艾利丹尼森 (AVY) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison's earnings conference call for the second quarter ended July 2, 2016. This call is being recorded and will be available for replay from 10:00 am Pacific time today through midnight Pacific time, July 30th. To access the replay, please dial 800-633-8284 or 402-977-9140 for international callers. The conference ID number is 2178-2907.

(Operator Instructions)

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

Thank you, Demetra. Today we will discuss our preliminary unaudited second-quarter results. The non-GAAP financial measures that we use are defined, qualified, and reconciled with GAAP on Schedules A2 to A8 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 Mitch Butier, President and Chief Executive Office; and Anne Bramman, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Mitch.

Thanks, Cindy, and good day, everyone. I'm happy to report another quarter with strong growth in earnings and free cash flow. We beat our expectations for Q2 adjusted EPS by about $0.05, driven by another exceptional quarter in PSM. We continue to drive above average growth in high-value products segments and improve our competitiveness and profitability across the entire portfolio, and we are making good progress with our business model transformation in RBIS.

So starting with pressure-sensitive materials, as you know, our goal in PSM has been to create value by organically growing the top line of this high return business at 4% to 5%, while expanding operating margin. I'm pleased to say that the team continues to deliver on both fronts.

In the second quarter, we grew PSM sales by nearly 5% on an organic basis and expanded adjusted operating margin to a new high of 13.5%. Once again, emerging markets were a key growth driver, up 10% in the quarter. From a product perspective, high-value graphic and specialty labels material continued to grow at rates well above the segment average, while sales declined for performance tapes, due largely to a loss of a specific customer application, as we've discussed before.

Overall, I'm very pleased with our progress in shifting PSM's portfolio mix towards these higher value categories. We expect continued benefit over the long term from our focus and investment in these areas, including acquisitions, exemplified by the Mactac deal we announced in April.

As for the base business within PSM, what we have often referred to as less differentiated products, we continued to deliver in the second quarter, with solid top-line growth overall and margins expanding across the board. Speaking of which, overall profitability for PSM exceeded our expectations, reflecting leverage on strong volume growth, continued discipline with respect to pricing in the base business, and of course, exceptional execution on the productivity from.

Shifting now to retail branding and information solutions. Sales were up a little over 2% organically, driven by radio frequency identification. I'm happy to report that RFID sales were up nearly 50% in Q2. The case for RFID is clear, and we remain the go-to supplier in the market. So expect this to continue to be a key growth driver for us going forward.

Outside of RFID, top-line growth was short of our target for the quarter amidst the challenging apparel market, in particular, continued challenges experienced by the department stores and inventory reductions associated with athletic good store closures. That said, we are seeing signs of success from our multi-year transformation strategy becoming faster, simpler, and more competitive while driving margin expansion.

Specifically, we saw solid volume gains in both the value and fast-fashion segments of the market during Q2, and unit volume for the department stores were relatively stable, an improvement over recent trends. We are also on track to deliver planned restructuring savings from the transformation. With these actions we are taking to improve our competitiveness in the base business, along with the lift from RFID, even in a relatively modest apparel retail market, I am confident we will achieve our 2018 margin target for RBIS.

Now looking at Vancive Medical Technologies, while this business reported solid margin expansion in the quarter, we're not yet performing at the level we expect. We began taking actions mid-last year that are beginning to refill our product pipeline, and have recently reestablished the organizational link between our Vancive and performance tapes business. Long term, these actions, combined with strong growth from our new product platform, should enable us to deliver consistent organic growth and double-digit margins in this business.

So coming back to the total Company view, in terms of our outlook for 2016, we have raised our adjusted EPS guidance by $0.05, reflecting the strong results we delivered in the second 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.

First and foremost being our focus driving outsized growth in high-value segments, 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 in these key segments.

Second, we are relentless in our pursuit of productivity improvement to enhance our competitiveness across all product categories, and of course, drive margin expansion. And third, we are maintaining our high degree of capital efficiency while increasing investments to support profitable growth. And of course, we will continue our disciplined approach to returning cash to shareholders.

Now I'll turn the call over to Anne.

Thanks, Mitch. I'll be providing a little more color on the quarter.

In Q2, we delivered a 20% increase in adjusted earnings per share on 4% organic sales growth. Currency translation reduced reported sales by 1.7% in the second quarter, with an approximately $0.03 impact to EPS. Adjusted operating margin in the second quarter improved 120 basis points to 10.7%, as the benefit of productivity initiatives and higher volume more than offset the net impact of price and raw material input costs and higher employee-related expenses.

We realized about $21 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. Year to date, free cash flow was $152 million, an increase of $38 million compared to last year, reflecting the increase in earnings and timing of tax payments.

During the first half of the year, we repurchased approximately 2.4 million shares and paid $70 million in dividends. Net of dilution, we reduced our share count by 1.2 million for a net cost of $119 million, bringing the total amount of cash returned to shareholders so far this year to roughly $190 million. Our balance sheet remains strong and we have ample capacity to fund acquisitions, as well as to continue returning cash to shareholders in a disciplined manner.

Now looking at the segments, pressure-sensitive materials sales were up approximately 5% on an organic basis. Emerging markets continue to be strong contributors to growth for this segment. With organic growth of 10%, emerging markets represented a majority of the segment's top-line growth in Q2, in line with the preceding quarter and our long-term expectations.

A key exception to this strong growth trend has been China, where sales were roughly flat in the quarter on an organic basis. In North America, sales declined modestly on an organic basis, while western Europe remained solid, up mid-single digits.

As noted previously, we continued to see strong growth in many of the PSM's high-value segments. Within label and packaging materials, specialty film and paper products were up 10% on an organic basis and graphics grew high single digits. In contrast, sales of performance tapes were down mid-single digits on an organic basis for the reasons we've discussed.

PSM's adjusted operating margin of 13.5% was up 120 basis points over last year, as the benefits from productivity and higher volume more than offset higher employee-related costs and the net impact of price and raw material input costs. By the way, that net gap between deflation and pricing was a modest negative for the quarter. We wanted to it, highlight given the change in direction from preceding quarters. Once again, the team delivered the majority of this quarter's margin improvement through ongoing productivity efforts, including product reengineering and restructuring.

Now shifting to retail branding and information solutions. RBIS sales grew 2% on an organic basis, driven by growth of radio frequency identification products, which were up nearly 50% in the quarter. We now anticipate full-year sales for these products to be at more than 30% in 2016, recognizing that the comps get significantly more challenging in the second half.

Adjusting for the impact of RFID, organic growth for the [core] labels and tags was down low single digits, reflecting modest growth in volume, which was more than offset by the impact of strategic pricing actions that we began to take late last year. As you know, we began lowering our prices in some categories late in 2015 to become more competitive. So the sales growth comparisons become easier in the fourth quarter.

From a regional perspective, we saw strong unit volume growth [for core] European retailers and brand owners. This reflects excellent progress in expanding our share among the fast fashion players. In contrast, unit volumes declined in the US, where we had a relatively high share position among department stores.

Notwithstanding the large volume growth and pricing adjustments we have made, adjusted operating margin for this segment improved by 30 basis points, reflecting the benefit of the restructuring and other cost-reduction actions we have taken to transform our business model. We remain on track to achieve our margin target for this business by 2018.

Turning now to our outlook for the balance of the year. We have raised the range of our guidance for adjusted earnings per share by $0.05 to $3.80 to $3.95. We outlined some of the key contributing factors to our EPS guidance on slide 8 of our supplemental presentation materials.

Highlighting the changes from our previous guidance, we now expect that currency translation will reduce net sales by approximately 2.5% and pretax earnings by roughly $18 million, or an estimated $0.13 per share, $0.02 worse than our April guidance. We have reduced the high end of our organic growth outlook and now expect full-year sales to grow between 3% and 4% on an organic basis.

We anticipate that the Mactac deal will close in August, resulting in roughly 1 point of incremental sales, with an immaterial impact to EPS this year, reflecting various transition costs. We have reduced our estimate for severance and other restructuring-related costs included in reported EPS by approximately $0.05.

So just wrapping up, we are very pleased with the strategic and financial progress we made against our 2018 goals this past quarter. I am confident we will continue to deliver exceptional value over the long term through superior execution of our strategies, including the disciplined allocation of capital. And now we will open the call up for your questions.

(Operator Instructions)

Ghansham Panjabi with Robert W Baird & Company.

Hi guys, good morning. First off on the PSM emerging market growth, the 10% plus, I know you called out China as being flat across emerging markets. But what about some of the other regions on the emerging markets side, Brazil, Southeast Asia, et cetera? And then what was North America up during the quarter?

So just talking about the emerging markets, so China was ultimately flat, as Anne commented on. Everything else, pretty much exceptional growth. If you look at southeast Asia, that was very healthy double digits, as was India, and Eastern Europe returned to good growth trajectory as well. Some of that we think is a little bit of pipeline fill within the quarter, but even if you back that out, return to a healthy growth level.

And Latin America, we continue to see solid growth. A lot of that comes from pricing, as you know. But even on the volume front, we saw a return to growth, particularly in Brazil. Now some of that has to do with the elections that come up that always have a benefit for us. And not sure what the impact is specifically from the Olympics, but we assume that has had some positive lift as well.

So pretty broad based on the emerging market exposure, and you're seeing a little bit of shift. If you look at the last number of years, China was the lead driver of the emerging market growth and we're starting to see that our strategy of being the leader in all markets is paying off, with -- as China starts to slow down the rest of the emerging market is carrying the load. And then North America we said was down modestly.

Okay, thanks for clarifying that. And then just generally on the RBIS outlook, obviously, apparel has been mixed in North America for a while now. I know you have some Company-specific initiatives to gain share in the market, but are there any adjacent markets that you see opportunities to diversify away from retail apparel to some extent over time?

I think there's two specific items. One is of you think about RFID, RFID is really an intelligent label and we are looking at how do we -- the first place to adopt was within the apparel market and we were vertically integrated there. But looking how we leverage our manufacturing prowess as a Company at large, and specifically, the knowledge within RBS and RFID to leverage that more broadly, which is something we think will be a key growth driver for us in the long term.

The other one, which doesn't reduce the exposure to apparel but does create a growth driver for us, is the external embellishment. So the heat transfer labels. This business, if you look10 years ago, was only about the heat transfer labels on the interior of the garment. We are going to the exterior garment where it's actually part of the branding that is displayed, whether it be for brands or sports teams and so forth. That will continue to be a key growth driver for us as well.

Okay, just one final question maybe for Anne on Mactac. Any other modeling parameters that you can share with us for 2016, assuming the model -- the August close, I think you called out 1% sales contribution, but what about EBITDA? Thanks so much.

So, consistent with what we've said, the 1% for the full-year impact and then EPS is -- there's really no impact, given all the transition costs associated with it for the back half of the year.

Okay. Thank you.

Adam Josephson, KeyBanc Capital Markets.

Thanks good morning, everyone. Anne, one question on -- one on margins. Obviously, PSM margin first half of 13.2% or well above your long-term target. The corporate margin of 10.2% in the first half was also above the high-end of your 2018 target. To the extent your margins are expanding on account of productivity efforts and volume growth, why would that not be sustainable, and what do you think sustainable margins at this point and why?

Thanks. As we talked about, we are really pleased with where we are and we're achieving new highs in this business. We talked about margin in Q1. We were seeing new highs then as well, and we were -- we never want to cap this business, and so we're cautious but never want to cap this business.

We talked about was in Q1 with my comments were really relative to the average for the year. So when you think about the second half of the year, we have got -- we talked about a couple of headwinds that we've got. First of all, the loss of a customer in the performance tapes business, which has an impact out about 1 point for the full year, but it's really back-half weighted. And the second thing is just normal seasonality of this business as well. If you think about it, second half generally doesn't have the same profitability ratio that you would have first half of the businesses that you would see.

Adam -- from my perspective, we've been consistent saying we're continuing to test new heights, and we're going to continue to do that. In this business, we've expanded operating margin by 300 basis points over the last three years. That's something we're going to continue to drive to, to see what the right balance is from an EVA perspective of driving good, organic profitable growth, having the right margin level and capital efficiency. And we continue to test new highs, and clearly, we don't feel limited by the targets we've set long-term or anything else. So but that's what we're going to continue doing and as Anne commented on.

Sure, thanks, Mitch. And just two other ones, one on the organic sales growth guidance for the year. Can you talk about why you modestly took down the high end of the range there?

Yes, so the high-end of the range, we said that earlier, part of it was assuming that you would have that sustained growth of for the whole year. And as we talked about, we have 1 point of headwind, primarily in the back half for performance tape. But the other piece to it is really on RBIS. In order to sustain that -- the growth -- we [already] saw the growth rate coming down a little bit in Q2. So we modified that. You would have to assume that you're back to full-on growth rates and covering for that from the Q1 run rate.

Got it --

And just looking at the second half the organic growth rate of 4%, the first half was around 3.9%. So it's basically saying we'd overcome the challenges that Anne is saying at the high end of our guidance. So we don't look at it as lowering -- we lowered the top end, but if we left it at 4.5% it imply that growth dramatically improves in the second half, which is not what we're predicting right now.

Sure, I hear you, Mitch, and just last one on pension. If current interest rates were to hold through year end, can you talk about what the impact might be on your discount rate, PBO, and pension expense for next year? And thanks very much.

John, why don't I follow-up with you on that after the call? I'm frankly not as buttoned up -- this is Cindy, on all those answers, so follow-up after the call.

Sure. Thank you.

Anthony Pettinari, Citigroup Global Markets.

Good morning. On the RBIS pricing actions, I was wondering if it's possible to say how long you expect those to be a headwind. Do you lap that headwind at the end of the year or is it possible that pricing actions maybe move into 2017?

And then relatedly, is it impossible to quantify how much market share you've gained back since starting these actions? Or just qualitatively, can you give us any color in terms of how you feel from a market share perspective?

So there's always pricing actions at various levels, but the specific actions we took late last year we do cycle through beginning in the second half. So it blends in beginning in Q3 through the end of Q4, so we do cycle through that.

And as far as from a share-gain perspective, relative to the growth that we're seeing within fast fashion, our gross levels are exceeding the end market. So we are very confident we're taking share there. From a value perspective, we believe we're taking share within value.

And contemporary, so department stores, tough to read. As I commented on, the volumes there or the trends that we're seeing are positive and relative to what we're seeing their performance in the marketplace; we believe we are now regaining share there. That was a space, if you recall, along with value, we were losing share on up until beginning late last year, if you will. So we believe we're starting to shift the share mix overall for those businesses, but we'll have to see how their performance plays out here over the next couple of quarters.

Okay, that's helpful. And then on the restructuring costs, the impact to EPS was lowered $0.20 to $0.15, but the savings remained the same. Can you just provide a little bit more color on that? Why is the restructuring program going to cost less than originally anticipated or what is the progress there?

There's a couple of things that we looked at. First of all, we went in and really trued up our estimates of thee cost and so we saw some -- we were a little conservative so we trued that up and we see a little bit of favorability on that. And then quite frankly, some of it's just some of the timing of when the costs are actually be recorded or hit in the year. So some of that will have a little bit of a timing shift.

Okay, so it gets pushed into 2017 or?

Yes, early 2017.

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

Scott Lewis Gaffner, Barclays Capital.

Thanks. Good morning, Mitch, Anne, Cindy how are you doing?

Good morning.

Good, thanks

Mitch, I just wanted to focus again on pressure-sensitive for a second, just given the margin performance in the quarter. Is it the margin profile of the products that you're selling in the emerging markets is pushing the margin here? Or is it the incremental margins on the 10% growth rate? How should we think about what was really pushing that incremental margin in 2Q?

Broad-based, it's not one specific item or theme here. I think the key thing, as I said, exceeded our expectations even the high end of our expectations for the quarter. The biggest single driver was the variable flow-through of the additional volume that we saw. The growth rate within PSM was above, if you will, the margin -- the guidance range we had for the whole business for the year, and it definitely was a little bit higher than we expected, particularly coming out of Europe. So that was the key driver overall, Scott, for the PSM performance in Q2.

Okay, and I think you mentioned though that price cost was negative. Do you expect that to continue for a couple of quarters within the segment?

Yes, we've been talking about this for, as you know, for a while. And we -- over the cycle, you would normally see that you would see a negative impact of price cost. So if we were to call that out that we are seeing modest impact this quarter, and you would expect to see over a cycle that would continue.

Okay, and just on the growth in the business in the emerging markets, Mitch, you mentioned southeast Asia, India, what are the product categories that are really growing? Even in Latin America, you had solid growth. Is it more in the variable information side of the business? Is it on the consumer product side? Where are you seeing the growth? Where is that coming from?

It's broad-based, but just the whole -- the economy in South Asia, both southeast Asia as well as India, are doing quite well and you can continue to see expanded consumer spending. It's consumer products linked as well as variable information labels as well, and it's very broad-based, and very healthy double-digit growth there.

I just got back from a three-week trip over in Asia, and I will just tell you when you're engaging with customers and so forth, they're quite optimistic about the prospects for their countries and their individual industries and excited by what's going to come. And we are key partners for them, not only helping ourselves but helping them grow, and lead the market to GDP-plus type of growth.

That's good to hear. Just one last one for me on RBIS and on RFID in particular. I think you said you expected it to be up 30% at the current run rate. How big would that make the RFID business for you if you actually achieved a 30% rate? And then in addition to that, how have the recent rollouts been going? Have you seen any customers interested in moving from test to broad-based rollout? Can you just give an update there? Thanks.

Sure. So the business after this year will be roughly $200 million for the full year. So pretty sizable relative to the total size of RBIS, and I think that's an important thing to point out. If you look at RFID in our external embellishments, it's roughly 15% of total RBIS right now, whereas it was 6% just five years ago.

And so the whole thing we're talking about continuing to improve our portfolio mix and higher value product lines. That's a great example of what's going on within RBIS as well. So there's a number -- we don't talk about specific customers within RFID and who's going to full rollout and so forth, but I will tell you that the pipeline is rich. We've got about 90 customers in the total pipeline, a blend between those that are in full adoption, those that are in rollout, those that are in pilot. And those are -- it's the very early stages of just evaluating the business case.

So continued to see great progress, and as I said before, we do have the go-to team for RFID adoption. And that's something that we -- a leadership position we expect to maintain.

Thanks, Mitch.

Thank you, Scott.

Christopher John Kapsch, BB&T Capital Markets.

Good morning, had a couple follow-ups. Just wondering if you could explain why you suppose China was flat, vis-a-vis the growth that you're seeing in other emerging markets. And is there a different competitive dynamic there versus other regions? I know [RaffleTech] did add some capacity over there not too long ago.

It's hard to pinpoint to any one thing. I will tell you when I was over there speaking with customers, generally they are talking about the challenge of just adjusting to a lower growth environment right now. We do expect this business to continue to grow and try to be a mid-single-digit growth market, which we still consider a healthy clip. And so you're seeing a little bit of adjustment down from -- I'd say that industry used to growth closer to 10% and being mid-single digits.

Specifically within the quarter, there was a number of puts and takes for being depressed down to the low single digits or roughly flat. But no key takeaways right now. And I will say for our business, a single quarter being flat or growing a few percent that can happen. Our expectation here is mid-single digits for China.

Okay, and then just moving western around the world to Europe, just wondering if the trends there have continued to -- been pretty buoyant considering what's gone on over there. I'm just curious if there's been any change in those trends since the Brexit vote around a month ago?

It's actually too early to tell, overall, is what I'd say. Clearly, I think the broader question is just what does it mean for the EU and so forth? But if you look at where we are, our market leadership position regardless of market environment, we are well-positioned for this. And the UK business is just a little over $100 million worth of business, so relatively small in the grand scheme of things.

Personally, I think it's a little bit blown out of proportion, a little bit, some of the market reaction initially with what we saw. But we're well-positioned, and if there' some challenge in the marketplace we're going to be looking to take advantage of those as the market leader.

Okay, and if I could just follow up on this pressure-sensitive segment margin topic, and I know you had referred to first-quarter performance, which was strong, as possibly approaching peak. And now we exceeded that performance by 60 basis points sequentially. And it sounds as though like mix is a obviously -- operational excellence is contributing. But also mix with the growth of that you've seen in international markets, which I believe are higher margin. And obviously your emphasis on shifting towards the more value-added products.

And it sounds like that's all going to continue, particularly with investment in accelerating the growth of those sorts of product lines. So just wondering given how well you're executing and given the trajectory of those higher margin businesses, what's maybe a more realistic, longer-term margin expectation for this pressure-sensitive segment as we continue to move forward here?

We're not resetting margin targets right now. We've said that this business at the margins that we've had, even the 11% plus, is very healthy returns and our focus is, again, find the right balance of top-line growth margins and capital efficiency to optimize EVA. So we will be setting new targets when we come out. We're going to do an investor day. We're now planning for that to be in March, and we will send out a press release with the exact date here in due time, but that will be the time that we reset it.

And again, I want to emphasize here the previous targets we had, we clearly don't feel limited by those in any way. We are going to continue driving forward and find that optimum balance. We have again, expanded margins by 300 basis points over the last few years. And remember, we've got questions about resetting targets beginning a year-and-a-half ago. Had we set them then, we'd probably be talking about should we be resetting them again right now, given where our performance is. So we are testing new heights and will continue to do so, and we'll update everybody with our long-term expectations in March.

Right, well and just one quick follow-up. And you'll continue to get the question until you do reach that to margin I'm thinking. But just wondering, if you're -- are you constrained, given the margin performance and how this business is done, are you constrained anywhere where you feel like you need to ramp-up capital in order to capitalize on growth in the pressure-sensitive division?

I wouldn't say constrained, but we have said that we are going to be increasing the pace of capital investment within this business. If you look at the growth rate, to your point, we do need to increase the pace of capital investment. That is something we would expect.

If you look at the long-term targets that we had laid out a couple of years ago, it was roughly an average of $200 million over the horizon. We haven't been on that pace until now, but we do expect to be ramping up here, specifically, to capture profitable growth to your point.

Okay, thanks and kudos on the execution.

Thank you.

George Leon Staphos with the Bank of America/Merrill Lynch.

Hi everyone, thanks for taking my question. Congratulations on the quarter. How are you? Very good performance here. The first question I had and we're beating the pressure-sensitive margin question into the ground. But would you expect from the current level in the second quarter that you achieved that we should be seeing some flattening out from here seasonally, or is that getting too close for comfort? And the commentary about 1Q being perhaps close to peak maybe created more distraction than needed to be and we should just let you run your business and wherever the margins come out, they come out?

Personally, I like that second option, but I guess I'll have to address the first question. Loo, as I talked about, even on last quarter's call and this quarter's call, we are hitting new heights, as we talked about. We do have seasonality in this business, and I think you've seen that historically. Traditionally, Q4 in particular has quite a dip in margin when you look at the historical trend on this.

I would say that, and as I mentioned, we also have the headwind of the performance tapes customer in the second half. So when you look at the high-end of the range, you would have to assume that we can largely sustain this and overcome some of these issues, as well. But at the high end, it's really sustaining this but continuing it through and overcoming some of the performance tapes customer loss.

George, just to reinforce what Anne said, we typically see a drop in Q4 by 1 full tape. And then we've talked about tapes, the decline there on the volume side. Well that is a high-margin business and so that will have pretty decent impact on the margins as well.

And as Anne said, full range of our guidance we think captures the full range of possible outcomes -- not possible outcomes, but probable outcomes. And the high end has roughly a continuation excluding a little bit of the excess in Q2 if you go by the continuation of margin trends we saw in first half continuing into the second half with the normal seasonal drop and the impact of performance tapes.

Okay, I appreciate that additional color; that helps us here. If we talk about RFID, so I remember from the last quarter, you were expecting 20% growth thereabouts and now you are in excess of 30%. So I think a lot of the answer here is in relation to what you're saying to Scott's question about RFID.

But have you seen more customers coming to you for trials as the reason for the increase in the growth rate? Or has it been a greater amount of sale in existing trials that's been driving the increase in the guidance there for the full year? Obviously, you have tougher comps in the second half.

Generally, the latter, so it's an increase in sales to customers that are already in the process of rolling out. So just being more aggressive, if you will, to customers in their rollouts, so that's been the primary driver. As far as customers switching into full adoption, if you will or into rollout, that's something that usually there is a pretty short lead time from when that's announced to when we start sourcing that. So the key question here we talk a little bit about tough comps in Q4, anybody else convert to that next level, which we've seen in the past, as you know.

Understood. The last question I had and I'll turn it over, because most of my questions have already been asked. When we look at RBIS, and I think you said you're ultimately constructive or pleased with where the businesses is, and I'm putting words in your mouth, so feel free to adapt as you need to. But when I look at the margin dollars year on year being flat versus 2Q, in spite of the $60 million net benefit that segment is getting from restructuring and other performance improvements, are you really happy with that business?

Should we assume that all of that benefit has been basically used to grow market share through pricing and other actions? And should we expect a continuation of the play book and maybe even an intensification of the strategies in that play book to ultimately try to grow volume and margin for the segment in the next 12 to 18 months? Thanks, guys.

Thank you, George. Just the comments around RBIS is we're pleased with progress we're making on the transformation, which we are very pleased with our growth that we're seeing in RFID. But that the organic growth of 2% plus in the quarter was short of our obviously long-term targets that we had for this business. And while it is largely due to the softness in the apparel market, we're looking to grow this business 4% to 5% long term.

So I would say that net our guidance expectations, given what was going on in the apparel market, we're pleased with the progress the team is making on the transformation. And we knew this was going to be a multi-year transformation as well. So yes, there is more. We're continuing to focus on how -- where can we can get less complex, simpler, if you will, and more competitive across the entire customer base.

So this is something that we will continue to be focused on. And I think it's important that you step back. Yes, the top line has been less consistent, if you will, but we have continued to grow this business over the last number of years. And regardless of market environment, we have consistently expanded margin over each of the years over the last five years. And that's something that we're going to continue to do regardless of the market environment, leveraging our strengths in RFID and external embellishments in our customer relationships across all market segments, and our focus on productivity to get more competitive.

Thank you.

Jeffrey John Zekauskas, JPMorgan Securities.

Hi, thanks very much. I think you said early in the call that volume growth and pressure-sensitive was negative in North America in the quarter. My memory is maybe last year it grew 4% or 5% and in the first quarter grew 1% or 2%. Is there a change in trend there or is this quarter an anomaly? What's happening there?

So the trend -- so we did have negative growth, slightly negative in this quarter. I would not -- I don't think we've said that this business has been 4% to 5%. I think even last year we saw a bit of a modest improvement, low single-digit growth in this business. So I think within the band, if you look over the last several quarters, it's within a pretty tight band where we're seeing this business. I don't think you're seeing dramatic changes in the marketplace.

Okay. You said that there is now a little bit of raw material pressure. So if raw materials are -- I take it that they're going up or is it that prices are coming down? Where does the squeeze come from, on the price side or on the raw materials side?

Jeff, we don't comment on the specific components. We talked about the modest net headwind, if you will, which is not exceptional by any stretch if you look at the long-term trajectory within the business. So overall, I think the message here is stable in general, stable on raw material and inflation. That's the type of environment we're seeing, and we continue to see what you'd normally expect in a competitive industry like we're in on the top line.

Okay, will -- in terms of your upcoming acquisition, do you have all of the regulatory approvals for it?

So Jeff, just received word this morning actually that we received final regulatory approval. We expected that to come through, which is why we said we expect to close in August. But that did actually come through this morning, so we are still on track and expect to be closing here in the coming weeks.

Okay, will RFID revenues be higher or lower in the second half than in the first half, given that you grew 50% in the second quarter and you expect to grow 30% for the year?

They will be higher in the second half. Most of the growth will be in Q3 though. Q4 is particularly here the tough comps are. We still expect some modest growth in Q4, but it will be modest. Unless another rollout starts, of course.

Okay, and you said that in pressure-sensitive you had inflationary pricing in South America. Did that lead overall to positive pricing for the pressure-sensitive in the quarter or negative pricing?

Jeff, a number of markets, particularly Latin America, we do have what we call currency pricing. So when the currencies move, because a lot of the raw material input costs are coming from outside the region. So it's not having a net positive impact overall to -- in a sizable way to the bottom line. It's just more way to cover the input costs in local currency.

Okay, great. Thank you so much.

Thank you.

(Operator Instructions)

Rosemarie Morbelli, Gabelli & Company.

Thank you and good morning, everyone. Most of my questions have been answered, but there is one little hole regarding Vancive. Could you give us a little more details on that particular business. Is that $1.6 million of EBIT sustainable over the balance of the year and then we start seeing the substantial margin improvement the next year?

Yes, so that business we've been talking about being in a turnaround, and some of the changes we've started making mid to late last year around getting the top-line pipeline moving again. So to answer your question specifically, we don't expect the positive margins to stay at that level going into the second half. There will be some headwinds on that front, and also on the top line within that business. We expect to take us into 2017 to see the reverse in this trajectory and the turnaround of that business.

And just to add to that, we are expecting in the second half that we'll see declines in organic growth in this business.

And that is due to what?

Sorry?

What would be the reason for the decline in organic growth, which is not particularly large to begin with?

Specifically, there is an inventory reduction that is expected with one particular customer for one of the core product lines in the second half.

Okay. And looking at RBIS, could you talk about the growth rate? If you eliminate the impact from RFID what is RBIS all by itself doing or is that something you cannot separate?

What we said in the earlier comments was that RFID drove the vast majority of the growth in RBIS to organic growth.

It was actually down modestly, excluding RFID, Rosemarie.

Thank you, and when you look at the customers or the garments that are using your products on RBIS, can you separate -- you talked about the now growth or decline in department stores. But could you separate the high-end product garments versus the type of garments that will be sold at a Walmart or Target? Could you give us a feel as to what the industry is doing?

Sure. Overall, and I think it's somewhat reflective of the types of garments, but with the exception of the impact of some inventory reductions that are impacting us in Q2 or impacted us in Q2, performance athletic, for example, high-value athletic garments have done and are expected to continue to do well. Fast fashion has done quite well in the market, so that's a low-cost, high churn, a lot of fashion elements. That has done well and is expected to continue to do well, which is one of the reasons why we are focusing on driving growth with that segment and taking share.

Value continues to do well and value actually has a range -- value and contemporary, a full range of high-end garments and more discount garments. So it's hard to call out specifically what's winning within that space overall. I think what you're seeing here is broad-based. The reason we talked about department stores is department stores are -- a number of them, getting

Okay, thank you very much. You're welcome.

George Leon Staphos, Bank of America and Merrill Lynch

Thanks, operator. Just last one, quick one, guys. As we think about the guidance for the year and it went up $0.05, which was basically what the variance was, round numbers. In the second quarter, which in turn was driven by pressure-sensitive materials. Now again I think some of the other analysts have asked the same question.

There are lots of things that are going right for pressure-sensitive at the moment: the growth in emerging markets, the mix inherent in those markets and so on. And those -- I recognize seasonally there should be some drop-off, but we wouldn't expect a significant one in the third quarter anyway, relative to second quarter, based on history. Should we just very simply assume that the -- the reason you only took your guidance up by the amount that you beat Q2 is that whatever you're seeing improvement in pressure-sensitive is being largely offset at this juncture by RBIS and Vancive the back half of the year? Or would there be any nuances around that? Thanks and good luck in the quarter, guys.

In general, if you look at the range of the guidance, as we talked about earlier, you'd have to assume that you would have higher growth rates in the second half and that you would have to cover for some of the headwinds we've got or seasonality. And don't forget, we have got the tapes customer business coming out which is higher-margin than the average for this segment and really is distorted to second half as well when we think about the impact to the business.

So you do have -- you'd have to take into account the Vancive, the RBIS, and then the fact that we've got those headwinds. We also have a $0.02 headwind for FX that you'll see in the guidance as well.

That's right. We've tried to account for that customer loss in PSM, but we will go back to our spreadsheets on that. Again, thanks for all the color, guys. We will talk to you soon.

Thank you, George.

Mr. Butier, I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you. Overall, we're pleased with the quarter and pleased with the progress we're making across both of our strategic and financial priorities. We remain committed to achieving our long-term targets by driving accelerated growth in our high-value segments and continuing to leverage our strength traditionally in productivity to ensure we continue to have healthy returns and expanding margins across all product categories. I want to thank the leadership team and employees everywhere for their hard work, creativity, and commitment to our success. So thank you.

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.