艾利丹尼森 (AVY) 2010 Q1 法說會逐字稿

Welcome to Avery Dennison's earnings conference call for the first quarter ended April 3, 2010. This call is being record and will be available for a replay from eleven AM Pacific Time today to midnight Pacific Time April 30, 2010. To access the replay, please dial 800-633-8284, or international callers, 402-977-9140. The conference ID number is 21438866.

I would now like to turn the call over to Eric Leeds, Avery Dennison's head of Investor Relations. Please go ahead sir.

Thank you. Welcome everyone. Our discussion today will reference the earnings release that we issued earlier, along with the slide presentation titled First Quarter 2010 Financial Review and Analysis. Both documents were furnished today with our 8-K and posted at the Investors section of our website at www.investors.averydennison.com.

We remind you these results are preliminary, as we have not yet filed our 10-Q. Our news release references GAAP operating margin, which includes interest expense, restructuring and other charges included in the Other Expense line of our P&L.

Also referenced are transition costs associated with acquisition integrations. Restructuring charges and integration transition costs tend to be fairly disparate in amount, frequency, and timing. In light of the nature of these items, we'll focus our margin commentary on pre-tax results before their effect and before interest expense. This detail is in schedules A-2 to A-5 of the financial statements accompanying today's earnings release.

We also remind that you we'll 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. The Safe Harbor Statement included in the documents that we provided today, along with our 2009 form 10-K, addressed certain risk factors that could cause actual results to differ from our expectations.

On the call today are Dean Scarborough, Chairman, President and CEO, and Dan O'Bryant, Executive Vice President and CFO. I'll now turn the call over to Dean.

Thanks, Eric. The first quarter was an encouraging start to the year. While the results benefit from comparison with one of our toughest quarters, we saw a meaningful increases in demand, especially from Raw Materials, Graphics, and Reflective Products, and Retail Information Services. Now volumes are not all the way back to pre-recession levels, but we are pleased nonetheless.

We saw a solid top line growth across all regions, and we had double digit growth in all emerging markets. Gross profit margin was more than a point better than the fourth quarter, and more than four points better year over year. The operating leverage from restructuring and other productivity initiatives enabled gross margins more than 250 basis points above 2008 levels on 5% lower sales. Operating margins before restructuring charges and other items improved 170 basis points from the fourth quarter in 2009.

We do see raw material inflation accelerating. We did raise prices in the first quarter, but it wasn't enough to offset the inflation that we felt during the last two quarters. We have announced price increases going forward in many of our businesses, and while we do expect that we will cover the raw material increases, there likely will be some lag.

Turning to the businesses, the Pressure Sensitive segment delivered very strong margin growth. Raw materials momentum in the fourth quarter continued, especially in emerging markets. Our end user marketing programs are creating a pipeline of new opportunities for decoration transfer, which will enable above market growth, as we continued to implement those programs.

Graphics and Reflective Products benefited from restocking to accommodate a modest increase in promotional spending. This division has also launched two new products, a new cast film that has superior conformability, and new reflective sheeting that makes signs more visible at night.

Retail Information Services experienced increased demand and benefited from comparison with one of their most difficult quarters, the first quarter of last year, when retailers dramatically accelerated inventory destocking. What we see is apparel sales beginning to increase, and while it is too early to call a pipeline refill, because retailers are still watching their inventories closely, we are definitely seeing an uptick in volumes as retailers are attempting to catch up with those sales increases. This year we actually started strong, and we are continuing to see solid demand right through the second quarter to date.

Office and Consumer Products was the exception to our margin story in the quarter. End demand for our products is still declining, but at a slower rate.

As most of you know, we have new competition in the Labels category, and will spend some money to defend our strong brand position, as well as continuing to increase our spending on innovation in new areas. I'm confident we'll continue to be successful in our Printable Media business, because we have excellent relationships with customers, including an outstanding service record and recognized expertise in category management, and the Avery brand has very strong consumer brand equity. In fact it drives traffic to the stores, and our customers understand this.

We'll be increasing our investment in demand creation, including TV and radio advertising, which you'll see later this year, and you'll also see us begin to launch several new products late this year and early in 2011. The RFID business continues to develop well, with demand up more than 50% from one year ago. There continues to be strong interest in item level marking in retail, but we also see strength in other applications as well. Now Dan will go over the quarter in more detail.

Thanks, Dean. I'm going to start with slide five if you have the handout that we've provided. Sales in the first quarter were up organically about 7%, contributing strongly to the improvement trend of the last three quarts. We experienced solid volume growth across all regions and in almost every key business across the Corporation. Emerging markets in particular continued to surge ahead with Asia leading the way growing nearly 30% in our Materials businesses in China. Emerging markets represented over 35% of our total sales for the quarter.

Operating margin also improved, due to the continuing positive impact of restructuring and productivity initiatives. Margins were up sequentially as well. Volume, restructuring, and productivity initiatives more than offset the net impact of raw material inflation and selling price changes. For the year, we expect inflation in pricing to be a headwind to margins, which I'll discuss later in the outlook section.

Sequentially, MG&A was roughly flat, although in dollars and as a percentage of sales, it was up versus last year. In the first quarter of last year, we were in the throes of the economic decline, running MGA -- and MG&A in severe austerity mode, well below what is healthy for the business.

In the first quarter of 2010, variable costs associated with higher volume, along with the increased growth related and infrastructure investments, were partially offset by restructuring and productivity initiatives. Currency translation represented a $10 million increase versus prior year. And for reasons that Dean mentioned, namely increased volume in the benefits of restructuring and productivity, gross margin for the Company is up in the first quarter, both year over year and sequentially. And looking ahead, and we'll reiterate this in our Outlook section, we expect both gross margin and operating margins to come under pressure from raw material inflation in the coming months.

As we discussed in January during our fourth quarter conference call, we began to see some inflation in the fourth quarter, and started raising prices in January. The pace of inflation is accelerating, and we are in the midst of another round of price increases in most geographies. So while margins in the near term may come under some pressure, we expect our prices to cover the inflation once they are fully implemented.

Our Pressure Sensitive Materials segment delivered double digit margins in the quarter, with both volume and productivity actions contributing. Emerging markets were strong again, accelerating further off last quarter's positive numbers. Within the Pressure Sensitive segment, our Graphics and Reflectives business delivered its highest revenue since the third quarter of 2008. We are seeing some restocking here, and we'll need a few more months behind us before we declare a trend. The margins in this business have improved dramatically due to the volume and cost reductions we have driven over the last year.

In Retail Information Services the big margin story is the 440 basis point improvement over last year's first quarter. This reflects over 45% in incremental operating margin year over year, consistent with this segment's high contribution margin. First quarter revenue comps in RIS, benefited from increased demand, due in part to significant inventory destocking among apparel retailers that occurred in the first half of 2009.

The inventory to sales ratio and in apparel remains at long-term lows and even dipped further in February, as sell through improved ahead of inventory restocking. There is evidence that while the consumer hasn't come back completely, retail sales of apparel are up, which is great news for the sector.

Now the second quarter is the best indicator of retailer sentiment, and we are hopeful the current trends indicate some inventory rebuild going on now and in coming months. The order pattern in Q1 was strong and as Dean said, continued into April.

Looking at Office Products, the decline in sales in the first quarter reflected weak end market demand and changes in customer programs. This was partially offset by lower inventory destocking in the first quarter of 2010, compared to that in the first quarter of last year. Office Products operating margin declined in the quarter, due to increased spending related to customer programs, as well as higher investment in consumer promotions and marketing. Dean has covered the competitive dynamics in this segment, so suffice it to say that our margins will remain under pressure here while we invest and defend.

In our other Specialty Converting businesses, margins swung from negative to positive. Here too, there is evidence of restocking, but it will take some time to see what the ongoing trajectory will look like.

As you know, the Company's cash flow is seasonal. We generally use cash in the first half of the year and generate all of our free cash flow in the second half. This year should be no exception, particularly with the growth in volume we are experiencing early in the year.

On slides 14 and 15, we provide a list of factors that we believe will contribute to Avery Dennison's 2010 financial results. Based on the factors listed and other assumptions, we expect reported revenue growth of 5% to 7%, and adjusted earnings per share of $2.50 to $2.80 per share. We estimate free cash flow in 2010 of $300 million to $350 million.

Comps obviously become more challenging as the year progresses, but we are pleased with the strong start to the year. Just as we did last quarter, we are listing what we currently believe to be some contributing factors to 2010's year over year changes of the P&L and free cash flow. The key factors on slide 14 that are in our April guidance assumptions, and that are different from what we said in January, are as follows. At current rates, currency translation represents less than a 1% benefit to reported sales growth, and neutral impact to EBIT.

We now expect approximately 3% or $75 million in new inflation and raw material costs, partially offset with the benefit of our global sourcing strategies, material cost productivity, and price increases. This is about double the inflation we expected coming into the year. And we will incur additional expenses for the rest of the year focused on innovation and demand creation in our Office Products segment. These factors, plus the others listed on slide 14, get us to our 2010 EPS guidance of $2.50 to $2.80 per share.

While we are not giving quarterly guidance, there are a couple of comments I can make about Q2. First, in Office Products, back-to-school season has been shifting earlier in some years and later in others. We expect this year's back-to-school to occur later, resulting in some sales shifting from the second quarter into the third. In the second quarter, inflation is outpacing our price increases, as it has since the fourth quarter. This will keep some pressure on Q2 margins.

And as mentioned, free cash flow should again be strong in 2010. We are expecting to generate between $300 million and $350 million of free cash flow. Our primary focus for the use of this free cash is to reduce debt. As you know, we completed a $250 million bond issuance this month and we will use the proceeds to pay down our term loan. If the economy cooperates, we would expect to be in a position later this year for the Board to consider an increase in the return of capital to shareholders in the form of increased dividends, share repurchases, or both.

And before opening the call to questions, let me wrap-up with one more comment. We are pleased with the trajectory of our businesses, and though the economy is moving in a positive direction, we are not yet back to 2008 levels. Nevertheless, with sales still down more than 5% from the first quarter of 2008, we exceeded that quarter's pre-tax profits by over 13%. With all the actions we have taken over the last year, we have generated a new level of operating leverage and have continued investing for growth at the same time. And now, we'd be happy to take your questions.

(Operator Instructions). Our first question is from the line of Ghansham Panjabi, Robert W. Baird. You may proceed.

Hi guys, how are you?

Hi Ghansham.

Was there a negative mix in the Office Products business on a year over year basis? Core sales were down 2% but operating profit was down north of 20%, and this is presumably a lower cost structure. So just trying to understand the disconnect between the two.

I don't think there was much of a mix impact, Gahnsham, we are investing money, in both innovation in the space on new product development; we are also spending some money to improve our marketing programs with customers, so that is really the major impact on the quarter.

Okay. And in terms of the competitive environment for the RIS, business, there is, I think one of your competitors in particular that seems to be targeting more aggressively. Curious on whether this has impacted pricing?

I don't think so. Right now we are in a situation where the order books are pretty full, I think not only for us, but across the whole industry. My sense is that retailers are trying to catch up a bit, and as a result, the focus is on getting product, rather than reducing costs.

Okay and then finally, Dan, you know you gave us some parameters on 2Q. But isn't it also true that RIS, typically is stronger 2Q versus 1Q?

Absolutely. First quarter is the weakest quarter in this business seasonally, and we are feeling the effect of the typical seasonal order surge right now.

Okay, thanks.

Our next question is from the line of Mr. George Staphos Banc of America Merrill Lynch. You may proceed.

Thanks, hi everyone. Good morning. I guess the first question I had, when I [parse] some your comments along with the guidance commentary at the back of the PDF, what I'm winding-up with is that maybe inflation this year net of whatever pricing you get in costs you about $0.20, $0.25 from what you would have otherwise earned. Would you provide any additional color, or agree or disagree with that number?

Well I think I'm not going to put a number on it, George, because it's tough to predict exactly the rate of inflation and how fast you can get your prices up. But just as we had said in the January call, one of the concerns we had was if the economy was rebounding quickly, that we would see an imbalance of supply and demand in some raw materials, and that is exactly what we are starting to experience now. So we'll get the prices where we need to get them, but it's awfully hard, as you know, to match that quarter for quarter.

We saw a little bit of that in the fourth quarter last year, and we managed to catch up somewhat in Q1, and we are raising prices now. So fundamentally, that is, from my perspective, the biggest drag on the year. I think in the long run it won't be a drag, but within a year's context it will be.

I would add too, George, that in the low end of the guidance range we gave versus the high-end, the raw material inflationary impact and our ability to cover pricing early versus late is the key factor in moving us between the two ends of the guidance range.

I think the other thing George, too, don't forget we are going to be spending some more money in Office Products, as part of our offense as a good defense strategy in that sector. So that's a little bit more than we had anticipated in the beginning of the year as well.

Okay. Appreciate that. Maybe as a follow on to that, within your inputs, are you seeing more pressure at this juncture from resins and related products, or are you seeing it more from especially papers?

Well, it depends on the categories. Let me be specific. Right now acrylic monomers are pretty tight. And while it has not impacted our ability to ship, we have had to go out in the spot market and buy some product to ensure supply, which is obviously a little more expensive at this point.

Pulp is also still high, and then especially, because I think after the earthquake in Chile, you know demand is up a little bit as well. There is a little bit of tightness there, as well as in the specialty paper category, especially for liner. We'll see how long that lasts, but it is a little tight in a few categories. A lot of producers frankly cut way back last year when demand was down, and now we are feeling the other side of that equation.

Yes. Hopefully, there should be some relief there, given some things that we have seen, but I'll leave my comments there. I guess the last question I have and I'll turn it over, specifically within Europe, what kind of trends have you seen with either RIS, or Pressure Sensitive Materials? Have you seen some improvement in volume from what you might have been seeing earlier in the quarter year on year? How have trends progressed? Thank you.

Yes, eastern Europe's actually been quite strong, and so that has brought up the average. If you look at Europe as the average, actually the organic growth rate was similar to the US, but if you pull out eastern Europe, the number drops. I think from an RIS perspective, retailers in Europe are not seeing the increases in demand that US retailers are. I still think they are a little bit lagging behind.

The Pressure Sensitive business actually had a pretty good quarter in Europe in Q1, so I'm not sure what that says yet. But my sense is, we are still not the at the same level of as robust a recovery as we see in North America.

Hopefully it means RIS, will pick up in six months right?

Be great if everything in Europe picked none six months.

Okay, thanks. I'll turn it over.

Our next question from the line of Jeffrey Zekauskas from JPMorgan. You may proceed.

Hi, this is Silka Koopf for Jeff. How are you?

Hi Silka.

A couple of questions. On the Pressure Sensitive Materials side, where are you in terms of a price increase? It seems that some price increases were announced early in the year, and so can you just talk about what has been announced, and where you are trying to get to by year end?

We started raising price as you said in January. We had a little bit of negative pressure in some markets in the late stages of the third quarter into the fourth quarter. Obviously the inflation has reversed that trend, and we started raising them in the first quarter.

As the inflation has accelerated we are accelerating additional price increases. So most regions of the world are seeing a second round happening as we speak that will roll-out during the second quarter. I think all the competition's feeling the same inflation, and it seems that most players in the market are raising prices at the same time.

Okay. And when it's all implemented, which may take until like [in the] next year, should that lead to like 1% higher prices or 2% higher prices? It seems that's the [order of magnitude] you would need to [offset] a 3% raw material head.

Well that's right. We expect to fully cover that on a dollar basis. That is going to add a couple of points at least to the revenue line. It is not all of our businesses here that are experiencing inflation the same way, so it will be higher in our Materials sector, obviously but lower in some other parts of the business that don't get hit with inflation.

In terms of volume growth, these are very nice results in that Pressure Sensitive Materials business. Do those seem sustainable to you, given that there may be some - - I know it is hard to quantify whether there is seasonality in any quarters, but normally it seems that the second and third quarters always do a little better than the first and the fourth. So are the current volume rates that we see sustainable going to the next quarters?

That is sort of the big question. I definitely think we saw some inventory rebuilding, restocking, and certainly the comps were a lot easier than normal in the first quarter. We do see continued strength into April.

And I mentioned earlier in the call that we have been adding a lot of marketing capability to call on end use segments, so our pipeline of forward projects continues to grow. So I would characterize the market as having lots of activity, and much of that activity has not yet translated into top line sales. So I'm definitely more optimistic than I was a few months ago.

Okay. That is helpful. And RIS, it's been mentioned a few times that normally like the second quarter always seems to be a seasonally stronger quarter, and so it seems activity on the RIS side looks also positive. Should we see an incrementally higher benefit in the second quarter versus the first?

Absolutely. Q2 is always RIS's strongest quarter. So the volumes will be higher, and as a result the incremental margins are higher as well.

What we should expect is that incrementally the operating margins should improve from the first to the second quarter? Meaningfully?

Yes, and that is generally the case.

Okay. Lastly, on Office Products, how much of the negative organic growth was due to the competitor on the label side?

From a buying perspective, here's the way I kind of look at it. So we saw the impact of a little bit less destocking than we saw the prior year. POS trends are still negative. This business is probably going to be the last to recover, [in an economy], because it is pretty much based on white collar employment. So a lot of it is just, again, investment that we have for new product, for innovation, and more attractive consumer programs as we defend the category.

The good news I have heard lately is more anecdotal, is that the part of the business that got hurt the most last year was the contract and commercial side of the business versus retail. They both were down, but the contract and commercial was down a lot more. The comps looks a little more promising on the commercial side of the business these days. So I have got my fingers crossed that we'll see maybe, hopefully a little earlier recovery than we anticipate.

The big impact, though, will be the impact of back-to-school in the second and third quarter. I think we are well positioned to have a decent back-to-school this year.

And if I can ask a final question. Can you discuss where, in terms of cost savings, [I] remember the target was to get to a run rate of $180 million by mid 2010. So where are we at the end of the first quarter, and is that still the target, or is it higher?

No the target is still $180 million. We have pulled that up over the last quarter or two. We are virtually finished with the program now; by the end of the second quarter it will be fully implemented and the run rate will be the full $180 million.

We'll still have some cash that will trickle out in coming months, obviously, but we delivered about $25 million in incremental savings over the fourth quarter because of these actions. But we are nearing the end of the program we started in the fourth quarter of '08 now.

That is helpful. Thanks very much. I'll get back into queue.

Our next question is from the line of John McNulty, Credit Suisse. You may proceed.

Good afternoon. Just a couple of quick questions. With regard to the Pressure Sensitive markets, prior to the recession, it looked like the industry had kind of finally found discipline. And I was wondering, because it got a little bit cloudy through the recession, but now that we are starting to come out, what are you seeing in terms of the competitive environment, and how is the discipline holding up right now?

Well, I think that certainly when a couple of our competitors were actually losing money or having negative operating margins for a few quarters, after the round of inflation and then the recession hit, I sensed certainly a renewed focus on making money, and I think that's a good thing. And we are going to continue to raise prices when raw material inflation occurs, so I feel confident that customers want to continue to buy from us and we need to pass on those costs, and I think folks understand that.

Okay, great. With regard to the RIS business, you had indicated that it looked like there was a little bit of restocking, there would be some restocking coming. The inventories looked like they were relatively light throughout your customer channel. And at the same time you indicated that the back-to-school season might be coming later than expected. The two don't exactly jive, so what gives you confidence that the back-to-school season does come later than expected and doesn't hit in the second quarter?

Okay, so on the first one, obviously RIS is driven by Apparel. The inventory to sales ratio for apparel dropped to its lowest level ever, at least on our charts in a number of years, in February. So, at the same time, I think March apparel sales actually rebounded quite nicely.

So I think we are starting to see some restocking. Frankly, what we are seeing anecdotally is retailers giving us a forecast [to that] and then when they actually order, saying oh no, it is X plus 15, or X plus 20. And so my sense is that in the US, for US retailers and brand owners, there is a lot more confidence. And so we are feeling pretty good about the trends.

Let's face it, apparel is kind of one of those low cost luxuries, and as consumers get a little more confident, buying that extra outfit isn't huge. Back-to-school is all about binders and dividers for us, and so the two aren't necessarily linked. I have got to tell you every other year it's the same. So one year, it's early, the next year it's late. We actually know though, from a couple of customers who want their back-to-school season to run a little later and longer, that we just simply expect the orders to flow through a little more in the third quarter than the second quarter.

However, it's always tough to predict. They could change their minds in the next two weeks, and we just don't know.

I think specific to your question, the restocking that Dean refers to is primarily going on in RIS in the Apparel space. The delay in back-to-school is in the Office space.

Okay. That is helpful. I think I misunderstood. I thought you were talking in the RIS segment as well.

Sorry, yes, there is a back-to-school apparel season as well obviously, in the fall season, and that is basically what's happening right now. My sense there is that retailers again are chasing orders, and they need to get their inventories topped off a little bit [from] what they had before. When you add that to the positive demand that we are seeing, I think RIS will obviously have a much better year than last year.

Okay, no that's definitely helpful. Thanks for clearing it up.

Last question is just in the Office Products area, with regard to your investing in it and trying to defend, I guess relative to some new competition in the space, how long do you think this plays out in terms of some of the incremental margin pressure you may be feeling. It seems like the competitor that is pushing into the market is pretty big; has some brand awareness as well, so how should we think about this playing out in terms of the margins over, say, the next year or two?

I think a year or two is about right. I think we have got a number of new application product areas that we have been doing a lot of qualitative and quantitative research in. And we'll be watching some new products at the end of this year, but most of the activity on new products will likely really hit in 2011.

And also we feel good. In the test markets that we have had, versus our competitor [in spaces], we've done quite well. So I guess, maybe the real answer is as long as it takes to defend the category, we are confident we'll be successful.

Okay great. Thanks for the color.

Our next question from the line of Joe Naya from UBS. You may proceed.

Hi, I have a questions, I realize this was just a broad scenario, but looking back at what you gave in your report of the fourth quarter results, you are looking at a scenario with 5% organic sales increased driving a $2.70 to $3.00 EPS number versus the $2.50 to $2.80 where we are now. It seems as though inflation is probably the biggest mover there, but are there any other issues that we should be thinking about in terms of that change?

The two factors are the ones that we have talked about, inflation and our ability to catch up with that through pricing is the single biggest change. As I have mentioned, we have seen twice as much inflation on its way to us as we had anticipated coming into the year, and the other is the effort to grow and defend at the same time in the Office Product spaces that is hitting margins a bit. So those are the reasons. Sales will be strong, we'll still have a good earnings growth, but we are going to have some margin pressure.

So you are planning to probably invest a little bit more now than you were back when you reported fourth quarter?

You bet.

I apologize if I missed this, but did you give the inflation impact in 1Q?

We weren't specific about it. No, haven't done that. We have quantified that what will hit us for the year, and that hits us primarily through the first two and into the third quarter. We'll still have some inflation coming in the third quarter as well, based on what our suppliers are indicating to us.

We had some inflation in the fourth quarter, recall. So we caught up with some of that inflation in Q1, although we did see additional inflation in Q1 as well.

Okay. And then just in terms of your expectation for uses of cash, you mentioned potentially returning some cash to shareholders. But could you just kind of refresh us on your priorities, and if you have any expectations in terms of debt pay down as well?

Sure. The first priority remains debt pay down. Based on the cash flow forecast we have provided for the year, late in the year, we'll achieve our debt targets, and at that time start thinking about the dividends. So the Board looks at the dividend every quarter.

Our current discussions would indicate some willingness to start moving cash back to shareholders, because we'll hit those debt targets late in the year. So we obviously cut the dividend last year. We'd like to see the dividends start moving back up in the direction where we had it pre-recession, and that will be the discussion.

But we intend to look at share repurchases as well. We have another round, the final round of our converts that come due late this year, and so there are a couple million shares that we will issue. We would like to not see those additional shares outstanding for very long, but debt comes first.

Thanks a lot.

Our next question is from the line of Peter Ruschmeier from Barclays Capital. You may proceed.

Thank you, and good afternoon. A couple of questions. I was hoping you could help us better understand the improvement in the margins. You mentioned 410 basis points PSM margin improvement year over year, I think it was 250 basis points sequentially. How much of that margin improvement would you attribute to 8% organic volume growth versus other factors?

About a third of the total came from volume. We still are carrying year on year much of the benefit of price increases that were happening a year ago that caught us up with the last round of inflation. So still, as we came into the first quarter, the net of price and raw material was a positive year on year. But about a third was volume, and the rest was restructuring and productivity that we drove as the year went by.

Okay. That is helpful. Shifting to the RFID opportunity, you mentioned increased item level marking interest. I'm curious if you can further elaborate on what you are seeing free customers, what types of applications, what types of customers, what types of geographies are you seeing the increased interest?

Well you know, we have seen it kind after cross the board, to be honest, both in Industrial applications, but certainly in Retail for item level marking there has been the highest level of interest we've ever experienced. And we are definitely going to see a ramp up in the back half of the year as we implement a couple of key programs, and I anticipate, actually, at sort of our highest scenario level, we may have to actually increase our capital budget a bit, internally not externally at this point, but invest in some capacity, because I think we are close to a tipping point in item level marking for RFID. And we'll see. We have been kind of there before, but there is a lot more serious discussion about this technology from a lot of retailers.

And Dean, what kind of investment is required from your customers, are these large customers, small customers? Are these large capital investments to enable the technology? Can you elaborate on that?

It depends on the retailer, of course. But it is in the anywhere from $5,000 to $15,000 to $20,000 per store, in terms of investment, in terms of the readers and the other devices required to read, from a capital perspective. And of course, it changes the consumables cost as well. And you are taking a tag that costs $0.02 and you are making it cost $0.10, so, there is an investment there.

But the business case is solid, in terms of reduced inventory, increased sales from having products in stock, and the balance between those two is actually what retailers are focused a lot on right now. So, it's happening.

And not to cut this too finely, but do you think that your customers have already budgeted for these types of expenditures? Or do you think they are just closer to the edge of pulling the trigger on allocating capital for these kinds of expenditures?

Some had definitely allocated capital and are moving forward, and others are still in the decision phase, and I believe we'll see some rollouts in the back half of this year, starting in the back half of this year. These usually take a number of quarters to roll-out, especially if it is a large store chain, and certainly in 2011, we'll see some increased interest as well.

Very helpful. Thanks very much.

Our next question is a follow-up question from the line you have George Staphos with Banc of America Merrill Lynch. Please proceed.

Thanks, I've got a couple of follow on questions. When we look at your performance over the years, and map it against EVA per share, I think you have seen this as well, there is a very, very strong correlation between the net economic profit you generate and what it means for the stock price and relative performance. And we have seen, obviously, a recovery in both over the last year, as you've pulled back on spending and generated more cash.

Given the investments that you need to make in Office Products and some of the things you are hinting at with RFID, Dean, and maybe other areas, what confidence should we have that you can continue to drive economic profit higher from here? Or maybe should we expect, given what you are looking at right now, maybe a plateauing until you reach another ramp later on in the decade?

I think we have the bar set pretty low, frankly right now, George, so I feel very confident moving forward. Our businesses generate great free cash flow. We have used a lot of that free cash flow to invest in restructuring over the past few years, as well as more recently paying down debt.

I believe we are going to get to a situation now where we won't need the cash for restructuring, but we'll use some of the cash to invest in growth, organic growth and we'll still have plenty of cash to return to shareholders and keep our debt to equity balance right on target. So it's low risk spending, I guess is what I would put, and more high quality spending in terms of the returns we get. We expect to get tough line growth with good returns.

At this juncture as we look out, should we still expect that RIS is the biggest driver of the improvement or turns from here, where like this last quarter it's Pressure Sensitive Materials, so the horse that drives the train?

Well, Pressure Sensitive Materials is the core business of the Company, and we are make something investments for growth in that business as well. I do expect it to continue to generate good, solid growth top line, bottom line, and free cash flow. That is a great business. And with our investments in end use marketing now, we really are building an interesting and excellent pipeline of needs from a number of end use sectors.

That being said, from a relative basis, RIS has the most upside, simply because of its current performance level and what we believe this business can do. So I also believe that RIS, given it's got the cost out, we are still going to continue to do that. We have growth opportunities on both the Branded Solution side, but as well as the Information Solution side, especially if item level RFID takes off, that brings a whole new trajectory to that business.

With RIS, do we get to the types of margins that we could have calculated, based on where the businesses were pre-recession, the restructuring that was done and so on, at $1.4 billion, or $1.5 billion, or do we really need to get back at $1.6 billion of revenues within that segment?

We need more rapid growth and we need some more productivity to get to the margin targets that we had. So it is not going to happen instantaneously for sure. And I don't want to get into your formula, but I still have a strong belief that this business, it will be an important contributor to economic profit for the Corporation going forward.

Okay. I'm turn it over. Thanks Dean.

Speakers, we have no further questions at this time. You may resume with your presentation or closing remarks.

Okay. Just to sum up, we are more confident, certainly than January, that an economic recovery will continue through the year. Although raw material inflation will be a bit of a challenge with some short-term margin pressure, I want to emphasize short-term, not long-term, and over time, we do expect our pricing to catch up with inflation.

We talked about Office Products and the reasons for stepping up investment there, and we are playing offense across the Company in a number of our sectors to capitalize on opportunities for growth. We just talked about RIS, and I expect this business, with its high contribution margins, to expand margins significantly as revenue grows. And our Pressure Sensitive and Other businesses have increased upside, as end user marketing initiatives pay off and we get the full benefit of our restructuring program.

Our actions will continue to increase sales, operating leverage and earnings power for the Company. And on behalf of all of us, thanks to everyone for joining, and we look forward to speaking with you again.

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation, and ask that you please disconnect your lines. Have a great day everyone.