艾利丹尼森 (AVY) 2016 Q1 法說會逐字稿

Welcome to Avery Dennison's earnings conference call for the first quarter ended April 2, 2016.

This call is being recorded, and will be available for replay from 9 AM Pacific today through midnight Pacific time April 30. To access the replay, please dial 800-633-8284, or 402-977-9140 for international callers. The conference ID number is 21782906.

(Operator Instructions)

I would now like to turn the call over to Cindy Guenther, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead, ma'am.

Thank you, Pama.

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'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 and CEO; Mitch Butier, President and Chief Operating Officer; and Anne Bramman, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Dean.

Thanks, Cindy, and good day, everyone.

We're off to a very good start to the year on several fronts, including better-than-expected earnings growth. Both of our core businesses delivered solid organic sales growth and significant margin expansion, driving mid-teens growth in adjusted earnings per share.

We also signed a definitive agreement to acquire Mactac Europe from Platinum Equity. This acquisition aligns perfectly with our strategy to enhance our competitiveness in high-value, Pressure-sensitive materials for graphics applications. Mactac complements our existing Business with a strong brand and loyal customer base, expanding our product offering, capabilities and distributor network.

Our consistently strong operating performance, along with the disciplined execution of our long-term capital allocation plan, is testament to the strategic foundations we've laid, as well as to the strength and depth of our leadership team. I'm happy to say that the leadership transition we have had under way has been seamless. As we announced in February, I am formally handing over the CEO reins to Mitch this week. I will stay on the Board as Executive Chairman, with Mitch joining the Board following his election at tomorrow's shareholder meeting.

Since joining Avery Dennison in 2000, Mitch has worked in various businesses and regions across the Company, and in roles of increasing responsibility. He has been a close partner of mine and has been at the center of our most successful business strategies. Most recently, he was the driver behind our focus on the high-value market segments of our portfolio, while making the investments necessary to be competitive across all product segments.

Just as important, Mitch is a champion of the values, integrity and high ethical standards that define Avery Dennison. I'm handing off my CEO duties to Mitch with complete confidence in his ability to guide Avery Dennison toward an increasingly prosperous future.

I'll save my closing remarks for after the Q&A, so now I'll turn the call over now to Mitch and Anne. Mitch?

Let me start by thanking you, Dean, for your leadership, counsel and support over the years, not just for me personally, but on behalf of the entire Organization. You've taken Avery Dennison to new heights, and I'm extremely honored to be able to build on your legacy as I become the next CEO, and I'm grateful to be able to continue to tap your vast experience in your role as Chairman.

This is a great Company with great people, and I could not be more confident in the Company's position, nor more excited by our prospects. As CEO, my focus remains the same: ensuring the long-term success of the Company by delivering exceptional value for our customers, our employees, and our shareholders.

Our two industry-leading core businesses are well positioned for profitable growth. That growth, combined with our constant focus on productivity and capital discipline, will enable us to continue to deliver strong returns for our shareholders.

As Dean said, we're pleased to report a very good start to the year. We beat our expectations for Q1 EPS by a few cents, reflecting continued outperformance in Pressure-sensitive materials. Our consistently strong performance speaks to the strategic foundations we've laid.

We are focused on driving profitable growth through differentiated quality, service and innovation, with the specific goal to accelerate growth in high-value market segments that have above-average growth and margin potential, such as tapes, graphics, RFID and emerging markets. We will continue to invest disproportionately here, both organically and through bolt-on acquisitions. Over time, this will improve our portfolio mix, and bolster our leadership positions in these key segments.

In addition to driving growth in high-value categories, we're also focused on driving more profitable growth in those that are less differentiated, such as base materials for bar code labels in Pressure-sensitive, and the value and contemporary segments of RBIS. We are increasing our competitiveness here by lowering our costs and tailoring our go-to-market strategies.

Finally, productivity improvement remains a top priority. This has been a core strength of ours over the years, and it is something we will continue to focus on through continued deployment of lean and six sigma, ongoing innovation and product reengineering, and investments in automation and restructuring. I want to stress that our productivity focus is not just about lowering costs and expanding margins, both of which are crucial, but also about becoming more competitive so we can grow profitably and better serve the less differentiated segments of our markets.

Now let me describe how these strategic priorities are playing out within each of our businesses. As you know, our goal in PSM is to create value by growing the top line of this high-return business at 4% to 5% organically, while expanding operating margin. And I am pleased to say that the team continues to deliver on both fronts. This business has consistently generated solid organic growth for the past four years, and Q1 was no exception with 4% organic growth, driven by emerging markets, and strength in graphics and specialty label materials.

We see opportunities to continue expanding in such high-value categories, and are investing to support this growth, including through acquisitions. The Mactac deal is an excellent case in point. I'll comment more on that in just a moment.

As for the less differentiated product categories, I am pleased to say we have made good progress on this over the past year, and saw a continuation of that trend in Q1. We have more to do on this front, but overall, good progress.

As I said, our acquisition of Mactac Europe demonstrates the execution of our strategic priority to further penetrate high-value segments, as this acquisition enhances our position in both graphics and tapes. This is a classic bolt-on accusation that meets all of our strategic and financial criteria for acquisitions.

Mactac is known in Europe for its high-quality pressure-sensitive graphic materials, with products and capabilities that are complementary to our existing Business. It has a loyal customer base, and gives us access to new distributors. Incidentally, given the high customer loyalty and opportunity to broaden our distributor network, we intend to maintain the Mactac brand in Europe. And Mactac's manufacturing facility in Belgium adds needed capacity to support growth for both graphics and tapes.

Shifting now to Retail Branding and Information Solutions, the RBIS team continues to win in high-value categories. Sales for radio frequency identification products grew by more than 70% in Q1, and sales growth for the Performance athletic brand was solid once again.

Furthermore, the team continues to execute well on its business model transformation, which will enable this business to win in the less differentiated value and contemporary segments, while driving significant margin expansion. To this end, we are executing an aggressive set of restructuring and other productivity actions designed to put RBIS back on the margin expansion trajectory necessary to achieve our long-term financial goals.

Let me remind you that this multi-year transformation -- what it entails. We are reducing our fixed costs, localizing our material sourcing, and responding more quickly to changes in our customer needs by decentralizing decision making. In short, we are rapidly moving to a business model that is making us more competitive.

We are seeing early signs of success from this change, as we have realized core volume gains in the value segment. Now, volumes for core products among the department stores, what we call contemporary segment, are still down, due in large part to the challenges that these customers face in their own markets.

Overall, the RBIS team is making solid progress against the transformation, and we are pleased with the results on the top and bottom line in the quarter. That said, the second quarter will be a key test for us, as it is the seasonally most important quarter for this business.

Turning now to Vancive Medical Technologies, first-quarter results were simply disappointing, with a significant drop in sales. While our long-term new product platform continues to gain traction, we have been losing ground with respect to our core product pipeline. We began taking actions mid-last year that are beginning to refill that pipeline, but it will take time to recover due to the long sales cycle in this business. We are committed to achieving consistent growth in our long-term margin objectives for Vancive.

Coming back to the total Company view, in terms of our outlook for 2016, we have raised the mid-point of our adjusted EPS guidance by about $0.08, reflecting some relief from currency headwinds, as well as the strong results we delivered in the first quarter. Even more important, we remain highly confident in our ability to consistently deliver exceptional value over the long run, based on the execution of our key strategies. We plan to continue to drive outsized growth in high-value segments, relentlessly focus on productivity to improve our competitiveness in less differentiated segments, and drive margin expansion, maintain our high degree of capital efficiency, while increasing investments to support profitable growth, and continue our disciplined approach to returning cash to shareholders.

Now I'll turn the call over to Anne.

Thanks, Mitch, and hello, everyone. I'll provide a little more color on the quarter.

In Q1, we delivered a 16% increase in adjusted earnings per share on 4% organic sales growth. Currency translation reduced reported sales by 5.6% in the first quarter, with an approximately $0.06 impact to EPS. Adjusted operating margin in the first quarter improved 130 basis points to 9.7%, as the benefit of productivity initiatives and higher volume more than offset higher employee-related costs.

We realized about $27 million of incremental savings from restructuring charges, net of transition costs. 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 $37 million, about $18 million lower than Q1 of last year, primarily due to higher bonus payments associated with our strong performance last year.

We repurchased approximately 1.5 million shares in the quarter, and paid $33 million in dividends. Net of dilution, we reduced our share count by 0.8 million for a net cost of $80 million. Our balance sheet remains strong, and we have ample capacity to fund both the Mactac acquisition, as well as to continue returning cash to shareholders in a disciplined manner.

As Mitch mentioned earlier, the Mactac deal aligns with both our strategic and financial criteria for acquisitions. Not only do we expect to be EPS accretive within 12 months, but we also expect it to generate a rate of return in excess of our cost of capital within 18 months. We expect to close this deal within a few months, and we anticipate that the transaction will have an immaterial impact to EPS this year, and expect an approximately $0.10 benefit to EPS next year. That $0.10 benefit is net of interest costs, amortization of intangibles, and certain transition costs, and it corresponds to EBITDA of roughly EUR25 million next year.

Now looking at the segments, Pressure-sensitive Materials sales were up approximately 4% on an organic basis. Traditionally, emerging markets have been a big driver of our growth in PSM. We saw a reverse of that trend last year when faster growth in mature markets picked up the slack for slower-than-usual growth in China and other parts of the world.

In Q1, we returned to the normal trend. Specifically, we saw a return to more modest growth in North America and western Europe, low-single digits for both, while emerging markets grew at a high single-digit rate.

As noted previously, we continued to see strong growth within PSM's higher-value segment. Within label and packaging materials, we grew faster than average in specialty films and papers, and graphics grew by more than 10%.

PSM's adjusted operating margin of 12.9% was up 140 basis points compared to last year, as the benefits from productivity and higher volume more than offset employee-related costs. Once again, the team delivered the vast majority of this quarter's margin improvement through ongoing productivity efforts, including engineered reductions in raw material costs, as well as restructuring initiatives. While we saw a benefit from deflation net of price in the quarter, it was very modest.

Shifting now to Retail Branding and Information Solutions, coincidentally the organic growth and margin expansion for RBIS was identical to PSM. Sales were up approximately 4% on an organic basis, and adjusted operating margin expanded by 140 basis points. Sales growth for this segment was driven largely by radio frequency identification products.

RFID sales exceeded our expectations for the quarter, with organic growth of more than 70%. The comps for RFID get significantly more challenging in the second half, but we continue to expect better than 20% growth for the full year. Adjusting for the impact of RFID, we saw solid growth in the performance segment. This was notwithstanding a tough comp against last year's first quarter.

Sales of external embellishments were soft in the quarter, mostly due to timing of orders. We're confident we'll see this part of the Business pick up over the course of the year.

As Mitch indicated, the growth trend for core, less differentiated products remains mixed. Q2 remains a key barometer for us here. In contrast to recent quarters, sales growth among European retailers and brand owners outpaced their US counterparts, partly due to easier comparisons.

RBIS operating margin improvement reflected the net benefit of productivity initiatives and higher volume, which more than offset higher employee-related costs. As the team continues to execute its aggressive transformation program, we anticipate continued margin expansion over the balance of the year.

Sales in Vancive Medical Technologies declined by approximately 18% on an organic basis, due in part to a difficult prior-year comparison related to a specific customer. Even with the lost profits associated with this sales decline, the segment's operating loss came down modestly, reflecting the actions we took last year to shut down our investment in wearable sensors. We expect improvement over the balance of the year, in terms of both the top and bottom line.

Turning now to our outlook for the balance of the year, we have raised the mid-point of our guidance for adjusted earnings per share by $0.08, with an updated range of $3.75 to $3.90. We outlined some of the key contributing factors to our EPS guidance on slide 8 of our supplemental presentation materials.

The only assumption that has changed here is the impact of currency. Specifically, at recent exchange rates we now estimate the currency translation will reduce net sales by approximately 2% and pre-tax earnings by roughly $15 million, or an estimated $0.11 per share. This compares to our previous estimates of reductions of 3.5% to sales and $0.18 to EPS. The rest of our key assumptions remain unchanged from what we shared last quarter.

So just wrapping up, we're very pleased with the strategic and financial progress we made against our 2018 goals this past quarter. I'm confident we will continue to deliver exceptional value over the long term through secure execution of our strategies, including the disciplined allocation of capital.

Now we'll open the call up for your questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Ghansham Panjabi from Robert W. Baird & Company. Please proceed.

Hey, guys, good morning. Dean, congratulations.

Good morning.

Best wishes to you for the future and same to you as well, Mitch.

Thank you.

I guess first off on Mactac, in the context of this business being sold by Bemis in 2014 for less than what you're purchasing just the European assets for, can you give us some color on why you passed on the asset two years ago? Was it being sold as one asset, including North America, so antitrust maybe kept you away?

We're not going to comment actually on the process that Bemis ran a few years ago. I think the key thing we comp it to what us buying this business for more than what Platinum bought the whole business for, including the US, a few years ago -- actually only 18 months ago or so. They've done phenomenal job, the leadership in Mactac have, particularly in Europe, in really turning that business around and improving the profitability, leaning out the organization, so they've created a lot of value in the last 18 months. We see opportunities to leverage it from here and create even more value going forward.

Okay. Then Mitch, do you see any additive technology that you're acquiring with these assets?

It's complementary technology overall. They have a number of coating lines with various different adhesive capabilities. But if you look at within the graphic space, there's graphics and tapes to a smaller degree within this business, but there's very long likes and casting films, which is something that we do quite well, like shrink wrap and so forth. And then there's shorter life promotional films for graphic materials, and they have a very strong brand and complement our strengths with how they go to market in their approach.

Okay. Just one final one on the customer loss at PSM you called out last quarter. Just to clarify, did that start impacting the first quarter, and is the 1% or so top-line loss for that segment any different than your previous view? Is that still the right way to think about that loss? Thanks.

Yes, so we're still looking at about a 1% impact for the year. I would say it's more back loaded to the second half of the year when you're actually going to see the exit of that business.

Okay. Thanks.

Thank you. Our next question comes from the line of Scott Louis Gaffner from Barclays Capital, Inc. Please proceed.

Thanks. Good morning.

Good morning.

Just to follow up on the Mactac for a minute, any regulatory hurdles that have to be overcome in regards to the acquisition?

We are making filings in a couple of jurisdictions, call it Germany specifically. Normal customary filings that we usually go through. This is a highly competitive space, and we see that the acquisition that we're making is going to even increase the level of innovation in this space, so I think that the regulators will look at that favorably.

Okay. One of the issues around that business was the prior owner hadn't invested very much capital in the business. Did the buyer --from Platinum, did they invest significantly in that business from a capital perspective, do you know?

They invested in restructuring that business over the past year and a half, streamlining the organization.

Okay.

When I look at the pressure-sensitive margins in the first quarter, up 140 basis points year over year, is there something, or any items that fall off as we move through the year that would keep you from that kind of variance year over year as we move throughout 2016?

Yes. I think, look, we're in a record cycle from a margin perspective, and we're really kind of at the peak for PSM, so I would anticipate we're going to have margin compression in the back half of the year. We talked about this before. In the last couple quarters we've seen some modest benefit from deflation at a price, and so it'd be reasonable to assume that the business cycle would see offsets of this gain.

Additionally, we're seeing some signs of modest inflation in the commodities markets, and as I mentioned earlier, we are seeing some -- the 1% change for performance tapes with the customers' program that's exiting, and that was a margin that was a little bit higher, higher margins than above average in the business as well, so it's a little bit of an impact to the second half, as well.

Okay. When you say margin compression, you mean lower margins year over year in the back half of 2016, or just lower than we have --

I think what we're going to talk about is right now we're at a record -- . Q1 is really a record quarter for PSM from a margin perspective, so less about year over year and more about we are at a peak right now.

Okay. All right. And then in the quarter, just around the organic volume for pressure-sensitive 4%, how much of that was price and how much of that was volume?

Most of that came from price -- or from volume, sorry. And then about 3% of that actually came out of the emerging markets.

Okay. Great. Thank you.

Thank you. And our next question comes from the line of George Leon Staphos from Bank of America Merrill Lynch. Please proceed.

Hi, good morning, it's actually Alex Wong sitting in for George. Congratulations on the quarter.

First question, it sound like PSM was really the driver of the positive variance relative to your expectations. Can you talk a little bit more about the higher value-added segments and emerging markets, how sustainable you think those trends are? On a related point, having now four or five quarters with the operating margins at the high end or above the long-term guidance range, are you in a position maybe to reevaluate the margin target for PSM?

Yes, so as far as your first question, the performance on the margins within PSM, so yes, it was basically the margin beat in PSM was what caused us to beat our own expectations of the total Company. Essentially the mix came in a little better and we continue to drive growth within the high-value segment, so that was a key contributor to that factor.

Within emerging markets, we did see within China, we just saw some modest growth as China, the level of growth, as we've been talking about for four out of the last five quarters or so, has moderated from what we had seen traditionally. So it was in low-single digits. However, that's been offset by pretty phenomenal growth in Ausian, as well as in India.

That's what's going on with the growth trajectory and the margins. One of the other things that came in a little better than we expected, we were expecting essentially neutral benefit on the net impact of price and raw material inflation, it came in a couple million dollars better than our expectation, so that was a positive contributor, as well. Remind me Alex, what was the second question?

Just on the long-term target and whether you're in a position maybe to reevaluate that.

We're not going to reset targets. We established those targets for 2018. As we've always said, this business is an extremely high-return business even at those levels, and we've never seen them as a ceiling or a cap and we're continuing to test our limits and continue to push this business both on the top and bottom line, and that's something we'll continue to do. We think it would be at this point after a few, five, six quarters of out performance to just change the long-term trajectory or long-term targets is not the right time to do it.

Understood. Just as a follow-up, maybe switching over to RBIS, if you could talk a little bit about why maybe the core products, we're not seeing similar acceleration in that. Maybe what your expectations are as we progress through the year and what you are hearing from your customers as we move into a heavier selling season.

Thanks very much.

Yes, so in the core products we are -- actually, I think what I commented on is we're starting to see early progress from the actions we've been taking. Now the revenue is actually down modestly, but recall we said we were going to be more aggressive on the pricing front with certain -- in certain categories and we've done that. And so the volumes are actually up with value, and that's if I am excluding RFID right now. They're significantly up if you include our RFID.

Volumes in our core products are up, and so we think we're seeing good signs. It's been consistent the last few quarters from volume growth perspective, good trajectory there. In the contemporary or the department stores, we are still seeing volumes down, and a lot of it has to do with some of the challenges that a number of the department stores are seeing in their own marketplace today.

As far as what customers are telling us, it's hard to give you an average. If you look at it, there's a number of customers that are doing quite well, a number of retailers and brands, and there's a number that are having their own challenges as they work through things. Overall, we're coming off of a winter season that was a little lackluster from a retail sales perspective, and so a number of the retailers have more inventory than they want to be having right now, and that is factoring into their thinking.

On a broad base, if I had to characterize it, I'd say cautious optimism is what the retailers and brands are looking at, and those that are even struggling, everybody's looking to get more productivity out of their existing retail footprint, and it's something that we can help them achieve that, particularly with RFID, and that's the focus of the conversations.

Appreciate the thoughts. Thank you.

Thank you. Our next question comes from the line of Jeff Zekauskas from JPMorgan. Please proceed.

Thanks very much.

How do you feel about your working capital? I think your receivables were up year over year, your sales were down. Do you think that you're managing working capital as well as you might? Do you expect it to be a use this year or a benefit?

In general on our working capital we -- part of -- a big part of the change is that we had some planned investments in inventory, primarily in the RFID space to support the accelerated growth that we've seen in that business. So over time we expect that, that will even out. But we did plan on making those investments to make sure that we made our customer commitments.

And your receivables?

Just quick on the receivables, specifically there's a regional impact as far as regional mix. The higher growth in some of the emerging markets where we have slightly longer terms has an impact on that. I'd say overall I think we can do a little more here on the working capital perspective. We saw some deterioration. Part of that is just due to mix and some strategic decisions that Anne comments on in inventory. We think we can do more here.

Okay. Your corporate costs year over year were up a couple of million dollars but your SG&A was down, I don't know, $22 million. Why was corporate up and SG&A down so much?

In general, we're going to see over each quarter there's a little bit of variance that goes on with the corporate expenses. You should expect it to be anywhere from $20 million to $25 million a quarter. It's within that variance that we see just based on timing of some of the expenses. As far as SG&A, as we've talked about, we've had a significant restructuring program, especially in RBIS, where a majority of their savings are coming through the SG&A line. When you look at SG&A savings, the productivity, primarily at the restructuring, is driving the improvement overall.

RFID --

We also have some favorable-- sorry, we also have some favorable in currency, as with the currency change that also was favorable, but there was offsets with higher employee costs.

Okay. Are RFID margins higher or lower than the RBIS average margin? Or is there much of a difference?

The EBIT margins are above the RBIS average.

Okay. Often you get a sense of the order pattern going into the second quarter.

Retail sales in the United States have been a little bit on the weak side. Is that something that you're seeing? When you look at your order patterns so far, how does that appear to you?

The order patterns are consistent with the guidance we're giving overall, but just the real test is not entering the quarter. It's really how long the peak lasts throughout Q2, so if it ends a few weeks early, that obviously has a big negative impact to us. It's consistent right now, but it's really not an early read. As we've said we have limited forward visibility. Last year the season actually ended relatively early and that was one of the reasons we had the decline last year in Q2. So consistent, but I'd say it's too early to give you any color on how that will play out.

How will you finance Mactac, or how will you pay for it?

Yes, so we have ample capacity through both cash and our current credit lines.

So do you expect to borrow the whole amount or partly borrow? What's your plan?

We're -- we have plenty of capacity available in our credit lines that we can fund this transaction, and we'll look at long term what this means for us from a financing perspective. But we generally, we have a CP program and we've got some other credit available for us that we can use.

When you give your accretion calculation for next year, do you assume cost cuts, or that's without cost cuts?

There's very -- as I mentioned in my comments, there's very little that we've got into the number for next year for synergies. We really will have some from the procurement side. But the Mactac team has done a phenomenal job of investing in the business and really streamlining it. So what we're getting is a business that's really complementary to our graphics business in Europe.

Okay. Great. Thank you so much.

Thank you.

(Operator Instructions)

Our next question comes from the line of Christopher John Kapsch from BB&T Capital Markets. Please proceed with your question.

Yes, good morning, and kudos.

Had a follow-up on the -- on Mactac. Just so if I remember, I mean, this is going back a while, but it was probably over a dozen years ago that UPM came and tried to acquire all of Mactac globally. That was challenged domestically by the DOJ, and obviously didn't go through. I'm just wondering, back then was there any challenges on the European side? If you could comment on that first. I realize the market --

Chris, this is Dean. The answer is there. The answer is no. So only the US Department of Justice was looking at anticompetitive practices. There was a -- in Europe there was also an investigation of the industry that happened around the same time, but the two weren't linked in terms of an antitrust linkage, so to speak. They were independent investigations.

Okay. Could you just maybe provide some color on what sort of physical assets come with the acquisition? You did mention in your formal comments some of the things that the private equity sponsor had done to improve that business in Europe. Just wondering if that improvement was more a function of productivity and cost outs or did they also grow the business? You could talk about maybe the growth trends for Mactac Europe in the last couple years and how it looks going forward based on your due diligence.

Sure. As far as the assets that is we're acquiring, it was eight coating lines and they have capabilities across all different primary adhesive categories, emulsion, hot melt and solvent. That's what we're acquiring. As far as what the Company's gone through over the last year and a half is that they basically restructured down to a single manufacturing facility. They used to have more than one and that's been the area of focus.

As far as the top line, this business is -- Mactac has an extremely respected, well-respected brand in the graphic space and tape spaces. This business used to have some other unprofitable categories, specifically bulk roll label materials, that they've exited over the last year and a half as well that were unprofitable and pretty low end. The trajectory for the overall business isn't really indicative of what was going on in the underlying core. Yes, we know them as -- from what we've seen in the due diligence and also competitors that they're well respected within the market, and it's a platform that we expect to be able to leverage and continue to grow profitably.

Okay.

One follow-up on just the regulatory -- and I'm going to go back even further, but when you acquired Jackstadt many years ago, was there any antitrust issues or questions in Europe on that transaction? I guess that was more a play in role stock materials versus it sounds like Mactac is exclusively on the higher-end graphics.

Is that correct?

You've got a good memory, Chris. The Jackstadt acquisition, we did have filings in multiple jurisdictions around the world. You're correct also in that about 80% of Jackstadt's sales were in the bulk roll label category, although they did have a decent-sized graphics business as well. We went through a second round of process with some of the regulatory authorities in Europe, specifically in Germany. So it took them, I think, four or five months and then we got the approval.

Mactac's business is primarily a graphic's business, by and large, with a little bit of tape. It's a nice add on to what we're doing. These are both categories where we have relatively low market shares respectively. I don't want to project how regulatory agencies will react, but suffice it to say that we wouldn't have done the deal unless we had some level of confidence that it would go through.

Sure.

Thanks for the additional context. If I could just follow up on one on the -- just the comment about peak margins and some expectations that there would be compression in the second half. If you look at some of the drivers, setting aside the raw material benefit that you got in this quarter, it seems as though you have been optimizing your customer mix.

You've been driving growth in higher margin, more value-added product lines, and you always have been terrific at optimizing your manufacturing both from, contenting out the material content, as well as just enhancing your operational run rates, and none of that seems like it's in jeopardy in terms of not being sustained. So I'm just wondering why the commentary about maybe this flattening out or compression of operating margins over the balance of 2016?

Thanks.

Yes, Chris, so overall I think the way you've characterized it is right and then I'll answer your question. We continue to drive growth and looking to have outsized growth in the high-value segments that obviously improves mix, and we've also been talking about instilling more discipline in our less differentiated segments with how we grow and ensuring that it is profitable growth there. Our productivity initiatives, that is a core strength of ours we continue to execute on and have consistently done that and will continue to do that.

As far as if you look at where the margins are in Q1, Anne's comments were comping from Q1 where we're expecting it to go forward. You normally have a seasonal reduction in those margins in the second half late in the year, so we just want to highlight that there's some seasonal adjustments.

We've got the impact of lower -- the tapes decline of one customer which will have an impact. From a -- just purely from the purchase prices we have for raw materials and the selling prices, it was a modest benefit. There was definitely some deflation in North America and as we talked about last time, we've actually been adjusting our own prices to our customers and those segments that are impacted the most.

It's -- we're at peak levels. You don't want to lock down each time you get to a new level and say this is something you should baseline your models on and how you're thinking about it. I will tell you our focus here is about growing this business and growing it profitably and continuing to see opportunities for how we can further expand margins, which also -- this is a great business and a great platform. It links right into why we're trying to penetrate these spaces even more aggressively with acquisitions like Mactac.

Okay. Thanks much.

Thank you.

Mr. Scarborough, there are no further questions at this time. I will now turn the call back to you. Please continue with your closing remarks.

Thanks, Pama. Well, I'd just like to say I'm excited about the Company's future, probably more excited than when I joined more than 33 years ago. I'd also like to say that the course that we set in late 2011 and then committed to the longer-term targets in 2012, it's working, and -- but there's more to come.

I'm proud to have been part of making Avery Dennison the leading company that it is. I want to thank the leadership team, our employees, our customers, and our suppliers for their creativity and commitment to our success. I have enjoyed engaging with investors and financial analysts over the years, and I really appreciate the relationships that we've built. Thank you.

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