Avery Dennison Corp (AVY) — Q1 2015 Earnings Call Transcript

Thank you, Frans. Welcome everyone. I’m happy to be back supporting shareholders as the Head of Investor Relations. Today, we’ll discuss our preliminary unaudited first quarter results. The non-GAAP financial measures that we use are defined, qualified, and reconciled with GAAP on 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 our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statements included in today's earnings release. On the call today are Dean Scarborough, Chairman and CEO; Mitch Butier, President and COO; and Anne Bramman, Senior Vice President and Chief Financial Officer. I’ll now turn the call over to Dean.

Thanks Cyndy and good day everyone. We’re happy to have Cyndy back as the IR lead and I’m certain that she will serve all of us very well. I’m also very pleased to introduce you to our new Chief Financial Officer Anne Bramman. Anne started five weeks ago, joining us from Carnival Cruise Line where she served as Senior Vice President and Chief Financial Officer. Anne has extensive experience overseeing the finance functions of market-leading companies with complex global operations, including Carnival and specialty retailer L Brands. Anne is an outstanding addition to the corporate leadership team and I know you will enjoy getting to know her and benefitting from her insights. I’ve also asked Mitch to join us today to participate in Q&A. Besides the earnings announcement today, I hope you took note of another significant announcement concerning the organization. The board recently approved the appointment of George Gravanis for the role of President, Materials Group effective May 1. George has been a driving force in the growth and global expansion of our materials businesses and he joined the company 12 years ago. He played a key role in unifying our market presence in Europe and has been instrumental in our successful penetration of the Asia-Pacific region. Throughout his career with us, George has demonstrated a remarkable ability to inspire his team and drive strong business results. Now, turning to Q1 results, I’m very pleased to report a good start to the year. We beat our expectations for Q1 adjusted EPS by about a nickel, reflecting solid organic sales growth in pressure-sensitive materials and strong sequential improvement for retail branding and information solutions. We also delivered significant margin expansion through productivity gains, higher volume, and improved product mix. I’m also happy to report that free cash flow improved nicely in the quarter, up nearly $140 million, compared to the first quarter of last year. You will recall that we did expect a meaningful shift of cash from the fourth quarter of 2014 into the first quarter of this year, as we took actions to reduce the volatility associated with year-end changes in working capital. That strategy has played out as anticipated and we continue to look forward to solid free cash flow for the full year with quarterly results more closely reflecting the underlying seasonality of our business. And we continue to expect to return the vast majority of that annual free cash flow to shareholders. We returned $66 million to shareholders via share repurchases and dividends in the quarter. Earlier this month, the board approved a 6% increase in the quarterly dividend consistent with our earnings growth last year. And of course, we still have over $500 million authorized under our share repurchase program. As you know, we are laser-focused on achieving our long-term financial goals, both the full-year commitments we set through the end of this year and our new targets through 2018. We said in last quarter’s call that we were making some mid-course corrections to our strategies to ensure that we achieve those targets. I’m happy to report that we’re already seeing some benefits from those actions as we strengthened the long-term competitive positions of all of our segments. One key course correction was rebalancing the price, volume, and mix dynamics in pressure-sensitive materials. We had already begun to see some progress on that front in the fourth quarter. I’m pleased to say that we delivered further improvement in the first quarter with favorable product mix contributing significantly to PSM’s margin expansion in the quarter. The other key course correction was to accelerate profitable growth in the less differentiated segments of both PSM and RBIS markets. Seeing some top-line challenges in the back half of 2014, along with the negative translation effects of the stronger dollar, we intensified our efforts to identify, accelerate, and execute new restructuring actions. Again, this productivity focus is not just about lowering costs and expanding margins, which are crucial, but also about becoming more competitive so we can grow profitably and win in the more challenging segments of our markets. We made significant progress on this front as well, which is reflected in the increase to our projected restructuring charges and associated savings for the year. Looking briefly at the segments, pressure-sensitive materials had a great quarter, with roughly 4% organic growth and record operating margins in the segment. Organic growth was solid across most regions. As I mentioned, favorable product mix had a significant impact on earnings growth and operating margin in Q1, as our strategy to accelerate growth in higher value segments delivered. We grew faster than average in the films category within label and packaging materials, including durables and specialty applications, as well as with higher value segments within graphics and performance tapes. Productivity improvement also contributed to the record operating margin for PSM, primarily through ongoing efforts to engineer reductions and material costs, as well as through restructuring initiatives. While we benefited from raw material deflation in Q1, these savings were more than offset by the carryover effects of prior year pricing adjustments. As I mentioned at the start, retail branding and information solutions delivered strong sequential improvement in organic sales growth. The priorities for the RBIS segment are clear. First, accelerating top-line sales growth for the core business. To that end, the performance segment continues to perform well, delivering double-digit organic growth in the first quarter. You may recall that we faced some pretty tough comps in the fourth quarter last year, but this segment has been a consistent source of strength for us. Our biggest challenge last year was in the less differentiated segments of the market, particularly within value and contemporary. Sales in these segments were still down modestly year-on-year in Q1, but the team has made good progress gaining share in several key accounts. In particular, the team serving factories in North Asia and especially China delivered solid growth, reversing last year’s challenging trend there. Another key priority for RBIS is to capture the above-average long-term growth potential in embellishments and RFID. We continue to see strong profitable growth from embellishments, leveraging our proprietary heat transfer technology. Now, sales for RFID products declined in the first quarter versus the prior year as we expected due to reduced demand from a couple of large European accounts. But the existing pipeline of activity remains very strong, and I’m confident we will see our return to strong growth for RFID in the back half of this year and beyond. That confidence was reinforced by the feedback I received from multiple customers at the recent RFID Live tradeshow in San Diego where the question of retailer ROI wasn’t even a topic of discussion anymore. Another key priority for RBIS is, of course, margin expansion through further streamlining of S&A and rationalizing our manufacturing footprint. With the aggressive restructuring and other productivity actions underway, we expect RBIS to return to the margin expansion trajectory necessary to achieve our 2018 financial goals. In terms of the company’s overall outlook for 2015, we’ve raised our adjusted EPS guidance by $0.05, as we believe the execution of our strategies will more than offset the incremental pressure we’ve seen from the stronger dollar. Now, I will turn the call over to Anne.

Thanks, Dean, and hello, everyone. I’m very pleased to join the Avery Dennison team. There were many compelling reasons for me to make this move. I’ve enjoyed working for companies with leading market positions and Avery Dennison was obviously attractive from that perspective. It’s very exciting to join a team with a proven track record for innovation and execution. I’m transitioning to a new space both in terms of industry and B2B focus; I look forward to bringing a different perspective to the team as I ramp up. Now adding to Dean’s commentary, I will provide a little more color on the quarter. In Q1, the company delivered a 25% increase in adjusted earnings per share on 3% organic sales growth. Currency translation and the effect of the extra week in the prior year had material impacts on reported sales growth and earnings. Currency translation reduced reported sales by 7.2% in the first quarter with an approximately $0.08 impact to EPS. The effect of the extra week in Q4 added an estimated 3 points to reported growth for Q1, which was worth roughly $0.05 in terms of EPS. Adjusted operating margin in the first quarter improved 130 basis points to 8.4% as the benefit of productivity initiatives, higher volume, and improved product mix more than offset higher employee-related costs. The company realized about $10 million of incremental savings from restructuring costs net of transition expenses. The adjusted tax rate was 34%, consistent with the anticipated full-year tax rate in the low to mid-30% range. Free cash flow was a negative $16 million, an improvement of $139 million compared to Q1 of last year. As Dean mentioned, a good portion of that claim was expected following the actions taken in 2014 to reduce the volatility associated with year-end changes in working capital. The company repurchased approximately 600,000 shares in the quarter at a cost of $34 million and paid $32 million in dividends. We remain committed to returning cash to shareholders and have sufficient capacity to continue our share buyback program in a disciplined manner. Now looking at the segments. Pressure-sensitive materials sales were up approximately 4% on an organic basis; Label and Packaging Materials sales were up low single digits; while combined sales for Performance Tapes and Graphics were up mid single digits. On a regional basis, the pace of organic growth in both North America and Western Europe improved sequentially with North America up low single digits and Western Europe growing mid single digits. Organic growth from emerging regions was relatively low in Q1, up low single digits due to continued softness in China and a significant decline in Russia offsetting continued strong growth in the Asian regions, India and Korea. PSM’s adjusted operating margin of 11.5% was up 160 basis points compared to last year as the benefits from favorable product mix and higher volume combined with productivity more than offset higher employee-related costs. Turning to Retail Branding and Information Solutions sales were up approximately 2% on an organic basis and adjusted operating margin expanded by 60 basis points. In terms of the top-line performance, Dean discussed the solid progress the team has made in improving the challenging trends in the value and contemporary segments of the market, as well as the continued strong performance in the form of segments. Adjusted operating margin improved 60 basis points in Q1 as the benefit of productivity initiatives and higher volume more than offset higher employee-related costs. As Dean mentioned, we expect increased margin expansion over the balance of the year as the team executes an aggressive set of restructuring and other productivity improvement initiatives while gaining leverage from higher volume. Sales in Vancive Medical Technologies are expected to achieve a positive contribution to earnings by year-end. Turning now to the outlook for the balance of the year, we have raised our guidance for adjusted earnings per share to be in the range of $3.25 to $3.45, reflecting the roughly $0.05 beat to our expectations for Q1. We outlined some of the key contributing factors to the guidance on slide eight of our supplemental presentation materials. Note that three of the assumptions underlying our original guidance have changed and we have reflected those changes in our new outlook. Specifically, for the full year, at recent exchange rates, we estimate that currency translation will reduce net sales by approximately 8.5% and pretax earnings by roughly $50 million or an estimated $0.35 per share. Combining carryover benefits from 2014 with new actions taken this year, we now estimate that restructuring initiatives will contribute roughly $70 million-plus pretax or about $0.50-plus per share. Consistent with the increase in anticipated restructuring savings, we have raised our estimate for cash restructuring charges to $15 million pretax. Combined with other items, this raises our estimate for pro forma adjustment to GAAP earnings from $0.25 per share to $0.40 per share. Overall, we delivered a good first quarter. Our two market-leading core businesses are well positioned for profitable growth, which combined with our continued focus on productivity and capital discipline will enable us to expand margins and increase returns and achieve our 2015 and 2018 targets. Now I will open the call up for your questions.

Hey, guys, good morning. And Anne and Cyndy, welcome.

Thank you.

Thank you.

First off on Europe and the increase in PSM growth there, but I think you said mid-single digits in Western Europe. Do you think that’s in line with the market or a function of share gains? And also, what are you generally seeing in the macro in Europe across both businesses?

Mitch, why don’t you take that?

Yeah, so, broadly speaking, I think we’ve been telling that for a while that Europe has actually been coming in stronger than we had been anticipating based on the macro. But there is a big difference here between Eastern and Western Europe. Western Europe is actually showing really strong growth overall. I think if you look at some of the macro indicators as well, the consumer confidence and so forth, it’s showing positive performance in Western Europe, so we are seeing all that. Eastern Europe is different, particularly Russia. We’ve seen a significant drop-off in Russia, part of that is market and part of that is share, to be quite honest. Because we source Russia from Europe, so our cost base is in euros and it’s getting more challenging to get into Russia from that perspective. So, overall, Europe is on the West very strong, East is a little bit weaker. We continue to be pleased with the performance and the team continues to do a great job of driving growth in the high profit segments, and we continue to maintain more discipline in lower profit segments.

I think Ghansham from an overall perspective including RBIS, what we see there – we have some pretty tough comps from Europe. As you recall, we were going in the kind of double-digit category for a number of quarters. A couple of our big retail customers have been reducing inventories over the last couple of quarters and that’s put a little bit of pressure. So I would say that would be a slightly more negative outlook on Europe from RBIS, but we are hopeful that as the year progresses and the European economies get a little more solid that we will see some of the benefits there.

Okay that’s helpful. And that the upside in cost savings for 2015, does that come to some extent from 2016 as a pull forward or is that actual cost savings from something new you found for this year?

These are incremental actions from what we got previously.

Okay, but doesn’t change anything in terms of 2016?

No, we haven’t provided guidance on 2016. So...

So definitely there is some carryover into 2016.

Okay, alright. And then just finally on the margins for PSM in the first quarter I think at 11.5%, I think that’s a record if I am not mistaken. How much of that was boosted by any one-offs such as lower raw material cost or anything else that may not recur as you kind of think about next year for example. Thanks so much.

As far as one-offs, there aren’t any one-off benefits that you see coming through within the quarter. It is above the high end of our targeted range that we’ve laid out and we still - when we laid out those long term targets of 10% to 11%, we said we are targeting 11% because that level of this business is a very high returns business and we are focusing on achieving 4% to 5% organic growth rate. So no big benefits from that perspective as far as your question of other one-offs related to deflation, we have seen some deflation as Anne and Dean spoke to, but it’s been offset by the pricing that we have seen, primarily carryover pricing from last year.

Okay. Thanks so much.

Hi everyone, good morning. Welcome back Cyndy, welcome and look forward to working with you. I guess a couple of questions, first, on RBIS, if we go back and we’ve asked the question I guess in the past as well, for 10-plus years RBIS has been a source of continual restructuring. What makes you feel at this juncture that this level of action or the actions that you are taking really put the business on a much more profitable, much more sustainably profitable footing for the future? And then I have some follow-ons.

Yeah, George it’s a good question. I think if you look back kind of at the bottom mostly in 2009, we made significant improvements and the returns of this business are roughly at an average of 100 basis points per year. I think the team has done a nice job reducing costs and improving service, improving our competitive position and I think the go-forward plan would be continued focus on both delivering a balanced strategy which is decent top-line growth of 4% to 5%, which we think is doable given the market and also continuing to drive a lot of productivity. We slipped off the track a little bit last year, we did expand margins last year despite the soft top line and – but what I see is a business definitely recovering here. Since we want to go back to age-old stories, I have to say RFID if I ever seen a turning point, it’s been these last few months talking to retailers in the U.S. At this trade show a couple of weeks ago, it was all about – it wasn’t about is the payback – it was all about when and how they are going to implement this important technology. So I really see this as a definite upside for us over the next few years.

Okay. I want to get to RFID in a minute, but just back to RBIS, you’ve seen the margin improvement and that’s good but it has required continual restructuring. And so do you think that you can get your 100 basis points of margin improvement to get to your goals by 2018, 2019 without further restructuring? And then on RFID, if you can take us through the backlog in terms of why you think the business picks up in the second half of the year, what’s the timeframe and what is the typical process for a retailing customer? Do they say, yes, we agree this is a fantastic thing and we contract with Avery Dennison for a couple of stores and it takes a couple of quarters to load those stores and implement RFID. Can you give us a bit more detail around that? Thanks guys and I will turn it over at that point.

Sure, George. So on your first question, yes, we are confident we’re going to be able to meet our 2018 objectives for this business both in terms of growth and margin expansion. To achieve those objectives, you are focusing in on margins. We do need a balanced strategy as Dean said which we do have of growth and productivity. This business has high variable margins and also has a pretty high level of wage inflation every year. So we need a few points of growth every year to be able to maintain and expand margins there and then drive the productivity that we talk through. In order to achieve the 2018 targets we laid out, we actually knew we’ll be continuing the restructuring within RBIS. We will continue to restructure this business every year to continue to find opportunities to reduce costs. So the balanced strategy, nothing shifted on that front and we’re going to continue to execute that. I think one thing we did say we are making adjustments is making sure we are streamlining our sales and customer service organizations to focus on some of the lower value segments if you will and we’ve seen good progress on that as you can see in the growth rate here in Q1. And particularly focused on the apparel batteries in China and North China. That’s where we’ve seen good progress as well. So yes is a short answer, but we are confident that we are going to meet our 2018 target, but – yes, it requires further productivity as well as growth across all segments.

Thanks. So I’d mention on the RFID.

Yeah, it’s interesting because I would say first of all most companies were taking longer time scaling up. They do 25 or 30 stores; they would go through the results. Then they would expand it to 100 or 150 stores and then they ramp up. And I would say the cycle can last anywhere from 18 months to 36 months. This difference for me here was that retailers understand that to compete in an omnichannel environment. In other words, the ability for customers to operate both online and get products shipped to them or pick up products at the store, inventory accuracy is fundamental to that strategy and RFID is the easiest way for them to achieve that. So what we’ve seen is the retailer now basically – their senior management is saying, we don’t need to go through a second phase of tests. We get the benefits, we saw it in the pilot, now it’s rolling out more effectively. So the pipeline of activity is quite substantial. Now that being said, it’s still very difficult to predict precisely quarter-by-quarter when those purchase orders will start rolling in. But I’ve been around the RFID space for more than 10 years and for me it’s more intuitive I definitely sense a change in mentality by U.S. retailers. So I think that’s positive for us in the long term.

Thank you.

Thank you. Good afternoon everyone and welcome to all. If you look at the first quarter, you surprised yourself at least should be better than you anticipated. Can you share with us, Dean, where you saw the main differences versus what your initial expectations were?

Yeah, it’s a good question, Rosemarie. Our expectations were obviously higher than the Street consensus, but that being said we’ve beat all internal expectations by about a nickel. I think certainly the margin expansion in PSM was a contributing factor and a lot of that came from mix improvement. Frankly, now the team has been working hard at growing the higher profit segments and changing the price mix equation. Here we called last year, most of the conversation on the earnings call was why aren’t we getting any flow-through from our volume growth, but the team has been working hard. So there was a real positive swing for that. I was pleasantly surprised by the rebound in RBIS. The first quarter is a tough quarter for us because it’s seasonally low, and I think the team did a great job executing against several programs capturing tier from some key retailers and we’ve got a hot product in our heat transfer product; we actually are a little bit short in capacity right now. We are adding capacity as we speak. So all those factors came together. I will say we normally don’t raise guidance at Q1 because it’s seasonally slow. I realize that a nickel may not sound that much, but for us we usually like to get two quarters behind us before we adjust our guidance. So, I think we are feeling obviously pretty good about the balance of the year.

Right, so in addition to the fact that your heat transfer is doing better as you probably benefited from lower cost for materials, is it too early to have a feel as to whether or not retailers are rebounding? I mean what do you hear out there?

Well that’s a good question. One of our data points unfortunately is the import of apparel into the U.S. and because of the Long Beach strike stock isn’t coming in. We don’t have a very good metric right now to see how retailers are feeling and we’ve had some anecdotal evidence where retailers are having issues finding ships to bring the new product over. I think that will all sort itself out in the next couple of quarters. I think U.S. retailers are net positive right now given the way the consumer market is playing out and European retailers were less positive last Christmas. That’s even holiday season, but somewhat more positive now. I would say given the relative strength in European economies.

Thank you, that is very helpful. I’ll get back on line.

Good morning. It is Sofya in for Jeff, how are you?

Good.

Couple of questions. Can you discuss what the initiatives are that you are targeting under the $50 million restructuring program? And what was interesting in looking at your results is that all of the margin improvement really came in on the gross margin line and it didn’t really come in on the SG&A line, and so I was wondering whether you can touch on whether all the $10 million in cost savings affected the gross margin line, and also what projects you are targeting within the restructuring program for this year?

Sure, Sofya. We are talking a number of initiatives. So part of what’s baked in here from the beginning is the restructuring that we have within graphics and the recapitalization of our graphics operations in Europe. We also took some actions and more you are going to see it really kick in more in Q2 and beyond, around just SG&A reductions. So, we’ve had some actions within both segments, as well as at the corporate level to reduce costs, but also it’s not just about reducing costs we’re also just creating more of a streamlined linkage between our marketing and R&D organizations for example and pressure-sensitive, as well as some other changes really to get just more dynamic within the marketplace while also further reducing costs. So, SG&A is an area; you’ve heard about the graphics here of actions and we’re taking some additional footprint actions within RBIS. We just recently announced the closure of a couple of facilities in the Southeastern U.S. So there are a number of actions across the board that are happening and that we are working through.

Just add on to that if you look at for the full year, roughly about two-thirds of the savings will impact SG&A and then the remainder will be in the gross profit line.

And don’t forget, Sofya, that product mix benefit that Dean and Mitch were talking about clearly benefitted us on gross profit.

Yeah. If you took out the – there sis like some carry over from like negative pricing from last year probably in pressure center, but if you took out the negative carry over what was your raw material benefit in the quarter and what do you think it may be for the year if you had to guess?

We can’t really predict. As you know we like specialty products by and large both chemicals as well as papers and we just don’t have forward visibility not only to our own volume, but also to just what’s going to be happening in the market. So, we have not tried to predict what’s going to happen in the future as far as commodities market. We did see some sequential deflation, but that was something that we were anticipating and was part of, as we said we look at – we’ve always talked about this on a net basis, looking at price and raw material cost and as you look at the price reduction that we’ve been having throughout last year included in Q4 that’s been offset by some of the recent deflation that we’ve had.

So net benefit was zero you think?

Correct.

Okay. In the pressure-sensitive materials segment, the organic volume growth was – in my opinion phenomenal like 4% on top of like 6% last year, is that rate sustainable for the year seeing, I mean is there – do you have visibility where you are gaining share and do you think you can carry this rate of growth forward for the year?

Well, Sofya, our long-term target is 4% to 5% and the difference this quarter was very solid growth in mature markets and a little weaker in emerging markets. I would expect over time for emerging markets growth to kick back in. I think we mentioned China and Russia were pulling us down a little bit on the emerging market side. So, it’s really hard to predict. I’m real happy with the 4% to your point, but we got there a little differently than I would have expected.

Yes, I’m even surprised there was this much domestic strength. I mean it’s a little bit different from what we hear from other commentary and like in other retail trend. So it sounds like that you must have gained a little bit of market share as well?

Well, our focus on the high-value segment that we have been talking is – those are places where we do have relatively lower share and so absolutely that is around share gain. So, yes is the short answer to your question. I wouldn’t say in the categories where we are the market leader that you are seeing the share gains, it is more in the areas like graphics in specialty and so forth.

My last question would be, as a component of the total pressure-sensitive materials business, how bigger are the higher value-add segments now, what do they comprise of the total business?

So, in total, I mean it’s not like there is a black-and-white high-value segment and low-value segments. If you look at tapes and graphics and reflective solutions in total, those are about a quarter of the total PSM and within PSM, films is a high-value segment in many regions and you have specialty as well, which is over 10% of the LPM business. So it’s a good portion in this varying degrees of high value versus low-value; when we talk about the focus on high value, it targets segments that are around 40% or so of the total.

Thanks very much. I’ll get back into queue.

Good morning. Just wanted to follow up on RBIS value and contemporary, you all shared there last quarter and I think you indicated in your prepared remarks that your team is making progress in gains share back. My question is and I apologize if I missed this, but were sales in value and contemporary, did they continue to lag in the first quarter and as you exited the quarter you saw some trends that you liked or were you recapturing share in 1Q in those segments?

So the negatives, so basically we are still down in the quarter year-over-year. We started to really get share in the back half of the year, really Q2 through Q4, but they were a lot less negative than they were in the fourth quarter. We know anecdotally that we have gained some programs. Some of that should actually start to show up in the second quarter. Most importantly, most of that business resides in North Asia which is basically China and Asia, and that region shows nice positive growth for us. So we’re pleased to see that and that was a reversal of the trend, so we are feeling good about the trend. We are not exactly where we want to be yet.

Okay, that’s very helpful. And then just kind of a bigger picture question for Dean or Anne. Over the last few years, you’ve obviously taken steps to reduce the volatility of your cash flows and improve your margins. And given you’ve realized some good success on those initiatives, I was wondering how you think about the long-term leverage target in terms of being maybe at the upper-end or the lower-end of that range or even reconsidering the range given your leverage versus some of your peers either on the packaging or the chemical, you appear to be a little bit under-levered?

So, I’ll take this one. It was actually a part of a conversation, part of me joining the company as far as the company’s philosophy around this. We just did a pretty in-depth analysis on this as well. Quite frankly, we are very comfortable with the approach that we’ve been taking and are sticking to that measure. Our target – we are targeting a net debt to EBITDA between 1.7 and 2. We use that as a proxy for the rating agencies that we are looking at, but we do believe that is the right target for maintaining liquidity in all scenarios and then making sure that we achieve the lowest weighted cost of capital across the business as well. So we are continuing to target that BBB rating in order to have access to the markets.

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

Yeah, I guess good morning out there in the West coast. I just wanted to follow up on the margin strength in the pressure-sensitive materials segment. Obviously, that was a key source of the upside in the guidance revision. In the past, you’ve talked about the margins in that business from the emerging market business being higher than the Western regions and then in the quarter, you talked about a little bit better strength in the Western regions and a little deceleration in some of these emerging markets. So I’m just wondering if you can reconcile that mix shift in terms of the contribution to the upsides for the margins in that business.

Yeah, so the sales growth was higher in relative terms than what we have seen traditionally within emerging markets within that business. The margins are higher in the emerging markets, particularly Asia, than you see in the Western, particularly Europe margins overall. So if you look at our – I think what you’re asking is whether geographic mix was a positive or negative for the quarter.

The geographic mix piece is relatively neutral overall George and part of it, as we talk about emerging markets where it came in, Russia was one of the reasons for that. Russia is not one of the higher margins of the emerging market. So overall on the geographic piece, it’s relatively neutral but overtime we would expect it to be a tailwind for us, something that lifts margins overtime but we think that benefit until we got the product mix.

To that point George, I would also add – we are talking about China being a little soft specifically around moving away from some lower margin product and we did see a lift in the margin in China year-on-year.

Okay, that’s helpful. Thank you for all of that folks. And secondly and just a quick question, I think the answer would be no but I want to check it out anyway. Some of the work that we do survey vice and one of the other sections that we look at had picked up that apparel expectations had improved from some of the company that we track to sell packaging into these markets. Now since most of the apparel is coming from offshore, it would suggest that perhaps there’s some supplier response maybe because of the poor situation here domestically, have you seen any kind of indication to that effect where you are starting to see some apparel being produced here or not from your radar screen?

Yeah, it would be so small, George, it would be a blip for us. There isn’t enough apparel making capacity in this region to make a significant difference. I think what retailers are doing – and again this is anecdotal, some of them to get product in are using air and one the issues they are facing isn’t so much the bottleneck at ports here in LA. It’s the fact that the ships are taking longer to get back to Asia to pick up products. I actually think this will all be sorted out in the next few months. So I think it’s going to be a relatively minor blip.

There’s some shift mix to Latin America, but also you are seeing it out of China. You are shifting towards Vietnam and so forth. Those trends are continuing. But South China is still such a huge apparel hub that we still expect that to be the lion’s share of apparel manufacturing.

Okay. Appreciate that. The last question from us, more the macro question, I think Taylor was getting at it a little bit earlier. Historically, PSM has been a fantastic indicator for the economy is going and you obviously saw a better than expected first quarter from a volume growth standpoint. Do you get any sense specific to pressure-sensitive in the market that you sell into that even with GDP being, I guess, today 20 bps perhaps a little bit stronger underpinning as we head down to the next three quarters of the year? Thanks, guys and good luck.

Yeah, I will comment and I will let Mitch to just comment as well. So last year was not a great year for the North American pressure-sensitive market, it was down three quarters I think up a little bit, one quarter. We did see nice growth. We don’t have the market data yet for this quarter. I’d like to see a couple of quarters of sequential growth to kind of gain my confidence level. I obviously saw the same numbers you did this morning on GDP, but I know there’s been awful lot of numbers on export reductions, not surprisingly. I’d say I’m going to reserve my judgment until at least another quarter of market activity for PSM. Mitch, what do you think?

It’s tough to link our performance to what’s going on in the macro, but overall if you look at where our growth was in some of the higher value segments and where we know some of that’s been driven by share gain, if you take that away, if you look in North America, the volumes within LPM are not great growth. So, some of the growth that we are talking about is coming across strong, due to our penetration in the high value segments. Western Europe, it’s surprisingly strong, the level of growth that we’re seeing there, both in the market, as well as what we are experiencing ourselves is continuing to surprise us to the upside. I’d say North America seems, I think the numbers we quoted shouldn’t read too much into the macro because it’s also around the focus on the high mix products and then within Europe though that definitely seems to be underlying strength. In China, we are seeing, what we described is exactly what we are experiencing right now, even when you pull comps away there is a little bit of slow down that we are experiencing in China.

Just very quickly, we didn’t touch on when seen and I know it is small and the 11% top line growth is quite strong, and you expect that particular business to be profitable or at least break-even by year-end, what kind of a growth rate should we anticipate and what kind of a profitability based on that? I mean going out to 2016, obviously not this year.

I think in our long-term targets we set was 5% top-line growth and maybe a little higher than that and then operating margins, can’t recall at the top of my head, 9% something like that.

Yes, but we are basically focused on, this business is getting breakeven at the end of this year and then continuing by driving growth as well as productivity getting this business to be comparable to the other businesses by the 2018 horizon on margins, but through its higher growth rate and we are expecting more than 5%, whereas the other ones we are expecting 4% to 5%.

When we talking there, we are talking about dates for lack of band-aids or whatever which are going to deliver medication directly through the skin, correct?

No, so these are not transdermal drug delivery mechanisms, they are wound care basically, so think about a high-tech band-aid with antimicrobial protection to prevent infection basically, as well as we have a lot of other wound care-related products.

Alright. Thank you very much.

You’re welcome.

I assume that’s the last question. So, thanks for listening this morning. We are obviously pleased with the first quarter. We believe we are positioned to win in all key segments of the market and we are particularly happy that the course corrections that we began implementing last year are going through. We will continue to drive growth through innovation and superior quality and service, while reducing the fixed cost structure for both PSM and RBIS to significantly expand operating margin and return on capital and we will maintain our strong balance sheet and continue to return capital to shareholders. So, thanks for joining us today and I look forward to seeing many of you very soon.