艾利丹尼森 (AVY) 2014 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 March 29, 2014.

This call is being recorded and will be available for replay from 12 PM Pacific Time today through midnight Pacific Time April 27.

To access the replay, please dial 800-633-8284 or 402-977-9140 for international callers. The conference ID number is 21676581.

(Operator Instructions)

I would now like to turn the conference over to Mr. Eric Leeds, Avery Dennison's Head of Investor Relations.

Please go ahead, sir.

Thank you, welcome everyone. Today we will discuss our preliminary, unaudited first-quarter 2014 results.

Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP on schedules A-2 to A-4 of the financial statements accompanying today's earnings release.

We remind you that we will 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 will now turn the call over to Dean.

Thanks Eric.

Good day, everyone. We had a solid start to 2014.

Our playbook is working. We are delivering mid-single-digit organic sales growth, driven by emerging markets, innovation and share gain.

We are executing productivity actions and driving capital efficiency. We are improving returns, and we are returning cash to shareholders.

Organic sales growth came in at the high end of our expectations for the quarter, driven by pressure-sensitive materials growth outside the US. Specifically, the Labeling and Packaging Materials business continued to benefit from strong growth in Asia and South America as well as solid growth in Europe.

Performance Tapes also delivered another strong quarter. However, consistent with recent quarters, we did not see as much of the benefit to operating profit from PSM's incremental sales growth as we generally expect.

We had some headwinds in the quarter that drove higher-than-expected manufacturing and SG&A expense. So our operating margin for PSM came in a bit short of expectations for the quarter, given our relatively strong top line result.

We are very pleased to see the acceleration of topline growth for our highest return business, and will continue to take actions to drive productivity as modest improvement in our flow-through will drive even greater value creation.

Retail Branding and Information Solutions delivered another quarter of strong earnings growth, in line with our expectations for both topline and margin expansion. Growth continues to be the strongest with our Europe-based retailers and brand owners and in the performance athletic and fast fashion segments of the market.

RBIS remains on track with its profit improvement plan. The business has made excellent progress in executing its footprint reduction strategy and other key productivity initiatives.

As you know, we target a full point of margin expansion for this business each year through 2015. The consistent execution of our marketing and operational strategies has kept us on track to achieve that objective. So, again, a solid quarter for us overall.

But while I'm generally pleased with the progress we made in the first quarter, we will not be satisfied until we achieve all of our long-term goals.

We will be providing more detail on our opportunities and strategies within each of our key businesses and providing new financial targets through 2018 during our Investor Meeting in New York on May 21. I hope you will be able to join us.

Now I will turn the call over to Mitch.

Thanks, Dean.

Hello, everyone.

We had another solid quarter, with 5% organic sales growth and a 10% increase in adjusted earnings per share, driven by higher than expected volume growth in pressure sensitive materials and continued margin expansion in retail branding and information solutions.

Adjusted operating margin in the quarter grew 40 basis points to 7.1%, as the benefit of our productivity initiatives and continued solid topline growth more than offset the negative impact of higher employee-related expenses.

As part of our productivity initiatives, we realized approximately $10 million of restructuring savings in the first quarter and incurred about $7 million of restructuring costs.

Our tax rate in the first quarter was 18%, reflecting benefits of discrete items. Our adjusted tax rate for Q1 was 33%, in line with our expectations as we continue to anticipate the full-year tax rate to be comparable to last year.

Free cash flow from continuing operations came in as we expected with a net outflow of $155 million, reflecting seasonality and the timing of capital needs. We continue to expect to deliver free cash flow in excess of $300 million for the year.

With net debt to EBITDA at 1.4 times, we remain below our long-term targeted leverage position with ample capacity to continue to return cash to shareholders over the coming years and we will continue to do so in a disciplined manner. Along these lines, we repurchased an additional 1.2 million shares for $59 million in the first quarter, more than offsetting dilution, and paid $28 million in dividends.

Looking at the segments, Pressure Sensitive Material sales in the first quarter were up approximately 6% on an organic basis, exceeding our expectations. Both Label and Packaging Material sales, and the combined sales for Graphics Reflected in Performance Tapes, were up mid single digits on an organic basis.

On a regional basis, North America sales grew slightly, Western Europe grew mid single digits, and emerging markets grew about 10%, reflecting solid volume growth in both Asia and Latin America.

PSM's adjusted operating margin in the first quarter was flat at 9.9%, as a benefit of productivity initiatives and higher volume was offset primarily by higher employee-related expenses, as well as modest headwinds from the net impact of pricing and raw material inflation; currency transaction costs; and higher manufacturing expenses in North America, due in large part to extreme weather in the quarter.

While some of these headwinds will dissipate in the second quarter, as Dean mentioned, we continue to have challenges with the flow through in PSM; and we're working to address them.

Retail Branding and Information Solutions sales grew about 2% in the quarter, consistent with our expectations as continued strong demand from Europe-based retailers and brands offset the impact of the tough RFID comps from one US-based retailer. RFID revenue in the quarter declined almost 10%, reflecting the tough comps.

Q1 represented the last quarter of these tough comps, and we expect RFID sales to begin to return to a more normal growth pattern over the balance of the year.

RBIS again demonstrated continued strong margin expansion in the first quarter, with adjusted operating margin improving 120 basis points to 5.8% as the benefit of productivity initiatives and higher volume more than offset higher employee-related expenses.

Sales in Vancive Medical Technologies, which was previously identified as other specialty converting businesses, grew 2.4% in the quarter with an operating loss that was roughly the same as last year.

As for our 2014 outlook, we continue to expect adjusted 2014 earnings per share from continuing operations of $2.90 to $3.20. This guidance is based on a number of assumptions, including the key factors listed on slide 8.

We now estimate 3.5% to 5% organic sales growth, which excludes the benefit of the extra week of sales this year. The increase in the low end of this range simply reflects PSM's higher-than-expected sales growth in the first quarter. And as you can see, the rest of our key assumptions remain unchanged from what we shared last quarter.

Overall, we delivered a solid first quarter and continue to expect adjusted earnings per share growth of 8% to 19% for the year. We are continuing our strategies of driving above-market organic sales growth through innovation and differentiated quality and service while continuing our cost and capital discipline.

We will maintain our strong balance sheet and continued returning cash to shareholders.

Now we will open it up to questions.

(Operator Instructions)

Scott Gaffner, Barclays Capital.

Just wanted to dig a little deeper on PSM on the contribution margin, came in around 10%. You mentioned mix before, I think last quarter.

Can you talk about the mix of sales? Is there something else as far as headwinds that maybe go away?

Dean, I think you might have talked about them dissipating at some point. Can you add a little more color there?

Sure, actually the mix trends are less negative, so we did see a positive impact of that sequentially. But, we did run, and I hate to blame the weather, but we did run into some weather related problems during the quarter.

We had 13 plant days of no shipments, and therefore to hit customer service requirements, it cost us a bit more money. We had some currency impact, we had some extra expenses that went the wrong way for the quarter. So normally we have puts and takes in the quarter, and this year we had a few more takes than puts.

When we look at the targets you have outlined so far, you did say at the last analyst day, or I think you updated it since then, 9% to 10% operating margin for this segment. These headwinds that you are facing, do you think they're more cyclical and one-time in nature, or are they secular trends that are difficult to overcome?

I do not think they are secular. The business operated over the target range for three quarters last year. We are still at the top of the target range.

We are certainly trying to grow the business faster. This is a business that operates at a multiple of the cost of capital, so growing it faster makes some sense.

Some of that growth has come with slightly lower margins, but it is still value creating, and we did have a few more bad guys this quarter I think than we normally would've expected. And I do expect the weather to be much better in the spring than it certainly was in the winter.

Right, agreed. And then just from a sales perspective, looking at -- you said combined sales for graphics reflective and performance tape is up mid single digits.

And if I go back all the way to Q2 of last year, that particular portion of PSM has grown quite nicely. Would you consider that a leading indicator for the Company, or is there a different subsegment within the Company that you would look at as your leading indicator. Because the growth there does look relatively strong over the last three to four quarters.

I really think label and packaging materials is the best leading indicator. And there we had good growth everywhere except for North America, where we were disappointed. But honestly, that was more weather related than anything else.

We don't have market data yet for the first quarter, but the trends we saw from the market data showed strengthening trends over the last two quarters of last year. So that, for me, has been a net positive.

Our tapes business has been executing extremely well with very nice growth, and a lot of that is just crisp execution of their growth strategies for both the personal care business and our industrial tapes business. So we feel good about that, but I wouldn't consider that to be a leading indicator.

Okay, and then just lastly, you said in your opening comments -- off to a solid start for the year, the playbook's working, organic growth came in at the high end of the range. And yet we see the stocks down considerably today. Is there something that you have been talking to investors about that's been a big disappointment here in the quarter, for the year?

And just add to that the PSM. It sounds like some of this is fleeting over time. Anything you can point to that is causing some concern?

No. Actually I'm disappointed with the stock price drop this morning. Of course, I think everyone is.

We're pretty much right on track for the year. I think we felt like we could have done a little bit better, but again, we had several one-time events that hurt us a bit. But fundamentally, the businesses seem to be clicking on 7 1/2 out of 8 cylinders, if there is such a thing.

And market demand looks pretty good. I feel very good about the organic growth. And we're holding our guidance for the year.

As you know, we generally don't change our guidance after the first quarter. It does tend to be -- it is our weakest quarter of the year, so it's hard to draw the trend lines. And we saw strengthening coming through the quarter.

So you're probably in a better position to understand stock price movements than we are. I can only guess that the past few quarters we've been beating the consensus number by a penny or two, and this time we came in under. Even though we don't give quarterly guidance, I know some investors track those numbers pretty closely.

Sure. Thanks Dean.

Sure.

Ghansham Panjabi, Robert W. Baird.

Can you first off quantify as best as you can the weather impact on the first quarter? Obviously it impacted a lot of companies in this sector and other sectors as well. Just hoping to get some sort of quantitivity around that.

Sure Ghansham. Let me comment about the three components I mentioned. I mentioned about the price inflation gap being a modest headwind, a modest headwind from the currency, and then also from the higher cost in North America, which a good portion of that was weather.

Each of those had a $0.01 to $0.02 impact within the quarter. And if you look at which ones of those will actually reverse out immediately and going into Q2, there a couple cents that basically will come right away. And we're working to manage through the rest of them as well.

Okay, so it was pretty considerable. And then in terms of margins for PSM, 2013 was pretty strong, Q2 and Q3 in particular from an operating margins standpoint. Just given some the mix issues and some of the productivity things you have lined up for this business, do you expect margins to be up year over year for this business assuming the midpoint of your range in terms of sales?

Ghansham, we don't give segment guidance, but let me just talk a little bit about what we're doing this year. We are trying to accelerate our growth rate, which makes a lot of sense. It's value-creating for a business with its high returns.

The second thing is we're executing a major restructuring action in Europe, closing the factory. That will cost us some money this year on the expense lines, but we're doing ti to make ourselves more competitive. And therefore it should definitely see some improvement, then, in our operating margins for 2015 and beyond.

So we're going to obviously give a lot more color to that as we talk about our targets in May. One other factor here is our graphics and tapes and reflective businesses have higher than average margins, and we have an opportunity to grow those businesses a bit faster. So that's another real positive.

And just one final one on RBIS in terms of the geographic sales breakdown between the two major regions there.

Still stronger in Europe. We were actually -- I should say European-based retailers and brands, because obviously some of those companies in the fast fashion and performance athletic wear have global footprints.

The US was negative when you take out the impact of the RFID customer. It was low single digit positive.

And what we see in the US, frankly, is again good performance in the performance athletic area, but some of the mass merchandise business hasn't been that good. And I think it reflects somewhat consumer sentiment.

Fortunately, we did tart to see apparel sales for customers start to rebound in the March timeframe. I think most apparel companies reported pretty good results. So we're hopeful, but the one thing I'm very pleased with, though, is the amount of margin improvement we were able to drive even with a relatively low organic sales growth rate in the quarter.

Okay, thanks so much.

Sure.

Anthony Pettinari, Citigroup.

Just following up on the European restructuring, I was wondering if you could give us any color on how costs will flow through the year and how operating margin improvement -- is that something that we should think of a really being backend-loaded? And if you can -- in terms of the plant closure in the Netherlands that you announced, maybe check the timing on that?

Anthony, you broke up a little bit towards the end, but I think your question was around timing of the European restructuring and when we see the savings. One thing I will say is the savings are going to be next year. So there's no real restructuring savings in 2014 -- it's in 2015.

And then we have some transition costs when you implement a big restructuring like this, and that will hit Q2 or Q3. The timing of this is still being worked through as we're going through the process of announcing the planned closure.

Okay, that's helpful. And then you tightened up the organic sales growth guidance, but your full-year earnings guidance is unchanged.

And I guess that's a fairly wide range, 8% to 19% earnings growth. As you look to the rest of the year, I'm just wondering what would be the major factors that would swing you potentially to the upper end or the lower end of that range outside of just volume and demand growth?

I think a lot of it again has to do with the organic sales growth. I think they are pretty good proxies for that, still a pretty wide range, 3.5% of 5%.

The number one question we always had in the second quarter is the length and strength of the second-quarter ordering season for apparel. It is something we just do not have a lot of forward visibility too, and to a certain extent that has a fairly -- that will have a big impact certainly on the second quarter which is a fairly strong quarter for us.

Maybe just last question dovetailing on that, as you look through the first three weeks of the month, what have business trends for been like and order trends been like in RBIS and PSM?

They've been pretty much as we expected and certainly in line with our guidance. Again, it's always a tricky period. It is three weeks.

We have Easter in there, and I would say fundamentally they are okay. The one thing we just do not know especially for RBIS is the length of time that the strong ordering period will start.

And then, if you look at the whole company, we started off slow in January, a little better in February, March was quite strong. And our order rate has been just fine for the first three weeks of April, but again, trying to predict that out to how the end of May, early June look, it is hard to do.

Jeffrey Zekauskas, JPMorgan Securities.

Good morning, it is [Selka Cook] in for Jeff. Were all of the $10 million of cost savings in the RBIS segment?

The vast majority were in RBIS, yes.

Second, I was wondering how your raw material costs are trending, like your paper cost, your propane cost. It seems like it was a little bit like a headwind in first quarter, which would make sense with the propane prices moved up and they're now downward moving. I was wondering whether you had some comments on that?

Sure, so this is one of the areas where we have seen a little bit of a shift that I commented on around a modest headwind from the price inflation gap. And we have been talking about experiencing inflationary pressures for the last few quarters and started to materialize a little more in Q1 than we had seen previously.

Where we are seeing the pressures are coming in, adhesive components as well as in paper. Paper pulp is at an all-time high right now, or at least for a long time.

That is where we're seeing the pressures, and we're working to offset that through procurement actions, further productivity, reducing the material content of the products we produce and sell, and then what we cannot offset with that, we will be evaluating price adjustments and so forth. Again, pretty modest in the quarter.

We are feeling the pressures. It id go against us a couple of cents in the quarter.

How much pricing did you get generally in the quarter if any?

We got through the pricing -- you really have got to look at it region by region. We talked last quarter about some additional surcharges that we were putting through in North America; those went through.

As far as, we have a lot of pricing in emerging regions linked to currency movement, so that is offsetting the movement in the imported, higher import cost of raw material in those regions. Those pricings are all going through, but overall pricing, it is a competitive situation, and that is where things are.

Generally, again, pricing of raw material inflation has been relatively neutral. We have seen over the last number of quarters; this time it went against us a couple cents. Not significant, but a little bit of a shift.

I was going to ask a last question. So of the $0.01 to $0.02 in weather headwinds, maybe $0.01 to $0.02 in the raw material cost -- price headwinds, do think you can make all of this up in the second quarter or maybe you will make up half of this in the second and the other half in the third?

I think some of this goes out immediately, so the things like weather and so forth, a couple of cents we should recover immediately going into the second quarter. Others we have to work through and address between Q2 and Q3 and work to offset.

One comment I would make is the quarter came in pretty much right at our expectations in our planning. I would say that if you sense any disappointment other than the drop in the stock price, it is really about we felt that we probably could have performed better in the quarter, but from our internal planning and modeling perspective, we came in right where we thought we would.

What I would say, when I look back at my model, I thought that -- in terms of sales, I thought that pressure sensitive would have done better and RBIS a little bit worse than I thought. And that looks like what happened for profit performance was different than I was expecting because there was very little margin in pressure sensitive, and you explained why.

And RBIS did so much better, and I guess that is where we also capture the cost savings. And I guess going forward, I'm assuming that the majority of the cost savings for the year also will be captured in RBIS if I understand that correctly.

Yes, and next year you will see a shift towards PSM again because of the European restructuring. That is absolutely right, Selka.

Can I ask one more question on the cash flow statement if I could. There's a very large negative working capital number in the quarter. I understand there are inventory builds early in the year, does some of it also relate to year-end bonus payments that get done, or why is that number so large in the first quarter?

A couple of comments. If you are asking seasonally why is free cash flow always negative in Q1, there is a couple of reasons for that.

Part of it is just the base seasonality of the business, so December sales are depressed relative to other months. So when we collect the cash from those sales in Q1, that is lower then, so that is one reason.

The other is, incentive compensation payments as you say happen in the first quarter as well. That is why seasonally, Q1 is always a negative. As you saw, we had a bigger outflow this year than we had last year, a few reasons for that.

One is if you recall last quarter, I mentioned just because of year-end timing, basically 2013, about $30 million I said moved from the first weeks of --what we normally see in the first weeks of the year into year-end 2013. That was $30 million, you can see the CapEx timings and other $20 million. And the rest of it is around working capital timing, and a key piece of this is around the receivables as far as movement around that.

Part of that is geographic mix; our terms are longer in the emerging markets where we are seeing the most growth. Part of that was timing of sales within the quarter. As Dean said, we saw higher sales growth in March that we saw in the first couple of months, so that moves working capital as well.

We are seeing a little bit of a shift there. Again, free cash flow came in as expected, and I think the key thing here is, we are not seeing any increased risk from a bad debt exposure or anything else. You can actually see that in the financial statements as well.

Do you still expect to buy back 5 million shares this year?

Our estimate for the average amount of shares outstanding for the year is 97 million, and given that we usually have [2 million] dilution, the math would get you to roughly 5 million.

George Staphos, Bank of America Merrill Lynch.

A couple things. One, are you in a position at this juncture to talk about what the savings might be in Europe from the capacity realignment?

Yes, the savings next year is expected to be around $15 million.

Then, your incremental margin in RBIS this past quarter was exceptional because you are getting all the restructuring savings. Obviously a lot of it is going to be driven by volume, but if we can hold normal levels of volume, whatever that might be, say certainly no worse than what we saw in the first quarter, should we continue to see stronger than normal incremental margin in RBIS the rest of 2014 from what you can see right now?

I think it, George, depends on the sales growth, of course. We always have headwinds, so if we get growth above 1.5% or so, we have really good flow through.

I think the thing to focus on is, overall we said expect to have a full point plus of EBIT margin expansion both in 2014 and 2015 to be able to hit our targets, and we are expecting that full point for this year. You saw we had a little bit more of that in Q1.

Any one quarter can have a little bit more or less than that, just timing of when marketing expansions come in one year versus the other and so forth. I think that point that we have been talking about is the right proxy overall for the year.

I'm not try to get a month by month, quarter by quarter margin expansion target, but you had 100% incremental margin in a quarter where you did not really have your normal revenue growth rate in RBIS, so it was exceptional. So I was just try to see if we should continue to expect better-than-average margin expansion there. I appreciate the color there.

Can you talk at all about what -- there was some capacity closure in pressure sensitive material in North America. What if any effect that is having on your business and customer base this year, if at all, if you have any view on that right now.

And similarly, I noticed that one of your peers is expanding capacity in Asia. Any initial views on whether that might have a negative effect on you this year -- probably not, but in the next couple of years?

George, yes. In North America, any time a company announces a closure of a factory, it is generally an opportunity to go after some business because customers are forced to requalify materials.

So certainly we have probably had more than the average number of phone calls about security of supply, et cetera. I think that could be a small upside for us in the balance of the year, but I don't think it is going to be anything hugely material to us just given the relative size of that plant versus our business.

In Asia, it has been 10 years since our competitor put in a big new asset, so I am not surprised that after 10 years, they have got to add some capacity. They have taken out capacity in Australia and South Africa, so this is really a regional add. It is not just a country add in China.

In the meantime, I just commented, we have added several new coating assets during that period of time. So given the growth in that market over there, it is not really a surprise.

And I do not anticipate any major disruption in our business in Asia in the last couple of years. Our customer surveys indicate that, especially in that region which is very high growth, says that we have still quite an edge in terms of product quality and service over all of our competitors, and we expect to maintain that as we go forward.

One question more, and I will turn it over and come back in queue. Obviously you can't talk about your day-to-day changes in capital allocation policy depending upon which way the stock is going, but given that the stock has done fairly well here in the last few months, let alone -- forgetting about today for a minute, how do you view the attractiveness of a buyback incrementally from here relative to dividend? Can you update us on your thoughts on dividend policy?

On dividends, George, we have a board meeting tomorrow, and that is the meeting where the board decides on the dividend increase, so we will let everyone know tomorrow in a press release. As far as timing of a share buyback, et cetera, we do not comment on that specifically, but I think given our track record, how do I look at it? I look at a pullback in the stock as a buyback opportunity frankly.

George, when we go through that assessment, we have a number of things to evaluate as we think of pace of share buyback. The biggest one is just our assessment of intrinsic value.

And then we basically look around volatility around in the stock over time, and when there's more distance between the stock price meaning the stock is trading at more of a discount to the intrinsic value, we buy more, and we buy less as it gets closer. That is how we think about it.

Rosemarie Morbelli, Gabelli and Company.

Could you touch on your increasing employee expenses? Are you hiring new people in order to push the growth that you talked about during the call, or is it just your inflation? Could you give us a better feel for what is happening there or what happened in the first quarter and what you expect for the balance of the year?

It is all wage inflation, 90% plus of it, Rosemarie. So we have -- as we have talked, RBIS has relative to their size more wage inflation than the pressure sensitive materials, but that's what it is.

It is not any large investments or anything else that we are doing. We're not having to add back any shifts or anything for capacity, so it is all wage inflation.

Looking at Vancive medical, I know it is small, but you have a target of above 5% operating margin, and we are obviously nowhere near there. Could you give us a feel as to where that margin is going to come from, and you already have one and a half years to get to it. Are you changing your outlook?

Actually we changed the segment because we had -- the DES business was a substantially larger business and certainly had some nice profitable business which we sold last year. And we never updated the guidance for that segment. We will update investors in the May meetings, but I will say we expect Vancive to be profitable next year in 2015.

You talked, if I may ask another question, you talked about the extra week in the fourth quarter adding 1%. I'm assuming it is to revenues. Is that 1% to the fourth quarter revenues, or could it be because of the timing number that could be as large as 1% of full-year revenues?

It is 1% for the full year, and it all comes in the fourth quarter. So we will be about 3.5%, 4% impact on Q4 itself, but we do not include that in our organic sales growth guidance when we talk through it. We basically exclude the impact of the extra week.

That should translate into a positive surprise as we get into the last quarter, or do you expect some offsetting number which is why you aren't including it?

We excluded on the top line just to show what the true underlying trends are. And from a bottom line perspective, I think that is where your question is, we do not expect this to have much of an impact at all on the bottom line.

So normally adding a week, you would normally expect a 2% lift for the full year. We are only saying one because the week that is being added for the year is a week essentially between Christmas and new year. It is a very soft volume weeks, so the variable margin we have on those sales are really just enough to cover the fixed cost.

That is very helpful. Thank you very much.

Just summarizing, you are expecting the full $20 million of savings in 2014 to hit RBIS results. And you already had $10 million of that in the first quarter and then next year, you expect the full $15 million to hit PSM results?

Yes. The plan is $15 million next year, and it is $40 million is the full year number for restructuring in 2014 which we received roughly $10 million in the first quarter.

George Staphos, Bank of America Merrill Lynch.

You had mentioned that there were three buckets, if you will, of more takes this quarter, past quarter than puts, and they were in price cost, FX and weather related cost. Correct me if I'm off on any of that jargon.

You said that you would be able to begin to see $0.02 of reversal in the second quarter, which is mostly around weather, and that you would work around recapturing the rest of that over the rest of the year. I can understand price cost managed either by reduced cost or by trying to improve pricing, but on the FX side, what else might you be doing other than trying to raise pricing much more quickly than the FX effect on EBIT?

The couple of cents that go away immediately relate to the -- we said higher cost in North America manufacturing costs, if which a good chunk of that was weather. That will go away immediately.

Of course the FX is another piece that is expected to go away. There was quite a bit of volatility toward the end of the quarter, more than you normally see. We had hedging practices in place, we manage that, but on the fringe, you always have a little bit of movement.

And to be honest George, it's not something we would normally comment on, and that is what Dean's point was -- we always have things, puts and takes, and there was just more of them going in one direction. A portion of that is going away as well. The $0.02 we expect to be gone right away; the other items we have got to work through.

Understood. I guess a related question, I did not take from your comments that the competitive landscape has changed for the negative relative to the amount of price cost compression that you had in the first quarter, from my experience anyway, covering it.

That is garden-variety type of compression that you would see when input costs are going up. There is normally some lag time on pricing.

But correct me if I am wrong, aren't you in fact seeing more competition than normal. Your markets aren't a walk in the park -- I recognize that. But are you seeing more competition than normal and in fact you are signaling that?

No, I would not say there has been an increase in intensity in the competitive landscape. In fact, overall market growth I would say in pressure sensitive certainly has been better.

That has been helpful. We have been taking market share fairly consistently across the board, so I do not really sense -- it is always competitive, but I do not see a shift.

Dean, last question I had for you, you mentioned trying to improve the flow through, the incremental margin if you will in the pressure sensitive business. What specifically are you doing to try to affect that?

Are you changing incentives to the sales force to try to incentivize sales of higher-margin product? Are you deliberately now going to pursue the less margin rich volume to a lesser degree than in the past, how are you trying to implement that?

Good question. The sales force is incented for part of their incentives in pressure sensitive for selling a richer mix. Certainly a component of that in their pay.

We are focused on higher margin categories of product. A lot of our innovation frankly is designed around products that have higher value and therefore a higher flow through, so all of those things are underway.

In fact, we did see a shift from the fourth quarter to the first quarter. Unfortunately it was offset by things like weather, and currency and a little bit of inflation. The areas where we targeted and focused are showing progress, and now given a somewhat shift in the environment, we will just take some additional actions.

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. Our playbook is straightforward, and it is working, and we are going to continue down this path. Innovation will continue to be a hallmark for our businesses, further strengthening our industry-leading positions in all of our key markets. With modest topline growth, ongoing productivity improvements and highly disciplined capital management, we will continue to drive double digit earnings growth and solid free cash flow, most of which will give back to shareholders.

I look forward to speaking with many of you at our meeting in May. Thanks for joining us today. Goodbye.

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