艾利丹尼森 (AVY) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison's earnings conference call for the first-quarter ended April 2, 2011. This call is being recorded and will be available for replay from 12 PM Pacific Time today, through midnight Pacific Time May 1. To access the replay, please dial 1-800-633- 8284, or 402-977-9140 for international callers. The conference ID number is 21496534. I'd now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may proceed, 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 2011 Financial Review and Analysis. Both documents were furnished today with our 8-K and posted at the investor section of our website at www.investors.AveryDennison.com. We remind you that these unaudited results are preliminary, as we have not yet filed our 10-Q.

Our news release references GAAP operating margin, which includes the interest expense, restructuring and other charges included in the other expense line of our P&L. Restructuring charges 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 non-GAAP operating margin, which reflects pre-tax results before their effect and before interest expense. This and other non-GAAP financial measures that we use are reconciled with GAAP in schedules A2 to A4 of the financial statements accompanying today's earnings release.

We also remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are 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 Form 2010 -- with our 2010 Form 10-K, address certain risk factors that could cause actual results to differ from our expectations. I'm sure that you noticed in our documents that we've changed the names of some our business to better reflect what we deliver to customers. Our Roll Material business is now called Label and Packaging Materials and our Retail Information Service Business segment is now Retail Branding and Information Solutions.

On the call today are Dean Scarborough, Chairman, President and CEO, and Mitch Butier, Senior Vice President and CFO. I'll now continue turn the call over to Dean.

Thanks, Eric. During the year-end earnings call I outlined our priorities for 2011. First, to close the price inflation gap from the second half of 2010. Second, to continue the positive trajectory for RBIS, improving both sales and margins. Third, to invest in the turnaround of Office and Consumer Products by launching a pipeline of new products. I'll discuss the first-quarter in terms of these priorities.

All of you know that the first-quarter is our lowest revenue quarter because of the seasonality of RBIS and Office and Consumer Products. Given that seasonality, our results were consistent with our plans and we remain on track for 2011. Pressure-sensitive Materials delivered another quarter of solid top-line growth, with net sales up 10%, with continuing strength in emerging markets, as well as in Europe. More important, though, was the sequential improvement in margins for this segment.

Our ability to pass through price increases, make material substitutions and increase productivity all contributed to this sequential improvement. Inflation continues to accelerate in this sector, as we see increases in paper, film and chemicals. As a result, we are increasing the magnitude and frequency of our price increases, and -- as well as raising our targets for material reengineering and productivity improvements. I'm confident we'll continue to make progress in margin improvement.

Retail Branding and Information Solutions had another strong quarter. The 9% sales growth was driven by market volume growth, as well as customer program wins resulting from our improved service, RFID roll-outs and new products. There is some concern among retailers and brand owners about the consumer's reaction to higher apparel prices, as well as the pocketbook squeeze from higher food and fuel prices.

So far, apparel sales have held up well, and the inventory to sales ratio for soft goods continues to be at historical low. We'll understand this trend better as the quarter unfolds. Also, the solutions that RBIS provides not only enable brands to differentiate themselves, they also improve supply chain performance and help retailers manage their inventories more effectively. Given the current market environment, that's a real plus, so my confidence level in this business and its execution remains high.

As expected, Office and Consumer Products had a tough quarter. Sales volumes were down 13% due to customer inventory reductions from prior-year forward buys, plus a softer retail environment that was partially weather related. Now, while Q1 is always soft, this year's first-quarter sales represent less than 20% of Office and Consumer Products full-year sales volume, and given the high variable margins in this segment, operating margins were very low in the first-quarter.

Our focus has been on launching new products with a goal of $20 million to $30 million in new product sales during 2011. Customer commitments for these new products are on track with our target. A combination of these new products, plus the normal seasonal impact of back-to-school, will drive improved sales trends and enable us to achieve our full-year margin targets for this business.

To sum up, despite the dramatic increase in inflation, we are maintaining the full-year earnings guidance we provided in early February. We also expect to meet our free cash flow target for the year and we remain committed to returning more cash to shareholders.

And now Mitch will go through the quarter in more detail.

Thanks, Dean. Starting with slide 5 and talking through to slide 8, sales in the first-quarter were up as reported and organically about 7%. Currency had little impact on sales in Q1. As Dean mentioned, Pressure-sensitive Materials and Retail Branding and Information Solutions again delivered solid top-line growth, more than offsetting the decline in Office and Consumer Products.

Our consolidated operating margin declined in the first-quarter, as expected, to 5.4%, driven largely by inflation in PSM and margin compression at OCP, offset somewhat by another quarter of margin expansion in RBIS. Raw material costs in the first-quarter came in pretty much as expected, and we made good progress offsetting inflation by implementing the productivity initiatives and price increases that we discussed last quarter.

Now, inflationary pressure again picked up significantly both March and April and we are implementing further actions to offset this new inflation. I'll talk more about that in a moment. While our marketing, general and administrative expense ratio was flat to prior year, MG&A increased in absolute dollars. As we've discussed, we've stepped up growth in IT infrastructure-related investments. We also had a warehouse fire in Brazil that cost about $4 million in the quarter. Now, before getting into the segments I want to point out that our adjusted tax rate increased from 22% to 25% in the first-quarter, reflecting our expectation of reduced benefits from discrete tax events this year.

Turning to slide 9. Our Pressure-sensitive Materials segment again delivered strong organic revenue growth of 10%, driven by volume gains and price in both our label and packaging materials businesses, and in graphics and reflective solutions. PSM's volume growth was a little over 5%, led by emerging markets. While PSM's operating margin in the quarter was down 90-basis points year over year, margin versus the fourth-quarter went up 130-basis points due to our progress in offsetting raw material inflation. We've talked a lot about our pricing ability and productivity gains in this business and we made great progress in offsetting inflation in the first-quarter.

Retail Branding and Information Solutions delivered organic sales growth of 9% in the quarter. This business is making great progress on the top and bottom lines, with operating margin expanding 250-basis points in the quarter. We continue to build momentum, and with a strong operating leverage in this business, expect continued margin expansion as we grow. Keep in mind that the sequential decline in operating margin reflects the seasonality of this business. The first quarter is typically this segment's smallest and the second quarter typically its largest.

Dean covered Office and Consumer Products, which came in largely as expected. Q1 is also a seasonally low quarter for this business and it was compounded by the Q4 customer inventory build, which reduced Q1 sales and profits. We continue to expect margins in this business to be in the upper single digits for the full year. Our other specialty converting businesses again had solid sales growth in the quarter. Most of the cost of the warehouse fire in Brazil that I mentioned earlier impacted these businesses.

Moving on to the outlook for 2011. On slide 12, we've summarized the key factors that we think will contribute to our P&L and cash flow in 2011. Slide 13 has our EPS and free cash flow guidance. I'll highlight just a few key assumptions that have changed from what we discussed last quarter. We now estimate organic revenue growth in 2011 of approximately 7%, reflecting our large and growing presence in the emerging markets and benefits from our investments in growth, as well as lift some pricing actions. The increase in our revenue assumption from last quarter is due primarily to price. Now, obviously currencies have moved since January, and at March rates, currency would add $18 million of EBIT year over year.

As for inflation, last quarter we expected $140 million to $150 million of inflation, but inflationary pressure rose dramatically in March and April, as I mentioned earlier. We're now experiencing approximately $220 million of raw material inflation year over year, and it's across most of the materials that we buy; oaper's up, chemicals are up and films are up. A side note for those not familiar with how we derive our inflation assumption, our methodology is to project a continuation of what we're currently experiencing for the remainder of the year.

As we've demonstrated over the past couple quarters, we are working to mitigate this inflation by leveraging our global vendor network, seeking substitute materials, driving further productivity and raising prices. We successfully narrowed the price inflation gap in Q1, as demonstrated by the sequential margin expansion in PSM, and, given the magnitude of the continuing inflationary pressure, it should be no surprise that we're currently implementing further price increases and productivity initiatives.

As we said last quarter, the uncertainty about the timing of when we close the price inflation gap remains one of the key factors driving the range in our EPS guidance. And as for the tax rate, we're now assuming it to be in the mid-20s, at the high end of our previous range. Netting these puts and takes, based on the estimated sales and other assumptions, including the listed factors, our EPS and free cash flow guidance are unchanged. We continue to expect adjusted earnings per share of $3 to $3.30, and free cash flow of $325 million to $350 million.

Overall, we remain confident about our position and prospects. We're expecting another year of solid revenue growth, driven by strength in PSM and RBIS. We expect to close the price inflation gap and see margin expansion in PSM. RBIS will continue to build momentum in both its top and bottom lines. Free cash flow will remain strong. And reflecting the strength of our balance sheet, we've shifted the focus of free cash flow from debt reduction to returning more cash to shareholders.

Now we'd be happy to take your questions.

Thank you. (Operator Instructions). Our first question comes from the line of Ghansham Panjabi, Robert W. Baird & Company. You may proceed, sir.

Hey, guys, good morning.

Good morning, Ghansham.

The 1% operating margin in Office Products, just want to clarify, Dean, was that where you initially forecasted the quarter as per your internal plan? And also, how should we think about the bridge between where you ended at 1% of the upper single-digit margin threshold you're still backing for the year?

Yes, we knew when we got the big forward buy from some of our customers in the fourth quarter that Q1 would be unusually soft. And if you read some of the announcements from the office super stores, you could see their retail foot traffic was down pretty substantially, especially in January, because of the bad weather, and as you might expect, they weren't really interested in building inventory. So pretty much came in right where we thought. And you have to realize, given our strong seasonality, especially for back-to-school and the fact that most of the new product programs that customers are excited about really won't hit until the back half of the year, that revenue for us is less than 20% of the full-year guidance, so it'll be a much different story for the back half of -- well, for the next three quarters, actually.

Okay.

Now, it's still going to be lower than it was in the prior year and I think we've been really clear about that.

Yes, you have. Switching to RIS, operating margins up 250-basis points year over year in the first quarter, is that a reasonable trend line for the full year, and also can you comment on trends in April so far? Thank you.

Yes, the trends have continued. They're maybe a little choppier for the first few weeks of the second quarter, but Easter's right here, so it's always a little difficult to call that. I think retailers are going to be somewhat cautious about putting products into the pipeline. That being said, our service has never been better, so it appears to me we're taking some market share. We've got some new products and new programs, especially RFID, that helps us on the upside, as well. So I'm feeling reasonably confident about us going into our most important quarter, frankly.

Okay. Sorry, one more, just a clarification. The warehouse fire, why is that expense through the P&L? I assume you have some sort of insurance to cover the loss.

Yes, the cost that flows through the P&L is the amount of our deductible, Ghansham.

Oh, okay, got you. Thanks so much.

Sure.

Our next question from the line of George Staphos, Banc of America-Merrill Lynch. You may proceed, sir.

Thanks. I just wanted to come back to Office Products. Was there any residual impact in the 1% margin from -- well, remaining competitive action that had taken place last year? Have you seen any change in the pace of competition in the market as the year has progressed thus far?

No, our share position remains the same as it's been for the last couple of quarters. As you know, it dropped in the third quarter of last year, but it's been essentially pretty flat. I just think it was -- again, the main impacts were the inventory buy-ins by customers at the end of the year and a somewhat slower POS than we expected, but that was across the whole industry for the first quarter.

Okay, but -- and just to conclude on that, yes, your share did not change. You didn't have to defend with any more spending to maintain that share from what you're saying, Dean; correct?

That's correct. We are, though, as we've communicated before, investing in new product development, in advertising and promotional spending and that -- I can't even think about sequentially, but that rate has been going on for a couple of quarters now. So maybe a little more incrementally in the first quarter.

Okay. Within Pressure-sensitive Materials you mentioned that -- I think you said the sales growth was about 5% led by emerging markets. If you mentioned it before, I missed it, I apologize.

It's actually 10%.

What's that?

10% growth for Pressure-sensitive Materials.

Okay. Could you just give us a reasonable walk-around then on the sales growth trend that you saw for PSM? Thanks, Dean.

North America grew mid single digits, Europe was in the low double digits and the emerging markets was in the mid-teens.

Okay. And do you think -- as we think about margin compression and your ability to close the gap, you did a nice job in the first quarter, given the acceleration and cost that you saw towards the end of the quarter. Could we not see some maybe widening out of that price cost spread for a period until you catch up again on pricing? Thanks. I'll turn it over after that.

Well, George, our goal is not to and we have definitely accelerated the pacing and the size of our price increases. What could happen, though, is if we get another unexpected round mid quarter or something like June, because that has happened to us before, where we just simply don't have enough time to recover for the quarter. But from a full-year perspective, you know, we're still committed to closing that gap.

Yes, the way I think -- just to add to that point -- is we've talked about we're committed to closing the gap. This area is one of the areas with the greatest uncertainty so it's one of the biggest reasons for the range in our guidance that we provided. Think about this more on a net terms as far as the timing of when we close. So from where we were a quarter ago, given the ramp-up in inflation that we've seen and that it takes us a couple months to pass along the inflation through pricing and productivity, you'd expect that for Q2, in particular, things just be pushed out a little bit. But overall we expect to close the gap.

Okay, understand. Thanks. Turn it over.

Our next question from the line of Jeffrey Zekauskas from JPMorgan securities. You may proceed with your question, sir.

Hi, good day. Your inventories moved up about $110 million sequentially and your accounts receivables are up maybe about $100 million, and I would imagine that part of that is a function of raw materials, part of it is a function of demand. So it seems, though, that with raw materials relatively high, you'll need to use more working capital this year. So in your $325 million of free cash flow for your assumption, what kind of working capital use do you assume, and is working capital use a risk to the free cash flow estimate?

Overall what our assumption is is that working capital -- that we basically keep working capital productivity at the same levels as what we had at year-end 2010 so that we're holding on to that productivity. Now we do expect working capital in absolute dollar terms to increase approximately $40 million to $50 million just given the growth. So when you look at the -- we can comment on about the level of increase, there is a good amount of currency in some of those changes. The biggest and most of the changes are due to just growth overall, with the one exception being inventory. In inventory there was a couple of additional things that we built inventory in the first quarter. One was around just -- we intentionally did it in Europe around a system implementation around the end of the quarter. We were going to shut a plant down for a little bit so we built up some inventory for that. And two is, also because of the inflation we prebought some materials ahead of some price increases. So overall, for the full year we expect to hold onto the productivity. We've demonstrated the ability to do that, we feel confident with our ability do that. In Q1 you did see it did slip from prior year for those reasons.

Okay. And then -- so we've seen propylene move up $0.15 a pound in April and it should move up again in May. So do you think that's going to lead to your margins in Pressure-sensitive shrinking a little bit in the second quarter, or do you think your prices can stay ahead of the current propylene outlook?

Well, Jeffrey, this is always the difficult question and again, I think Mitch stated it well, I It's the reason for the range in our guidance because we can't really accurately predict when we'll get those next price increase or two, and it takes us a couple of months. The answer is sure, that's always a risk if inflation accelerates way beyond what we've projected for the quarter and what we have out in our current pricing. And then we have to make it up with the next round of price increases.

Okay. And then lastly, in terms of your Office Products margins, this used to be a high mid-teens operating margin business. With the competitive environment that you're in now, has that secular margin moved down, and how do you see that going forward for this year and in the out years?

Well, we indicated that we'd be in the upper single-digit margins this year and that's a combination of certainly what we had to do to the brand but also a fairly significant investment in brand building and in new product development, so we expect to see the fruits of that in the back half of this year. And then in 2012 we start to see those margins climb again, as those products start to get an annualized benefit and we have more new products and categories coming on stream. So I don't think we've given guidance on where we think Office Products will settle out there. I think it's reasonable to assume it's probably not going to be at the high double-digit margins that it was before.

Right. Okay, thank you very much.

Sure.

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

Yes, good afternoon, just a couple of questions. With regard to your raw material inflation number where you're looking for $220 million, what does that assume in terms of raw materials from the current level? Are you expecting further inflation later on this year, or things to level off?

No. So basically our raw material assumption just assumes what we see today, which isn't just what's priced in today but where we've had communications from vendors or discussions around what's actually happening in markets as of this time. So we don't forecast or speculate what Q3 or Q4 will turn out to be because that's moved pretty wildly, both up and down, over the past few quarters.

Okay, and then just one question on the tax rate. It looks like -- you're indicating it's going to come in toward the high end of what you were expecting and historically Avery's had a very low tax level and I guess I'm wondering how we should be thinking about directionally the tax rate going, say, into 2012 and beyond?

The mid-20% range. We talked about in the 20s is the more normalized rate. We've had a number of discrete tax planning events every year. We expect to have discrete tax event. The past couple years we've had a couple very large ones, but that we expect to dissipate over time and to be more just the normal level and bring us into the mid-20s or so.

Okay, great. Thanks for the color.

(Operator Instructions). Our next question from the line of [Christopher Kapch] with BDR Research Group. You may proceed with your question, sir.

Yes, hi. Just wanted to come at this price -- the raw material cost inflation and price increase from another angle. I'm just curious if -- my understanding is you have some price increases on the table this spring. I'm just wondering if those go through along with the adhesive surcharges, if that's not enough to offset and close this gap in what you perceive now to be the inflation for the rest of the year?

Well, we're planning more after that, so these current price increases were actually announced, I don't know, 30 or 45 days ago and so we received additional inflation since that time so we're planning more increases later.

Okay. And then just on a cost accounting basis, do you go -- is it a LIFO or FIFO cost basis? The reason I ask, I'm just wondering if the sequential margin improvement you saw in this segment in the first quarter was -- if it's on a -- if you're on a LIFO basis that would have been in spite of, I guess, some more raw material cost inflation later in the quarter.

We're on a FIFO basis overall. And the way to think about it, the inflation started mid last year and that's when the margins -- if you focus in on PSM -- dropped from around 10% down to 8% in Q3, Q4 because of some of that lag in pushing the price inc -- the inflation through, both in price, as well as productivity, and so we've started to narrow that gap. And so with this new round of inflation, we're now passing along price increases just as fast as the new rounds are coming through right now, so that's how you should think about it overall.

Got you. Are there any regions where converters are more resistant to the price increases versus other regions? In other words, is it easier to get through in emerging markets versus North America?

It's never easy in any (inaudible).

Right. Okay, fair enough. And I just had one follow-up question on the RBIS segment. You mentioned the share that you're gaining, I'm just wondering if what's -- in terms of your value proposition to the ultimate customers there, is the share being driven more from your efforts to help them in differentiating their brands and their products and so more on the branding identification side of things, or is it really more driven by you just having a better mouse trap with helping them with supply chain logistics, or is it a little bit of both?

I think it's both. Certainly the RFID implementation is where we've captured quite a bit of business there. It's all about in-store solutions and supply chain management. We've also -- we dramatically improved our service, as well, and as you can imagine, retailers are ordering in smaller batches and they want faster turnaround. It's a way that they can react to their markets more quickly and that's really helped us a lot. And we just, in fact, did a recent customer survey and we definitely saw -- the customers indicated they saw improvements in our service capability, which was great news. On the branding side, as well, we've launched a number of new initiatives, especially on the exterior branding. Although that hasn't impacted sales yet, it is something that we've had a lot of interest in. So it's pretty much been across the board.

Thanks for the color.

Sure.

Our next question from the line of Peter Ruschmeier with Barclays Capital. You may proceed, sir.

Thank you, and good morning or good afternoon.

Hi, Peter.

I wanted to ask, Dean, if you could elaborate on your comment of inventory to sales being low and I imagine that's affecting both PSM and RIS, but is it affecting both those businesses equally? And as you talk to your customers, what is your sense out there that this is a new normal that we're dealing with, or is there something that you'd anticipate a change in that going forward?

Yes, Pete, that -- specifically I should have been more clear. The inventory to sales ratio that I was referring to has to do with footwear and soft goods, which we had talked about in various seminars and, of course, investor meetings and that remains at historical lows. So speaking specifically for RBIS, what we see there is that retailers are still planning their seasons well, but then they always keep this open to buy, so it's the reorder points.

That -- they're just being cautious, very similar to what they have been in the last year or so. They don't want their inventories to get out of whack with sales. Some are raising prices on certain apparel items right now and they're trying to make -- they're trying to test and see what the consumer reaction will be to some of those apparel price increases. I don't think we've had apparel price increases for 20 years in this country, so it is a little bit a new territory that they're breaking into. So far, it doesn't seem to have impacted overall volume, but we'll see as the year progresses.

And how do you --

On the Pressure-sensitive side, I've been pleasantly surprised, especially in Europe, with overall volume demands and when I read the -- all the news coming out of Europe, sometimes it surprises me. Some of that, of course, is related to eastern Europe, which still remains pretty strong, but even Western Europe has been strong. I think North America's also held up pretty well. So it's something -- that is something I watch very closely because typically the pressure-sensitive businesses and the volume in the market tend to be a leading indicator for what's going on in the economy. So so far, no warning lights.

So far, so good. Okay, that's helpful. Maybe a question for Mitch, if I could. I was just trying to reconcile -- if I have our numbers right here, net debt rose about $193 million sequentially and part of that, I appreciate, was working capital related, but I can't seem to connect all the dots. Were there other cash items that affected the balance sheet on looking at that comparison?

Well, overall, Q1 traditionally seasonally is the lowest quarter and it's always cash flow negative and it was quite a bit more negative in Q1 this year than Q1 last year, which we anticipated. So it's the -- overall just the results and the free cash flow that you're -- I mean the working capital dynamics that you're seeing there. One of the things specifically is just every year we do pay our annual bonus in Q1 and so that's just one of the reasons for the seasonal -- it being seasonally lower. But there's nothing else beyond that.

Okay, and then maybe just lastly -- excuse me -- Dean, as you mentioned returning cash to shareholders. How do you think about that against the backdrop of expectations for higher taxes going forward as it relates to dividends? So if you were comparing -- contrast dividends versus buybacks, I think previously you said you wanted to ratchet back your dividend to prior levels more quickly, but is that really part of your focus still, or how do you think about that?

Certainly a discussion in the boardroom and we're going to use both levers, as we go forward. So we bought back three million shares at the end of the fourth quarter last year and so used quite a bit of capital to buy back shares. As you know, the board authorized another five million shares for -- authorized for purchase, as well. So again, we'll use both and I don't think it's a good idea for me to get into specific -- breaking that down.

Fair enough. Thanks very much.

Sure.

Our next question is a follow-up question from the line of George Staphos, Banc of America-Merrill Lynch. You may go ahead, Mr. Staphos.

Thanks. Hi, guys. There have been some recent announcements within the paper industry that what's been traditionally a printing and writing capacity, as demand has been declining, may be moving into the production -- instead of specialty grade, like (inaudible), (inaudible) liners and the like, do you think that that might be able to have a beneficial effect at some point in the next 12 months in terms of the inflation that you're seeing right now? Whatever thoughts you have around that. Then taking from a different tack, can you just update us on what your capacity expansion plans are for this year and if there are any quotas that you know of from some of your larger competitors going up this year? Thanks, guys.

Sure. George, I'm hopeful that more people get into this business. I don't think it'll impact us much this year. We've spent a lot of time over the last few years developing new sources of supply in emerging markets, in the film area and in the paper area, and that's actually helped us, especially in times of somewhat tighter supply. But typically, unfortunately when someone announces they're going to get into specialty paper business, it's a capital investment, it takes time and then they've got to figure out how to actually make the grades that we buy. So I'm not too hopeful for 2011 and maybe in 2012 we'll -- that'll help us.

In terms of our capacity expansions, number one expansion that we're executing right now is in India. In fact, I was just there over the last couple of weeks and that project's right on track to come online in the back half of the year. Still very solid growth in south Asia. And in other parts of the world, frankly, we're able to -- in China we made a big investment a couple years ago so we're still in pretty good shape there. And in Europe and North America we're handling the volume increases simply with ongoing productivity. I would expect, though, with emerging market growth continuing at the rate that it's growing that that will be the next area for -- somewhere in Asia or even South America, we're going to need to make some more investments in capacity going on. I've not heard of major investments in capacity by competitors. Might be some small ones, if there are, I'm just not aware of it.

Dean, on the emerging market capacity, when that does come, if it does come, is that a -- do you have enough capacity in these markets to get through 2012, or could we, in fact, see next coater coming in in 2012? And I would imagine with the coater you have some additional splitting and distribution capacity that you have to put in place. Obviously that's not going to be as capital intensive but nonetheless it would seem that that would also have to go hand in glove?

Sure. I mean, that's a normal part of the process. Now normally we don't put in all the finishing capacity at the same time we do coating, because the coaters capacity generally lasts for two or three years in those Markets, so we do spread that out a bit. My guess is -- and we haven't done our planning yet. We normally have our planning meetings in June on capital, is that -- we'll likely be doing something in emerging markets in 2012, I just don't know exactly where yet. We're still trying to figure that out.

And, George, when we looked at -- talked about the capital expenditure for this year, we said about a third of that would be to growth. Most of that investment's in emerging markets. So there's the coater capacity, but it's also adding some more splitters, more investments within the RBIS space and so forth. So overall it's getting a disproportionate share of the capital going forward.

Okay, thanks for the reminder on that, Mitch. The last question and then I'll turn it over. What materials are you finding -- if you can talk about it -- that you're able to buy on an advantaged basis in emerging markets in Asia on chemicals? I would imagine to some degree that these regions would actually be at a cost disadvantage versus, say, US suppliers, but -- maybe I'm wrong -- but if you could help us fill in some of the gaps here that'd be great. Thanks, guys. Good luck in the quarter.

George, I'd love to but I don't want to give away our -- sort of our trade secrets.

Okay. Thanks very much. Have a good quarter.

Thanks, George.

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.

Thank you. Well, just to sum up, we made progress in first quarter against our three main priorities. We made progress on inflation. It's accelerating again and we're taking further action to close the cost and price gap. Retail Branding and Information Solutions continues to build momentum, improving both sales and margin. And Office and Consumer Products is on track for improvement later this year. And as Mitch said, we're maintaining our full-year earnings guidance and free cash flow target and remain committed to returning cash to shareholders. Thanks everyone for joining and we look forward to speaking with you again.

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