Brady Corporation ($BRC)

Good day, and thank you for standing by. Welcome to the Brady Corporation Acquisition Announcement Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ann Thornton, CFO. Ma'am, please go ahead.

Thank you. Good morning, and thanks, everyone, for joining us. This morning, we would like to take the opportunity to explain an exciting moment for Brady, which is our announcement of our planned acquisition of Honeywell's Productivity Solutions and Services business. The slides for this morning's call are located on our website at www.bradycorp.com/investors. 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 are defying 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 identified in our press release regarding the transaction issued today and in our investor deck, each of which are included on our website and in Brady's fiscal 2025 Form 10-K, which was filed with the SEC in September of 2025. We 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 being recorded.. I'll now turn the call over to Brady's President and Chief Executive Officer, Russell Shaller, for some prepared remarks before opening up the floor to questions. Russell?

Thank you, Ann, and thank you all for joining us today. As you know, this morning, we announced an exciting transformative move to acquire Honeywell's Productivity Solutions and Services business, or PSS. The transaction will significantly expand our portfolio with data capture and workforce solutions. At its core, this transaction brings together two highly complementary organizations that are uniquely positioned to help our customers operate smarter, safer and more efficiently through our full suite of products from our highly engineered durable labels to the data powering an entire supply chain. With the combined strength of our business, we will be able to offer our customers a one-of-a-kind solution, a more comprehensive portfolio of hardware and software solutions across critical workflows for companies in a wide variety of industries and markets. This transaction is the culmination of our Board and management's team thoughtful and opportunistic approach to M&A that complements our existing businesses advances our strategy and deliver significant value for our shareholders. We remain committed to our disciplined capital allocation approach to capitalize on the highest return opportunities that fit squarely within our strategic and financial criteria, and we view this acquisition as a unique opportunity that fits within Brady incredibly well. PSS provides mobile computers, barcode scanners and free solutions with nearly 3,000 employees globally, and 2025 revenues of approximately $1.1 billion for the 12 months ending in December 31, 2025. Importantly, PSS also shares our focus on talent with a particular expertise across R&D with deep technical knowledge and a strong record of product innovation. PSS serves some of org's transportation, warehousing and logistics funds in the world. which expands the enterprise customer change for Brady as well as our total addressable market with fast-growing verticals. Geographically, approximately half of PSS' revenue is generated in the U.S. and Canada, about quarter from Europe and the remainder is equally split among the rest of the REITs. By vertical, the largest end markets are retail, industrial, transportation and logistics with smaller positions in health care and other industries. This is truly a fantastic complement to our existing base of business. PSS has a broad global manufacturing and distribution footprint across 40 facilities, their global footprint unlocks cost-efficient scale while maintaining the ability to meet shifting global needs. With nearly 4,000 patents and almost 4 million service contracts, PSS is focused on the development of products and solutions that empower worker productivity for millions of frontline workers around the world, in applications in which data accuracy is critical. We believe that the addition of PSS gives the opportunity to drive incremental growth and earnings from actionable near-term investments is R&D focused and an active new customer pipeline. Nearly 70% of PSS' revenue was generated from products launched within the last 3 years, demonstrating the effectiveness of their R&D engine. This combined with our operational efficiency, compelling secular tailwinds within the productivity solutions market and PSM's growth and margin outlook makes us confident in the value creation opportunity presented by this transaction. I think our strategic rationale in four primary categories. First is the expansion of our portfolio into adjacent workflows and to provide a more comprehensive offering for our customers. Second is the expansion of our customer base into enterprise accounts where we may not play a large role today. Third is our entry into a much larger total addressable market; and fourth, is creating a new platform, including high-margin recurring software revenue. When we put all this together, it translates into a compelling financial benefits that Ann will walk through in more detail. Walking through this one by one. Starting with the portfolio. We're proud of leading position in high durability, high-quality printers and our specialty adhesive materials designed to withstand the harshest environment and comply with stringent safety and regulatory standards. PSS brings mobile computing, barcode scanning, RFID and workflow software, which is incredibly strong complement to our existing portfolio. PSS' products and purpose built to perform the liability and high-volume operations where accuracy and uptime are critical. We'll be able to offer our customers something new and truly differentiated, a complete portfolio that takes them from printing and identification through to data capture, workflow execution and real-time operating intelligence. Our second strategic pillar is customer expansion. PSS expands our customer base within enterprise customers. These customers provide an excellent opportunity to cultivate long-term partnerships that we fully intend to grow with an opportunity to expand wallet share as we fully integrate PSS. We're also greatly expanding our presence in new verticals through PSS' customer set, particularly retail, logistics and warehouse environments. The third strategic pillar is our entry into much larger total addressable market. This transaction moves us into technology-enabled data capture and workflow solutions markets, which is a $9 billion productivity solutions market. The core verticals in which PFS has a strong foothold have extremely compelling secular tailwinds that we can benefit from. Think of automation, digitization and asset tracking. Global organizations are constantly pushing for efficiencies, and in order to achieve this year in and year out, they need high-quality products that are easy to use and most importantly, that allow employees to do their jobs accurately. This is exactly where PSS products excel. To take one example within retail, which is PSS' largest vertical, retails have done dockers or touch points with a single customer from in-store assistant and checkout to inventory management, customer service, picking orders and packaging and shipping. Large global retailers can require tens of thousands of devices to serve high volume of customers, improve customer service and increased dollars per transaction. the same concept applies to logistics applications, health care environments and many others. Our fourth strategic point, we're creating a new platform of high-margin recurring revenue and software service and voice penetration. PSS generates over $200 million in recurring software service and voice revenue today, which is meaningful. PSS' installed base is significant with over 3 million devices with active service contracts and millions more deployed. Products had a 3- to 5-year refresh cycle, which drives repeat demand with an opportunity to add service contracts as well. We see an opportunity to lever PSS, life cycle service, software and voice opportunities across our existing platform of high-performance products. Overall, we see a compelling story that should be immediately result in financial upside with increased recurring revenue. Now I'll hand it over to Ann to provide additional details on the financials. Ann?

Thanks, Russell. This exciting transaction represents an important next step to grow the earnings power of Brady and to provide attractive opportunities to grow revenue in the future. We expect the acquisition of PSS to be double-digit accretive to adjusted diluted EPS within the first year following close. This will allow us to maintain balance sheet flexibility as well as our disciplined capital allocation approach, both of which are core to Brady's fundamentals. . We expect to achieve a minimum of $25 million in annual run rate cost synergies within 3 years of closing the acquisition through primarily improved operational efficiency. Over time, we expect that these synergies and other scale benefits, such as commercial execution and manufacturing efficiencies will ensure that our margin profile remains within our historical levels. While we will see a short-term dip in EBITDA margins upon closing, we fully expect to bring that back up to our historic levels within 2 years post close. Operational excellence has been a priority for us for years, and you can see this in our financial results. We've improved our gross profit margin to above 50% despite the impact of incremental tariffs compared to last year. We've reduced SG&A as a percentage of sales while increasing our investment in research and development from just over 3% of sales several years ago to more than 5% of sales as of last year. All of this in combination has resulted in 5 straight years of record adjusted diluted earnings per share, starting in fiscal year 2021 through fiscal year 2025. And finally, we always focus on cash generation and cash-based decision-making. You can see this through often being in excess of our net income, along with our incredibly strong balance sheet, all of which gives us the ability to capture opportunities like the acquisition of PSS. In terms of transaction financing, it will be funded with cash on hand and new debt. This acquisition is expected to increase our net debt-to-EBITDA ratio to approximately 2.5x at close, and we expect that our pro forma revenues and cash flow will support rapid deleveraging to below 2x EBITDA within 2 years post close. While we will immediately prioritize debt reduction, we believe that we will have ample capital on our balance sheet to maintain our robust shareholder return programs, including the increase in our annual dividend and opportunistic share repurchases while always investing in our organic business. As we think about transaction next steps, we anticipate completing the transaction in the second half of calendar year 2026 and subject to regulatory approvals and other customary closing conditions. We believe the compelling deal economics of the transaction will result in long-term shareholder value and enable profitable growth into the future, and we're looking forward to bringing PSS into Brady. With that, we'd like to turn it over for Q&A. Operator, would you please provide instructions to our listeners?

[Operator Instructions] One moment for our first question. Our first question is going to come from the line of Keith Housum with Northcoast Research.

Russell, congratulations on ASM deal and stuff, a game changer for you guys. How do you understand in terms of looking at Honeywell has actually been declining in market share and revenue over the past 5, maybe 10 years. What are your thoughts in terms of how you're going to be able to turn that around this organization? .

Yes. So we obviously spent a great deal of time looking at the business and looking at where they were strong and how it invested into Brady. So First, I would probably correct what you've said. They haven't been declining for quite that long. And there are definitely some strong pockets and there's some weaker pockets. But if you look at our business, their mobile computer business is actually doing very well as are their enterprise-level customers. That traditionally is an area that we have no expertise. So the part of the business that you're doing well on continue to do that will continue to perform. The partner where we think you're best able to help them is in the printers and in some of the newer areas where we know we've got a very strong position, not necessarily in all of Honeywell's customers, but if you look at this and you look at their struggle, I think the small and medium-sized businesses, which is actually a tremendous strength of Brady. I think putting the two businesses together makes a lot of sense and really will turn their trajectory with them

Great. And Russell, I can ask a few more here. You hit on the head, my understanding is the channel program efforts have been really backing over the past several years. And I'm not sure how deep Brady is into the channel, but any thoughts maybe it's premature, but any thoughts on how you guys are going to try to address some of the channel relationships that they have and how you can perhaps split them to grow more.

Well, I think I'm not going to get into details at this juncture because we don't actually own them, but I think we're going to bring a level of stability to their business that they probably haven't enjoyed in the past. As you're well aware, braving very consistent and methodical performance for the last decade. And you're not the flavor of the month or whatever, but we can pretty much consistently expand market share and expand operating margins as per year. We're looking to bring that same set of discipline to Honeywell.

In terms of their R&D efforts, is it anticipated that you're going to have to increase their spending on R&D? Or are you satisfied with the level they currently at?

I'm satisfied with where they're going to be by year. So they went through a period of R&D reduction that was pretty significant I think they even realized that, that was too big a cut. And so they've been building back R&D over the last couple of years. Still not quite where it needs to be. But again, this is the area you're going to get the dual of Gray and Honeywell. We have a pretty significant portfolio of RFID products, we've done some things in machine vision and optics that we believe will be inventory. And then, of course, our printers will build out their portfolio in a better shape So those things we think are additive and so we'll be able to redeploy some of the R&D resources into different areas. So I do think the combination of Brady's R&D team and Honeywell's R&D team, which will now being roughly a $200 million spend will be a full reality.

And then maybe I get 1 more. In terms of the cultures of the 2 companies, perhaps can you talk about how the culture they are and thoughts in terms of how you're going to merge those together? .

Yes. I think Brady, I would say, what was 1 of our outside people called the scrapping. And I think that's a fair characterization. We're quick to make decisions if we don't have a lot of bureaucracy. We are definitely going to be bringing that to Honeywell. I think that will be pleasant surprise to some. It will probably be confusing to others, but our ability to make precision at very low levels, I think, is a tremendous strength to Brady and something that we expect to translate into Honeywell.

And then maybe if I can 1 for Ann. You think double-digit accretive to Brady's earnings, can you give us a little bit more context? Are you thinking 12%? Are we thinking 40%? I mean any idea that we can kind of conceptualize that? .

Yes. I mean it partially does -- it will depend on when we do actually close and I fully recognize second half of the fiscal year is broad. It's just would expect in the more likely kind of third calendar quarter, but we'll see how things go. But beyond that, with the multiple that we're buying the business at and financing of all cash the incremental number will depend on the different factors, but we do expect it to be meaningful, double digit, for sure. And we'll give more specifics as we get closer to closing. But I appreciate that question, Keith. But it will be immediately accretively.

One moment for our next question. Our next question will come from the line of Steve Ferazani with Sidoti.

I just want to follow up the last question, Ann, in terms of the double-digit accretive. What kind of assumptions are you building in for financing. It's a pretty large transaction, you're going to be over 2.5x. I'm assuming not as attractive financing as you're used to? Or what are you building in there? .

Yes. We're building in -- basically, I mean, you can kind of follow our EBITDA multiple, will still be in that mid 2x range. And expect financing at least our initial indication to be still decently favorable to Brady, not at the low levels that we're currently enjoying with our minimal amount of borrowing, but we expect -- we still expect basically a favorable outcome from our financing. I'll be able to share more once we actually do get to that point and get closer to close, we'll absolutely provide a lot more now on that.

The $25 million in synergies over 3 years, that seems kind of low for a deal this size. Can you talk about where you think you'll realize it and what you're not including in that number? Because I would imagine there's other opportunities. .

Yes. I think there is, but we wanted to be conservative there is not a tremendous amount of overlap between our organizations. And this deal stands itself with minimal synergies. We think we can get far more. In fact, we get very little baked in, in terms of those synergies and cross-selling, which we know money is there, that as we get through this. And remember, this is a carve-out of a very large parent. So there's a lot of moving pieces and we didn't want to, I guess, stick our neck down too far in the first year or two of the transaction, which I think is consistent with Brady's. We've been a very conservative company, and we try to achieve or exceed what we say we're going to do.

Can you talk about the competitive landscape you're entering here? .

Yes. So obviously, and, to a lesser extent, data logic. If you look at the small Chinese competitors, of which there are numerous ones, they don't really compete with Brady or Honeywell or the -- at a larger level. If you're going to buy 2 readers or 2 scanners or a printer, there's a lot of different options that you might have, but if you're going to buy something for a real environment where you have dozens of stores are you hearing data security lost of other support issues, it really comes down to the three of us. So it would be Honeywell, and data logic, which is definitely stronger in Europe than in the United States. And then once you get past that, there really is very little competition.

I know it's a little early for this question, but given this is -- you've been through a multiyear transformative might be a little strong, but it's certainly coming close to being transformative where Brady is going. When you start looking at your overall business, clearly, this transaction is going to take a lot of your attention. Do you start looking at pruning some of your other businesses or product lines that are not growing or are lower margin? Does this precipitate that?

I think everything is potentially on the table. Some of those businesses, though, are very, very steady and actually have a great return on invested capital. So some of those businesses that I think people would look at and say, why are you doing -- we're getting mid high double-digit return on invested capital because we invested very little in them for the amount of cash they generate. So while anything possible, we definitely like the stability and the profile of the cash flow businesses generating over the last few years, we deemphasized investments and actually I've now got disposed of two online businesses. So at this point, everything in our portfolio makes money. It's not a management distraction. We have a very decentralized organization with individual general and energy on a host of these businesses. So I'm going to say it's possible, but we're not looking to do that immediately. All of our focus right now is going to be on integrating Honeywell and making sure that we hit the ground running once they become part of Brady.

Got it. Last one for me. I guess, based on the timing of this deal probably doesn't impact your fiscal year, but does -- but are you expecting any changes to your fiscal guidance? Are you still comfortable with it?

Yes, we're still comfortable with it. There's obviously a onetime fees associated with these deals that were -- that would happen during the quarter, but it's -- they're one-timers and not big on scaling things.

And I'm showing further questions at this time. And I would like to hand the conference back over to Russell Shaller for closing remarks.

Okay. I'd like to leave you all with a few closing remarks. This is an exciting time for Brady. PSS allows us to expand our portfolio into adjacent workflows, which provides a more comprehensive offering for our customers. It expands our customer base into both enterprise accounts and much larger total addressable market and creates a new platform, which includes high-margin recurring software revenue. . I'm incredibly excited about this opportunity. The PSS business has an incredible product portfolio, a talented R&D team with deep technical expertise and critical sales and support functions who know their business extremely well. We're looking forward to bringing the PSS and Brady businesses together. We have a great future ahead of us with a significant opportunity to drive long-term shareholder value. Thank you for your time this morning. Operator, you may disconnect the call.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a good day.