Brady Corporation (BRC) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2012 Brady Corporation Earnings Conference Call. My name is Matthew, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Aaron Pearce, who is the Treasurer and Director of Investor Relations. Please proceed, sir.

Thank you, Matthew. Good morning, and welcome to the Brady Corporation's Fiscal 2012 Fourth Quarter Conference Call. During the call this morning, you'll hear from Frank Jaehnert, Brady's CEO; and Tom Felmer, Brady's CFO; as well as our 3 Regional Presidents, Stephen Millar, President of the Asia Pacific region; Peter Sephton, EMEA President; and Matt Williamson, President of the Americas region. After the prepared remarks by the team, we'll open up the call for the Q&A. The slides for this morning's call are located on our website at www.bradycorp.com. Please note that during this call, we may make forward-looking comments. Words such as expect, believe, forecast and anticipate are 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 latest Form 10-K, which was filed with the SEC in September of 2011. 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. Your participation in the Q&A session will constitute your consent to being recorded. Thank you. And now, I'll turn the call over to Brady's CEO, Frank Jaehnert. Frank?

Thank you, Aaron. Good morning, and thank you for joining us. As you will hear from Tom, and our 3 regional business leaders, during the fourth quarter, we had positive organic growth in both the Americas and the EMEA regions. We were especially pleased with our sales growth in Europe this quarter given the difficult economic climate. We are also actively pruning our portfolio of businesses where we do not see a clear path to sustainable organic growth and satisfactory profitability. For instance, in the fourth quarter, we sold Etimark, a paper-label business in Germany, saving about $10 million. In August, we sold Brady medical, our medical die-cut business in Texas, we saved approximately $18 million. Together, these businesses had approximately breakeven earnings in fiscal 2012. Also in the fourth quarter, we decided to close our die-cut operation in Sweden, former headquarters and manufacturing side of Tradex. Tradex was a large mobile handset die-cut company that we acquired in 2006. This will effectively eliminate all die-cut manufacturing in the Nordic region. The closure of Tradex in Sweden and several other cost reduction measures we are taking, including exits in our die-cut business in Asia, led to pretax restructuring charges in Q4 of $8.7 million. Also fiscal 2012 was a challenging year in our Asian business. We are quite optimistic as we look forward to fiscal 2013. Our strategy to separate our Asia business into 2 dedicated business teams, one focused on die-cut products and the second dedicated to growing our identification solutions business ,is starting to pay off. We have had some nice designs and wins in our die-cut business with 3 of our large electronics customers, and these projects will be entering the manufacturing stage shortly. And we're also seeing traction in our identification solutions business with our increased…

Thanks, Frank, and good morning, everyone. Let's start with Slide #3. As Frank mentioned, during the fourth quarter, we took actions to prune our portfolio and adjust our cost structure resulting in after-tax restructuring charges of $0.14 per share. We also incurred a nonroutine noncash tax charge of approximately $0.11 per share. If you exclude these items, our net earnings per diluted Class A share would've been $0.47. Currency was also a headwind during the quarter, impacting our bottom line by approximately $0.04 per share when compared to the guidance that we shared in May of 2012. Move on to Slide #4 for a summary of our fiscal 2012 full year financial results. On a GAAP basis, we incurred a fiscal 2012 net loss of $17.9 million. Net income excluding the noncash Asia goodwill impairment charge, restructuring charges and the nonroutine tax charge was down 1.9% to $113 million in fiscal 2012. Our sales for the full year were $1.32 billion, down 1.1% from fiscal 2011. The net impact of acquisitions and divestitures added 0.3% to sales, FX decreased sales by 1%, and organic sales were down 0.4%. During fiscal 2012, our gross margin finished at 48% of sales compared with 49% of sales in 2011, and SG&A expense declined 50 basis points to finish at 32.5% of sales, mainly due to reductions in variable compensation. We continued to generate strong cash flow during fiscal 2012 as we generated free cash flow of $120.6 million, which equates to 123% of net income, exclusive of the impairment charge. Our consistently strong cash flow enabled us to repurchase 1.9 million shares for $49.9 million and pay $38.9 million to our shareholders in the form of dividends. Yesterday, we announced our 27th consecutive year of annual dividend increases by raising our dividends to…

Thanks, Tom, and good morning, everyone. Please turn to Slide 13 for the Americas review. Before getting to the current quarter, let me provide a quick recap of the Americas' results for the full year ended July 31, 2012. For the full year, we had total sales growth of 2.2% and organic sales growth of 3.4%. This 2.2% sales growth resulted in 7% segment profit growth. Our identification solutions business throughout North America was the strongest performer in the year with mid single-digit organic growth, driven by our strategic initiatives and strong profitability improvements. Our Direct Marketing business had relatively flat organic sales in F '12 as we managed the shift of buying patterns from our traditional catalogs to the Internet. Looking at the fourth quarter, sales in the Americas were $147 million. Organic sales increased 3%, and foreign currency translation decreased revenues by 2.4% compared to the fourth quarter of fiscal 2011. Our identification solutions business in the U.S. grew nicely with continued high single-digit organic sales growth rates in the quarter. The strong growth rates in this business were driven by positive execution across multiple key growth initiatives, including a strong focus on our core distributor base business, delivering an unrivaled customer experience, improvements in the digital experience offered to our customers, key customer conversions and improved services offering and new product development, to name a few. Our identification solutions businesses in Mexico and Canada also grew nicely in the quarter with double-digit growth, albeit on a much smaller base. We continue to drive benefits from the successful launch of several high-quality printers and proprietary consumable materials launched earlier this year. Our business in Brazil is now feeling the impact of weakening economic conditions, impacting both the automotive and white goods industries and a deteriorating exchange rate as…

Thank you, Matt. Now moving on to Slide 14. Like Matt did, I'll just start with a quick recap of the full year. For full year, overall revenues were down slightly at 0.4% at constant rates and 3.9% down including foreign exchange. Organic sales were down 1.3%, while acquisitions added 0.9%. Looking back on fiscal 2012, we have several causes of difficult comparables due to the lack of winter product sales in fiscal 2012, which made a difference of about $5 million or 1.2% on total sales. Looking at segment profit as a percent of sales, this is a healthy 27.1% compared to 27.7% last year. We can take some encouragement from the fact that we finished the year with positive organic growth despite the tough economic climate, as the strategies that we've been executing during the year started to bear fruit, particularly our focus on emerging markets. Looking then at our fourth quarter, organic sales growth was 0.6%, which is encouraging given the general state of the European economy. Total sales in EMEA, including foreign exchange, were down 4.6% to $98.3 million in the fourth quarter, which is caused exclusively by foreign currency translation. Acquisitions completed earlier this year added 5.6% of sales growth to our 0.6% organic growth, meaning, we achieved a very solid 6.2% growth at constant rates, but as I said, this is offset by foreign currency translation, which reduced sales by 10.6% ending at minus 4.6% overall for quarter 4. Overall, and in quarter 4, we saw modest organic sales growth in most of our businesses, while our Direct Marketing businesses were down by just shy of 0.1% -- 0.9%. Our identification solutions business was up 2.2%. Our identification solutions business was driven mainly by good growth in Central and Eastern Europe, but this growth…

Thanks, Peter. Continuing on Slide 15. Recapping the year, sales in the Asia Pacific region in fiscal 2012 were $345.2 million, down 3.4% from the prior year with organic sales being down 5.3%. Clearly, F '12 was a disappointing year in Asia, as our segment profit declined by $18.4 million to $31.7 million. As such, we have reorganized our management team, and we are actively reorganizing our business to enhance efficiency and enable a more focused growth effort. Our focus in Asia continues to be twofold. Firstly, we are highly focused on improving profitability in our die-cut business, and secondly, we are expanding our presence in our identification solutions businesses of workplace safety and compliance, wire and cable identification and product identification. Let me take a moment to further explain the status of the organizational changes. If you look at our business, we can divide it into 3 main streams, which are operating in different market segments: die-cut, identification solutions in Asia, and identification solutions in Australia. Our die-cut business represents approximately 1/2 of our total Asia Pacific sales, but the decline in volumes and increased competition in this business has seriously eroded segment profit, and as such, is significantly driving down the profitability of our overall Asia business. As we focus on improving the effectiveness and profitability of our die-cut business, we have flattened organization structures and realigned sales teams. This realignment of sales teams is proving effective with existing and new customers, and we are encouraged by the opportunities we see for ourselves in the market in the near term. Switching to our identification solutions businesses of MRO and identification offerings, we now have teams in Asia dedicated to expanding these businesses. Our MRO business is largely our portfolio of products, which help customers with workplace safety and…

Thanks, Stephen. Before moving to questions, let me share some concluding thoughts. First of all, our business in EMEA and the Americas are performing well, while our Asian business, primarily die-cut, is struggling. But the actions that we have taken in Asia are starting to take hold and they appear in a solid position at the start of the mobile phone build season. We have taken actions to prune our portfolio as evidenced by the recent sale of 2 businesses. We have been reducing cost, including closing our former Tradex mobile handset die-cut headquarters in Sweden. Looking forward, our strategy is very focused. First, take cost out of our businesses and reinvest the savings from these restructuring activities into organic growth opportunities to drive our long-term organic growth in excess of GDP. These initiatives include expanding our business in emerging geographies; expanding globally in certain focused markets such as aerospace and mass transit, chemical oil and gas, and food and beverage; expanding our new product development efforts; attractively converting customer opportunities into customer wins; and expanding our digital capabilities. Also cost management and taking out costs wherever feasible is critical to our long-term success. If we want return to prerecession profit levels of net income equal to 10% or more of sales, we need to see increased organic growth, and that's where our focus in investments are. Second, we will continue the process of pruning our portfolio to ensure that we are focusing the right level of resources on the best opportunities, and we will continue the process of separating our Asian die-cut business from our other Asian businesses. Third, take a balanced capital allocation approach that invests in our future through the core growth opportunities that I just mentioned, along with identifying and closing acquisitions processes [ph] in our cost base and having adjacencies. In addition to organic and inorganic growth opportunities, we expect to continue to pay increasing levels of dividends to our shareholders, and we expect to continue to repurchase shares in an opportunistic manner. Let's now start the Q&A. Matthew, can you please provide instructions for our listeners?

[Operator Instructions] Your first question comes from the line of Allison Poliniak.

In the Asia Pacific region, I know you guys talked about die-cut being down greater than 25%. Can you talk about the identification business in Asia? It sounds like Australia is growing, but is that business growing too? Or are we seeing declines there as well?

Our Australian business has been growing well. It's a little bit flat just right now, there's a little bit economic uncertainty in Australia, but they've had very good high single-digit growth over the last 18 months or so. Our non-die-cut business in the rest of Asia was broadly flat last year, and we're seeing that return to growth at the moment as well.

Okay. And can you remind me again, are there -- the other businesses in Asia, are they completely separate now from the die-cut in Asia, has that been completely done?

In some senses, yes. The task of physically splitting out some of the facilities takes a little bit longer, but the business are virtually separate and the physical separation is underway.

Great. And then Frank, you talked about the pipeline for acquisitions being robust. Could you give us a little bit more color on the environment right now, just given the uncertain macro situation?

Yes. Allison, we have been very active in acquisitions throughout the last couple of quarters. And actually, we have some -- I think, Tom mentioned that we had some acquisition-related charges, not only for acquisitions which we closed, but also for acquisitions which we didn't get because of price competition. We remain prudent in our pricing, and in some cases, we didn't make the cut in the end because we're not ready to go up as high as some others, which kind of tells you what the situation looks like. The environment is competitive. If there's a good acquisition candidate, a probable growing company, you have a lot of interest. On the other hand, if you have acquisition opportunities of a company which is mediocre or maybe not so good, there's not too much competition. But our pipeline is full. We have some in our core. We have some others in the end adjacencies. We are pretty excited about the opportunities, but again, we're going to be prudent when it comes to how much we're going to pay for an acquisition best as we want to create shareholder value.

Your next question comes from the line of Charlie Brady.

With regard to the APAC region, in your guidance for fiscal '13, can you comment on the second half outlook, I mean, you said up -- I think you said up significantly. Are we talking a double-digit growth rate? Obviously, in Q4, you've got an easier comp in '13, but can you quantify that a bit?

Yes. Sure, Charlie, I'm not sure we said up significantly, but it's mainly -- first, there's 2 things. We have a solid trend with orders coming in, but we also have a more -- an easier comparative in the second half. Q4 F '12 particularly was a tough quarter as we've just said, and so that makes it easier for the comparative in F '13. I don't think we're seeing double-digit. I think it's probably mid to high single-digit growth.

And when do those platforms or those programs you've been specked in on, when do they start coming in? Is it second half or first half?

Now we'll start to see some income in quarter 1. We're just entering the build stage on some programs now.

Okay. And I missed some part of your commentary, on the businesses that you have divested in Q4, could you just run through those again and what the revenue impact were for those businesses?

The businesses that we divested, there was a business -- a paper label business in Europe called Etimark, and there was a medical die-cut business that we have in the U.S. And the combined revenues for those, I believe, was just under $30 million -- between $25 million and $30 million. And just another comment, that's roughly offset by the recent acquisitions that we've made. So it's about equal offset.

Your next question comes from the line of Jason Ursaner.

Just first question for Peter. It was a good sign to see your segment hold on to core growth. But given that Europe still accounts for almost 1/3 of revenue and an even a larger portion of operating income, it's clearly the biggest risk to the Brady story right now. So you mentioned a lot of different growth initiatives. Can you talk about which of those opportunities you see as the most meaningful to helping you create your own growth story, I think, were Frank's words that he used a couple of quarters ago. And overall, are they enough to maybe move you away from the core Eurozone GDP picture with any real significance if we see that continue to deteriorate?

Yes. I mean, the outcome from the Eurozone is uncertain as it's ever been. But I think everything we've been doing in execution this year has help record that to the positive growth in quarter 4. And I guess the major features that we've been -- that I've mentioned is investing heavily in emerging markets, both organically and through acquisition. I made mention of them as being a real catalyst for growth. That has created our own growth story, primarily in the Brady ID solutions business. DM business is very much in our core European mature economies. Now what we've been doing there and the reason we've acquired Runelandhs and Pervaco is to extend our reach into new geographic markets where we're under-penetrated. And there's an under-penetration of competition as well. So that's another way that we're creating our own growth story. And in Direct Marketing as well, I made mention of Securimed, this first aid business that we bought. And we've had remarkable success with that in France and being able to roll that out across Europe. So Jason, we're doing those things, emerging geographies for our Direct Marketing business, especially in Middle East and Sub-Saharan Africa and Central Europe, extending our product offer through acquisitions and mature economies through Direct Marketing. We've been working hard as well, and I don't want to sort of underemphasize this reallocation of resources, both in terms of physical feet on the street sales resources deploying them into areas. For instance, our Sales Manager from Portugal went over to South Africa, so we've deployed other resources like that in other territories, so it's a measure of the capability that we have in that to -- and commitment we have from our employees to put their personal lives on hold and go to where the business is. And likewise, in Direct Marketing, we've been reallocating investment dollars to those areas where we can actually grow our customer file, which is tough for those areas that are performing well against an economic headwind, but it's the right thing to do. So I guess that's sort of a synopsis of the things we're doing. Is it enough? I think it's enough for what we know at the moment to combat those economic headwinds. But there are multiple outcomes from Europe, and I can't say for certain. But it was just a nice way to finish the year and I'm really confident that it could continue, but the outlook for Europe is as uncertain as it ever has been.

And in terms of grouping, can you put some type of size on Eastern Europe or the Middle East relative to the overall segment in terms of what business you're doing now in those regions?

Yes. Look, broadly, in emerging economies in that Brady ID solutions, it accounts for about 17% -- 15%, 17% of our sales currently. It's growing rapidly. So it's not an insignificant proportion, but the bulk of our sales are in mature economies in Europe as well, but it's growing very rapidly.

Okay. And then, just on the balance sheet, the company, I guess, is sort of overcapitalized relative to its historic needs. What do you guys see is the target structure right now?

Yes, I can't say that we have a target structure. As you know, in the last quarter, we've paid down some debt. We bought back some shares, and we just continue to monitor. Ideally, what we're looking for is -- or we continue to look for acquisitions and take -- with the right acquisition or 2 acquisitions, obviously, our cash will go down and we'll be in much better position from a leveraged standpoint. But we do not have a specific target that we set out.

What we do have is a limit where we would not like to go over for extended period of time, which is 2.5x debt to EBITDA. And we do realize that we are under-leveraged, and we don't want to be under-leveraged. We would like to put our balance sheet to work up to 2.5x debt to EBITDA for the longer term.

Okay. And then just following up on the earlier question about acquisitions, it sounds like a pretty difficult environment to get those external targets to your price, but yet you did mention you essentially made a $40 million acquisition in yourself at 11.5x the midpoint of next year's guidance, and you sort of reestablished a $50 million to $60 million target. How should we balance your priority for that internal investment, which seems to be at a pretty good price relative to where these external companies are trading these days?

What we have been doing historically, do share repurchase in an optimistic manner. And every time we do something like this, we look at what's out there in terms of acquisitions and want to make sure that we have a prudent approach. So I'm not sure if I can exactly answer this question. There's so many things which play into this stock price or company prices for acquisitions, the pipeline likelihood, timing, many, many different things. But we just want to make sure that we have all means available. As you have seen, we have executed on our share repurchase in the last quarter at a pretty significant rate.

Your next question comes from the line of Robert McCarthy.

I hate to beat a dead horse, but I want to bring you back to comments about expectations for the coming year. In Asia, specifically, the estimate that the first half organic growth comparison could be flat with last year. I mean, you would know best, of course, but you just had a very negative organic growth number against what looked like a difficult comparison. Excuse me, you'll forgive me, but the comparison at first quarter doesn't really look any easier from my point of view. So I'm wondering if we are perhaps expecting that organic growth will remain negative yet in the first quarter, which would imply to get to flat that we would start seeing positive comparisons emerge in the second quarter. Is that, perhaps -- I mean, I realize it's a little more detailed, but is that perhaps consistent with the way you're looking at it?

No, it isn't. Obviously, if you'd asked 8 weeks ago, how do we feel about the first quarter, I would have said we're probably slight -- very low single-digit negative organic growth. And with the new business that we've secured and we're starting to see into the production phase which is really now and over the next couple of weeks. But the reason we have confidence because there's a pretty good chance that we'll have a flat quarter 1. So we're certainly not expecting quarter 1 to still be starting negative and quarter 2 to pick it all up. Now all other things being equal, we're basing this assessment off customers' expectations of how their products will sell. And if they sell the way they believe they do, then I think we're on track for better growth that we would have anticipated 8 weeks ago and having a flat quarter.

Well then, I guess, congratulations are in order.

Hold that till the first quarter is over.

That's probably a good thought. I also wanted to, Frank, follow-up on the divestitures. I wonder if you could talk about a little bit about why these businesses were divested.

Yes, the paper label business, that's a business, which, I think, a couple of years ago, we looked at it and said, "What else could we do?" We are a high-performance label company. And we thought maybe we can take this business in Germany and use it as close in adjacency and grow it. It turns out that paper labels or prime labels are just much more commodity, and that's attractive profitability. And while we tried our best to bring profitability up to our levels of expectation, we could not -- we were not successful as much as we would like to. So that's why we divested this business. And a similar story is for the medical die-cut business. Die-cut in general is a business which is more challenging from a profitability point of view. It was a small business. Medical die-cut is not a big portion of our business, so it's kind of stand-alone there. We just didn't think there's an opportunity to bring it up to our expectations in terms of growth and especially profitability. I mentioned this in my notes, in my prepared notes, we are looking at all our businesses and look at the profitability potential, organic growth potential and see the opportunities to maybe do some more. I think as most companies do, you just look at your portfolio on a continuous basis; that's what we are doing.

And so not unrealistic to think that we might see some more transactions like this? Small trimming during the course of the next year.

Yes, it's realistic to assume that we're looking at all our businesses constantly, and if we see an opportunity to improve profitability, overall profitability and growth rate for the company, we will execute.

Right. And then I wonder if I could just get a couple of clarifications on items that have already been talked about. The repurchase authorization, I assume it has no deadline sunset on it, it's open ended?

Correct.

And you mentioned the Thai facility as a driver of increased CapEx levels this year. Is it reasonable then to expect that having completed that in F '13 that we'd see CapEx return to, I guess, what you would call more normal levels in the $20 million to $25 million range instead of the $35 million you're talking about?

Yes. We still believe that CapEx will continue to run at about 2% of sales. And this year, with the Thailand flood, it was not a facility we had planned to rebuild, but we have to do that. And then we are making some investments in a facility in Brazil as well. But going forward, we anticipate the long-term CapEx to continue to run about 2% of sales.

Your next question comes from the line of Tony Kure.

I just want to clarify, on the Asia business, obviously, you're seeing some good program wins here and you laid out your expectations pretty clearly. I guess what I'm maybe confused about is, and maybe this is my impression, that maybe this was a business that was primed for that divestiture strategy or maybe separating given how you're separating it out and improving the profitability of it. But now that we're hearing a better volume expectation in these profit improvement plans seeming to take hold, are you less likely now or is this no longer as much of a tangible option here in the near term to exit this business totally?

You will understand that I cannot give you a straight answer on this one regarding what our plans are. But I can tell you this much. We look at all our businesses, and we look at all our businesses all the time and even at our most profitable businesses and say, "What are the chances of increasing profitability even beyond a very profitable business? What are the growth expectations?" and so forth. And that's true for everything. We do not take a temporary downturn in a business or a temporary upswing in a business into consideration as much as long-term profitability and growth rates of those businesses. So I would not read too much into a temporary downturn or a temporary upswing in any of our businesses.

Okay. I think I get what you're saying there. And then for the restructuring that is already completed, first, did you get any benefits that you can measure in the fourth quarter on a savings perspective?

Yes, most of these changes took place towards the end of the quarter, so there was really no benefit in Q4.

Okay. And then the expectations you're going for your EPS guidance excludes restructuring expenses, but was the $10 million number from the restructuring benefits, is that factored into the guidance or is that reinvestment of those profits, so to speak, or savings, so to speak, is that not included in guidance either? You hear what I'm saying?

Yes. No, the benefits from last year's restructuring are reflected in the guidance. We said that we would be reinvesting much of those in the initiatives and delivering the guidance that we had put out. And then what we also said was if there's additional restructuring expense or benefit that we would take in F '13, that is not considered in the guidance, that is not reflected in the guidance.

Your next question comes from the line of Joe Mondillo.

I was wondering if you could talk about the product offering in the Asian segment and the die-cut segment. How does that differ from 6 to 12 months ago? And how are you gaining the new customers that you're seeing?

I guess they're different from the product segment. I mean, we're still making die-cut parts, but that's a different source of product sales as you would see in the industry now. There are more tablet-sized design products of various configurations coming out. So we're seeing what we could describe as variations in mobile handset products that are out there. So that's really what it is.

Stephen, I would answer this even maybe from a different angle. As you know, we have had significant reduction in sales due to a loss of market share of one of our customers, not our market share loss to this customer, but one of our -- our largest customer actually lost a lot of share. And we were desperately trying to gain more business with other large share customers. And of course, you cannot switch it overnight because you have to get specked in, you have to, in many cases, design a product, you have to work with the engineers of the customers, and that's what we have been doing. And we have actually, with 3 larger customers, made progress. It's a focus on the customers, calling on engineers, working on product design and so forth. So it is a diversification strategy into customers we have historically not had as much business as with our largest mobile handset customer.

Could you give some specifics on sort of what kind of product offerings that you're selling into or just some examples?

You mean, names of customers or...

No, no. Like what you're doing with some of the mobile handsets, what kind of products you're selling, what is sort of technologically advanced or more highly engineered type things that you're doing that you're seeing the pricing hold and you're just gaining more customers through?

Yes, we have been -- a general answer, we have been very successful on heat-dissipative materials, which take heat away from, let's say, tablets. These devices become smaller and smaller and become thinner and thinner. There's an issue of getting heat away. And this has been a pretty successful trend for us over the last couple of months, and I think it's also part of the success here with new customers. And if not new customers, but higher share with existing customers.

Okay. And then just in terms of that guidance, are you guys expecting that op margins in the Asian segment can get back to double-digits by the second half? Or sort of where are your expectations there?

Let me also answer this because I'm not sure. I understand some of us are hard to hear, so we switched around microphones so hopefully it's better now, but I think Stephen is still hard to understand. So I'll just answer this question. Australia is a business which is pretty profitable. It has been an established business in a mature industry, and I think this will weigh into the answer of the question you just asked. I think if you'll -- here's a little bit about how well Australia is doing, and we have seen some recent slowdown in the business in Australia, whereas we see an uptick in our die-cut business. So it all depends how fast the die-cut ramp-up and does Australia slow further down or does it stabilize then because of the high profit margin in Australia, relatively high profit margin compared to die-cut. So it's a mix issue as well. So as optimistic we are about die-cut, I think we're a little bit concerned about the Australian economy and how the business is doing there.

Okay, great. And then just lastly, could you remind me why the first quarter in the Americas, the margin's usually strongest? And do you expect that this year as well?

That's a good question. I don't know why there would be a big difference there to be quite honest, other than -- go ahead, Frank.

In the second quarter, of course, we have Christmas and New Year and Thanksgiving, this is always weaker, right? And I would assume, in the fourth quarter, we have July. Well, but of course we have August. I don't know.

Okay. And the only reason I asked was because the last 3 years, it's been significantly stronger. So I wasn't sure if it's maybe South America coming out of the winter and demand being stronger there and U.S. still remaining strong or if it's just a coincidence.

I would say nothing has been normal in the last couple of years with the recession that you can just look at a pattern how we used to. Before the recession, we could clearly give you answers to something like this, but I think the last 3 or 4 years have been just challenging because nothing is any more as normal and as predictable as it used to be.

Your final question comes from the line of George Staphos.

It's Benjamin Wong sitting in for George. I'll make it quick since we're running over. Is there any way to comment where Asian die-cut operating margins are currently? I mean, when you consider the split of businesses, I assume there's a mid to high single-digit percentage maybe. And then maybe you could talk about where you hope die-cut profitability levels to be after your initiatives relative to where they are now.

Definitely higher, I can say this much, but can you be more specific?

The only way that we've answered that in the past, George, is the following: I think we've laid out the business in Asia as being about 50% of the business is die-cut, about 25% of the business is Australia, and the remaining 25%, I would say, is more of our traditional identification solutions business. The Australian business has profitability, I would say comparable to what you would see in the segment profits of America and Europe. The identification solutions business, the other 1/4 of the Asian business, is not at those levels because we're still investing. But it's a little better than what the die-cut business is. And you can sort of back into the die-cut businesses, it's the remainder of that. So it's not -- it's significantly lower than the rest of the company, but we have not called it out specifically.

Okay. And then the final question is on the share buyback plans, so the new plan on 2 million shares, it's essentially the same as it was about a year ago, and you're able to execute on this pretty easily despite challenges in Europe and Asia. So I just want to explore why you wouldn't announce a larger share repurchase plan for fiscal 2013. I understand there's some uncertainty out there, but you still got a very conservative balance sheet, earnings should be up with Europe and Asia, hopefully not getting worse, and you're also expecting to generate a solid amount of free cash flow again this year, so maybe you could comment on that.

As I said earlier, there are many things we take into consideration, acquisition pipeline, pricing, stock price, and so forth. And I mean, nothing [indiscernible] us if you want order [ph] for the 2 million, to have another authorization. I also don't want you to think that the authorized 2 million shares that we're going to jump in it right now and try to fill it as fast as possible. We said we're going to look at it opportunistically, we just want to have the authorization out there. We concluded at the end of last year that it would be good use of our money, considering all the things I mentioned before, and we're going to take the same approach with this 2 million.

I would now like to turn the call over to Aaron Pearce for the closing remarks.

Thank you. Thank you, everyone, for your participation today. And as a reminder, the audio and slides from this morning's call are also available on our website at www.bradycorp.com, and the replay of this conference call will be available via the phone beginning at 12:30 Central Time today, September 7. The phone number to access the call is 1 (888) 286-8010 or international callers can dial (617) 801-6888, and the passcode is 10764076. The phone replay will be available for 1 week until September 14. As always, if you have questions, please contact us. Thanks, and have a great day. Operator, can you please disconnect the call?

Thank you, and thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.