Q4 2023 Brady Corp Earnings Call
Participants
Ann E. Thornton; CFO, Treasurer & Director of IR; Brady Corporation
Russell R. Shaller; President, CEO, Senior VP & Director; Brady Corporation
Keith Michael Housum; MD & Equity Research Analyst; Northcoast Research Partners, LLC
Stephen Michael Ferazani; Research Analyst; Sidoti & Company, LLC
Presentation
Operator
Good day, and welcome to the Brady Corporation Fourth Quarter 2023 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 Financial Officer. Please go ahead.
Ann E. Thornton
Thank you. Good morning and welcome to the Brady Corporation fiscal 2023 fourth quarter earnings conference call. The slides for this morning's call are located on our website at www.bradycorp.com/investors. We will begin our prepared remarks on Slide #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 2023 Form 10-K, which was filed with the SEC this morning.
Also, please note that this teleconference is copyrighted by Brady Corporation and may not be rebroadcast without the consent of Brady. We will be recording this call and broadcasting it on the Internet. As such, your participation in the Q&A session will constitute your consent to being recorded.
I'll now turn the call over to Brady's President and Chief Executive Officer, Russell Shaller. Russell?
Russell R. Shaller
Thank you, Ann, and thank you for joining us today. We released our fiscal 2023 fourth quarter results this morning, which represented another company record earnings per share results. Our organic sales growth grew 6.9% this quarter due to strong results throughout our global business. We increased our GAAP earnings per share 23.5% and we grew our non-GAAP earnings per share by 19.5%. This quarter represented an excellent finish to another great year.
Our full-year 2023 GAAP EPS of $3.51 was another all-time record high following 2 consecutive years of all-time record EPS. Our non-GAAP EPS of $3.64 was also an all-time record high. This year, we grew organic sales 5.5% with growth driven by both regions throughout all of our major businesses and we returned $120 million to our shareholders through dividends and share buybacks while still finishing the year in a net cash position. I'm proud of our results this year. This is a direct result of the hard work and dedication of the entire company.
We continue to improve profitability while increasing our investment in R&D, expanding our sales force and investing in our digital capabilities. Our focus on new products and sales generating investments positions us to continue to generate consistent organic sales growth into the future.
Our cash generation this quarter was excellent with operating cash flow of 161% of net income and free cash flow of 148% of net income. Our priorities for the next year are consistent, which are to generate topline growth in excess of GDP and continue our evolution into a faster growing company, to develop our product offering to support our customers' automation initiatives, which we believe is a growth opportunity for years to come, to execute operational effectiveness opportunities to ensure we continue to improve profitability as we grow, to effectively deploy our capital in order to drive long-term shareholder value which includes organic investments, acquisitions and returning funds to our shareholders through dividends and share buybacks.
We demonstrated our commitment to returning funds to our shareholders this year as we repurchased more than 3% of our diluted share count by nearly exhausting our existing buyback authorization. And we announced a new $100 million share buyback authorization and yesterday we announced an increase in our dividend which represents the 38th consecutive year of annual dividend increases. We're committed to consistently return cash to our shareholders while delivering a strong shareholder return.
I'll now turn the call over to Ann to provide more details on our financial results. Ann?
Ann E. Thornton
Thank you, Russell. This quarter we had strong organic sales growth of 6.9% while improving our gross profit margins and reducing our SG&A expense as a percentage of sales, resulting in earnings growth and a quarterly record GAAP EPS of $1 per share, which was up 23.5% compared to the fourth quarter of last year. Non-GAAP EPS, which is calculated as our GAAP EPS less the after-tax impacts of amortization expense, was $1.04 per share this quarter, which was up 19.5% over the fourth quarter of last year.
Both regions performed extremely well with strong sales and profit growth. Compared to last year's fourth quarter, our Americas and Asia region grew organic sales 5.6% and increased segment profit by 17.2%. And our Europe and Australia region grew organic sales 9.5% and increased segment profit by 9.1%. Our teams are executing extremely well throughout our global businesses.
So, the key financial takeaways this quarter are strong revenue growth, record EPS, excellent performance within both of our regions and the continued commitment to return funds to our shareholders.
Let's move to Slide #4 for our quarterly sales trends. Organic sales grew 6.9% and foreign currency translation increased sales 0.6% this quarter, while the impact of our PremiSys divestiture that we closed in the third quarter reduced sales by 0.7%, resulting in total sales growth of 6.8%. The recent weakening of the U.S. dollar versus other major currencies resulted in a slight positive to our total sales growth this quarter, which follows 6 consecutive quarters of the opposite FX impact due to the shrinks in U.S. dollar.
On Slide #5, you will find our quarterly gross margin trending. Our gross profit margin increased 40 basis points to 50.8% compared to 50.4% in the fourth quarter of last year. Consistent with the third quarter, we were able to offset the majority of our input cost increases through reduced freight charges and other efficiency gains.
Slide #6 details our SG&A expense trending. SG&A was $97.5 million this quarter compared to $94.5 million in the fourth quarter of last year. As a percent of sales, SG&A declined to 28.2% compared to 29.2% of sales in the fourth quarter of last year. If you exclude amortization expense from each of the periods presented, then SG&A will decrease from 28% of sales in the fourth quarter of last year to 27.5% of sales this quarter. So overall we're making nice progress with our cost structure. We've reduced our SG&A expense from over 36% of sales 7 years ago to 27.8% in the full year fiscal 2023. Meanwhile, we are still investing in sales generating resources by growing our sales force while identifying ongoing efficiency opportunities throughout our sales and other support functions.
Slide #7 details the trending of our investments in research and development. This quarter, we once again increased our investment in R&D to $16.3 million, which was 4% of sales. We believe that the investments with the best ROI are almost always organic investments, in particular, research and development. We're committed to new product development and we have an exciting pipeline of new products set to launch in fiscal 2024.
On Slide #8, pretax earnings increased 18.2% on a GAAP basis from USD54 million to USD63.8 million. And if you exclude amortization from both periods, pretax earnings increased 14.8% on a non-GAAP basis from USD57.7 million to USD66.2 million. Slide #9 details the trending of earnings and EPS. You can see a clear trend of increasing earnings and you can also see that the fourth quarter is our strongest quarter on record. On both a GAAP and non-GAAP basis, our fourth quarter EPS was an all-time record high. This quarter's GAAP EPS increased by 23.5%. And if you exclude the after-tax impact of amortization from both periods, our fourth quarter non-GAAP EPS increased by 19.5% compared to last year.
On Slide #10, you'll find a summary of our cash generation. Operating cash flow increased substantially this quarter from $53.2 million in Q4 of last year to $79.3 million this quarter and free cash flow increased as well from $32.2 million in last year's fourth quarter to $73 million this quarter. Operating cash flow was 161% of net income and free cash flow was 148% of net income this quarter.
Turning to Slide #11, you can see the impact that Brady's historical cash generation has had on our balance sheet. We're currently in a net cash position of $101.8 million. To put this in perspective, even with returning more than $56 million to our shareholders in the form of dividends and buybacks this quarter, we still increased our net cash position by more than $17 million. Our approach to capital allocation 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 and automation focused CapEx. Despite any economic uncertainty, we will continue to deploy capital to drive productivity and sales growth.
And second, we focus on consistently increasing our dividends. We've now increased our dividends annually for 38 consecutive years, which is a [streak] that we're very proud of. After fully funding organic investments and dividends, we then deploy our cash in a disciplined manner for either acquisitions where we have clear synergies or for opportunistic buybacks when we see a disconnect between intrinsic value and Brady's trading price.
Our strong balance sheet positions us to be able to execute additional value enhancing activities such as R&D investments and other organic sales opportunities to acquire companies strategically when the price is right and the synergies are clear and to return funds to our shareholders through dividends and share buybacks.
Slide #12 provides an overview of our financial results for the full year ended July 31, 2023. Overall, sales increased 2.3% and organic sales grew 5.5%. This organic sales growth was partially offset by the negative impact of foreign currency translation of 3% and a decline of 0.2% due to the sale of our PremiSys business in the third quarter. We finished fiscal 2023 with all-time high GAAP and non-GAAP EPS. These strong earnings results were even after increasing our investment in R&D by nearly 5% this year. Fiscal 2023 was another record EPS year and our fourth quarter was another record quarter as well. We're confident that our actions this year and our consistent priorities will set us up for success in the future.
So, this takes us to our guidance for next year on Slide #13. We are forecasting GAAP EPS to range from USD3.70 to USD3.95 per share in fiscal 2024, which would represent an increase of 5.4% to 12.5% next year. We also anticipate organic sales growth in the mid-single digit percentages for the year ending July 31, 2024. And based on foreign currency exchange rates as of July 31, we expect the weakening of the U.S. dollar to increase fiscal '24's sales by an additional approximately 2%.
Other elements of our guidance include an income tax rate of approximately 22%, depreciation and amortization expense of approximately USD32 million to USD34 million and capital expenditures of approximately $75 million. Our CapEx estimate is inclusive of the purchase of a previously leased facility and the build-out of a new facility totaling approximately $55 million. Our capital allocation strategy remains unchanged, which are to continue to invest in our organic business through both research and development and our sales force, continue to pay the dividend which we just mentioned increased for the 38th consecutive year, continue to be opportunistic with share buybacks while identifying potential acquisitions where the price is right and the strategic fit is clear.
We have a strong balance sheet and we'll continue to use that to drive long-term shareholder value. Potential risks to our guidance, among others, include potential strengthening of the U.S. dollar, inflationary pressures that we're unable to offset in a timely enough manner or 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 R. Shaller
Thanks, Ann.
Slide 14 details the financial results of our Americas and Asia region. Sales were $227.5 million this quarter and organic sales growth was 5.6%. The divestiture of our PremiSys business decreased sales by 1% and foreign currency translation reduced sales by 0.2%, resulting in total sales growth of 4.4% this quarter.
Segment profit increased by 17.2% to $50 million. Organic sales growth resulted in a significant increase in profit in the fourth quarter, while another contributing factor was freight rates returning to normal in fiscal '23. Barring any drastic change in macro and logistics environment, we expect freight rates to remain at these normalized level, which will not provide the year-over-year benefit in fiscal '24 that we realized this year.
As we disclosed in the third quarter, our new regional structure became effective on February 1, but this quarter we will provide a few additional details regarding the sales performance of our previous segments. Our former Identification Solutions business in the America and Asia region grew sales in the mid-single digits and our former Workplace Safety business declined in the mid-single digits in this quarter. Approximately 90% of the revenue in our Americas and Asia region represents the former IDF Solutions division and the remaining 10% of the revenue in this region represents the former Workplace Safety division.
We realized growth in most of our product lines and end markets except for our healthcare identification product line. The healthcare industry has struggled to fully recover from a variety of challenges that have impacted it over the last several years, starting with the pandemic and then moving into supply chain and logistics challenges and most recently inflationary pressures. Also, our Asia business struggled in the fourth quarter reporting a mid-single-digit decline primarily due to weakness in China and in the consumer electronics industry in Southeast Asia. The exception in Asia is our business in India, which continues to grow organically between 15% and 20% quarter-over-quarter. We're looking forward to our expansion in India and the additional growth potential in fiscal '24.
Moving to Slide 14, you will find a summary of the performance of our Europe and Australia region. Sales were $118.4 million this quarter, organic sales growth was 9.5% and foreign currency increased sales by 2% for a total growth of 11.5%. As far as the sales performance of our previous segments both our former Identification Solutions and Workplace Safety businesses grew sales organically in the high single digits in the quarter. Slightly more than half of the revenue in Europe and Australia region represents the former Identification Solutions division and the remainder represents the former Workplace Safety division. Throughout Europe, we continue to realize organic growth across our major product lines and we are benefiting from many similar trends that we're seeing in the U.S. Many companies are working to shorten their supply chain and find workers resulting in real demand for our productivity solutions.
Our Australian business grew sales organically by nearly [13%] this quarter and contributed significant increase in segment profit. In total, Europe and Australia segment profit increased 9.1% to $18.4 million this quarter. Europe is realizing the impact of inflation as the impact has occurred slightly later than the impact of inflation in the U.S. This results in segment profit as the percentage of sales decreasing slightly from 15.9% to 15.6% this quarter. We're actively working to address these cost pressures through operational efficiencies and selective price increases, but near term inflation expectations bring profitability challenges along with it.
In total, our fourth quarter for our entire global business, our historical Global ID Solutions business would have had organic sales growth of 7.3% and our historic Global Workplace Safety business would have had organic sales growth of 5.1%.
With that, we'd like to start the Q&A. Operator, would you please provide instructions to our listeners.
Question and Answer Session
Operator
Thank you. At this time, we'll conduct the question-and-answer session. (Operator Instructions) Our first question comes from Keith Housum with Northcoast Research.
Keith Michael Housum
Good morning guys, and congratulations on a great quarter. Russell, perhaps you didn't touch on some of the growth initiatives that you've put in place, I guess, since your tenure as CEO has started. And perhaps provide a bit color in terms of how it's driving growth that we're seeing here, what we can expect next year?
Russell R. Shaller
Yes, sure. And thanks for joining the day after vacation. Yes, so traditionally Brady has been very good at selectively targeting customers to both improve their overall plant safety as well as improve their automation initiatives in their plant. And really by focusing in on those areas for the whole company rather than just IDS, we're starting to see the translation into growth for the company. So if you were to look back at IDS over many years, it enjoyed a pretty decent growth track record. Now, what you're seeing is the expansion of that across really the consolidated group of companies within Brady. So, that's helping us.
Second part that's helping is the drag that we had by some of our traditional catalog businesses becomes increasingly a smaller share of the overall corporation. And so while we're still seeing some of those businesses decline in the low single digits, the effect it's having on the overall corporation is certainly less. So, I'm going to give it 2 things. The positive impact of really focusing on customers and some of the customer solutions we're delivering, that's giving us a great tailwind. And then on the flip side, having increasingly smaller percentage of our dragging businesses is helping us as well. So, long-winded answer, but to give you guidance kind of into next year, we've always felt that we can do GDP of our underlying countries plus a couple of points. What the total macro environment will be next year, I think, is anybody's guess. Americas seems very strong, Europe is okay and China is not doing too well.
Keith Michael Housum
Sure. Got you. If I could just drill down on one of your comments before about expanding the sales force, can you perhaps provide little bit more color in terms of how much you're expanding the sales force? Is it by several percentage points above revenue growth or where is the sales force growing in terms of driver?
Russell R. Shaller
Yes, we continue, sales for us is a great marginal investment. unfortunately those sales people are kind of granular. So, if you hire 2 people in Texas, is it worth hiring a third person in Texas, for instance? We look at that as we continue to invest in sales people as long as we're getting a marginal return on them. Is it an enormous increase in sales force? Absolutely not. But we continue to push the bounds of saying should we add another 5%, 7% to our sales force as we continue to grow our business. And it's something that we look at every month because they're very granular decisions about whether we would add say a sales person in India or whether we would invest in digital marketing in the UK, for instance. So, we have a great analytics team that is helping us tremendously in the resolution of where we are making our investments.
Keith Michael Housum
Great. And if I could squeeze one more in here and I'll turn it over to others. In terms of the profitability of the segments, the Europe and Australia segment obviously has a lower summit profit margin than the Americas and Asia. Can you perhaps help us reconcile while that's the case, is there an opportunity to get into more of a balance going forward?
Russell R. Shaller
(technical difficulty) is, it's just a little bit tougher environment in Europe. The cost structures are a little bit higher. I think both businesses are in a good place in terms of profit margins. It's always the question if you push profit margins, you start destroying demand for some of our products. And we do see that if you push pricing too far, people will buy 2 printers instead of 3 or they will buy less consumables. So, if you look at the European region in particular and how cut up it is by the different countries and the different languages and the logistics costs and what have you. It's just a slightly more expensive place to do business. We love them and we love their growth opportunities. I mean, clearly did fantastic in the last quarter. But with that said, it's just slightly more difficult to do business there than you'd have in the U.S.
Keith Michael Housum
Great. I appreciate that. I'll turn it over.
Operator
Our next question comes from Steve Ferazani with Sidoti.
Stephen Michael Ferazani
I wanted to ask a little bit about cost management, SG&A. Obviously, you've continued to do a great job in reducing costs. I want to go back to when you announced the resegmentation and talked about it adding USD0.10 to USD0.20 in EPS to fiscal 2024. I'm assuming we've seen some of those benefits already in the second half of this year. Is it a USD0.10 to USD0.20 benefit next year? And what other efforts being made here? Do you see further reductions in SG&A going forward?
Russell R. Shaller
Yes. So you're absolutely right. We did capture more of that savings in '23 than we had originally expected. So I think when I had said that USD0.10 to USD0.20 in 2024, I was probably a bit pessimistic in how fast we were going to be able to realize the savings. So we certainly picked some of it up in '23. The remainder will be in '24. I feel fantastic so far with how that has come together. In fact, it has absolutely exceeded our expectations and our business case and going through it. We always said this was going to be a pay-as-you-go event. We've digested all of the costs that were associated with making this change, and yet we've still been able to turn out record profits. So I think we're well positioned in '24, but to explicitly answer your question, some of that gain absolutely was seen in '23.
Stephen Michael Ferazani
Great. The $55 million in CapEx related to the conversion in the new facility, can you provide a little bit more detail on what you're funding?
Russell R. Shaller
Yes, sure. So we always do the decision, I think, as all companies do of lease versus buy on facilities. And we had the opportunity of converting a pretty significant plant leased to a purchasing decision. The return on capital, we thought was fantastic, and we're doing that. But it's a significant cash outlay, approximately $37 million for the plant, which previously would have been a lease. We have another facility that we've been in the process of constructing for a little bit over a year, but the significant part of the bill is due this year and occupancy will happen towards the end of next year. So those 2 are onetime bites, they wouldn't be typical of our company. We tend to have plant purchases or significant investments once every few years, they just incidentally, these 2 lined up at the same time.
Stephen Michael Ferazani
Is that supporting any particular growth segment products?
Russell R. Shaller
No, both are ongoing operations. Now they will certainly help us streamline a little bit of our activities, but both locations were previously occupied by Brady, and so it doesn't appreciably change our footprint. It just gives us a little bit more long-term control over the cost of doing business.
Stephen Michael Ferazani
Yes. Okay. Got you. You talked about it still having a pretty good pipeline of new product launches coming in fiscal '24. Can you give us any kind of a preview also if you can comment a little bit on products tied to the Code & Nordic ID acquisitions and where you are with industrial track and trace kind of a wide question...
Russell R. Shaller
So obviously, we have a myriad of smaller products that we launch every month and throughout the year from locks to safety devices and what have you. Our more significant launches are our printers and optical and RFID readers. We're having a few product launches this year in terms of printers. It's a combination of both new printers as well as some product refresh. One of the things that we're super excited is the capability to print from voice. We're in prototyping right now, but talking to some of our devices and allowing that print technology to occur. I personally am super excited about that. Also, this fiscal year, we'll be launching the industrial versions of our RFID and optical readers. This is a long journey that started with the purchase of Code & Nordic. We knew it was going to take a substantial amount of development effort to make them sufficiently rugged that they were industrial use contractor use case products, but you can look to see those in the coming year.
Stephen Michael Ferazani
Are you as excited about industrial track and trace that market as you were, I guess, when the previous CEO announced the purchase?
Russell R. Shaller
Yes. We absolutely are. For us, it's all part of our automation solutions. Now it's important to recognize what that means for us. We're not really in distribution centers. That's not part of our business or freight shipping or what have you. We're very intimately involved in manufacturing environments and what I'll call niche manufacturing of parts. I think there is a tremendous opportunity for Brady in what I'll call the medium-sized corporations out there that manufacture things. So those would be the $1 billion to a couple of billion dollar companies. We're actively engaged with many of them. And I think the overall trends towards improving productivity, saving labor is something that will help us for years to come.
Operator
Thank you. That concludes the question-and-answer session. At this time, I would like to turn it back to Russell Shaller, for closing remarks.
Russell R. Shaller
Sure. Thanks, everyone, for your time today and your questions. We performed very well this quarter, and we have positive momentum throughout the entire organization. We're also in an incredibly strong financial position. Fiscal '21, '22 and now '23 were all record EPS years, and we're once again guiding to another record year in 2024. Like many other companies, we have to navigate through an uncertain and rapidly changing macro environment. We're focused on controlling what we can control and consistently delivering on our priorities, which are to continue to invest and grow the top line and continue our evolution to a faster-growing company, to further develop our product offering to support our customers' automation initiatives, to execute operational efficiencies and ensure that we grow profitably and to effectively deploy our capital to drive long-term shareholder value through organic investments, acquisitions and returning funds to our shareholders through dividends and share buybacks. I'm looking forward to the future, and I know that our global team has the ability to overcome challenges and continue to deliver results. Thank you all for your time this morning and for your interest in Brady. Operator, you may disconnect the call.
Operator
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
