Thank you for standing by. And welcome to Brady Corporation’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Chief Financial Officer, Ann Thornton. Please go ahead.

Thank you. Good morning. And welcome to the Brady Corporation fiscal 2023 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 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, 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 of 2022. 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. Thank you all for joining us today. First of all, I’d like to congratulate Ann for becoming Brady’s new CFO. Many of you know her already, as our leader for Investor Relations and now I’m delighted to see Ann step up to this new challenge as CFO. This morning we released our fiscal 2023 third quarter financial results, which marked another quarter of strong results throughout our global businesses. This is a direct result of the hard work and dedication of the entire Brady organization. We have a culture that focuses on innovation and puts the customer first. As a result, we have a team of fantastic professionals who are providing the best possible customer experience, while delivering innovative products that differentiate us from our competition. This quarter we once again improved profitability, while continuing to invest in R&D, expanding our sales force and improving our digital capabilities. These are the types of long-term investments that we expect will help us keep our momentum going. We not only had record earnings per share this quarter. We also had outstanding cash generation with operating cash flow of 151% of net income and free cash flow of 141% of net income. Brady’s global footprint and sales into many end markets give us a unique view of the macro economic environment. Let us share a few recent observations. Our ability to hire and retain high quality personnel continues to improve in most geographies, but this still remains somewhat challenging in areas such as research and development, and IT, where skill sets remain in high demand. International shipping rates have normalized and have nearly returned to pre-pandemic levels. Additionally, our supply chain is also returning to normal. You can see some of this in our improved gross margins this quarter. As…

Thank you, Russell. This quarter we grew organic sales, we increased our gross profit margins and we grew our bottomline nicely. Putting it all together, we reported third quarter GAAP EPS of $0.96, compared to $0.78 in the third quarter of last year, an increase of 23.1% and non-GAAP EPS, which is calculated as our GAAP EPS, excluding the $2.3 million after-tax gain on the sale of our PremiSys business and the after-tax impact of amortization expense was $0.95 this quarter, which was up 10.5% over Q3 of last year. The key financial takeaways this quarter are, another quarter of organic sales growth, nicely improved EPS, organic sales growth and segment profit growth in each of our three regions, and significantly improved cash flow, all of which helped us overcome the year-over-year appreciation of the U.S. dollar and delivered fantastic financial results. Let’s move to slide number four for our quarterly sales trends. Organic sales grew 1.9% this quarter, but foreign currency translation reduced sales by 2.1% and the impact of our PremiSys divestiture reduced sales by another 0.2%, resulting in a sales decline of 0.4% in total. Foreign currency had a much larger impact on our Europe and Australia segment, where we saw a reduction of 4.8% from currency translation in the quarter. However, with the recent strengthening of currencies such as the euro versus the U.S. dollar, we expect the headwind from foreign currency to subside as we progress through our fourth quarter. Based on April 30th exchange rates, we expect foreign currency to have a minimal impact on Q4 and then to turn positive in Q1 of next year. On slide number five, you can see our gross profit margin trending. Our gross profit margin increased 190 basis points to 50.3%, compared to 48.4% in the third…

Thanks, Ann. Effective with the beginning of this quarter on February 1st, we changed our reporting structure from a global product lines to more geographically aligned organization. This change was all about creating a structure that sets us up for the future by taking advantage of the synergies that exist between Identification Solutions and Workplace Safety, by utilizing our best go-to-market strategies in each of our key geographies and by using our increased geographic scale to accelerate new product development, while delivering tailored solutions that meet the unique needs of each region. We’re also providing sales information for our former segments to assist with the transition through this fiscal year. As part of this transition, we are incurring certain costs such as severance. However, these one-off severance charges are effectively being offset by reduced personnel costs, so these charges aren’t significant enough to talk about or break out separately. Slide 13 illustrates the financial results of our Americas and Asia region. Sales were $222.8 million this quarter and organic sales growth was 1.2%. Foreign currency reduced sales by 0.8%. We also sold a small business this quarter that reduced our regional sales by 0.3%. The $2.3 million after-tax gain on the sale of this business is not included in the segment financial results. Adding this up, total sales increased by 0.1% this quarter in the Americas and Asia region and segment profit increased by 9.3% to $49.2 million. Approximately 90% of the revenue in our Americas and Asia region consists of our historical Identification Solutions business and the remaining 10% of this region is our historical Workplace Safety division. Our historical IDS business in the Americas performed well this quarter. Our increased investments in R&D and excellent new product launches are making a difference. Our productivity solutions and our focus…

Yes, sir. [Operator Instructions] Standby for our first question, which comes from the line of George Staphos of Bank of America Securities. Your question, please, George.

Yeah. Hi. This is actually Cashen Keeler sitting in for George this morning. Thanks for all the color. So I guess you discussed that April slowed in the quarter. So I was just wondering if you’re able to quantify trends maybe in February and March relative to April. And then as you sit here today, are you able to provide any color on exit rates, or I guess, how things are trending to start the fourth quarter? Thanks.

Yeah. Sure. So it’s hard to take too much into one month, because we do see a fair amount of volatility from month-to-month. But one of the things that I think is being talked about pretty significantly is what is the right level of inventory to have at our distributors and that’s not just Brady. That is, I think, a question that’s happening throughout the industrials worldwide. So we have seen a little bit of a destocking effect that happened in April. We didn’t see the same effect in February and March. But more interestingly, we do track direct customer demand and with the exception of our business tied to consumer electronics, most of the point-of-sale purchases seem to be pretty robust. So not necessarily in every last segment or every last region. But the primary demand seems to be holding up. I think what we’re seeing largely is a transitory effect of stocking levels in the supply chain, which is that going to be a headwind for a month or two or a headwind for the next four months, I think, it’s just very premature for us to tell. But we do see a little bit of that and we saw it in April, and the likelihood of course, is that it will spill into May, whether it goes past that, we just can’t predict.

Got it. Yeah. That’s helpful color. And then, I guess, just going back about a year ago, roughly, you laid out a number of initiatives in terms of SKU rationalization, better addressing competitiveness and some other items. So I guess can you just help us understand where we are in terms of the stages of that, how much more needs to be done? And relatedly, you divested some business here in the quarter, so ultimately, are there more opportunities to do some more pruning of the portfolio?

Yeah. I would say it is, I’ll call it, a light nipping tuck that is self-funding. So, yeah, clearly, we’re going through our portfolio. It wasn’t in bad shape. There were just some parts that either we felt we weren’t the best parent or had become sufficiently commoditized that we no longer saw them as an office -- as an opportunity for really profitable growth. So in the case of access control, it was actually a good business, very small, but it was distinct from the rest of the businesses within Brady and really wasn’t a fit hence the reason we divested it and I think it’s gone off to a much better parent at this point. We do have some other businesses. I don’t immediately anticipate any further divestitures given the climate out there. And what I would again say in terms of SKU rationalization, that is an ongoing effort that we have and we’ll continue to do so. But, again, self-funded and not to the level that you’d see a dramatic impact to either top or bottomline.

Great. Thanks.

Thank you. Please standby for our next question. Our next question comes from the line of Steve Ferazani of Sidoti. Your question, please, Steve.

Good morning, Russell. Congratulations, Ann. I wanted to ask about gross margin, obviously, you got it back over 50%. Where do you think you are in terms of pricing and keeping up with inflation? Now if it’s tamer than it was, do we see more benefits from pricing moving forward if we remain at a more tamer level, even though, as you noted, there’s still some moving parts?

Yeah. I mean if you look at the drama over the last couple of years, most of that is all gone. So we along with many people experienced purchase price variance with semiconductors significantly elevated shipping rates, container shipping rates, in particular, or the need to switch to airfreight to get parts at the right place at the right time. Almost all of that has relaxed. We still see a little bit of elevated, I’ll say, inflationary trends, both in wages and in some regions. But I feel like we’re in a good and stable place at this point, unless there’s some unusual shock to the global economic system of one sort or another. I think our gross margin is in a reasonable place. It’s largely recovered to historical levels given the product mix that we have. If I was to trace back pre-pandemic and adjust for mix, which has changed a bit over time. It feels like we’re in a pretty good place where pricing and raw materials and efficiency gains, all balance each other out to deliver a pretty good gross margin for us.

When we think about the, I guess, what you would have called the ID Solutions and the slower growth, given the launch of those three new products, which are major products in your portfolio, the M610, the M611…

Yeah.

…M710, does that drive the replacement cycle, can that spur some growth in a slowing growth global economy?

Yeah. So there’s two things. Again, we are super excited about those product launches and refresh cycles. They are being launched into a refresh base. So we already have a pretty significant installed base on all three products. But what it does open up for us is more mobile app-based applications. So the prior generation of devices were not as smart as the new ones. So it does open up market segments that might traditionally have been opaque to us, particularly the ability to store imagery in the cloud or on a phone and be able to port it to the printer rather than manually keyboarding it or having some other way of inputting the data. So what we’ve seen in the past, if we -- as we start to introduce mobile-based computers, we get additional market share from either non-consumption or people who aren’t used to using those type of products. At the same time, you’ll notice there are keyboards still on many of our products to service our traditional users. So given the size of Brady and the size of these printers, you wouldn’t expect to see an immediate uptick. These are very long-term plays for us, where we see growth for essentially anywhere from four years to seven years is typical for these products and then the consumables that come along with it. So you wouldn’t expect to see a pop in, I’ll say, 2024. But at the same time, it keeps us relevant and keeps us at the forefront of technology.

Great. Great. That’s helpful. One more, Ann, just on, obviously, cash conversion well over 100%, starting to build up that net cash position again. How does that affect capital allocation decisions in terms of M&A buybacks?

I mean, we’re -- first we’re still consistent here in our approach and our prioritization being focusing on the organic growth opportunities, both through our sales force and new products, which you touched on, Steve, with the three fantastic new products in the quarter that Russell just went through committed to the dividend. We bought back some shares in the quarter. We spent $11.9 million and bought 229,000 shares and then still looking strategic from an M&A standpoint. So, yeah, I mean, huge cash generating quarter for us with the big driver being a reduction in inventory and…

Right.

… we’re definitely seeing that as -- that’s our expectation basically as we finish out the year as well.

I see. Okay. Thanks, Russell. Thanks, Ann.

Thanks, Steve.

Thank you. Please standby for our next question. And our next question comes from the line of Keith Housum of Northcoast Research. Your line is open, Keith.

Good morning, guys. Thanks. I appreciate the opportunity. Russell, just touching on some of your growth initiatives. I remember earlier in the year, you talked about adding salespeople in India and your commentary is you’re adding a plant there in the second quarter. Perhaps just expand a little bit more on some of your growth initiatives, including this one and outside of that and when we might be able to see a little bit more of an impact on that to the topline?

Yeah. So, one of, I guess, the advantages and perhaps disadvantages to Brady is we’re in almost every industrial segments and industrial country in the world. The consequence of which is there are always a lot of puts and takes. We’ll see strength in India and Australia in some extractive industries and then it gets balanced out by we saw some weakness in consumer electronics. But our business and our model is always and will always be to look at where we like the trends in the future, where we think what countries, what geographies and regions are growing. More recently, India has been doing fantastic for us, they have for the last several years and the consequence of which is that we keep adding our growth in India and our investment profile in India. And the same -- more recently with Australia post their lockdown also doing really a shining star. In terms of our growth initiatives, we have always said that, working on productivity solutions, working on printers and printer materials is really the backbone of what Brady is. And then we have a host of peripheral products that support those or are tied to those. That is -- for the most part, that is the real driver of Brady’s operating profit. Without taking away from some of the super niche products that we have in a number of regions and a number of countries. So I feel like we’re in a good place for our initiatives. I don’t see any impediment at this point. We went through a year or two during COVID, where chip supply and chip availability definitely hampered some of our product development efforts. We believe most of that is behind us now, and unless there’s some global slowdown or recession, we feel like we’re well positioned to kind of capitalize on growth over 2024.

Okay. Appreciate that. As we look at your R&D and I appreciate how important the printers are to your business. Your R&D pipeline, do you see like new products that get you guys more into new markets and less more -- that’s the refreshes that you have going on here. How are you thinking about the use of R&D and driving topline growth there?

Yeah. So it’s ironic, but a lot of our products actually are fighting against non-consumption. So they are industrial manufacturers that haven’t automated or don’t even know that they can automate and our target market continues to continues to be people who are buying from us. Again, if I looked at the 500 largest industrial companies, I would be hard pressed to find one of them that didn’t buy something from Brady. The question is and what we’re striving for is, how do we get them to buy more, how do we get a bigger wallet share, how do we help them on their automation journey, how do we help them in productivity. All of these things are areas where Brady can help. And if you look at our portfolio, not only of the printers, but of the Workplace Safety Visualization products, they’re all aimed towards improving productivity and helping ensure the manufacturing environment and the healthcare environment are safer and more productive places. So there’s -- I can’t say there’s a huge swath of industry that’s out there that we don’t work in right now, but I think there’s tremendous opportunity for wallet share expansion at this point.

Got you. I appreciate that. And then last question for you here. As we look at sales in the quarter, is there a feeling that perhaps sales benefited from backlogs being finally fulfilled as supply chain eased or that was not as big for you as perhaps some of your competitors?

Yeah. I would say, we elected several quarters ago to build inventory to ensure we didn’t shortchange any of our customers. So we’ve had no, I’ll call it, backlog effect of shipping late products. What you -- our conversion, and I’m going to say, for more than 95% of our sales, our conversion from order to sale is days or less, which has traditionally been our product line pre-pandemic and I feel really good about that. It came at a cost of increased inventory and part of the reason we’re seeing significant cash generation this quarter as we’ve been able to pull down some of our inventory levels, but they’re still elevated over where they were pre-pandemic. And all of this is aimed towards ensuring our customers and our distributors are not short change products. So a very longwinded answer to your question of no, we don’t see it as chewing into a backlog at this point affecting our sales.

Great. Thanks a lot. I appreciate it.

Thank you. At this time, I’d like to turn the conference back to Russell Shaller for closing remarks. Sir?

Perfect. Thank you. Thank you all for your time today and for your questions. Brady is in a strong position regardless of which direction the economy heads. We’re growing organically and we’ve accelerated the pace of our new product introductions. Our diverse portfolio of products in our diverse geographic footprint increased Brady’s ability to overcome challenges. We are very resilient. Our pricing and efficiency actions are helping us generate gross profit margins of approximately 50%, which demonstrates the value we bring to our customers. Our profits are up and our cash flow was outstanding this quarter. We have a balance sheet that allows us to keep investing in our sales growth initiatives while also returning funds to our shareholders throughout the economic cycle. On the ESG front, we are making great progress. We’re working to ensure our manufacturing footprint is ecologically friendly and we’re excited about the contributions we’re making to our communities. Because Brady strives to be a transparent company that provides value to all of our stakeholders. Even though the global economy may face challenges in the future, I’m optimistic that our team and our company will overcome these challenges. As I hope is evident, we are excited about the Brady story. At some point, mid-fiscal year, we’re looking to hold an Investor Day to talk about our future in great detail. Thank you for your time this morning, and as always, thank you for your interest in Brady. Have a great day. Operator, you may disconnect the call.

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