艾利丹尼森 (AVY) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to Avery Dennison's earnings conference call for the first quarter ended April 4, 2015. During the presentation, all participants will be in a listen-only mode.

(Operator Instructions)

This call is being recorded and will be available for replay from 11:00 AM pacific time today through 12:00 AM pacific time May 2nd. To access the replay, please dial 1-800-633-8284, or for international callers you may dial 402-977-9140. The conference ID number is 21734745. I would now like to turn the conference over to Cindy Guenther, Avery Dennison's Vice President of Finance and Investor Relations. You may begin, ma'am.

Thank you, France. Welcome everyone. I'm happy to be back, supporting shareholders and analysts as the head of Investor Relations. Today we'll discuss our preliminary unaudited first-quarter results. The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP on Schedules A2 to A4 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 and CEO; Mitch Butier, President and Chief Operating Officer; and Anne Bramman, Senior Vice President and Chief Financial Officer. I will now turn the call over to Dean.

Thanks, Cindy, and good day, everyone. We're happy to have Cindy back as the IR lead, and I'm certain that she will serve all of us very well. I'm also very pleased to introduce you to our new Chief Financial Officer, Anne Bramman.

Anne started five weeks ago, joining us from Carnival Cruise Lines, where she served as Senior Vice President and Chief Financial Officer. Anne has extensive experience overseeing the finance functions of market-leading companies with complex global operations, including Carnival and specialty retailer L Brands. Anne is an outstanding addition to the corporate leadership team, and I know you'll enjoy getting to know her and benefiting from her insights. I've also asked Mitch to join us today to participate in question and answer.

Besides the earnings announcement today, I hope you take note of another significant announcement concerning the organization. The Board recently approved the appointment of George Gravanis to the role of President, Materials Group, effective May 1st. George has been a driving force in the growth and global expansion of our materials businesses since he joined the Company 12 years ago. He played a key role in unifying our market presence in Europe and has been instrumental in our successful penetration of the Asia-Pacific region. Throughout his career with us, George has demonstrated a remarkable ability to inspire his team and drive strong business results.

Now turning to Q1 results, I'm very pleased to report a good start to the year. We beat our expectations for Q1 adjusted EPS by about $0.05, reflecting solid organic sales growth in Pressure-sensitive Materials and strong sequential improvement for Retail Branding and Information Solutions. We also delivered significant margin expansion through productivity gain, higher volumes and improved product mix.

I'm also happy to report that free cash flow improved nicely in the quarter, up nearly $140 million, compared to the first quarter of last year. You will recall that we did expect a meaningful shift of cash from the fourth quarter of 2014 into the first quarter of this year, as we took actions to reduce the volatility associated with year-end changes in working capital. That strategy has played out as anticipated, and we continue to look forward to solid free cash flow for the full year, with quarterly results more closely reflecting the underlying seasonality of our business.

And we continue to expect to return the vast majority of that annual free cash flow to shareholders. We returned $66 million to shareholders via share repurchases and dividends in the quarter. Earlier this month, the Board approved a 6% increase in the quarterly dividends, consistent with our earnings growth last year. And of course, we still have over $500 million authorized under our share repurchase program.

As you know, we are laser-focused on achieving our long-term financial goals, both the four-year commitments we set through the end of this year and our new targets through 2018. We said in last quarter's call that we were making some mid-course corrections to our strategy to ensure that we achieve those targets. I'm happy to report that we're already seeing some benefit from those actions as we strengthen the long-term competitive positions of all of our segments.

One key course correction was rebalancing the price, volume and mix dynamics in Pressure-sensitive Materials. We had already begun to see some progress on that front in the fourth quarter, and I'm pleased to say that we delivered further improvement in the first quarter, with favorable product mix contributing significantly to PSM's margin expansion in the quarter.

The other key course correction was to accelerate profitable growth in the less differentiated segments of both PSM and RBIS markets. Seeing some top line challenges in the back half of 2014, along with the negative translation effects of the stronger dollar, we intensified our efforts to identify, accelerate and execute new restructuring actions.

Again, this productivity focus is not just about lowering costs and expanding margins, which are crucial, but also about becoming more competitive so we can grow profitably and win in the more challenging segments of our markets. We made significant progress on this front as well, which is reflected in the increase through our projected restructuring charges and associated savings for the year.

Looking briefly at the segment, Pressure-sensitive Materials had a great quarter with roughly 4% organic growth and record operating margin for the segment. Organic growth was solid across most regions.

As I mentioned, favorable product mix had a significant impact on earnings growth and operating margin in Q1, as our strategy to accelerate growth in higher-value segments delivered. We grew faster than average in the films category within Label and Packaging Materials, including durables and specialty applications, as well as with higher-value segments within Graphics and Performance Tapes.

Productivity improvement also contributed to the record operating margin for PSM, primarily through ongoing efforts to engineer reductions in material costs, as well as through restructuring initiatives. While we did benefit from raw material inflation -- or deflation, sorry -- in Q1, these savings were more than offset by the carryover effects of prior year pricing adjustments.

As I mentioned at the start, Retail Branding and Information Solutions delivered strong sequential improvement in organic sales growth. The priorities for the RBIS segment are clear. First, accelerating top line sales growth for the core business. To that end, the Performance segment continues to perform well, delivering double-digit organic growth in the first quarter. You may recall that we faced some pretty tough comps in the fourth quarter over last year, but this segment has been a consistent source of strength for us.

Our biggest challenge last year was in the less differentiated segment for the market, particularly within Value and Contemporary. Sales in these segments were still down modestly year-on-year in Q1, but the team has made good progress, gaining share in several key accounts. In particular, the team serving factories in North Asia and especially China delivered solid growth, reversing last year's challenging trend there.

Another key priority for RBIS is to capture the above average long-term growth potential in embellishments and RFID. We continue to see strong profitable growth from embellishments, leveraging our proprietary heat transfer technology.

Now, sales for RFID products declined in the first quarter versus prior year, as we expected, due to reduced demand from a couple of large European accounts. But the existing pipeline of activity remains very strong, and I'm confident we'll see a return to strong growth for RFID in the back half of this year and beyond. That confidence was reinforced by the feedback I received from multiple customers at the recent RFID live trade show in San Diego, where the question of retailer ROI wasn't even a topic of discussion anymore.

Another key priority for RBIS is, of course, margin expansion through further streamlining of SG&A and rationalizing our manufacturing footprint. With the aggressive restructuring and other productivity actions underway, we expect RBIS to return to the margin expansion trajectory necessary to achieve our 2018 financial goals.

In terms of the Company's overall outlook for 2015, we've raised our adjusted EPS guidance by $0.05, as we believe the execution of our strategies will more than offset the incremental pressure we've seen from the stronger dollar. Now I will turn the call over to Anne.

Thanks, Dean, and hello everyone. I'm very pleased to join the Avery Dennison team. There were many compelling reasons for me to make this move. I've enjoyed working for companies with leading market positions, so Avery Dennison was obviously attractive from that perspective. It's very exciting to join a team with a proven track record for innovation and execution. I'm obviously transitioning to a new space, both in terms of industry and B2B focus. I look forward to bringing a different perspective to the team as I ramp up. Adding to Dean's commentary, I will provide a little more color on the quarter.

In Q1, the Company delivered a 25% increase in adjusted earnings per share on 3% organic sales growth. Currency translation and the effect of the extra week in the prior year had material impacts on reported sales growth and earnings. Currency translation reduced reported sales by 7.2% in the first quarter, with an approximately $0.08 impact to EPS. The effect of the extra week in Q4 added an estimated three points to reported growth for Q1, which was worth roughly $0.05 in terms of EPS. Adjusted operating margin in the first quarter improved 130 basis points to 8.4% as the benefit of productivity initiatives, higher volume and improved product mix more than offset higher employee-related costs.

The Company realized about $10 million of incremental savings from restructuring costs, net of transition expenses. The adjusted tax rate was 34%, consistent with the anticipated full-year tax rate in the low to mid 30% range.

Free cash flow was a negative $16 million, an improvement of $139 million compared to Q1 of last year. As Dean mentioned, a good portion of that swing was expected, following the actions taken in 2014 to reduce the volatility associated with year-end changes in working capital.

The Company repurchased approximately 600,000 shares in the quarter, at a cost of $34 million, and paid $32 million in dividends. We remain committed to returning cash to shareholders and have sufficient capacity to continue our share buyback program in a disciplined manner.

Now looking at the segments. Pressure-sensitive Materials sales were up approximately 4% on an organic basis. Label and Packaging Materials sales were up low single digits, while combined sales for Performance Tapes and Graphics were up mid-single digits.

On a regional basis, the pace of organic growth in both North America and Western Europe improved sequentially, with North America up low single digits and Western Europe growing mid-single digits. Organic growth for emerging regions was relatively low in Q1, up low single digits due to continued softness in China and a significant decline in Russia, offsetting continued strong growth in APN regions, India and Korea. PSM's adjusted operating margin of 11.5% was up 160 basis points compared to last year, as the benefit from favorable product mix and higher volume, combined with productivity, more than offset higher employee-related costs.

Turning to Retail Branding and Information Solutions, sales were up approximately 2% on an organic basis, and adjusted operating margin expanded by 60 basis points. In terms of the top line performance, as Dean discussed, the solid progress and improvements we've made in improving the challenging trend in the Value and Contemporary segments of the market, as well as the continued strong performance in the Performance segment.

Adjusted operating margin improved 60 basis points in Q1, as the benefit of productivity initiatives and higher volume more than offset higher employee-related costs. As Dean mentioned, we expect increased margin expansion over the balance of the year, as the team executes an aggressive set of restructuring and other productivity improvement initiatives while gaining leverage from higher volumes.

Sales in Vancive Medical Technologies grew approximately 11% on an organic basis. The segment's operating loss was reduced by about $1.6 million, primarily due to volume and pricing. The team continued to focus on the milestones needed to drive long-term growth of this platform, with the objective of achieving a positive contribution to earnings by year end.

Turning now to our outlook for the balance of the year, we have raised our guidance for adjusted earnings per share to be in the range of $3.25 to $3.45, reflecting the roughly $0.05 beat to our expectations for Q1. We outlined some of the key contributing factors to the guidance on slide 8 of our supplemental presentation materials.

Note that three of the assumptions underlying our original guidance have changed, and we have reflected those changes in our new outlook. Specifically for the full year, at recent exchange rates, we estimate that currency translation will reduce net sales by approximately 8.5% and pretax earnings by roughly $50 million, or an estimated $0.35 per share.

Combining carryover benefits in 2014 with new actions taken this year, we now estimate that restructuring initiatives will contribute roughly $70 million plus pretax, or about plus $0.50 per share. Consistent with the increase in anticipated restructuring savings, we have raised our estimates for cash restructuring charges to $15 million pretax. Combined with other items, this raises our estimate for pro forma adjustments to GAAP earnings from $0.25 per share to $0.40 per share.

As you can see, the rest of our key assumptions remain unchanged from what we shared last quarter. So overall, we delivered a good first quarter. Our two market-leading core businesses are well positioned for profitable growth, which combined with our continued focus on productivity and capital discipline, will enable us to expand margins and increase returns, and achieve our 2015 and 2018 targets. Now we will open the call up for your questions.

Thank you.

(Operator Instructions)

And our first question from the line of Ghansham Panjabi with Robert W. Baird.

Hey, guys. Good morning. Anne and Cindy, welcome.

Thank you.

First off on Europe and the increase in PSM growth there by, I think you said mid-single digits in Western Europe. Do you think that's inline with the market or a function of share gains? Also, what are you generally seeing in the macro in Europe across both businesses?

Mitch, why don't you take that?

Broadly speaking, I think we've been talking about for awhile that Europe has actually been coming in stronger than we had been anticipating, based on the macro. But there's a big difference here between Eastern and Western Europe. Western Europe is actually showing really strong growth overall. I think if you look at some of the macro indicators as well, the consumer confidence and so forth, it's showing positive performance in Western Europe. So we're seeing all that.

Eastern Europe is different, particularly Russia. We've seen a significant drop-off in Russia. Part of that is market, and part of that is share, to be quite honest. Because we source Russia from Europe, and so our cost basis is in euros, and it's getting more challenging to get into Russia from that perspective. So overall, Europe is on the West very strong, East is a little bit weaker. We continue to be pleased with the performance, and the team continues to do a great job of driving growth in the high-profit segments. And we continue to instill more discipline in the lower profit segments.

I think that from an overall perspective, including RBIS, what we see there is -- we have some pretty tough comps from Europe. As you recall, they were growing in that kind of double-digit category for a number of quarters. But a couple of our big retail customers have been reducing inventories over the last couple of quarters, and that's put a little bit of pressure. So I would say that would be a slightly more negative outlook on Europe from RBIS. But we're hopeful that as the year progresses and European economies get a little more solid that we'll see some of the benefit there.

That's helpful. Then the upside in cost savings for 2015. Does that come to some extent from 2016 as a pull forward? Or is it actual cost savings from something new you found for this year?

These are incremental actions from what we talked about previously.

Okay. But it doesn't change anything in terms of 2016?

No, we haven't provided guidance on 2016, so --

There's definitely going to be some carryover into 2016.

Okay. Okay. All right. And then just finally on the margins for PSM in the first quarter, I think at 11.5%. I think that's a record, if I'm not mistaken. How much of that was boosted by any one-offs, such as lower raw materials or anything else that may not reoccur as think about next year, for example? Thank you so much.

As far as one-offs, there aren't any one-off benefits that we see coming through within the quarter. It is above the high end of our targeted range that we've laid out. And we still -- when we laid out those long-term targets of 10%, 11%, we were targeting 11%. Because at that level, this business is a very high returns business and we're focusing on achieving that 5% organic growth rate. So no big benefits from that perspective. As far as your question of other one-offs related to deflation, we have seen some deflation, as Anne and Dean spoke to, but it's been offset by the pricing that we have seen, primarily carryover pricing from last year.

Okay. Thank you so much.

Our next question is from the line of George Staphos with Bank of America Merrill Lynch. You may begin, sir.

Hello, everyone. Good morning. Welcome back, Cindy. Welcome, Anne. Look forward to working with you. Couple of questions first on RBIS. If we go back -- and we've asked this question in the past as well -- 10 plus years, RBIS or RIS has been a source of continual restructuring. What makes you feel at this juncture that this level of action or the actions you're taking really put the business on a much more profitable, much more sustainably profitable footing for the future? Then I have some follow-ons.

Yes, George. It's a good question. I think if you look back kind of at the bottom, which was 2009, we've made significant improvements in the returns of this business roughly of an average of 100 basis points per year. I think the team has done a nice job reducing costs, improving service, improving our competitive position. And I think the go forward plan will be continued focus on both delivering a balanced strategy, which is decent outlying growth, 4% to 5%, which we think is doable, given the market And also continuing to drive a lot of productivity.

So we feel -- we slipped off that track a little bit last year. We did expand margins last year, despite the soft top line. But what I see is the business definitely recovering here, and it's -- since we want to go back to age old stories, I have to say, RFID, if I've ever seen a turning point, it's been this last few months. Talking to retailers in the US, at this trade show a couple weeks ago, it was all about -- it wasn't about, is there a payback? It was all about when and how they're going to implement this important technology. So I really see this as a definite upside for us over the next few years.

Okay. I want to get to RFID in a minute, but back to RBIS. You've seen the margin improvement, and that's good, but it has required continual restructuring. And so you think that you can get your 100 basis points of margin improvement to get to your goals by 2018, 2019 without further restructuring? And then on RFID, if you can take us through the backlog in terms of why you think business picks up in the second half of the year?

What's the timeframe, and what's the typical process, if you will, for a retailing customer? Do they say, yes, we agree, this is a fantastic thing, and we contract with Avery Dennison for a couple of stores, and it takes a couple of quarters to load those stores and implement RFID? Can you give us a bit more detail around that? Thank you, guys. And I'll turn it over at that point.

Thank you, George. On your first question, yes. We're confident we're going to be able to beat our 2018 objectives for this business, both in terms of growth and margin expansion. To achieve those objectives and focusing on margin, we do need a balanced strategy, as Dean said, which we do have of growth and productivity. This business has high variable margins, and also has a pretty high level of inflation, wage inflation, every year. So we need a few points of growth every year to be able to maintain and expand margins there and then drive the productivity that we've talked through.

In order to achieve the 2018 targets, what we laid out, we actually knew we would be continuing the restructuring within RBIS. And we will continue to restructure this business every year to continue to find opportunities to reduce costs. So it is a balanced strategy. Nothing has shifted on that front, and we're going to continue to execute that. I think one thing we did say what we are making adjustments is making sure we're getting more streamlined in our sales and customer service organizations. To focus on some of the lower value segments, if you will.

And we've seen good progress on that, as you can see in the growth rate here in Q1. We talked particularly focused on the apparel factories in China and North China. That's where we've seen good progress as well. So yes is the short answer. Yes, we're confident we're going to hit the 2018 target. And yes, it requires further productivity as well as growth across all segments.

Thank you. Any mention of RFID?

Yes, George. It's interesting, because I would say first of all most, most companies were taking longer time scaling up. They'd do 25 or 30 stores. They would get good results. Then they would expand it to 100 to 150, to validate what they saw. They get that, and then they ramp up. I would say the cycle can last anywhere from 18 to 36 months.

The difference for me here was that retailers understand that to compete in an omnichannel environment -- in other words, the ability for customers to operate both online and get product shipped to them or pick up products at the store -- inventory accuracy is fundamental for that strategy, and RFID is the easiest way for them to achieve that. So what we've seen is the retailers now, basically their senior management is saying we don't need to go through a second phase of tests. We get the benefits. We saw it in the pilot. Now it's rolling out more effectively, so the pipeline of activity is quite substantial. Now that being said, it's still very difficult to predict precisely, quarter by quarter, when those purchase orders will start rolling in. But I've been around the RFID space for more than 10 years, and I just -- for me, it's more intuitive, but I definitely sense a change in mentality by US retailers. So I think that's a net positive for us in the long term.

Thank you.

Our next question from the line of Rosemarie Morbelli with Gabelli & Company.

Thank you. Good afternoon, everyone and welcome to all. If you look at the first quarter, you surprised yourself. You did better than you anticipated. Can you share with us, Dean, where you saw the main differences versus what your initial expectations were?

Yes. It's a good question, Rosemarie. I think our expectations were obviously higher than the street consensus. But that being said, we beat our own internal expectations by about a nickel, and I think certainly the margin expansion in PSM was a contributing factor. And a lot of it came from mix improvement, frankly. Now the team has been working hard at growing the higher profit segments and changing the price/mix equation.

You'll recall last year most of the calls -- most of the conversation on the earnings calls was, why aren't we getting any flow-through from our volume growth? And the team has been working hard. So there was a real positive swing to that. So that is a net positive. And frankly, I was pleasantly surprised by the rebound in RBIS.

The first quarter is a tough quarter for us, because it's seasonally low. And I think the team did a great job of executing against a number of programs, capturing share from some key retailers, and we've got a hot product in our heat transfer product. Customer will -- actually, we're a little bit short of capacity rate now, and we're adding capacity as we speak. So all those factors came together. I will say we normally don't raise guidance at the end of Q1, because it's seasonally slow. I realize that a nickel may not sound that much, but for us, it's -- we usually like to get two quarters behind us before we adjust our guidance. So I think we're feeling obviously pretty good about the balance of the year. Currency situation aside that.

Right. So in addition to the fact that your heat transfer is doing better, you probably benefited from lower cost for materials. Do you -- is it too early to have a feel as to whether or not retailers are rebounding? Are they -- what do you hear out there?

Well, that's a good question. One of our data points unfortunately is import of apparel into the US, and because of the Long Beach strike, stuff isn't coming in. So we don't have a very good metric right now to see how retailers are feeling. And we've heard some anecdotal evidence where retailers are having issues finding ships to bring the new product over here. I think that will all sort itself out in the next couple of quarters. I think US retailers are net positive right now, given the way the consumer market is playing out, and European retailers were less positive last Christmas. That season, the holiday season, but somewhat more positive now, I would say, given again the relative strength in European economies.

Thank you. That is very helpful. I will get back in line.

Our next question is from the line of Jeff Zekauskas from JPMorgan Securities. Please go ahead.

Good morning. It's [Silka Kueck] for Jeff. How are you?

Fine.

Couple of questions. Can you discuss what the initiatives are that you are targeting under the $50 million restructuring program? And that is -- one of the things that was interesting in looking at your results is that all of the margin improvement really came in on the gross margin line, and it didn't really come in on the SG&A line. So I was wondering whether you can touch on what all the $10 million in cost savings affected the gross margin line? And also what projects you are targeting within the restructuring program for this year?

Sure, Silka. So we're taking a number of initiatives. Part of what's baked in here from the beginning is the restructuring that we have within Graphics and the recapitalization of our Graphics operations in Europe. We are also took some actions and more. You are going to see it really kick in more in Q2 and beyond, around just SG&A reductions. So we've had some actions within both segments, as well as at the corporate level to reduce costs. But also, it's not just about reducing costs.

We're also creating more of a streamlined linkage between our marketing and R&D organizations. For example, in Pressure-sensitive as well as some other changes. Really to get just more dynamic within the marketplace while also further reducing costs. So SG&A is an area. You've heard about the Graphics group actions, and we're taking some additional footprint actions within RBIS. We just recently announced the closure of a couple of facilities in southeastern US. So there's a number of actions across the board that are happening that we're working through.

Just add on to that, if you look at for the full year, roughly about two-thirds of the savings will impact SG&A, and then the remainder will be in the gross profit line.

And don't forget, Silka, that product mix benefit that Dean and Mitch are talking about clearly benefited us on GP.

Yes. If you took out the -- so there's like some carryover from negative pricing from last year, probably in the Pressure-sensitive. But if you took out the negative carryover, what was your raw material benefit in the quarter and what do you think it may be for the year, if you had to guess?

We can't really predict. As you know, we buy specialty products by and large, both chemicals as well as papers. And we just don't have forward visibility, not only to our volume, but also to just what's going to be happening in the market. So we have not tried to predict what's going to happen in the future, as far as commodities market. We did see some sequential deflation, but that was something we were anticipating and was part of --. As we said, we look at -- we've always talked about this in a net basis, looking at price and raw material costs. And as you look at the price reductions that we've been having through last year, including Q4, that's been offset by some of the recent deflation that we've had.

So net benefit was zero, you think?

Correct.

Okay. In the Pressure-sensitive Materials segment, the organic volume growth, in my opinion, phenomenal. 4% on top of 6% last year. Is that rate sustainable for the year? Are there -- do you have visibility where you're gaining share? And do you think you can carry this rate of growth forward for the year?

Well, Silka, our long-term target is 4% to 5%. The difference this quarter was very solid growth in mature markets and a little weaker in emerging markets. I would expect over time for emerging markets' growth to kick back in. I think we mentioned China and Russia were pulling it down a little bit on the emerging market side. It's really hard to predict. I'm real happy with the 4%, to your point. But we got there a little differently than I would have expected.

Yes. I'm even surprised there was this much domestic strength. It's a little bit different from what we hear from other commentary in other retail trends. It sounds like you must have gained a little bit of market share as well.

Well, our focus on the higher value segment that we've been talking about, those are places where we do have relatively lower share. So absolutely that is around share gain. So yes is the short answer to your question. I wouldn't say in the categories where we are the market leader that you are seeing the share gains. It's more in the areas like Graphics and Specialty, and so forth.

My last question will be, as a component of the total Pressure-sensitive Materials business, how big are the higher value add segments now? What do they comprise of the total business?

So in total -- Yes, it's not like there's just a black and white high-value segment because (inaudible). If you look at Tapes and Graphics and Reflective Solutions, in total those are about a quarter of the total PSM. And then within PSM, Films is a high-value segment in many regions. And you have Specialty as well, which is over 10% of the LPM business. So it's good portion, and there's varying degrees of high value versus low value. When we talk about the focus on high value, it's a targeted segment that are around 40% or so of the total.

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

Our next question is from the line of Anthony Pettinari with Citigroup. Please go ahead.

Good morning. I just wanted to follow up on RBIS Value and Contemporary. You all shared their last quarter, and I think you indicated in your prepared remarks that your team is making progress in gaining share back. My question is, and I apologize if I missed this, but were sales in Value and Contemporary, did they continue to lag in the first quarter? And as you exited the quarter, you saw some trends that you liked, or were you recapturing share in Q1 in those segments?

So the negative -- so basically we're still down in the quarter, year-over-year. We thought we started to really good share in the back half of the year, really Q2 through Q4, but they were a lot less negative than they were in the fourth quarter. And we know anecdotally that we have gained some progress. Some of that should actually start to show up in the second quarter. But more importantly, most of that business resides in North Asia, which is basically China and [Auzian], and that region showed nice, positive growth for us. So we were pleased to see that, and that was a reversal of the trend, so we're feeling good about the trend. But we're not exactly where we want to be yet.

Okay. Okay. That's very helpful. And then, just kind of a bigger picture question for Dean or Anne. Over the last few years, you have obviously taken steps to reduce the volatility of your cash flows and improve your margins. And given you've realized some good success on those initiatives, I was wondering how you think about the long-term leverage target, in terms of being maybe at the upper end or the lower end of that range? Or even reconsidering the range, given your leverage versus some of your peers either on the packaging or the chemical side. You appear to be a little bit underlevered.

So I will take this one. Actually, it was actually a part of the conversation prior to me joining the Company, as far as the Company's philosophy around this. We just did a pretty in-depth analysis on this as well. And quite frankly, we're very comfortable with the approach that we've been taking and are sticking to that measure. Our target -- we're targeting a net debt to EBITDA between 1.7 and 2. And we use that as a proxy for what the rating agencies are looking at, but we do believe that is the right targets for maintaining liquidity in all scenarios. And then making sure that we achieve the lowest weighted cost of capital across the business as well. So we are continuing to target that triple D ATT2 in order to have access to the markets.

Okay, that's helpful. I'll turn it over.

Our next question from the line of Chris Kapsch with BB&T. You may go ahead.

Good morning out there on the west coast. I just wanted to follow up on the margin shrink in Pressure-sensitive Materials segment. Obviously that was a key source of the upside and the guidance revision. In the past, you have talked about the margins in that business from the emerging market business being higher than the western regions. And then in the quarter, you've talked about a little bit better strength in the western regions and a little deceleration in some of these emerging markets. I'm just wondering if you can reconcile that mix shift, in terms of the contribution to the upside to the margins in that business.

The sales growth was higher in relative terms than what we had seen traditionally within emerging markets within that business. And the margins are higher in the emerging markets, particularly Asia, than you see in the western, particularly Europe, margins overall. So if you look at our -- I think what you're asking is do we have a mix hit, regional mix hit because of that growth level. The answer is that's more than offset by the product mix benefit that we're getting by driving growth in the high-value product categories. As well as what we've talk about in Q4 was instilling more discipline in some of the less differentiated segments around pricing and how we go to market in those segments as well.

So it's a combined mix of all that. But I want to call out also, we're highlighting mix here. But productivity and cost out were significant part of the margin expansion that we had within the segment. And we talked about the stuff we were going to be accelerating our efforts there, both to reduce costs, ensure we can hit our goals, but also to ensure we are even more competitive in these less differentiated segments. So that's what you're seeing come through here.

I see. Just to follow up on that rebalancing of pricing and mix that you just alluded to. Did that, in some of the less differentiated segments, which I assume you're talking about more in Label and Packaging versus Graphic and Performance Tapes, did that entail just walking away from any businesses? Or any business or customers? Or conversely, did you successfully implement any price increases in those areas?

Both. We actually implemented some price increases targeted, and in some cases we actually -- and this is more around Q4. I talked about this last time, where there was previously some business in Q4 that we would go after that we didn't go after, because it was just not that the margins that we need.

is there any regions that are -- where you feel like the market's more receptive to pricing versus others, in some of these less differentiated product lines?

I wouldn't say this is really a regional matter. This is really going to get down into the details, customer by customer, product by product, and that's the focus that we're giving, and we're really using -- adding EVA as an overall focus, not just gross margin. And making sure that product by product, account by account that we've got the right EVA lens and achieving what we need to be achieving. So broadly speaking, I wouldn't talk about regions that are more receptive to pricing because we have in areas where we have experienced some deflation. Like in Film's areas, we've given some price reductions to be able to make sure we're continuing to grow competitively.

I see. And if I could just follow up quickly on RBIS segment. Challenge for that business over the years has been the retail space, operating their businesses with less and less inventory. I'm just wondering, the first quarter is obviously never been a seasonally strong one. So I'm wondering if the -- what you have seen there is supportive of any notion that maybe retailers with consumers having a little bit of relief from energy prices, if there's any notion that they may be looking to bolster their inventories a little bit?

You know, Chris. It's a great question. I think the focus of retailers right now is making sure they have the right inventory. And that's why we see so much energy and activity around RFID. I think retailers before every season are always positive.

There are new items that they have that are going to be terrific. But if they had been very disciplined in that kind of overbuying, and we did have a couple of large European retailers who purposely cut back last year to just reduce the level of stocks. They just thought they had too much. So I don't think we're going to see a massive increase in inventories because of retailer overconfidence. But I do think we will see increased adoption of RFID to make sure they have what the customer wants.

I see. Just to follow up on that because I appreciate your comment about omnichannel and its increased importance. As these retailer customer look at their CapEx budgets, I'm just wondering, with the shift in CapEx towards omnichannel versus, say new square footage growth, which just hasn't been happening, it seems like RFID is sort of now looked at, at least the way you are looking at it, as sort of a subset of omnichannel. So just wondering is, are the folks that control the purse strings on the CapEx side of the retailers. Are they looking at cutting more? Are they looking at increasing the spending in RFID because of the complements of omnichannel? Is that what you're sort of getting at?

Yes, so that's what we're hearing. And I think for me, the real result -- lots of interest, lots of activity, lots of piloting, much more intensity around the activity. When it comes right down to it, I won't 100% believe until I see those purchase orders come. But I do expect to see a strong growth component in the second half of the year. And it's still relatively unpredictable on what that ramp looks like.

All right. Appreciate the color. Thank you.

And our next question is from the line of Scott Gaffner with Barclays Capital. You may go ahead.

Hello. This is actually Taylor Saunders, on for Scott this morning.

Hello, Taylor.

Congratulations on the quarter. Just a couple of quick follow-ups. Most of my questions have been answered. But firstly, on the -- I guess organic sales in both segments were pretty good, in my opinion. I was just wondering if you can provide any color on what you are seeing so far in Q2? If you think that strength is going to continue?

Yes. We've only had the first few weeks of shipments and the comps are pretty tough, because you've got Easter timing shifting and a number of holidays that happen in spring in Europe. Overall organic growth is 3% or 4%. First few weeks are a little bit softer than that, to be quite honest. But it's normal within the normal band that we see for a few weeks, and the comps are pretty tough right now that we're looking at. So overall, that's where it's coming in, but we're still committed and expect the 3% to 4% for the full year.

Okay, understood. And then any update I guess on what you're seeing, just with the M&A environment right now, and your views on potential to do maybe some smaller bolt-on acquisitions?

Good question, Taylor. We've had an active pipeline for awhile. Nothing imminent. Again, pretty much all small bolt-on type acquisitions. Again, I say very likely -- they're all private companies at the end of the day, so it takes time. And valuations can sometimes be a little high these days, too. We're pretty disciplined about what we're willing to pay. So we'll see.

All right. Thank you a lot.

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

Hello, guys. A few quick ones to wrap up from our side. And I just want to piggyback on a question that Chris had asked earlier, and I wasn't quite sure I understood the answer, in terms of geographic mix. So historically, your EM is higher margin. EM grew less quickly, yet margins were up. So can you go back through very quickly what the drivers of that were, given what is normally been the geographic mix trend in PSM?

George, are you -- you're trying to -- I guess what you're asking is that geographic mix a positive or a negative for the quarter?

Yes. I would guess, based on history, that it would have been a negative, yet it sounded like it was a positive. I was just trying to reconcile that, or determine if I might not have heard correctly.

I think it was kind of a raising tide lifts all boats. Every region has been executing fundamentally the same strategy. I believe we saw margin improvement in every geography. And the focus on driving higher growth and high return segments was the dominant factor. I haven't really looked at the geographic mix.

The geographic mix piece is not as much of it. It's a relatively new tool overall, George. Part of it, we talked about emerging markets, where it came in. Russia was one of the reasons for that. Russia is not one of the higher margins of the emerging market. So overall on the geographic piece, it's relatively neutral. Where over time, you'd expect it to be a tailwind for us, something that lifts the margins over time. But we didn't get that benefit, but instead we got the product mix benefit.

Understand. Thank you for that.

That point, George, I would also add, we're talking about China being a little soft, specifically around moving away from some lower margin product. We did see a lift in the margin in China, year-on-year.

Okay. That's helpful. Thank you for all of that, folks. And secondly, just a quick question. I think the answer would be no, but I want to check it out anyway. Some of the work that we do survey-wise in one of other sectors that we look at had picked up that apparel expectations had improved from some of companies that we track that sell packaging into these markets. Now since most of the apparel is coming from offshore, it would suggest that perhaps there's been some supply response, maybe because of the poor situation here domestically. Have you seen any kind of indication to that effect, where you're starting to see some apparel being produced here or not, from your radar screen?

Yes, it would be so small, George. It would be a blip for us. There isn't enough apparel making capacity in this region to make a significant difference. I think what retailers are doing -- again, this is anecdotal. Some of them, to get product in are using air, and one of the issues that they face isn't so much the bottleneck. It's the ports here in L.A. It's the fact that the ships are taking longer to get back to Asia to pick up products. I actually think this will all be sorted out in the next few months. I think it's going to be a relatively minor blip.

Yes, it's the shift mix to Latin America, but also you're seeing it out of China. We see it all the time with China. You are seeing shifting towards Vietnam and so forth. Those trends are continuing, but South China is still such a huge apparel hub that we still expect that to be the lion's share of apparel manufacturing.

Okay. Appreciate that. The last question from us, more the macro question. I think Taylor was getting at it a little bit earlier. Historically PSM has been a fantastic co-indicator for where the economy is going, and you obviously saw a better than expected first quarter from a volume growth standpoint. Do you get any sense specific to Pressure-sensitive in the markets that you sell into that even with GDP being what I guess today 20 bips, perhaps had a little bit stronger underpinning as we head into the next three quarters of the year? Thank you guys, and good luck.

Yes, I'll comment. And then I'd like Mitch to comment as well. Last year was not a great year for the North American Pressure-sensitive market. It was down three quarters, and up a little bit one quarter. So we did see nice growth.

We don't have the market data yet for this quarter. I would like to see a couple of quarters of sequential growth to kind of gain my confidence level. I obviously saw the same numbers you did this morning on GDP, but I know an awful lot of that was from export reductions. Not surprisingly. But I say -- I'm going to reserve my judgment until at least another quarter of market activity for PSM. Mitch, what do you think?

Overall, it's tough to link our performance to what's going on in the macro. But overall, if you look at where our growth was in some of the higher-valued segments and where we know some of that has been driven by share gain, if you take that away, if you look in North America, the volumes within LPM were not great growth. So some of the growth that we're talking about that's coming across strong is due to the penetration and the high-value segments. Western Europe is surprisingly strong.

The level of growth that we're seeing there, both in the market as well as what we're experiencing ourselves is -- continues to surprise us, to the upside. So I would say North America seems -- the numbers we quoted shouldn't read too much into the macro, because it's also around the focus on the high mix products. And then within Europe, those aspects definitely seems to be an underlying strength. In China, we're seeing what we've described is exactly what we're experiencing right now, even when you pull comps away. There's a little bit of slowdown that we're experiencing in China.

And with that speakers, we'll go to our last question from the line of Rosemarie Morbelli. Please go ahead.

Just very quickly. Would you touch on Vancive, and I know it is small. 11% top line growth is quite strong. You expect that particular business to be profitable, at least break even by year-end. What kind of a growth rate should we anticipate, and what kind of a profitability, based on that? I mean going out to 2016. Obviously not this year.

I think on the long-term targets we set was 5% top line growth and maybe a little higher than that. And then operating margins -- I can't recall off the top of my head. 9%? Something like that?

Yes. We're basically focused on -- this isn't getting to break even at the end of this year -- and then continued by driving growth, as well as productivity. Getting this business to be comparable to the other businesses by the 2018 horizon on margins, but through a higher growth rate. We're expecting more than 5%, whereas the other ones we're expecting 4% to 5%.

And there we are talking about tapes? For lack of a -- band-aids or whatever, which are going to deliver medication directly through the skin, correct?

No. These are not transdermal drug delivery mechanisms. They're wound care, basically. So think of a high-tech band-aid with antimicrobial protection to prevent infection basically. As well as we have a lot of other wound care related product.

Oh. All right. Thank you very much.

Is that the last question? I assume that's the last question. So thanks for listening this morning. We are obviously pleased with the first quarter. We believe we're positioned to win in all key segments of the market, and we're particularly happy that the course corrections that we began implementing last year are bearing fruit. We'll continue to drive growth through innovation and superior quality and service, while reducing the fixed cost structure for both PSM and RBIS, but significantly expand operating margin and return on capital. And we'll maintain our strong balance sheet and continuing to return capital to shareholders. So thanks for joining us today, and I look forward to seeing many of you very soon.

Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation.