Brady Corporation Q4 FY2025 earnings call

• Brady released fiscal 2025 fourth quarter results, with adjusted EPS for the quarter and year being new company record highs. - Grew organic sales 2.4% in the quarter with acquisitions adding 11.3% to sales growth, and adjusted earnings per share grew 5.9% to $1.26 per share. - Americas and Asia region had strong organic sales growth in the quarter and year. Europe and Australia region operated in a challenging macro environment but saw operating income increase when excluding certain costs. - Increased R&D investment by 31% in the fourth quarter, driven by investment in organic businesses and acquisitions. - Added capabilities through acquisitions like Gravotech and MECO, and combined technologies for seamless interoperability. - 2025 adjusted EPS was $4.60, another all-time record high, with organic sales growing 2.6% led by Americas and Asia region. - Repurchased 733,000 shares for $51 million and announced a dividend increase for the fortieth consecutive year.

In the Americas and Asia region, organic sales grew 4.3% in the fourth quarter, with total sales growth of 14.1% consisting of organic growth of 4.3% and growth from acquisitions of 9.8%. The wire identification product line had organic growth of nearly 12% in the quarter, representing approximately 20% of the organic growth in this region. Safety and facility identification products also saw low to mid-single digit organic growth. In the Europe and Australia region, organic sales declined 1.3% in the fourth quarter, but excluding certain costs, operating income increased 7.9%. Printers and included consumable products represent just under 40% of Brady's sales in fiscal 2025, with organic sales growing by between 6 - 7% annually for the last three years.

• Projected GAAP EPS for fiscal 2026 ranges from $4.55 to $4.85 per share, representing an increase of between 15.5 - 23.1% compared to fiscal 2025. - Projected adjusted EPS for fiscal 2026 ranges from $4.85 per share to $5.15 per share, an increase of between 5.4 - 12% compared to fiscal 2025. - Anticipates organic sales growth in the low single-digit percentages for the year ending July 31, 2026. - Estimates income tax rate of 21%, depreciation and amortization expense of approximately $42 million, and capital expenditures of approximately $40 million in 2026. - Estimates potential additional tariff impact of $8 million to $12 million in fiscal year 2026 compared to 2025. - Other potential risks include strengthening of the US dollar, inflationary pressures unable to be offset timely, or overall slowdown in economic activity.

• Uncertainty of tariffs and trade policy. - Potential strengthening of the US dollar. - Inflationary pressures that can't be offset in a timely enough manner. - Overall slowdown in economic activity.

Q: 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.

A: 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?

Q: 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.

A: 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.

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

A: 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.

Q: 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?

A: 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.

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

A: 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.

Q: 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?

A: 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.

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

A: No problem. Thanks, Steve.

Q: 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?

A: 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.

Q: Yep.

Q: 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?

A: 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.

Q: 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.

A: 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.

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

A: Yes.

Q: 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?

A: Yes.

Q: 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?

A: 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.

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

A: Yes.

Q: Okay. Great. Thanks, guys. Appreciate it.

A: Thank you.