艾利丹尼森 (AVY) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison's earnings conference call for the first quarter ended March 31, 2018. This call is being recorded and will be available for replay from 11 a.m. Pacific Time today, through midnight Pacific Time, April 28. To access the replay, please dial (800) 633-8284 or +1 (402) 977-9140 for international callers. The conference ID number is 21857411. (Operator Instructions)

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

Thank you, Dimitra. Today, we'll discuss our preliminary unaudited first quarter results. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled with GAAP on schedules A4 to A7 of the financial statements accompanying today's earnings release. Please also note that we have adopted the new pension accounting requirements under ASU 2017-07, applying the rules retrospectively to facilitate comparison.

These changes in presentation do not impact net income or earnings per share, but they do have a modest favorable impact on operating margin for the total company and our business segment, generally, in the 20 to 30 basis point range. You can find reconciliations of historical results reflecting the impact of this accounting change at the Investors section of our website.

We remind you that during this call, 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 Mitch Butier, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer. Now I'll turn the call over to Mitch.

Thanks, Cindy, and good day, everyone. We're off to a good start for the year. Sales grew 7% on a constant currency basis. Adjusted operating margin expanded by 30 basis points, and adjusted EPS grew 30%, with all 3 of our operating segments meeting our expectations.

Label and Graphic Materials delivered another quarter of solid growth, with sales up roughly 3.5% organically. High-value categories in emerging markets continued to deliver above-average growth, and the price increases we implemented over the last few months are largely sticking. As expected, overall volume growth was a bit slower than usual due to the timing factors that we discussed previously, and we are already seeing a pickup here in the second quarter.

Operating margins remained strong in Q1 for LGM, once again demonstrating the resilience of this business, given the inflationary pressures that we've been facing. To ensure continued high returns for LGM and further improve our competitiveness, we recently approved a large multiyear restructuring plan tied to the consolidation of our footprint in Europe. Leveraging the added capacity and capabilities from both our Luxembourg expansion as well as the acquired Mactac plant, this restructuring will further enhance our competitive position in the region. The plan includes a series of actions, including the shutdown or movement of several coating assets as well as the closure of a plant in Schwelm, Germany. When complete, the project is expected to yield $25 million of annualized savings beginning in 2020.

Retail Branding and Information Solutions delivered another strong quarter, with solid top line growth and significant margin expansion driven by the execution of our transformation strategy and continued strength in RFID. RFID grew more than 20% in the quarter as the markets for these products continued to build momentum. We're seeing increased engagement among apparel retailers and brands across all stages of the pipeline as well as promising early-stage developments in other end markets. We continue to increase our pace of investment in both business development and capacity expansion to further strengthen our position here.

Excluding RFID, sales for the base apparel business were up modestly, reflecting demand in underlying apparel markets and the timing of holidays. The relatively low growth of apparel markets in the developed region over the past few years reinforces our laser focus on productivity improvement in RBIS, while we continue to target share gain through product innovation and superior service and quality. Overall, we're pleased with the progress we've made in the business since the start of the transformation, and expect to deliver another year of solid growth and margin expansion.

In the industrial and health care materials segment, we met our expectations for the quarter in terms of both the top and bottom lines, and the team is making good progress integrating last year's acquisitions. Operating margin declined significantly due to the impact of acquisitions and investment spending.

Now while this is in line with our expectations for the quarter, we're obviously not where we want to be on this front. We are, however, ramping up our productivity initiatives and expect to see meaningful sequential margin improvement here in the second quarter. We remain confident that we will achieve our growth and margin targets for this business over the longer term. All in all, another good quarter. Our strategic playbook continues to work for us as we focus on our 4 overarching priorities: driving outsized growth in high-value product categories; growing profitably in our base businesses; relentlessly pursuing productivity improvement; and remaining disciplined in our approach to capital management.

By consistently executing this playbook, we are positioning the company for superior value creation over the long term, including our plan to deliver our seventh consecutive year of strong top line growth and double-digit adjusted EPS growth here in 2018.

Now I'll turn the call over to Greg.

Thanks, Mitch, and hello, everybody. As Mitch mentioned, we delivered a very solid start to the year. Adjusted earnings per share was $1.44, up 30% compared to prior year, which was about $0.05 above our expectations due equally to better operational performance and the benefit of currency translation.

We grew sales by 6.8% excluding currency, split roughly evenly between organic growth and the benefit of acquisitions. And currency translation added 6.2% to reported sales growth in the quarter with an $0.11 benefit to EPS compared to the same period last year. Adjusted operating margin increased by 30 basis points to 10.6% as the benefits from productivity and higher volume more than offset higher employee-related costs and the impact of increased investment spending.

Productivity gains this quarter included approximately $11 million of net restructuring savings, most of which benefited RBIS. And free cash flow was negative $20 million in the quarter, roughly comparable to prior year. And recall that free cash flow is typically negative in the first quarter due to seasonality. And in the quarter, we repurchased nearly 450,000 shares at an aggregate cost of $52 million, and we paid $40 million in dividends. Net of dilution, our share count declined by approximately 200,000 shares compared to the year-end 2017.

So turning now to the segment results for the quarter. Label and Graphic Materials sales were up 4% excluding currency, reflecting about 0.5 point benefit from the acquisition of Hanita in March of last year. Organic sales growth of roughly 3.5% reflected modestly above average growth for high-value product lines and solid growth for the base business. The results for high-value categories were driven by continued strong growth of specialty and durable labels materials and low single-digit growth for the combined graphics and reflective product lines.

Sales for Graphics and Reflective came in a bit below expectations, which appears largely be timing-related as we've seen a pickup early in the second quarter. And recall that we had estimated our organic growth for total LGM in the fourth quarter of last year, benefited by about 0.5 point from customers pre-buying in advance of price increases that we had announced for January. This fact, combined with other timing-related factors that benefited Q1 of last year, created a total growth headwind of roughly 1 point for LGM in the quarter.

And breaking down LGM's organic growth in the quarter by region, North America and Western Europe were both up low to mid-single digits. And growth in emerging markets was mid-single-digits, with continued strong growth in South Asia and mid-single-digit growth in China. And operating margin for the segment remained strong, up 20 basis points on an adjusted basis to 13% as the benefits from increased volume and productivity more than offset higher employee-related cost and a modest net negative impact from pricing and raw material cost. The impact of raw material inflation was in line with our expectations for the quarter. And while we expect some modest sequential inflation in the second quarter, we expect we'll continue to mitigate this through pricing and product reengineering.

So shifting now to Retail Branding and Information Solutions. RBS delivered another excellent quarter. As Mitch indicated, the team continues to execute extremely well on its business model transformation, enabling market share gains while driving significant margin expansion. RBS sales were up 3% organically, driven by RFID, which grew by more than 20%, and partially offset by a headwind from the timing of holidays that impacted base business growth.

Adjusted operating margin for the segment expanded by 170 basis points to 10.2% driven by the benefits of productivity and higher volume as well as the reduction in intangibles amortization. These benefits were partially offset by higher employee-related cost and the impact of higher investment spending. With our adjusted margin above 10% for this seasonally softest quarter, we remain confident that we'll be solidly within our long-term target of 10% to 12% for the full year.

And finally, turning to the Industrial and Healthcare Materials segment. With the benefit of the Yongle and Finesse Medical acquisitions, sales rose 42% excluding currency, while sales growth on an organic basis was 3%., reflecting above average growth in industrial categories partially offset by relatively flat sales in health care-related categories. And within health care, sales in our Vancive Medical business growth remained strong.

Adjusted operating margin declined by 430 basis points driven largely by the impact of acquisitions and other investment spending. And as we've discussed, over the coming years, we expect to see operating margin for this segment gradually expand to LGM's level or better, achieving our long-term targets for the business by 2021.

So turning now to our revised outlook for 2018. We raised our expectations for adjusted earnings per share and are now targeting to be in the range of $5.85 to $6.05. At the same time, we have increased our estimate for after-tax restructuring cost to reflect the new LGM restructuring in Europe that Mitch described, which results in a reduction to our outlook for reported EPS. And we've outlined some other key contributing factors to our guidance on Slide 9 of our supplemental presentation materials. In particular, we estimate that organic sales growth will be approximately 4% for the year, in line with what we have delivered over the last few years.

The impact of acquisitions on sales is approximately 1.5% from closed deals. And at recent exchange rates, currency translation represents a roughly 4 point addition to reported sales growth and a pretax operating income tailwind of roughly $35 million. And we estimate that incremental pretax savings from restructuring actions will contribute between $25 million and $30 million in 2018. This estimate has been reduced from our original expectation for the year, reflecting the impact of higher transition cost associated with the LGM restructuring.

And we continue to expect a tax rate in the mid-20s and assume 25% for purposes of our EPS guidance, consistent with our pro forma tax rate in Q1. And we anticipate spending between $250 million and $270 million on fixed capital and IT projects, a modest increase for our outlook earlier this year, reflecting an acceleration of capacity expansion for RFID as well as spending related to LGM's European footprint consolidation. And note, the cash cost associated with our just-announced restructuring charge combined with modestly higher CapEx this year is consistent with the cumulative 5-year spending target and our long-term capital allocation plan.

And finally, we estimate average shares outstanding assuming dilution of 89 million to 90 million shares. So in summary, we're pleased with the progress we've made this quarter, and we remain confident in our ability to achieve both our 2018 and long-term goals. And now we'll open up the call for your questions.

(Operator Instructions) Our first question comes from the line of Scott Gaffner with Barclays Capital.

Greg, you mentioned the $25 million of cost savings in LGM by 2020. Could you talk about cost to achieve those synergies? And then, also, when I look at the estimated restructuring items, it went from $0.20 up to $0.95. It seems like a relatively large restructuring charge related to that project. Can you just explain why the restructuring charge goes up so much in regards to that?

Sure. I think as we indicated here, we have about $70 million of costs related to this restructuring charge with about 7 of that related to asset impairments and the other related to cash severance cost. In addition to that, as we said, we have a little bit of cost that's -- in our adjusted EPS is transitioning cost this year as well as a little bit of capital spending associated with that project as well.

Okay. And as far as restructuring within RBIS, have we run the course on restructuring on RBIS? Or is there more to come? I know you mentioned a rather sizable benefit from past restructurings. Just, can you give us an update on where we stand on that effort?

Yes. So as you know, we've continued kind of a multiyear restructuring effort within RBIS, and we continue to see some carryover benefits from things that we executed last year and have continued to execute as we've entered the first quarter. So largely, the restructuring savings that we expect to get in 2018 are largely RBIS-related, offset by a transition cost that we had in the LGM business in 2018.

Yes. Scott, I'll just add that we're always looking for sources of restructuring and productivity to continue to drive competitiveness and margin expansion. So I think as Greg laid out, larger charge right now and cash outlay related to this specific program, but as far as if you look over the 5-year horizon, our overall capital allocation strategy, this fits right in within the overall long-term strategy, and we consistently look for opportunities to drive productivity.

Our next question comes from the line of Ghansham Panjabi with Robert W. Baird & Co.

So first off, in Graphics, and Reflective, and the low single-digit growth in the first quarter, you called that timing in your prepared comments. Can you, first off, expand on that? And also, the catch up there, what is behind your view that core sales growth will be better in the second quarter year-over-year? Or are you seeing the growth more broadly -- growth pick up more broadly across your portfolio?

Yes. So as I mentioned, Graphics and Reflective were roughly low single-digit growth in the first quarter. We did see a little bit of a pickup here as we've entered the second quarter. And as we said mostly, we think it's somewhat timing-related as it is for much of the LGM segment in the quarter. And we would expect a little bit better growth rate as we go into the second quarter because we had some of these comp issues last year that we've talked about that were an impact against us in Q1, we expect to be a little bit of a tailwind in the second quarter from a growth rate perspective.

Okay. And just since you last reported, there's obviously been a significant increase in crude oil prices, a lot of customers across the CPG space are calling out freight cost, having gone up significantly, et cetera. Can you just update us on your view on inflation, and also the various pricing initiatives you have underway?

Sure. So inflation in the first quarter came in largely as we had expected it to from a sequential perspective from Q4 to Q1, driven by some of the things you mentioned around petrochemical-related increases particularly in North America and some paper-related increases in other parts of the world, Europe and Asia as well, and we expect to see some modest sequential inflation going into the second quarter also. As we talked about last time, we implemented some pricing actions across the globe in early Q1. We announced most of those in late Q4, so it has gone into effect largely in the first quarter, and we'll see some sequential benefit from pricing into Q2 as a result of those as well. So overall, we continue to expect to be able to largely mitigate the sequential inflation we'll see through both the pricing actions as well as through continued product reengineering efforts as we've done in the past.

Our next question comes from the line of George Staphos with Bank of America Merrill Lynch.

So I want to ask my first set of questions really just around the restructuring, and I forget who asked whether it was Ghansham or Scott, but what's left on the restructuring program benefit beyond or separate from the ones that you'll be getting out of the $25 million from this latest program that you should accrue -- that should accrue this year?

I'm not sure I exactly understand the question, George. So...

Let me try it again. What out from your existing restructuring programs, not the one you just announced in here, what's the net residual restructuring benefit you should get this year from that, and for that matter, into the future? What's left of benefits?

Yes. From some of the actions, as we've said, we expect roughly $35 million or so of incremental restructuring savings this year, offset by some of the transition costs that we've talked about. Most of that savings is related to actions that we've taken in RBIS and either executed last year or in the process of executing right now as well.

Okay. So $35 million and you got $11 million of that so far in the first quarter, did I hear that right?

Yes. From a net perspective, yes.

George, just to be clear, the $35 million (inaudible) before transition cost, so the number that we provided for the first quarter would also be net of transition costs.

Okay. Okay. Understood. The second question I had, you went fairly quickly in going through what you're going to do in Europe and recognizing there are sensitivities around this sort of thing. Can you give us a bit more color in terms of what you hope to accomplish and what some of the operating steps will be in the restructuring-related to LGM and Europe?

Sure. So we're closing a plant in Schwelm, Germany, and we are shutting down several coaters and we'll be moving one key asset from Schwelm, Germany to one of our other facilities in Belgium. So that's the plan that will be unfolding here over the next 18 months, and really, the focus here is around getting the business, continuing to focus on remaining competitive so we can grow profitably, both within the base business as well as the high-value categories, and this fits in within our long-term strategy for continuing to drive profitable growth across the product portfolio.

Our next question comes from the line of John McNulty with BMO.

On the European restructuring, I know you've been bringing up some capacity or have plans to bring up some capacity. I guess how should we think about the net effect between the capacity that's coming out because it does sound like a little is coming out, but maybe not all of it. I guess, how should we be thinking about the net effect in terms of your growth in Europe around capacity?

Yes. So as we said the investments that we've been making are just consistent with the overall growth strategy that we have and what we're seeing within the industry. Now obviously, the investments as we make them, these are assets that last for a long time. So specifically, within this type of assets that we've installed with [Lux 3] we see we have enough capacity for growth for the next 8 years or so within the emulsion adhesive laminating that we have. So that's our expectations overall. And as we've talked about in the past, these assets can be ramped up slowly, bringing on one shift, then 2, as we rebalance capacity across various assets.

Great. And then for the IHM business, you had indicated, I guess, in your prepared remarks, significant margin uplift, I guess, coming even in the second quarter. I guess it didn't sound like a whole lot of the things that you were doing were necessarily kind of flip the switch type move. So I guess, I'm curious where the confidence comes in and kind of what actions you're taking where, sequentially, you're going to see that big of a move in terms of the margins?

Yes. These -- we've been talking about this for a couple of quarters now, about the need to ramp up our productivity initiatives within this business, and we weren't where we wanted to be. And so actually, this has not flipped the switch to your point, this has been underway for the last few quarters. And we expect, we said by middle of this year, that we would start seeing traction, and Q1 is where we're seeing the pivot point. And from here on out, we expect to see the margin expansion start to come through.

Our next question comes from the line of Adam Josephson with KeyBanc Capital Markets.

Greg, just a couple of questions on the guidance, if you don't mind. Just to be clear on the moving pieces here. So you picked up $0.13 on currency. It sounds like you had better operations in the quarter, which are, I guess, being offset by the additional transition costs that you're incurring. Is that right?

Yes. I think that's characterized fairly well, Adam. So we had beaten Q1, was it roughly $0.05 or so from our expectations, with about half of that from operating performance and about half of that from currency. And we essentially carried that and we have a little bit higher transition cost as you said, and then, we have a benefit of currency based on where rates are today, in the outlook.

And what is the -- what are your FX assumptions now versus before, Greg?

Yes. So FX assumption going into the year, the euro was around $1.19. Today, we're roughly $1.23 on the euro rate, [open to changing assumption.]

Sure. And just on developed versus emerging markets, can you just remind me what trends you saw in the quarter? And to what extent they differed at all from what you had seen throughout last year?

Yes. So I don't think we saw a significant difference. I think our growth in North America and Europe, particularly in LGM was in the kind of low to mid-single-digit range, relatively consistent with what we'd seen over the last few quarters. And our growth in the emerging regions overall was in the mid-single-digit range. So we continue to see good growth in India and South Asia, continue to see mid-single digit growth in China as we've mentioned before as well. So overall, I think the growth in the quarter was pretty, pretty solid broad-based across the globe from a market perspective as well as from our organic growth rates across the regions.

Our next question comes from the line of Anthony Pettinari with Citigroup Global Markets.

The restructuring program is quite extensive, and when we look at the CapEx step up, it seems like CapEx is going to be around 3.5% of sales this year. Maybe going back 5, 6 years, it was below 3%. I guess my question is how would you characterize returns at this point in the economic cycle? Is your 17% plus returns target impacted at all by these moves? And then, with the step up in CapEx this year, should we expect that to roll off in '19? Or maybe stays elevated in '19, rolls off in '20? Or any kind of broad thoughts you could share there.

Yes. Maybe I'll first step back in terms of overall capital allocations. We talked a little bit about CapEx and restructuring, and I'll touch on the other components as well. Overall, our capital allocation strategy remains the same. We're looking at investing 30% to 35% of our available capital in organic capital investments and restructuring, and we'll continue to be within that target that we've communicated over the last year or so. And then, we're looking to continue to return about 20% of our available cash through dividends to shareholders, and then, we have about 45% to 50% of our available cash for M&A and share buyback. And we expect, with these changes, to be able to continue to deliver within that what we've committed to over the last year or so. And these capital allocation -- or these capital spending and restructuring numbers are pretty much in line with those expectations as we had and what we've committed to over -- what we communicated over the last year in regards between now and 2021. So we expect to still be within the targets that we've communicated there. And from a return perspective, we expect to still be able to continue to delivering at that 17% or above level as well.

Yes. And so, Anthony, just to further elaborate on what Greg said. I think this program looks a little bit more expensive than a number of the other programs relative to savings, and we've consistently said restructuring programs in Europe tend to be more expensive. So this is consistent with what we've seen in the past and our expectation. And the returns on this initiative, specifically our multiple of our cost of capital, and above the overall returns on capital. I think you're talking about -- that we've talked about, achieving around top quartile returns within the business. So this is consistent with our capital allocation strategy, as Greg laid out. It's consistent as far as cost relative to benefit that is typical for what we see in Europe and is consistent with the return profile for what we're targeting for the long term within the business.

Okay. That's very helpful. And then, just 2 follow-on questions on IHM. I guess, first, in terms of the sequential margins step up in Q2, apologies if I missed this, but any quantification of what that could look like from 1Q to 2Q? And then, second, you have a fair amount of balance sheet flexibility. Could you just talk about the kind of M&A environment for these kind of adjacent industrial and health care businesses? What you're seeing in terms of availability of assets, but also, just sort of valuation?

Sure. So as far as IHM, we expect a meaningful increase from Q1 to Q2. What does that mean? Roughly, say, 1.5 points is what you should be thinking about going into Q2. On the M&A front, yes, we continue to have a rich pipeline of companies that we're engaging with it. These tend to be engagements that can last long period of time, and then, suddenly, ramp up and move from slow courtship to quick deal. So it's hard to predict the exact timing of when things may come through, but we're having lots of good active discussions broad-based but particularly within IHM, but nothing to say that I'd say overall, if you look over the coming years that the pace would be meaningfully different than what we've seen over the past few years.

Our next question comes from the line of Jeff Zekauskas with JPMorgan Securities.

I'd like to go back to the cost of the restructuring. You're laying off 150 people, and so in the scheme of things, maybe that's $15 million or $30 million at the most, but the restructuring charges in cash is roughly $63 million pretax. Can you explain the difference where the large costs are? And how much does this change your capacity in Europe? Does it expand by 5%? Or 3%? Or leave it the same? Can you quantify something?

Yes. So first of all, on the cost of restructuring, so the net impact of the headcount reduction is roughly 150 headcount reduction. The gross impact is higher, closer to the 400 headcount reduction ranges. We're closing a facility and moving many of those assets into other facilities. So the gross reduction that leads to a higher severance cost is a bigger number than what the net headcount reduction would be. In terms of capacity, as we're moving a few assets from one site to other sites in the closure, we don't have a significant change capacity. And in this case, we're utilizing capacity from the Luxembourg investment that we've talked about in the past as well as some capacity from the Mactac investment that we made a little over a year ago.

How did the cash charges -- the cash outlays split between this year and next year?

The majority of the cash outlay is severance related, and the majority of that will end up in 2019.

So it's maybe 60% next year, 40% this year? Is that what majority means?

No. Much higher percentage, closer to 90-or-so percent in 2019.

90%? Okay. If I could just ask one question on RFID. Can you remind me, do your RFID revenues come from the use of RFID in warehouses in order to locate and track particular items? Or are your RFID revenues more stemming from more straightforward retail application?

Well, the answer is both, Jeff. We see broad applications for RFID in general, and we're seeing a ramp-up. Now the biggest initial adapter is within apparel retail, which is the RFID is used both from their supply chain because they're tagged source all the way through to retail or omnichannel through e-commerce. So the apparel channel uses it through their warehousing, their entire supply chain, including the retail floor, and we're also seeing applications for warehouse management and so forth. We've, as I said, we're seeing a buildup of momentum within RFID. I was at the RFID live trade show just a few weeks ago. I will say the pace of excitement continues to build and is becoming much more broad-based and our pipeline is up quite significantly from last year, about 65% increase in the pipeline and half of that now is coming from non-apparel categories. So significant ramp-up in the amount of energy and the excitement around this and people seeing the benefits that it will bring. We've got the team that the market leadership of how to adopt RFID, and we clearly bring unique capabilities as far as unique inlays that we can design around intended design and so forth. So we're well positioned here. We're investing significantly to be able to capture this market share and drive adoption along -- across a broad set of categories.

Our next question comes from the line of Edlain Rodriguez with UBS Securities.

Not sure if you addressed that already. I may have missed that. Like volume trends seems to have decelerated a little bit for all the segments. I mean, exactly what's going on there? Like are you seeing any softness in certain product lines or regions? And -- or is it something else, like due to timing or seasonality?

Yes. So I think as we talked about in LGM in particular, it's typically timing related. So as we mentioned, we had some pre-buys in the fourth quarter related to some pricing actions earlier this year. Last year in the first quarter, we had some pre-buys related to the price increases that have been announced for the second quarter a year ago, and we have the timing impact of the Easter holiday, which fell partially in Q1 this year and Q2 in prior year. If we net all those things together, for LGM it's about 1 point to the overall organic growth rate. So that puts us kind of squarely on our expectations if you adjust for that. I think with the other businesses within IHM, we had solid growth in our industrial categories, around 5%, and we had solid growth in our Vancive Medical business, and we still had some impact from the program loss we had talked about over the last number of quarters. If you adjust for that, organic growth in IHM would have been closer to 4% and more or less in line with our expectations as well. So no other, really, changes in expectations on volume outside of the timing impacts that we have discussed.

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

I actually would like to -- I first wanted to look -- ask the previous question differently. If I look at organic growth for the entire company, it has declined over the past 3 quarters, up 5.3%, up 4.7% and now 3.4%. So I was wondering what is behind that in raw material inflationary environment. Are you losing business because of price increases? Or is there -- or are there other factors?

So Rosemarie, if you look over the past couple of years, I'd say the volume trends are very consistent with what we've been seeing, specifically, quarter-to-quarter. It's become a little bit more choppy because when you're going through an inflationary period for one, you'll see pre-buy activity occur. And so last year, we talked about Q2 was below the normal because of both price increase levels as well as holidays, and then, Q3 and Q4 benefited from that. And we knew that some volume was being pulled out of Q1 into Q4, and then you also have the impact of holidays such as Easter depressing Q1, which is why we're highlighting that we expect Q2 to be above the usual level of growth. So if you look at a over a number of quarters on just an averaging basis, the volume trends are very consistent. And I think broad-based, we're seeing actually in the market as well as our performance, continued solid growth pretty much across the board on the positive side, the exception to that would be India, which is coming out of the whole Indian market coming out of the low point of growth last year because the adoption of the goods and service tax. And then, the low point exception will probably be South Korea, given the macro challenges that South Korea's going through. But overall, broad-based growth, pretty consistent. Our growth trends quarter-to-quarter just due to the holiday timing and the effects of pre-buys, which you will expect to see during an inflationary environment.

That is really very helpful. And I was wondering if you could -- if you have looked at the potential impact from tariffs on the retail side of your business, and therefore on your operations.

Yes. So far, our expectations on the tariff are pretty, relatively, at this point, insignificant impact is our expectation right now. If over time, that has an impact on volumes in retail, something that may be a different type of impact for us. But right now, our expectation, particularly to the tariffs, is relatively insignificant or immaterial impact at this point.

Our next question comes from the line of Chris Kapsch with Loop Capital Markets.

Yes. I had one question focused on the competitive dynamic in the LGM business and particularly in the wake of the price increases that have happened. So the way it kind of went down is one of your big competitors introduced a big -- a relatively large price increase. My sense was a lot of smaller guys immediately followed, and then, you came in with a lower price increase. So I'm just wondering when all the dust has now settled, is there -- was there any share shifts that took place? Or did some of the competitor sort of backpedaled on the order of magnitude of the price increases that they were looking to get?

Yes. So Chris, there was pretty broad-based people of various companies putting through price increases. I'm not sure I'd say lead and follow. We put through a price increase that we needed, that was necessary to offset inflationary pressures we were seeing. Now when you go through this period of change, there's often a little bit of a share that might move a little bit within that period for a quarter or 2, and so you see account by account, and that was pretty much what we've seen again. But on a macro, I think our share position has been relatively stable. We don't have share data yet for Q1, but we expect it will be relatively stable through this period.

Got it. And then, just one follow-up on the growth rates around -- in emerging markets in particular. I think you characterized them as mid-single-digits, including China, mid-single digits. Is that -- it seems like over a longer period of time, that's definitely a deceleration. I'm just wondering how you would characterize that growth rate. Are you pleased or disappointed? Is there anything structurally going on there that would cause a lower growth rate over time, other than simply the law of large numbers? Just wondering if you can provide a little bit of color around the growth rate in emerging markets.

Yes. I think over time, we've seen emerging markets at this space mid-single to high single-digits over the last number of quarters, more or less in total, roughly where we've been over the last 4 to 6 quarters. I think in China, it's been a little bit spiky given some of the price increase pre-buy impacts that we've talked about. So we grew mid-single digit this quarter. On the back of last year, we had a strong Q1 driven by price increase pre-buys that happened in April of last year. So I think the growth rate that we had in China this quarter was pretty solid in respect to the timing issues that we also face there. So no real changes to the overall underlying demand that we've seen in the emerging regions. A little bit spikier as Mitch said a few minutes ago, but otherwise, still feel pretty good about the growth prospects and what we've been delivering in the emerging regions.

And Chris, just to build on that, if you want to take a longer view, I think a couple of things to add. We had commented that China was in the high -- consistently high single-digit for a number of years, and that's moderated to mid-single to upper single digits, and South Asia is basically taking that place and ramped up the growth. And so that shift within the emerging markets has been China continuing to show strong growth, but slowed down a little bit, more consistent with GDP there and South Asia continuing to grow well ahead of GDP overall. And I think your question about, is it the law of large numbers within China, I think that's absolutely part of it.

Right. And is it also maybe just, obviously, law of large numbers, I guess, but also just certainly not a saturation of sort of the per capita consumption of labels, but it's just those economy, where they are in terms of their maturation, I guess, another way of thinking about it?

No...

In terms of the adoption -- per capita adoption of sort of label materials.

We still see plenty of upside around the adoption of -- penetration of label materials as well as the e-commerce trends.

We have a follow-up question from the line of George Staphos, Bank of America Merrill Lynch.

I'll ask them in one shot just to expedite things. First off, Mitch or Greg, can you remind us what you actually mean by the pipeline within RFID? Is that numbers of customers? Is that volume? Is that revenue? If you could just discuss what's in there. And relatedly, your RFID growth that we saw in the first quarter of 20% plus, congratulations on that. Is that still your expectation that we should see -- if I remember correctly -- that type of growth over the rest of the year, recognizing it can be a little bit chunky at times, might we see some deceleration in the next couple of quarters after a strong 1Q? And my last question and then I'll turn it over, with IHM obviously, you've given us the answer to the quiz. You're looking for 150 basis points of sequential improvement. Aside from when you put out the next press release, what can we see from our side, either from a macro or market standpoint that would give us more or less confidence in you being able to achieve that goal for 2Q?

Thanks, George. So just real quick -- on the pipeline comments we're having, the comments are specifically around number of engagements, but it's basically number of customers as well. There's only a handful of customers where there's more than one engagement going on. So it's largely one and the same when you read the trends that I commented on earlier around the 65% increase and the overall pipeline being spread between apparel and non-apparel. As far as our RFID growth expectations for the year, we said we expect this business to grow 15% to 20% over the long run, and we commented that last year, it was $250 million of revenue. We expect $300 million this year, so that's a 20% growth rate. So we'd expect the trend you saw in Q1 to continue through the rest of the year, maybe not quarter-by-quarter but overall. And then, last, around IHM. This has -- the reason we call out the amount of productivity that we're focused on here is, I'd say that the ability to achieve the margin trends clearly volume growth is key, but most of it is really around just internal productivity drive and not around macro trends outside. So that's -- our focus is really the ability to achieve that is going to be more around our internal ability to execute more than anything else. Obviously, that's barring any major slowdown in automotive or something else, so we're just assuming a consistent run of those industrial categories.

I think the other thing on IHM that gives us some confidence Q1 to Q2 is as you know, we've made the acquisition last year with Yongle Tape, which is largely a Chinese-based business, and Q1 is its softest quarter as well as the impact of Chinese New Year in the first quarter. So we would expect to see a lift there from Q1 to Q2, and that's a sizable portion of the IHM segment at this point in time as well. So it's another factor driving the Q1 to Q2 benefit that we expect.

Mr. Butier, I'll turn the call back over to you for any closing remarks.

Okay. Well, great. Well, thank you, everybody, for joining the call and your interest in the company. We're off to a great start to what we believe will be another great year here within the company, continuing to drive profitable growth across the entire portfolio, focused on having GDP-plus growth over the long run and top quartile returns.

And just wanted to thank the entire team within Avery Dennison. Truly tremendous capabilities and efforts across the entire team, and it's the strength of the team that gives me confidence that we're going to continue to drive forward. Thank you, everyone.

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.