Brady Corporation (NYSE:BRC) Q2 2024 Earnings Call Transcript
Brady Corporation (NYSE:BRC) Q2 2024 Earnings Call Transcript February 22, 2024
Brady Corporation beats earnings expectations. Reported EPS is $0.93, expectations were $0.92. BRC isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to Brady Corporation's Second Quarter 2024 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ann Thornton CFO and Treasurer of Brady Corporation. Please go ahead.
Ann Thornton: Thank you. Good morning and welcome to the Brady Corporation fiscal 2024 second 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 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 2023 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'll now turn the call over to Brady's President and Chief Executive Officer, Russell Shaller. Russell?
Russell Shaller: Thanks Ann and thank you all for joining us today. We released our 2024 second quarter financial results this morning and I'm pleased to report another quarter of organic sales growth and improved profit. This quarter we increased our gross profit margin to 50.2%. We improved our pre-tax earnings by 15.1% and we grew our non-GAAP earnings per share by 14.8%. These results wouldn't be possible without the hard work and dedication of our entire global team. I'm incredibly proud of the effort the team has put in to ensure the success of our regional reorganization, which became effective at this time last year. The progress we've made and the opportunities we've identified continue to excite motivate me every single day.
It has absolutely contributed to our improved earnings and cash flow. And just as importantly it's creating an environment where we're encouraging our teams to think differently about what they do every day, which to me is the best part. Combining our businesses within our regions has brought our teams together and cultivating more innovative thoughts and we're all working together better than ever. This quarter we once again grew earnings per share, while increasing our investment in both research and development and our sales force. We increased our R&D spend by nearly 10% in the second quarter and we added a number of new salespeople throughout our global business. We have some exciting new products to launch over the next several quarters and a strong future pipeline of innovative new products which are essential to drive sales growth over the long-term.
I'll now turn the call over to Ann to provide more details on our financial results. Ann?
Ann Thornton: Thank you, Russell. We grew organic sales 1.6% this quarter, while once again improving our gross profit margin and our overall profitability. This resulted in GAAP EPS of $0.9 per share, which was up 18.4% compared to the second quarter of last year. Non-GAAP EPS was just calculated as our GAAP EPS excluding the after-tax impact of amortization expense was $0.93 per share this quarter which was up 14.8% compared to the second quarter of last year. Our Americas and Asia region grew organic sales 1.2% and increased segment profit by 9.3% compared to last year's second quarter. And our Europe and Australia region grew organic sales 2.5% and increased segment profit by 11.9% compared to last year's second quarter.
We executing extremely well in Europe despite a macro environment with minimal growth. We continue to integrate our businesses and identify opportunities to grow sales with existing customers as well as to convert new customers to our high-performance solutions. Our key financial takeaways this quarter are continued organic revenue growth despite slowing against macroeconomic trends. Non-GAAP EPS growth of 14.8%, significant improvement in gross profit margin, and a continued commitment to return funds to our shareholders. Now, I will turn to Slide number 4 for our quarterly sales trends. Organic sales grew 1.6% and foreign currency translation increased sales 0.8% this quarter while the impact of divestitures reduced sales by 3.5% resulting in a total sales decline of 1.1%.
Slide number 5, outlines our quarterly gross profit and gross margin trending. Our gross profit margin improved by 220 basis points to 50.2% compared to 48% in the second quarter of last year. The significant improvement in our gross profit margin was the result of several factors, but with the primary being favorable product mix. Turning to Slide number 6, you'll find our SG&A expense trending. SG&A,was $91.3 million this quarter compared to $92.3 million in the second quarter of last year. As a percent of sales, SG&A,was consistent with last year at 28.3%. We're funding additional selling resources while reducing overall SG&A expenses through ongoing efficiency initiatives throughout our global businesses. Slide number 7, details our investments in research and development.
This quarter, we once again increased our investment in R&D from $15.4 million to $16.8 million, which was 5.2% of sales. We're fully committed to our R&D efforts and we have several innovative new products planned for launch in the second half of this fiscal year. Moving to Slide number 8, you'll find our pre-tax earnings which increased 15.1% on a GAAP basis from $48.5 million to $55.8 million in the second quarter. Excluding amortization from both periods, pre-tax earnings increased 12.4% on a non-GAAP basis from $51.8 million to $58.2 million. Slide number 9, details earnings and EPS. Our trend of increasing earnings on a quarter-over-quarter basis continued this quarter. Our GAAP EPS increased by 18.4% and excluding the after-tax impact of amortization from both periods, our second quarter non-GAAP EPS increased 14.8% compared to last year.
Turning to Slide number 10, you'll find a summary of our cash generation. Operating cash flow increased from $29.4 million in the second quarter last year to $36.1 million this quarter. Capital expenditures increased this quarter, because we purchased one of our facilities that had been previously leased, resulting in negative free cash flow due to this one-time purchase. We have been looking forward to closing this transaction because it secures a primary manufacturing location for us for the long term. On Slide number 11, you'll find the impact that our consistently strong cash generation has had on our balance sheet. We're currently in a net cash position of $95.8 million. So even as returning over $19 million to our shareholders in the form of dividends and share buybacks this quarter, the facility purchase and reducing our debt we are still in a net cash position.
This gives us an incredible amount of flexibility in our capital allocation decisions. Our approach to capital allocation remains consistent, which is, to first use our cash to fully fund organic sales and efficiency opportunities. This includes investing in new product development, sales-generating resources, capability enhancing capital expenditures as well as automation focused CapEx. We will continue to deploy capital to productivity and sales growth opportunities throughout the economic cycle, that we focus on consistently increasing our dividend. This fiscal year, we announced our 38th consecutive annual increase in our dividends. After fully funding organic investments and our dividend, we then deploy our cash in a disciplined manner for either acquisitions where we have clear synergies or for opportunistic share buybacks when we see a disconnect between our intrinsic value in our trading price.
Our incredibly strong balance sheet puts us in a position to execute additional growth opportunities through our R&D investments and sales resources, to acquire companies strategically, when the synergies are clear and the price is right and to return funds to our shareholders through dividends and share buybacks. On Slide number 12, you'll find our fiscal 2024 guidance. We are increasing the bottom end of our full year fiscal 2024 EPS guidance range of $3.70 to $3.95 on a GAAP basis and $3.85 to $4.10 on a non-GAAP basis to our new range of $3.80 to $3.95 on a GAAP basis, and $3.95 to $4.10 on a non-GAAP basis. Our outlook is based upon January 31st foreign currency exchange rates and it assumes continued economic expansion. Macroeconomic conditions do continue to slow in certain end markets and parts of Europe.
So we now expect that organic sales growth will be in the low single-digits for the full fiscal year 2024. The other elements of our guidance remain consistent with an income tax rate of approximately 22%, depreciation and amortization of approximately $30 million to $32 million and capital expenditures of approximately $75 million, which is inclusive of approximately $55 million of CapEx for the purchase of the previously leased facility, which I mentioned, as well as the build-out of a new facility which will allow us to combine two lease leased locations into one owned location. Potential risks to our guidance among others include potential strengthening of the US dollar, inflationary pressures that we're unable to upsell to offset in a timely enough manner for an overall slowdown in economic activity.
I'll now turn the call back over to Russell to cover our regional results and to provide some closing thoughts before Q&A. Russell?
Russell Shaller: Thanks, Ann. Our Americas and Asia regional results are detailed on Slide 13. Sales were $211.6 million this quarter and organic sales growth was 1.2%. The impact of divestitures reduced sales by 5.1% in the region and the result including the impact of foreign currency was a total sales decline of 3.8%. We were able to grow consistently in our major product lines and end markets despite some weakness we're seeing in industrial automation as well as project delays. Our core businesses performing well. The area where we saw some weakness within our healthcare identification product line, which declined in the quarter. The impact of lower reimbursement rates for healthcare providers coupled with a decrease in overall hospital admissions continues to reduce demand for our identification products in the healthcare segment.
For analyzing our product offering, we have some new products in development that we're looking forward to launching in the next few quarters to mitigate this trend. Outside of healthcare growth was excellent, throughout our remaining key product areas as our identification and Safety Solutions did well for the quarter. Our business in Asia turned the corner on growth and recovered nicely in the second quarter with 5.1% organic sales growth. We grew sales throughout the region with mid-single digit growth in China along with another incredibly strong quarter in India, where we saw just over 21% sales growth. Our business in India has been a clear growth leader in our Asia business for several years. So we're excited about the future in India.
Segment profit in Americas and Asia increased 9.3% to $43.9 million and segment profitability improved from 18.3% of sales to 20.7% of sales this quarter. Our continued improvement in gross profit margin resulted in this significant increase in segment profit. Slide 14 details the performance of our Europe and Australia region. Sales were $111 million this quarter. Organic sales growth was 2.5% and foreign currency increased sales by 2% for a total growth of 4.5%. Despite slowing economic conditions in Europe, we were still able to grow well above GDP in our key geographies and end markets through our focus on use cases that require a specialized solution, which is absolutely ideal for Brady products. Organic growth in Europe was 2.3% and organic growth in Australia was 3.7% in the quarter.
Our organic sales growth resulted in solid increase in segment profit for the quarter from $13.5 million to $15.1 million. And as a percentage of sales, segment profit increased from 12.7% to 13.6%, although we're facing cost pressures, we were able to more than offset them through operational efficiencies and targeted price increases. We continue to integrate our businesses in Europe in particular, and the opportunities to grow sales with current customers as well as provide solutions for new customers continue to be identified by our team. I'm really proud of the progress we've made, our execution in Europe and Australia has been incredibly strong. We had another great quarter and first half of the year and I'm definitely looking forward to finishing the second half of the year on a high note as well.
With that we'd like to start the Q&A. Operator, would you please provide instructions to our listeners
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