thus creating tough comparables. As a result of these tough comparables, we saw a decline in WPS organic…

19:52 Thank you, Aaron. Slide number thirteen outlines the first quarter financial results for our Identification Solutions business. IDS sales increased twenty five point four percent to two hundred and forty eight point six million dollars. This very robust sales growth is comprised of organic growth of thirteen point two percent, acquisition growth of eleven point six percent and an increase of zero point six percent from foreign currency translation. 20:20 Organic sales in our IDS division were once again very strong, not only versus the first quarter of last year, but also against previous sequential quarters. And on the cost side, our strong focus on sustainable efficiency gains partially offset the input cost increases that we've been experiencing. 20:39 Segment profit as a percentage of sales was nineteen point six percent, which was down from twenty point three percent last year. However, if you exclude the sizable increase in amortization that Aaron mentioned, then segment profit as a percentage of sales would have increased from twenty one percent of sales to twenty one point one percent of sales, so an increase of about ten basis points compared to the first quarter of last year. 21:07 Regionally, organic sales in Asia were strong this quarter with growth of over fifteen percent compared to the first quarter of last year. This is the fourth consecutive quarter of Asian organic sales growth in excess of 10%. Organic sales were also up more than fifteen percent in EMEA, despite several lockdowns continuing throughout most of the first quarter. Our European team once again did an excellent job driving sales growth while handling the period interruptions caused by the lockdowns. 21:39 We also had organic sales growth of nearly twelve percent in the Americas. We saw growth in all product lines and geographies throughout…

30:20 Thank you. [Operator Instructions] Our first question comes from Michael McGinn at Wells Fargo. Your line is open.

30:37 Hey. Good morning, everybody.

30:38 Good morning, Michael.

30:42 I wanted to go -- talk about Workplace Safety for a second. So, you mentioned sales are kind of in line with those pre-COVID levels and I'm wondering, if holding the line on the Workplace Safety business those sales, is the goal versus Identification Solutions, if you strip out the acquisitions, it's materially above pre-COVID levels, is Workplace Safety core to shareholder value?

31:12 Great question, Michael. We are working hard to really change the profile of WPS in a significant and meaningful way. We are investing significantly in R&D, we're investing in in-sourcing key products, we're investing in getting closer to our customers. We believe that we have a value-add equation there that is unique in the marketplace as we execute these changes. It is going to take time. We are already down that path. We're excited about what we see from that. But this is not a quick situation and they have also been plagued more significantly than IDS, in that, A, a much larger percentage of their products are brought in, and B, a much larger percentage of their products come from Asia. So, they have a both logistical and cost pressures there. So, we absolutely see more short-term difficulties in that business, but we do believe that it is a business that overall, we can continue to provide significant shareholder value over the long term. That said, I want to be clear on all of our businesses, we evaluate our portfolio. We have in the past looked at some businesses that didn't make sense putting into our portfolio. We will continue to do that. We are very strongly cognizant of our critical need to make sure that we're always providing our shareholders with the most significant return for their investment.

32:48 Great. And then switching gears to the gross margin conversation and the chips, you mentioned being able to kind of maybe hold the line up fifty percent gross margin last quarter, not a whole lot of noise from chips and you mentioned being proactive. What change quarter-to-quarter and does this current situation alleviate or does it push you to make more of an eighty, twenty portfolio pruning approach to you need to sunset some legacy products here to kind of make way for the newer product suites?

33:22 It's excellent. Things are changing rapidly. I'm sure you're hearing that across the board. We have very good connections throughout all industrial business space and we know that what we're dealing with is certainly not unique. But the challenges of logistics, as I mentioned last quarter, I believe hopefully I did, I'd have to go back and listen to the tape. We do think will last for eighteen to twenty four months, that is not a guarantee of timing, but it is our latest belief and our continued latest belief on how this will impact things. 34:01 What that means is product sets, even in IDS that are more dependent, we have those on Asian imported products are dealing with much larger sourcing difficulties and also timing difficulties. We have made a lot of proactive steps. I know for a fact that in many ways we're able to service our customers better than our competition today and it is our goal to continue to do that. 34:29 But as far as pruning products, we look at that regularly. Throughout my tenure at Brady, we've pruned a number of products and continue to look at that cycle, and make sure we're offering our customers the best and the brightest. As an example, with our printers years ago when I first got here, we would allow the products to really just run to life before developing new ones. 34:52 We have an extremely strong pipeline, roadmap, and we make sure that we are always upgrading our products on a reliable basis. So, we never experienced that. So, we've created a very natural pruning process with all of our products that really look at life cycle capabilities. So, for instance, things like software upgraded, much more rapidly firmware and then hardware and we have a cadence depending on the product sets and the markets to do that. 35:25 But to be unequivocal, yes, we are taking this opportunity to look at all of our products to make sure that it's a product that still makes sense in the long-term marketplace. As you come out of a downturn like a pandemic or any other downturn or you look at our workplace changes that have come out of this, you have to be cognizant of the fact that our customers do have changing needs. And we believe a lot of our products are becoming more digital, more focused on interconnectivity re system approach, and therefore that does lead to pruning in the other direction as well.

36:00 Appreciate the time.

36:02 Thank you, sir.

36:04 Thank you. Our next question comes from Steve Ferazani of Sidoti. Your line is open.

36:12 Good morning, everyone. I did want to follow up on a question about Workplace Safety. You mentioned the two point five million dollars of investments in the quarter. But, those sound like more like expected ongoing costs every quarter. So, it sounds like to get your margins back to pre-COVID levels, you're going to have to get revenue up substantially?

36:38 Steve, those are actually one-time costs. Those are absolutely one-time costs. We are careful and as you know, through our history and your knowledge of our history, we are very careful not to bucketize costs that are not one-time is one-time. In this case, the majority of those expenses, the vast majority were related to opening up a new facility that is already proving itself logistically to be tremendous help in us re-growing that business. In particular, as you know, micro businesses in the U.S. were dramatically disproportionately impacted, but we're already seeing the green shoots that I spoke about six, nine months ago that we would see. We're already seeing them from new start-ups. 37:28 The good news about having a lot of cash right now in society is that the entrepreneurial spirit in the U.S. is alive and well and we will definitely see new businesses starting up that benefit from our product sets and we've repositioned that business to be located in an area that is very advantageous to be much more successful even than we were in the past before the pandemic. So, no, those are definitely one-time costs.

37:56 Okay. Fair enough. Thanks for clarifying. In terms of clearly logistics problems will hurt, obviously, going through the 3Q conference calls we've heard this across the board that they are clearly worse than they were three months ago. You're maintaining guidance. I'm just trying to figure out, are you figuring out more work arounds, are you just getting a sense that maybe it sounds like you don't see an end to it. So, I'm just trying to figure out why maintain guidance if logistics problems are getting at least worse in the near term?

38:28 Well, just to speak more specifically about logistics, they vary by business, by percentage of imported products, by location. So, let me give you an example. In Australia, everything -- not everything, but we certainly import from Europe, the U.S., and Asia significantly larger amount of products than we do from other locations. Their logistics, their shipping costs, things like that are up incredibly. Even cross-country in Australia, the shipping costs are up large amounts. 39:03 Historically, as I've told you in the past, I believe last quarter, I can count on two percent is the shipping cost number throughout -- most of my history in international businesses and it is way up depending on the business above that. So, those are not going to go away. We definitely see those continuing to be impacted. Obviously, fuel rates things like that will change things, but we are anticipating that our cost remain up for an extensive period of time. 39:33 In addition, suppliers are having lots of different pressures from labor inflation to core material cost inflation that they are in some cases passing on more or less aggressively and we are certainly very aggressive about making sure we have a cost effective and significantly positive supply base, but we don't see that going away. 40:02 And so where we're pushing is on things like automation we're excelling. I think that you are aware we just introduced and literally are just almost fully completely functional on our inventory storage system in our major North American distribution center. This is both a way to rapidly increase our ability to be productive, but also to significantly reduce our costs. 40:34 We're able to get products out to our customers quicker and a higher quality rate because of this, but also less…

42:10 Great. Thanks, Michael. Appreciate the time.

42:13 Thank you, sir. Appreciate your time.

42:15 Thank you. [Operator Instructions] Our next question comes from Keith Housum of Northcoast Research. Your line is open.

42:24 Good morning, guys. Michael, just kind of elaborating on the previous conversation here, does it sound like this quarter or perhaps the second quarter will be like a low point of your cost of -- your margin pressures and you perhaps have a little visibility or line of visibility into it creeping back up?

42:44 Yeah, Keith. I think our biggest opportunity set is in regard to revenue. I really feel very good about our ability to continue to drive our revenue. I don't have a perfect crystal ball. I know I've used that analogy with you in years' past. I don't have a perfect crystal ball, but what I do know is that we're pulling all the right levers to accomplish that goal. 43:10 I'm not going to give you a perfect prognosis of, hey, our margins are going to be X, Y, and Z by the third or fourth quarter. But I think in combination with revenue increases and really improving pricing and improving our cost structure and our logistics structure, I do feel confident that we'll be able to continue down the path that we're on for the guidance we've given.

43:38 Okay. And you referenced some challenges getting some products in the door as well, some challenges hiring the right amount people. Is there a sense that you lost out on some revenue during the quarter because of those challenges or do you got it done just costing more to get it done?

43:53 Yes and yes. It's definitely cost a lot more. Without giving specific products, we've been air shipping products we never shipped before. I can also tell you, some of those products are now on ships in addition to air shipping. So, we are -- there were some key products we absolutely needed to get to our customers. 44:15 Our first goal is to get them to our customers even though the cost may not be what we want, but we want to get them to our customers. And so, we did do that with a lot of air shipping. We currently do have some of those key products on ships again, thank goodness, but what that means is, we were able to get ahead of the curve and produce enough extra that we could still keep shipping by air, but put a bunch on ships. So, that is absolutely true in that regard. We definitely moved the first and foremost. 44:50 Now, did we ship everything we wanted to ship? No, we didn't. But I will tell you, I was personally amazed at the Herculean effort at some of our factories to close out October, Amazed. It was a tremendous effort and it made me literally just proud of all our people of how hard they work, how driven they were. 45:15 We've got a very motivated team and they have a lot of pride. They have a lot of pride in getting to our customers what they need and they don't want to let them down. And so, although we did leave some material on the shelf and some material in the system, we really closed the gap in a very significant way.

45:37 Okay. And then the final question from me, you referenced price increases going into effect. Can you provide a little bit of color in terms of the end markets which just price increases you will be going toward and you guys raise your prices on a regular cycle, so just want to confirm is this off-cycle in IDS, WPS, and Crafts, any color on the amount that you're being forced to raise prices?

46:01 Well, first of all, I don't say across the board because we don't peanut butter spread, but the truth is, there is some level of price increase across the board. It just isn't -- we're not putting in place X, Y, Z percent across the board and the timing does vary, Keith. We have contracts, we have agreements, we need to interact with our customers. We treat our customers with a lot of respect. We care about them tremendously. But at the same time, to your point, we have to pass on the value that we create in price increases to them as we're dealing with those pressures. 46:37 Timing, we do have off-cycle increases, we do have on-cycle increases. We are overall raising our prices more than we have in the historical past as our most industrial companies right now. So, overall, I'd say this, yes, off-cycle increases, yes, on-cycle increases and larger increases. But it does absolutely vary by product set and the cost pressures that we're facing in the cost -- product set. 47:06 You also mentioned regions, that's also true on regions. We're raising prices effectively in all regions, but those price increase timing and amounts do vary by region, by customer, by product set. So, yes, this is a significant effort for Brady right now. As I guarantee and I talked to a lot of people, it is for almost all organizations.

47:34 Yeah. All right. Thanks, Michael. Good luck.

47:37 Thank you, sir. Have a great one. Thanks, Keith.

47:40 Thank you. Our next question comes from Michael McGinn of Wells Fargo. Your line is open.

47:45 Hey. Thanks for the follow-up. I was wondering, if you had a sense of how lean you think the distribution channel is, how much room there still is to restock and what kind of percentage of your total business that represents?

48:00 Well, I apologize, I may not have heard the question perfectly. I'm not sure that was on the slide. But I think what you're asking me, I will say this, we are not seeing significant stock-ups by the distribution channel and that's good news, in that, I do eventually expect an economic boomerang from stocking up, but we are definitely not seeing it right now with our partners, our distributor partners. 48:29 Little harder to tell with our end users, but if you look at society overall and what's happening and I think we probably are seeing some of that. But it's a little harder to tell. But better that I know that it isn't definitely happening right now with our distributor partners. And so therefore, I’m optimistic that volumes will continue to go up in the near future. 48:54 What happens at the end as things untangle from this is yet to be seen. But I would expect, not for us, but for a general economic pullback as there is more inventory and you know this from all the numbers in the system overall than there historically has been.

49:18 Great. Then switching gears to the geopolitical front, trade talks have seemingly resumed and we now have an infrastructure framework. Any overall commentary on where you see yourself benefiting in infrastructure and then on the trade, any kind of benchmarks you that the percentage of total imports of your business is?

49:45 Well, I'd tell you this, first about we love anything related to infrastructure. We believe we provide products that are critical for the world infrastructure, not just the U.S., but in your particular case, the question. The U.S. is so yes, we do definitely see some very positive construction. We do very well in the construction industry, as a result of the safety needs, identification needs of that industry, their need for high quality, high durability. So, we are excited about that. Obviously, that's going to take some time and the whole construction industry is still tangled up right now. 50:25 So you know, if you're – I’ve been analogy, which is probably myth, but Napoleon lost the war for a lack of a nail, in horseshoe in our horse on a cannon in the Battle of Waterloo. So, that is what I believe the construction industry is facing right now. If you go through a lot of areas in that way buildings are being finished because of literally one or two critical elements. And so, I do think that's going to take a little while to untangle that will impact the rolling out of the infrastructure money, as far as getting to us. But you know what the great news, because we're towards the end of that cycle, typically, the great news is, it will come typically. The great news is it will come. And when it does come that will definitely help Brady. 51:14 Now, let's talk about trade barriers and all of that, we -- it's interesting, everything from automation to developing new products for the next generation to forward to in-sourcing, to forward deploying our products. We've been working on for about five years now, ahead of a lot of companies are just now realizing…

53:18 Understood. Appreciate the time.

53:20 Thank you, sir. Appreciate your time.

53:24 Thank you. I'm showing no further questions at this time. I’d like to turn the call back over to Michael Nauman for any closing results -- remarks.

53:31 Thank you so much. I'd like to leave you with a few concluding comments this morning. The COVID-19 pandemic has certainly entered a new phase. In this phase, we're seeing stress supply chains, increased input costs, labor shortages and overall increased inflation. We're working through this effectively, but we are experiencing some short-term margin compression. 53:56 I don't know what the future holds for the global economy, but I do know that Brady is well positioned to thrive regardless of which direction the economy heads. We have a strong balance sheet. We're prioritizing investments for growth and we have a never-ending focus on cash generation. 54:14 As a result, we're seeing strong sales growth at once our pricing and efficiency initiatives catch up to the cost inflation, our strong sales growth and improved gross profit margins will drive significant bottom-line growth. 54:31 On a final note, I would like to wish a very special Happy Birthday to our own Ann Thornton here at Brady. It is her birthday today. I'm not allowed to say which one, but happy birthday and from all of your friends at Brady, please stay safe. Thank you for your time this morning. Have a great day. Operator, you may disconnect the call.

54:55 Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.