BRC - NYSE

Good day, and thank you for standing by. Welcome to the Brady Corporation Q4 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. And wait for your name to be announced. To withdraw your question, please press 11 again. 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, CFO. Please go ahead.

Thank you. Good morning, and welcome to the Brady Corporation Fiscal 2025 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 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. Factors were noted in our news release this morning and in Brady's fiscal 2025 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 Schaller. Russell?

Thanks, Ann, and thank you all for joining us today. We released our fiscal 2025 fourth quarter results this morning. And I'm pleased to announce another company record high adjusted EPS for the quarter and for the year. We grew organic sales 2.4% in the quarter, acquisitions added 11.3% to our sales growth, and we grew adjusted earnings per share by 5.9% to a new quarterly record of $1.26 per share. Our Americas and Asia region once again reported strong organic sales growth of 4.3% in the quarter, finishing a terrific top line with 4.8% organic sales growth in 2025. Our Europe and Australia region has been operating in a challenging macro environment where organic sales declined 1.3% in the fourth quarter. However, excluding the impact of facility closure and other reorganization costs in the region, operating income increased 7.9% in the quarter. This streamlined cost structure is better aligned to our expectations for the business in 2026. A consistent theme for the last several years and one of the primary drivers of our organic sales growth is our increased investment in R&D. Increased R&D by 31% in the fourth quarter of this year, which was driven by our investment in organic businesses as well as through our acquisition of Gravitec from the beginning of the fiscal year and our acquisition of Hunais Microfluidic Solutions product line starting in the third quarter. Printers and the included consumable products for our printers represent just under 40% of our sales in fiscal 2025. And our sales of these products have been growing organically by between 6-7% annually for the last three years. In particular, customers have responded positively to our new flagship printer, the I7500 industrial label printer that we launched in the second quarter, with sales well above our targets. Our R&D investment focuses on the development of high-performance materials, which are combined with our safety products, printers, barcode, and RFID readers, creating an ecosystem of interoperable products. To this core product offering, we've added the capabilities of direct part marking through our acquisition of Gravotech as well as through our acquisition of MECO last month. Brady's goal is to provide seamless interoperability across our products, and we are beginning to see the integration of multiple technologies into a single platform. For instance, we successfully combined our optics technology with our lasers and cortex decoder software to enable real-time image capture and verification. What makes this unique and has me most excited is we are able to use low-cost consumer-grade electronics combined with our software to provide a more cost-effective solution to our customers. Our goal is consistent: to expand our workplace safety and identification solutions portfolios by providing complete tailored solutions that fulfill our customer's safety and identification needs. This quarter was a strong finish to 2025. Our 2025 adjusted EPS of $4.60 was another all-time record high following four consecutive years of record highs. We grew organic sales 2.6%, which was led by our Americas and Asia region with organic sales growth of 4.8%. We closed on the acquisition of Gravitec and Funyze microfluidic solutions product line, both of which add technical capabilities to our product portfolio, which we believe will be additive to our growth rate in the future. We increased our investment in R&D to another record high of nearly $80 million, which was 5.3% of sales. And we returned $96 million to our shareholders through dividends and share buybacks. Our priorities for the next year are consistent: continue to develop unique products for our customers, particularly in the area of workplace automation, which we believe is a long-term growth opportunity. Continue to invest in R&D, stay ahead of the competition, and deliver specialized products that help customers automate and drive efficiencies, generate sales growth above GDP in the geographies where we operate, deliver operational improvements, and increase profitability as we grow. And to effectively deploy our capital to drive long-term shareholder value, which includes organic investments such as R&D, strategic acquisitions that add technical capabilities, 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 733,000 shares for $51 million. And yesterday, we announced an increase in our dividend, which represents the fortieth consecutive year of annual dividend increases. We're incredibly proud to reach this milestone of forty straight years of annual dividend increases, which shows our commitment to returning cash to our shareholders and delivering long-term shareholder return. And now I'll turn the call over to Ann to provide more details on our financial results. Ann?

Thanks, Russell. We had a good quarter and another strong year in fiscal 2025. Organic sales grew 2.4%, and we reported another quarterly record for adjusted earnings per share of $1.26 per share, which was up 5.9% from the fourth quarter of last year. Our sales results were led by our Americas and Asia region with organic sales growth of 4.3% in the fourth quarter, which was partially offset by an organic decline of 1.3% in our Europe and Australia region. The macro environment in Europe and Australia has become increasingly challenging during this fiscal year, which is the primary reason for the facility closure and other reorganization cost actions that we've taken over the last three quarters. We believe these actions will position us to improve our profitability as we look ahead to next year. We finalized the following actions that we began midyear in response to the performance of certain businesses as well as economic conditions. First, we reduced additional headcount in several of our locations in China in response to the continued decline in economic activity. We believe these actions were necessary in light of the decrease in sales as well as our growth outlook in the country. And second, we finalized our actions to reduce headcount in Europe and Australia in order to operate with a more efficient structure while further integrating Gravitex operations into our core operations. In total, we recognized facility closure and other reorganization costs of $8.9 million in the fourth quarter, and we do believe these actions position us to operate more effectively and efficiently going forward. I'll briefly touch on Slide number four for our quarterly sales trends. Organic sales grew 2.4% this quarter, and acquisitions added 11.3% growth. Foreign currency translation added another 2% for total sales growth of 15.7% in the quarter. Turning to Slide number five, this details our quarterly gross margin trending. Our gross profit margin was 50.4% this quarter, compared to 51.6% in the fourth quarter of last year. The cost reduction actions that I just mentioned resulted in incremental expense of $1.9 million in cost of goods sold in the fourth quarter. So if we exclude this expense, our gross profit margin would have been 50 basis points higher than we reported, or 50.9%. Moving to slide number six, this outlines our SG&A expense trending. SG&A was $117.9 million this quarter, compared to $93.3 million in the fourth quarter of last year. As a percent of sales, SG&A increased to 29.7% compared to 27.2% last Q4. If you exclude amortization expense from both quarters, and exclude the facility closure and other reorganization costs from the current quarter, then SG&A was 26.8% compared to 26.5% of sales in the fourth quarter of last year. Slide number seven shows the trending of our investments in research and development. This quarter, we once again increased our investment in R&D, finishing at $23.1 million, which was 5.8% of sales in the quarter. We continue to increase our investment in our engineered products, and with the acquisitions of Gravitec as well as Funae's microfluidic solutions product line, our commitment to R&D is higher than ever. Looking forward to our new product roadmap, and we have another exciting lineup of products set to launch in 2026. Slide number eight outlines our pretax earnings on a GAAP basis. If you exclude amortization from the fourth quarter of this year and last year, and exclude the facility closure and other reorganization costs from the fourth quarter of this year, adjusted pretax earnings increased 5.1% from $70.5 million to $74.2 million. Our trending of earnings and EPS are detailed on Slide nine. GAAP net income decreased from $55.5 million to $49.9 million, and GAAP diluted earnings per share decreased from $1.15 per share to $1.04 per share in the fourth quarter compared to the same quarter last year. If you exclude amortization from both periods, and exclude the facility closure and other reorganization charges from the current period, our adjusted net income was up from $57.3 million to $60.2 million, which was an increase of 5.1%. And our adjusted diluted EPS grew from $1.19 per share to a new company record quarter of $1.26 per share, which was an increase of 5.9%. Slide number 10 provides a summary of our cash generation. Operating cash flow was $58.3 million in the fourth quarter this year, compared to $84 million in the fourth quarter last year. Free cash flow was $49.4 million compared to $73.2 million in the quarter last year. Turning to Slide 11, you can see the impacts that our cash generation has had on our balance sheet. As of July 31, we were in a net cash position of $74.6 million. Our approach to capital allocation is consistent, which is to first use our cash to fund organic sales growth and efficiency opportunities. This includes investing in new product development and R&D, sales-generating resources, capability-enhancing CapEx, and automation-focused CapEx. We have the ability to continue to invest throughout the economic cycle to put ourselves in the best position possible to drive future sales growth and profitability. And second, we focus on consistently increasing our dividends. Yesterday, we announced our fortieth consecutive year of annual dividend increases, which is an incredible milestone and one that we're very proud of. Other elements of our capital allocation approach are to deploy our passion in a disciplined manner for acquisitions where we have clear synergies, and for opportunistic share buybacks when we see a disconnect between intrinsic value and Brady's trading price. In the fourth quarter, we repurchased 257,000 shares for $17.7 million, which was an average price of $68.73 per share. And for the full year fiscal 2025, we repurchased 733,000 shares for $50.9 million, which was an average price of $69.32 per share. We believe that share buybacks are a valuable element of our capital allocation strategy. Our strong balance sheet puts us in a position to be able to continue to increase our investment in R&D 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 number 13 outlines our guidance for next year. We're projecting GAAP EPS to range from $4.55 to $4.85 per share in fiscal 2026, which would represent an increase of between 15.5-23.1% compared to fiscal 2025. And we're projecting adjusted EPS, which excludes the impact of amortization in 2026, to range from $4.85 per share to $5.15 per share in fiscal 2026, which would represent an increase of between 5.4-12% compared to fiscal 2025. We anticipate organic sales growth in the low single-digit percentages for the year ending July 31, 2026. Other elements of our guidance include an income tax rate of 21%, depreciation and amortization expense of approximately $42 million, and capital expenditures of approximately $40 million. As for the financial impact of tariffs, we realized approximately $2 million in incremental tariff expense in the fourth quarter and approximately $7 million in incremental tariff expense in fiscal year 2025. Of the impact of price increases and other mitigating actions. Under current trade guidance, which is rapidly changing, we estimate a potential additional impact of $8 million to $12 million in fiscal year 2026 compared to fiscal year 2025. Of mitigating actions. The range represents an estimate based upon current tariff rates and scope, which have been changing rapidly. And the outcome may change depending on trade policy developments as well as with the timing of our mitigating actions. In addition to tariffs and trade policy, other potential risks to our 2026 guidance, among others, include the potential strengthening of the US dollar, inflationary pressures that we're unable to offset in a timely enough manner, or an overall slowdown in economic activity. Now I'll turn the call back over to Russell to cover our regional results and to provide some closing thoughts before Q&A. Russell?

Thanks, Ann. Slide 14 details the financial results of The Americas and Asia region. Sales were $260.8 million this quarter, and total sales growth was 14.1%, which consisted of organic sales growth of 4.3% and growth from our acquisitions of 9.8%. We realized the strongest growth in our wire identification product line, with organic growth of nearly 12% in the quarter. This product line represents approximately 20% of the organic growth in The Americas and Asia region. Safety and facility identification and product also grew organically in the low to mid-single digits. Our business in Asia continues to perform extremely well with organic sales growth of 12% in total in the fourth quarter. Our business in China declined approximately 3%, but the remainder of our business in Asia more than made up for this decline with organic sales growth of 23% outside of China. Our businesses throughout Southeast Asia continue to do well as they benefit from manufacturing expansion as well as growth in our printer product lines throughout the region. Our segment profit in The Americas and Asia decreased 3.3% to $51.6 million, and segment profit as a percentage of sales was 19.8% in the quarter. If you exclude the impact of amortization in both the current quarter and last year's fourth quarter, as well as the facility closure and other reorganization costs in the current quarter and the incremental tariff impact, segment profit increased 7.5% compared to the prior year. Sales growth in printers and consumables continued to drive both top and bottom line within the region, and targeted cost actions we've taken within specific businesses also set us up for more profitable growth in the future. Slide 15 outlines the performance of our Europe Australia region. Sales were $136.5 million in the quarter, organic sales declined 1.3%, acquisitions added 14.4%, and the impact of foreign currency translation increased sales 5.7% for a total growth of 18.8% in the region. Both Europe and Australia are operating in challenging economic conditions for industrial manufacturers. We've experienced a decline in this end market within most of our major product lines during 2025. The majority of the decline in this quarter was due to our business in Australia, which declined 5.1% organically, while Europe saw a slight decline of 0.8%. We took additional actions in the quarter to reduce our cost in both Europe and Australia. So while our segment profit was down 21.8%, if you exclude the impact of amortization in both the current quarter and last year's fourth quarter, as well as the reorganization costs we incurred in the current quarter, segment profit increased 7.9% compared to the prior year. Setting ourselves up for improved profitability as we look ahead, and we continue to utilize a creative approach to solving unique customer problems within our niche solutions. This customer-intimate strategy has delivered long-term growth for Brady over many years. We have a lot to look forward to in 2026. We've launched several exciting new products this year that are performing well, and we have an incredible roadmap of new products planned for the next year. I'm particularly excited about the fact that we've added MECO to Brady's portfolio as of a month ago. MECO specializes in industrial direct part marking and identification systems designed for a variety of applications and industries, and their products are an ideal complement to Gravitec's direct part marking solutions. Similar to Gravitech in Europe, MECO utilizes a consultative approach by collaborating with their customers to develop highly customized direct part marking solutions. We're looking forward to future growth through the combination of these two companies, along with offering part-level barcode verification through our code group. Expanding on this, our goal is to have a complete set of regulatory compliance systems before GS1 and Europe's digital product passport take effect. Driven by our fantastic portfolio of products, we had another strong year of financial results. We're navigating the ever-changing global tariff and trade situation, and we're working through a variety of mitigating actions. As before, we're keeping our focus on what we can control and we're moving forward, always with the long term in mind. This approach has served us well as we just reported our fifth consecutive year of record EPS, which means that we need to continue this momentum into 2026 and beyond to deliver long-term value for our shareholders. I'd like to turn it over for Q&A. Operator, would you please provide instructions to our listeners?

As a reminder, to ask a question, please press. To withdraw your question, please press. Our first question comes from the line of Steve Ferazani from Sidoti.

Morning, Russell. Morning, Ann. Appreciate all the detail on the call. Want to start by asking about guidance. Given, I mean, you walked through all the challenges in the environment you're currently facing with economic growth, with tariff and trade impacts. I get the low single-digit organic sales growth. What surprised me is the EPS growth, particularly at the high end. That implies pretty significant margin expansion in a difficult environment. Just trying to figure out how you'll get there.

Yeah. So there's a couple of things. You know, first and foremost, we really took a decent amount of cost out of our structure in the last two quarters. And that in and of itself is going to get us a lot of the way there. The second part is we've incurred costs due to tariffs, but at the same time, we have a number of mitigating strategies that we've been rolling out. From a combination of reshoring to redoing how the supply chain works, and a variety of other tools. I think all of those put together is going to lessen the impact. Now we can't predict if there's some fundamental knock-on effect that happens throughout the globe. But from our vantage point right now, and what we're seeing in terms of the uptake of our and the traction that we've got with our current product portfolio, I feel pretty good about the range that we gave. And I think it's pretty doable.

So just so I can recap, a lot of this is gonna be coming from the costs out.

Yes. Well, two things. The cost out and remember, when tariffs first came into play, we had little ability to mitigate those actions. Those take us months to roll through. We've already started that. And we pushed through our first price increase in June. And so you don't see some of that effect until a few months later. And so, you know, I think we've digested the worst of it right now.

Okay. Perfect. That's helpful. I did want to ask about free cash flow. Typically, historically, 4Q has always been your strong free cash flow quarter. This year, it wasn't, and it was obviously down year over year pretty substantially. And in a year where your CapEx was way down, it was more than offset by lower cash flow from operations. I'm just trying to figure out how that affects your outlook for cash flow next year in a year where you're expecting higher CapEx?

Sure. Yes. Great question, Steve. The primary item that drove our cash flow down in Q4, which you're absolutely right, it's typically a pretty high quarter for us. In terms of operating and free cash flow, was a little bit of inventory build. Really, that happened throughout this fiscal year as we moved a couple of, actually, three relatively large facilities either into a new facility or a newly leased facility or following up on our announcement of our closure of our facility in Buffalo. So, yep. Last year, we were talking about the build-out of a facility in Belgium. Well, now we're in it. But to be able to kind of work through operations and ensure that we're serving our and, you know, everything is on time, that it just results in a little bit of lumpiness from inventory.

Okay. Any cash costs you think carry over into next year related to the reorg and plant closures?

There will be some. There will be some as we are finalizing the action through the fourth quarter, but we'll be through those items by the end of the first quarter, for sure, the cash impact.

Fantastic. And then implied in your guidance, are you expecting R&D over 5% next year? And given the investments you're making in these acquisitions, and these smaller ones, are they dilutive near term with better growth past that as you integrate them into your portfolio, or how should we think about that?

Yeah. So they're a little bit different. The microfluidics with fluNI is a really core fundamental technology of not only inkjet, but enables us to do a variety of other things ranging as far and wide as cosmetic delivery to potentially even drug delivery. So that will be just a pure R&D platform with the associated sales for the inkjet. We're super excited with what that brings to us as a corporation. MECO, on the other hand, should be additive almost immediately. There is some advantage to the integration of MECO and Gravitec and some overlap of cost that we can drive out very quickly. So a little bit of a different story for the two of them.

Got it. Makes sense. Thanks, Russell. Thanks, Ann.

No problem. Thanks, Steve.

Thank you. One moment for our next question. Our next question comes from the line of Keith Housum from Northcoast Research.

Thank you. I appreciate it. Hey, Russell, you historically have pointed to R&D being relatively 5% of sales. Obviously, a significant spike up here in the fourth quarter with these acquisitions sound. Being a big driver of that. Are you thinking that R&D will get back to 5% of sales, or are we kinda at a new normal at these levels?

You know, I don't think we have a target as a percent. We look at opportunities and our investments and decide whether that is a go-forward project. You know, now what I will say is the more engineered our products, the higher the gross margin to the point where some of our very engineered products are in the 60s and 70%. So you know, I only wish that was our entire portfolio. Now that some of those are carrying 10% or higher R&D loads, but it works its way to the bottom line in terms of a very differentiated solution. So whether the portfolio will increase potentially. But at the same time, those products come with much higher gross margins. And so what falls to the bottom line is actually a more profitable business. So, you know, we could and I'm not saying this will happen by any stretch of the imagination, but some of our very engineered products are 10% plus R&D. And those are amongst the best performing products we have in our portfolio. So, like I said, I can only wish everything was at that level.

Yep.

So no problem with other commentary, but just trying to think about it. Should I think about $23 million a quarter being roughly a good cadence going forward, or you have some work to come out of that that may bring that number down a little bit?

I, you know, I think in the short term, it probably will come down a hair as we look to merge some of the R&D teams. In the long term, you know, we've been on a journey to increase our R&D for the past decade. You know, with some potential blips here and there. And I see that trend continuing. So, you know, again, I'm a product person. I think that shows. And I love R&D, and I love everything that we're been investing in. So you know, that is not an area we're looking to save or consolidate. I think there's a lot of other ways that we can improve our operating income and R&D is not one of them.

Okay. Appreciate that. With the $8 million to $12 million in incremental tariff impact in 2026 over 2025, should we assume that's going to be primarily first-half loaded? Or is there another way to think about that based on up-to-date information? Obviously, I know that things have changed dramatically over the past few months.

Yeah, it's kind of a bouncing ball, but I would say that it will be more to the first couple quarters than the next couple quarters. As we slowly walk through price increases, but again, it's a very nuanced approach, and it's very product category specific. Our goal is to be reasonable with our customers, some of whom expect pricing to go along with the tariffs and have passed that through to their customers. And others aren't quite there yet. Every day, month, quarter is a journey on the whole tariff front.

Yeah, absolutely. But that's also in your guidance, right? Are your mitigation efforts also in your guidance?

Yes.

Okay. Great. And then, I guess, final question. I'll turn it over here. Did I hear you say that printers and cartridges are just under 40% of your business now?

Yes.

Okay. As we think about the growth that you've seen, obviously, I know you guys have added on new products here in the past several years. But now can you perhaps conceptualize for me, like, some of your biggest end markets that you're experiencing that growth? Is it, you know, electricians or plumbers, industrial? Is there one or two areas that we should be thinking about, you know, what's driving that growth?

Well, the biggest one is you can see from our wire markers, which data centers is a significant part of the wire marker business. Data centers have been doing, no surprise to anybody, phenomenal. The other part of wire markers that we've seen pick up is the aerospace and defense. With the defense side being particularly strong in the last couple of years. So you know, those two segments drive a lot of that revenue. Yes, we are absolutely in construction and some other areas. But right now, those are the two principal growth areas that we're seeing.

That makes sense. So your biomarkers, what you would include in your category of printers and consumables. Correct?

Yes.

Okay. Great. Thanks, guys. Appreciate it.

Thank you.

At this time, I would now like to turn the conference back over to Russell Schaller, CEO, for closing remarks.

Thank you for your time today and for your questions. 2025 was another great year. We're accelerating our business by expanding sales capabilities while significantly increasing our R&D. Organic sales growth is heavily driven by our steady launch of highly engineered products, which we expect to continue to fuel sales growth into the long term. Additionally, these R&D investments are giving Brady the ability to engage with a broader set of customers and markets. The current dynamics of the global trade environment and constant changes in tariff guidance result in challenges for any global manufacturer as well as to the entire economy. And although we do expect to continue to be impacted by incremental tariffs, we believe that our global manufacturing presence and largely in-country as well as our geographic diversification helps to mitigate some of this impact. We're monitoring the situation closely and adapting where we can while ensuring that we're never sacrificing the quality or reliability of our products. I'm looking forward to the future, and I know that our global team has the ability to overcome challenges, think creatively, and continue to deliver results for our shareholders. Thank you for your time this morning and for your interest in Brady. Operator, you may disconnect the call.