Avery Dennison Corp (AVY) — Q2 2015 Earnings Call Transcript

Thank you, Amanda. Today, we'll discuss our preliminary unaudited second quarter results. The non-GAAP financial measures that we used for the quarter 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 statement included in today's earnings release. Making formal remarks today will be Dean Scarborough, Chairman and CEO; and Anne Bramman, Senior Vice President and Chief Financial Officer. Mitch Butier, President and Chief Operating Officer is also with us today to participate in the Q&A portion of the call. And now I'll turn the call over to Dean.

Thanks, Cindy, and good morning, everyone. I'm happy to report another solid quarter with sales up 4% on an organic basis, continued expansion in adjusted operating margin and mid-teens growth in adjusted earnings per share. We also delivered a $45 million increase in free cash flow for the quarter. As you know, we are focused on achieving our long-term financial goals both the 4-year commitments we've set through the end of this year and our new targets through 2018. I'm very pleased to say we're on track against these goals for 2015 and the longer term. That said, it's fair to say we expect to arrive there in a different way than we had planned for the current year. The Pressure-sensitive Materials business delivered exceptionally strong results in the second quarter, which were offset by weakness in Retail Branding and Information Solutions. So let me give you some perspective on each of the segments. As I said, PSM had a great quarter with better-than-expected organic growth combined with significant margin expansion. Organic growth was positive in all geographies, with Europe the strongest. Growth in China remained slow, albeit better than the pace we saw in the first quarter, reflecting weaker economic conditions there. We continue to benefit from the growth of higher-value market segments in both Europe and North America, which has been a key strategic focus for us. Graphics, for example, grew organically at a high single-digit rate in these regions, while sales of specialty label products and performance tapes grew at mid- to high single-digit rates. Despite the recent slowdown in Asia, we believe in the long-term growth of these markets and are investing to support this growth. We're adding 3 new coding assets in Asia, providing additional capacity for higher-margin segments including tapes, specialty products and durables. And our project to recapitalize the graphics business, which was part of the major restructuring program in Europe that we undertook last year is now complete. At the same time, we are pursuing growth of less-differentiated products but with an emphasis on improving profitability through disciplined pricing as well as a reduction in both complexity and cost, allowing us to be more competitive in these segments. Our strategic course correction, which we've discussed over the past couple of quarters to rebalance the price, volume and mix dynamics on Pressure-sensitive Materials is working. We're beating our long-term target for organic sales growth, and that growth, combined with ongoing productivity and a favorable raw material environment, is driving record operating margin. We will continue to execute this strategy, leveraging our strengths in innovation, quality and service across the entire materials portfolio. Now let's turn to Retail Branding and Information Solutions. The results for the quarter were clearly disappointing. Sales declined 2% on an organic basis and operating margin contracted. The priorities for RBIS are very clear, accelerate top line sales growth for the core business and expand operating margin and return on capital. I'm confident we'll get this business growing again and drive return above the cost of capital before 2018. We are winning in the higher-value segments of the business. A good example is the performance athletic segment, where customers value the global consistency and design capabilities that we offer. Growth in this segment has been consistently strong, roughly 17% annually over the last couple of years, as we have taken share and leveraged the full breadth of our product solutions, including RFID and external embellishments. RFID is ramping up now as more retailers begin to adopt this new technology. We are the go-to supplier in this market with a robust pipeline of new programs that are building momentum. We have better than 50% share of RFID for apparel today and expect to maintain that leadership position through 2018 based on our competitive advantages. While RFID sales have been down in the first half of 2015, reflecting the timing of various rollouts, we still expect sales to be up 15% to 20% for the full year, with growth of better than 35% in the back half. External embellishments represent another strong growth opportunity where we're gaining traction. Over the past 2 years, we have seen this business grow roughly 30% annually, albeit off a small base. We expect to continue growing these products at better than 20% annually, becoming a $100 million-plus business for us by 2018. Our strategy for value, contemporary and fast fashion retailers and brand needs will change. These represent roughly 60% of the market for apparel labels, and we can win in these segments. We will reduce our fixed cost, localize our material sourcing and respond quickly to changes in our customer needs by decentralizing decision-making. We are rapidly moving to a business model that will be competitive for all segments. This strategic shift actually shares a common theme with Pressure-sensitive Materials. In both cases, we are focused on reducing cost and complexity to be more competitive in the less-differentiated segments of the market. These aren't just short-term cost plays. It's part of our long-term strategy to win in the marketplace, expand margins and improve returns. I'm confident that we have the right leadership team and employees in place to make that happen. And we will share the details of our plan during the October earnings call. In summary, I'm confident in our ability to achieve our long-term financial targets through 2018, adjusting course as needed, to deliver double-digit EPS growth and top quartile return on total capital. We'll continue to deliver strong free cash flow and we're committed to returning the majority of our free cash flow to shareholders over the long term.

Thanks, Dean, and hello, everyone. I will supplement Dean's commentary with some color on the financial results for the company and segments. In Q2, the company delivered a 14% increase in adjusted earnings per share on 4% organic sales growth. Currency translation reduced reported sales by 9.5% with an approximately $0.10 impact to EPS. Adjusted operating margins in the second quarter improved 140 basis points to 9.5% as the benefit of productivity initiatives, higher volumes and the net impact of price and raw material input costs more than offset higher employee-related expenses. The company realized about $18 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 $130 million, an increase of $45 million compared to Q2 of last year, driven by improved working capital productivity and higher earnings. In the first half, the company repurchased approximately 1.1 million shares at a cost of $62 million and paid $66 million in dividends. As Dean indicated, we are committed to returning cash to shareholders and have sufficient capacity to continue our share buyback program. Consistent with our stated philosophy and strategy, we continue to be disciplined and opportunistic with share repurchases, buying relatively more when the share price dips and relatively less when the share price is higher. Now looking at the segments. Pressure-sensitive Materials sales were up approximately 6% on an organic basis. Label and Packaging Materials sales were up mid-single-digits as were the combined sales for Performance Tapes and Graphics. On a regional basis, North America delivered another quarter of low single-digit growth, while Western Europe was up high single digits, benefiting from above-average growth in Graphics and continued strength in products for labeling applications. Organic growth for emerging regions improved compared to the first quarter, but continued to be relatively slow up mid-single digits due to softness in China as Dean mentioned. PSM's adjusted operating margin, a record 12.3% for the segment, was up over 2 full points compared to last year. This improvement was driven by productivity, including continued material for engineering savings and our recently increased level of restructuring activities, as well as fixed cost leverage through strong volume growth. We also saw a net benefit from price and raw material input costs as we continue to reinforce our pricing discipline, particularly in the less-differentiated segments of the market. Both North America and Europe continued to experience benefits from product mix as both regions had faster growth in higher-margin segments. Sequentially, adjusted operating margin for PSM expanded by 80 basis points, primarily due to incremental savings from restructuring and other productivity initiatives. The Retail Branding Information Solutions sales declined approximately 2% on an organic basis and adjusted operating margin contracted by 40 basis points. Several factors contributed to the organic sales decline in the quarter. Once again, with sales up high single digits, we saw growth in performance segments for both Europe- and North America-based retailers and brand owners. However, we continue to experience declines in the value and contemporary segments, reflecting the share loss that we've been speaking to over the last few quarters. Additionally, sales of apparel labels for Europe-based retailers and brand owners were further impacted by reduced orders for apparel due to the impact of the euro devaluation on the cost of imported goods. As expected, sales for RFID products declined due to reduced demand from a couple of large European accounts. However, as Dean mentioned, sales in the second half are expected to grow in the mid-30% range. Returning to the total segment, the decline in adjusted operating margin reflects the impact of the lower sales, including reduced fixed cost leverage and negative price and mix, as well as higher employee-related costs. These challenges were partially offset by the benefit of productivity initiatives. We are focused on reducing costs and streamlining our processes to position ourselves to grow and win in all the segments. Sales in Vancive Medical Technologies declined about 1% on an organic basis, following an 11% increase in the first quarter. Given the application-specific nature of orders in this business, we do expect sales growth to be somewhat choppy by quarter. We continue to anticipate that organic sales growth for Vancive will be faster than the company average for the full year. The segment's operating loss was reduced by nearly $1 million due to productivity actions. The team continues to focus on the milestones needed to drive long-term growth of this platform with the objective of achieving a positive contribution to earnings by year-end. Turning now to our outlook for the full year, we've raised our estimates of organic sales growth modestly to a range of 3.5% to 4%, reflecting the strength of PSM in the first half. We have maintained our adjusted EPS guidance, as we believe that out-performance by PSM will offset the combined negative impacts of weaker-than-planned performance by RBIS and a higher-than-expected share count. We outlined some of the key contributing factors to this guidance on Slide 8 of our supplemental presentation materials. Several of the assumptions underlying our previous guidance have changed modestly. Specifically, for the full year, at recent exchange rates, we estimate that currency translation will reduce net sales by approximately 8%, a slight improvement from the rates in April. Our outlook for the impact of currency translation on pretax earnings and EPS have not changed. As discussed, we now estimate average shares outstanding on a fully diluted basis will be in the range of 92 million to 93 million shares. We divested a small, roughly breakeven industrial printer product line in Europe during the second quarter, which resulted in the recognition of a loss and some related exit cost. We've included the loss and associated cost in our pro forma adjustment for the quarter, which resets our estimate for restructuring costs and other items by $0.03 to $0.43 per share. As a result, while our guidance for adjusted EPS remains unchanged, we have reduced our estimate for reported EPS by $0.03. Summing up, we delivered another good quarter and remain on track to achieve our 2015 and 2018 targets. Now we'll open the call up for your questions.

Can you first off give us some color on what you're seeing in Brazil and China at current and particularly, if there was a change in the monthly sales rate on a year-over-year basis during the second quarter? The economies there seem quite fluid and secure. So if you're seeing any deviations in this region just on a monthly basis?

Mitch, do you want to take that?

Sure. So, looking at Brazil, overall, I'd say we've got decent growth on an organic basis in Latin America in general, including Brazil, but it is all due to pricing. The volumes that we are seeing in Brazil have softened quite a bit in the last couple of quarters to be quite honest. And within China, we've been seeing softening within China. We talked about it last quarter. And we're continuing to see that again this quarter.

Do you have any comments on Europe as well?

On Europe? Well, Europe, specifically Western Europe, extremely strong growth is what we're seeing, and the emerging markets have been softer. So we've seen a shift here over the last couple of quarters where Western Europe is actually growing faster than emerging markets within Europe.

Okay, and then just on PSM, can you help us bridge in any way the improvement in operating profit year-over-year? There are a ton of moving parts with FX, and I would assume some level of impact from lower raw material cost as well. So can you kind of break up a few of those pieces? Whatever you can share.

Well, I think it's a good question. Every region has a slightly different scenario, so it is complicated, Ghansham. We have some markets where raw materials are more advantageous. In Europe, it's not really a benefit because many of the commodity cost reductions stem from oil. In fact, there are some shortages in specific resins that are forcing us to raise prices in the European market. Overall, the largest impact has come from our emphasis on expanding in the higher-margin segments, particularly in Europe and North America. We've achieved considerable productivity from material reengineering, restructuring, and growth in those higher-margin segments, and while raw materials have also been beneficial, they haven't been the most significant factor this quarter. Even with slower market growth in emerging markets, particularly in Asia, we're still experiencing margin improvements in that region.

And the only thing I'd add, Ghansham, is just that mix of the key component we're talking about in driving growth in the high-value segments, as Dean spoke to. And while we have some of the net price benefit we received, it's really around our focus on expanding the margins within the less-differentiated segments and holding on to that deflation where we are seeing it in some of the less-differentiated segments. We are seeing positive growth.

I wanted to follow up on the question regarding the raw material capture in Pressure-sensitive Materials. It appears that operating margins in this segment improved by a couple of hundred basis points this quarter, with a 160 basis point increase in the first quarter. Should we anticipate that these gains will slow down as the price-cost gap closes in the second half of the year, or do the other factors related to mix and higher-value products more than compensate for any potential compression?

Yes, I think there's a couple of factors. I think we had said at the end of the first quarter, we had a little bit of uncertainty of how raw material and commodity costs would be reflected in the back half of the year. I think I mentioned that in Europe, we are actually seeing some raw material inflation even despite this. And then our fourth quarter this year is a bit challenging because of the 53rd week last year kind of moved some from, I would say, a normal amount of profit into the first quarter of this year. And so the comparisons year-over-year in Q4 are going to be a bit challenging. So that's a bit of it. I think that has no economic impact on the business, it's just the number of good shipping days in the quarter is less this year than last year.

Okay. Moving to RBIS, I think you mentioned you're coming up with a new plan there, maybe to decentralize the organization a little bit. But you have been on this footprint optimization within RBIS for a number of years, closing down a significant number of facilities and moving to digital printing in order to improve response times. I'm just curious, I know you said you'd share more details in October, but why the sudden shift? Is it more volume issue? Or is it a cost issue that caused you to make this course of action?

Yes, we had a significant realization during the second quarter that we were not going to meet our growth targets. This prompted us to adopt a more aggressive approach to capturing market share in the value and contemporary segments. In hindsight, we should have made this shift earlier, and we acknowledge that. We have been planning and adapting, as we've noticed a trend where buying decisions are increasingly being made closer to where products are manufactured, rather than being centralized in established markets. This requires giving our regional teams more control over their business decisions and raw material selections, which were previously managed from the center. We've observed changes in customer purchasing behavior, which is a primary reason for this necessary shift. Additionally, our footprint consolidation has been successful, making us more productive than we were a few years ago, with improvements in service quality and safety metrics. Moving forward, we will likely continue to adjust our operations, but I feel more confident in our capability to execute effectively across all segments now compared to five years ago. Mitch, would you like to add anything?

I believe you captured it well. This is something we are aware of and have been discussing over the past few quarters regarding our performance compared to the market and the need to become more competitive in the less differentiated segments. Following what transpired in Q2, we recognized the need to adopt a more aggressive approach to enhance our competitiveness by reducing complexity, streamlining our processes, and cutting costs to become more price-competitive and succeed. Our business needs to maintain consistent growth, similar to what we are experiencing in Pressure-sensitive Materials, and improve its margins in accordance with the targets set in 2018. We are committed to this and confident that we can achieve it with the strategic adjustments we are discussing.

I wanted to start with a question similar to what Ghansham asked regarding PSM, specifically about the bridge and RBIS. How much of the EBIT negative variance was related to the revenue decline and the incremental margin associated with that? To what extent is this impacted by labor inflation? Any details you can provide on this would be appreciated, and I have some follow-up questions regarding RBIS.

I’d like to start with a general observation. One thing we didn't foresee was the slowdown among European brands and retailers due to the rising cost of clothing. Since they primarily source from dollar-denominated regions, our customers are indicating that they are being more cautious about increasing their inventory. This was somewhat unexpected for us in the second quarter. Regarding the margin differences, I can provide more details as needed.

Yes, so overall, your question about normal wage inflation. So we saw a normal level of wage inflation that you'd expect within the quarter. So really it's around the volume price and mix elements were the biggest single driver for the reduction in the margins that we've seen. We, of course, had to get down to productivity, as we always do. But the real shift here was the volume-price mix dynamic.

Okay. I guess again, taking a step back, I mean, this business has been a defined segment for over 10 years. You started building it out in the early 2000s. It has never hit your margin targets. And I wish I could be more diplomatic about it, but aside from maybe 1 quarter or 2 where you were over 10%, it's never performed as you had expected as the latest strategy from your people within the division would have presented. So taking a step back, what should give us confidence that the latest plan from within the organization, RBIS team, will get you the performance that frankly, we would expect and that your capital providers should deserve given what's been the history?

Well, George, that's a great question. In our 2018 targets, we outlined a plan where the margins for these businesses would be coming together. However, at this moment, they are actually moving apart, as we are falling short on the margin improvement targets we set for RBIS, while Pressure-sensitive Materials has performed better. We understand that for investors to have confidence in our portfolio, these two businesses need to align. That's our primary focus. Additionally, I believe, and the management team shares this belief, that we can enhance the margins in this business. To achieve this, we need to become more competitive in the 60% of the market where we currently lack competitiveness. The way forward seems quite clear, and while it will take us a few quarters to reach our goals, I can only assure you that in every other area of the business, we have upheld our commitments. If we find that we cannot succeed, we will take action regarding the portfolio.

Understood. I appreciate your thoughts on that, Dean. From our perspective, what should we evaluate most closely? Intra-quarter analysis is challenging, but during reporting season, aside from the expected increase in margins, that would indicate to investors that we are on track. I recall that you typically need about 2% revenue growth in that segment just to keep up with inflation. Should we anticipate a 3% or better revenue growth in that segment by the fourth quarter or first quarter? What other one or two things should we focus on regarding RBIS? Also, congratulations to everyone in Pressure-sensitive. It’s your largest segment, and you performed exceptionally well. I don’t want to spend too much time on RBIS, but if you could address that question, I’ll turn it over from there.

Revenue growth is indeed crucial. Looking at the RBIS business, apparel unit growth is about 1% to 2% annually, and we are concentrating on increasing our market share through various initiatives. We have seen success in several segments. It's a bit frustrating because we previously mentioned our strong performance in athletic wear. Additionally, I believe RFID is at a pivotal moment, and we expect significant growth in the latter half of the year attributed to RFID. I anticipate impressive volume growth for RBIS as we have easier comparisons and an acceleration in RFID program launches, particularly in North America, where we have captured a significant share of these new programs. Although I can't specify the retailers, we are optimistic about the outlook, and this segment is profitable for us. Our external embellishment business is also growing. We see substantial opportunities ahead, and our primary focus remains on volume growth and increasing our market share.

Forgive me in advance if I ask anything you already addressed. I got on a bit late. Anne, 1 cap allocation question. Can you talk about your appetite for share repurchases at these levels, appreciating that you guys are price-sensitive buyers of your stock?

We have discussed this in previous calls, emphasizing our disciplined approach and strong commitment to returning value to our shareholders. Our strategy is centered around a long-term perspective. As mentioned earlier, we tend to be more opportunistic when share prices decline and pull back when we see significant increases, which was the case this past quarter. Our commitment remains strong, and we continue to focus on the long-term view.

And on PSM, just in terms of your expectations for margins sequentially, do you expect a significant sequential decline just in light of the rolling off of the raw material benefits or some of the other items that you called out? Or do you think they could in fact be fairly stable sequentially? And if so, why?

So in general in those raw material pieces, we do not see a change sequentially on that. What we're seeing on the back half is a natural shift in mix for the materials group. And then, quite frankly, Q4 was a calendar shift. It's about $0.10 to $0.14 of impact to the headwind for the second half of the year. So that's really a big driver when we look at it overall.

You're talking $0.10 to $0.14 down from a year ago, Anne?

Yes.

And so the raw material, you still expect some benefit in the third quarter from raw materials, sounds like?

Not sequentially, no.

There is modest inflation expected as we enter the third quarter.

That was the essence of my question. Regarding the slight increase in your sales guidance that is linked to PSM, was Western Europe the only factor contributing to that revision in your sales expectations? If so, are there specific segments within Western Europe that are performing particularly well for you at this time?

So really it was an overall sales improvement from PSM. They delivered 6% organic. So it wasn't 1 particular region that drove the increase in the overall guidance. It was the general over-performance by PSM.

And within PSM, we're seeing the strong performance of Western Europe pretty much across the board, but specifically, we are going faster in the higher-value segments, such as Graphics.

But just geographically, Mitch or Anne, were there any regions that performed better than you had previously expected, aside from Western Europe?

Western Europe is the standout. That should be the takeaway.

Your SG&A costs were down, I think, $23 million in the quarter. How much of that was currency?

Currency basically made up the lion's share of that. And then productivity offset natural inflation as well as some other investments.

Okay. In pressure-sensitive adhesives, were sequential prices in the United States up, or down or the same?

We don't provide specific insights into different regions and their conditions. However, generally speaking, we have observed some price reductions sequentially in certain areas or segments where we have relatively higher variable margins. In those cases where we have experienced deflation, we have been passing that along to customers in targeted areas. At the same time, we are beginning to notice some inflation, and that's what we are currently monitoring. A key point regarding the net benefit we mentioned earlier for this quarter is centered around maintaining our position in the lower-value segments, where the returns we have seen were not necessarily EVA-positive. We are using this situation to enforce discipline in order to raise the EVA for those less differentiated segments above break even.

In the quarter, your severance costs were a little less than $17 million. How long will it be before you pay that out?

You're asking specifically about the timing of the cash out on restructuring?

Exactly right. Yes, on the $16.8 million that you booked in the quarter.

Yes. So it could take several quarters. Yes, it could take several months for that to job happen, depends on the geography and several other factors.

Several months, okay. And then I guess lastly, the PSA growth of 6% relative to, I don't know, pick a unit, global GDP, U.S. GDP, is way high. And obviously, there's all kinds of weakness in the offshore markets. Is this you? Or is this the pressure-sensitive adhesive market in general? Historically, you said that PSA growth turns out to be a leading economic indicator. How do you read the overall organic growth of PSA and the strength in Europe?

Well, I think we had a competitor report numbers yesterday. They also had strong organic growth. So clearly, for me, Europe is growing quite nicely. I think there's a bit of a rebound there in activity and probably easier comps from prior years. North America, as you recall last year, we didn't see much growth at all, actually for the last couple of years. And now that's growing in the low to mid-single-digits. So yes, I would guess that, that bodes pretty well for economic activity.

Okay. And then lastly, you talked about 30% growth in RBIS in the second half. What's the motivation for that?

RFID.

RFID.

Oh, I'm sorry. RFID. And those are new wins?

Yes, we have reached a point where retailers are no longer questioning whether RFID has a payback but rather are focused on when and how to implement it. Several major retailers will be launching significant deployments in the latter half of this year. This effort is centered on enhancing inventory accuracy so they can effectively serve customers both online and in physical stores. We have definitely observed a change in behavior regarding RFID, which is quite exciting.

Like in rough terms, what are your RFID revenues?

They'll be about less than $150 million this year.

I would like to delve deeper into the variance in pressure-sensitive products. You identified several factors contributing to this, such as productivity, operating leverage, product mix, and raw materials. However, you also mentioned that these benefits significantly outweighed the increased employee costs. Yet, your reduction in SG&A costs, which was partly due to foreign exchange, seems to contradict this. I am trying to understand how much of a challenge the employee costs were. Alternatively, were the lower SG&A costs a major driver of margin improvement in the pressure-sensitive segment?

Overall, the increase in employee costs and inflation reflects the typical wage increases within our business. When considering SG&A expenses, the majority of the overall dollar shift for the company was due to currency fluctuations, alongside wage inflation and some investments we've been making. We are focusing on organic investments in high-value segments, like our Performance Tapes business, balanced by productivity improvements. Looking at the sequential margin expansion in PSM, it primarily stems from productivity, a significant portion of which is due to our restructuring efforts. We initiated the restructuring program at the start of the second quarter to enhance our competitiveness in less-differentiated segments and improve margins in those areas.

Okay. And it sounds like on a year-over-year basis, productivity was also the largest contributor to the variance. Was raw material benefit the second-largest? Just trying to get a little more granular on the benefit from raws.

Volume mix was the second-largest. So it's very consistent with where we were. We've mentioned the benefit on net price, if you will, between raws and the pricing element, because it's not negligible this quarter. But still, the biggest single item was productivity, followed by volume mix, consistent with what we've been seeing and talking over the last few quarters.

Okay, got you. And then earlier in the Q&A, you were touching upon sort of trends on a regional basis. I think you were referring to trends during the second quarter. Just wondering if you could provide any color about order demand trends thus far into the third quarter, albeit we're just a month into it. But just by region, if possible. Any color on sequential trends thus far into the third quarter?

So overall, the trends we're seeing are consistent with the guidance we've been giving. If you recall going into April last quarter, we said it's a little bit softer than what we had seen in the first quarter. It then picked up dramatically in materials, and at RBIS it didn't. So it shows, again, lack of forward visibility within the business overall. So to answer your question, going into Q3, we're seeing trends relatively consistent with what we saw in Q2. So RBIS down a little bit from where we were this time last year. And then PSM showing growth consistent with what we have as particular strength in North America and Europe.

Well we are in the Ramadan periods. So by the way, year-over-year comparisons, because of South Asia for us in RBIS are really tough. So it's again consistent with our guidance.

Looking back at the RBIS, especially the Paxar business, there has only been seasonality and strength in the second and fourth quarters. With the sluggishness you're experiencing, I understand there are specific reasons for it. However, do you see any changes in the historical seasonal pattern of the RBIS business that might be contributing to the lagging performance?

I don't think there are significant changes. There may be minor differences in how retailers make purchases over time, and seasonality is becoming more consistent. RFID will also play a role, as it often has irregular impacts. Overall, I expect the fourth quarter for RBIS to be stronger than the third quarter, but not as strong as the second quarter.

I understand. Regarding the capacity additions in Asia that you mentioned, I believe those are aimed at your higher-margin products like tapes and graphics. Are these investments flexible, or will they be allocated specifically to those product lines? Additionally, it seems that these investments aren't significantly affecting your overall capital expenditure expectations. I just need some clarification on that.

Yes, so these assets are dedicated within China. They're focused on specialty labels and tapes. And then within Europe, they're focused on graphics. And as far as they're not having a meaningful impact, these were part of our plan all along as far as level of investment. So what you'll see within PSM, we'll talk about the major points of investment, and they shift from one region or one initiative to another year-over-year. But we have these types of investments regularly.

Actually, Chris, these investments are just about up and running. So they've been part of our existing run rate.

The graphics one is actually up and running beginning in Q2. The rest of them should be by the end of Q3 or early Q4.

Just a follow-up to Jeff's question. In PSM, this is another quarter where growth in Europe seems to be outstripping other regions. Just to clarify, is that a case of more a case of under-penetration of the product in Europe that might run its course at some point? Or are you actually seeing stronger underlying demand from consumers in Europe?

Anthony, that's a great question. The market for PSM in Europe has been outperforming North America for about three consecutive years now. Honestly, it's quite challenging to pinpoint the reasons for this trend. We've considered various hypotheses over the past three years. One possibility is that pressure-sensitive products have lower penetration in Europe, which could be contributing to this situation, but...

Application that's driving this overall. We are seeing some higher growth in areas that may be linked to more export markets. Given the lower euro, they're somewhat benefiting from that. Another factor is a regulatory shift around larger label sizes, which includes requirements for larger font sizes and more nutritional information. However, I can't identify any one specific item as the main driver. There are several smaller factors contributing to this. Overall, in Western Europe, we are witnessing improved growth trajectories, which are also reflected in reports from a key competitor.

Got it. Got it. And then just more broadly in the PSM business, given the very strong results in the last few quarters, would you look at revising the long-term margin targets that you outlined at the last Analyst Day?

I don't believe we will make any changes midyear. It's something we will consider as we progress through the year. We only have a few quarters of performance to analyze so far, and the current volatility in the world is quite unusual. We are observing slowing emerging markets and accelerating mature markets. Some regions are experiencing inflation while others face deflation, leading to many unpredictable factors. Therefore, I don't think we will be revising our guidance anytime soon.

We're testing new limits, and we're committed to continuing to test those new limits. But it's really about having a balanced strategy of growth as well as the margin expansion that we've seen so far.

Fair enough. Regarding RBIS and the value in contemporary segments, you mentioned share loss in the latter half of last year. From what I recall in last quarter's call, there seemed to be an indication that this had stabilized or possibly even improved a bit. However, this quarter, it appears there may have been further share loss. Is that an accurate representation of your market share and value in the contemporary segment over the past year? Was it down late last year, and has it been relatively flat year-to-date, or has the share loss worsened? Any insights on this would be appreciated.

So Anthony, we don't have information on market share for Q2 because we lack the apparel imports data to support that. Our sales typically occur a couple of months before we see any corresponding import volumes. When we spoke in Q1, it appeared that things were stabilizing somewhat. We have received the import data for Q1, which was somewhat erratic due to the strikes at the ports, but overall, import volume remained robust. It did stabilize somewhat and the trends are moving in a positive direction. I believe the trend continues to improve in the U.S., but Europe poses challenges for the reasons we discussed earlier.

I have a quick question. I’m not sure if you mentioned it during the call, but if you did, I missed it. Why did you increase the share count guidance for the year? I believe it was raised by one or two million shares.

So we didn't buy back as many shares as we had planned in the second quarter, and so we went back and revised some of our estimates for the full year.

Okay, so it's just a question of price of stock, but it's not necessarily indicative of what you might have before you in terms of other capital allocation decisions?

We experienced significant dilution in the second quarter, particularly towards the end of the quarter when the share price rose. Many options became profitable during that time, contributing to this situation.

Okay. And to RFID, can you remind us, what kind of payback period are your customers seeing on the initial rollout of an RFID program? And if we could sort of bracket the mid-30s growth that you expect to see in the second half of the year. You said a number of customers, I believe, Dean. Is that 5? Is that 12? Is that 2? Is there a way, if not to the single point, is there a way to bracket how many customers are bringing on these implementations?

Thank you. In terms of the number of customers, we have at least six retailers that I am aware of, and there may be a few more. Additionally, we have a significant application outside of the apparel industry, which is encouraging because we believe RFID is applicable in various other sectors besides apparel. This serves as a positive early indicator. I'm sorry, but I don't remember the first part of your question.

The first part of the question was just what kind of payback period are your customers seeing when they roll this out?

Yes, that's a great question. I'm not entirely sure about the specifics. However, I do believe it offers a good return on investment, although retailers tend to be hesitant to disclose their exact payback periods since we are still in negotiations regarding RFID tag pricing. My guess is the payback period is likely under two years; otherwise, retailers would probably be less inclined to adopt it. It also varies based on the individual retailer. A significant part of this is about enhancing customer satisfaction, increasing sales growth, and integrating their online, mobile, and in-store operations. During my visit to the RFID show, I spoke with at least a dozen retailers, and none of them expressed concerns about whether there was a payback, which suggests it must be quite favorable.

Okay, well, thanks for everyone for listening today. I'm really pleased with the progress that we're making this year, especially in light of some weaker economic conditions in emerging markets and certainly the headwinds that we have from currency. It takes quite a bit of agility in an organization to continue to deliver against our overall targets given the shift. So I'd like to thank all of our employees for their continued support, hard work and creativity in meeting our business challenges. Again, really excited and pleased about our progress in Pressure-sensitive Materials. It's great to hit new highs on margin targets. So we're obviously going to work hard to continue to maintain our progress there. And then for RBIS, we're committed to getting this business back to the levels that we committed to for 2018, because we realize how important it is to have our portfolio relatively similar from a capital market perspective. And so we certainly understand that. We're going to make progress, and we'll update all of you on some very specific plans in the October call. Thank you.