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Edited Transcript of BRC earnings conference call or presentation 21-Nov-19 3:30pm GMT

Q1 2020 Brady Corp Earnings Call

MILWAUKEE Dec 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Brady Corp earnings conference call or presentation Thursday, November 21, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aaron James Pearce

Brady Corporation - CFO & Treasurer

* Ann E. Thornton

Brady Corporation - CAO & Corporate Controller

* J. Michael Nauman

Brady Corporation - President, CEO & Director

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Conference Call Participants

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* Brian Joseph Lau

Sidoti & Company, LLC - Associate

* Keith Michael Housum

Northcoast Research Partners, LLC - MD & Equity Research Analyst

* Michael Lawrence McGinn

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Brady Corporation Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Ann Thornton, Chief Accounting Officer. Ma'am, you may begin.

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Ann E. Thornton, Brady Corporation - CAO & Corporate Controller [2]

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Thank you. Good morning, and welcome to the Brady Corporation Fiscal 2020 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 2020 first quarter Form 10-Q, 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, Michael Nauman.

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J. Michael Nauman, Brady Corporation - President, CEO & Director [3]

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Thank you, Ann. Good morning, and thank you all for joining us. We released our fiscal 2020 first quarter financial results this morning. I'm pleased to report another quarter of profit improvement and strong cash generation. This quarter, we increased pretax income by 4.2%, increased net income by 22.4% and increased earnings per share by 20.7%, all while continuing to generate strong cash flows in excess of earnings.

Total organic sales declined by 0.4% this quarter. We're seeing the effects of a challenging industrial economy in several geographies around the globe, including Europe, the Middle East and China, which resulted in a slight decline in organic sales in both our Identification Solutions and Workplace Safety businesses this quarter. The organic decline in IDS was only 0.2% but this is a reversal of the growth trend that we've enjoyed for the last several years. This was driven by the macroeconomic challenges that we've experienced outside of the United States. Organic sales in our WPS business decreased by 0.8% this quarter, modest growth in Europe was offset by low single-digit declines in North America and Australia. The economic backdrop in Europe and Australia has certainly impacted our WPS business as well, but we're working hard to take share wherever we can to offset these challenges.

At the same time, we continue to see improvements in our North American business as our rate of decline has steadily improved. We're pleased with this progress as we push to return this business to steady revenue and profit growth. To combat this sluggish economic environment, we're controlling what we can through the consistent execution of our key priorities, which are to invest in sales generating resources and new product development and to serve our customers extremely well all while driving sustainable efficiency gains throughout our business.

We believe that this relentless focus on improving our manufacturing processes and driving savings throughout our business while investing in organic growth positions us extremely well for an even stronger return once our end markets recover. Although the industrial economy is challenging, we're performing well in a number of our businesses and geographies. Our IDS business in the Americas continues to generate strong organic growth and solid returns. This growth was led by our U.S. business, where we're seeing strength in most product lines and end markets. Our recent investments in new product development are also providing benefits.

We launched several new products in our IDS business this quarter that we've been looking forward to bringing to our customers. The WPS business in North America continues to make progress in improving its digital presence. North American WPS sales declined in the low single-digits this quarter, which was a sequential improvement from mid-single-digit decline last quarter.

We're making steady progress throughout this business, and digital sales increased sequentially since the fourth quarter. We continue to believe that we're on the right track to return this business to profitable growth. With the fundamentals in place and our digital presence improving, we're looking ahead to what we believe is the beginning of a trend of organic sales and profit improvements in fiscal 2020.

We've executed efficiency gains within SG&A for the last 4 years, and this quarter was no exception. We continue to identify and execute sustainable improvements throughout our businesses, many of which were started over the last several years and are now beginning to pay off. This is a testament to the team's strong commitment to making investments in both the time and resources that are necessary to drive long-term process improvements.

Now I'll turn the call over to Aaron to discuss our financial results, then I'll return to provide specific commentary about our Identification Solutions and Workplace Safety businesses. Aaron?

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Aaron James Pearce, Brady Corporation - CFO & Treasurer [4]

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Thank you, Michael, and good morning, everyone. The financial review starts on Slide #3. Sales in the first quarter were $286.9 million, which consisted of an organic sales decline of 0.4%, and a decrease of 1.7% from foreign currency translation. Pretax income increased 4.2%, while net income was up 22.4% to $37.5 million this quarter compared to $30.6 million in the first quarter of last year. Diluted EPS increased 20.7% to $0.70 compared to $0.58 in last year's first quarter. And cash flow from operating activities was $38.8 million this quarter, which is more than double the $18.8 million we realized in last year's first quarter. Overall, our earnings growth and cash generation were quite solid, especially given the economic challenges that Michael mentioned.

Turning to Slide #4. You'll find our quarterly sales trends. IDS organic sales decreased 0.2% and WPS organic sales decreased 0.8%. The decline in IDS organic sales was due to macro challenges in several of our foreign businesses in Europe and Asia. We saw growth in most product lines in North America, but this was not enough to bring the entire IDS division to organic growth this quarter. The decline in WPS organic sales was driven by our North American and Australian businesses. As Michael mentioned, growth in our European business wasn't quite enough to offset the low single-digit declines in North America and Australia.

Slide #5 is our gross profit margin trending. Our gross profit margin was 49.3% this quarter, which is a decrease of 70 basis points from last year's first quarter. We're seeing input cost pressures in both IDS and WPS with our largest areas of cost pressure being labor and certain raw materials. We're focused on aggressively driving process improvements throughout our manufacturing facilities in an effort to offset these cost increases. And we have a strong pipeline of opportunities that our teams are driving each and every day.

Turning to Slide #6. You'll find our SG&A expense trending. SG&A was $89.5 million this quarter compared to $94.6 million in the first quarter of last year. Approximately 1/3 of this decrease was due to foreign currency translation as the U.S. dollar strengthened against most major currencies. And the remaining 2/3 of this decrease was due to our ongoing efforts to drive sustainable process improvements throughout our SG&A structure. As a percent of sales, SG&A decreased from 32.3% in the first quarter of last year to 31.2% of sales this quarter.

Slide #7 outlines the trending of our investments in research and development. This quarter, we spent $11 million on R&D. We continue to invest in new product development, and we're committed to increasing our investments over time, while at the same time, ensuring that we're very disciplined so that we get the most out of every dollar spent in R&D.

Moving to Slide #8. You'll find our quarterly trending of pretax income. We increased pretax income by 4.2% to $41.6 million this quarter. This 4.2% increase in pretax earnings is in comparison to a particularly hard comparable as we grew pretax earnings by more than 14% in last year's first quarter. Our ability to improve pretax earnings in a challenging industrial economic environment is a direct result of the sustainable efficiency gains we've implemented over the last several years and will continue to implement in the future.

Slide #9 illustrates our after-tax income and quarterly earnings per share trends. Diluted EPS increased from $0.58 last year to $0.70 in the first quarter of this year, an increase of 20.7%. Along with an increase in pretax earnings, we also had a lower tax rate this quarter. This quarter's tax rate was 9.8%, while last year's first quarter tax rate was 23.2%. This lower-than-normal tax rate was primarily due to the impact of a favorable audit settlement and the realization of tax benefits from equity-based compensation. We now expect our tax rate to be approximately 20% for the full fiscal year ending July 31, 2020.

Turning to Slide #10. You'll find a summary of our quarterly cash generation. We generated $38.8 million of cash flow from operating activities compared to $18.8 million in last year's first quarter. Free cash flow was $31.1 million compared to $12.8 million in the same quarter last year. A portion of this improved cash generation was due to the timing of our annual incentive compensation payments. Last year annual incentive compensation payments were split between the first and second quarters, while this year the vast majority of annual incentive compensation payments will be made during the second quarter.

On an annual basis, we've consistently generated cash flow in excess of net income, and we're always focused on making the right long-term cash decisions for the organization. This quarter, we returned $11.5 million to our shareholders in the form of dividends, and we also invested $7.7 million in capital expenditures, most of which was new machinery and equipment to either add new capabilities or to drive further efficiencies in our manufacturing processes.

Slide #11 outlines the trending of our net cash position, along with our debt structure at the end of the quarter. We increased our net cash position by $16 million this quarter while continuing to invest in capital expenditures and increasing our annual dividend. We finished the quarter in a net cash position of approximately $245 million. Our debt consists of a $45 million Euro-denominated private placement scheduled for repayment in May of next year, and we have no borrowings outstanding on our recently renewed line of credit.

Our approach to capital allocation remains consistent. We are disciplined, and we are patient. First, we use our cash to fund organic sales and efficiency opportunities throughout the economic cycle, which includes funding investments in new product development, sales generating resources, IT improvements, capability enhancing capital expenditures and capital expenditures to increase efficiency and automation in our facilities; and second, we focused on returning cash to our shareholders in the form of dividends.

After funding organic investments and funding dividends, we then deploy our cash in a disciplined manner for acquisitions where we believe we have strong synergistic opportunities, and we use our cash to improve shareholder returns through opportunistic share repurchases. Our cash generation is strong, our balance sheet is strong, and we're focused on driving long-term value for our shareholders through this disciplined allocation of capital.

Slide #12 is our guidance for the full fiscal year ending July 31, 2020. Because of our reduced income tax rate, we're increasing our full year diluted EPS guidance from the previous range of $2.45 to $2.55 to our new range of $2.50 to $2.60 per share. Our organic sales growth expectations remain unchanged at approximately 1.5% to 2.5% for the full fiscal year ending July 31, 2020.

And as I mentioned, we also expect our income tax rate to be approximately 20% for the full year ending July 31, 2020. This tax rate guidance of approximately 20% is consistent with our longer-range forecasts for fiscal 2021 and beyond.

Depreciation and amortization expense are expected to approximate $25 million, and we anticipate capital expenditures to approximate $35 million this year. This guidance is based on foreign currency exchange rates as of October 31, which continued to be a headwind due to the strength of the U.S. dollar. And we're not excluding any onetime income or expense items from this guidance. This guidance is based on financial results fully in accordance with U.S. GAAP.

I'll now turn the call back over to Michael to cover our divisional results and to provide some closing comments before turning the call over to Q&A. Michael?

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J. Michael Nauman, Brady Corporation - President, CEO & Director [5]

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Thank you, Aaron. Slide #13 outlines the first quarter financial results for our Identification Solutions business. IDS sales declined 1.4%, finishing at $215 million with an organic sales decline of 0.2% and a decrease from foreign currency translation of 1.2% this quarter. Organic sales increased in the low single-digits in the Americas region. We continue to see solid organic growth in the U.S. with our strongest growth in Safety and Facility Identification products. Organic sales decreased in the mid-single-digits in Europe and in the low single-digits in Asia this quarter. We've started to see an overall reduction in organic growth rate in the back half of last year, and the softer economic conditions continue in our first quarter, resulting in an organic sales decline in both Europe and Asia.

IDS segment profit increased 2.1% to $42.4 million this quarter. As a percentage of sales, segment profit was 19.7%, which was an improvement over the same quarter last year's segment profit of 19.1%. We improved our profitability compared to the prior year, even though we had a modest organic sales decline and foreign currency headwinds. This profitability improvement was a result of ongoing process improvements and efficiency gains that we've been pushing throughout our business. The soft industrial economy outside of the U.S. made some process improvement initiatives that much more important as we continue to drive reductions in SG&A.

We remain committed to our investment in R&D. This quarter, we launched several high tech materials that are suited for a variety of manufacturing applications. For instance, we launched thermal transfer printing polyamide labels, which is designed for circuit board and electronic component pre-process labeling -- process labeling and manufacturing. These labels are resistant to chemicals, heat, corrosion and humidity and meet a wide range of governmental and industrial compliance requirements.

We also launched a line of labels -- materials for our inkjet printers that are specifically designed to withstand the outdoor elements during overseas shipping. We've built the high tech label material that when combined with our full color, high resolution inkjet printer results in clear, reliable solution that meets all GHS compliance requirements for marine shipping. Both of these materials can be used in a variety of applications in industries and are extremely high quality. And most importantly, they're each a great example of the reliable solutions we offer that prevent the high cost of compliance failures that our customers face every day.

For the full fiscal year 2020, we expect IDS organic sales to grow from 2% to 3%. We'll continue to invest in R&D and drive efficiency throughout our facilities and in SG&A. We remain committed to our top priorities, which are to invest in organic growth opportunities in both sales and R&D, to launch innovative new products to serve our customers extremely well and to continue to drive efficiencies in our manufacturing processes and SG&A.

Slide 14 outlines our Workplace Safety performance. WPS sales declined 4.2%, finishing at $72 million, with an organic sales decline of 0.8% and a decrease from foreign currency translation of 3.4% this quarter. Organic sales increased modestly in Europe and declined in the low single-digits in both Australia and North America. We're seeing consistent improvements in our North American digital sales as a result of the changes we've implemented in the back half of last year.

Overall, our rate of decline continued to improve as our sales decreased in the low single-digits compared to mid-single-digit decline last quarter, but we still have work ahead of us to build sales back to the level we experienced prior to the initial digital platform change. We remain focused on 3 priorities to turn our WPS North American business to consistent organic sales growth and improve profitability. First, we're improving the buying experience for our customers so that it's as simple as possible, reach our customers the way they prefer to be reached whether it's online, mobile, catalog, in-person or through a combination of these channels is essential to returning our business growth, which is exactly why we're focused on having industry-leading websites.

Second, we're increasing our customer interaction rather than only fulfilling orders. This allows us to better understand of what our customers are dealing with in the Safety and Identification perspective and helps us better serve those needs by offering our compliance expertise and complete solutions.

We're doing this through our expanded sales force with expertise in industry-specific regulatory and compliance requirements that our competitors do not possess. Third, one of our strengths is our ability to customize products and quickly turn orders from improving our portfolio of products, by introducing more customized and proprietary products that our customers need. We believe that we're increasing the value that we bring to our customers by focusing on these 3 priorities, which creates customer loyalty and improves our sales and profitability over the long term. Our recovery in North America has been, and will continue, to be choppy. However, we believe we're on the right track to have a solid fiscal 2020 in this business. Organic sales led by our European WPS business this quarter although Europe is a challenging market, the focus and dedication of our team continues to help us grow in our key end markets in Western Europe. Our Australian business declined in the low single-digits this quarter. Economic growth in Australia has slowed recently, and we're seeing the impact of this macro environment on our sales. We're focused on improving our pipeline of opportunities so we can reverse this decline and return to growth. WPS segment profit was $5.2 million compared to $5.5 million in last year's first quarter. As a percentage of sales, segment profit was 7.2% this quarter compared to 7.4% in the same quarter last year.

For the full fiscal year 2020, we expect organic sales to be approximately flat in the WPS business, and we expect to improve in segment profit through benefits from our reduced cost structure and continued efficiency opportunities in SG&A.

Looking again at Brady's total results. I'm proud of our ability to once again increase profitability in this challenging economic environment where foreign currency rates continue to trend against us, and our organic sales have slowed in geographies outside of North America.

We're executing efficiency opportunities, controlling costs throughout our manufacturing facilities and our SG&A structure. We've seen sequential improvements in our WPS North American business. Our IDS business in North America continues to be strong and is growing nicely, fueled in part by new products. But we must remain focused on our priorities, which are to execute sustainable efficiency opportunities in manufacturing and SG&A while investing in selling resources and R&D to grow organic sales growth. We intend to come through this period of sluggish economic activity in even stronger position than we're in today. And we're confident by maintaining our focus and eliminating distractions, we're setting ourselves up to do just that.

Overall, we're in a very strong position. We're dealing with a tight labor market, some increasing material costs and foreign currency headwinds, but Brady is an organization that is accountable and committed to delivering strong financial performance now and into the future. I would now like to start the Q&A.

Operator, would you please provide instructions to our listeners.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Keith Housum from Northcoast Research.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [2]

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Mike, just a little bit on your expectations for how the quarter went, the results versus expectations? And then second, with the decline here in IDS, more specifically, what gives you the confidence that you'll be able to keep your annual growth rate to 2% to 3%?

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J. Michael Nauman, Brady Corporation - President, CEO & Director [3]

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Keith, I would say a couple of factors are very important this quarter. We saw across the board an incredibly slow August, unanticipated in household was and we then saw, we were able to build on that in September and October. So we do believe that despite the extremely slow start to last quarter, the trend is better than the overall quarterly results indicated.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [4]

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Great. And then switching over to the gross margins, the 70 basis-point decline year-over-year, it's probably the most you guys have had in a while. I think that's the lowest gross margins I've seen in the past several years. Your confidence and the ability for your automation efforts to keep up with some of the pressures that you're seeing with your raw inputs and your wages, any color on that?

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J. Michael Nauman, Brady Corporation - President, CEO & Director [5]

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Yes, we actually are continuing to move forward across the board in that effort. I think, as you may know, part of our culture is to do an annual communications meeting with all our facilities at the beginning of our year, so our senior leadership gets their eyes on at all our facilities, what we should be doing and what we are doing. Having just finished that process, I can tell you, I'm extremely pleased not only with the projects that are finishing up, but the pipeline of new projects that are coming forward and are being introduced right now. We have a lot of opportunity to move forward. By the way, Keith, this is not just good for productivity improvements, it's good for our employee base. As we shift generationally, the interactive nature of our employees' changes of how they like to interact with manufacturing, manufacturing equipment and our new field systems, our new automated technology fit in line with the desires of our continuing employee base.

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Operator [6]

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(Operator Instructions) And our next question comes from Joe Mondillo from Sidoti.

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Brian Joseph Lau, Sidoti & Company, LLC - Associate [7]

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It's Brian, actually, on for Joe. Just real quick. I had a couple of questions. The first one, on IDS, specifically in the U.S., organic growth is still solid. What was really driving that? Any particular end markets or divisions or things like that?

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J. Michael Nauman, Brady Corporation - President, CEO & Director [8]

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Our Facility and Safety ID is our strongest driver in that market, Brian. But I'd also tell you, as you've been listening to the calls over the last few quarters, our cadence of new product development of actually patented proprietary products has been growing strongly. In the industrial marketplace, that takes a little longer to develop into revenue than in other marketplaces, but we are starting to really see that take hold. In addition to that, we're doing a much better job of connecting with our end users. The Brady brand, the Brady product set has a great reputation, but the more interactively we can work with our end user sets, the better they can really take advantage of that. And we are seeing that as well.

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Brian Joseph Lau, Sidoti & Company, LLC - Associate [9]

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All right, great. And then transitioning over to health care, it looked like sales were kind of flattish in the quarter. Any update there on how that business is trending as far as profitability and things like that?

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J. Michael Nauman, Brady Corporation - President, CEO & Director [10]

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We feel very good about that business. As I think I mentioned last quarter, we did foretell a little choppiness as we came out into growing, and we're seeing exactly what we expected to see. We've got a great new sales force that we've really increased in that area. New product sets, printer families that are really generating some energy within our customer base. So we do see that continuing to move in the right direction and are pleased with where we're at this point.

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Brian Joseph Lau, Sidoti & Company, LLC - Associate [11]

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All right, great. Then also moving over to the Workplace Safety. Specifically with digital sales, it looks like those were up organically. Any concern that what happened in North America in the recent quarters could potentially happen in that segment as well?

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J. Michael Nauman, Brady Corporation - President, CEO & Director [12]

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We are -- I -- we are looking very hard at all times throughout our global footprint for WPS, seeing if there are any bleed-overs. As you know, we did have a disconnect in our digital platform a year ago, June, which drove us in the wrong direction for several months before it became apparent as to the root causes. We have been moving in the right direction since approximately February -- January, February of this year. So that part, we're confident, we have addressed and are moving in the right way. We do and work hard to bifurcate our markets in Europe in places like that to really hit our customer needs. We still feel fundamentally that the European customer mentality is different. Not only from the U.S. mentality, but within countries and even regions of countries. And so our approach to that marketplace is somewhat different. Just as in Australia, we've headlined that we've been working to expand into different industry segments from our original primary segment of mining and have done an effective job of that. So overall economic issues are always a challenge, both in Europe and in Australia.

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Brian Joseph Lau, Sidoti & Company, LLC - Associate [13]

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All right. And then last one for me here. Just on the refinancing of the credit facility earlier, was that just based on the maturity? Or was there something else involved? And then just you know you touched on M&A a little bit in your prepared remarks, but how does that pipeline look? Anything specific we should be aware of or looking forward to?

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Aaron James Pearce, Brady Corporation - CFO & Treasurer [14]

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Brian, this is Aaron. I'll answer the credit facility question. It actually was due to expire within a year. And we typically like to extend our credit facilities when we get about a year out. So that's really the main reason that we did it. There were no other extenuating circumstances.

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J. Michael Nauman, Brady Corporation - President, CEO & Director [15]

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And regards to M&A, as a public company, we -- certainly can't foreshadow or foretell M&A activity. What I can tell you is that as you look back over Aaron and my tenure, we have created a philosophy of building, building on the fundamentals and the foundation. And I have been talking to you about the fact that we're moving strongly into an ability to execute M&A in a logical, technology-driven way at this point in our juncture. Whether that happens or not, depends on a lot of factors. We deal with private companies in many cases. It's as important that they're in the right spot as it is, we're in the right spot. But you can know that we are looking at key opportunities that will help us drive our technology forward to really create a better growth platform in the future and that we are actively always, at this point, in discussions with different individuals to see whether we can combine for a 1 plus 1 equals 3. It's very important to us that our acquiring companies win just as much as it is that we win. We both kind of win in these transactions to be a long-term viable, and it's got to be based not just on market share, but on a real differentiation and advantage to technology and product sets that will really enable us to move forward. But you can be assured, we are continuing to focus more effort in that area.

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Operator [16]

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Our next question comes from Michael McGinn from Wells Fargo.

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Michael Lawrence McGinn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [17]

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This is Mike on for Allison. I just had a couple of quick questions. Michael, you mentioned August was particularly weak. I was wondering if you could talk about whether you saw any channel to destocking from distributors. I know you guys have some shorter lead times. And is that now in the rearview and you're going to see better growth going forward, especially IDS? And if you can just give us a little color there, that would be great.

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J. Michael Nauman, Brady Corporation - President, CEO & Director [18]

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We did experience, across the board, all regions, all businesses, a dramatic downtick in August that was weaker than any of our teams expected. The unique part about it was it was very consistent in that it was across the board. But as I said, and I want to be clear, we then saw progress through September, particularly the second half of September going through October. We have experienced in Europe as an example, but we believe, in many cases, Brexit-related changes in stocking patterns. And at this point, although we think that we are through that, as we are not through Brexit, there is no guarantee that it's an absolute case, but we do believe that we are through the initial strong stocking and then destocking situations.

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Michael Lawrence McGinn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [19]

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Got it. And then if I could just ask more of a longer-term question. Michael, I hear you on the more patented target approach to R&D. Can you give us a little perspective on, is there a fine line between maybe an aggressive 80/20 approach to -- and then still being able to offer a plentiful amount of SKUs with a good, better, best product offering? How do you tow that line going forward?

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J. Michael Nauman, Brady Corporation - President, CEO & Director [20]

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That is actually very true as we take a look at where we're going. I'm going to talk about both product sets, to give you an idea. We, for instance, in WPS are a value-added distributor at about 50% manufactured products, 50% buy and resell. We believe that moving that up to about 70% is the ideal point. That still is a significant amount of buy and resell. But those are all the products where we don't add value or don't add enough significant value or possibly are the -- as to your point, the lower costs. In addition to that, we do look at providing our customers with alternative cost value points for them. That doesn't mean the products aren't proprietary. What it does mean is not all feature sets, not all durability levels are needed for all our customers. If you look at -- Floor Markings is a great example. We've introduced newer levels of ToughStripe, Super ToughStripe materials. We have regular grade floor marking materials, we can take a customer through very temporary and basic needs to the highest durability level of floor markings and really give them and explain those options to them. That doesn't mean how we do it in all cases, can't be proprietary and/or patented. But it does mean that we're providing them with differentiated products for their level of need. And I think that's something Brady does very, very well. We are super high durability in many of our applications, but we also have levels of that, really depending on what the user case is. So I think your point is very valid. We do evaluate that, not only as we introduce a new product, but as we think about the development of new products. What does the customer really need and is their bifurcation in the market's need base. And we are doing that and provide that. So I agree that, that's something that's very important, and we do keep that in mind.

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Operator [21]

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And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Michael Nauman for any closing remarks.

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J. Michael Nauman, Brady Corporation - President, CEO & Director [22]

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Thank you very much. I'd like to leave you with a few concluding comments this morning. We reported a good start to fiscal 2020. Looking forward, I believe that Brady is in a very enviable position despite weakness in the industrial economy. Over the last several years, we've made increased investments to develop high quality, innovative new products, and those new products are now coming to market. We've improved our customer service and support, which is making more loyal customers. We have healthy gross profit margins, and we've been aggressively driving sustainable efficiency gains, which you can see in our continued reductions in SG&A expenses. All of this has made us a more efficient and effective organization that is better able to react and adapt to change. These improvements, combined with our solid balance sheet that is in a net cash position of $245 million really puts Brady in a position of strength as we can continue to invest in our future while aggressively targeting the customers of our competitors, so that when our end markets recover, we will be in an even stronger position and emerge with even stronger financial results. Our team is motivated. And I'm motivated to keep our positive momentum alive. We expect to grow organic sales, drive efficiencies to the organization and grow earnings. I'm proud of what we've accomplished so far, and I know we're making the right decisions today to set us up for improved, long-term financial results.

As always, if you have any questions, please contact us. Thank you all for participating today, and have a great day. Operator, you may disconnect the call.

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Operator [23]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.