Brady Corporation (BRC) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Brady Corporation Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded [Operator Instructions]. I would now like to hand the conference to your speaker today, Ann Thornton, Chief Accounting Officer. Please go ahead, ma'am.

Thank you. Good morning, and welcome to the Brady Corporation fiscal 2020 fourth quarter earnings conference call. The slides for this morning's call are located on our Web site 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 the forward-looking statements. 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 2020 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. Michael?

Thank you, Ann. Good morning, everyone and thank you all for joining us. This morning, we released our fiscal 2020 fourth quarter financial results. We continued to navigate through unprecedented times, both economically and operationally. And I'm proud of how the entire Brady team is stepped up to the challenge. The team's ability to deal with uncertainty, think on their feet and solve problems quickly, all while never compromising the long-term has been extremely impressive. I'm proud to work for such a focused and dedicated global group. Before we get into our financial results, first let me provide an update on our response to the COVID-19 pandemic and where we stand around the globe. Brady is an essential business. And although, we did have minor work stoppages in several of our factories and we still have a significant number of people working remotely, our manufacturing has effectively been up and running globally throughout the pandemic. Our team has worked tirelessly to manufacture, source and deliver the products that our customers need. We support first responders, healthcare workers, food processing companies, logistics companies, retail establishments, schools and virtually every other essential industry by helping to solve their safety and identification needs and ensuring that they can fulfill their missions. Our products are used to help businesses, governments and schools with social distancing. Our signage is used to help provide a more hygienic environment when employees returned to work. And our products are used to help hospitals and laboratories identify and track samples and medical equipment and to keep patients safe. Brady’s safety and identification products are in demand and are helping the world to be a safer place during these challenging times. Our priorities have remained unchanged and our strong financial position allows us to focus on the long-term and ramp up our growth investments. While other companies may be focused on surviving, we're focused on thriving. First, we're investing in growth. We're improving our Web sites around the globe. We're improving our marketing capabilities. We're investing in new products. And we're investing in capability enhancing machinery. We're doing whatever we can to increase customer satisfaction, because we believe that great customer service will continue to separate us from our competition. Last quarter, we talked about the 20,000 plus new customers that we added. This quarter, we added an additional 27,000 new customers in our workplace safety business as we quickly developed and launched many new products, including floor markings and other types of signage and safety products specifically focused on helping our customers with their social distancing needs and help them safely operate their businesses. Now it's our job to serve all of our customers, new and old extremely well, so they can keep coming back to Brady time and time again to fulfill their safety and identification needs. These are unusual times, and we believe that if we can make our customers lives easier as they navigate the challenges presented by COVID-19 and that we will establish long-term customer relationships that will pay off for years to come. Second, we're driving efficiencies in automations through auto facilities around the globe. We're continuing to make ROI positive investments, even if those investments may take some time before the benefits are realized. For example, on July 31st, we went live on our common ERP system in two of our European locations. Thus, streamlining our operations and reducing IT costs. These implementations were six months earlier than planned, because our teams took advantage of the opportunity and pulled them in when we had time to focus on them with the least disruption to the business. These are the types of investments that have a cost today but will pay dividends in the future. We've been on a multiyear journey to become a leaner organization, which can clearly be seen in our financial trends as our gross margins are strong and our SG&A expenses declining. These actions have improved our long-term cost structure without impacting our ability to grow. We're focused on long-term while taking swift cost actions in the short-term, which set up to capture growth and drive long-term shareholder value. Lastly, we're consistently deploying our capital. We're investing in our organic business for returning funds to our shareholders through dividends and buybacks. Yesterday, we announced our 35th consecutive year of annual dividend increases. We're incredibly proud of this streak. Our strong financial position should continue to allow us to both invest in our organic business, while also returning funds to our shareholders. Shifting gears to our financial results. Our organic sales declined 13.7% this quarter as we progressed throughout our fourth quarter, we saw improvement in our daily sales trends, as May was our weakest month of the quarter and July was our strongest month. If you look at our sales trends by division, sales growth is relatively consistent to the quarter in our WPS business, finishing at an organic growth of 10.8%. In our IDS business, while organic sales were down 21.7% in the quarter, we saw improvements in daily sales patterns each month of the quarter. We still have a lot of work ahead of us as we work through top line challenges and reduced demand in the industrial sector. Our response is to control what we can, reduce our cost structure to invest in sales resources and research and development to make quick, decisive decisions and to operate as efficiently as we can so that we can emerge from the pandemic stronger than when we started. We use these opportunities to improve. I'll now turn the call over to Aaron to discuss our financial results. Then I'll return to provide specific commentary about our identification solutions and workplace safety businesses. Aaron?

Thank you, Michael. Good morning, everyone. The financial review starts on Slide number 4. Sales in the fourth quarter were $251.7 million, which consisted of an organic sales decline of 13.7% and a decline of 1% from foreign currency translation. Pre-tax income before losses of unconsolidated affiliates declined 26% and diluted EPS declined 22.1% to $0.53 compared to $0.68 in last year's fourth quarter. Included in this quarter's results were certain oneoff expenses, including severance charges, the write-off of previously capitalized catalog costs and certain inventory write downs. These expenses were effectively offset by reductions in incentive based compensation. Thus, netting to a minimal impact on Brady's overall financial results. However, these charges did reduce the reported segment profit in our workplace safety division by approximately $4 million with the offset being reductions in corporate admin expenses of $2 million and reductions in IDS expenses of $2 million. Again, the net impact of these items was insignificant to Brady in total, but it did impact our divisional results with the largest impact being in our WPS segment. Moving to Slide number five, you'll find our quarterly sales trends. Organic sales in our identification solutions division declined to 21.7%, while organic sales in our workplace safety division grew 10.8%. Organic growth in our WPS business was driven by approximately $16 million in sales of products directly related to supporting the fight against the COVID-19 virus. Our WPS team moved quickly to customize existing product offerings for social distancing requirements, including floor markings with unique 3D design, along with other custom signage, while continuing to source and manufacture other personal protective equipment for our customers. Turning to Slide number 6, you'll see our gross profit margin trending. Our gross profit margin was 47.1% this quarter compared to 49.6% in last year's fourth quarter. This decrease was mainly due to our reduced sales volume this quarter combined with costs to rightsize the business and product mix. On Slide number seven, you'll find our SG&A expense trending. SG&A was $75.9 million this quarter compared to $89.1 million in the fourth quarter of last year. As a percent of sales, SG&A remained constant at 30.2% in both the fourth quarter of this year and the fourth quarter of last year. The majority of our SG&A decline was due to ongoing benefits from the efficiency actions we've been driving over the last several years combined with the reduction in discretionary spend, including travel for our sales people. Although, we did have certain one-off expenses, such as severance and the write-off of capitalized catalog costs that I just mentioned, these costs were offset by reductions in incentive-based comp in the quarter. Moving on to Slide number 8, you'll find the trending of our investments in research and development. This quarter, we invested $9.4 million in R&D. We continue to have opportunities for investments in new product development and we're committed to increasing our investments overtime, while at the same time, ensuring that we get the most out of every dollar spent on R&D. Our R&D spend was down due to reduced incentive-based comp and reduced headcount. We have no intention of backing away from our investments in R&D, as these investments are critical to our long-term success. In fact, now is when investing in innovation is most important, because we suspect that many of our smaller competitors don't have the financial wherewithal to continue investing throughout this economic downturn. Slide number 9, details the trending of pretax income, which declined 26% from $47.1 million last year to $34.9 million in the fourth quarter of this year. This quarter, we made a minority investment in a company called React Mobile. This Seattle based company developed a technology that allows businesses to pinpoint the exact location of an employee emergency through the utilization of GPS geo location and Bluetooth technology. This investment had a small loss this quarter, which is included in our income statement on the line, titled Equity and Losses of Unconsolidated Affiliates. Slide number 10, illustrates our after tax income and EPS trends. Net income declined to 24.4% to $27.7 million this quarter compared to $36.6 million in last year's fourth quarter, and diluted EPS declined 22.1% to $0.53 this quarter. On Slide number 11, you'll find a summary of our quarterly cash generation. We generated $45.1 million of cash flow from operating activities, and free cash flow was $39.4 million this quarter. We consistently generated cash flow in excess of net income, and this year was no exception. Cash flow from operating activities was equal to 125% of net income for the full fiscal year ended July 31, 2020. We've maintained our focus on making the right long-term cash decisions for the organization, which has resulted in cash flow in excess of net income year-after-year. Turning to Slide number 12, you'll find the trending of our net cash position. We finished the year with cash of $217.6 million and no outstanding debt. Our balance sheet is in excellent shape. Our approach to capital allocation is consistent. It is disciplined and we're patient. First, we use our cash to fully fund organic sales and efficiency opportunities throughout the economic cycle, even in challenging economic times like those we're experiencing today. We continue to fund investments in new product development, sales generating resources, IT improvement, capability enhancing capital expenditures and CapEx to further automate our facilities. We will keep funding these investments where it makes sense and where the investments are long-term ROI positive. And second, we focus on returning cash to our shareholders in the form of dividend. This year, we returned $45.8 million to our shareholders in the form of dividends. And as Michael just mentioned, yesterday, we announced our 35th consecutive annual increase in our dividend. After funding organic investments and dividend, we then deploy our cash in a disciplined manner for acquisitions where we believe we have strong synergistic opportunities. And we use our cash to improve shareholder returns through opportunistic share repurchases. This year, we returned $64.5 million to our shareholder through the repurchase of approximately 1.4 million shares. It's during these challenging times when companies like Brady, with super strong balance sheets that consistently generate operating cash flow in excess of net income can keep investing and emerge a leaner yet stronger company. Slide number 13, provides an overview of our financial results for the full year ended July 31, 2020. Overall, organic sales declined 5.4% and we finished with pretax earnings of $141 million. Of course, both our revenues and our earnings were significantly impacted by the COVID-19 pandemic in the backhalf of our fiscal year. As we sit here today on September 16th, we continue to lack visibility as to revenues or earnings for the full fiscal year ended July 31, 2021. As such, we are not providing formal fiscal 2021 sales or EPS guidance at this time. However, as we look to the start of the fiscal '21, we do anticipate that the trends we saw exiting last year would at least continue through the first half of Q1. Specifically, we expect sales volumes in our ID Solutions business to continue to improve sequentially but to remain below prior year levels, while the strong momentum we experienced in Q4 of last year in our workplace safety business should at least continue through the first half of Q1 as well. In our WPS business, our fourth quarter results were buoyed by sales of products directly related to the fight against COVID-19. And although, these sales continued through today, we don't know how long these sales will last, when they will slow down, or if they'll be replaced by growth in the general industrial sector. In our IDS business, we saw sequential improvements each month in Q4. However, we are uncertain if or at what pace this recovery will continue into the future. We are clearly in recovery mode, but we have not yet reached pre-pandemic levels and are not forecasting to be back to pre-pandemic levels in the near term. As for capital allocation, we do not foresee any major changes in our capital allocation strategy. We will keep investing in organic business. I just mentioned our announced dividend increase. And we will be opportunistic with buybacks, while looking for acquisitions where the price is right and the strategic fit is clear. As it relates to capital expenditures, we may increase capital expenditures beyond our historical levels in F'21 if we get the right opportunity to own one or more of our currently leased strategic manufacturing facilities. Our philosophy is to lease facilities that are not strategically important, so think warehouses or office buildings and to own our critical manufacturing facilities. We have a strong balance sheet and we will use it as a tool to drive outsized returns when we emerge from this period of depressed industrial demand. 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?

Thank you, Aaron. Slide number 14 outlines the fourth quarter financial results for our Identification Solutions business. IDS sales declined 22.8%, finishing at $171.2 million, with an organic sales decline of 21.7% and a decrease from foreign currency translation of 1.1% this quarter. Overall, organic sales in our IDS division improved as we progressed throughout the quarter. May was our most challenging month this quarter where organic sales per day were down in the upper 20% range. Whereas, in July, IDS organic sales per day were down in the mid-teens compared to last year. Our results improved sequentially throughout the quarter but our top-line remains challenged by reduced economic activity, primarily within the industrial manufacturing sector. Regionally, organic sales in both IDS Americas and Europe improved as we progressed throughout the quarter, but we're still operating well below pre-pandemic revenue level. On the other hand, our IDS business in Asia had low-single-digit sales growth in May and June, followed by an organic sales decline in the low-teens in July. Our Asian businesses that work to their pent up demand have now started to realize the impact of reduced demand resulting from the shutdowns in Europe and North America. Demand in our healthcare business has also remain challenged this quarter. Elective surgeries and hospital admissions are still down significantly compared to normal pre-pandemic levels. Sales in our healthcare product line declined by approximately 25% year-on-year this quarter. In response to these reduced levels of demand, we continue to take actions to reduce our cost structure throughout the IDS business this quarter. Any incremental costs we incurred, such as severance, were more than offset by reduced incentive based compensation in the quarter. IDS segment profit was $31.1 million compared to $45.6 million in last year's fourth quarter. Segment profit declined 240 basis points from 20.6% of sales last year to 18.2% of sales this year's fourth quarter. This decline in profitability considering the 21.7% sales decline illustrates how our team was able to quickly adjust for cost structure in response to decline in revenues. Our commitment to R&D remains a top priority and we launched several exciting new products this quarter. We launch the BradyGrip Print-on Hook Material, which is a label material designed to adhere to VELCRO brand labeling bundles. This high tech new material is a result of a collaboration between Brady and VELCRO, and is targeting for the datacom market where bundle cables can be time consuming to organize where accuracy is essential. BradyGrip makes the job easier and allows installation technicians and IT professionals to quickly identify and troubleshoot datacom issues. This quarter, we also launched Dissolvable Paper Labels for the BradyJet 2000. These labels dissolve completely in warm water, leaving no adhesive residue and are ideal for laboratory test environments or temporary applications with easy removal help to reduce both cleanup time and the waste of costly lab supplies. And we launched the product in our lockout tagout product line to safely lockout pull handle valves. Our products provides a better fit and stays in place with a simple fold over design that locks pull handles in any position. It can also hold up the four padlocks for added safety and security. The pull handle butterfly valve lockout is a versatile one piece device targeted for a variety of industries and applications, including food and beverage, chemical, pharmaceutical, water utility and fluid process applications, among many others. Our R&D pipeline is strong and we remain committed to developing innovative new solutions to help our customers solve problems and be more efficient and effective. Moving along to Slide number 15, you'll find a summary of our workplace safety financial performance. Our WPS business reported an impressive quarter in the midst of this unprecedented global pandemic. WPS organic sales grew 10.8%. This growth was driven by our European business with growth in the mid teens in the quarter. Once businesses in Europe began to reopen, this team did an excellent job supporting our existing customers and gaining new customers by applying the essential product that they need during this critical time. Our Australian business performed extremely well for the second quarter in a row with nearly 25% organic sales growth this quarter. Our team rose to the occasion and found creative ways to customize products and quickly meet the needs of our customers, many of whom were new customers. The rate of organic sales growth in Australia was highest at the beginning of the quarter and tapered down each month sequentially. So we don't expect this level of 25% quarterly sales growth continue into the future given the trend as we finished the year. Organic sales in North America declined in the low-single-digit this quarter, which was an improvement from a mid teens decline in sales in the third quarter. One of our businesses sell primarily to very small micro companies, which continued to be impacted by government required shutdown through much of our fourth quarter, resulting in the decline in sales. Our workplace safety team launched more new products this quarter that are specifically designed to fight against COVID-19. We launched floor marking for social distancing that are 3D and are designed, so they have a high level of visual impact, making them perfect for schools, retailers and many other applications in high traffic areas. They are commercial grade, slip resistant and can be applied to asphalt, concrete, stone, metal, tile and other surfaces without peeling or tailings. We also launched a drinking fountain lockout device this quarter. This product utilizes Brady patented lockout technology, which attaches to the spout of a drinking fountain to prevent use and keep hands off of a high touch area. COVID-19 has presented constant challenges for offices, manufacturers, retailers, schools, sporting venues and countless other businesses, one of which is to reduce the potential for contamination and spread through high touch and high traffic areas where people tend to congregate. This proprietary Brady device turns a complex problem into a simple solution for our customers. Both of these new products are examples of where our sales team increased interaction with our customers, understood the problems that they were trying to solve and quickly took action to develop customized solutions to meet their needs. Both the 3D floor marking signs for social distancing and the drinking fountain lockout device were developed in direct response to COVID related customer needs. WPS segment profit was $6 million this quarter compared to $6.7 million in last year's fourth quarter. Response rates to digital advertising increased this quarter, while the effectiveness of traditional catalogs decreased as a shift in buying patterns from traditional catalogs to online continued to accelerate. As Aaron mentioned earlier, we wrote off previously capitalized catalog costs in response to the shift in buying patterns of our customers. We also recognized certain inventory write offs and other costs, including severance in the fourth quarter. Excluding these onetime costs totaling approximately $4 million, our WPS segment profit would have been approximately $10 million or 12% of sales. Our WPS team pulled together and delivered a very good quarter. They listen to their customers to identify what they needed, they modified marketing campaigns to reach entirely new customers in entirely new industries, they delivered what they promised and they launched several new products along the way. Ideas were generated throughout all levels of the organization and within all departments. The team showed a tremendous entrepreneurial spirit and delivered. I'm so proud to be part of the role that Brady is playing in the fight against COVID-19. We continue to generate new ideas every day, and we're committed to delivering the highest quality of customer service, as many of our customers do with daily challenges that are changing constantly. Brady does make the world better and safer every day. The macroeconomic environment is uncertain but we are in a very strong financial position. Our cash flow remains solid and our balance sheet is very strong. We don't know how long the demand will remain for COVID-19 related products in our WPS business, we do believe that many of our newly acquired customers will remain with Brady. We don't know when demand will return to pre pandemic levels in the overall industrial economy. We are prepared to perform when the buying levels increase. Although, the future is uncertain, we are controlling what we can. We will continue to invest in R&D, sales in our resources and capability enhancing CapEx and efficiency opportunities, all while being extremely tight on non-revenue generating expenses. We know these are the right actions to take so we can deliver improved financial results and drive long-term value for our shareholders. With that, I'd now like to start the Q&A. Operator, would you please provide instructions to our listeners?

Thank you [Operator instructions]. Our first question comes from Joe Mondillo with Sidoti. Your line is now open.

Michael, I'm wondering if you could talk about your trends that you're seeing in IDS in August and September, you mentioned what may look like and July. Just wondering if mid-teen -- down mid-teens in July, did things get better in August and September? Could you just give us an idea of the last month and a half or so, how those trends look like?

Absolutely, Joe. As I said, throughout the quarter, we saw sequentially month-after-month and really very consistently an upward trend in our daily sales. We continue to see that pattern in August and early September. And we're anticipating that we'll see that through at least the end of September. We're definitely seeing a gradual and steady improvement.

So from the mid-teen -- down mid-teens in July, the year-over-year declines have improved in August and September then?

Absolutely.

Okay. Couple of questions, WPS first. You said the strength at the end of fiscal '20 will continue into 1Q. Was the trend at the end of the quarter similar to the overall quarter itself?

Yes, absolutely. Really the issue here is, we don't know when the transition from COVID-19 related products will take place. We are confident that our customers that we've been generating are actually are very strong customers and a strong customer base. And as we improve in the industrial segment, if that happens, we also think that we'll be able to make some gains there.

Okay. And then on the cost side at WPS, you mentioned the $4 million really with the catalog write-offs and severance. If you exclude that, the margin would have been over 12%. How do we think about sort of normalized margin at that segment? And traditionally, the fourth quarter you do usually see stronger margins than sort of the average throughout the year. So could you help us understand sort of normalized margins there? How you think about it?

I think, Joe, that you're going to see a continued positive trend. As you probably remember very well, when revenue increases we get a great waterfall effect. We are seeing increased revenue. We are very proud of the effort that those teams have put forth and we do not see a specific decline in that effort and therefore our margin. So we think we're going to do well in that area, as we go forth. And with one of our micro businesses in particular or businesses, I apologize, focused on micro industries as that improves, we're going to see continued improvement in our margins.

Okay. And then one last question for me, regarding the acquisition of -- or the acquisition of the minority stake of React Mobile. How much it is that minority stake? And then just looking forward, you guys have talked about capital distribution and you've been very consistent with your wording. That said, you've been very quiet on the acquisition front. So should we anticipate given where you are and everything in the progress that you've made over the years and now the very strong balance sheet. Should we anticipate maybe more acquisitions going forward?

Joe, we've invested just under 25% in that business. We feel very good about it. It is a great technology, a great group of people. And we think this is the right direction in our current world to really be able to make sure that once again we're helping to make the world a safer place for everyone. So the React Mobile investment is a good one for us and as I said just under 25%. As we move forward in acquisitions, we do feel very good about our pipeline of opportunity. The real challenge right now, the biggest challenge by far, you're right, is not capital, and we are seeing some good companies. It's logistics. Physically being able to get out and do the due diligence and the efforts that we cannot get around to do a good job of being proper disciplined investors. So really we are working with anticipation that as the world opens up, we'll be able to do some strong efforts in that regard.

And would you characterize your hunger to land more acquisitions? Is that a bigger priority now, maybe compared to year or two ago?

Well, Joe, I would say this. When I first came here, we clearly and purposely shutdown our acquisition efforts. I had not felt that that effort had been a positive one for us. And I think the street, the investor community had felt the same way. So we needed to become disciplined again in how we did business. But you're right. I feel very good that our business now is a very disciplined, innovation oriented, manufacturing company, focused on niche markets. So although, we are not willing to take our eye off that ball at all, because that would be a tremendous mistake, I do think that it is a good time for us internally to be able to focus some of our efforts on looking for technologies that would really add to our strength, while externally I think the markets are in a better position to buy at a reasonable price. If you remember our philosophy here. It's not only do we have to find a good technology that will help Brady, we also have to be able to help the company we're acquiring, but we have to be able to do it at a smart and intelligent price. And I think, Joe, you're correct. Those elements are all coming together right now. we feel like we will have more opportunities. As I mentioned before, the biggest impediment to our closing deal like that right now was literally logistics.

Okay, great. Well, thanks for taking my questions. I'll hop back in queue. Good luck.

Thanks, Joe. Appreciate you.

Thank you. Our next question Michael McGinn with Wells Fargo. Your line is now open.

Good morning, everyone. Mike on for Allison here.

Good morning, Mike.

Good morning. There was a lot of discussion on new customers serving those essential industries. I was wondering if you could help us kind of frame for what sort of verticals were already core to you and sales inflected upward in that vertical versus what kind of new to the portfolio that you're seeing, and how you managing those working capital needs on the receivables and inventory side? It looks like there was a pretty good step up there. So just any comment there, or any color there would be great.

Great. So Mike, we serve literally every SIC code there is and have served those. So we are incredibly broad based. That said, we certainly have areas where we're much stronger and have a much bigger focus. The areas that we've seen major uptick from restaurants, retail, areas like that, that are relatively small areas within Brady's existing portfolio, give us new opportunities in those marketplaces. But also, we're seeing new customers across the board around the world. So that has been a very good advantage for us. As far as our control of credit, I'm quite proud of our finance team and our management teams’ efforts to make sure we keep our credit very much in line with the combination of the needs of our customers but also their ability to properly pay. As far as inventory, you're correct. You did see an uptick in inventory continuing throughout the quarter. Our first priority has been to make sure our customers are served. One of the things that we've seen during this downturn is there have been many disconnects throughout different industries with customers not being able to be serviced properly by their suppliers. We did not and will not be one of those suppliers. So we did put a very large focus on not only making sure that we have the right inventory, but we forepositioned a lot of inventory throughout the world. That said, that number is coming down as the world stabilizes. Also, this is giving us an opportunity to once again accelerate something we already do and that is really moving more and more products closer to our end customers. And if you remember from past years, we've been talking about doing that now for about three years. We're really working to be ahead of the curve it turns out, because a lot of people are now looking at that more and more after this pandemic situation. But for us, it was the reasoning was more about serving our customers properly. So yes, the inventory is higher as a result of that. But this is our A level inventory. So good, very high quality inventory and we are moving it down as we speak.

Great, thank you. Then second one from me. Can we just talk about the two businesses beyond the headline margin more specifically? Just they seem like two very different businesses and what is the SG&A variability flex up flex down for each and the gross margin differential, because obviously there's a large dichotomies between the two segments right now in terms of top-line. So if you can just address that? And maybe what level of structural or temporary costs you took out in each business and the timing for when you expect to roll that back in?

Mike, this is Aaron, I can handle that. From a structural/directional standpoint, our WPS business has higher gross profit margins also higher SG&A expense in comparison to identification solutions, which of course is a result of how they go to market and how they service their customers. So as you look at the costs that have come out of the organization, I mean, frankly, we struggle with what's a permanent cost reduction versus a temporary cost reduction. So I'll give you an example. Our headcount is down approximately 700 people from July 31st of last year to July 31st of this year. Some of those headcount will most likely come back as the economy recovers, some may not. Our travel expenses are down quite substantially, as you would imagine as well, given the travel restrictions. Clearly, our salespeople need to travel. It’s a critical component of adding value. Some of that travel will come back, some won't. It's actually very difficult to determine what costs will or won't come back. But I can tell you this over the long-term, we would absolutely remain focused on taking costs out in the most sustainable manner that we possibly can and keeping out as many costs as we can, so they don't come roaring back into the organization. As we sit here today, we think our cost structure is in better shape than it was this time last year. And it just keeps getting better every single year as we become a more efficient organization. And Michael mentioned a couple of IT projects as an example that we implemented in the fourth quarter. Those are perfect examples where we'll continue to invest even though frankly, it is a cost in the short-term. But it's the right thing to do over the long-term, just to keep the steady March going down. So long winded answer but the reality is it's really difficult to pinpoint a permanent versus a temporary cost reduction.

Okay. And that gross profit WPS higher, I think on Slide 6 you said product mix was a negative. Are you talking more the mix with any segment or how should I view that?

We are specifically referring to the mix within each segment.

Thank you. Our next question comes from Keith Housum with Northcoast Research.

Good morning guys. Michael, you referenced the 26,000 new customers in this quarter and I think last quarter was 20,000. First, can you give us perspective? How does that compare to your overall customer count? And then second, is there any proof that any of these customers are -- have potentially being recurring customers? I don’t know you’ve made an order in the fourth quarter after getting new customer in the third quarter?

I don't want to correct you, I hate doing that, Keith, but it was 27,000 this quarter. We value every customer. So I don't want to shut out 1,000 customers. So in total -- and by the way, that trend continues, I would say two things about that. We already know these are high-quality customers. We already know that we're getting revenue out of them that goes beyond COVID, and we're seeing a better-than-average recurrence rate for those customers. So we feel very good about both the quality of the orders that we're getting from those customers and about the repeat rate that we can see out of those customers.

I never intended to shortchange anybody. And then how does it compare to your total customer count?

It actually is significant to us. We do have a large number of customers, but this is a very uniquely high number. You know we never call out those numbers, but this is very significant.

In terms of your visibility that you referenced in terms of not much beyond first half of the year, what's your normal visibility like? Do you usually have visibility more than six months out?

You're right, we don't really end up having as much visibility as other companies. Some would say that's a difficulty. I actually think it's an advantage because as a result, we always need to be able to react very, very quickly. So we're set up to react quickly to ups and downs. That said, I think you can find from all of your investment base that you're looking at, particularly in industrials, there's really very, very little open visibility in the market. For instance, in May, I had projected that we had hit the bottom. I was right about that. So I'm going to give myself an A for that. But I'm going to give myself for a C for the next statement, I thought we were going to bounce around the bottom for probably up to six months, and yet we've been seeing slow and steady improvements literally throughout the process since May. So I would love to be Nostradamus or have a crystal ball on this, but I think right now, the visibility is more challenging than usual.

Understood. And then you called out health care as being down 25% year-over-year, and that's obviously a significant vertical for you guys. And I understand that industrial as a whole was just challenged. But is there one or two verticals within industrial that was just much more cash-strapped for you guys compared to others that we can kind of look to as perhaps an opportunity for improvement if we want to look forward ourselves?

Well, I'll tell you this, aerospace certainly is not a bright side. Now maybe I'm a little naive, all of our leisure and entertainment business and all of that has been incredibly hit, down without giving a specific percentage. I think you can imagine that it's been catastrophic for small suppliers that are not diversified as we are. That said, I think some of those businesses maybe I'm a little pie in the sky on this one, I tend not to be. But I'm pretty excited that when those businesses come back, they're going to come back hard. I can't tell you when that will happen, but I will tell you this. When people feel safe again, there is giant pent-up demand for hotels, for airlines, for travel, for amusement parks, for all the things people love to do. If you go out and just survey any group, you're going to see they have 50 things they want to do in the future. The real key question is when will people feel safe? But when that happens, I think it's going to happen like a herd. Very, very quickly you're going to see a waterfall effect. The limiter to that will not be infrastructure, it will be personnel. In all of these industries, they've cut back tremendously. So hotels are working on short staff. Everyone is working -- airlines are about to do a major layoff. So they will have to ramp back up. Good news not on infrastructure but it will be a challenge for them. So the limit will be that. But I think you'll see some very big pitch-ups in that area. Obviously, though, if you take the other end of aerospace, the actual builders of the equipment, that's going to be a longer grind, because the airlines themselves have a lot of excess capacity in planes.

Yeah. Last question from me then. In terms of the gross margin. How much was the gross margin impacted by your onetime items, such as your inventory write-offs?

Well, our margin was down about 250 basis points versus fourth quarter of last year, and it was -- actually, it was pretty close to half and half between the onetime or the nonrecurring, if you will, and then the other items we mentioned being mix and volume.

Our next question comes from George Staphos with Bank of America. Your line is now open.

This is actually [Kashin Keller] sitting on behalf of George. I just had a quick question. Can you just speak to exit rates on volume for both the WPS and IDS segments? And then secondly, I know you talked about some new products in IDS, but is there anything else there in the pipeline that you're particularly excited about heading into 2021? Thanks.

As far as exit rates, as I think I said, we're continuing to look strong. We feel very good that things are moving up. We don't see it being super rapid to getting back to where we were, but we feel very good about that. As far as the pipeline, we've been investing significantly more in the last few years. So we are very excited about our pipeline of products. We obviously can't speak to those ahead of time for a variety of mainly IP-related issues, but we have great IP coming out. We have products that are really designed to help our customers as we look at making our customers' jobs easier every day. Most of our products, almost all of our products aren't on bills material. So we not only want to make effective durable products but we want to make products that make their lives easier, and we believe we're coming out with that. The other thing I'd say is that we've got pretty broad reach in that with all of our product segments. So there isn't one segment alone that I think we're developing interesting products in. We have interesting products in literally all of our segments. So very excited about the next year's product development.

Okay. Great. Just one more. What outlook from customers on CapEx are you seeing with regard to new plants or facilities? And assuming no flare-up in COVID over the next few months, is facilities construction and spending likely to increase or decrease, do you think, in 2021?

Well, that's not a real crystal ball that I would honestly be able to give you a good answer on, because a lot of our equipment goes into small CapEx and it goes into production and production improvement, facility improvement. So as far as specific CapEx, that's not really an area that we would see a definite or be a good model for you to look at the future on.

Thank you. Our next question comes from Joe Mondillo with Sidoti. Your line is now open.

Just a couple of follow-up questions. I appreciate you taking them. Just IDS, so you talked about how Asia saw a sort of an inflection in July after the pent-up demand sort of waned. Any indication of that happening in North America or Europe at all in August, September? These regions sort of lagged Asia. So any indication of that happening, that pent-up demand sort of waning a little bit?

Joe, this is interesting. We heard from a lot of people that Asia was going to lead the way into the recovery. And I never personally quite understood that because a large part of China's economy is based on North America and Europe. And so as North America and Europe were declining, yes, we are seeing Asia improve but they had a pent up particularly for us we know they had pent-up demand for our products that they had to recover from, but their long-term model still is very dependent on North America and Europe and those numbers are still down. And so the fact that we went down in July wasn't surprising to me at all. And I think that was why as opposed to a second round of COVID or anything else, I think in North America and Europe, we're still seeing continued steady improvement.

Okay. And then your decremental margins at IDS were about 29% in the fourth quarter. I know how -- there's a lot of moving parts with the cost structure. But in the near term, how can we think -- is there any way to think about sort of decremental margins in the near-term at IDS?

Yeah, I can answer that. You're pretty close at that 30% range. I think we're maybe just slightly above that when you factor out the nonrecurring items that I mentioned. And I don't see that changing in the near term. And then, of course, that flips the other way with respect to our workplace safety business where the incremental margins after you adjust for the $4 million that Michael mentioned, were very strong, north of 45%.

Okay. And then just last question from me. The catalog costs. Can you give us an idea of how much this makes up of your cost structure? And is there an accelerated -- I know this has been an opportunity over time. But is there an accelerated opportunity as the pandemic forces customers onto online platform? Is there an accelerated opportunity to reduce the catalog cost?

Let me answer that second half and then I'll flip it over to Aaron to answer the first half. Yes, we believe -- in fact, you must have a microphone in here to eavesdrop. We believe that the pandemic has accelerated transition. So if you imagine, some of it is generational, the millennials, the Zs. And by the way, many people don't realize it but the Zs are five to seven years into the workforce right now, up to 25-year olds. As they move forward, they are much more comfortable in an Internet focused, digitally focused environment. But this pandemic shifting people quickly to home really took the generations before and also moved them into a situation where they were -- learn to be more comfortable with a different approach. So we do see that driving a faster shift forward into a digitally based approach. Something we've been working on very hard for several years. So we're pleased that that's happening, and we're positioning ourselves to be able to accelerate in that. Aaron, if you want to hit the first half?

Sure. As you look at catalog cost next year, it shouldn't have much of an impact at all on the full year results. It may make the quarters a little bit lumpier from an expense standpoint than normal, but it really shouldn't have much of an impact in the aggregate. And as far as our total catalog costs, we don't actually break out total catalog costs. But what we do break out is total advertising. It's actually in the K that we released this morning, and it’s just north of $60 million, majority of which is catalog...

And why would you not -- relative to Michael's answer, why would you not expect a material impact to fiscal '21? Why do you think it would be down?

What I was referring to was specifically the impact of the change in accounting. So by writing off the catalog costs, that does not impact our fiscal '21 results in any way, shape or form. Now if we mail less catalogs, of course, if we produce less catalogs, of course, our catalog costs will then go down.

You’re just -- Aaron was just referred to the lumpiness that is created by the new accounting treatment.

I understand. But relative to sort of maybe total advertising dollars or maybe if you just look at catalog total costs, those would be down based on sort of what Michael described as far as the...

Yeah. You should expect that to continue to decline as we move more into a digital approach, or more to the point, as our customers move more into a digital approach. We're obviously going to reflect what our customers want, need and how they want to be reached. That is our basic philosophy. We reach our customers how they want to be reached.

Okay. And just lastly, as far as that total advertising dollar, is catalog over half of that? Or can you give us any sort of directional? Is it a small percentage? Is it more than half? Any sort of idea just in terms of size?

It's well more than half.

Okay. All right. Great.

It's a significant number to us. Yes.

Okay. Thanks.

Thank you.

Thank you. Our next question comes from Michael McGinn with Wells Fargo. Your line is now open.

I appreciate the follow-up. Understanding you're not giving guidance, but you usually give a CapEx number. I'm wondering if I missed that or if you have a framework for maybe the low end and then the high end if you complete some of those facility transactions you were talking about earlier.

Yes. It's tough to give you a high end. If you exclude the facilities, which are a bit of an unknown at the moment. If you exclude that, we would expect our CapEx for, I'll say, for our normal type of expenditures to be in line with what it's been in the past, which is, call it, close to 2% of sales, somewhere in that range. And that would be for, specifically think machinery and equipment to either add new capabilities or to automate our facilities.

And then as far as the actual buildings themselves, we continue our structure we talked about in the call of looking to make our critical factories our own. The reason we do that is it allows us to modify them easier, allows us to put in some investments that would not make sense in leased facilities. And really, it allows us to control our destiny. As we're looking at that, we do have several big ones left that we need to do. It's a matter of timing, can we get the right opportunity to actuate that in this year. And that could have a significant impact, but it certainly doesn't hurt our cash position, our ability to do anything like acquisitions and dividends and buybacks.

Okay. And on the top of buybacks, you guys are essentially debt-free here. The last time you did an authorization was, I think, way back in 2016, so 0.5 million of the 2 million shares remaining. Any idea of what expectations you have from an authorization standpoint going forward?

We don't add powder until we use up our powder. So, you are correct about the number as of the end of the quarter that we had out there. We continue our same philosophy. We're opportunistic. We look at a major disconnect. We don't look to set the market for our stock. We believe that's our investors' job. But if we do see a major disconnect in the market, we do opportunistically go after that and don't expect to change our philosophy.

Okay. And last one from me, if I can sneak it in. You mentioned an ERP transition, or I think two actually. A lot of companies that we've been on calls with they've pushed these out or done smaller phases, you seem to have leaned in on this. Can you just talk about the rationale, timing and what you learned from an onboarding process? And if this was a full-scale conversion or just like an add-on feature? Any comments there would be great.

No, this is full-scale conversion, total and complete. Why do we do what we do? People sometimes say are you contrarian and the answer is absolutely not. We're opportunistic. So, we had the bandwidth at that moment because of the downturn where we could continue to keep our customers happy, but we wanted to make some strategic moves forward, use these opportunities to really push hard against your competitors through efficiency, effectiveness, new product developments and this is efficiency and effectiveness. And we knew by moving them in by about six months, it would allow us to move some other projects in. And so we've actually not only moved those projects in and completed them, we have others that have moved forward dramatically as well. And so what we're really doing is continuing our effort to becoming a much more efficient and effective organization. And doing it at a time. Like I said, I continually hear people say don't worry, we're going to survive. And I tell our people all the time, we refuse to just survive, we're going to thrive. And that's a critical part of that mentality is that we have the bandwidth, we have the internal skill sets and we needed to do it, so why not do it sooner than later. It just puts us a foot forward ahead of our competition.

Thank you. Our next question comes from Keith Housum with Northcoast Research. Your line is now open.

Thank guys. Just one follow-up. Michael, coming back to your healthcare comments regarding it being down 25%. Obviously, it's been very challenged since you guys acquired that in 2013, I think it was. Is there any sign that it's permanently broken here? Or is this -- the downfall this quarter are really all related to just the challenges within the industry?

You know you're right, Keith. It has been a challenging business for us, but we were coming out of that. We're starting to see good progress. And the COVID situation hit us hard. It's an interesting marketplace in that many marketplaces really, the sales model is very strong in healthcare with the exception of, I'd say, cosmetic products. There is no sales model, people come in, they have a methodology of approaching business, and the ramp-up has been a lot slower than I would have anticipated. But it's actually pretty logical because the hospitals think a long-term scheduling methodology and their customers tend to be older in nature. And so many of the surgeries that are elected that we make a lot of money off of, one spouse may say to the other spouse "hey, your knees are fine, you can go another three months. You stay out of that hospital." And that's what we think we're seeing. It's just taking a lot longer. Anecdotally, I have a typical situation for a regular checkup where they schedule out three months. They said it's a usual three months, and I thought to myself you've got to be kidding. But they didn't schedule it in two weeks. So, they're still thinking as an industry just a stretched out time line. And I think their customer base, which is primarily predominantly older, is reluctant just to come back in mass. Certainly, there are people even closer to the industry than us, but we do see pretty quick correlations, because users of hospitals are users of our products. And so we think the hospital industry overall is going to take longer than many would have anticipated to come back.

But no signs that you’re losing any competitive share?

No, not at all. Not at all.

Great. Thank you.

Thank you, Keith.

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

Thank you so much. I'd like to leave you with a few concluding comments this morning. We're all living in unprecedented times, and that is certainly not an exaggeration. We're dealing with uncertainty and disruption on a daily basis in our lives and in our businesses. Our focus at Brady remains unchanged. We will deliver what we promised to our customers. We'll invest in R&D and sales-generating resources. We'll invest in automation and capability-enhancing machinery in all of our facilities, and we will execute sustainable efficiency gains. We don't know when this pandemic will subside or when demand will return to pre-COVID levels. But we're doing what we can to increase our customer base today, and we're controlling what we can from a cost perspective. Customer buying habits have changed and demand for many of our safety and identification products has increased. And as global supply chains change, it will undoubtedly present both opportunities and challenges for us and our customers. We won't allow ourselves to become distracted or lose sight of what makes us great at what we do. We'll stay focused on the long-term and will make the right investments and the right decisions today that will continue to generate opportunities for our future. We're up for the challenge. Please stay safe, and thank you for your time this morning. Have a great day. Operator, you may disconnect the call.

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