艾利丹尼森 (AVY) 2013 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by. During the presentation all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session.

(Operator Instructions)

Welcome to Avery Dennison's earnings conference call for the first quarter ended March 30, 2013. This call is being recorded and will be available for replay from 1 PM pacific time today through midnight pacific time April 26. To access the replay please dial 800-633-8284 or 402-977-9140 for international callers. The conference ID number is 21610812. I'd 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. Today we'll discuss our preliminary unaudited first quarter 2013 results. Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The Company's Office and Consumer Products and Design and Engineering Solutions businesses are classified on our income statement as discontinued operations. The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP in schedules A2 to A4 of the financial statements accompanying today's earnings release. We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor Statement included in today's earnings release.

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

Thanks, Eric, and good day, everyone. First quarter results were in line with our expectations, highlighted by strong sales growth in emerging markets for Pressure-sensitive Materials and another good top-line performance by Retail Branding and Information Solutions. Higher volumes and the benefits of our restructuring program drove a substantial increase in earnings per share over first-quarter 2012. We are also on track to deliver strong annual free cash flow. Typically, we're a user of cash in the first half of the year and we ended the quarter where we expected to. During the quarter we returned nearly $90 million to shareholders through dividends and the repurchase of approximately 1.5 million shares. Regarding the dividend the Board will conduct its annual review at its meeting tomorrow. As we announced last December the Board has moved its annual consideration of the dividend increase from December to April.

Turning to the businesses, Pressure-sensitive Materials delivered solid overall results again driven by strong sales of label and packaging materials in emerging markets with modest growth in mature markets. Operating margin expanded and was within our long-term target range reflecting higher volumes and the productivity gains from integrating graphics and reflectives into our Label and Packaging business. Trends for our Retail Branding and Information Solutions continued from the back half of 2012, with continued growth in the core business and strong growth in RFID. Sales to US and emerging market retailers and brands grew by double-digit percentages, and I was encouraged by mid-single digit growth from European based retailers and brands. Based on the latest import data, we are continuing to gain market share.

RBIS operating margin expanded significantly. We expect further progress later this year as we reduce the manufacturing footprint and execute our productivity plans. Second quarter is, of course, the most important season for RBIS. As you know, we don't have that much forward visibility, however our order intake does remain strong. I'm pleased to say that during the quarter we received all regulatory clearances for the sale of office and consumer products and Designed and Engineered Solutions. We expect to complete the deal mid year. We've also made steady progress on our restructuring initiative, which is enabling us to deliver strong bottom line improvement.

We had a solid start to the year. As Mitch will explain, with the movement of Designed and Engineered Solutions to discontinued operations, we've effectively raised our earnings guidance. I'll note that Q2 is very important for us. We'll feel even more confident about the year once we delivered the quarter. Now, I'll turn it over to Mitch.

Thanks, Dean. We delivered another solid quarter with 4% organic sales growth and a 37% increase in adjusted earnings per share, in line with our expectations. These results reflect strong emerging markets growth in Pressure-sensitive Materials, continued solid progress in RBIS, the results of our restructuring program, as well as lower interest expense and the accretion from share repurchases. Our free cash flow in the quarter was negative as is consistent with our normal seasonality. With leverage in our targeted range and our consistently strong annual free cash flow, we returned $89 million of cash to shareholders with dividends of $27 million and the repurchase of 1.5 million shares.

Adjusted operating margin in the quarter grew 60 basis points to 6.7% as the benefit of productivity initiatives and higher volume more than offset higher employee related expenses and the impact of product mix as a result of our continued penetration of lower margin categories in PSM. The net impact of costs associated with raw materials and pricing was again modest in the quarter. As for our restructuring program to save more than $100 million annually, we're on track and continue to expect to achieve our savings target by the middle of this year.

In addition to expanding operating margins we also benefited from a reduction in interest expense of approximately $6 million. This reduction is due primarily to a three-month time lag between when a $250 million long-term note matured in mid January and when we refinanced it in early April. The new $250 million note is due in 10 years and bears a coupon of 3.35%, and will result in a reduction to annual interest expense of $8 million going forward.

Turning to the segments. Pressure-sensitive Materials sales were up 3% on an organic basis in the first quarter, primarily reflecting solid growth in emerging markets and a moderation of growth in mature markets. Labels and Packaging Materials, the largest division in this segment, sales were up low-single digits on an organic basis, while the combined sales for Graphics, Reflective, and Performance Tapes, were up slightly. On a regional basis, sales for this segment grew low-single digits in North America, were relatively flat in Western Europe, and grew double digits in emerging markets. PSM's adjusted operating margin improved 30 basis points to 9.9%, near the high end of our targeted range as the benefit of productivity initiatives and higher volume more than offset the impact of product mix and higher employee related expenses.

Retail Branding and Information Solution sales grew 6%, with about half of the growth coming from RFID and the other half reflecting solid growth at North American and modest growth at European retailers and brands. Sales of RFID products more than doubled in the first quarter, but, as we said last quarter, the growth rate is expected to moderate for the remainder of the year as a major retailer recently decided the slow its pace of RFID adoption. RBIS adjusted operating margin improved 150 basis points to 4.6% as the benefit of productivity initiatives and higher volume more than offset higher employee related expenses. As you know, the first quarter is RBIS's seasonally, lowest sales and margin quarter while the second quarter is the strongest.

Sales in our Other Specialty Converting businesses grew 13% reflecting solid growth in our Medical business. The biggest difference between reported and organic sales growth in Other Specialty Converting is due to the exit of a small former OCP product line last year. With DES now in Discontinued Operations, the Medical business is the only component of Other Specialty Converting beginning this year. The negative adjusted operating margin in Other Specialty Converting was reduced somewhat compared to last year due to higher volume. This business has a negative operating margin as we are making investments in growth to leverage our material science capabilities and technologies in the medical space.

Moving on to the outlook. We now expect adjusted 2013 earnings per share from continuing operations of $2.40 to $2.75 and free cash flow from continuing operations of $275 million to $315 million. When you consider that we are now excluding the estimated results from DES, we are effectively increasing our earnings guidance. The exclusion of DES had a negative impact of approximately $0.15, which was largely offset by lower anticipated costs and at the lower end of our range, higher volume. As for free cash flow, we've reduced the high end of our guidance range for continuing operations primarily due to the exclusion of DES. Our guidance is based on a number of assumptions including the factors listed on Slide 8.

To highlight a few -- Our estimate for organic sales growth in 2013 is now 2% to 4%. We've raised the low end of our sales expectation by 1 point given our performance in the first quarter. Our full-year estimate reflects modest growth in the US, Western Europe being flat to down modestly, and emerging markets up mid to high-single digits. Obviously, the macro environment remains uncertain. As you know, the nature of our businesses gives us limited forward visibility. Interest expense in 2013 is expected to be approximately $60 million versus $73 million last year. First quarter interest expense was $12 million. We expect a run rate beginning in Q2 of $16 million to $17 million per quarter. Average fully diluted shares outstanding for 2013 are still assumed to be approximately 100 million.

Given the timing of when we expect the divestitures of OCP and DES to close, the impact of the additional share repurchases from the proceeds of these divestitures will have a modest impact on the calculation of average shares outstanding for the full year.

In summary, the first quarter represented a solid start to a year in which we expect to deliver adjusted EPS growth of between 22% and 40%. Our two core businesses are market leaders and are well positioned for profitable growth and increasing returns. Our cost reduction program to save more than $100 million is on track and positions us for continued strong earnings growth. Our continued cost and capital discipline enabled us to maintain our financial strength and return more cash to shareholders, all of which demonstrate our continued commitment to delivering on our long-term targets.

Now, we would be happy to take your questions.

(Operator Instructions)

George Staphos, Banc of America Merrill Lynch.

My first question is on the guidance related to what the sales trend has been. Certainly, we understand that you effectively raised your earnings per share guidance given the effective DES. When I look at what I think is your new continuing operation schedule, at the back of the slide deck, it shows that organic sales have been decelerating a little bit over the last few quarters still at very healthy rates. So, I was wondering, if in fact that's the trend you've been observing, what gives you more confidence in terms of raising the outlook as you've done? And, I had a couple follow ons.

Sure, so overall the reason for raising the outlook is really at the low end, George. That was pretty much just due to our performance in Q1. When you talk about the growth rate in Q1, it's we're right in the middle of our long-term targets coming in at 4% overall, our 3% to 5% target that we've had. It did decelerate from the pace you saw of the last few quarters, but recall the last few quarters were benefiting from some easier comps. In mid 2011 is when our sales fell off. So, when you look in absolute terms, this is a solid pace and the pace of which we expect overall.

George, I'd also note that Easter fell in the first quarter this year, rather than in the second quarter in the prior year, so that's part of the reason for, I would characterize that as deceleration.

Yes, the shifting calendar had a little over 1 point of impact on the quarter as well, but does not change our full-year expectations.

Okay, wouldn't Easter being early have shifted volume into the first quarter and helped the growth rate, if I'm hearing you correctly?

Easter was on -- it was one week earlier, and so Good Friday fell into Q1 of this year. Whereas, Good Friday, last year, fell into Q2.

I understand. Now related--

That effects all regions equally, of course, or all businesses equally.

Sure. Now, in terms of the RBIS business and apparel, you obviously gave the appropriate caveat you don't have great lead times, but you're bookings thus far have been pretty healthy. So, the question is what are your customers saying right now about what their expectations are for the Christmas selling season in the fourth quarter?

Yes, I think there is a reasonable degree of optimism, as they're looking forward. We're pleased with our growth rate from both European and US and emerging market retailers and brands. I don't think anybody is ecstatic about the environment, but they're not pessimistic either. It feels, it looks okay, is how I'd characterize it.

I think the key thing to focus on some of the comments I made about RFID was half the growth in Q1 and we do expect that growth rate to moderate somewhat.

Sure, but it sounds like your customers are feeling a little bit more confident about the consumer in turn be willing to open up their wallets to make expenditures towards the end of the year. Would that be a fair assessment? Whether or not it plays out or not we'll see, but would that be a fair characterization of what you're customers are thinking right now?

Yes, I mean certainly, both anecdotally and on the order trends, I'd say yes, right exactly within our guidance range and pretty much what we expected.

Last question and I'll turn it over. In Other, especially Converting, what pace of margin improvement could we expect over a couple of years? We realize you're investing in that business right now. Is this a business that, given the current, if we hold the macro environment constant going forward, that can get to a breakeven or better margin with the next couple quarters? Let's say some time as a run rate, some time in 2013, or would you need to do more restructuring, investment, or see more growth for it to be more profitable than it is right now? Thanks guys.

Yes, let me just maybe give a little bit of color on the Advanced and Medical Solutions business that's pretty much all of Other Specialty Converting. It's a carve out of our performance pace business. The core business has actually been growing quite nicely, and we had invested in a couple of new growth platforms. One is on a wearable sensor, where you can wear it on your body and it tracks the heart rate and respiration and whether you're sitting or standing. As well as a new anti-microbial wound care device, we've actually imbedded the anti-microbial agent into the adhesive, which is actually very hard to do and we figured out a way to do it. We actually haven't seen sales on those sales on the products. We do expect -- we're in the commercialization stage, so we're pretty pleased with our progress so far. I don't want to give guidance on exactly when we're going to trip over to positive EBIT because I'll be wrong whatever I forecast. But, we are pleased with the trajectory. We've got very specific milestones against the business. We're going to hit the long term targets for that business that we've communicated to Wall Street.

Ghansham Panjabi, Robert W. Baird & Company Incorporated.

On PSM, Mitch, I think you mentioned negative mix as part of the EBIT variance. Is that mostly because the growth rates in the emerging markets are stronger and that's maybe some of the lower margin business that you're referring to? Or how should we think about that?

No, actually emerging market growth is accretive to margins. What we've been doing, even in emerging markets, is looking for places to take share that are still investment-grade opportunities, but maybe we just haven't been quite as focused on that. It's working pretty well. I think the flow-through margins are -- certainly, versus the first quarter of last year, are just a little bit less, but it's good profitable business. So, we feel good about it.

Then the double-digit growth commentary across the emerging markets, was there a meaningful deviation between say China and Brazil or some of the other emerging markets?

The only deviation, I'd say, is Eastern Europe, as you'd expect, was a little bit softer than what we saw in Latin America as well as Asia.

Okay, and then back to RBIS, I guess as a follow-up to George's question. You seem pretty optimistic on the outlook there. Most retailers in the US, when they reported March were calling out weather and more uncertainty as it relates to the consumer. Can you just help us bridge the gap between the two in terms of the outlook?

All retailers are optimistic about the upcoming season. So, they're talking about what happened in the first quarter, and of course those are goods that we shipped back in late Q3, early Q4. At least from our perspective, there's a lot of good things going on. We believe we're taking market share, so that's helpful. We still have adoption of RFID, granted the pace will slow in 2013 versus 2012. I would say in general, and it's hard to generalize of course, we see a decent degree of optimism about how the year will play out. Inventories, the inventory-to-sales ratio in Apparel is still about where it should be. Apparel costs are also maintaining a good relative position, so all those factors so far look okay.

Okay, thanks so much.

Scott Gaffner, Barclays Capital.

My question is really on the guidance. You said okay, we understand a minus $0.15 for DES, and you said the offset was I think you said lower cost and higher volume. Can you break down the pieces there? What's lower cost? Then, maybe on a penny's basis, what's the higher volume?

Sure. Just very simply at the high end pull $0.15 off for DES, and basically add back $0.10 for the lower costs, which is $2 million lower than we had a few months ago for interest expense. The rest of it just being lower operating cost. As well as something I didn't mention, $0.02 from different shares outstanding assumption late in the year. So, that's plus $0.15, minus $0.10 at the high end. Then at the low end, you've got the same factors, but then as you can see, we raised the low end of our volume guidance for the year. So, that's where you get the extra $0.05.

So, you said lower share count later in the year. Is that -- that's not related to DES, the sale of OCP and DES? You'd --

We're still saying approximately 100 million shares outstanding for the year. The averaging effect is really modest, so we were just -- a very modest amount, over 100 million before, we're a modest amount below 100 million now.

Okay, but just to be clear that does assume that you buy back shares with the proceeds?

Yes.

Okay, just want to make sure we have the guidance right.

Thank you for clarifying, if I wasn't clear. I appreciate that.

No problem. The other thing is with RFID growth moderating in the second quarter, do you think it can actually turn negative in the second quarter?

I suppose it's possible, because we had very strong growth last year, I haven't really looked at it quarter by quarter. We still think RFID growth will be 10% to 20% this year or something like that, maybe 10% to 30%. Again, quarter by quarter, that's very difficult to be that precise.

The key question is, we know what's going away as far as the build up of one retailer that drove a lot of demand, it's the ramp up of additional new programs and so forth. Predicting the exact timing of that can be challenging.

Just lastly on RBIS, I think, Dean, you said mid single-digit growth in Europe in RBIS in the first quarter?

For retailers and brands that are based in Europe, correct.

Right. Are you just with the right retailers or what would you attribute that to? Maybe we're mixing weak European headlines, and the environment's better? Or, is it just you're with the right customers?

We have lower relative market share in Europe, so I think part of it is -- there's several factors. One is yes we are with the right retailers. Some of these brands also that we serve tend to be global, even though they're based in Europe. So, think of someone like Audidas, for example. It's really difficult for us to figure out exactly where all their products are shipped, so we just characterize them as European source retailer. I sense, we don't have the import data yet, is that we're continuing to take market share in Europe. There is RFID activity going on in Europe, ramping up as well.

Great. Thank you.

Jeff Zekauskas, JPMorgan Securities.

This is Silka Cook for Jeff. I was wondering if you can discuss where the strength in the domestic Pressure-sensitive business is coming from? That is, is any of the players selling into the US American packaging markets have reported pretty poor results so far, whether it's PPGs packaging business or ALCOA's can business. It's like low single-digit volume growth is pretty good. So, I was wondering how you did that?

I'm not actually sure I'd answer the question. I think--

Did you gain share?

We don't have any share data yet, Silka, for the US business. I do think that -- so, I can't really estimate that. We did have low single-digit sales growth in the quarter. We had been taking some market share in North America in the last couple of quarters, so some of that is probably just a lapping factor, is that most of our market share gains came in the back half of the year. I think anything else would be highly speculative at this point.

Okay, in terms of cost savings, what was the run rate in the quarter? Are you at $22 million or $23 million a quarter already, something like that?

As far as the restructuring program?

Yes.

We're, net of the some transition costs that we had in the quarter, we're that $15 million in the quarter, which would equate to roughly a $60 million, $65 million annualized run rate.

Okay, and your goal is just to get to $100 million by the end of the second quarter?

Yes, by the middle of this year.

Okay. What is your target for RFID revenue in the RBIS business for this year? If I remember it right, maybe it was close to $100 million last year, and I was wondering what your target is for this year?

I think we announced we had hit about $100 million run rate by the end of last year, and we're expecting anywhere from 10% to 30% growth in RFID sales in total for 2013.

Last question I have is on raw materials. It seems that propylene prices are really coming off sharply again and have you noticed decreases in the derivative materials that you purchase as well?

Well, we definitely saw some inflation, especially in North America during the first quarter, which wasn't surprising giving input costs were going up during that period of time and --

But, all of that should have disappeared by now, right?

Well, I hope it does, but it's still -- there is a lag time between the time those input costs change and when we get a benefit or an increase. There's also supply and demand factors that impact those rates as well.

I think overall the story is very similar to what we said last quarter, Silka, is relatively stable and we're seeing some inflation, some of the specialty materials that we buy and some deflation in some other specialty items. Overall, it's pretty much stable.

Okay, thank you very much. I'll get back into queue.

There are no further questions at this time. I'll now turn the call back over to you.

Okay, thanks. Well I'd just like to say, I'm pleased with the start of the year. We delivered at the high end of our revenue range for the year, met our expectations for earnings, and received regulatory clearances for the sale of DES and OCP. We are committed to meeting our long term targets of 3% to 5% revenue growth and 15% to 20% EPS growth while generating substantial free cash flow so that we can return more to shareholders. I'd like to thank the entire team at Avery Dennison for a good start to 2013. Thank you for joining us today.

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.