艾利丹尼森 (AVY) 2008 Q1 法說會逐字稿

Welcome to the Avery Dennison first quarter 2008 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded, Tuesday, April 22nd, 2008.

I would now like the turn the conference over to Cindy Guenther, Vice President of Investor Relations. Please go ahead, ma'am.

Thanks, Tanya. Hello, everyone, and thank you for joining us. Hopefully you have had a chance to download our slide presentation that's titled "first quarter 2008 financial review and analysis." We filed that today with our 8K and posted it at the investor section of our website. Our discussion will generally follow this handout and refer to information contained in the slides, so I encourage you to have that in front of you as you listen to our formal remarks. As usual we have included references to GAAP operating margin in our news release, which includes: interest expense, restructuring and other charges included in the other expense line of our P&L, as well as transition costs associated with the Paxar integration. Those show up this past quarter in MG&A expense. Restructuring charges and integration transition costs tend to be fairly [different] in amount, frequency and timing. In light of the nature of these items we will focus our margin commentary on pretax results before their effect and before interest expense as detailed in schedules A3 to A5 of the financial statements accompanying our earnings news release for the quarter.

We have also included a reconciliation of margin change in slides 17 and 18 of the handout to help you see the impact of the Paxar acquisition on our gross margin and on operating expense ratio. I also remind you we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to uncertainty. Our recent form 10K addresses the most important risk factors that could cause actual results to differ from our expectations. Please see the MG&A and risk factors sections of that document for the discussion. Dean Scarborough, President and Chief Executive Officer, Dan O'Bryant, Executive Vice President and Chief Financial Officer, and Mitch Butier, Corporate Vice President, Global Finance, are here for today's call. And now I will turn it over to Dean.

Thanks, Cindy. As you know -- now know by our news release and financials we experienced a very tough start to the year. The challenging business conditions we experienced last year continued for a number of our businesses during the first quarter and in some cases we saw some further weakening. In particular, the slowdown in the U.S. retail environment hurt top line sales for both retail information services and office products.

In retail information services, sales related to the U.S. retail market have tracked a rather dramatic reduction in apparel imports. In Europe, the picture for this business has been a lot brighter. Even though the retail apparel market has softened in Europe, our share gains from new applications and programs moving offshore have sustained solid growth for that region. On the office product side our large customers continue to focus on inventory management in the face of weak consumer demand. We estimate that our customers' inventory levels are down close to 20% compared to a year ago. So we do expect that the worst of this phase of the business cycle is behind us.

The impact of the quarter though was very significant. Volume growth in the raw materials business actually improved a bit compared to the fourth quarter, both in North America and Europe. But the sales trend for our graphics and reflect business which tends to be impacted by advertising and promotional spending weakened considerably. Pressure sensitive profit margins were negatively impacted by weaker product mix across this segment as well as incremental raw material inflation. PSM margins had the biggest impact on our earnings plan for the quarter and we are moving fast to address this issue.

As we indicated earlier this year, we announced price increases for the raw materials businesses in the Americas that began to take effect in late March. We have been raising prices in Asia and we also implemented a price increase on products sold in the U.K. in response to the devaluation of the British pound against the euro. Last week we broadened our pricing actions in Europe to include the entire region, announcing a general price increase to take effect in mid June that reflects the overall cost inflation we had been experiencing in that market.

The difficult macro environment requires aggressive action on our part, both to weather the storm and to position ourselves for the longer term. It is our intent to come out of this cycle stronger than ever and we are implementing a number of initiatives to accomplish just that. First, we are driving the Paxar integration and expect to achieve over 3/4 of our targeted cost savings by year end. We are also in the planning stages of other productivity actions that will take place in the next couple of quarters. As previously noted, we are implementing price increases in many of our businesses to at least partially offset raw material inflation. We are finding new productivity.

Several key initiatives will drive incremental productivity gains over the coming months. The restructuring actions we undertook in 2007 will drive $45 million to $50 million of annualized savings when fully implemented, with close to 60% of the value resulting -- representing incremental savings in 2008. Some of the bigger projects contributing to this productivity include a raw materials plant closure in Australia, closure of several distribution centers in North America and outsourcing of our product lines to Asia. In addition to these announced actions, we continue to execute and plan for more productivity improvement including taking down a number of coating lines in various locations around the world, actions made possible to the enhanced productivity of other assets. Our strategy is to continue to move production to our widest fastest assets and retired older, less productive ones.

New projects announced in the first quarter are expected to drive about $7 million of annual savings when completed, and we have a number of other large projects still in the planning stages which will have a more significant impact on future productivity. While we are very focused on productivity we're also passionate about continuing to invest for growth. RFID, emerging markets and other growth initiatives continue to get the resources they need to drive value creation over the medium to long term. Our recently announced acquisition of DM Label is a good example. This deal has strengthened our front-end sales and customer service capabilities in greater China, while giving us much needed production capability for low cost, high quality interior labels for apparel. This was a private deal, so I can't disclose the terms of the transaction, but I can say that we expect the business to deliver a good return on investment within a couple of years. The return on total capital in 2010 will be close to our target for bolt-on acquisitions of about 15%. This deal demonstrates our commitment to capturing opportunities for growth.

At the same time, we remain highly focused on free cash flow. We are reducing our capital and IT budgets for the year given the slower economic trends. And we have already begun to see results from our efforts to improve working capital efficiency. Most of the improvement on that front still lies ahead. We have implemented new measures across the company to achieve our goal of better than 30% compound annual growth in free cash flow over the next three years.

Let me touch briefly on our revised earnings guidance for the year. At the analyst day in New York we said that calling the year would depend on several factors: the economic conditions for the balance of the year and their impact on the apparel business and back to school, our ability to raise prices and raw material inflation. Based on retail conditions in the first quarter which did not believe conditions will get better in the second half. In fact we believe customers will start to reduce inventories in the face of declining demand, putting additional pressures on revenues for the balance of the year. While we are confident about getting prices up, we do believe there will be a one or two quarter lag in recovering additional raw material inflation we are seeing. With that said, combining the actions I have outlined with normal seasonal earnings lift, sequential pricing improvements and some incremental benefit from currency, we expect a significant improvement in quarterly profits over the balance of the year. More important, the actions we are taking are designed to prepare the company for a more dramatic improvement in earnings and cash flow as the economy begins to improve.

When the economy turns, in fact if history repeats itself just before the economy turns, we expect to see a strong lift in volume growth. That was clearly the case for us in the wake of the 2001 recession, but we are not willing to stake our earnings guidance on the timing of that economic recovery. Our outlook essentially assumes continuation of the current macro environment with improvement for those levers that we can control. Now I will turn the call over to Dan for a more detailed review of our financial results for the quarter and our revised outlook for 2008.

Thanks, Dean. Let's begin with the financial overview on slides five and six of the handout that you hopefully have. Net sales were up 18% due to the benefits of the Paxar acquisition and currency translation. On an organic basis, sales declined about 2% compared to the prior year. I'll provide some color in just a few minutes. Operating margins before changes and transition cost declined by 200 basis points or about 150 basis points if you adjust for the addition of the base Paxar business. The year-on-year decline in margin reflects the carry over of the price reductions we experienced last year in the raw materials business, as well as raw material inflation, negative segment and product mix, and reduced fixed cost levers due to the soft top line. Because of seasonal factors, Q1 will always represent the trough in the year from a margin perspective. And that trough was deepened by the effects of the weaker than expected volume. We anticipate a substantial improvement in operating margin for the balance of the year which I will discuss more in the context of our guidance.

The short fall in our expected operating earnings was offset by the realization of a large tax benefit in the quarter. This change has two effects: first, we will be able to capture the cash benefit of deferred tax assets already on the balance sheet; and second, it will reduce the effective tax rate on future earnings. We now believe a tax rate in the range of 17% to 19% will be sustainable for at least the next few years reflecting geographic income mix, reductions in the statutory rates in a few countries as well as benefits of our tax structure.

Now let me walk you through the story on top line sales in slide seven. As I said, reported sales were up about 18% compared to the prior year. The Paxar acquisition added about 14 points over growth, currency translation added six points of top line growth and $0.05 of earnings to the quarter. Looking at organic growth, trends on a regional basis, ex acquisition sales in the U.S. declined by about 5%. In Europe sales before the Paxar acquisition in currency were up about 1%, representing a slow down from the pace we saw in the fourth quarter of last year. The raw materials business in Europe actually picked up its pace on a sequential basis, but we experienced a meaningful slow down in the graphics and reflective business in that region. Sales in Asia grew about 7% on an organic basis, also slower than Q4 of last year, due to the weakness in apparel exports to the U.S. that impacted retail information services. All of our materials businesses in that region remain strong, with organic growth in the mid teens. Sales in Latin America were roughly comparable to the prior year on an organic basis with sequential slowing across most of our businesses in that region.

Managing our operating margin in this environment is the big challenge. Slide eight provides a comparison of margins by business. Once again, for purposes of margin comparison we have added Paxar's results from last year into our own prior year numbers, and provided the back up for that adjustment on slide 18 in the handout. On this adjusted basis, operating margin declined by 150 basis points. Slide nine summarizes the key factors driving the change in company operating margin. Gross margin before Paxar integration cost declined by 40 basis points compared to the reported results for the prior year, notwithstanding the benefit of the higher gross profit margin of the business we acquired. Adjusting the prior year number to include Paxar, gross profit margin declined by 170 basis points, driven by a number of factors. The impact of price competition primarily the carry-over effect for last year's reductions in the roll materials business drove about 150 basis points of decline in gross profit margin. The combination of raw material inflation, negative mix and reduced fix cost leverage represented another 200 plus basis points of headwind.

Now we estimate that raw material costs were up about $12 million in the quarter compared to the same period last year. For 2008 we have raised our estimates for raw material inflation by roughly $15 million to a total of about $70 million. Partially offsetting the negative factors outlined, we generated closes to 200 basis points of gross margin improvement through our productivity programs including the Paxar and other restructuring actions.

Turning now to operating expenses. Before integration cost, MG&A increased by 160 basis points compared to reported results for the prior year. If you adjust the prior year number to include Paxar, the MG&A expenses ratio declined by 20 basis points which partially offset the gross margin decline. Now compared to the adjusted prior year absolute spending on MG&A was up about $5 million as productivity improvement and cost reductions largely offset general inflation. Corporate expense was down compared to prior year due in part to the roughly $3 million to $4 million of Paxar synergies that are reflected there each quarter. On average we continue to estimate that annual corporate expenses before restructuring charges will run about $40 million to $50 million with the potential for fairly wide swings from quarter to quarter. Looking at the effect of our ongoing restructuring efforts, Paxar synergies aside, we realized a total of about $11 million of incremental savings from restructuring actions. That $11 million in savings is net of about $1 million of transition costs that were incurred during the quarter.

Now the next few slides provide some details on our segments starting with pressure sensitive. Sales for pressure sensitive materials were up about 7% or roughly 1% on an organic basis. We estimate the unit volume for the segment was up about 5% to 6%, comparable to the pace that we saw in the fourth quarter. Volume growth was almost entirely offset by price and mix changes, which took about five points off the top line for this segment in the first quarter. While price competition definitely eased in North America during the first quarter, the year on year comparison reflects the carry-over effect of the aggressive market conditions we experienced in 2007, particularly in the second half of the year.

Now, let me give you a little color on our results by region, starting with our largest division within the segment, ex currency sales for roll materials business in Europe increased at a low single digit rate, about two to three points better than the pace we saw in the fourth quarter. As Dean said we announced a general price increase for this region just last week to offset the raw material inflation we have been absorbing, so we do expect the margin to improve for the region in the coming quarters. Unit volume growth picked up nicely for North America, with a portion of the improvement driven by sales to businesses inside the company. In terms of external sale, unit volume growth was more than offset by negative price in mix changes. We continue to expect improvement for the roll materials business in North America over the balance of the year. We are benefiting from the volume pick up, we are beginning to realize the benefit of the general price increase that took effect in March, and of course we continue to pursue aggressive productivity initiatives as well.

Returning to Q1, results Asia delivered another solid quarter with mid teens growth, while sales in South America were essentially flat with prior year. Our graphics and reflective business slowed considerably compared to the pace we saw in the fourth quarter. Frankly, we were pleased that the business was still growing late last year in the face of weakening economic conditions. The graphic business tends to be more economically sensitive than other parts of our portfolio, as businesses can delay promotional signage changes when things slow down. And we felt those effects in the fourth quarter, in the first quarter as well. Excluding restructuring and asset impairment charges, operating margins for the segment declined 170 basis points to 8%, as the negative effects of pricing and raw material inflation more than offset benefits from restructuring and other productivity initiatives. And what I meant to say about this business is that it was strong in the fourth quarter, stronger than we might have expected, but did slow in Q1.

Slide 11 sales for the RIS segment increased 138% almost entirely due to the Paxar acquisition. Taking out the effect of the acquisition and seven points of benefit from currency, sales declined by 1% on an organic basis. This is well below the combined historical trend for Paxar and RIS, with all of the weakness coming from a decline in orders for apparel shipped to North American retailers and brand owners. Sales from products destined for European markets remain very solid with close to 10% growth. Excluding transition costs and restructuring and asset impairment charges associated with the Paxar integration, operating margin declined by 330 basis points compared with the prior year of 1%. We attribute about half of this decline to reduced fixed cost leverage given the soft top line.

As you know, this is a highly seasonal business, so volume short falls in an already seasonally soft quarter have an unusually large impact on margins. We anticipate a significant sequential improvement in margin for the RIS segment as the second quarter is by far the seasonally strongest of the year. We have in fact seen a solid pick up in slow growth since late March, but we are cautious about the likely duration of this improvement, as we expect that U.S. retailers will be very conservative about building inventory in the face of soft consumer demand. In addition to the impact of reduced fixed cost leverage, higher employee related cost and raw material inflation added about $12 million of expense versus the prior year. Partially offsetting these challenges the benefits of the Paxar integration continue to build. Slide 12 provides additional detail on that front. We captured a total of about $17 million worth of synergy savings in the first quarter, up from about $11 million in the preceding quarter. About $3 million of those first quarter savings are reflected in our corporate expense line.

We remain highly confident in our ability to achieve our targets for cost synergy. Let me just remind you of the medium term outlook. In 2008 we are targeting $80 million to $90 million of absolute savings or about $60 million to $70 million in incremental savings over 2007, with over 75% of our total target in savings benefiting the run rate by the end of this year. By the end of 2009 virtually all of the actions will be completed, so we expect to see the full targeted annual savings of close to $125 million in 2010. Our anticipated one-time cash cost to execute the integration remain unchanged at about $165 million to $180 million, with about 40% of those cash costs being incurred this year and about 20% remaining to be paid in 2009. The permanent financing for the acquisition was completed in February in the form of a three-year floating rate bank term loan.

Now if you turn to slide 13, I will review the first quarter results for the rest of our businesses. Sales for office and consumer products were down about 9% or about 12% on an organic basis. About half of that decline was due to customer inventory reductions, which we estimate had a roughly $12 million impact on net sales in the first quarter. We estimate that our customers now have about 15% to 20% less inventory on hand compared to this time last year. Point of sale trends also weakened sequentially across virtually all categories as end use demand softened with the weaker domestic economy. In light of the sales decline, pro forma operating margin for the segment declined by 150 basis points to 11.1%. Sales for the other specialty converting businesses were comparable to prior year on a reported basis. Adjusting for currency, sales declined by about 4%, reflecting our decision to exit a low margin distribution business. RFID inlay revenue continues to build in line with our expectations.

Returning to the total segment level, the operating margin for this collection of businesses declined by 130 basis points, as the benefit of productivity initiatives and reduction in RFID losses were more than offset by reduced fixed cost leverage and cost inflation. As you can see on slide 14, our debt to total capital ratio at quarter end was about 52% up from prior year due to the Paxar acquisition, but down about one point on a sequential basis. Working capital improvement is an important priority for us particularly in the context of the current economic environment. As you see on the slide, notwithstanding the reduced earnings for the quarter, cash flow from operations improved nicely and there's more to come.

Cash usage for capital expenditures in the quarter was $38 million, with another $17 million used for software investments. These figures include spending related to Paxar facilities and integration actions which we have included in our total assessment of cash costs for the integration. In light of the soft market conditions we experienced in the first quarter, we have reduced our 2008 budget for capital and IT spending by about $25 million to a total of $170 million before investments associated with the Paxar integration.

Now let me walk you through our current guidance for 2008 earnings and free cash flow starting with slide 15. For the year we have adjusted our earnings per share guidance before restructuring charges to the range of $4 to $4.30 with the most significant variable being organic growth. Given the slow start to the year we have taken our previous assumption for our organic revenue growth down by about two points, assuming modest growth will be offset by negative price and mix changes. And note that while we have announced price increases in many of our businesses, the benefit of those increases in terms of top line growth is offset by the carry over of prior year reductions, as well as negative mix -- prior year price reductions, as well as negative mix. That said we do expect announced price increases to partially offset the $70 million negative impact of raw material inflation. The important positive contributors to our outlook include incremental cost savings from the Paxar integration and other restructuring actions, as well as savings from ongoing productivity initiatives including material cost out projects. Relative to our original expectations for the year, we expect incremental benefits from currency translation and the lower tax rate.

Slide 16 summarizes the key assumptions for our current guidance and the relevant differences compared to our outlook at the start of the year. As I said, operating margin will pick up significantly over the balance of the year compared to the first quarter. Even with our conservative volume outlook we expect operating margin in the second half of the year to exceed last year's second half margin levels. I have already outlined our revised guidance on CapEx and other cash investments. Taking these into consideration, along with our targets for earnings and working capital improvement, we remain committed to our original target for free cash flow before dividends in the range of $400 million to $450 million. And I will turn the time back to Dean.

Thanks, Dan. Notwithstanding the uncertainty regarding near-term demand trends, my confidence in the strength of each of our key businesses remains very high. We reviewed our key strategies for long term value creation at our March investor meeting, but let me just quickly recap our priorities. We will capture the synergy from the Paxar acquisition and begin to deliver on the growth promise as well. We will change the trajectory of our pressure sensitive business by driving accelerated productivity, price realization and continued growth in emerging markets, and we will continue to invest in growing new applications. In office products we intend to renovate and develop new products, but we'll focus on those areas close to our core and on projects that have rapid pay back. We'll accelerate our enterprise lean sigma efforts to improve productivity and to enhance our service and quality for customers. And we will deliver better cash flow this year from the reduced capital budget and focused targets on working capital improvement. Now we'll be happy to take your question.

Operator?

Thank you. (OPERATOR INSTRUCTIONS) One moment please for the first question. Our first question comes from the line of Jeff Zekauskas from JPMorgan Securities. Please proceed with your question.

Hi. On the sales decline for -- the organic sales decline for the company as a whole, the 2% number can you break that into price and volume?

Yes. Volume was up a couple of percent. Price and mix offset that volume. It was heavily weighted toward mix, the price in the quarter. The price decline we saw was primarily the carry-over for what happened mostly in the second half of last year. So, price and mix on a combined basis were around 2.5% to 3% for the entire company.

So if I understand what you said, so sales decline 2%, and volume forgive me, was up 2% then price mix was down 4%?

Well, the volume was up about 1% offset by about three points of combined price and mix. So quarter sales as we define it would be down roughly 2%.

Okay.

I got to just remind you too that with RIS being a much bigger part of the business, measuring price and mix in that highly customized business is a -- is an art not a science, so these numbers are not as precise as in the past when we didn't have that much of the business mix. N.

Okay. Secondly, if you just looked at [fasten] exclusive of the graphics and reflective business, was the operating income sort of up or down or flat year-over-year?

Definitely down.

Definitely down.

Right.

And in general --

It was down year-over-year and down sequentially.

Can you talk a little bit about the price dynamics in that business sort of what the first -- how the price dynamics either changed or didn't change over the course of the first quarter?

We didn't see too much impact on price. Most of the impact was on the mix. So a lot of did growth that we saw in terms of volume tended to be in lower margin product categories, and we did see a little more raw material inflation than we had anticipated especially in North America.

And then, lastly on the RIS margin, like order of magnitude, by what amount of operating profit did RIS miss your own target in the quarter?

Yes, Jeff, they only have about 10% of their operating profit in the year in the first quarter. So, obviously a small mix in market in such a soft quarter makes a huge difference in margin, so it was in the I don't know low-single digit millions.

Low single digit millions. So the major miss from your point of view was all -- was mostly PSA.

Pressure sensitive had the biggest impact on the margins, and of course with office products, with the inventory reductions we had, it also had a knock on effect because that's our highest margin business.

So the reason that RIS doesn't have a greater operating profit number in the first quarter given all of the cost savings that you're achieving has to do with its unusually low volume number, and that will presumably we will see the cost synergies when the volumes seasonally pick up?

Yes, here is a couple of factors, Jeff. So we have, first of all, in this economic environment, what we see is retailers delaying decisions on ordering later I would say than normal, so I think we are definitely seeing a shift into the second quarter from the first quarter, just as we did last year. We saw a shift of ordering from the third quarter into the fourth quarter. So I think the seasonality was magnified. We -- volume leverage was a big part of that. There's also a printer systems business in part of retail information services, I don't want to make this too complicated, that sells printer. As you can imagine hardware sales in terms of selling printers isn't exactly robust right now. It is mainly a U.S. business. And then we did see some inflation in terms of raw materials and labor costs in south China.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Ghansham Panjabi with Wachovia. Please proceed with your question.

Hey, guys.

Hi.

The growth in Asia still seemed very solid. Just curious as to whether you have seen any change in customer sentiment there. It seems like the rest of your businesses on a geography basis are seeing signs of slowing, or at least have slowed. Just wondering what the sentiment overall in Asia.

Yes. Let me -- if we pull out RIS, because obviously a lot of apparel comes from Asia for the U.S. market. If you pull that out, the other businesses in Asia had a great quarter. South America is actually just fine. The issue there was about a two-week strike in Argentina, where they basically shut down the country and we didn't see much of a lift. I expect that to come back. And western Europe was also strong again for the materials business. So, so far customer sentiment in Asia and most emerging markets actually is still good.

Okay. And just in terms of your comment on your pricing initiatives and the backdrop of increased inflation with oil, close to $120 now, should we expect then that margins in the second quarter are are not as weak on the year-over-year basis as the first quarter, but still down year-over-year and start to see a little bit of acceleration in the back half. Is that how we should model it?

Yes. As I said in my prepared remarks we expect the margin to improve significantly. The biggest single thing that happens into Q2 is we anticipate sales picking up in the range of $150 million over Q1. That's the significance of the seasonality that is a fact of life in our business right now. On top of that we start getting price increases through that help margins more productivity initiatives both out of Paxar and other sources billed as the year goes by. So we definitely expect to see margins improve year on year basis in Q2 versus what we saw in Q,1 and continue to pick up as the year goes by. By the back half of the year we expect margins to be running at a rate about where they were prior year. Let me adapt one thing. I said last year we had a pretty solid with a pretty high operating margin. That's the comps there are going be tough in the second quarter by the back half of the year clearly the margin will be up to where they were last year or better.

Okay. Thank you.

One other thing, Ghansam, and that is the difficulty for us timing back to school shipments for office products. We don't know, but on -- I would bet that most of our customers are going to be pretty conservative and bring most of the volume in the third quarter rather than the second quarter.

Thank you. Our next question comes from the line of George Staphos with Banc of America Securities. Please proceed with your question.

Thanks, hi, everyone.

Good morning.

Just to clarify then on Ghansham's question, 2Q margins lower than last year and presumably higher in the second half. Is that what you are saying?

I am not going to get completely specific, but you remember last year we had some volumes that shifted out of Q1 into Q2 that helped the margins. We had high margins so year on year comps in Q2 are tougher, but we expect to see margins improve in the back half of the year will be better than prior year.

Fair enough. Now, in terms of office product volume, what are you seeing early in 2Q? Can you relate that to us?

Yes. Right now, George, what we are getting orders for back to school. We expect back to school to be down versus prior year probably in the low-single digits. We are getting nice orders now, but we never really know until June when people will want to ship, whether they want it in Q2 or Q3.

Okay. But if we look at either RIS or office products broadly speaking and realizing it is difficult to measure this in RIS, pricing really wasn't the factor, it was just volume and/or reduced operating leverage. Is that correct?

Yes, and that's exactly right.

Okay. I guess the last question I had for now and I'll turn it over. If I take out the tax benefit from the first quarter and I am assuming that wasn't originally your guidance anyway, but your run rate earnings was more line $0.60 in 1Q. To get to $4 or more you have to ram very, very quickly in the next several quarters. You laid out what the factors are: productivity, seasonal improvement in volume etc. Of those, what are you banking the most on? Is it the pricing, is the productivity? Is it the sequential improvement in volume, because there's a big gap in this chunk here to make up.

A lot of it is volume, George. Remember that the -- we didn't see a quick start to the apparel ordering season. So I am making the assumption that some of the volume has shifted from Q1 into Q2, and volume is the probably the most important factor going forward.

Okay. And you have seen a bit of a pick up in RIS, but it's really the volume in RIS that's going to --

We are booming right now. We just don't know how long it is going to last.

Okay. All right. Thanks, guys. I will turn it over.

Thank you. Our next question comes from the line of Reik Read with Robert W. Baird and Company. Please go ahead.

Hi, good afternoon. Can you guys just go back on the pricing side of things? It doesn't sound like pricing bothered you too much in this quarter, but you do have to put through some price increases. Can you talk a little bit about the challenges associated with implementing those price increases and what the lags might be?

Well, the -- we are waiting -- we have announced a price increase for office product that is goes into effect on the first of July. That one will go through. We have implemented a price increase in our pressure sensitive business in North America and what we are seeing right now is that has gone through. That has been successful. We have also implemented increases in Latin America and other parts of Asia, and now we are implementing them in Europe. I am confident we will get our price increases. And that is because of the -- basically because of the additional raw material inflation we are seeing that is impacted our entire industry, and generally in times, when we see rising raw material costs, we see rising prices. So, I do think that there's probably a little more lag time than we would normally see when we are raising prices. Part of it, frankly, is just a tactic to make sure we get the price increases and we are delaying it so that we minimize any type of share loss.

Secondly, I think we are going to see more inflation in the back half of the year. We haven't heard any price -- additional price increase announcements right now, but I think it is going to happen given where oil is, and given the fact that in the U.S. I think the big surprise to us was paper increases being much higher than we had anticipated, and some of that frankly is because those mills are selling more product overseas and just are allocating less capacity to U.S. markets. So I think there is going to be a lag time.

Let me also clarify, Reik, we did see some negative price impact in the quarter beyond just mix. Mix was most of it, but the business has been feeling over the last few quarters the most price decline is roll materials business in North America. It raised prices effective in March. So we saw that slow down and start to turn the other way and other move toward price increases too. But on a net basis, we still saw some incremental price decline in Q1 over where we were just out of a slower rate than Q4 was.

Okay. But having said all of that, you guys feel like second quarter you are going to get a good chunk of it and most of these will be in the third quarter in total.

That's right. We get relief if Q2 and more in Q3 and Q4. That's right.

Our price increase in Europe goes into effect in the latter part of the second quarter. So there we should see the impact in Q3 and Q4.

Okay. So with respect to the productivity you are talking about do you have a sense for in terms of milestones? I mean you are talking about achieving more than you have before, but in terms of milestones, is that back-end loaded or how do we think about that through the year?

Well, it builds as the year goes by. As we talked in the earlier some of the carry-over from programs that we did in '07 benefiting us now. We have other actions we are taking some that have been and some will be announced. In our cash flow guidance we've got some restructuring money still in there, so we anticipate doing more things as the year unfolds and announcing those as we go and getting some significant productivity by the fourth quarter out of these new actions. So it builds.

Okay. And then just one last question, can you talk a little bit about what's driving the weaker mix in [PFM]?

Yes. Some of it is we are seeing volume growth in food and beverage categories on glass containers, it tends to be rigid films, they're less expensive than conformable films you will see in the health and beauty aid category. And I think some of it is just simply cost savings as customers are figuring out ways to use less expensive versions of coated papers than they are before on the paper market.

Great. Thank you, guys.

Thank you. Our next question comes from the line of Mark Kurland with Bear, Stearns. Please proceed with your question.

Yes. My question is -- was asked by I think George Staphos about the back-end loaded nature of the year. Is that -- I just want to make sure that seems to be like the answer that you guys gave that you expected much greater strength in the back half than in the second quarter and such. Is that fair?

Well, on the sales line we are really not anticipating a pick up as we said before, and that is a little different from some forecasts I have seen anticipating economic pick up. We haven't done that. What we are talking about is getting more out of integration savings as the year goes by, getting more of our productivity programs put in place, and then the price increases building that are happening basically between March and June. So on a margin basis it does build as the year goes by, but that's not driven so much by volume. We get a big spike between Q1 and Q2 and the volume levels remain fairly constant the rest of the year.

Okay. But you would have more revenue, assuming you get the price increases.

Yes, over the Q1 base, just seasonally our volume picks up by on average about $150 million a quarter, and on top of that, or included in that number is some price which helps the margins.

Just one question regarding price. Are you guys getting any resistance, you always get resistance, but what kind of resistance are you finding with your customers?

Most of them, they pick up the news paper and everything else they buy is going up in cost. So there's always -- no customer loves getting a price increase, on the other hand, they understand it. So, I think that's why we were successful getting it in the U.S., and that's why I am confident we will get a price increase in other parts of the world as well.

Okay. Thanks.

Thank you. Our next question comes from the line of John McNulty with Credit Suisse. Please proceed with your question.

Yes. Good afternoon, guys. Just one or two questions, looking back to 2001 into 2002, can you tell us what the RIS first quarter margin would have been then? I know you didn't break out the details, but can you give us some color as to how things looked in the last recession and if something is different this time around?

I don't think I have those numbers in front of me, but this is what tends to rebound the most after recession, I mean we do across the company, tend to be pressure sensitive as people build inventories. We would have to go back into the archives.

Yes, I think that if you go back that far too, our business in RIS was about $200 million in sales and the mix would be radically different from today. I'm not sure the correlation works, and haven't got an answer for you, John.

Okay. But I guess maybe from a different way, is there anything that is different that you are seeing in your markets right now from what maybe you would normally have expected going into a recession?

Well, yes. I think the impact on apparel sales is more dramatic. This is -- I mean, talking to customers, they said, and I am talking about people who sale apparel, they say this is the worst retail recession they have seen in 20 years. So I think it is more severe, and I think it is because the U.S. consumer is faced with not a lot of extra money and what money they have is going to things like food and fuel, which are going up pretty dramatically in price. So those things like apparel, which you don't have to buy every day, are simply getting deferred right now. And that is the big concern from all of the apparel guys. And I don't remember that being the case in 2001. I remember the apparel business going down about as much as the normal economy did. So this is different.

Okay. Fair enough. And Dan, you had mentioned sequentially normally you would see kind of a seasonal swing in materials of revenues of about $150 million. I assume that the price increases that you have put through would be additional to that. The price increases say from late call it late March and even some of the ones that you are putting through in the second quarter, that would be if it is a normalized run rate you'd be tacking on top of that, the price increase. Is that fair?

I don't think our ability to forecast the revenue range is quite that precise. So, what I would say is that we should average about $150 million a quarter in sales above the Q1 rate, and the richness of that sales mix ought to be good because we are getting price built into it. But I wouldn't take that $150 million and add the price on top of that, no.

Okay. Fair enough. That's all I need, thanks.

Thank you. Our next question come is a follow-up question from the life of Jeff Zekauskas with JPMorgan Securities. Please proceed with your question.

I have a couple of questions. What more is to be done in making the RIS business more efficient this year? If you can review what it is that you have accomplished and what it is that is to be done.

Yes, I don't know if we are going to go through specifics. Are you talking specifically on the integration?

Exactly right. How many plants do you plan to close, how are plants are closed right now, how many more do you have to go, when will it be done?

Well, we expect to be 75% complete or more than 75% complete by the end of the year. Again, the corporate costs are done. A lot of the front-end costs and the overlap are completed certainly in the U.S. and in Europe. We have -- we still have some plant closures we need to get done this year. We are still -- in the first quarter we are still in the midst of your our Latin American business. And so, we have got Mexico, El Salvador, and the Dominican Republic ought to be done by the end of the second quarter, and then there's some other units in Europe we are making some changes. So I don't know if I want to be more specific than that because some of these have not been announced yet.

In terms of -- Dan spoke about incrementally another $150 million in revenues in RIS in the second quarter.

The whole company number.

Forgive me, for the total company. For the RIS business, though, the numbers should still be pretty big. I guess maybe half of that would be RIS?

Yes, it's a big part of it. It's the most seasonal. But we also get back to school pick-up in the office product business, but, yes, a good half of that or close to that is probably a little less than half, but close to half of that is RIS.

So what are the incremental margins in RIS like? You talked about all of the penalties you had because of high overhead. Are the incremental margins 30% or 20%, or how do you think about that? You talked about a substantial pick up in the second quarter. Can you quantify that at all in terms of margins?

Well, the variable margins within that business are actually higher than the ranges used throughout, but it obviously depends whether it is the Q2 or Q4 peak depending on the mix that you see within that business. So, yes, they are higher now on a variable basis.

Okay. Thank you very much.

Thank you. Our next question comes from the line of George Staphos with Banc of America Securities. Please proceed with your question.

Thanks. Hey, guys. To conclude maybe piggy-backing first on Jeff's question and RIS. If I just very, very simply look at the EBIT this year in the first quarter and look at last year's, and I tack on the synergies that you say you are getting, obviously there's a deficit somewhere, you talked about volumes being down. But you also mentioned earlier that volumes were only off low single digits dollars relative to your forecast, if I heard you right. Are you seeing decremental margins of 40% to 50% right now, or is there a base RIS Paxar split that we're seeing much worse performance in one of the businesses versus the other? If you could just help me fill in some of the holes there, I'd appreciate it. Thanks.

Well, in the first quarter I think the main thing to recognize is that the normally seasonally low business was really compounded by the short fall in revenues, and that double effect had pretty dramatic impact on the margins for that business in the quarter. That we do get substantial recovery on as we go right into Q2.

Okay.

There are mix issues too. We have customers that are trading down in terms of the kind of things that they're ordering, so there's a top line and a margin impact from the downward mix shift as retailers become sensitive about their cost and so on.

Dan, is it possible to [parset] at this juncture between your old business and Paxar, or not really anymore?

We really can't do that, George. They're so mixed together and production has been comingled, the front end has been comingled, the IT systems. It's -- I wouldn't say it is a single business now, but it is a lot closer than it was six months ago.

We had an abnormal impact in the first quarter from two other I would characterize them as "nonapparel related businesses," our printer systems business as I mentioned before.

Okay.

And our fastener business, the plastic.

Cable tie.

And cable tie which unfortunately a big chunk of that in automotive which had a really bad quarter. And that actually was half of our short fall to our plan anyway in the quarter. So --

Those two items --

Sorry.

Those two items combined.

Yes, the areas outside of the apparel sourcing business.

Got it. Okay. Now, second question, how do you prevent as you are trying to raise pricing, two things: one, your customer is trying to further go downstream or lower in price mix, and mix, so as to offset the inflation coming at them? Secondly, you had mentioned earlier they too see the cost rising, they know you're going to have to raise pricing. How do you prevent against prebuying, which is inflating demand relative to what is really occurring in the market right now?

Yes, on the prebuying we don't really see very much of that, George. It is very, very difficult for -- I will just go to the pressure sensitive side of the house --

Okay.

-- to they're in a custom business most of them so they have unpredictable demand, so they're buying on a kind of per order basis. So if we did see prebuying we might see a week, maybe two weeks, across some customers. So it is really a very minor amount. And remember the products we make are fairly bulky, so you have to actually store them somewhere and most label converters don't have a place to do that. So I am not really anticipating so much on those issues.

What about --

As far as customers how they decide what materials they are going to use for labels, that's a very difficult thing to impact. So what we do do is we tripled our rate of product reengineering so at least on an ongoing basis, we work on the productivity side to make those lower price products more profitable.

Okay. You mentioned glass volumes as being strong and beverages and that's one of the reasons you are seeing mix lower. Is that true?

Yes, so we have seen more business come over on the beer side.

Okay.

And other food products, so we have captured more new applications.

Can you mention how much your volumes might be up there because at least from the industry data that we see, volumes in beverage and food are down significantly in glass this year? So you think it is share gain?

Some of it is share gain, but some of it we have captured some applications that weren't pressure sensitive before. And so, I mean, it is in I don't know for sure, high-single or low-double digits for the quarter. So it's quite good. I don't think you can attribute that to any sort of glass bottle volume that's out there. Remember we have a really small share of beverage.

Okay. So, it is effective mix but not really because it is not that large is what you are saying.

Well, I thought maybe you were trying to attribute glass container volume out there to us. It is basically we are capturing an ever-increasing share of glass bottle decoration. More is moving to pressure sensitive. That's continuing to be a growth story for us.

The mix point, George, is that we did see improved growth in these businesses in the U.S. and Europe in the quarter. A lot of that came from the areas Dean is talking about, which is not as rich of a mix as we would normally see in the films area, for example.

Okay. All right. Last question, and I will turn it over, and good luck on the quarter. The deferred tax in 1Q were minus $20 million. I wonder if that is related to the tax benefit you saw on the P&L, and if you can just reconcile that or at least give the additional color. Thanks, guys.

Yes. There is, you can see the move in our -- on our balance sheet in the deferred tax line. This will be a cash benefit. We get some of that cash benefit in the current year, probably about 1/3, and the rest of it will spill into future years. So this is real cash benefit, it is just not as immediate as the entry would reflect.

Okay. Thanks very much.

Mr. Scarborough, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks, sir.

Okay. Thank you, everyone, for joining us. Bye-bye.

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.