Avery Dennison's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Avery Dennison (AVY)

Q1 2012 Earnings Call

April 25, 2012 1:00 pm ET

Executives

Eric Leeds -

Dean A. Scarborough - Chairman, Chief Executive Officer and President

Mitchell R. Butier - Chief Financial Officer and Senior Vice President

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Scott Gaffner - Barclays Capital, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Todd Wenning - Morningstar Inc., Research Division

Gaji Balakaneshan - The Buckingham Research Group Incorporated

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison's Earnings Conference Call for the First Quarter, March 31, 2012. This call is being recorded and will be available for replay from 1:00 p.m. Pacific time today through midnight Pacific time, April 29. To access the replay, please dial toll-free 1 (800) 633-8284 or (402) 977-9140 for international callers. The conference ID to enter is 21543230. [Operator Instructions] I would now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may begin, sir.

Eric Leeds

Thank you. Welcome, everyone. Today, we'll discuss our preliminary, unaudited first quarter 2012 results. Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The company's Office and Consumer Products business is classified on our income statement as a discontinued operation. The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP and schedules A-2 to A-4 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 future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today's earnings release.

On the call today are Dean Scarborough, Chairman, President and CEO; and Mitch Butier, Senior Vice President and CFO. I'll now turn the call over to Dean.

Dean A. Scarborough

Thanks, Eric, and good day, everyone. First quarter earnings came in as we expected on somewhat lower than anticipated sales volume while free cash flow was somewhat better than we expected. Sales declined modestly, reflecting the slowdown in volume that started in the second quarter of last year and impacted all regions. Run rates were generally in line with recent trends. Asia, however, was weaker than we expected for the pressure-sensitive Materials segment, and I'll touch on that just a bit more in a few minutes.

Despite lower volumes, we increased the operating profit through productivity initiatives and higher prices. And I'm pleased to say we're delivering on the commitment to return more cash to shareholders. We repurchased 2.4 million shares during the quarter and paid a higher dividend.

Now let me comment briefly on the 2 segments before turning the call over to Mitch. Pressure-sensitive Materials continues to deliver solid results. Despite lower volume, operating profits were up. Results for North America and Europe were pretty much in line with our expectations, but sales in Asia came in weaker than planned for Label and Packaging Materials. We knew the comparisons to prior year will be tough for this region, but LPM sales in Asia ramped up more slowly than we anticipated following the Chinese New Year. The run rate has picked up for this business, so we expect to see a return to double-digit growth for LPM Asia over the balance of the year. To that end, we completed the expansion of LPM's plant in Pune, India where we continue to see exciting growth opportunities. Globally, this business has solid, long-term growth drivers, stable to improving operating margins and generates a lot of cash. You'll hear much more about our strategies and outlook for this business from LPM's President Don Nolan during the May Investor Meeting.

First quarter results for Retail Branding and Information Solutions reflect the trends we saw in the back half of last year. We expect to see improvement in the RBIS growth rate over the balance of the year, with both easier comparisons and the success of our growth strategies. Recall that we have now passed the anniversary of retailer decisions to reduce unit volumes to beat the anticipated higher impact -- or impact of higher prices. Given the seasonality in this business, the second quarter will be an important benchmark for assessing how this market is progressing, as well as testing the traction of our key growth initiatives. As discussed in previous calls, the major challenge for RBIS has been achieving margin improvement objective in a lower growth environment. Over the past few years, we've been steadily restructuring this business to reduce fixed costs. We ramped up this activity in the second half of last year and expect to continue these efforts over the next few years.

The next wave of actions is focused on factory efficiency and the further consolidation of production. We'll shrink square footage in manufacturing and invest at less than the rate of D&A to deliver solid free cash flow in this more volatile market environment. As with LPM, you'll hear much more about the strategies and outlook for this business from RBIS President, Sean Neville, during the May Investor Meeting.

Moving on, in light of the previously announced agreement to sell Office and Consumer Products, this business is reported as a discontinued operation. OCP increased sales on a year-over-year basis due to the new products we launched last year, including a healthy lift from the pipelines associated with Martha Stewart. The sale of OCP is in regulatory review, and we expect the transaction to close in the second half of the year.

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