Brady Corporation (BRC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Brady Corporation acquisitions conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ann Thornton, Chief Accounting Officer. Please go ahead.

Thank you. Good morning, and thank you for joining us. This morning, we would like to take the opportunity to explain our recent acquisitions, including the acquisition of The Code Corporation, which was announced yesterday. With me today are Brady's President and CEO, Michael Nauman; and Brady's CFO, Aaron Pearce. The slides for this morning call are located on our website at www.bradycorp.com/investors. We will begin our prepared remarks on Slide #3. Please note that during this call we may make comments about forward-looking information. Words, such as expect, will, may, believe, forecast and anticipate, are just a few examples of words identifying a forward-looking statement. It's important to note that forward-looking information is subject to various risk factors and uncertainties which could significantly impact expected results. Risk factors were noted in our news release yesterday and in Brady's fiscal 2020 Form 10-K, which was filed with the SEC in September of 2020. 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, for some short prepared remarks, before opening up the floor to questions. Michael?

Thank you, Ann. Good morning, and thank you all for joining us today. We're very excited to announce that yesterday we announced the acquisition of Code Corporation. The purchase of Code Corp. marks the third acquisition that we've completed this quarter. The other 2 recently acquired companies, Magicard and Nordic ID, although smaller than Code, are also strategically very important to Brady. The combined purchase price of these 3 companies was approximately $245 million. Brady's strong balance sheet enabled us to complete these acquisitions while still remaining in a net cash position. To put this in perspective, on April 30, we had cash on hand of $322 million and no debt outstanding. So even after investing $245 million on these 3 acquisitions, this still leaves us in a pro forma net cash position of over $75 million. Our strong balance sheet and consistently strong cash generation will allow us to continue to search for additional shareholder value-enhancing acquisitions while fully funding organic sales growth opportunities, including R&D, sales personnel, digital marketing and geographic expansion. And we will continue to be able to return funds to our shareholders through dividends and opportunistic share buybacks. We're in great financial shape. Before jumping into the specifics of our acquisition of Code, let me start by providing a bit more color on the other 2 acquisitions that we completed earlier this quarter, starting with Magicard, which is summarized on Slide #4. We closed the Magicard acquisition on Friday, May 21. Magicard is a U.K.-based company with approximately 100 employees. Magicard is well known globally for its innovating 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 identification card printers and consumables with high-resolution, full-color image capabilities that have built-in card security features and the ability to encode smart cards. The purchase price of Magicard was approximately GBP 42 million, and Magicard's pre-pandemic EBITDA, i.e., for the calendar year ended December 31, 2019, was approximately GBP 4.1 million, resulting in an EBITDA multiple of just over 10x. We anticipate Magicard revenues of approximately $35 million and EBITDA of approximately $4 million, inclusive of integrated-related costs during Brady's first full fiscal year of ownership, which is for the year ending July 31, 2022. Strategically, the acquisition of Magicard allows us to expand our product offering into rigid-card printing and encoding. Magicard's complementary product offering allows Brady to offer new printing capabilities to a diverse set of customers and industries. We intend to expand Magicard's addressable market through Brady's global footprint throughout Europe, Asia and the Americas. Rigid-card printing has historically been a gap in our product portfolio and is a critical piece of the technology stack when competing for business in the access control and credential markets. We believe that the combination of Magicard and Brady will help bolster our position in the faster-than-GDP growing access control space. We've talked about a desire to acquire companies that bring some level of technology to Brady that can be leveraged across our global footprint. This is exactly the type of acquisition we've been looking for. Brady's other acquisition news on May 21 was that we completed the tender offer process and secured more than 90% of the outstanding shares of Nordic ID, which is a publicly traded Finnish company. Our intention is to eventually purchase 100% of the outstanding shares. We've started the squeeze-out process and hope to have it completed by the end of this calendar year at which point in time Nordic ID would be delisted and would become a wholly owned subsidiary of Brady. Some background on Nordic ID is included on Slide #5. Nordic ID specializes in RFID readers, scanners and the associated software to help power track-and-trace applications. Nordic ID's solutions bring a digital identity to every component of a product by enabling customers to track and analyze the movement, status and location of products throughout the manufacturing process. Our total purchase price for Nordic ID was approximately USD 13 million. Although Nordic ID has great technology, they are subscale, and this subscale nature is expected to result in slight dilution in fiscal 2022 as we work to integrate Nordic ID products into Brady's ecosphere. We anticipate Nordic ID revenues of approximately $11 million and approximately breakeven EBITDA, inclusive of integrated-related costs, during Brady's first fiscal year of ownership, which is for the year ending July 31, 2022. The value of Nordic ID comes from its strong technology and complementary products that will help us expand in track-and-trace applications within industrial settings. We intend to increase the R&D efforts at Nordic ID to help accelerate new product introductions and help us expand this product offering outside of Europe. The vast majority of Nordic ID sales are currently in Europe, so there are natural synergy opportunities once combined with Brady's global footprint. We're very excited about how the acquisition of Nordic ID, combined with additional R&D efforts, will help us to develop a complete global solution in the industrial track-and-trace space. Even after completing the acquisition of Nordic ID, a significant gap still remain in our track-and-trace product offering, and yesterday's announced acquisition of Code Corp. helps fill that gap. We've included some general commentary on the specifics of the Code acquisition on Slide #6. Code Corp. is a Utah-based company with approximately 100 employees. Code specializes in high-quality barcode scanners. The majority of Code sales are into the U.S. health care space, and they have a growing position in barcode scanners designed specifically for industrial track-and-trace applications. Code has a long history of strong growth and improving profitability and will be an outstanding complement to our current product offerings. The purchase price of Code was approximately $173 million, and we're forecasting revenues of approximately $50 million for the year ending July 31, 2022. Code's EBITDA is forecasted to be approximately $10 million during Brady's first fiscal year of ownership, which is for the year ending July 31, 2022, resulting in an EBITDA multiple of just over 17x. This multiple is a direct result of Code's anticipated growth rate and the significant revenue synergy opportunities we see over the long term for the combined Brady organization. Similar to our attraction to Nordic ID, Code helps fill a gap in our portfolio and helps Brady become a complete solution provider in the industrial track-and-trace space. As articulated on Slide #7, the combination of Code's barcode scanners, Nordic ID's, RFID readers and Brady's current strength in printers and high-quality materials makes Brady's track-and-trace product offerings much stronger. Brady is firmly positioned as a leader in high-performance niche application industrial printers and materials. Our printers are already supporting virtually all 1D and 2D barcode print formats. Brady also has a leading position in aerospace RFID tags. Until now, we use off-the-shelf RFID and barcode readers which can sometimes put us at a disadvantage as we don't have the complete integrated solution that our customers demand. With the addition of Nordic ID's RFID technology and Code's barcode reading technology, we will create a portfolio of industrial readers that are fully integrated with our printers and our software, driven by the adoption of an Industry 4.0. The industrial track-and-trace market is growing quickly as a result of emerging use cases provide better workflow visibility. At the core of Brady, we're an identification company focused on industrial end markets. Our vision is to expand our presence in industrial track-and-trace applications, and we Nordic ID and Code as critical steps in helping us to realize this vision as they fill known gaps in our product portfolio. We see the industrial track-and-trace market as one of the fastest-growing use cases for Brady's printers, consumables, software and now RFID scanners with the acquisition of Nordic ID and barcode readers with the acquisition of Code. We've already begun the process of integrating Brady products with Code barcode readers and Nordic ID RFID scanners, so we can provide a complete user-friendly solution in the niche markets of industrial plant automation. We believe that the need to digitize everything to attract products throughout the entire manufacturing cycle and to drive efficiency at every possible point of the manufacturing process will increase in prominence as companies realign their supply chains to avoid overreliance on certain geographies and as companies revamp their manufacturing processes in an effort to cut down on personnel needs while they find it more and more difficult to even find workers. Now it will certainly take some time and incremental R&D over the next couple of years to ensure that our track-and-trace applications are fully integrated, user-friendly, and we have software we need to power the solutions as we evolve from a discrete product identification provider to a track-and-trace solution provider. So don't expect to see a major change in organic sales overnight, but we see this as an excellent opportunity to expand Brady's presence in the faster-growing end markets that will move the entire company from growth at near GDP to, once integrated, consistently growing in excess of GDP. Moving along, Slide #8 is a brief overview of the short-term financial impacts of these 3 acquisitions. As I just mentioned, we believe that these acquisitions, once integrated, will accelerate our long-term organic sales growth to consistently exceed GDP. In the near term, specifically our fiscal year ending July 31, 2022, as we've pressed through the integration process, we expect combined incremental revenues of approximately $96 million and additional EBITDA generation of approximately $14 million. At this point, we have not yet determined the impact on fiscal 2022 EPS as we're still currently working through purchase accounting. We would expect to be able to provide a bit more color on the EPS accretion as well as updated fiscal 2022 forecast for these newly acquired companies when we communicate our annual fiscal 2022 guidance, which is anticipated to take place in September of this year. We funded both Magicard and Nordic ID 100% from cash held overseas, while the Code acquisition was funded through a combination of cash and short-term borrowings on our revolver at an interest rate of below 1%. As I mentioned, we're still in a strong net cash position which provides us well for additional acquisitions, if the opportunities present themselves. With that, I'd like to now start the Q&A. Operator, would you please provide instructions to our listeners?

[Operator Instructions] Our first question comes from George Staphos with Bank of America.

This is actually Cashen Keeler on behalf of George Staphos today. Just first off, you indicated that additional work and spending will be needed to create a more unified ecosystem for Nordic ID and Brady's products. So I guess what additional spending, if you're able to quantify it, will be necessary to do this for all the 3 acquisitions you completed?

The key will be creating a software umbrella over the Brady existing products, the Nordic and the Code products. We have the capability to do that very, very effectively, but that will take time. We aren't announcing a specific dollar amount, but we don't believe that, that will be significant strain on the Brady organization and our financial results. We do believe that it will take some time. And as a result, once we have that complete umbrella, we're going to offer a very dynamic solution set, complete solution set to the end market which will accelerate our growth, as we said.

Got it. That's helpful. And then given some continued softness in IDS sales to health care markets, can you talk about your outlook there and particularly the outlook for Code Corp., given the competition of sales into this industry?

We believe that Code Corp., in particular, is in a great position. They do extremely well in this market. Their products are well, well received, extremely well-respected brand name and capability sets. We just see this as an additional advantage to Brady in that marketplace as that marketplace does continue to come out of the pandemic situation. And as we mentioned in our last call, we are certainly seeing that in an effective manner, and Code will just help in that effort.

Our next question comes from Keith Housum with Northcoast Research.

Michael, congratulations on the acquisitions.

Thanks, Keith.

Absolutely. I focus my question on Code Corp. Can you give us a breakdown of their hardware versus software offerings here?

Well, they have a complete solution set. So we won't give you a breakdown on the actual numbers, but there is an integration, clearly, of their hardware and their software sales. So it's very synergistic for them. They do have excellent software, and that is critical to their customer experience. But obviously, with that software, we sell their physical product set hand in hand.

Okay. I guess I was trying to point to, is there a recurring revenue element to the Code business?

Yes, there is, absolutely. The coupon approach is one that we do appreciate greatly. And as you can see from this whole strategy that we're implementing, we will be moving more and more into that space. Please don't misunderstand. It doesn't mean that we are not a hardware provider. It does. It's just part of that integration value stream that we see and are very excited about. You're correct.

Got you. Got you. And is this -- obviously, there's going to be revenue synergies for the Brady business, but do you anticipate there being some cost synergies as well?

Yes. We actually see that we're going to be able to develop more effectively together as a team. We think and believe and strongly are excited about the excellent technical capabilities of the Code organization, so I would not expect you to see any cost out of that area at all. We purchased the organization primarily for their incredible technology that comes from their amazing team. That said, we think we can work together as we provide the actual products to be more cost effective in the future and do see some exciting opportunities there, yes.

Got you. And then can you comment the growth, I guess, trajectory which Code has been on over the past 4 years? Obviously, I know the pandemic perhaps threw a wrench in it, but how fast has Code been growing? And how fast, I guess, is the industry growing?

Keith, this is Aaron. So pre-pandemic, Code was growing very nicely, certainly double-digit organic on the top line and with very strong gross profit margins. Of course, that drives a lot to the bottom line. I mean their flow-through is absolutely fantastic. They did take a step back in the pandemic, as you would imagine, much like our health care business did. But overall, they're certainly growing and have been growing at a much faster clip than the core Brady business.

Okay. And then last question, and I'll get back in the queue. They've had a lot of success in the U.S. health care industry. What's preventing them from getting outside of the U.S. health care space? Has it been the fraud portfolio? Or is it just -- help me out there.

Keith, I really think they were a privately held company that was developing excellence first. And as you know, you want -- as smart private companies, as they grow, have a rightful shot approach. I've actually seen the opposite create chaos for companies where you have more shotgun approach. And I would say it was wisdom that kept them into the U.S. medical space. They were growing at double-digit rates. And as a result, we have a tremendous opportunity together to expand the spaces they're in. That doesn't mean they weren't working on industrial track and trace, but they were primarily focused there because they had great growth, great acceleration. And companies, as they grow and develop, my history is, tend to be much stronger, if they can, first and foremost, dominate a space. And now this is a transition point for us to help them dominate more spaces.

[Operator Instructions] Our next question comes from Steve Ferazani with Sidoti.

I just wanted to follow up some of the lines of questions previously on Code, which is, obviously, the multiple was high. You noted the strong growth rate to support that. So does that mean you are anticipating double-digit growth rates continuing in the near future for Code?

Yes. I would say we're not only expecting that, but if you take a look at the Nordic ID, Code and Brady combination, all 3, combined together with the software umbrella that I've been talking about, really will allow us to generate a very, very strong growth with extremely strong margin. So we're very excited, not just about Code, but when we put it with Brady and Nordic ID, we combine our resources and, add to them, we're going to have a very, very dynamic story for the marketplace. And we do have one right now, so yes. To answer your question, very clearly, yes, we expect the strong growth to continue in the future.

And obviously, you did a lot of work on this with these acquisitions. I just want to get your thoughts on RFID versus barcode. It would seem like RFID has certain advantages moving forward. I mean what's your thought on those 2 technologies and barcode's future versus RFID, particularly with track and trace?

It's a very good question. My answer is you need both. It's why we purchased both. There are different applications where RFID has advantages for its technology, whereas barcode works much, much better in applications that don't require that level and that situation but where you need the high, high clarity of read and quick read throughput, which we're able to do with Code there, have excellent technology in that regard. So I'm not going to claim there's going to be a winner. I absolutely believe that both technologies are going to remain, having strong application space out in the marketplace. And it really depends on the end user application. As you can see, health care is the perfect example for Code of where that technology is excellent and works very, very well. Whereas, we look at our aerospace applications, where you have remote dislocated applications where you can't physically get line of sight. RFID, from a point of view, would physically be on top of it, such as aerospace, like I said. You see RFID has a real advantage there, so I would tell you both.

Okay. Fantastic. And then I know you said this is the one thing you couldn't provide. So of course, I'm going to ask the question about it, which is you're seeing minimal impact on earnings. Is that considering amortization when you make that statement?

I'm sorry, Steve. When you say minimal impact on earnings, you mean in Q4, so the current quarter that we're in?

Yes. But you're not -- so that's only for Q4, so you're not seeing minimal impact next year.

Yes. I mean the challenge we have with next year, which is why we just shared the EBITDA numbers, is we haven't figured out the amortization yet, to be quite...

Do you have any stance on -- so you're thinking dilutive for next year. Is that fair or not fair?

I don't think that's fair quite yet. I mean I'd love to point you directionally, but we're still working through it.

No. That's fair. I understand. I understand. And then any thoughts on -- well, a couple of things, thoughts on how this affects cash flow? And how long do you think you need that revolver in place, given your general strong cash flow generation?

Well, our goal would be to pay down -- well, first of all, cash flow from these acquired companies will be positive, which is, of course, important. Our cash flow within Brady continues to be very strong, as you know. Our goal would be to pay down the revolver quickly, actually. And just to put it in perspective, we're still in a net cash position. We're constantly repatriating funds. And as Michael mentioned, we're -- we'll continue to have a very strong balance sheet. So don't expect the revolver to be outstanding very long.

Our next question comes from Keith Housum with Northcoast Research.

Just more 2 follow-ups here. You guys noted that the EBITDA, inclusive of integration costs. One, I guess, can you give us an idea of what those integration costs will be? And then second, do you anticipate most of those integration costs will be in year 1? Or will those extend out further?

Well, first off, the majority of our, say, the one-off acquisition-related costs will actually be included in our fourth quarter, so the quarter we're in right now. So think legal fees, transaction costs, some external diligence costs, writing off of inventory and the impact that, that has, et cetera. As we look into fiscal '22, the integration costs would be the types of expenses that you would imagine, right? It would be any and all management incentive-type plans, bonuses, special bonuses, et cetera. It would be the cost to drive synergies, both on the cost side as well as the revenue side. So think things such as legal entity restructurings, any facility actions that we have, in-sourcing of manufacturing, IT system implementations, those types of activities. That's what we're talking about. In general, the reason why we don't break these out and the reason why we're presenting numbers, inclusive of these types of expenses, is that we truly believe that these are really ongoing restructuring-type activities, and they're normal part of doing business. And I know some companies would break these out and call them restructuring charges. We're not doing that, just because our philosophy is that you always have these types of expenses. And then to answer your other question on is it year 1 versus year 2, the vast majority of the integration costs will be a year 1 expense. But then if you get into some of the larger items that Michael was mentioning to build out the software umbrella, that certainly could expand for several years.

Okay. So I guess I'm trying to understand is should we expect in like fiscal '23 for the profitability of these organizations to increase because the integration costs will be going down? So it sounds like it's going to be a mixture of both, some more recurring costs going forward, but also you should expect some increase. Is that true?

Yes. The answer is yes to that question, Keith. We are certainly modeling fiscal '23 higher than fiscal '22 because of many of the expenses that you're referring to.

Got you. And then last question for me is the go-to-market strategy for like Magicard, Code and Nordic ID, is that a different go-to-market strategy than the core Brady Corporation that we're used to or not?

No. They do use a large distributor model. You know that Brady uses the large -- particularly in our IDS business uses a distributor model. We're very happy with their distributor base of all these companies. We believe we can work with them very effectively, so we feel good that we understand their go-to-market. We're comfortable with it and synergistic to what we do.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Michael Nauman for any further remarks.

Thank you so much. I'd like to leave you with a few closing remarks this morning. First, this is a very exciting period for Brady as these recently announced acquisitions continue to build on the strong momentum that we're experiencing. Clearly, we have a fair amount of integration work ahead of us to develop a complete solution that is cohesive and provides the ease of use that our customers have come to expect from Brady. However, our rock-solid balance sheet and strong cash position give us significant dry powder to accelerate growth through further R&D efforts and additional business acquisitions. It's a combination of technology acquisitions, such as Magicard, Code and Nordic ID; the investments we've made through the pandemic in R&D, sales and marketing; and our recently expanded customer base that results in strong future for both ID solutions and our workplace safety business. I'm confident we will see strong revenue growth in the future as a result of these acquisitions and our focus on growing organic sales, which includes expanding in faster-growing end markets and applications, including access control and industrial track-and-trace applications. Brady is well positioned as we close our fiscal 2021 and look ahead to next year. Please stay safe. Thank you for all your time this morning. Have a great day. Operator, you may disconnect this call.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.