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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. And welcome to the Q1 2021 Brady Corporation Earnings 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]
I would now like to shift this conference call today, Ms. Ann Thornton you may begin ma'am.
Thank you. Good morning, and welcome to the Brady Corporation fiscal 2021 first quarter earnings conference call. The slides for this morning's call are located on our website at www.bradycorp.com/investors. We will begin our prepared remarks on slide number 3.
Please note that during this call, we may make comments about forward-looking information. Words such as expect, will, may, believe, forecast and anticipate, are just a few examples of words identifying a forward-looking statement. It's important to note that forward-looking information is subject to various risk factors and uncertainties, which could significantly impact expected results.
Risk factors were noted in our news release this morning and in Brady's fiscal 2020 Form 10-K, which was filed with the SEC in September. 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 will now turn the call over to Brady's President and Chief Executive Officer, Michael Nauman. Michael?
Thank you, Ann. Good morning, and thank you all for joining us. This morning we released our fiscal 2021 first quarter financial results. Even in this challenging environment caused by the COVID-19 virus, we were able to increase operating income and increase pre-tax earnings this quarter. And our cash flow was extremely strong with operating cash flow growing by more than 60% over the first quarter of last year.
There are four key messages that we want you to take away from our release this morning. First, our Workplace Safety business performed extremely well. Our teams have shown outstanding entrepreneurship as they have developed many new products to help both existing and new customers fight COVID-19. They've expanded their marketing campaigns to reach new customers and grow their customer base, and they've leveraged their multi-channel approach to ensure that we bring value to every customer. This increase in our customer base is critical to maintaining momentum and our positive momentum even after COVID-19 related product sales subside. And our strong gross margins in WPS are driving strong earnings growth as can be seen by our nearly 55% increase in segment profit on just under 10% in sales growth.
Second, our IDS solutions revenue trends continue to improve month after month as revenues were down only 7.8% this quarter. Even with the decline in revenue segment profit as a percentage of sales increased in our IDS business as the team did a great job managing their cost structure and driving sustainable efficiency gains. These steady improvements combined with our investment in sales, marketing and R&D give us reason to be quite optimistic about the future of this business.
Third, our reduced cost structure enabled us to increase operating income and pre-tax earnings this quarter. We've been on a multiyear journey to become a leaner organization, which clearly can be seen in our financial trends as our gross margins are strong and our SG&A expense is declining.
We're focusing on the long-term, while taking swift cost actions in the short-term, which sets us up to capture growth and drive long-term shareholder value. Even with this reduced cost structure we continue to upgrade our websites, improve our marketing capabilities, develop new products and invest in capacity enhancing machinery and equipment. All of this will improve future earnings.
Lastly, we have a rock-solid balance sheet. In fact, we're in a net cash position and we continue to generate strong cash flow. This allows us to keep investing and to keep returning funds to our shareholders, which will enable us to generate outsized returns in the future as we put our balance sheet to work.
Economic conditions and the ongoing COVID-19 pandemic had tremendous uncertainty and risks to future revenues and profitability. Our response is to control what we can; to reduce our cost structure, to avoid letting overhead creep back into our business, to invest in sales resources, marketing resources and research and development and to make quick decisions and to operate as efficiently as we can so that we will emerge from the pandemic as a much stronger company.
Our teams have 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 solve their safety and identification needs to ensure that they can fulfill their mission.
Brady's full suite of safety and identification products, are in demand and are helping the world to be a safer place during these unique times. I am proud of, how our team has performed throughout this challenging period, their ability to deal with uncertainty, think on their feet and solve problems quickly all while never compromising the long-term has been very impressive.
I'll now turn the call over to Aaron to give you a bit more detail on our financial results. Then, I'll return to provide specific commentary about our Identification Solutions and Workplace Safety businesses. Aaron?
Thank you, Michael. We'll start with the financial review on slide number 4. Sales in the first quarter were $277.2 million, which consisted of an organic sales decline of 4.9% and an increase of 1.5% from foreign currency translation. Operating income increased 3.2% and pre-tax income increased by 1.6% when compared to the first quarter of last year.
In last year's first quarter, we had an unusually low tax rate of 9.8% compared to a tax rate of 20.3% this quarter. Last year's lower than normal tax rate was primarily due to the impact of a favorable audit settlement and the realization of tax benefits from equity-based compensation.
Diluted EPS finished at $0.64 this quarter compared to $0.70 in last year's first quarter. If our tax rates would have been consistent between the first quarter of this year and the first quarter of last year, our EPS would have increased by approximately $0.02.
Moving to slide number 5, you'll find our quarterly sales trends. Total sales declined 3.4% this quarter. If you exclude currency and just look at organic sales, you'll see that our Identification Solutions division declined to 8.4% while organic sales in our Workplace Safety division grew 5.5%.
Organic sales in our WPS business were driven by 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 and personal safety, and did an excellent job reaching new customers and delivering strong value.
Turning to slide number 6, you'll see our gross profit margin trending. Our gross profit margin was 48.9% this quarter compared to 49.3% in the first quarter of last year. This slight decrease was mainly due to reduced sales volumes in our ID Solutions business, combined with product mix in our Workplace Safety business, offset by our continual focus on driving efficiencies in our factories.
On slide number 7, you'll find our SG&A expense trending. SG&A was down nicely to $83 million this quarter compared to $89.5 million in the first quarter of last year. As a percent of sales, SG&A ticked down to 30.0% from 31.2% in the first quarter of last year. The majority of our SG&A decline was the result of our 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 salespeople.
Looking at SG&A expense sequentially i.e. comparing Q1 of this year to Q4 of last year, SG&A increased from approximately $76 million to $83 million. This increase was almost exclusively in incentive-based compensation. Last year in the fourth quarter, as a result of the pandemic, we eliminated the vast majority of bonuses. While in the first quarter of this year, we reinstated most bonuses back to normal levels.
Moving on to slide number 8, you'll find the trending of our investments in research and development. This quarter, we invested $10.2 million in R&D. We continue to have opportunities for investments in new product development, and we're committed to increasing our investments over time, 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 slightly when compared to the first quarter of last year as a result of reduced headcount and the timing of project spend, but was up sequentially compared to Q4 of last year. We have no intention of backing away from our investments in R&D.
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 nine illustrates our pretax income trends. Pretax income increased 1.6% from $41.6 million last year to $42.2 million in the first quarter of this year. This improved profitability is a direct result of our reduced cost structure, which more than offset the impact from the 3.4% decline in sales. As a percent of sales, pretax income increased from 14.5% in last year's first quarter to 15.2% this quarter.
Slide number 10 illustrates our after-tax income and EPS trends. Net income declined 10.7% to $33.5 million this quarter, compared to $37.5 million in last year's first quarter and diluted EPS declined 8.6% to $0.64 this quarter compared to $0.70 in the first quarter of last year. As I mentioned, this decrease in after-tax earnings and EPS was due to an unusually low income tax rate in last year's first quarter. If our tax rate had been consistent between periods, then our EPS would have increased by approximately 3%.
On slide number 11, you'll find a summary of our cash generation, which continues to be very strong. We generated $62.8 million of cash flow from operating activities and free cash flow was $53.5 million this quarter. This represents a 62% increase in cash flow from operating activities and a 72% increase in free cash flow when compared to Q1 of last year. Cash flow from operating activities was equal to 188% of net income this quarter.
Helping drive our strong cash generation was an intentional reduction in the inventory levels that we had previously built up early in the pandemic, to ensure that we could meet the demands of all of our customers. This reduction in inventories contributed $14.8 million to operating cash flow this quarter. Our investment decision processes are cash-based and long term focused. It's this discipline that helps us consistently generate strong cash flow.
Turning to slide number 12, you'll find the trending of our net cash position. On October 31, we had cash of $256.3 million and no outstanding debt. This quarter our cash balance increased by $38.7 million, even after returning $14.1 million to our shareholders in the form of dividends and buybacks. Our approach to capital allocation is disciplined and we are patient.
First, we use our cash to fully fund organic sales and efficiency opportunities throughout the economic cycle. We continue to fund investments in new product development, sales-generating resources, IT improvements, 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 dividends.
Fiscal 2021 marks the 35th consecutive year of annual dividend increases. After funding organic investments and dividends, we then deploy our cash in a disciplined manner for either buybacks or acquisitions, where we believe that we have strong synergistic opportunities. As Michael mentioned, uncertainty is very high right now. As such, we're unable to provide formal fiscal 2021 guidance.
However, we do now have several quarters in a row of organic sales growth in our WPS business, where our sales have been buoyed by products directly related to the fight against COVID-19. And although the sale of COVID-related products continues through today, albeit at a slowing rate, we don't know how long these sales will last, the pace at which they will recede or when they'll be replaced by growth in the general industrial sector. As such, we lack visibility in our Workplace Safety business.
We've also experienced improving trends in our ID Solutions business over the last couple of quarters. However, we're uncertain if or at what pace this recovery will continue into the future. As you can see in our results, we're clearly recovering. In Q1, we exceeded pre-pandemic operating income levels, but we were still short of pre-pandemic revenue levels. We're seeing reduced demand for products specifically designed to help in the fight of COVID-19 and there are macroeconomic challenges caused by additional government lockdowns, that when combined with normal seasonality, will impact our financial results for the quarter ending January 31, 2021.
Regardless of what happens in the macro economy, we will continue to make the investments necessary to drive organic sales growth and we will continue to drive sustainable efficiency gains, while being tight on non-revenue-generating expenses. Although, there continues to be near-term economic headwinds, Brady's strong balance sheet and strong cash generation combined with our organic growth investments, and our focus on efficiencies position us extremely well to generate outsized returns as industrial production improves around the globe.
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 13 outlines the first quarter financial results of our Identification Solutions business. IDS sales declined 7.8% finishing at $198.2 million with an organic sales decline of 8.4% and an increase of 0.6% from foreign currency translation. Overall, organic sales in our IDS division continued to improve at a modest, but consistent pace as we progress through each of the last six months. This quarter's organic sales decline was a major sequential improvement over the 21.7% decline experienced during the quarter ended July 31, 2020. And on the cost side, our strong focus on efficiencies led to a 60 basis point increase in segment profit as a percentage of sales when compared to the first quarter of last year.
Regionally, organic sales in Asia performed better than both the Americas and Europe. In Asia, our organic sales decline was quite modest, whereas declines were larger in both the Americas and Europe. Overall, our sales volume and order patterns somewhat followed, where the impacts of the pandemic were the greatest on the economy as Asian countries appear to be coping better with the pandemic, whereas countries in Europe and the Americas, continue to deal with relatively large numbers of coronavirus cases, while some countries have once again entered various states of lockdown.
Demand in our health care business is clearly getting better, but also remains challenged this quarter. Elective surgeries and hospital admissions are down significantly compared to normal pre-pandemic levels. Sales in the healthcare product line declined by approximately 8% year-on-year this quarter, which is an improvement from the nearly 25% decline we saw in the fourth quarter of last year.
On the cost side, we continue to focus on driving efficiency activities and keeping our cost structure lean, while never sacrificing sales-generating investments. IDS segment profit was $40.3 million, compared to $42.4 million in last year's first quarter.
Segment profit as a percentage of sales increased from 19.7% of sales last year to 20.3% of sales in this year's first quarter. This increase illustrates how our team was able to quickly adjust our cost structure, and keep these costs out. This continual improvement in profitability is a testament to the hard work of the entire ID Solutions team as it constantly work to become a more efficient and profitable organization. As a result, our decremental margin was only 13% as segment profit was down only $2.2 million, while sales were down $16.8 million.
Our commitment to R&D remains a top priority, and we launched several exciting new products this quarter. For instance, we just launched the i7100 Vial Label Applicator printer. This prints and automatically applies labels to vials and tubes, so that technicians don't have to fumble with labels. It's significantly faster more efficient and much more reliable than writing, or hand applying labels. It saves lab technicians both time and money.
We also launched the BradyJet J1000 industrial printer. This printer is designed for customers, who mark terminal blocks and control panel components. The combination of the Brady J1000 printer, our workstation software and our high-performance materials results in an easy-to-use solution that streamlines a quite intricate process. These niche applications, where we're able to marry our printers, materials, software and strong customer service is where we really separate ourselves from our competitors, who don't bring the entire solution set.
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. Although, I don't know, what the future holds for the economy, I'm excited about what we're doing in our ID Solutions business. We're improving our business – customer service, continuing to invest in our future and are streamlining the rest of our cost structure.
As the economy improves and our growth initiatives pay off, we should continue to generate strong profitability on even incremental dollars of sales. These positive revenue trends combined with our strong cost discipline definitely bode well for the future of our IDS business.
Moving on to slide number 14, you'll find a summary of our workplace safety financial performance. Our WPS business reported another impressive quarter in the midst of this pandemic. WPS sales grew 9.8% and organic sales grew 5.5%. This growth was driven by our European business with organic growth in the upper single digits this quarter. Our team did an excellent job supporting our existing customers and gaining new customers by supplying the initial -- essential products that they need during this critical time. Much like last quarter, we benefited from the sale of COVID related safety and identification products.
Our Australian business performed extremely well for the third quarter in a row with over 10% organic sales growth this quarter. The rate of organic sales growth in Australia was highest at the beginning of the quarter and tapered down each month sequentially. But we do continue to grow organically and increase profitability as this team finds ways to grow our customer base and provide our customers with a very high level of service.
Organic sales in North America declined in the low-single digits this quarter, which was a slight improvement over the client experience last quarter. One of our business sells primarily to micro companies. This business continues to struggle as do their customers but they have rightsized their cost structure and are operating profitably at these reduced revenue levels.
Our workplace safety team continued to launch new products specifically designed for the fight against COVID-19 and we launched numerous other new products aimed at the general industrial market including the Seton EasyProtect Safety Barrier, which is a fully collapsible indoor and outdoor barrier. It is patent pending and proprietary to Brady is easily portable, easy to store, and enables a simple display of standard and customizable safety messages. This product is superior to other barriers of the market as it's highly durable, transportable and stores significantly better than comparable products. It's this type of innovation that our customers have come to expect and appreciate from Brady.
We believe that continuing to invest in and launch proprietary new products that we manufacture while many of our competitors hunkered down to reserve cash will keep driving us ahead of our competition, keep protecting our strong gross margins and we'll keep improving our business over the long-term.
WPS segment profit was $8 million this quarter compared to $5.2 million in last year's first quarter. This represents a very strong incremental margin of 40% as we increased segment profit by $2.8 million on a sales increase of $7.1 million. Our WPS team pulled together and delivered another strong quarter. They listened 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 many 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 results.
I'm proud of the role that Brady is playing in the fight against COVID-19. We've launched many new products and we continue to generate new product ideas every day. We've been serving our customers extremely well, increasing our customer base and we continue to make investments necessary to keep our positive momentum. The macroeconomic environment is highly uncertain as many countries are once again locking down and it is clear that COVID-19 is far from behind us as a global economy. We also don't know how long demand will continue for COVID-19 related products in our workplace safety business but we're confident that many of our newly acquired customers will remain with Brady.
The future is uncertain but we're controlling what we can. We are in extremely strong financial position. Earnings are up, cash flow is up, and our balance sheet is incredibly robust. We will continue to invest in R&D, sales generating resources, capacity enhancing CapEx, and efficiency opportunities all while being tight on non-revenue generating expenses. And we will look to put our balance sheet to work through both returning funds to our shareholders and growing inorganically through value-added accretive acquisitions.
With that, I would now like to start the Q&A. Operator, would you please provide instructions to our listeners.
[Operator Instructions] Our first question comes from Michael McGinn with Wells Fargo.
Good morning everybody.
Good morning, Michael.
Sorry, if I missed this. Did you guys give an order or a monthly sales cadence that -- I know you're not giving guidance really uncertain, but any kind of incremental data points with -- I know things are changing rapidly here?
Sure. We actually did -- we talked about our sequential improvements in IDS in particular. Every month we've improved from our worst-case decline in the late spring. And so we have seen a very good steady pattern of improvement in that space. In addition, the WPS business although the COVID-related products have declined, they still remain very strong and that business still remains very strong.
Okay. And then within WPS, can you help us frame what kind of the differential is on COVID product versus non-COVID product? I know some of the distributors are saying safety PPE up 30-plus percent, but obviously you don't have masks and some of the other ancillary stuff they're selling. So any variation with that segment you can point us towards?
Well in our WPS space, we actually do sell masks. We sell Gel, as they call it in the EU. We sell a lot of products that are related to helping protect our first-line workers in particular. So yes, we do sell those products, but we sell a lot of core products such as signage, floor marking tapes that are doing extremely well and we've been modifying a lot of products. We have a few that we're quite proud of. We've been able to pivot lockout tag out products that are patented into COVID-related products. They are different from our lockout tagouts, but we've used some of the core components. We've modified the tooling, modified assembly and are able to do things like cover our water fountain throughout the world so that our people are more protected from them. So we have been selling a large variety of what I would say identification and safety-related products specifically and clearly into the COVID space. We are not breaking out products that aren't clearly COVID related. So when we say that's increase from COVID, we're looking at part numbers and looking at the specificity of what they're going into and why and differentiate it from floor marking tape as an example that we've always sold.
Got it. Appreciate your time. I'll pass it on.
Absolutely. Thank you, Michael.
Our next question comes from Keith Housum with Northcoast Research.
Good morning guys, and congratulations on a good quarter relatively.
Good morning, Keith. Thank you so much.
Absolutely. I think we're all uncertain in terms of where the next few months will hold us. But as we think about the potential for additional lockdowns or what it may be, can you kind of walk us through how the business has changed from like a sales perspective? And we do go back to a lockdown strategy in some of the U.S. and some of Europe. How have you guys changed your sales ability to kind of prevent any further decline?
Excellent. So Keith, first of all, looking at it from an internal perspective, we are in lockdowns and have been in lockdowns in a variety of locations. Some work at home situations never ended. Others have gone back to where they were a couple of months ago. But we've already proven that we're very lithe at keeping our factories opening and running because we service critical industries, but also in keeping our employee base motivated and challenged around our concept our real -- our drive around making the world a better and safer place. So our people are able to be very efficient in that. We do see difficulty in some product sets in being able to really interact with the customers the way we would like to. But in other product sets, we're able to overcome that through our digital campaigns, through our e-mail campaigns, through our telephone campaigns. We really take a very strong and proactive effort in making sure that our customers hear from us. And although we've highlighted WPS' direct sales growth, we've had the same experience, although not to the extent in IDS as far as bringing on new customers. So we're actually using it as an opportunity to bring in customers that aren't getting the service and the products that they need from other parties.
Got you. Appreciate it. And then I want to review the comment you made regarding WPS and the customer expansion. What's giving you the confidence that you're going to be able to retain those customers when we're past the COVID issues?
So it's a very data driven business as you know. And the comments that we really see, we're getting a lot of non-COVID business from those customers. Actually we're getting more non-COVID business from the customer than we're getting COVID, although it was clear the initial entry into Brady was through COVID. And we already are seeing the repurchase patterns are as strong or stronger than any of our typically historical customers.
Got you. Is it stronger in Europe than it is in North America? Is that geographically limited, or is it across the board?
It is across the board. Our European business as you know has been stronger. But as you also know North America is actually better in its core than it looks because of one of our businesses that really has been hurt dramatically through the decline in micro businesses in North America.
Got you. Thanks, Mike and good luck.
Thank you, Keith. Have a great day.
And I'm not showing any further questions at this time. I'd like to turn the call back over to Michael for any closing comments.
Thank you. I'd like to leave you with a few concluding comments this morning. We're living in unprecedented times and we're dealing with uncertainty and disruption on a daily basis. Our focus at Brady remains unchanged. We will deliver what we promise to our customers.
We will invest in R&D and sales-generating resources to drive growth. We will constantly invest in automation and efficiencies and we will take care of our amazing employees.
We don't know when this pandemic will subside and when demand will ultimately 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. This quarter our WPS business grew nicely over the prior year. Our IDS business continued its trend of sequential revenue improvements and strong profitability. Our reduced cost structure and efficiency focus enabled us to grow pre-tax earnings. And we had another quarter of very strong cash generation and are in a net cash position.
We're making sure that we're doing what we can to help our customers, our employees, communities and the world through this pandemic. At the same time, we're maintaining our focus on the long term and we'll make the right investments and we'll continue to make the right decisions today that will set us up for long-term success. Making the world a safer and better place every day is not a slogan for Brady. It's our focus and our reality. 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 does conclude today's presentation. You may all disconnect and have a wonderful day.