Operator: Ladies and gentlemen, thank you for standing by. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. Welcome to Avery Dennison's Earnings Conference Call for the First Quarter Ended March 30, 2013. This call is being recorded and will be available for replay from 1.00 pm Pacific Time today through midnight Pacific Time, April 26th. To access the replay, please dial 1-800-633-8284 or 1-402-977-9140 for international callers. The conference ID number is 21610812.
I would now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. Please go ahead, sir.
Eric M. Leeds - Head of IR: Thank you. Welcome everyone. Today, we'll discuss our preliminary unaudited first quarter 2013 results. Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The Company's Office and Consumer Products and Designed and Engineered Solutions businesses are classified on our income statement as discontinued operations.
The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP in schedules A-2 to A-4 of the financial statements accompanying today's earnings release. We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today's earnings release.
On the call today are Dean Scarborough, Chairman, President and CEO; and Mitch Butier, Senior Vice President and CFO.
I'll now turn the call over to Dean.
Dean A. Scarborough - Chairman, President and CEO: Thanks, Eric and good day, everyone. First quarter results were in line with our expectations, highlighted by strong sales growth in emerging markets for Pressure-sensitive Materials and another good top line performance by Retail Branding and Information Solutions. Higher volumes and the benefits of our restructuring program drove a substantial increase in earnings per share over the first quarter 2012.
We are also on track to deliver strong annual free cash flow. Typically, we're a user of cash in the first half of the year and we ended the quarter where we expected to. During the quarter, we returned nearly $90 million to shareholders through dividends and the repurchase of approximately 1.5 million.
Regarding the dividend, the Board will conduct its annual review at its meeting tomorrow. As we announced last December, the Board has moved its annual consideration of a dividend increase from December to April.
Turning to the businesses, Pressure-sensitive Materials delivered solid overall results again, driven by strong sales of Label and Packaging Materials in emerging markets with modest growth in mature markets. Operating margin expanded and was within our long-term target range reflecting higher volumes and the productivity gains from integrating Graphics and Reflective into our Label and Packaging business.
Trends for our Retail Branding and Information Solutions continued from the back half of 2012 with continued growth in the core business and strong growth in RFID. Sales to U.S. and emerging market retailers and brands grew by double-digit percentages. I was encouraged by the mid-single-digit growth from European-based retailers and brands. Based on the latest import data, we're continuing to gain market share.
RBIS operating margin expanded significantly and we expect further progress later this year as we reduce the manufacturing footprint and execute our productivity plans. Second quarter is of course the most important season for RBIS and as you know, we don't have that much forward visibility. However, our order intake does remain strong. I'm pleased to say that during the quarter we received all regulatory clearances for the sale of Office and Consumer Products and Designed and Engineered Solutions. We expect to complete the deal mid-year. We've also made steady progress on our restructuring initiative, which is enabling us to deliver strong bottom line improvement.
We had a solid start to the year. As Mitchell will explain with the movement of Designed and Engineered Solutions to discontinued operations, we've effectively raised our earnings guidance. I'll note that Q2 is very important for us and we'll feel even more confident about the year, once we deliver the quarter.
Now, I'll turn it over to Mitch.
Mitchell R. Butier - SVP and CFO: Thanks, Dean, We delivered another solid quarter with 4% organic sales growth and a 37% increase in adjusted earnings per share in line with our expectations. These results reflect strong emerging markets growth in Pressure-sensitive Materials, continued solid progress in RBIS, the result of our restructuring program as well as lower interest expense and the accretion from share repurchases.
Our free cash flow in the quarter was negative as is consistent with our normal seasonality. With leverage in our targeted range and our consistently strong annual free cash flow, we returned $89 million of cash to shareholders with dividends of $27 million and the repurchase of 1.5 million shares. Adjusted operating margin in the quarter grew 60 basis points to 6.7% as the benefit of productivity initiatives and higher volume more than offset higher employee related expenses and the impact of product mix as a result of our continued penetration of lower margin categories in PSM.
The net impact of costs associated with raw materials and pricing was again modest in the quarter. As for our restructuring program to save more than $100 million annually, we are on track and continue to expect to achieve our savings target by the middle of this year. In addition, to expanding operating margins we also benefited from a reduction in interest expense of approximately $6 million. This reduction is due primarily to a three month time lag between $250 million long-term note matured in mid-January and when we refinanced this in early April. The new $250 million note is due in 10 years and bears a coupon of 3.35% and will result in a reduction to annual interest expense of $8 million going forward.
Turning to the segments, Pressure-sensitive Materials sales were up 3% on an organic basis in the first quarter, primarily reflecting solid growth in emerging markets and a moderation of growth in mature markets. Label and Packaging Materials, our largest division in this segment; sales were up low-single digits on an organic basis, while the combined sales for Graphics, Reflective and Performance Tapes were up slightly. On a regional basis, sales for this segment grew low-single digits in North America, were relatively flat in Western Europe and grew double-digits in emerging markets.
PSM's adjusted operating margin improved 30 basis points to 9.9%, near the high-end of our targeted range, as the benefit of productivity initiatives and higher volume more than offset the impact of product mix and higher employee related expenses.
Retail Branding and Information Solutions sales grew 6%, with about half of the growth coming from RFID and the other half reflecting solid growth at North American and modest growth at European retailers and brands. Sales of RFID products more than doubled in the first quarter, but as we said last quarter the growth rate is expected to moderate for the remainder of the year as a major retailer recently decided to slow his pace of RFID adoption.
RBIS' adjusted operating margin improved 150 basis points to 4.6%, as the benefit of productivity initiatives and higher volume more than offset higher employee related expenses. As you know the first quarter is RBIS' seasonally lowest sales and margin quarter, while the second quarter is the strongest.
Sales in our other specialty converting businesses grew 13%, reflecting solid growth in our medical business. The big difference between reported and organic sales growth in other specialty converting is due to the exit of a small former OCP product line last year. With DES now in discontinued operations, the medical business is the only component of other specialty converting beginning this year. The negative adjusted operating margin in other specialty converting was reduced somewhat compared to last year due to higher volume. This business has a negative operating margin, as we're making investments in growth to leverage our material science capabilities and technologies in the medical space.
Moving on to the outlook. We now expect adjusted 2013 earnings per share from continuing operations of $2.40 to $2.75 and free cash flow from continuing operations of $275 million to $315 million. When you consider that we are now excluding the estimated results from DES, we're effectively increasing our earnings guidance. The exclusion of DES had a negative impact of approximately $0.15, which was largely offset by lower anticipated cost and at the lower end of our range, higher volume. As for free cash flow, we reduced the high end of our guidance range for continuing operations primarily due to the exclusion of DES.
Our guidance is based on a number of assumptions including the factors listed on Slide 8, to highlight a few, our estimate for organic sales growth in 2013 is now 2% to 4%. We've raised the low-end of our sales expectation by 1 point given our performance in the first quarter. Our full year estimate reflects modest growth in the U.S., Western Europe being flat to down modestly and emerging markets up mid-to high single-digits. Obviously the macro environment remains uncertain and as you know the nature of businesses gives us limited forward visibility. Interest expense in 2013 is expected to be approximately $60 million versus $73 million last year.
First quarter interest expense was $12 million and we expect a run rate beginning in Q2 of $16 million to $17 million per quarter and average fully diluted shares outstanding for 2013 are still assumed to be approximately 100 million. Given the timing of when we expect the divestitures of OCP and DES to close, the impact of the additional share repurchases from the proceeds of these divestitures will have a modest impact on the calculation of average shares outstanding for the full year.
So in summary, the first quarter represented a solid start to a year in which we expect to deliver adjusted EPS growth of between 22% and 40%. Our two core businesses are market leaders and are well positioned for profitable growth and increasing returns. Our cost reduction program to save more than $100 million is on track and positions us for continued strong earnings growth. Our continued costing capital discipline enabled us to maintain our financial strength and return more cash to shareholders, all of which demonstrates our continued commitment to delivering on our long-term targets.
Now we would be happy to take your questions.
Operator: George Staphos, Bank of America Merrill Lynch.
George Staphos - Bank of America Merrill Lynch: I guess my first question is on the guidance related to what the sales trend has been and similarly we understand that you effectively raised your earnings per share guidance given the effective DES. When I look at what I think is your new continuing operations schedule at the back of the slide deck. It shows that organic sales have been decelerating a little bit over the last few quarters, still at very healthy rates and so I was wondering, if in fact that's the trend you've been observing, what gives you more confidence in terms of raising the outlook as you've done? I had a couple of follow ons.
Mitchell R. Butier - SVP and CFO: Sure, so overall the reason for the raise in the outlook is really at the low end, George, and that was pretty much just due to our performance in Q1. When you talk about the growth rate in Q1, we're right in the middle of our long-term targets coming in at 4% overall, our 3% to 5% target that we've had and it didn't decelerate from the pace you saw in the last few quarters, but recall the last few quarters were benefitting from some easier comps and mid-2011 is when our sales fell off. So, when you're looking at absolute terms, this is a solid pace and the pace which we expect overall.
Dean A. Scarborough - Chairman, President and CEO: I'd also note that Easter fell on the first quarter this year, rather than in the second quarter in the prior year. So that's part of the reason for – I would characterize that as deceleration.
Mitchell R. Butier - SVP and CFO: Yeah, the shifting calendar had over a point of impact on the quarter as well, but does not change our full year expectations.
George Staphos - Bank of America Merrill Lynch: Would Easter being early have shifted volume into the first quarter and helped the growth rate if I'm hearing you correctly?
Dean A. Scarborough - Chairman, President and CEO: Easter was one week earlier and so Good Friday fell into Q1 of this year, whereas Good Friday last year, fell into Q2. It doesn't affect all regions equally of course, or all businesses equally.
George Staphos - Bank of America Merrill Lynch: Now in terms of the RBIS business and apparel, you obviously gave the appropriate caveat. You don't have great lead times, but your bookings thus far have been pretty healthy. So, the question is, what are your customers saying right now, about what their expectations are for the Christmas selling season in the fourth quarter?
Dean A. Scarborough - Chairman, President and CEO: Yeah, I think there is a reasonable degree of optimism as they're looking forward, and so, we're pleased with our growth rate from both European and U.S. and emerging market retailers and brands. I don't think anybody's ecstatic about the environment but they're not pessimistic either so it feels – it looks okay. This is how I'd characterize it.
Mitchell R. Butier - SVP and CFO: I think the key thing to focus on some of the comments I made about RFID was half the growth in Q1 and we do expect that growth rate to moderate somewhat.
George Staphos - Bank of America Merrill Lynch: It sounds like your customers are feeling a little bit more confident about the consumer, and in turn being willing to open up their wallets to make expenditures, towards the end of the year, would that be a fair assessment, whether or not it plays out or not we'll see, but would that be the fair characterization of what your customers are thinking right now?
Dean A. Scarborough - Chairman, President and CEO: Yeah, I mean, certainly based both anecdotally and on the order trends, I'd say yes. Right, exactly within our guidance range and pretty much what we expected.
George Staphos - Bank of America Merrill Lynch: Last question, and I'll turn it over. In other, especially converting, what pace of margin improvement could we expect over a couple of years and we realized, you're investing in that business right now. Is this a business that given the current, if we hold the macro environment constant going forward, that can get to a breakeven or better margin with the next couple of quarters, let's say sometime at a run rate, sometime in 2013 or would you need to do more restructuring investment or see more growth were it to be more profitable than it is right now?
Dean A. Scarborough - Chairman, President and CEO: Yes. Let me just maybe give a little bit of color on the Vancive Medical Solutions business that's pretty much all of other specialty converting. It's a carve-out of our – out of our Performance Tapes business and the core business has actually been growing quite nicely and we had invested in a couple of new growth platforms. One is on a wearable sensor, where you can wear it on your body and it tracks heart rate and respiration and whether you're sitting or standing. As well as a new antimicrobial wound care device. We have actually embedded the antimicrobial agent into the adhesive which is actually very hard to do and we figured out a way to do it. We actually haven’t seen any sales on those products yet. So we do expect – we are in the commercialization stage. So we are pretty pleased with our progress so far. I don't want to give guidance on exactly when we are going to trip over to positive EBIT because I'd be wrong whatever I forecast. But we are pleased with the trajectory. We have got very specific milestones against the business and we are going to hit the long-term targets for that business that we have communicated to Wall Street.
Operator: Ghansham Panjabi, Robert W. Baird & Company Incorporated.
Ghansham Panjabi - Robert W. Baird: On PSM, Mitch I think you mentioned negative mix as part of the EBIT variance. Is that mostly because the growth rates in the emerging markets are stronger and that's maybe some of the lower margin business that you're referring to? How should we think about that?
Dean A. Scarborough - Chairman, President and CEO: No, actually emerging market growth is accretive to margins. What we've been doing, even at emerging markets is looking for places to take share that are still investment grade opportunities but maybe we just haven't been quite as focused on that. It's working pretty well and so I think the flow through margins will certainly – versus the first quarter last year are just a little bit less, but it's good profitable business and so we feel good about it.
Ghansham Panjabi - Robert W. Baird: Then the double-digit growth commentary across the emerging markets, was there a meaningful deviation between say China and Brazil or some of the other emerging markets?
Dean A. Scarborough - Chairman, President and CEO: The only deviation, Eastern Europe as you'd expect was a little bit softer than what we saw in Latin America as well as Asia.
Ghansham Panjabi - Robert W. Baird: Then back to RBIS, I guess as a follow-up to George's question, Dean, you're simply optimistic on the outlook there. Most retailers in the U.S. when they reported March, were calling out weather and more uncertainty as it relates to the consumer. So, can you just help us sort of bridge the gap between the two in terms of the outlook?
Dean A. Scarborough - Chairman, President and CEO: It's always, all retailers are optimistic about the upcoming season. So, they're talking about what happened in the first quarter and of course those are goods that we shipped back in late Q3, early Q4 and at least from our perspective, there's a lot of good things going on. We have been able – we believe we're taking market share, so that's helpful. We still have adoption of RFID, granted the pace will slow in 2013 versus 2012, and I would say in general, it's hard to generalize of course, we see a decent degree of optimism about how the year will play out. Inventories, the inventory to sales ratio in apparel's still about where it should be and apparel costs are also maintaining a good, relative position. So all those factors so far look okay.
Operator: Scott Gaffner, Barclays Capital.
Scott Gaffner - Barclays Capital: My question is really on the guidance, we understand the minus $0.15 for DES, and then you said the offset was, I think you said lower cost and higher Volume. Can you kind of break down the pieces there, what's the lower cost and then maybe on a $0.01 basis, what's the higher volume?
Mitchell R. Butier - SVP and CFO: Sure, just very simply at the high end, pull $0.15 off for DES, and basically add back $0.10 for the lower cost, which is a couple of million lower than we had a few months ago for interest expense and the rest of it just being lower operating cost, as well as something I didn't mention, a couple of cents from different share outstanding assumption late in the year. Then, plus $0.15 minus $0.10 at the high end and then at the low end you've got those same factors, but then, as you can see, we'll raise the low end of our volume guidance for the year and so that's where you get the extra $0.05.
Scott Gaffner - Barclays Capital: You said lower share count later in the year. Is that – that's not related to DES, the sale of OCP and DES and (you had be) likely for cash?
Dean A. Scarborough - Chairman, President and CEO: We are still seeing approximately 100 million shares outstanding for the year. The averaging effect is really modest and we were just a very modest amount over 100 before, we are modest now below 100 now.
Scott Gaffner - Barclays Capital: But just to be clear that does assume that you buy back shares with the proceeds?
Dean A. Scarborough - Chairman, President and CEO: Yes.
Scott Gaffner - Barclays Capital: The other thing is with RFID growth moderating in the second quarter, do you think it can actually turn negative in the second quarter?
Dean A. Scarborough - Chairman, President and CEO: I suppose it's possible because we had very strong growth last year. I haven’t really looked at it quarter-by-quarter. We still think RFID growth will be 10% to 20% this year or something like that me, maybe 10% to 30%. So again quarter-by-quarter that's up very difficult to that precise.
Mitchell R. Butier - SVP and CFO: The key question is we know what’s going away as far as the buildup of one retailer to go to a lot of demand last year with the ramp up of additional (running) programs and so forth and predicting the exact time of that can be challenging.
Scott Gaffner - Barclays Capital: Just lastly on RBIS I think, Dean I think you mentioned – I think you said mid-single-digit growth in Europe in RBIS in the first quarter?
Dean A. Scarborough - Chairman, President and CEO: For retailers and brands that are based in Europe, correct.
Scott Gaffner - Barclays Capital: Are you just with the right retailers or what would you attribute that to? Maybe we are mixing weak European headline and the environment is better or is it just you are with the right customers?
Dean A. Scarborough - Chairman, President and CEO: We have lower relative market share in Europe. So I think part of it is – there is this several factors. One is, yes we are with the right retailers. Some of these brands also that we serve tend to be global even though they are based in Europe. So think of someone like adidas, for example. So it's really difficult for us to figure out exactly where all their products are shipped. So we just characterize them as European source retailer. I sense we don't have the import data yet, is that we're continuing to take market share in Europe. There is RFID activity going on in Europe ramping up as well.
Operator: Jeff Zekauskas, JPMorgan.
Silke Kueck - JPMorgan: This is Silke Kueck for Jeff. I was wondering, if you can discuss where the strength in the domestic Pressure-sensitive business is coming from? That is any – so any of the players selling into the North American packaging markets have reported pretty poor results so far, whether it's PPG's packaging business, or Alcoa's can business. So I think low-single digit volume growth is pretty good. So, I was wondering, how you did that?
Dean A. Scarborough - Chairman, President and CEO: I'm not actually sure how to answer the question. I think…
Silke Kueck - JPMorgan: Did you gauge here?
Dean A. Scarborough - Chairman, President and CEO: We don't have any clear data yet Silke for the U.S. business. I do think that – so I can't really estimate that. We did have low-single digit sales growth in the quarter. We had been taking some market share in North America, in the last couple of quarters. So some of that is probably just a lapping factor, is that most of our market share gains came in the back half of the year. I think anything else would be highly speculative at this point.
Silke Kueck - JPMorgan: In terms of cost saving, what was the run rate in the quarter, $22 million or $23 million a quarter already, something like that?
Mitchell R. Butier - SVP and CFO: As far as the restructuring program?
Silke Kueck - JPMorgan: Yes.
Mitchell R. Butier - SVP and CFO: Net of some transition cost that we had in the quarter, we're up $15 million in the quarter, which would equate roughly to a $60 million, $65 million annualized run rate.
Silke Kueck - JPMorgan: Your goal is to get to $100 million by the end of the second quarter?
Mitchell R. Butier - SVP and CFO: Yes, by middle of this year.
Silke Kueck - JPMorgan: What is your target for RFID revenue in the RBIS business for this year? If I remember it right, maybe it was close to $100 million last year, and I was wondering what your targets were this year.
Mitchell R. Butier - SVP and CFO: So, I think we announced, we'd hit about a $100 million run rate by the end of last year and were expecting anywhere from 10% to 30% growth in RFID sales in total for 2013.
Silke Kueck - JPMorgan: The last question I have is on raw materials. It seems that, propylene prices are really coming up sharply again and as you noticed that decreases in the derivative materials that you purchased as well?
Dean A. Scarborough - Chairman, President and CEO: Well, we definitely saw some inflation, especially in in North America during the first quarter, which wasn't surprising given the input costs were going up during that period of time and…
Silke Kueck - JPMorgan: And all of that should have disappeared by now right?
Dean A. Scarborough - Chairman, President and CEO: Well, I hope it does, but still, there is a lag time between the time those input costs change and when we get a benefit or an increase, there's also a supply and demand factors that impact those rates as well.
Mitchell R. Butier - SVP and CFO: I think overall the story is very similar to what we said last quarter, so it is relatively stable and we are seeing some inflation in some of the specialty materials that we buy and some deflation in some other specialty items. But overall we are pretty much stable.
Operator: There are no further questions at this time. I will now turn the call back over to you.
Dean A. Scarborough - Chairman, President and CEO: Thanks. Well I'd just like to say I'm pleased with the start of the year. We delivered at the high end of our revenue range for the year, met our expectations for earnings and received regulatory clearances for the sale of DES and OCP. We are committed to meeting our long-term targets of 3% to 5% revenue growth and 15% to 20% EPS growth, while generating substantial free cash flow so that we can return more to shareholders. I'd like to thank the entire team at Avery Dennison for a good start to 2013. Thank you for joining us today.
Operator: Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.