Brady Corporation (BRC) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2013 Brady Corporation Earnings Conference Call. My name is Clinton, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is that is being recorded for replay purposes. And now I would like to turn the call over to Aaron Pearce, Director of Investor Relations. Please proceed, sir.

Thank you, Clinton. Good morning, and welcome to the Brady Corporation Fiscal 2013 First Quarter Earnings 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 to questions. 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 comments about forward-looking information. 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 2012. 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 today. 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?

Good morning, and thank you for joining us. I'm pleased with our performance in this quarter, as our business in the Americas and in Asia Pacific showed improved results over last quarter. In Asia, in particular, we benefited from several new product wins in the mobile handset and tablet computer space. Market conditions remain challenging in Europe, resulting in organic revenue decline. We are shifting our resources to the highest growth opportunities in the EMEA, which includes expanding our business in Central Europe, the Middle East and Africa. This is somewhat mitigating the impact of the difficult macroeconomic conditions in Western Europe. In the Americas, we continue to see positive growth in our U.S. identification solutions business, but the macroeconomic weakness in Brazil offset this positive growth. We are also pruning our portfolio of businesses where we do not see a clear path to sustainable organic growth and satisfactory profitability. For instance, in October, we sold Varitronics, a business located in Minnesota serving the education market, with annual sales of about $15 million. In August, we sold Brady Medical, our medical die-cut business in Texas, with annual sales of approximately $18 million. Together, these businesses had approximately breakeven earnings in fiscal 2012. Looking broadly, the global economy is sluggish at best, with pockets of weakness. As such, in order to create growth, we are focused on the following initiatives: expanding our business in emerging geographies or geographies where we are under-penetrated; second, expanding globally in certain focused markets such as aerospace and mass transit, chemical, oil and gas, and food and beverage processing; third, new product development; fourth, commitment to customer conversion; and five, expansion of our digital capabilities to deliver the best online buying experience for our customers. We continue to look for acquisitions as a use of cash as we are committed to making acquisitions at the right price, investing in organic growth opportunities at the top long-term uses of our cash. Now I'd like to turn the call over to Tom Felmer for our financial review. Tom?

Thanks, Frank, and good morning, everyone. Let's start with Slide 3, which is a summary of our first quarter result. Net income was $27.2 million in the first quarter, down 16.9% versus last year's first quarter. Diluted EPS was $0.53 in the quarter compared to $0.62 last year. The first quarter of this year included charges related to the net losses and the sales of the Brady Medical and Varitronics businesses. Excluding the losses on the sale of these businesses, net income would have been $30.4 million and diluted EPS would have been $0.59 in the quarter. Revenues were down 3.4% to $337.6 million in the first quarter. Organic revenues were down 1.9% in total. By region, organic revenues were down 7/10 of 1% in the Americas, 3.2% in EMEA, and 2.5% in the Asia Pacific region. The strengthening of the U.S. dollar against other major currencies decreased sales by 2.1% in the quarter, while acquisitions, net of divestitures, increased sales by 6/10 of 1%. Our first quarter gross profit margin finished at 48.8%, up from the 48% gross profit margin in last year's first quarter. SG&A was $108.3 million or 32.1% of sales in the first quarter compared to $108.9 million or 31.2% of sales in last year's first quarter. Lastly, on this slide, our cash generation and cash balance remain strong as we finish with $321 million of cash at October 31, 2012. Moving on to Slide 4. We summarize our guidance for the fiscal 2013. Our EPS guidance range remains unchanged. We are seeing economic weaknesses across a wide spectrum of geographies and businesses. Our business in both Australia and Brazil experienced negative organic sales this quarter and we are seeing declines in demand for die-cut parts for the hard disk drive industry and the overall macro…

Thank you, Tom, and good morning, everyone. Please turn to Slide 11 for the Americas review. Sales in the Americas were $148.7 million in the first quarter. Organic sales were down 0.7%, foreign currency translation decreased revenues by 1.1% and divestitures decreased revenues by another 1.6% compared to the first quarter of last year. As Frank mentioned, this quarter, we sold Varitronics, a business based in Minnesota serving the education market, and we sold Brady medical, our medical die-cut business in Texas. Neither of these businesses were core, and by selling these businesses, it helps us sharpen our focus on our key markets and products. Although down from the robust growth rates coming out of fiscal 2012, our identification solutions business in the U.S. and Canada continue to grow in quarter driven by the execution of key growth initiatives, including a strong focus on our core distributor base business, delivering unrivaled customer experience, improvements in the digital experience offered to our customers, key customer conversions and improved service offering and new product development. We continue our focus on launching innovative new products, including the BBP 33 printer and consumables that Tom highlighted. We also enjoyed growth in our services business, supporting our customers’ needs for creating and maintaining lockout procedures and providing the specialized signage and lockout products to go with this. To support the growth of this business, we also developed mobile software that improves the efficiency for field engineers, creating lockout procedures to meet their OSHA requirements. The application provides customers online access to their procedures and when additional signage is needed, it provides the ability to quickly order the products necessary. Our MRO business in Brazil continues to grow, but this growth has not been enough to offset declines in our automotive and consumer electronics OEM customers,…

Thanks, Matt, and good morning, everyone. I'll draw your attention to Slide 12. Sales in EMEA were $93.2 million for the first quarter; organic sales declined 3.2%, and foreign currency translation decreased revenues by 5.7% compared to the first quarter of last year. Acquisitions net of divestitures of our paper label business Etimark increased revenues by 4.7% in the quarter. Overall, these results show the impact of difficult economic circumstances where the main European economies may be slipping back into recession. When we take a look at our business by business stream, our Direct Marketing business saw organic sales decline slightly in most European countries. With the exception of France and Benelux, we were able to drive modest growth despite the economic challenges through aggressive sales promotion and product expansion. In order to mitigate these macroeconomic headwinds in the EU 27, we've been reallocating investments away from Spain and Italy, and are instead investing in areas where we still expect growth, including further expanding the French first-aid business, Securimed, that we purchased in 2010. Our commitment to e-commerce is an opportunity to win new business and new customers and service existing customers better continues to ramp up as we roll out our investments, both in customer facing and transactional processes software. We are currently implement in our SAP ERP system in Germany and implementing a series of automated tools that enable us to market seamlessly between catalog and multiple other channels to market. These investments will position us well against our competition and give us growth opportunity despite the challenged economy. Our Identification Solutions business saw sales decline by mid single-digits as the main industrial markets in Germany, France and Italy continue to weaken. This was somewhat offset by solid growth in emerging economies in EMEA, and confirms our strategy…

Thanks, Peter. Continuing on Slide 13. Our focus on Asia continues to be twofold. First, we are highly focused on improving profitability in our die-cut business. And second, we are expanding our presence in Identification Solutions businesses of web-based safety and compliance, wire and cable identification and product identification. Sales in the Asia Pacific region were $95.7 million in the first quarter. Organic sales decreased 2.5% and foreign currency translation decreased revenues by another 0.1%. As mentioned in our last earnings conference call, we were anticipating improved results in our mobile handset die-cut business as we successfully secured several new projects. All of these projects entered production in the first quarter, resulting in organic growth in the mobile handset die-cut business this quarter compared to an approximate 25% organic sales decline in the fourth quarter of fiscal 2012. We are pleased with these volume increases and we are confident that the restructuring actions taken last year to split the die-cut business from the rest of our Asian businesses to improve focus is paying dividends, as we not only saw revenue improvement, but we also experienced improved profitability. Our other die-cut business in Asia serves the hard disk drive market. This business experienced a decline in revenues of approximately 30% in the first quarter when compared to the prior year, as a direct result of decreased global demand for hard disk drives. Based on the current softness in the PC market and industry forecast, we expect that this lower level of activity will continue into the second quarter and possibly the third quarter. Our overall die-cut sales were down only 2% organically compared to Q1 last year, which is reflective of the significant improvement in our non-hard disk drives sales, given that hard disk drives sales were well below last year.…

Thanks, Stephen. Before moving to questions, let me share some concluding thought. With respect to our first quarter financial results, we are most encouraged by improved results in Asia. The separation of management teams in Asia has resulted in a renewed focus on each of our businesses including die-cut, which showed positive results in the quarter. Looking to the second quarter, however, we expect that the macroeconomic headwinds will negatively impact our financial results. Looking forward, our strategy is focused. First, take costs out of our business and reinvest the savings into organic growth opportunities. These initiatives include: expanding our business in emerging geographies; expanding globally in certain focus markets, such as aerospace and mass transit, chemical, oil and gas, and food and beverage; expanding our new product development efforts, converting customer opportunities into customer wins; and expanding our digital capabilities. Second, we will continue the process of pruning our portfolio to ensure that we are focusing on the right level of resources and the best opportunity. Third, take a balanced capital allocation approach that invests in our future through the organic growth opportunities that I just mentioned, along with identifying and closing acquisitions, both within our cost space and EMEA in 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 optimistic manner. Let's now start the Q&A. Clinton, can you please provide instructions to our listeners?

[Operator Instructions] The first question comes from the line of Charley Brady from BMO Capital Markets.

This is Andrew on for Charley Brady. The first question is, we were wondering -- gross margins are up on a revenue decline. We're just wondering, I guess, are cost takeouts driving that improvement, but is there anything else? And also, do you guys expect that to hold throughout the rest of the year?

As far as your response, we continue to see strength in the BBPS initiatives and part of it is driven by the -- some of the restructuring events that we had at the end of the first -- excuse me, at the end of the fourth quarter. And our gross margins have always remained just in the -- just below 50% range and we're striving to continue to improve them.

Okay. And then also, R&D expenses is slightly lower than we had expected. Do we think that -- is the new run rate that we should look at, the $8.5 million? Or do we think it will tick back up as the year progresses?

I think, historically, we have been running at about a $40 million per year run rate and I would expect us to be closer in line with that. I don't see this as being the new normal for the R&D spend.

Okay, great. And then the other question was, within Asia Pacific, was there -- it seems like there may have been some benefit from new platforms this quarter? I was just wondering if you might be able to speak to that and kind of how much it may impact subsequent quarters.

Andrew, can you just clarify your question. When you say new platforms, do you mean our Identification Solutions business were growing? Or you do mean new platforms within our die-cut business?

Within the die-cut business.

Okay. Yes. As we sit going into the quarter, we won some new business in the mobile handset and tablet computing areas particularly. Both programs are in production now. We're happy with what we have there. I think, looking forward, if the products that we have supplied pass into successful, we expect that this strength will continue. If they're not successful, we could see that slow down.

Our next question comes of the line of Jason Ursaner of CJS Securities.

Just a follow-up on the Asia Pacific segment. It's a very strong improvement; it materialized as forecast last quarter with the several product wins that you mentioned. Is the content that you're winning though, is it more along the lines of the original strategy for more value-add products in thermal, et cetera? Or maybe putting it another way, how big a factor was price in the winning of those positions?

Well, I think, prices have big effect than it ever is in winning in that industry. I think, without going into the details of what we're supplying, the sorts of products that are being made now are requiring better solution, things such as thermal are significant and we're winning in those areas.

I think, Jason, when you look at the operating segment profit picture of Asia Pacific, and you put this in context is what Stephen said earlier that our Australia business and our hard disk drive business was struggling in the quarter and is being offset by mobile handsets. Historically, Australia business is much more profitable than our mobile handset businesses, and so is hard disk drive. So we kind of had a very negative mix impact. But the fact to ship out that our segment profit helped actually should improve substantially, tripled from what we had last quarter. It just shows you that we didn't buy volume by a huge price concession. And we have also made operational improvements in this business. You might remember that Lee Marks was in charge of global operations a couple quarters ago, and he spends a lot of time over in Asia with the team there to improve operating performance, and I think that's what you see reflected in the numbers.

Okay. And Stephen, you mentioned that these are in production now. Is there an upfront revenue benefit when you win, and then once they go into full commercialization, it's more of a royalty stream? And I guess, I'm just wondering, longer term, the benefit of these wins, is it still dependent on how those products actually end up performing in the market this holiday season?

Well, not just this holiday seasons season, but ongoing. I mean, some of the -- there are many players in these markets that are, as you know, you read the newspapers, there's a continual supply of new products coming in. And as they're successful, and I guess, as we see the of the market change, we would hope that the longevity of some of these products increases and we continue to supply components in all the way. There's certainly no upfront followed by royalty thing here. As long as these products are in production and selling successfully, we expect to continue to receive revenues.

What encourage me most, Jason, what I said, we made a conscious decision a couple of quarters ago. I don't know, when did we speak to the management team?

February.

February, all right. We made a conscious decision to split the management team within die-cut and the other operating businesses in order to increase focus. And of course, they have put a lot of emphasis on talking to customers, winning new business and it's very encouraging to me to see that this strategy has worked out. There's such an increased focus on this business in the market. And as I said earlier, within our focus on operation, it's just a good story. Unfortunately, we had negative growth in hard disk drives in Australia where it's breaking our results down. But overall, I'm very encouraged by the improvements we made in die-cut.

Okay. And just last quick question for me. It looks like you bought back a little bit of stock in the quarter. I didn't hear if Tom gave the average price or shares and just what's left on the authorization?

I think we still have about 2 million, a little over 2 million shares left in the authorization and I did not give the average price --

But I think what you did say, you said about 188,000 shares and I think you said about $5.1 million. So I cannot do the math in my head but...

Your next question comes from the line of Tony Kure of KeyBanc.

I just want to go through a couple of the assumptions, especially the one, the second half growth expectation. Obviously, you've got an easier comp in the fourth quarter. But the third quarter isn't necessarily that easy. I guess, what are the growth initiatives or some of those initiatives? Just provide a little more color that sort of give you confidence in that back half growth?

Should we go region by region?

That would be great.

All right. Who wants to start? Matt, Peter?

Sure. In the Americas, start down in Brazil, I specifically commented on that. When you look at the Brazil economy, they're expecting a sizable growth in the GDP, and we're in some sectors that are growing there that we're expanding our capacity to sell. We definitely expect improved results there.

Primarily in the MRO side?

Well, that's a good point. So speaking of the OEM business there, but on the MRO side, we continue to expand really in the same areas that we are globally in Identification Solutions. And that's with the launch of a number of new products, some that we had recently launched. So this applies to North America as well as Brazil. So we just launched products, and we have other products that we will be launching throughout the course of the year that we'll get benefits from. And so when Frank brought up MRO, those are certainly feeding our MRO business throughout the Americas. We continue to invest in improving in digital. And this is an area, as I mentioned, we're getting double-digit growth. And the investments we're making not only have a long-term impact, but they have a short-term impact as well. And we expect our business there to ramp up. So for example, we were talking this morning about one of the improvements that we made that was really in line with expectation of business consumers today, and that's the ability to order products from a mobile device. And that's an area of real emphasis for us right now is to be able to continue to make it easier to grow off of the Internet. And as we've talked about, we are focusing more resources, strategic resources in selling, industry resources in the markets that we're focused on that we think we have the best chance to grow in. So we're getting some good results in areas such as food and beverage, mass transit, things that have sustainability in terms of market. So those are some of the key ones that we also have themes throughout the Americas on.

In this area, as like what you just said, food and beverage, aerospace, mining, where we added people or we reallocated people -- reallocated people, added people for the industry who managed then to go after those verticals, funding it was cost savings in other areas. We can really see the impact of this. The same is true for our geographic initiatives. They want to expand in areas that are under-penetrated or which are emerging and growing faster.

I'll just pick up on that point, Frank, because if I look at EMEA, that's one of our principal growth vectors going forward, and especially in our ID solutions in terms of growth in emerging markets. Then I guess the biggest indicator of that is the ramp up in sales resources. We've had an active recruitment drive. As Frank said, reallocated resources from more mature markets to less mature markets in emerging economies. And those sales resources start to gain traction -- maybe some, but isn't terribly visible move. We have made mention of it before, but we had a very well defined process for training salespeople. It's called the Brady Academy. We've done a lot of work and investment into that over the past couple of years, and we're able to deploy our sales resources and make them much more effectively sooner than we used to. These are online training tools. So that's one of the biggest growth vectors that adds on to our focus on the vertical markets for Brady ID solutions in EMEA. If I look at the Direct Marketing, the opportunities are a little bit different. But typically, our product offer starts to expand in January. We launched new promotions in January. And this year, probably more than any other years, we have had a defined process around innovative new products, and we've been looking at working with external suppliers, creating proprietary products. And we created about 62 proprietary products in the past 7 months that are now inserted into our offer, both online and in our catalogs, and they already started to take effect from January. The other thing I'd add to that is the acquisitions that we've made, Pervaco, Runelandhs. It's from January that they start to enjoy the benefit of the synergies and our product offer going into their offer in their respective markets in Norway and Sweden. So if you take that together, that's why we're more confident going forward even against a challenged economic headwind.

The common theme, I just want to wrap this up because I think they gave you a lot of insight in what's going on. But the common theme is, we don't expect the economy to provide a large tailwind, and we have to create our own growth story. And that's what we've been doing now are quite some time. And everything you are hearing, investing into emerging geographies, all geographies where we're underrepresented -- I want to remind you, we bought 2 companies in Scandinavia and one in South Africa, areas where we were under-penetrated or areas which are growing faster and focus on vertical markets. These are all initiatives, internal initiatives to try to outperform the GDP, the global GDP. Creating our own growth story. That's the theme which we have been working on for quite some time now. And we expect this to really gain some traction later in the year.

Okay, great. And then I guess as far as Asia goes, you alluded to the separation really starting to pay dividends here as far as the execution in the region. Any update on the timing of potentially -- obviously, you're getting very -- getting pretty adept at divesting businesses. Any timing as to -- or line of sight into that for the Asia OEM business? I'm sorry, Asia die-cut business?

Yes, we talked about pruning our portfolio, and we have exited 3 businesses, 3 smaller businesses. And this is surely part of our strategy going forward. Focusing on the businesses which are strategic, which meet our growth expectations in term of organic growth and profitability. But that's not the only strategy. The other part of the strategy is also to turn businesses around, to improve businesses. And what we have been doing is, particularly about Asia, what we have been doing in die-cut. We have put a lot of focus in improving our operations. But at the same time, our operations are signing up new customers, getting more business. By the same time, we also are separating the businesses in order to create focus but also, of course, to keep all options open. And I want to say this is true for all businesses within Brady, right? We don't get every business in Brady and assess it on a continuous basis from a strategic point of view.

Okay, great. And just the last wrap-up question I have is, looks like the CapEx expectation for the year is about $35 million. That sort of implies a ramp as we go through the final 3 quarters of the year. Could you just confirm or remind me, is that, I think it was a facility in Australia and Thailand? Am I right on that? And is that hard disk drive? And are you still looking at that, given the weakness of that business?

Yes, Tony, your memory is correct. Those are the 2 facilities that would create, I guess, a mini spike compared to our historic levels. In the Thailand business, we still need to go ahead and build that facility as the business we were in was pretty much wiped out in the flood last year.

And this is also a part of the separation of die-cut from the other businesses. This new Thai facility, which is going to be finished by the end of the calendar year, and we're going to move into this facility. This will also give us the opportunity to move some things around within Asia, to have a clean cut between die-cut and nondie-cut business in order to provide more focus, also in operations which have different business. Die-cut is a different business also operationally than the others, and this is a key piece of being able to execute on that strategy.

And what's the timeline for that building being completed?

Tony, it's almost complete now. We start moving in just before the Christmas holiday season, I think, and then it's a phased move-in, there's a clean room that's being ready over the next couple of months. So totally completed within fiscal '13.

Your next question comes from the line of Mig Dobre of Robert W. Baird.

This is Mig Dobre with Baird. My first question relates to the slight change in your organic outlook; you're talking flat versus the slight growth previously. And I guess I'm just wondering, can you walk us through each geography as to where you got maybe a little more positive versus the opposite?

You want to do this, Tom? They want to go by region.

I guess the outlook for Europe remains quite cautious. All of the news there is, it's not that positive. So Peter talked about what he's doing to battle against that, try and expand into Central and Eastern Europe, the Middle East and South Africa. Asia -- excuse me, in Asia, the outlook there for you?

Well, in Asia, it's mixed. I mean, we talked about Australia and Thailand, who we expect to both be down at least in the next quarter and probably into the third quarter. Largely offsetting, at least in the next quarter, the benefits we see from some of the other parts of the die-cut business growing.

I would say, what you might have picked up is -- I would say, not so much our outlook for the year, but more by quarter. We are not cautious about the second quarter for sure. Why is that? Because we have seen Australia slow down. We have seen Brazil slow down in the quarter. We have seen the hard disk drive slow down tremendously. We think that's a temporary thing. I mean, the amount of -- the magnitude of slowdown certainly was -- we think it's temporary thing. But we don't think it's going to turn around in the second quarter. Brazil, we already know that some of our customers, automotive customers already starting to pick up again, but it's not going to happen again this month or next month. That's slower than that. So I think we are particularly cautious about the second quarter. We are not changing our outlook for the year too much. Did we somehow indicate this, Tom?

Mig, I think what you're just picking up is a lot of uncertainty. Everything you hear from the fiscal cliff to what your hearing in Europe. With our businesses, we talk about often is we just don't have a lot of visibility going out. So if you picked up any change, there's just a lot of uncertainty out there. We're fighting hard to win wherever we can, and we certainly are getting wins, but there's this uncertainty in the economy going forward. It's really tough to predict for a company like ours.

Sure. So to sum it up, it's basically the second quarter rather than the second half?

Correct.

And then, this question was asked a little bit earlier, so sorry for revisiting. But as far as gross margin goes, really nice performance in the quarter. I'm wondering, looking at your earnings outlook, and what we just discussed about organic growth, what's the embedded assumption about gross margin progression for the remaining portion of the year?

Yes, typically, we don't give detailed guidance regarding our gross margin. We give EPS guidance. And I don't think we want to deviate from this, but I don't think we can see wild swings in our gross margin or similar to the impact caused by seasonality in second quarter. Again, we have Thanksgiving in the United States, and we have Christmas, we have New Year. I don't know when Chinese New Year is this year.

February.

In February, so it's not as impact the second quarter. So, it's more impacted -- more by volume. But typically, we don't see wild swings in our gross margin. If you look at the gross margin slide which we have in our presentation, you can see it's pretty stable.

I recognize that. I guess, where I was going with this, I'm wondering how much of a headwind did you have in Asia in the mobile handset business that obviously is doing a lot better. Should we be expecting to see this business being a contributor to gross margin perhaps for the remainder of the year?

I think it all depends on how fast hard disk drive turns around. And about the growth -- what kind of growth we see in Australia, because Australia is certainly a much more profitable business. Hard disk drive is a more profitable business than mobile handset, and it depends how fast those businesses kind of stabilize or turn around. And that's again why we think in the second quarter, it's probably not going to happen. But we are more optimistic that it's going to happen in the second half of the year, which means that it could be a contributor, Asia could be a contributor.

Very well. And my last question here is on Asia margin, I guess wondering a little bit about the sustainability of margin there. From what I can tell, seasonally, the first quarter has typically been the strongest margin quarter for Asia. Do you sort of expect this to continue in 2013? There's a lot of noise there. How should we think about that?

Yes, Mig, there is a lot of noise there. I mean, there's probably more than any other part of Brady we have mix impact on our margin because we have high sales volume, lower margin businesses, and lower sales volume, high margin businesses. It's really hard to say where this will end up. As Frank said, if we see it bounce back in sales in Australia and Thailand, who have 2 of our highest margin segments, then just the mix impact of that, everything else being equal, would pull our overall region margin up. I don't know that we can give you much more direction than that.

I can give you some -- Matt's just me that we divested 3 businesses. And from a gross margin point of view, they had about breakeven earnings, but also from a gross margin point of view, this is a positive impact on the mix, and we also added some businesses. We acquired 3 businesses which -- and if you look at -- we acquired about $30 million in sales and we divested about $40 million in sales. The impact on gross margin certainly is positive, and this should be here to stay.

But just to jump back in Asia. This is something we should -- and I don't know, where there's a trend where we would expect to see the margin, just some seasonality in the second and third quarters. But there's still just so much top line variability, still it's hard to pin.

The next question comes the line of Joe Mondillo of Sidoti & Company.

I guess my first question, to stay on the Asia segment, and then particularly the die-cut, just a bigger picture. Going into last year, fiscal '12, obviously, one of the biggest risks to the model was, I guess, and correct me if I'm wrong, product cycle and sort of a weighting towards one customer. Wondering how -- if you could just talk about it, sort of big picture, your customer base, how many customers are you selling to and talk about the product cycles that you're selling into nowadays and sort of how that, I guess, business model has sort of shifted and if there's any sort of less risk than there was before?

Joe, you might notice, this is the first quarter we haven't mentioned any further significant decline in our major customer. So that's positive on that sense. The overall mix has clearly changed. Our business is reflective of the changes you see in consumer electronics, personal computing, personal communication. So you know who the players are. You know who are bringing in new products, and we are probably proportionally represented with those people and our business follows accordingly. In terms of product life cycle, I think we are supplying into some new product arenas. I don't think any of us know what the product life cycles of those are because they're so new to the market. But what I would say is our reliance -- our strong reliance on 1 -- well, strong concentration on 1 customer in the mobile handset space is not the same risk that it was previously.

I would say, we're probably as diversified as we've ever been in this market.

Yes, plus the larger customer has become a smaller portion of our business and has stabilized. I would say has stabilized compared to our other quarters ago where we had precipitous decline.

So what has sort of changed that? What were you doing sort of, I guess, maybe wrong beforehand or not focusing enough on and now you are?

Joe, things are only wrong with hindsight, right? So they aren't wrong when you do them at the time. But we've talked a lot about the focus, the increased focus that we're trying to have. This is not just pitting the management teams within the die-cut team, for example. We've been very focused on winning business from customers. The sort of customers we deal with, they design and develop and engineer products in one country and then manufacture them in another country, and we focus on both ends of those. So really focused hard work by our salespeople, being very persistent. We've realigned some resources, put new people on in different parts of the world. The increase we're seeing right now is because we won business. Our people have been knocking on doors and winning business. And so right now, they're successful in terms of what's coming in the top line, and I hope that we're not setting a new year saying that it was the wrong decision. Right now, it seems the right decision, and it's working.

Okay. And in terms of the top line, should we suspect or expect a acceleration because we're in the early stages of these new platforms on the die-cut or -- how are you thinking about that?

I wouldn't see an acceleration. The typical trend is, the build season goes into the Christmas holiday period when they build and sell. We're in that point right now. I would say, we all hope that some of these new devices of the new players in the market are successful with their products and maybe we'll see some of the historical seasonality flatten out on that. But I don't think we'd be viewing an acceleration from this time and year, just based on what's the history in this industry.

We call it seasonality.

Seasonality, yes.

Okay, great. And then just my last question has to do with the Americas margin and just sort of bigger picture. Last peak back in 2008, you guys were a -- margin at 24%. You're now at 30% in this latest quarter, which I believe is, I think, a record high. Just wondering, and I apologize if I'm making you be repetitive, but if you could simply tell me how you were able to get that high end, sort of, is that sustainable? Do you think that's sustainable or can you further see expansion? Just some information on that would be helpful.

Okay. When you look at this time period versus history that you were bringing up, I think there's a couple of notable differences. One is, we've had -- made a purposeful effort to consolidate our facilities, reducing our footprint, and that has definitely improved our underlying cost structure and upped our gross margin. We've also really focused on improving the overall selling structure that you have or that we have. So that has improved the bottom line, but certainly has had an impact. When you look at on a quarterly basis, historically, our first quarter is better on average. We have 2 more days in the first quarter than we have the rest of the year. We have price increases that go into effect in the first part of the year. Our selling expenses, for whatever reason, as we go into the new fiscal year, our selling expenses tend to underspend a little bit. So it's a combination of all those things. So when you look a quarterly basis, this is going to be our highest quarter for the year, and I wouldn't expect this level of profitability as a percent of sales to repeat for the remaining 3 quarters.

Maybe I can say this better than you, Matt. There was a lot of heavy lifting done over the last 1 or 2 years to try to improve earnings quality in spite of a slow-growing economy. And as Matt said, you have facility consolidations contributed a bit. A lot of working on the procurement side, working operations, working there on kind of productivity and efficiency projects. It's a lot of heavy lifting. So I think, so certainly, we should take some credit for that, even though, as you're pointing out, first quarter is typically strong, but I think from a overall, more big picture point of view, never be question, I think a lot has been accomplished.

One thing that allows for that is, if you remember going back a few years ago, we said we were making a commitment to implement lean, and that has definitely improved efficiencies within our operations and has also allowed us to do things in plant in a smaller footprint, and that also allows us to look at our footprint in aggregate different as well. And so that's definitely had a very positive impact.

Okay. And I just, if I will, one follow-up to that. In terms of the rest of the year, if you look at the back half of last year, the margin was very similar to a year ago. And then in the first quarter that you just reported here, it was substantially higher, it was almost 200 basis points higher than a year ago. So on a year-over-year comparison, are you expecting as significant of a year-over-year jump in the margin for the rest of the year?

I would say it would be similar, yes.

Okay. So the sort of the 150 to 200 basis points year-over-year, that could potentially sustainable?

I'd have to look more closely to tell you exactly, but directionally, you're correct.

And your last question comes of the line of Ben Wong of Bank of America Merrill Lynch.

Going back to Asia die-cut, can you help us size how much is handset versus how much is the hard disk drive?

Yes, we haven't really disclosed it. I think it's probably about 3:1 ratio, handset to hard disk drive, about 25% of the portfolio.

Okay, 3:1?

Yes.

Yes. I think it's a little more than 3:1. I think it's maybe 4:1.

Yes, it's in that ballpark, it's not -- certainly not half the ballpark, it's probably 3.5, 4:1.

Got it. And then it sounds from your response to some of the previous questions that the new business wins are more value-added and more profitable. Can you just talk about how sustainable the competitive advantages for these new products -- is it something that competitors can't replicate easily and perhaps you could hold onto it for some time?

That's always hard to say. I mean, it's a very competitive place. As we are developing new cut release competitors seek to do it. Some of our business now, we are very comfortable with around the materials that we're using. I would be reluctant to stake a claim to hold advantage of this industry. You're talking product life cycle, 6 to 9 months on something, so it's very hard to say.

And I think one thing we can say is you when our largest customer lost market share big time and we lost sales, we asked our sales team to go out and get business. And they went out there and they got business. So in other words, we got larger allocations. And typically, these are more commodity parts, and that's where we saw a deterioration of profitability. Even though sales kind of -- maybe did not reflect what could have been, had we not done this. Now the recent wins we have, these were vouchers which we had systematically worked on at early stages with engineers, and we've got these signed in and typically those products [indiscernible] are more profitable than if you just win on a few allocation play. So I would say it's a pretty safe assessment that it is more -- maybe more sustainable, definitely more sustainable than what we had when we just went after volume and higher allocation. But Stephen also pointed out, all our life cycles are very short and at a tremendous pressure to reduce prices all the time. So what we have to do is just continue to work with the engineers and our customers and make sure we always stay on top of their requirements and provide value. But I feel much more comfortable compared to where we were maybe a year ago.

Great, okay. My last question, it's hard to go 5 minutes without hearing everyone's 2 favorite words: "fiscal cliff." Have any of your customers talked about some risk around that?

No, we have -- I mean, we hear the same what you hear. We go to -- we hear economists talk, and it's in everybody's minds. But our customers and us, we just do our job and try to win business, come out with new product, get after emerging geographies, try to get operational improvement. That's all we can do. We are not changing our strategies or changing our tactics because of what might or might not happen. But of course, in everybody's mind, there's no question that this is weighing on other people's heads and should decisions they make on how much inventory they put on stock and how much to invest. It's a do drive now. And I think that's another reason why we're a little more cautious about the second quarter. Once this problem is solved, we might get it solved, but the second quarter is still there.

Just to jump on again. Just checked. Our HDD is about 1 -- hard disk drive is about 1/5 of our portfolio.

1/5?

About 1/5.

I'd now like to turn the call back over to Aaron Pearce for closing remarks.

Thank you for your participation today. As a reminder, the audio and slides from this morning's call are 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, November 15. The phone number to access the call is (888) 286-8010 or (617) 801-6888, and the passcode is 41577972, and the replay will be available for approximately 1 week. As always, if you have questions, please contact us. Thanks and have a great day. Operator, can you please disconnect the call?

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