Good day and thank you for standing by. Welcome to Q4 2022 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. I would now like to hand the conference over to your speaker today, Ann Thornton. Please go ahead.

Thank you. Good morning, and welcome to the Brady Corporation fiscal '22 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 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 and which could significantly impact expected results. Risk factors were noted in our news release and in Brady's fiscal '22 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 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 Shaller. Russell?

Thank you, Ann. Good morning, everyone and thank you for joining us. This morning we released our fiscal 2022 fourth quarter financial results, which was another quarter of strong organic sales growth and record earnings per share. I'm proud of how the entire Brady team worked through this challenging macro environment all the while delivering for both our customers and our shareholders. Organic sales grew 9% this quarter, we increased GAAP earnings per share by 53% and we increased the non-GAAP earnings per share by 16%. This quarter was a great end to an outstanding year. Our full year GAAP EPS of 290 was an all-time record high and our non-GAAP EPS of 3.15 was also an all-time record high. For the full year, we grew organic sales by 9.4%, which was our highest organic growth rate in more than two decades. We performed well in our ID Solutions business and made nice progress moving a portion of our portfolio into faster growing end markets with cyclical tailwinds. We also finished the year with positive momentum in our WPS business. Our segment profit increased to 13.2% of sales in Q4. This is a great improvement over the first half of our fiscal year. And we returned more than 155 million to our shareholders in the form of dividends and buybacks. And we still finished the year in net cash position. We're proud of what we've accomplished at Brady, we've had strong organic sales growth over the last several years. And we now have businesses that are growing in excess of GDP, with innovative new products in an highly engaged professionals that should enable us to continue to grow in excess of GDP for years to come. As we look ahead, our priorities remain clear. First and foremost is to continue…

Thank you, Russell, and good morning, everyone. This quarter, we once again had very strong sales growth. We also increased our gross profit margins, or reducing our SG&A expense as a percent of sales to pull strong earnings growth and GAAP EPS of $0.81. Non-GAAP EPS, which is calculated as our GAAP EPS less the after-tax impact of amortization expense was $0.87. Each of our two divisions performed very well. IDS grew segment profit by 18.4%, while WPS increased segment profit by more than 65% this quarter. And as Russell mentioned, we took advantage of the market pullback last quarter, and repurchased another 535,000 shares, bringing our total shares purchased in fiscal 2022 to more than 2.3 million. So the key financial takeaways this quarter are strong revenue growth, record EPS, strong performance in each of our two divisions and a continued commitment to returning funds to our shareholders. Let's move to slide number four for our quarterly sales trends. Our 5.8% sales increase consisted of growth from acquisitions of 2.5% and organic growth of 9%. Organic sales grew in each of our two segments but with the recent strengthening of the U.S. dollar, especially against the euro foreign currency translation reduced total company sales by 5.7%. The impact of foreign currency reduced IDS sales by 4.5% and reduced WPS sales by 9%. The reason for the outsized foreign currency impact on WPS is because more than half of WPS sales are in Western Europe. Even with the significant foreign currency challenge, our WPS business still performed quite well this quarter. Please turn to Slide number five for our gross profit margin trending. Our gross profit margin increased 220 basis points to 50.4% compared to 48.2% in the fourth quarter of last year. This improvement over the prior year was…

Thank you, Aaron. Slide 14 outlines the fourth quarter financial results for identification solutions business. IDS sales increased 9.6% to 253.2 million, organic sales in our IDS division are once again very strong up 10.8% versus the fourth quarter of last year. And on the cost side, our focus on efficiency and pricing lead to 140 basis point increase in segment profit as a percent of sales when compared to the fourth quarter of last year. We're definitely experiencing ongoing inflationary pressures. However, we're driving automation inefficiencies and increasing prices where feasible to offset as much of this inflation as we can. Segment profit as a percentage of sales was 19.8%, which was up from 18.4% last year, if you exclude amortization expense, and the non-routine charges from Q4 of '21, and segment profit as a percentage of sales would have been 21.3% this quarter, compared to 20.8% in last year's fourth quarter. Regionally, sales in Asia were strong despite periodic lock downs in China. Asia organic growth was approximately 10% this quarter. In Europe, our organic sales are also up approximately 10%. Our European team did a very nice job driving sales growth while managing their cost structure. And the Americas performed well with organic growth in the upper single digits this quarter. We've been working hard to secure the critical parts we need to manufacture our goods and meet customer demands. However, there are still components that we've been unable to obtain in the desired quantities, which have delayed some of our initiatives. For instance, sales at our recent acquisition CodeCore were effectively in line with our initial acquisition business case. But we were forced to slow down some of our expansion plans due to a limited supply of certain chips. We're starting to see improvement in component…

[Operator Instructions] And our next question comes from George Staphos from Bank of America. Your line is now open.

Hi, good morning. This is actually Cashen Keeler for George this morning. So first off, I guess now that we're only one month into the quarter here, can just give us an update on how things are trending thus far.

Yes, August is really with Europe. And I would say people on vacation, it really is too short of a month to provide much commentary or trending. So we usually feel like we don't know how the economy is headed until late September, October.

Okay. Fair enough. And then, I guess you had a nice pickup in gross margin this quarter. And it sounds like you had a positive price cost dynamic. So just looking at the fiscal '23, do you expect to remain positive on price cost or just what's embedded in guidance on that front?

Yes. Obviously, we provided the guidance as looking forward. We had I think a fantastic Q4. But if you look at Brady's performance over several quarters, even pre-COVID, there is a fair amount of variability in our gross profit margin. I think 50.4 is pretty much a high watermark for us. And it was we had a very favorable mix and product conditions. I wouldn't expect continued growth over that type of figure.

Okay, understood. And then I guess on R&D, again, there's been pickup there, obviously a function of acquisitions and building out the track and trace. But I guess, is there any kind of normalized level or range, we can expect moving forward on that front?

Directionally, we feel around 5% of our sales is a comfortable and manageable R&D. So R&D will continue to grow along with the corporation's growth. So it's not stabilizing at a certain dollar figure. I think it's more a percentage of our revenue.

Got it. Understood. That's helpful. I'll turn it over.

And our next question comes from Keith Housum from North Coast Research. Your line is now open.

Good morning, guys. Appreciate it. Russell looking at the WPS [indiscernible], the 13 percentage in change, is the best that I can remember in several years. In your viewpoint, how sustainable is that? And is there an opportunity to grow from there? Or should we expect some volatility?

I think what we really need to be focused on WPS is the combination of growth and profitability. We feel pretty comfortable that we can ratchet up the profitability. But if you look at the figures in the U.S., the growth definitely lagged peers. So we're still looking at what's the right balance of reinvestment advertising versus overall margin. So, the 13%, I think, given the industry there in puts them peer competitive. It's we need to squeeze out some growth with that same profitability.

Got it. Appreciate that. In terms of the pricing action, in general, you guys have taken, how far along have -- would you say you guys are learning the process? Because if I remember correctly, you're thinking that was -- your price increases, we're going to lag the raw material increase you guys aren’t seeing? If you guys caught up to that, or you still have some more catching up to go?

Yes. Obviously, there's a few outliers in our raw materials. But for the bulk of the products, we definitely caught up. There's still some, I would say, unusual pricing in the semiconductor market, where you're seeing some vast purchase variances to be able to acquire some scarce chips. Obviously, our pricing hasn't fully captured that nor is it likely to because we think some of those premiums are going to be short lived. And most companies I think that are acquiring semiconductors have chosen to absorb those temporary costs into their portfolio.

Okay. Appreciate it. And then, a follow-up question for me on gross margins. I guess the gross margin recovery from [indiscernible] levels was probably a little bit quicker than anticipated. I noticed you said in a product mix was definitely one of those components. Do you expect gross margins to be roughly in the same area going forward?

Again, if you go back over the quarters, there is a decent amount of variability in our gross margin. So I'm not going to hang my hat on another 50.4. I do think we had, again, a favorable mix and a favorable set of conditions. So I'm going to say that, certainly our guidance is a little bit lower than that type of figure. With the understanding that given, we have some very high gross margin products and some very low gross margin products depending on what the mix is you can see, 100 basis points of variability.

Great. And amazing, I will sneak one more right here. I know in years past some of your smaller businesses in terms of the OSHA posters and things of that nature kind of trailed off during that pandemic. Have you seen any events of a business recover here?

Yes. It is definitely much better than it was a year and a half ago, for obvious reasons. It caters opportunity with business caters to small businesses, which were most affected by those shutdowns hasn't fully recovered to pre-pandemic levels. Absolutely not. There's still in the small business segment, there's still a lot of pain in recovery that needs to happen.

Great, thank you. Good luck.

And our next question comes from Steve Ferazani from Sidoti. Your line is now open.

Good morning, Russell, Aaron, thanks for all the color on the call. I do want to dig back into that 13% operating margin and workplace safety to us that was quite a surprise. I mean, I'm going back eight years, and I think you've only up 13% in that margin, maybe one year in eight years. So clearly, there's more going on here. And I would have thought it would be shrink to grow. But even if that you were growing top line minus FX mean, can you give us a little bit more detail how you're getting to that number that quickly?

Yes. So that business is very reliant on advertising and traditionally print catalogs. So one of the things that we can change pretty quickly and did was to shift more emphasis to digital, which is less expensive, all things being equal than catalogs. That was part of it. Part of it was also that they took costs out of that business operating costs, which improved the profitability. And lastly, we've moved to a more I'd say, market-based pricing. And so some of the things that we've done, have helped us. So I wouldn't point to any one of them as the major drivers, the three of them put together, help to do the improvement. But again, what we really need to see is yes, they did grow, but not as fast as we would like to see. So the recipe for us is, those kinds of profits, but industry growth at the same time.

But how are you doing this two elements here, right, which is if you're trying to move away from the resale model, right? I mean, you're trying to grow, but you're also trying to cut some stuff out, right?

Correct. So when I mean grow, there may be an additional sales decline, I'm not going to project one way or another. But, it's really the recipe of how we can best resonate with our customers in this particular channel. And like I said, I think the team has done a tremendous job, particularly in Europe, in really focusing and making sure they're in tune to the dynamics of both in market and their customers. But with that said, I think there is still room for improvement. And we're looking at ways where we can improve the overall relevancy of this channel.

Fair enough. Thanks. And if I can turn to ID solutions, obviously, you're finishing up a really, really strong year. Having said that, even if I back off, back out the FX, it looks like there was a little bit of a sequential pullback there. Are there certain areas where you're seeing a little bit of slowing or was there some seasonality?

A teeny bit of a seasonality. Traditionally, Q3 is really, really strong and you start to see some tail off in our Q4. As people start to head into vacations and what have you. I think we're still very concerned about European energy prices and whether that will be a constraint. So far, the U.S. market seems to be holding up very well. And we just have our fingers crossed that we'll continue to see these trends going through into the coming year.

Okay. And then if I can get one in on cashflow. Aaron, I may not have heard this right, it sounded like you said Q1 would be lower than traditionally some timing element and then Q2 stronger, can you just give a little color on that, because I might have missed it.

No. You absolutely heard it correctly. The timing of our annual bonus payments is shifting from what it was historically, the second quarter of the year, into the first quarter. So you'll see a slightly weaker Q1 and a slightly stronger Q2 all as a result of the timing of the bonus payments.

Okay. And couple more on that. One is, for obvious reasons, you want every other company have to build up your inventory, given supply chain constraints. And component shortages. Any thoughts on when that might start reversing? Because you had I mean, there has been a pretty substantial inventory build, which has affected cash flow.

Yes. So all things being equal, we're carrying, I'm going to say normally $40 million to $50 million more inventory than we would historically like, that's proven to be with supply chain issues of great investment the carrying costs of something like that, or a few million dollars. But it's enabled us to make sure that we don't stock out, and we've been able to sell throughout the last several quarters. We are and continue to look at how we can draw that down as freight becomes more predictable. And our supply chain becomes more predictable, that will definitely come down. One of the ironies in it, though, is, last year, we were shipping air, which is something we really prefer not to do, that's a very expensive way to ship our products. As we convert from air to sea, it actually drives down our costs substantially. But you wind up now, you pick up nominally six to eight weeks in transit, for inventory. So that pushes your inventory numbers back up. So from an operating perspective and operating margin of being able to move from air to sea, is absolutely the right thing to do. But at the same time, you're going to see an uplift in inventory very specifically due to that. I know this a long winded answer. I'd love to say we're going to peel off 10 million in the next quarter, but we're not quite there yet.

Fair enough. And then, last one is on the share repurchase, how far along you are on the current authorization and whether there's any share repurchases built into that guidance?

We have very little share repurchases built into our guidance. We had a 100 million authorization back in May. Of that $100 million of purchases, we have $85 million remaining today.

Okay, In terms of how you're thinking about capital allocation next year, anything you can offer?

We have basically the same philosophies that we've had and continue to have, which is first and foremost, continue to invest in our organic growth engine. So think R&D, sales, geographic expansion, et cetera. At the same time continued to increase our dividend. Russell mentioned our dividend increase this year as well, 37th consecutive year. And then, we still look at buybacks and acquisitions the same way that we always have. Acquisitions must have strong synergies, they need to make sense. We typically don't look at just straight direct competitors. We look for acquisitions that bring some form of technology to the table that will drive Brady forward. And then of course, buybacks, we look at it in an opportunistic manner. We have an awesome balance sheet today, 19 million of net cash at July 31. So very enviable position to be in. So we clearly have dry powder. And when we look at the buybacks, the price needs to be right. And that's comparing what we're trading at to intrinsic value. So pretty similar philosophies that we've had in the past and a great balance sheet to execute it.

Great. I know that was a lot of questions. Appreciate all the detailed answers. Thanks.

Thank you. And I am showing no further questions. I would now like to turn the call back over to Russell Shaller, CEO for closing remarks.

Perfect. Thank you. Thank you all very much for your time today and for your thoughtful questions. We live in a highly uncertain world. But Brady is a business that is well positioned to thrive, regardless of which direction the economy has. We're changing our portfolio to faster than GDP growing company with an increasing foothold in faster growing and markets. Our pricing and efficiency actions are improving our gross margins, our IDS division continues to perform extremely well. And the actions we've taken to improve our workplace safety business are also working. We're aggressively investing in R&D to ensure our products exceed our customers' expectations. And finally, we have a strong balance sheet, which enables us to keep investing in both organic and inorganic growth, while also returning funds to our shareholders. Our balance sheet and strong cash generation make Brady a safe port from future market turbulence. Even though the future of the macro economy is uncertain, I'm optimistic about our future. Thank you for your time this morning and you may now disconnect the call.

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