Avery Dennison Corporation (AVY)

Q2 2010 Earnings Call Transcript

July 28, 2010 1:00 pm ET

Executives

Eric Leeds – Head of IR

Dean Scarborough – Chairman, President & CEO

Mitch Butier – SVP & CFO

Analysts

Ghansham Panjabi – Robert W. Baird

John Roberts – Buckingham Research Group

Jeff Zekauskas – JP Morgan Securities

Pete Ruschmeier – Barclays Capital

George Staphos – Banc of America/Merrill Lynch

John McNulty – Credit Suisse

Presentation

Operator

Welcome to Avery Dennison’s earnings conference call for the second quarter ended July 3, 2010. This call is being recorded and will be available for replay from 12.00 pm Pacific Time today through midnight Pacific Time July 30, 2010. To access the replay, please dial 1-800-633-8284 or 1-402-977-9140 for international callers. The conference ID number is 21438867.

I would now like to turn the call over to Mr. Eric Leeds, Avery Dennison’s Head of Investor Relations. You may proceed, sir.

Eric Leeds

Thank you. Welcome everyone. Our discussion today will reference the earnings release that we issued earlier along with the slide presentation titled ‘Second Quarter 2010 Financial Review and Analysis.’ Both documents were furnished today with our 8-K and posted at the Investors section of our Website at www.investors.averydennison.com. We remind you that these results are preliminary as we’ve not yet filed our 10-Q.

Our news release references GAAP operating margin, which includes 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 pre-tax results before their effect and before interest expense. This detail is in schedules A2 to A5 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 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 provided today along with our 2009 Form 10-K address certain risk factors that could cause actual results to differ from our expectations.

On the call today are Dean Scarborough, Chairman, President and CEO; Mitch Butier, Senior Vice President and CFO and my most invaluable colleague and former Head of IR for Avery Dennison, Cindy Guenther, Vice President, Global Financial Planning and Analysis.

I’ll now turn the call over to Dean.

Dean Scarborough

Thanks, Eric. Before we get to the quarter, I’d like to welcome Mitch Butier. He has been on our quarterly calls for some time now as Corporate Vice President of Finance and Chief Accounting Officer and this is his first call as CFO. He has been with Avery Dennison for more than almost 10 years in leadership positions and he has worked in all three of our core business segments as well as here at Corporate. He is a seasoned finance executive and a strong leader and I’m delighted to have him in his new role.

Now, turning to the second quarter, I’m pleased with our performance with sales growth in the mid-teens and continued margin expansion. While the year-over-year comparison is with a very soft quarter, the good news is that our largest businesses either approached or exceeded pre-recession levels of sales and profitability.

The increased operating leverage from additional volumes combined with the benefits of restructuring and productivity initiatives enabled us to expand operating margins while absorbing higher raw material costs and additional growth investments.

Turning to the businesses, Pressure-Sensitive Materials delivered double-digit sales growth and solid profitability. Roll materials at double-digit sales growth in every geographic region. Graphics and Reflective products also had double-digit organic sales growth, reflecting increased government expenditures on infrastructure and a rebound in promotional spending from last year’s low level. As expected, raw material inflation impacted our margins on a sequential basis as price increases lagged cost increases.

We’ve added end-use marketing resources to strengthen our competitive advantage in the pressure-sensitive materials businesses. This investment is enabling us to grow faster by demonstrating the value of pressure-sensitive in enhancing brands, as well as giving us key insights on new packaging and labeling needs.

For example, during the second quarter, we launched several new products for the wine, durables, and digital printing market segments, and we are building a substantial pipeline of new products and solutions that will expand the market for pressure-sensitive and take share from alternative packaging and labeling methods.

Retail Information Services delivered very strong results in the second quarter as customers continue to refill depleted apparel inventory. During a time of unprecedented demand, we improved service, which I believe enables us to gain market share during the quarter. RIS margins improved dramatically and its increased volume and last year’s restructuring actions delivered solid bottom line results.

I know you’ve all seen the announcements about RFID item level marking. While we can’t discuss specific customer programs, this market is definitely accelerating, as retailers strive to improve inventory accuracy to enable a better consumer experience and reduced store labor costs with lower inventory levels.

We have significant competitive advantages in this business, including our backward integration in scale and inlay manufacturing, our global footprint and our excellent track record in delivering information solutions to retailers and plant owners all over the world. I do believe the Wal-Mart announcement last week will accelerate adoption rates across the retail market.

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