Good day and thank you for standing by. Welcome to the Q1 2023 Brady Corporation Earnings Conference Call. [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, Chief Accounting Officer. Please go ahead.

Thank you. Good morning and welcome to the Brady Corporation fiscal 2023 first 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 #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 2022 Form 10-K, which was filed with the SEC in September. 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 will now turn the call over to Brady’s President and Chief Executive Officer, Russell Shaller. Russell?

Thank you, Ann and thank you all for joining us today. This morning, we released our fiscal 2023 first quarter financial results, which was another quarter marked by solid execution across all of our businesses. Overall, we had a good quarter with organic sales growth of 6.9%. Much of this organic growth was ultimately offset by foreign currency translation, resulting in total sales growth of 0.3%. Although we can’t control currency translation, we can control organic sales and we can control our cost structure in an effort to offset currency headwinds. And that is precisely what we did, which led to our strong GAAP earnings per share growth of 17.9%. We once again improved profitability, while investing in R&D, expanding our sales force and improving our digital capabilities. I am proud of how the entire Brady team worked together through this challenging macro environment, all the while delivering for both our customers and our shareholders. More specifically, as it relates to the macro environment, we are starting to see some changes. For instance, hiring is improving, but still remains somewhat challenging. We are seeing more qualified candidates and we are filling open positions quicker than we had in the past. International shipping rates have moderated and our supply chain is improving. There are still certain products that are challenging to source in a cost effective manner. But for the most part, the supply chain has loosened up to the point where we are getting the critical parts that we need to meet our customer demands. However, these positive signs have not yet translated into reduce inflation. We are experiencing increased energy costs, increased wage rates and weaker currencies in relation to the U.S. dollar, which are squeezing margins in regions outside of North America. While there are number of economic…

Thank you, Russell and good morning everyone. This quarter, we once again had strong organic sales growth. We reduced the SG&A expense as a percent of sales and we grew our bottom line nicely. Each of our two divisions performed well. IDS grew segment profit by 5.5%, while WPS grew segment profit by 178% this quarter. And we took advantage of recent market pullbacks by repurchasing another 280,000 shares. Putting it altogether, we reported first quarter GAAP EPS of $0.79 compared to $0.67 in the first quarter of last year. And non-GAAP EPS which is calculated as our GAAP EPS less the after-tax impact of amortization expense was $0.84 this quarter compared to $0.72 in Q1 of last year. So the key financial takeaways this quarter are strong organic sales growth, nicely improved EPS, solid performance in each of our two divisions, and a continued commitment to returning funds to our shareholders. All of which helped us overcome the substantial appreciation of the U.S. dollar and deliver another very strong quarter. Let’s move to Slide #4 for our quarterly sales trends. Organic sales grew in each of our two segments, but with the stronger U.S. dollar, foreign currency translation reduced total company sales by 6.6%, thus bringing total sales growth to 0.3%. The impact of foreign currency reduced the IDS sales by 5.5% and reduced WPS sales by 10.3%. The reason for the outsized foreign currency impact on WPS is because approximately half of WPS sales are in Western Europe and another 20% of WPS sales are in Australia. Even with this significant foreign currency challenge, our WPS business still performed extremely well this quarter. On Slide #5, you will see our gross profit margin trending. Our gross profit margin decreased 10 basis points to 48.1% compared to 48.2% in…

Thank you, Aaron. Slide 13 outlines the first quarter results for our Identification Solutions business. IDS sales were $256.4 million this quarter and organic sales growth was 8.6%. In IDS, we continue to invest in innovation in R&D. The vast majority of the $13.9 million of R&D this quarter was in our IDS division, where our goals are to continue the steady stream of new product launches with a particular focus on combining product software and services that help our customers become more efficient and help them get their jobs done in a more cost effective manner. For instance, in our lockout/tagout product offerings, we provide comprehensive programs customized to meet each of our customers’ unique requirements. These programs combined Brady’s service focus with our proprietary LINK360 software, our printers, or durable materials, and our industry leading lockout and tagout devices. Along with our unique safety locks to deliver a complete solution that improves our customer safety experience, all the while improving their productivity as well. It’s these type of comprehensive customer experiences that set Brady apart from its competitors. We believe that we will have a secular tailwind for years to come as companies continue to push for efficiency gains and increased employee productivity, thus increasing Brady’s – increasing demand for Brady’s productivity solutions. Segment profit as a percentage of sales improved 20.1% this quarter compared to 19.6% last quarter. As we managed through this inflationary period, we can expect to continue to see quarter-to-quarter fluctuations in our segment profit margins due to the timing of pricing actions. Our goal is to remain price competitive, while offsetting the negative impacts of input cost inflation to deliver continued sales growth and strong profitability. Regionally, sales continue to grow in Asia despite periodic lockdowns in China driven by their zero-COVID policy.…

[Operator Instructions] Our first question comes from the line of George Staphos from Bank of America Securities.

Yes, hi, good morning. This is actually Cashen setting in for George this morning. So can you maybe just talk about your demand trends throughout the quarter now just month to month? And then I guess coming out of the first quarter, what has been just generally the trajectory here in the second quarter?

Yes, sure. So, we have seen some lumpiness in order patterns more so than would be historically normal. I think a lot of our customers and the distribution channel is still searching for what is the right level of inventory. And what is the demand that they are seeing from some of their use cases. So we had a brief period in September that I thought was unusually weak. And then as we got into October, virtually all of that got filled up. And I am speaking of the Americas right now that Europe has actually been pretty steady. And the rest of the world has been pretty steady. So, we are going into Q2 with basically the way we left Q1, which is in a pretty strong place.

Okay. That’s helpful. And then I guess in IDS, organic growth was pretty strong, even on a strong comparison. So, I guess ultimately, what was driving that? Was that more so pricing, or can you just give us a sense of that, and maybe just demand trends on a product level as well?

Yes. So, obviously, pricing is playing a role. And there is a part of the growth having to do with pricing, and also having to do with organic demand. We have been, I want to say pleasantly surprised that our order book continues to be very strong. And like I said, I think going into Q2, we are seeing no degradation of our performance from Q1.

Okay. Got it. And then I guess just on the track and trace build out, you did these acquisitions, call it, 1.5 year ago, you have lapped through those, I guess last quarter. So, I guess where do we stand now in terms of building out that comprehensive track and trace solution? What needs to be done and I guess ultimately, what are the mile markers we should be looking for over the next several quarters?

Yes. So, we knew this was and is a long journey. We feel very comfortable with the acquisitions that we have made. They are now on our own internal systems, which is important. We are melding the R&D teams across all three businesses. The next step here is really kind of two-fold. Some of the businesses, I will take Nordic was a little more focused on retail than we are as a corporation. And so we are making more industrial versions of some of their products. You will see those in the marketplace in the next few quarters. And in code, which was more focused on healthcare, we are also doing the industrial type solutions. So, they are more robust. They are more suited to an industrial environment. So, we had a long journey, where we expected to industrialize these products and make them look and feel and interchangeable with each other in our operating systems and our printers. So, at this point, it is really just a matter of engineering and getting the products to work together. We don’t really need much of it in the way of an epiphany, or additional acquisitions to make this happen.

Okay. Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Steve Ferazani from Sidoti.

Good morning Russell, Aaron. Thanks for all the detail on the call. I do – Aaron I want to dig into a little bit about with your comments on the guidance range, because it didn’t move. There is obviously a lot of moving parts here. Specifically, you pointed out the stronger dollar than it was three months ago, and the fact that that would have a $0.20 impact. And that would sort of lead to why isn’t the guidance coming down unless something else more positive offset it and I didn’t hear that. And just give us your comfort level on that range and what sort of needs to happen to get to that lower versus the higher end? Sort of a complicated question. Sorry, I know.

That’s okay. So, coming into the year, when we provided our original guidance, we had provided a foreign currency headwind somewhere in the neighborhood of 15% to 18%. And of course, that’s translation as well as any margin compression that we would get from the stronger U.S. dollar. So, it clearly got a bit worse. But frankly, it hasn’t been that significant and we have been able to overcome it with continuing to push efficiency gains, of course, pricing we talked about as well. And frankly, sales have held in there pretty good and as Russell mentioned order patterns remained strong. So, we remain very confident that we will hit this guidance range even with the what seems to be never ending foreign currency headwind from the stronger U.S. dollar.

What gets you to the higher end as opposed to the lower end, what needs to work out?

Well for Brady, as you know at our 50% gross – 50%-ish gross profit margin. Sales are super important and continuing to make the investments that we need to drive the top line. So, of course, without our top line growth, we are not going to hit the top end of our guidance range. But again, we are confident that we will hit that, we will hit our guidance range. Plus, as you know, WPS has improved quite substantially on the bottom line. And we need that to continue as well. So, Brady is a pretty complicated $1.3 billion business with a lot of moving parts, and a summation of a lot of smaller businesses. And just like always, we need to execute and we need to continue to make the investments to drive the top line.

Okay. That’s helpful. Alright. When I think about you covered the drain on the gross margin, softening sequentially, largely offset by much lower SG&A. It sounded like there are some one-offs there in terms of the lower SG&A this specific quarter, how can we think about that?

Yes. There definitely were a couple that are relatively minor. However, we have been experiencing some – I will say some nice reductions in healthcare expenses, which certainly matters for us, we call that out. And we have had a reduction in incentive based compensation a bit as well, that we would expect to continue. So, over and then of course, the bigger component of all of this is foreign currency, much like foreign currency hurts our top line, it certainly drives down or SG&A expense as well. So, you can basically take the 5%-ish reduction that we anticipate in revenue, and apply that to SG&A expense as well. So, if foreign currency exchange rates stay where they were at October 31st, for the remainder of this year, you should see SG&A expense go down as well. And then of course, that is partially then offset by the continued investments that we are making in our sales force and marketing expenses, etcetera.

Great. Thanks for that. If I can get one more in, I saw the announcement and the pictures from that the ribbon cutting for code in Utah. Can you talk a little bit about what that means and how that all sort of fits up in the process of bringing those acquisitions in?

Yes. So, it’s – first, it’s not super significant. I mean it’s a relatively small distribution channel. But we continue to look at supply chain on-shoring where possible, getting products hub-ed [ph] closer to the customers. If we were to look at pre-pandemic, shipping, global shipping and global transportation was a pretty drama free event. As we have went through the pandemic, and we had uncertainty in shipping time, shipping rates, it caused us to rethink how we deploy some of our products. And what opportunities we have to have them hub-ed closer to our customers. So, in the case of this particular location, we used to hub it in Asia and partially in Malaysia and partially in Singapore. And by bringing it back to the U.S., it becomes obviously much closer to the customer, since that’s the principal. That’s principally where this product is sold. And it gives us a little bit faster lead times, and we were able to do it in this case. So, we continue to look at all of our deployments throughout the globe and how we have products situated where we have our inventory. And I think we have a general desire to both do manufacturing and have our inventory as close to our customers as possible. And this was part of that strategy.

So, should we expect to see more of these types of developments?

It will be gradual. And again we don’t have like a block upgrade, where we are saying, we are going to move a huge part of Chinese manufacturing to the U.S., for instance. But we are comprised of literally dozens of locations and dozens of distribution centers. And we look through this. And one of the reasons why we actually have now a Chief Operating Officer is to look at all of our locations and say, are they really appropriate for the business and the business model we are running. So, like we did with this code distribution center, which again is pretty small in the scheme of things. I can imagine other smaller ones in the future. It’s all towards being both more operationally efficient, driving down our cost position, as well as making sure that we are serving our customers optimally.

Great. Thanks Russell. Thanks Aaron.

[Operator Instructions] Our next question comes from the line of Keith Housum from Northcoast Research.

Good morning guys. Just following up on the previous question, Russell, what are the changes to your incentive comp plan in the quarter? I noticed you have mentioned both R&D and SG&A, that was a contributor to the client expense this quarter compared to last quarter.

Yes. No, there has been no change to our plan in terms of kind of the total envelope. We have made it I will say slightly easier to get a little bit of incentive compensation, and definitely harder to max out on the incentive compensation. We think that is more indicative to the current environment where there is more uncertainty. If you look back to Brady, a few years ago, you could draw a ruler across some of the businesses in terms of gross margin and operating profit and what have you. I think our scheme now is more reflective of I will say changes in dynamics. Now, I will say at the 100% level, so the nominal bonus structure that hasn’t changed a penny year-over-year. So, we are keeping the base the same, but we are kind of stretching it out low and high. Now, we do like I think most companies, every quarter, we true it up, and we look at it. Last year was absolutely phenomenal. And we are at the very high end of the range of the bonus structure. As we are coming into this fiscal year, we think it’s going to be a lot tougher to hit some of those targets. And so we revised it down. So, you do see an impact from Q4 to Q1. But I think we are – nominally we are going to get back into what I consider a more stable range. It’s just the swing from Q4 to Q1.

Is that based on revenue and gross profits, or bottom line? Can you give me a little bit of context on what it’s based on?

Yes. So, it really the two principal parts of it are no surprise, top line, revenue growth and bottom line, operating income.

Got it. Helpful. Thank you. Appreciate it. And in terms of like your price increases, I know your commentary that you are still lagging, the raw material increases, and other contributors that have gross margins are custom? So, how far long do you think you guys are in the price increases. So, for example, if inflation kind of came to a halt today, will the price increases still had to go through the next several quarters?

If inflation literally stopped today, I would say our price increases essentially would stop Now, there might be a couple of small places here and there that we would still look at. But right now, we are anticipating future price increases, because we are also anticipating future increases in raw materials. It takes us about two months to three months from when we make a decision to actually do it and get into our customers, because there is notification periods. And the sheer effort to go through hundreds of – tens of thousands of SKUs at least and change pricing is a non-trivial process, because there is some nuance in how we do it. But right now, we are anticipating a price increase in most of our products in January. We are still – we are making the decision right now that that’s going to happen, but we could always backpedal it all of a sudden we saw a significant change in inflation.

Great. I appreciate it. Thank you.

Thank you. At this time, I would like to turn the conference back to Russell Shaller, President and CEO for closing remarks.

Perfect. Thank you all very much for your time today and for your thoughtful questions. Brady has a business that is positioned to perform well regardless of which direction the economy had. We now have a proven history of being faster than GDP growing company. Our pricing and efficiency actions are expected to help us stay in the upper 40% to near 50% in gross profit margin. Our IDS division continues to perform well and the actions we have taken to improve our workplace safety business are clearly working. And we have a fortress balance sheet which enables us to keep investing in both organic and inorganic growth, while also returning funds to our shareholders. Even though the future of the macro economy is uncertain, I am very optimistic about Brady’s future. Thank you for your time this morning. Have a great day. Operator, you may disconnect the call.

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