Earnings Call: Q4 2021

Sep 2, 2021

Thank you for standing by, and welcome to the Q4 2021 Brady Corporation Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker presentations, there will be a question-and-answer session. To ask a question at that time, please press star then 1 on your touchtone telephone. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. Ann Thornton, Chief Accounting Officer. You may begin. Thank you. Good morning, and welcome to the Brady Corporation Fiscal 2021 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 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 2021 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, Michael Nauman. Thank you, Ann. Good morning. Thank you all for joining us today. This morning, we released our fiscal 2021 fourth-quarter financial results, capping off a record earnings per share year. I'm proud of how the Brady team was able to navigate this challenging economic environment and deliver for both our customers and our shareholders. Brady played a very important role in the global fight against this pandemic throughout the last year and a half. In our WPS business, we worked tirelessly to manufacture, source, and deliver many of the products that our customers needed to aid in social distancing or to help provide a more hygienic environment for employees returning to work. We provided support to first responders, healthcare workers, food processing companies, logistics companies, retail establishments, schools, and virtually every other essential industry by helping solve their safety and identification needs to ensure that they could fulfill their missions. Our floor markings, safety signs, and many other products were used throughout the world. In our Identification Solutions business, we also provided many products into the healthcare industry and laboratories to identify and track samples and to help keep patients safe. Brady's safety identification products were in demand, and our team stepped up to deliver the products that help make the world a safer place. To put it mildly, this was a challenging year as we navigated through a rapidly evolving environment, all while never wavering from our primary goals of keeping our employees safe and ensuring that we meet the demands of our customers. It's clear that this pandemic is not yet behind us as new variants have emerged and COVID-19 cases are still high and rising in many countries around the globe. We and many other companies are dealing with supply chain disruptions caused by the abrupt shutdowns and then the rapid reopenings, which resulted in inflation in areas such as resin, freight, paper-based materials, certain services, and wages. Some of these cost increases may be temporary, but we see many of these cost increases as almost certainly permanent. As you can see, we continue to maintain a healthy gross profit margin. In fact, our gross profit margin was up 110 basis points versus the same quarter last year because we never slowed down on our push to automate our facilities and drive sustainable efficiency gains, which, when combined with targeted price increases, are offsetting most input cost increases. As I said, fiscal 2021 was a challenging year, but Brady did its part. We will continue to do our part to make the world a safer place. This quarter, revenues were up a robust 21.6%. We had growth of 35% in our Identification Solutions business and a decline of 6.8% in our Workplace Safety business. The revenue decline in our Workplace Safety business was primarily due to tough comparables as Q4 of last year was when we experienced peak COVID-related product sales. Earnings were also very strong this quarter, with earnings per share up 32.1% on a non-GAAP basis. Cash generated from operating activities was also very robust this quarter, finishing at $50.8 million and capping off a year where cash flow from operating activities exceeded $200 million. Overall, our fourth-quarter financial results were once again very strong and provide a strong jumping-off point as we enter fiscal 2022 with positive momentum. As we look ahead, our priorities are to drive organic sales growth, continue to become a more efficient manufacturer, integrate our recent acquisitions, and to deploy our capital to drive long-term shareholder value. To drive organic sales, we're upgrading our websites, we're improving our marketing capabilities, we're developing new products, we're investing in capital-enhancing machinery, and we're making the marketing investments necessary to grow our top line now and into the future. Profitable sales growth is definitely our number 1 financial priority in fiscal 2022. For instance, in our Identification Solutions business, we've been increasing our R&D spend and seeing the fruits of that labor as we're launching new products at increasing rate, and we're continuing to distance ourselves from our competitors who don't have the scale or financial wherewithal to invest this heavily in R&D, particularly during a downturn. We're improving our inline presence by upgrading our websites and investing more in digital marketing talent. We're also expanding our sales force and expanding geographically into underserved markets with strong future growth potential in areas such as Southeast Asia and Eastern Europe. Our strong new product lineup, combined with investments in sales, marketing, and our online presence, gives us confidence that our Identification Solutions business will continue to generate strong organic sales growth in fiscal 2022 and beyond. In our Workplace Safety business, we're capitalizing on our common web platform by using our much stronger market intelligence to quickly adapt and pivot to changing market dynamics. We're increasing our investments in new product development, we're increasing the pace of new product launches in an effort to increase the percentage of proprietary, high-value products sold to our customers by WPS. We're adding new salespeople around the globe to accelerate our sales even further. Our focus on serving our customers extremely well and aggressively working to increase our customer base is paying off. We also believe that we will soon see another leg up in organic sales growth as some of our other end markets improve. For instance, in our IDS business, we sell into many niche identification markets aimed at identifying people in workplace and entertainment venues. These markets have remained depressed and have not yet recovered quite like our core industrial markets have. In addition, our product offering focused on micro businesses in the U.S. has remained depressed as these businesses have been impacted the most. When these markets bounce back, which we believe they will, we should see another increase in organic sales. While we're investing in organic sales growth, we're also working to streamline our SG&A cost structure so that we can fund our sales growth initiatives while still driving down SG&A expense. We're focused on becoming a more efficient manufacturer. We're automating wherever we can in an effort to reduce manufacturing costs in a sustainable manner and to protect our strong gross profit margins. In addition to our focus on driving organic sales growth and becoming a more efficient organization, we're also in the process of integrating the three acquisitions that we completed last quarter. As it relates to the acquisitions of Nordic ID and Code, we're building out our track and trace solution set, which is an important initiative to help us move into faster-growing end markets. With the additions of Code's barcode scanning technology and Nordic ID's RFID scanning technology, we will create a portfolio of industrial readers that are fully integrated with our printers and our existing software. Driven by the adoption of Industry 4.0 and the trend of onshoring to reduce supply chain vulnerabilities, the barcode and RFID markets are growing quickly as a result of merging use cases to provide better workflow visibility. The value of Code and Nordic ID come from their strong technology and complementary products that will help us expand in track and trace applications within industrial settings. There are natural synergy opportunities once combined with Brady's global footprint. We're very excited about how these acquisitions, combined with additional R&D efforts, will help us develop global solutions in the industrial track and trace space. We also completed the acquisition of Magicard last quarter. Magicard is well known globally for its innovative and differentiated products in the ID card printing space, as they have a full range of desktop devices to meet local, on-demand, secure ID card issuance requirements. They specialize in ID card printers and consumables with high-resolution, full-color image capabilities that have built-in security features and the ability to encode smart cards. There are natural synergies with our people identification product offerings. Previously, we lacked rigid card printers in our product portfolio, and Magicard absolutely helps fill the gap. It's a combination of technology acquisitions such as Nordic ID, Code, and Magicard, the investments we've made through the pandemic in R&D, sales, and marketing, and our recently expanded customer base that results in a strong future for both our ID Solutions and Workplace Safety businesses. I'm confident we will see continued revenue growth in future quarters as a result of our focus on growing organic sales. Our rock-solid balance sheet and strong cash flow give us significant dry powder to accelerate growth through further R&D efforts and additional business acquisitions, all while continuing to return funds to our shareholders. Brady is well positioned as we look to fiscal 2022 and beyond. Yesterday, we announced an increase in our annual dividend for the 36th consecutive year. Today, we announce an increase in the amount of authorized shares available for repurchase that are coming out with guidance for fiscal 2022. As you can see from our guidance, we expect fiscal 2022 to be another all-time record earnings per share year for Brady. Overall, I'm confident in our ability to deliver results for our customers, our employees, and of course, our shareholders. I'll now turn the call over to Aaron to give a little more detail on our financial results. I'll return to provide specific commentary about our Identification Solutions and Workplace Safety businesses. Aaron? Thank you, Michael. Good morning, everyone. I'll start the financial review on slide number 3. Sales in the fourth quarter were $306.1 million, which was an increase of 21.6% compared to the same quarter last year. GAAP pre-tax earnings were $41.6 million, which was an increase of 19.4% when compared to Q4 of last year. Non-GAAP pre-tax income was $45.4 million, which was an increase of 30% when compared to Q4 of last year. The only adjustment to arrive at non-GAAP pre-tax income is the removal of truly non-recurring costs, such as acquisition-related legal fees, tax fees, and accounting fees, as well as the financial impact from recording inventories at fair value. GAAP diluted EPS finished at $0.53, while non-GAAP EPS increased 32% to $0.70 this quarter. The only adjustments to arrive at non-GAAP EPS were the removal of the acquisition costs that I just mentioned, removal of a non-recurring tax charge related to one of the acquisitions, and the removal of an impairment charge related to an equity method investment. We also had another very strong quarter of cash generation. Cash provided by operating activities was $50.8 million, which was 12.6% higher than the $45.1 million of operating cash flow generated in the fourth quarter of last year. Financially, Q4 was a very strong quarter. Moving to slide number 4, you'll find our quarterly sales trends. Our 20-plus% sales increase consisted of organic sales growth of 12.6%, an increase from acquisitions of 4.7%, and an increase from foreign currency translation of 4.3%. Organic sales continued to improve in our Identification Solutions business and finished up a robust 24.5% in Q4. Our Workplace Safety business benefited from strong COVID-related product sales in last year's fourth quarter. As a result of these tough comparables, we saw a decline in WPS organic sales of 12.7%. We remain quite optimistic about the future of our WPS business as we've increased our customer base, improved our digital presence, and have many new proprietary products. All of which bode well for the future. Turning to slide number 5, you'll see our gross profit margin trending. Our gross profit margin increased by 110 basis points this quarter, finishing at 48.2% compared to 47.1% in the fourth quarter of last year. If you exclude the purchase accounting charges from our recent acquisitions, our gross profit margin would've been approximately 20 basis points higher than the reported GAAP figures. The improvement over the fourth quarter of last year was a direct result of increased sales volumes and many efficiency activities that we've been driving throughout our manufacturing facilities. As you would expect, we are seeing inflationary pressures in raw materials, freight, and certain services. We're also seeing wage inflation, and we're finding it difficult to fill open manufacturing roles. We're automating wherever we can. We're driving efficiencies at a strong pace, and we're putting through targeted price increases. We believe that these actions will offset any inflationary forces and enable us to maintain our gross profit margin in the approximate 50% range. On slide number 6, you'll find our SG&A expense trending. SG&A was $93.7 million this quarter, compared to $75.9 million in the fourth quarter of last year. SG&A was heavily impacted by both the recent acquisitions as well as an increase in incentive-based compensation. Last year as a result of the pandemic, our incentive-based compensation was down significantly. In fact, in the fourth quarter of last year, our incentive comp was negative, whereas this year, incentive-based comp is running at more normalized levels. As a percent of sales, SG&A was 30.6% this quarter. If you'd exclude the non-recurring costs that I mentioned earlier, SG&A would've been below 30% of sales this quarter, which would've continued the general trend of declining SG&A as a percent of sales, even as we're increasing investments in sales and marketing to accelerate sales growth. Moving on to slide number 7, you'll find the trending of our investments in research and development. This quarter, we invested $13.2 million in R&D. Approximately $1.3 million of R&D expense came from our 3 fourth-quarter acquisitions. We continue to have opportunities to invest in new product development, and we're committed to increasing these investments, while at the same time ensuring that we get the most out of every dollar spent on R&D. These investments in R&D are critical to help propel Brady's long-term sales growth and protect our gross profit margins. Slide number 8 illustrates our pre-tax income trends. Non-GAAP pre-tax earnings increased 30% from $34.9 million last year to $45.4 million this quarter. Again, the only items we're adjusting for to get to non-GAAP pre-tax earnings are the truly non-recurring costs related to our recently completed acquisitions. This 30% increase in pre-tax earnings was a direct result of our very strong sales growth, combined with our ongoing focus on automation and sustainable efficiency gains. Slide number 9 illustrates our after-tax income and EPS trends. As I mentioned, non-GAAP diluted EPS was $0.70 this quarter, compared to $0.53 in last year's fourth quarter, an increase of 32%. On slide number 10, you'll find a summary of our cash generation, which continues to be quite strong. We generated $50.8 million of cash flow from operating activities, and free cash flow was $45 million this quarter. The conversion of net income into operating cash flow was once again very strong, with operating cash flow well in excess of both GAAP and non-GAAP net income. If you'll turn to slide number 11, you can see the impact that the strong cash generation is having on our balance sheet. Even after using $244 million of cash for the acquisitions of Magicard, Nordic ID, and CODE, on July 31st, we were still in a net cash position of $109.3 million. Our strong balance sheet puts us in a fantastic position to execute additional value-enhancing activities, including investing in R&D, completing additional acquisitions, and returning funds to our shareholders. Our approach to capital allocation is consistent. First, we use our cash to fully fund organic sales and efficiency opportunities throughout the economic cycle. We're funding investments in new product development, sales-generating resources, IT improvements, capability-enhancing CapEx, and CapEx to further automate our facilities. We will absolutely keep funding these investments where it makes sense and where the investments are ROI positive. Second, we focus on returning cash to our shareholders in the form of dividends. As we just announced last night, we're increasing our annual dividend for the 36th consecutive year. After funding organic investments and dividends, we then deploy our cash in a disciplined manner for either buybacks or acquisitions where we believe that we have strong synergistic opportunities. Slide number 12 provides an overview of our financial results for the full year ended July 31st, 2021. Overall, sales increased 5.9%, and we finished with all-time record earnings per share. Of course, both our revenues and our earnings were significantly impacted by the COVID-19 pandemic throughout most of fiscal 2021, which makes these record EPS results all that much more impressive. We're exiting fiscal 2021 with positive momentum. Q4 was our strongest revenue quarter of the year, with IDS posting organic sales growth of 24.5% and WPS running at a sales rate higher than what we experienced prior to the pandemic. The acquisitions we completed in the fourth quarter should provide positive momentum as we move into fiscal 2022. With that, let's move to our outlook for this upcoming fiscal year, which is on slide number 13. We're forecasting diluted earnings per share, excluding amortization, to range from $3.12-$3.32 per share, which equates to a GAAP EPS range of $2.90-$3.10 per share for the fiscal year ending July 31st, 2022. This implies that we expect GAAP EPS to improve somewhere in the range of 17.4%-25.5% in fiscal 2022. If you exclude the impact of amortization expense, which increases significantly as a result of our 3 fourth quarter acquisitions, then our EPS would increase from 21%-29%. Included in our earnings per share guidance is an increase in after-tax amortization expense from our recent acquisitions of approximately $6 million. After-tax amortization is increasing from about $5.5 million in fiscal 2021 to about $11.5 million in fiscal 2022, which is a delta of about $0.12 per share. As we look at phasing throughout the upcoming fiscal year, we expect the majority of our EPS growth to come in the second half of the fiscal year. We also expect that our Workplace Safety business will experience a decline in organic sales in the first quarter of this year due to the strong prior year comparables driven by COVID-related product sales last year. We are also anticipating total sales growth in excess of 12% for the year ending July 31st, 2022, which is inclusive of both organic sales growth as well as sales from the recently completed acquisitions. This guidance is based on foreign currency exchange rates as of July 31st, 2021, and is of course contingent upon continued macroeconomic expansion. We'll continue to make the investments necessary to drive organic sales growth. We'll continue to search for acquisitions that advance our strategies, and we'll continue to drive sustainable efficiency gains while being tight on non-revenue generating expenses. As for capital allocation, we do not foresee any major changes in our capital allocation strategy. We will keep investing in our organic business. I just mentioned our dividend increase for fiscal 2022, and we'll be opportunistic with buybacks while looking for acquisitions where the price is right and the strategic fit is clear. We have a strong balance sheet, and we'll use it as a tool to drive long-term shareholder value. I'll now turn the call back over to Michael to cover our divisional results and to provide some closing comments before the Q&A session. Michael? Hey. Thank you, Aaron. Slide number 14 outlines the fourth quarter financial results for our Identification Solutions business. IDS sales increased 35%, finishing at $231 million. This sales growth is comprised of organic growth of 24.5%. Acquisition growth of 6.9% and an increase of 3.6% from foreign currency translation. Organic sales in our IDS division were very strong, not only versus the fourth quarter of last year, but also against previous sequential quarters. On the cost side, our strong focus on efficiencies led to a 20 basis point increase in segment profit as a percentage of sales when compared to the fourth quarter of last year. Regionally, organic sales in Asia were strong this quarter, with growth of over 10% compared to the fourth quarter of last year. This is the third quarter in a row of Asian organic sales growth in excess of 10%. In Europe, our organic sales were up more than 25%, despite several lockdowns continuing throughout the fourth quarter. Our European team did an excellent job driving sales growth while handling the periodic interruptions caused by the lockdowns. We also had organic sales growth of approximately 25% in the Americas. We saw growth in all product lines and geographies throughout the quarter, and we were pleased with the bounce-back in our healthcare product line, where organic sales increased approximately 30%. In general, our sales trends in IDS are very positive. We continue to focus on driving efficiency activities and keeping our cost structure lean while never sacrificing sales-generating investment. We've been investing in sales and marketing personnel, research and development activities, and selected geographic expansion. These investments, combined with improved market conditions, are absolutely paying off with stronger sales growth. IDS segment profit was $42.4 million, compared to $31.1 million in last year's fourth quarter. Segment profit as a percentage of sales increased from 18.2% of sales last year to 18.4% of sales this quarter. This continual improvement in profitability is a testament to the hard work of the entire IDS Solutions team as they constantly work on becoming more efficient and profitable organization. Our commitment to R&D remains a top priority to drive future growth. In the fourth quarter, we continued our steady stream of new printer introductions with the launching of the i5300 bench-top industrial label printer. This is a significant enhancement over previous models. It's intuitive, auto-calibrating, and precise, and it can print barcodes on labels as small as two-tenths of an inch. With a solid metal frame construction, it can handle both high volume and high mix labeling applications in a wide variety of industries, including electronics, product identification, wire and panel identification, lab identification, and safety and facility identification. Continuing our focus on niche applications this quarter, we also launched ToughStripe floor marking tape specifically designed for challenging applications within freezers and cold storage areas. This is just another example of the niche applications where Brady products really shine. This extremely durable floor marking tape can be used to mark refrigerators, freezers, and other cold surfaces, and is ideal for food and beverage refrigerated warehouses and other cold storage facilities. The aggressive adhesive performance of this tape allows for very easy application and easy removal while withstanding heavy foot traffic as well as vehicle traffic. We're innovating throughout Brady and bringing solutions that our customers want and need. These products demonstrate Brady's ability to engineer high-performance printers and materials for a wide range of applications. Our R&D pipeline is strong. We continue to launch innovative new solutions that help our customers solve problems and be more efficient and effective. I'm excited about what we're doing in our Identification Solutions business and how our acquisitions of Code, Nordic ID, and Magicard will further accelerate our growth. We're improving our customer service, investing in our future, and streamlining the rest of our cost structure. These positive revenue trends, combined with our strong cost discipline, definitely bode well for the future of our Identification Solutions business. Moving to slide number 15, you'll find a summary of our Workplace Safety financial performance. WPS sales declined 6.8%, which consists of organic sales decline of 12.7% and foreign currency growth of 5.9%. This decline was primarily driven by challenging comparables in last year's fourth quarter. Our WPS sales were $75.1 million this quarter, which were above the pre-pandemic sales experienced in the fourth quarter of fiscal 2019. Last year's fourth quarter was the peak of COVID-related product sales. If you exclude the impact of COVID-related products, our WPS business would have shown double-digit sales growth this quarter. Despite periodic shutdowns in the U.K., France, Germany, and other countries in Western Europe, throughout much of the fourth quarter, our European business was still able to perform quite well. Our team has done an outstanding job of increasing its customer base, and for those customers who initially came to purchase COVID-related products, our team has done a nice job providing these same customers with our core safety and identification products as well. Overall, we're very pleased with how these newly acquired customers are performing and are expected to perform in the future. Our Australian business performed similarly to our European business. During the height of the pandemic last year, our Australian business grew organic sales nearly 25% in last year's fourth quarter. Given these challenging comparables, we were pleased with this quarter's sales volumes, as they were well above pre-pandemic levels. Overall, the last quarter, we've substantially increased our Australian customer base, and we continue to find opportunities to enhance our digital marketing approach to ensure that we retain our new customers and turn them into long-term repeat customers. The sale of COVID-related products declined in North America as well this quarter. This decline was not fully offset by sales within our non-COVID product offerings, thus leading to a decline in organic sales in the Americas as well. Our Workplace Safety team continues to focus on new product offerings. This quarter we launched a number of new products aimed at our core spaces. For instance, this quarter we launched a proprietary speed bump, which leverages our existing patented designs to also protect sensitive cables that must be strewn over areas with auto traffic. We also launched a whole series of safety and identification products aimed at food preparation and hospitality industries to help our customers with food segregation, temperature monitoring, and the avoidance of cross-contamination. Our Workplace Safety teams continue to come up with and quickly launch new innovative product ideas that help our customers improve safety and become more efficient and effective. WPS segment profit was $5.6 million this quarter compared to $6 million in last year's fourth quarter. This reduction in segment profit was directly related to the reduced sales volumes as a result of the reduction in COVID-related product sales. As a percentage of sales, segment profit was consistent with last year's 7.5%. Our WPS team members are listening to their customers to identify what they need. They're modifying their market campaigns to reach entirely new customers in entirely new industries, and they're working hard to address underperforming businesses within the portfolio. Our Workplace Safety business has some very difficult comparables ahead of it throughout the first half of fiscal 2022. Even without elevated COVID-related product sales, our fourth quarter revenues were above pre-pandemic levels, and we expect to see this positive momentum build as we move through fiscal 2022. We've laid the foundation for a solid recovery from this pandemic. Our core Workplace Safety business is healthy, which positions us well for long-term profitable growth. I'm proud of the role that Brady played and continues to play in the fight against COVID-19. Our Identification Solutions and Workplace Safety products help companies with social distancing. Our products help schools reopen safely, and our safety and identification products were used by frontline workers all around the globe. This pandemic is not over, and the financial impacts stemming from the pandemic are certainly not over. Throughout the pandemic, we invested in growth and efficiencies, and it's this continual level of investment that will enable us to keep this strong, positive momentum. Brady is in an enviable financial position. Our cash flow is up. Our earnings are up. Our balance sheet is extremely strong. We're in a net cash position even after making 3 acquisitions last quarter. We will continue to invest in R&D, sales-generating resources, and capability-enhancing CapEx, all while being tight on non-revenue-generating expenses. We intend to further put our balance sheet to work by returning funds to our shareholders and investing in both organic and inorganic growth opportunities. Again, I'm very proud of how our team performed throughout this challenging period. Their ability to deal with uncertainty, think on their feet, and solve problems quickly, all while never compromising the long term, has built a strong, solid foundation for Brady's future. With that, I'd like to start the Q&A. Operator, would you please provide instructions to our listeners? Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then one on your touchtone telephone. Again, to ask a question, please press star then one. One moment for our first question. Our first question comes from George Staphos of Bank of America. Your line is open. Hi, everyone. This is actually Tash Sure. We feel very good, as we indicated in our prepared remarks, about the economy going forward. There are absolutely challenges in the markets. In regards to logistics, as far as our customers being one of the largest challenges. As far as our products being able to be utilized by them. We're doing a very good job of being able to get our products to them, but there are industries, as you well know, that are struggling mightily with everything from chips to resins, to paper materials, to imported products from Asia, to really make sure that they can get their product sets out. Overall, it appears that most of our markets are very strong right now, with these issues being the one governor that we're watching very carefully. That said, it's our job to make sure we're not part of the bottleneck, and I feel incredibly proud of the team in that we, without knowing the pandemic was coming, worked hard to forward deploy resources and internalize resources and capabilities for the last several years, in addition to automating many of our process to become more efficient and effective. Those efforts have directly made us a stronger player and able to help our customers more. Markets are good to answer your question specifically, but there are real challenges in logistics that they're all facing, and they're facing, obviously, cost pressures across the board as well. Great. That's helpful. Then I guess on the last call that you had, you said that you expect $96 million in combined revenue from your recently acquired businesses in fiscal 2022. I guess assuming if Brady captures all of that would leave around 3%-4% revenue growth in 2022. First, does that fill the assumption? Then I guess, could you disaggregate how much of this you expect to come from pricing and volume? Thanks. Well, we still expect $96 million of revenue from the acquisitions that we closed in the fourth quarter in fiscal 2022. I think it comes to a bit more than 4%-5% of sales growth. It's going to be higher than that as a percent. Obviously, we still feel very good about these acquisitions, and we're super excited about them going forward. You did mention a question about pricing and volume in general. I'll be glad to answer that as well. There is no question we are seeing strong inflationary pressures, particularly in lines that have a lot of resin involved in them. There is some definite dynamics there. Chip costs are going up and are being a little more problematic. We have been very proactive about addressing those. There is always a lag. In any time I have seen inflation, by the way, for most people on this call, you haven't experienced inflation. It's been a long time since we have really seen that. What I have always experienced is there is some lag between being able to increase your prices after getting some cost increases. Our team is very proactive about it, very active about making sure our customers understand why we're increasing the prices, and making sure that those price increases are closing the gap. In addition, our continual automation efforts, particularly during the downturn, have put us in a much better position because the other big area for inflation is wages. It is a little more challenging to increase prices there. Our automation efforts, I have to tell you, the team has been extraordinary in what they pulled off during the downturn, and that has helped us have enough employees around the globe, despite the shortages, to do a stellar job. We definitely expect our prices, and our prices have gone up, but we're also seeing our volume go up. It's a dual bang for us. Great. Thanks. Thank you. Thank you. Thank you. Our next question comes from Steve Ferazani of Sidoti & Co. You're on the business. Good morning, Michael, Aaron. Thanks for all the color on the call. It's been helpful. Good morning, Steve. Just wanted to ask a little, I know it's a very tricky time to be trying to put out full year guidance. I'm just trying to think about how you're thinking about the uptick in infection rates with Delta and just general concerns, how that sort of plays into your guidance, particularly on the hospital and workplace ID side. I'd like to say that we're going to be through this quickly. I am not medical in any way, so any comment I make may be in error. If we take a look at the flu that we experience every year, it's my understanding that's a variant from the 1918 Spanish flu. It's my personal non-medical belief that we are going to be dealing with this for a long time. Obviously, we've found ways to deal with the flu. We will, as a world, find ways to deal more and more effectively with this. Also, as I understand it, the second year of the Spanish flu in 1918 was worse than the first year because of variants and mutations. We are seeing a lot of that, as you well know, and that is having an impact. We're having facilities that are in countries and locations and customers that are now being shut down again. Take a look at the situation in Australia. What I would answer you is, we believe, I personally believe, and we're reflecting that coming out of this will be bumpy. The good news about that is, take a look at our results from last year when it was extremely challenging. Our products are critical to many industries, and those industries need to function and perform well, and we need to perform and function well. Our people, and I can't say this enough, the pride in our people. They have proven to be incredibly resilient, nimble, reflective, doing an incredible job. I would tell you, absolutely, we're going to see challenges. The globe is going to see challenges from the variations and lack of ability to either vaccinate sufficiently, choose to vaccinate sufficiently, or the vaccination's not working quite as effectively on variants as it had been. That said, I'm confident we'll be able to overcome everything that we're at least seeing at this point. You did add a very big caveat that I will agree. If you'd told me where we'd be at financially or through the COVID-19 right now at this point a year ago, I would've been surprised. We're stronger than we expected to be financially, and COVID-19 is more challenging than I expected it to be. Both can take place at the same time. Hope that helps, Steve. Fair enough. Thank you for that. In terms of the margins on the 2 different segments, excluding the one time on IDS, it looked a lot like Q1 and Q2. Should we be thinking about the Q3 higher number as a bit of an outlier, or how do you want us to think about, or how are you thinking about the margins in that segment moving forward? Yeah, I think you're actually thinking about it the correct way, Steve. The vast majority, of course, of these acquisition charges that we called out did land in IDS, of course, because they're IDS acquisitions. Actually, if you exclude those, we would've been somewhere in the neighborhood of the 20% operating income level or segment profit level, and that's about what we would anticipate in the future. Okay. On the flip side, with Workplace Safety, you're back in that sort of 7.5%-ish range, which is where you were the year before COVID-19. Is this a level you're comfortable with? Do you think you can grow it from here, and how do you think about the long term of that business at that type of margin level? Well, we're certainly not comfortable at 7.5%, right? It's never good enough for us, so we're constantly pushing to improve. Workplace Safety is very much volume dependent, though. They have very nice profit margins, and as volumes go up, it drops a lot to the bottom line. We're really working with our Workplace Safety team to drive the top line, which will drive, obviously, the bottom line and the bottom line as a %. Steve, I've got to reiterate, I am incredibly encouraged with what the team's able to do with growth in that if we do take out the COVID materials, and we know we've already told you we're going to have another challenge next quarter with that, because we had a great quarter with COVID products. The base business, their standard business, is growing. That is something that for several years, we could not say. They have done a great job of really strengthening their capabilities, their product sets, their R&D, differentiating what they do in the marketplace, while at the same time, responding to all the needs of digital requests by customers and faster response rates by customers. They are positioned very well to grow, and that growth, as Aaron pointed out, will directly impact our margins in a good way. That said, I want to repeat, next quarter remains a comparable challenge because of the wonderful work they did with COVID products. Something that I am thrilled we were able to do, and both support the company financially, but even more importantly, the world during the heart of COVID. Fantastic. Thanks, Michael. Thanks, Aaron. Appreciate the responses. Thank you. Thank you. Thank you. Our next question comes from Michael McGinn at Wells Fargo. Your line is open. Thank you. I wanted to go back to the gross margin conversation. Understanding a little bit of conservatism on price cost, but on the other hand, you also said you have confidence to maintain 50% gross margin levels, if I heard you right. That would be 100 basis point uptick year-over-year. Can you just square the conservatism on price cost versus the optimism of being able to hold 50% gross margin? We actually have some great strengths, and as I mentioned in my commentary or questions, we foresaw the need, probably about four or five years ago now at this point, Aaron, to become much more automated, to become much more efficient as an organization. That was not related to some brilliance on knowing a pandemic would come, and there would be direct, even harder labor shortages as a result. It was based on the fact that you could look around the world seeing aging work populations, and the place that people really miss this is the aging work populations in China, specifically. I continue to tell people that the working-age population of China will continue to decrease for at least the next 20 years. It has to. Unless we can figure out ways to pop out adults instantly, the demographics are such that it's going to go down. That's true in most of the world. We saw that. We anticipated that. The positive for you in regard to margins and everything else is as we automate with the need to eliminate people, not for cost-But because we can't get those people, or knew we wouldn't be able to get them, it is also overcoming that in a much more cost-effective way. You bet, we've got some inflationary concerns. We have absolute concerns that during inflation, you cannot keep up with price increases in a perfect matched manner. There is some lag. We do have strong proprietary products that can keep that value proposition with the lag. In addition, we're doing a really good job of becoming more efficient and effective in everything we do. Some of the new systems that I see we're deploying in everything from our warehousing, to our production, to our customer service really get me excited. A few years ago, I was asked, "When can you stop this effort?" I said the answer is never. I'm going to actually change the statement to we're accelerating the effort. Appreciate the color. Sticking with the APAC theme, you mentioned you're investing headcount, sales force resources into that area. I guess my question is, that kind of seems like Brady's home turf, and you have pretty well-defined supply distribution relations here domestically. Are you taking the same product over there and layering it on top of the sales force? What kind of strategy are you implementing if there's a tiering or indirect, direct sales model? Any color there would be great. Yeah. Well, first of all, we've been in Asia for a long time. We do have a strong brand and strong reputation in Asia, particularly in Southeast Asia, which we're accelerating. Let's take India as an example. We do extremely well in India. Our products are well-respected. The real issue there is logistics. India is a very complex society and a very complex logistical challenge, we need more resources even closer to our customers in India. That's a strategy that has paid off for us and is going to pay off for us. That is one example. We also make products that are unique in the industry, not compared to any one other company, compared to all of the other companies. That uniqueness is valued, and we have a very high global retention rate of those customers as they go from generation to generation of our technology. I would say the first issue is we make truly unique, exciting products that make a difference to our customers. The second is we know that forward deploying resources helps us with those customers. The third is our reputation is very, very strong throughout Asia, where the customers are looking for true differentiation as opposed to pure cost plays. As you know, we're not in and don't plan it to be the paper label space is a great example. That is not an area where we believe Brady adds a lot of value. Other competitors in general, without naming any, do very, very well in the paper label space, but that's what they're focused on, that's what they're set up for, that's what they're good at. Looking at Brady-type applications, we actually have great belief, that in particular in the Southeast Asia area that we mentioned, both as customers migrate there more, and as we develop our resources there, we'll do very, very well. Thank you for that question, Michael. Good question. All right. Last one from me, if I can sneak one more in. The $2 million repo authorization, I think if you were to execute that today in the open market, it nearly matches kind of your net cash balance, coincidence or not. Looking at the financial profile of your company, you're going to maybe throw off another $150 million of free cash flow this year. Can you just talk about the confidence, the line of sight, and the timetable you see for your capital allocation priorities? As you very well know, we are not a program buyer. I won't tell you that we've always hit every dip for a variety of reasons at the right time. We are looking for disconnect opportunities. We want that powder and that ability available, so if those opportunities come up, we will take advantage of them. If there isn't a disconnect in the market, I'm also happy with that. I want to be quite clear. We like the market to be aligned with our intrinsic value. When it isn't, we are going to take an advantage of it, and we do have the ability, and you can see that in the amount, you did the math. That we do have the ability to take full advantage of that amount, if we think it's appropriate. I want to repeat, this is part of a total model. We look at acquisitions, where we have a lot of powder for acquisitions right now. We look at R&D growth, we look at infrastructure support, and we look at buybacks, and we say, what is the best use of our capital, and where do we see the key opportunities? We definitely want to be prepared for any potential disconnect in our stock price versus our understanding of our intrinsic value. Thank you. Appreciate the time. Absolutely. Thank you. Thank you. Again, if you'd like to ask a question, please press star then one. Our next question comes from Keith Housum of Northcoast Research. Your line is open. Good morning, guys. Hey, Mike, I kind of want you to look into your crystal ball here and kind of talk about some of the inflationary pressures you guys have seen over the past year. Is your expectation that you're going to see these inflationary pressures continue and perhaps even accelerate? Or is there anything that you're seeing on the horizon that says perhaps things are starting to stabilize there? You're killing me, Keith Housum. All the questions today are asking me to look at a crystal ball. I will do my best. Full disclosure, my crystal ball broke when I was a small child. I will literally try my best. We see logistical issues. I'm answering your question. I want to be clear of how I'm answering it. For the next 6-18 months easily, those logistical issues are a definite cause of inflation. They absolutely are a very primary cause of inflation. We also are seeing labor shortages. Not just because in the U.S., we have compensation models that people are By the way, you think people don't know their financial gain and return? They change their pattern when they don't get as much from staying at home as they get to work. That will change, we think, but there's a shortage of people. I have a belief that shortage is partly caused by something we didn't do. Brady did not have massive layoffs like many companies did. We did what we believed was the right thing at the time, and it's paid off for us. Many companies laid off as many as 20% of their people. The more experienced part of that workforce, I think, has made some decisions to never come back. If you're 60, 62, 63, 64, you may have kept working for five to seven more years, but you're not coming back. That is creating 1 level of shortage. The other level is around the world, with a few exceptions, countries like India, Philippines, Mexico. The actual workforce is aging out anyway. I think we're going to see some pressures from that. To answer your question, yes, I absolutely anticipate that we're going to continue to see inflationary pressures, not just us, but in industrial companies throughout the world. I believe Brady is positioned with our multiple levels of ability to control this. We're insourcing more products, as you well know, mainly to control the technological future, but that does add a margin advantage to us. We are automating things that people never believed just a few years ago when I got here that they could automate. They are now really understanding how powerful that opportunity is and coming to me with ideas and approaches and sets that are super strong. The third thing is we have strong value to our customers, and therefore we are able, because our products by and large are not commodities, able to pass on as quickly and effectively as possible real cost increases. That said, there is absolutely a lag in that part of the equation, and I don't want to kid you about that. You have to work with people no matter how bad the situation is to get the prices up. For some strange reason, no matter how strong our value is, they like to drag their feet about having that process take place. Mm-hmm. Okay. Keith, I hope that helps. With full disclosure, it is a crystal ball. No, I hear you on that one. You talked earlier about the disconnect on when you guys are experiencing the increases in, let's say, raw materials and your ability to raise prices. If you look at your gross margins, yeah, you guys are up year-over-year, but still on a historical basis, you're down probably 100 basis points or so versus other quarters. What do you think the impact was on the quarter in terms of your gross margin, in terms of that disconnect and your ability to raise prices versus the price increases you were seeing? You know what? It is a complex answer. It is literally product line by product line. In the case of where we have, I'm not going to list the product line, we do have some commoditized product lines. Not many, we do. Those, we saw a significant lag. We have covered most, if not all of the lag, we have twice seen major spikes in our materials and twice had to go back and really make some significant increases, and we saw bigger lags there. Whereas other areas that we have more control, we do better. Let's give you other spaces. Healthcare, we have contracts that make it take a little longer. It just is required by the contracts. There's a foot-dragging process literally built in. It literally depends on the product set, the materials, and the end customer. It's pretty complex. I wouldn't want to come out and try to break out a number for you right now, Keith. There is absolutely impact, though. Absolutely. Unequivocal. I'm not denying that at all. I thought you asked for a specific number, and didn't want to try to parse that. Oh, no, I did. I did. Thank you. I appreciate your understanding. Last question for you. You're going to have to forgive my skepticism. WPS has been a challenge for many years here, and I hear your enthusiasm for it. It sounds like you really believe that you actually have a turnaround in the WPS segment. I guess what would help perhaps my understanding the context of that enthusiasm a bit more is, can you quantify or give us more context in terms of what was the impact of some of the COVID closures you saw in Europe on the business? Because if I look at this year's WPS segment versus two years ago, it's only up 2% after being down 35% over the past 10 years or so. It's a good call. Look, your skepticism is real, and I understand it. You heard me for years say we're working on it. If you go back and check my comments, I don't think I ever said we're here. I feel better now than ever before. The biggest part I feel really good about, Keith, is that if I do lop off, and we can do that very efficiently, lop off the true COVID-related sales, we are growing. That is something that I couldn't look you in the eye and say five years ago, for instance. In fact, the opposite. I had to look you in the eye and say, "We're declining less." In fact, you can look at quarter after quarter where I said, "We're declining less. We're declining yet less. We're declining yet." I have to take in my mind the COVID sales off, they are truly an anomaly, to look at what's really under the lid, and we are growing. Very, very positive about that. It's still a challenging space. You know that, and I know that. We've got the best team we've ever had. We're moving in the right direction to both internalizing our production for cost and responsiveness. Even more important than cost to me is responsiveness. We're adding new technology there. Something that three and four years ago, that organization was stunned at how strong I was, is we are going to become a technological player. It took a while for me to get that organization really to understand how valuable that is in selling all of their products, because it's a pull-along effect. Keith, I do feel like we're developing new, unique, and proprietary products. I do feel like we're using Brady's bench of proprietary products more effectively in that space, and I do believe that's dragging along the rest of the business. I'm not going to tell you that isn't a challenging industry. Even the biggest players in that industry make most of their money in unrelated areas and not necessarily in selling. Where our advantage is we truly are a value-added distributor, and that is a big differentiation in that space. We are becoming much more so, and we have strong targets to become even significantly more of a value-added reseller as opposed to a pass-through reseller going down the future. Do I think we have the right team? Do I think we're seeing the right momentum? Absolutely. can I say, and I get it, I have to lop off the COVID sales, but can I say that we are growing as opposed to we're closing the gap of reducing? Yes. Now, how long will it take, Keith, to make up that 35%? I'm not going to give you a prognosis, but what I can tell you is we are where we are today. No, I got it. I am going to grow from where we are today. I can't make up for years before I even got here of decline. Yep. hey, honest question, I hope I gave you a very straightforward answer. You did. The part that I guess I didn't hear in the answer, too, was in terms of the closures that happened in Europe over the quarter, what kind of impact did it have on WPS for the quarter? I know you can't give me exact numbers, but- They did. They did. You look at France, I think we were at 5-kilometer restrictions for large periods of time. The U.K.'s been off and on and struggling. Every country, particularly our bigger, the Germanys, the U.K.s, the Belgiums. We have large facilities in Belgium. We're able to run those, but they've been under some great restrictions, and that has been adding some super challenges to them. At the same time, even with the second round of COVID, you're not seeing the COVID-related sales at all. That's not just with us, that's across the board. We can speculate as to why that is, but it isn't. It isn't happening. Even though you're getting the shutdowns, we're not getting the next level of COVID sales from those shutdowns, while you're right, in Europe, we are having some challenges. Okay. Do I think we would've grown more without that? Speculating, yes. Okay. All right. I've asked too many already. I appreciate your time, as always, and good talk, Michael. Hey, thank you, Keith. Appreciate your time. Yep. Thank you. Our next question comes from Michael McGinn at Wells Fargo. Your line is open. </edited_transcript Hi, thank you for the follow-up. Just wanted to do some house cleaning here. I looked at the deck post your three acquisition, and it looks like you had the run rate EBITDA of about 14.5%, but that was inclusive of some discrete charges. Is there an updated number that's more reflective of how you're reporting earnings and then any early profit improvements that would push that number higher? We're still looking at a F22 run rate EBITDA of about $14 million, which is the exact percent that you just mentioned. same with revenue. Our revenue estimates for this year, this fiscal '22, have not changed as well. They're at about $96 million for the summation of the three deals. No change. Add a little color. We're pleased with how those companies are performing. We love the teams. It's always about people for me. Do we have the right people, the right organizations? They're doing very well, but we expected them to do well. They're meeting those expectations. Very positive on the teams, the product sets they offer, and their excitement for what they see as a great combination opportunity. All right. On the top-line guidance, greater than 12% overall, you mentioned some positive inflections in healthcare. What are some of the big end markets verticals that would push you materially above that number, or the ones that are growing faster now or need a little bit of self-help still? </edited_transcript Well, we got to be careful. Brady is in every SIC code there is, and some spaces are larger and smaller. Obviously, general manufacturing is one of our biggest opportunity sets and is doing reasonably well. We'd love it to perform even better. That would certainly lift the boat more than other areas. There are other areas that the people areas still lag behind. I don't want to oversell those areas because they aren't massive markets to us, but we do have businesses in those areas that do well. Anything that is people identification in office space, still is a challenge. We could argue work at home or not work at home, how that'll come back, when it will, but in the end, most people will have to have some kind of credentials identification, because they're not going to be working exclusively at home. We think there's going to be some uptick there. Events are getting better. If you look at the results from Disney, and all of that, I'm not an expert on Disney, but I can tell you that they also raised prices. I think I did have an earlier question, how much is price versus volume? I would like to see their underlying price versus volume equation because overall, the industries that do that, such as festivals, are still not open. Concerts are very limited. Events are very limited. Conferences for industrial application is very limited. We do expect that to come up. Medical is recovered, but we hope that it'll continue to grow even more, as it's recovered, but it's not stronger than it was, and we think there's a lot of hopefully been up opportunity there. There are two factors that govern that. Right now the hospitals are back to, in many locations, focusing on COVID, and there is an absolute shortage of people capacity in our healthcare industry, and we think that's going to govern that situation more than we'd like. I think if there were more providers available once again, providers have seemed to go backwards for a lot of understandable reasons in that space. that's going to be a big challenge. I know a lot of hospitals are looking at bolstering their colleges for nurses, et cetera, I think because of those challenges, but that takes time. other spaces, I know there's some questions about the long-term of the oil and gas industry. I would say this, I have no question that in the short-term, it is definitely a high-use industry in the world. I do think that with prices going up in those areas, we'll see more opportunities as they refurbish plants, et cetera, in that type of space. A number of others. Aerospace will take longer. It's interesting, the airlines were very optimistic because of all the summer traffic, and they thought COVID was going down. Both from their statements and my experience, business travelers are not back. The fall is not nearly as good. They're now no longer anticipating the fall to be nearly as good as the people with the pent-up demand for tourism have to go back to work and school, and the business travelers aren't going up. I think our aerospace business, particularly the commercial side, is still going to remain challenged for probably about as long as they originally thought. You can get some great numbers of that obviously from them. </edited_transcript Great. Appreciate the time. Thank you. Hope that helped. Thank you, Michael. Thank you. I'm showing no further questions at this time. I'll return the call back over to Michael Nauman for any closing remarks. Thank you so much. I appreciate it, Valerie. Thank you. I'd like to leave with a few concluding comments this morning. We're certainly living in interesting times. We're still on the back half of a global pandemic. We just posted the best earnings per share in Brady's history, and our guidance for next year would be another record year. At the same time, we're experiencing supply chain challenges, and we're seeing inflationary pressures all around us. We're confident we can offset these inflationary pressures with our relentless focus on automation and efficiencies combined with targeted price increases. I don't know what the future holds for the global economy or the coronavirus, but I do know we're controlling what we can by prioritizing investments in growth and focusing on cash generation. We're confident that Brady is well-positioned to capitalize on global market trends. We just finished fiscal 2021 with strong momentum. We came out very, very strong, and we're well-positioned to generate significant future value for both our customers and our shareholders. I am excited about our future. Please stay safe, and thank you for your time this morning. Have a great day. Operator, you may disconnect the call. Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may all disconnect. Have a great day.