Avery Dennison (AVY)
Q1 2011 Earnings Call
April 27, 2011 1:00 pm ET
Eric Leeds - Investor Relations
Dean Scarborough - Chairman, Chief Executive Officer and President
Mitchell Butier - Chief Financial Officer and Senior Vice President
Peter Ruschmeier - Barclays Capital
Ghansham Panjabi - Robert W. Baird & Co. Incorporated
Jeffrey Zekauskas - JP Morgan Chase & Co
John McNulty - Crédit Suisse AG
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Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison's Earnings Conference Call for the first quarter ended April 2, 2011. This call is being recorded and will be available for replay from 12:00 p.m., Pacific time, today, through midnight Pacific time, May 1. To access the replay, please dial 1(800)633-8284 or (402)977-9140 for international callers. The conference ID number is 21496534. I'd now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may proceed, sir.
Thank you, welcome, everyone. Our discussion today will reference the earnings release that we issued earlier along with the slide presentation titled First Quarter 2011 Financial Review and Analysis. Both documents were furnished today with our 8-K and posted at the Investor section of our website at www.investors.averydennison.com. We remind you that these unaudited results are preliminary as we have not yet filed our 10-Q.
Our news release references GAAP operating margin, which includes the interest expense restructuring and other charges included in the other expense line of our P&L. Restructuring charges tend to be fairly disparate in amount, frequency and timing. In light of the nature of these items, we'll focus our margin commentary on non-GAAP operating margins, which reflects pretax results before their effect and before interest expense. This and other non-GAAP financial measures that we use are reconciled with GAAP in schedules A-2 to A-4 of the financial statements accompanying today's earnings release.
We also 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 based on certain assumptions and expectations of future events that are subject to uncertainty. The safe harbor statement included in the documents that we've provided today, along with our 2010 Form 10-K address certain risk factors that could cause actual results to differ from our expectations.
I'm sure you noticed in our documents that we've changed the names of some our business to better reflect what we deliver to customers. Our Roll Materials business is now called Label and Packaging Materials and or our Retail Information Service business segment is now Retail Branding and Information Solutions.
On the call today are Dean Scarborough, Chairman, President and CEO; and Mitch Butier, Senior Vice President and CFO.
I'll now turn the call over to Dean.
Thanks, Eric. During the year end earnings call, I outlined our priorities for 2011. First, to close the price inflation gap from the second half of 2010. Second, to continue the positive trajectory for RBIS, improving both sales and margins. Third, to invest in the turnaround of Office and Consumer Products by launching a pipeline of new products. I'll discuss the first quarter in terms of these priorities.
All of you know that the first quarter is our lowest revenue quarter because of the seasonality of RBIS and Office and Consumer Products.
Given that seasonality, our results were consistent with our plan and we remain on track for 2011. Pressure-sensitive Materials delivered another quarter of solid top line growth with net sales up 10%, with continuing strength in emerging markets as well as in Europe.
More important though, was the sequential improvement in margins for this segment. Our ability to pass through price increases make material substitutions and increased productivity all contributed to this sequential improvement.
Inflation continues to accelerate in this sector as we see increases in paper, film and chemicals. As a result, we are increasing the magnitude and frequency of our price increases and as well as raising our targets for our material reengineering and productivity improvement. I'm confident we'll continue to make progress in margin improvement.
Retail Branding and Information Solutions had another strong quarter. The 9% sales growth was driven by market volume growth as well as customer program wins resulting from our improved service, RFID rollouts and new products. There is some concern among retailers and brand owners about the consumer's reaction to higher apparel prices, as well as the pocketbook squeeze from higher food and fuel prices. So far, apparel sales had held up well and the inventory to sales ratio for soft goods continues to be at historical low. We'll understand the trend better as the quarter unfolds.
Also the solutions that RBIS provides not only enable brands to differentiate themselves, they also improve supply chain performance and help retailers manage their inventories more effectively. Given the current market environment, that's a real plus. So my confidence level in this business and its execution remain high.
As expected, Office and Consumer Products had a tough quarter. Sales volumes were down 13% due to customer inventory reduction from prior year forward VIES, plus a softer retail environment that was partially weather-related. Now while Q1 is always soft, this year's first quarter sales represent less than 20% of Office and Consumer Products' full year sales volume. And given the high variable margins in this segment, operating margins were very low in the first quarter.
Our focus has been on launching new products with the goal of $20 million to $30 million in new product sales during 2011. Customer commitments for these new products are on track with our target. A combination of these new products plus the normal seasonal impact of back-to-school will drive improved sales trends and enable us to achieve our full year margin targets for this business.