Avery Dennison Corp (AVY) — Q4 2018 Earnings Call Transcript

Thanks, Susie. Today, we’ll discuss our preliminary unaudited fourth quarter and full year results. Please note that throughout today’s discussion, we’ll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled with GAAP on schedules A-4 to A-8 of the financial statements accompanying today’s earnings release and the appendix of our supplemental presentation material. 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. On the call today are Mitch Butier, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer. Now, I’ll turn the call over to Mitch.

Thanks, Cindy, and good day, everyone. I’m pleased to report our seventh consecutive year of strong top line growth, margin expansion, and double-digit adjusted EPS growth. Our Label and Graphics Materials business delivered strong performance in the year of significant raw material inflation, retail branding and information solutions posted both strong top line growth and significant margin expansion, and Industrial and Healthcare Materials made solid progress with its margin turnaround in the back half. 2018 marked an important milestone for the company as the final year of measurement for the five-year financial targets we communicated in early 2014. This is the second long-term performance cycle we've completed since first introducing this discipline back in 2012 and I’m pleased to report that we once again achieved our company goals. Importantly, we are also on track to achieve our five-year goals through 2021. Our consistent performance reflects the resilience of our industry-leading market position, the strategic foundations we've laid, and our agile and talented workforce. Our strategic playbook continues to work for us as we focus on four overarching priorities: driving outsized growth in high-value product categories, growing profitably in our base businesses, relentlessly pursuing productivity improvement, and remaining disciplined in our approach to capital management. In 2018, we made good progress on all four of the strategic pillars. We delivered organic growth of 5.5% reflecting continued solid growth in our base businesses and continuing above-average volume growth from emerging markets and high-value categories such as specialty labels and RFID. Emerging markets and high-value categories remain our two key catalysts for GDP-plus growth across our entire portfolio. Roughly half of our total sales are linked to one or both of these catalysts. In 2018, high-value categories continued to grow at a high single-digit pace with RFID now contributing nearly a full point to total company sales growth and emerging market volume once again grew faster than average. Importantly, our end market exposure in emerging regions is quite broad-based with relatively even balance among China, South Asia and a combination of Latin America and Eastern Europe. Equally important to top-line results, we also maintained our strong focus on continuous productivity improvement. The combination of product reengineering, restructuring, and the deployment of lean operating principles contributed significantly to our results in 2018. This focus remains key to our long-term success, not just as a means to expand margins, but to enhance our competitiveness and to provide a funding source for reinvestment. Now looking at how these strategies played out in each of our segments. Label and Graphics Materials delivered another year of strong top-line growth, reflecting above-average volume growth in emerging markets and high-value categories, as well as pricing. Specialty labels led the way for LGM high-value categories with organic growth of roughly 10%, while Graphics and Reflectives grew at a solid mid-single-digit pace. Strength in emerging markets was led by South Asia and Latin America, while China was up mid-single digits. Mature regions delivered solid organic growth in 2018. Now while organic growth was strong overall for the year, our volume growth did moderate a bit in both Europe and China in the second half. This trend is reflected in our guidance assumptions for LGM for 2019. LGM’s operating margin remained strong in this high-return business, a significant result given that raw material inflation came in much higher than we anticipated at the start of the year. Keeping up with significant and persistent inflation required multiple price increases in every region of the world over the past 18 months, as well as, of course, our continued focus on innovative product reengineering. Overall, another strong year for LGM. Retail Branding and Information Solutions delivered both strong top line growth and significant margin expansion driven by continued execution of our transformation strategy and continued strength in RFID. In the base business, sales increased across all product categories, reflecting broad-based growth and performance in athletic, premium, and value channels. Our ability to grow our base business here in the face of a challenging retail environment underscores the success of our multi-year transformation strategy as our improvements in service, flexibility, and speed continue to resonate with our customers. RFID grew by more than 20% in 2018, topping $300 million for the year. As you know, apparel represents the vast majority of our total RFID sales today, driving most of the growth last year. Outside of apparel, we're seeing early stage traction in multiple categories including food, beauty, and aviation, which collectively contributed 2 points of growth for the year in RFID. Our pipeline continues to expand across all categories, driving our confidence that RFID will continue to deliver 15% to 20% plus growth annually. We continue to increase our level of investment to support this growth as we build our intelligent labels platform, to enable a future where every item can have a digital twin and a digital life. RBIS's adjusted operating margin expanded another 170 basis points, not only beating the high end of our long-term 2018 target range but also hitting the middle of our 2020 target range ahead of schedule. The team has done a tremendous job transforming RBIS into a simpler, faster, and more competitive business over the past three years and we're pleased with the momentum that we're seeing here. Turning to Industrial and Healthcare Materials. As you know, it was a challenging year for IHM and results fell short of our goals. That said, our top line challenges mostly limited to the business serving the China auto market. Elsewhere, we progressed well. Our industrial businesses in both North America and Europe grew organically at mid-single-digit rates with improved profitability in the second half and our medical business, part of the total healthcare category, grew high single-digits organically. We obviously have more work to do to achieve our 2021 targets we've set for IHM. I remain confident we’ll achieve these goals just as I was with RBIS a few years back. And I've covered the first three of our strategic pillars driving outsized growth in high-value products, growing profitably in the base, and relentlessly pursuing productivity gains. Now, I’ll cover the fourth pillar, highly disciplined capital management. In terms of the investments we’re making for organic growth and productivity, our primary focus has been capacity in emerging regions for LGM, recapitalizing LGM’s European and North American footprint and investing in both capacity and business development globally for RFID. Carefully planned and executed M&A is another key element of our disciplined capital allocation strategy, though we didn't complete any acquisitions in 2018, our strategy here has not changed. We look for opportunities to increase our exposure to high value-add segments as well as to expand and leverage our core capabilities. And finally, we continue to be disciplined in our approach to returning cash to shareholders, and as a result, significantly accelerated the stock buyback in the fourth quarter. In addition to the progress made toward our 2021 strategic and financial goals, we are also making solid progress towards our 2025 sustainability goals. Just to hit a few highlights. We've reduced our greenhouse gas emissions by 25% since 2015, roughly 80% of our paper is now Forest Stewardship Council certified, and more than 90% of our operations are now landfill free. Looking ahead, we are focused on tackling industry-wide challenges with a particular focus on packaging recyclability, by leveraging our existing products and capabilities and developing new opportunities through collaboration with our customers and partners. Summing up, I'm pleased with the progress we've made toward our long-term goals as we continue to deliver consistent GDP-plus organic growth and top-tier returns on capital. For 2019, we will continue to make progress toward these goals with the midpoint of our adjusted EPS range up 12% before the headwind from currency translation. Now, while we expect the external environment may prove more challenging this year, we are prepared for it commercially, operationally, and financially, and we will seek opportunities to lean forward even if others may pull back. Now, I'll turn the call over to Greg.

Thanks, Mitch and hello everybody. I’ll first provide some additional color on our performance against our long-term goals, and then I will walk through fourth quarter performance and our outlook for 2019. As Mitch said, 2018 was an important milestone for the company as the final year of measurement for the five-year financial targets we communicated in early 2014. And as we noted, we achieved all of our targets. If you turn to Slide 7 of the supplemental materials, you'll see our scorecard. Sales grew more than 4% organically and reported operating margin hit 10% or 11% on an adjusted basis. Adjusted EPS grew 18% annually over the past five years, and at the same time we expanded return on total capital over this period by 8 full points to 19% in 2018. Our balance sheet remains strong with our net debt-to-EBITDA ratio on the low end of our targeted range for 2018. In March of 2017, we introduced a new set of long-term targets extending our planning horizon to 2021. As you can see on slide 8, now two years into this cycle, we are on pace to achieve these goals as well. Given the diversity of our end markets, our strong competitive advantages, and our resilience as an organization to adjust course when needed, we're confident in our ability to deliver to a wide range of business cycles. At the same time that we communicated our financial targets through 2021, we also laid out a five-year plan for capital allocation which you can see on slide 9. We've put a total of $1.7 billion to work over the first two years of this cycle, allocating it very much in line with our long-term plan. This plan reflects our goal to deliver top quartile returns relative to capital market peers, a position we have maintained while increasing our pace of investment for both organic growth and M&A. Further, our current leverage position gives us ample capacity to continue investing in organic growth and acquisitions, while also continuing to return cash to shareholders in a disciplined way, and we are clearly in excellent shape to take advantage of any dislocations in the market should they occur over the next few years. Now let's focus on the fourth quarter. Overall, our financial results were solid. Reported earnings per share was $1.11 including a net $0.37 hit from the combined effects of the pension settlement and tax benefits from a discrete tax planning action in TCJA estimate revision. Adjusted earnings per share was $1.52, a few cents better than our expectations and a 14% compared to the prior year driven by both sales growth and margin expansion. We grew sales by 4.8% on an organic basis as currency translation reduced reported sales growth by 2.9 points in the quarter. Currency translation represented a roughly $0.6 headwind to EPS compared to the same period last year, which by the way exactly offset the benefit from the lower adjusted tax rate. Adjusted operating margin increased by 50 basis points to 11.1% as the benefits from higher volume and productivity were partially offset by higher employee-related costs. We realized $5 million of net restructuring savings in the quarter. Gross savings, most of which benefited RBIS, were partially offset by roughly $4 million of transition costs for LGM’s footprint action in Europe. Note that while we will incur an additional $10 million of transition costs in the first half of 2019 for this project, with savings ramping up in the second half. So turning now to cash generation and allocation, excluding the $200 million contribution to the U.S. Pension Plan, free cash flow for the full year was $429 million, up by roughly $8 million compared to the prior year. As we’ve discussed, we've increased our pace of fixed capital and IT-related spending this year with growth capital spending up by about $30 million to support both organic growth and margin expansion. We continue to return cash to shareholders with a higher dividend in share repurchases. We significantly accelerated the pace of share buyback during the fourth quarter to $218 million. For the full year, we repurchased roughly 4 million shares at an aggregate cost of $393 million and paid $175 million in dividends. So collectively, we returned a total of $568 million to shareholders in 2018, roughly two times the amount we distributed the year before. So let me now turn to the segment results for the quarter. Label and Graphic Material sales increased by 4.7% on an organic basis driven largely by price. High-value categories once again grew faster than the base business. Breaking down LGM’s organic growth in the quarter by region: North America was up high single-digits, and Western Europe grew at a low single-digit rate. Growth in emerging markets was mid-single-digits with continued strength in South Asia and Latin America, and China grew mid-single-digits including a benefit from the timing of sales due to pre-buy in the prior year. On a normalized basis, the trend in China slowed relative to the first half. Operating margin for the segment was strong, up 40 basis points on an adjusted basis to 12.9% as the benefits of productivity increased volume, and the net impact of pricing and raw material costs more than offset the higher employee-related expense and transition costs associated with the European restructuring. Shifting outward to Retail Branding and Information Solutions, RBIS delivered another quarter of strong top line growth up 6.9% on an organic basis driven by both RFID and the base business. Total RFID sales were up 20% for the quarter, the vast majority of which benefited RBIS, driven largely by European brands and retailers. Adjusted operating margin for the segment expanded by 10 basis points to 12.2% as the benefits from increased volume and productivity were largely offset by higher employee-related costs and growth-related investments, which ramped up over the course of the year. And finally, turning to the Industrial and Healthcare Materials segment, sales grew 0.7% on an organic basis. As mid-single-digit organic growth for industrial categories in North America and Europe, as well as for healthcare globally, was mostly offset by weakness in industrial products for the China market. Though this category represents only about 10% of IHM’s total sales, that is less than 1% of the company's total sales, we experienced a significant decline in these products due to the drop in Chinese auto production. We made good progress on the margin for IHM; the adjusted operating margin increased by 170 basis points to 9.6% driven by productivity improvement. We faced a modest headwind from raw material costs net of pricing in the quarter, but expect to realize sufficient price increases in 2019 to cover this gap. I spent a lot of time meeting with our teams in IGM over the past six months. We're sharpening our commercial focusing capabilities, improving our cost position, simplifying our organization structure, and further aligning our operations teams with LGM to leverage our strength there. I remain confident in our ability to achieve our long-term goals of 4% to 5% plus organic growth with the operating margin gradually expanding to LGM’s level or better by 2021. So turning now to the outlook for 2019. We anticipate adjusted earnings per share to be in the range of $6.45 to $6.70. The midpoint of our range reflects organic growth for LGM near the lower end of its long-term target range. While we assume RBIS will come in above the high end of its long-term range reflecting continued strength in RFID. We have outlined some of the key contributing factors to this guidance on slide 15 of our supplemental presentation materials. We estimate that organic sales growth will be approximately 4%, and currency translation would be at a roughly 2.5% headwind to reported sales growth. With the pre-tax operating income hit of $25 million, we estimate incremental pre-tax savings from restructuring net of transition costs will contribute about $35 million due to the timing of these actions and related transition costs; roughly 75% of the full year net savings from restructuring will be realized in the back half of the year, and we expect the adjusted tax rate in the mid-20s in line with 2018, and with the large non-cash charge associated with the pension termination, we’ll likely see a low single-digit reported effective tax rate. We expect interest expense of roughly $75 million to $80 million reflecting higher debt at the end of 2018 due to the pension contribution in Q3 and accelerated share buyback in the fourth quarter, as well as a higher average interest rate on total debt. We anticipate spending $275 million to $285 million in fixed capital and IT projects consistent with our five-year capital allocation plans, and we estimate average shares outstanding assuming dilution of $84 million to $85 million. As previously discussed, we expect to complete the process of terminating our U.S. pension plan resulting in pre-tax non-cash charge estimated at $490 million during the first quarter with an estimated after-tax EPS or roughly $3.55. Finally, given the timing of the impacts from currency translation and restructuring actions, our projected earnings growth is significantly weighted to the back half of the year. In summary, we're pleased with the strategic and financial progress we made against our long-term goals in 2018, and we are committed to delivering exceptional value to our strategies for long-term profitable growth and disciplined capital allocation. Now we’ll open up the call for your questions.

Yes. So, I guess first-off on the core sales growth to 4% for 2019. How does that break out between the segments from a growth standpoint and also how much of that 4% do you expect will come from price, just kind of the flow through from your pricing actions late in 2018?

Yes, Ghansham, so this is Greg. For LGM we expect to be as I said close to the low end of our long-term target range in terms of organic growth in 2019. And for RBIS, we’re expecting to be above the high end of our range, really driven by continued strength in RFID. In our IHM, we're continuing to expect some softness here in the first part of the year, driven by continued softness in China automotive and looking for that to turn around a little bit in the back half as we start to lap some of that and potentially see some impacts on China automotive or some of the actions that they're taking there to improve that market. So, overall LGM coming in around the low end of its range, RBIS a little bit above the high end of its range. And then the pricing contribution.

So price in LGM, we'll see price carryover I think in the 1% to 1.5% range in 2019 and volume growth accordingly after that. So again, coming in overall closer to 4% in LGM with price above 1.5% year-over-year mainly driven by the carryover actions that we've implemented.

Then I guess just as a follow up question related to the first one, you've been very consistent with the core sales growth over the last seven years as you sort of highlighted in your slide deck. What gives you confidence that you’ll be able to continue that in 2019 given that there are two very large economies in China and certainly the EMEA region that have slowed? Just help us think through that from a high level standpoint. Thanks so much.

I guess overall Ghansham, the guidance that we’ve reflected is largely volume and it basically comes from our two catalysts for consistent GDP-plus growth being in high value segments as well as emerging markets and our broad exposure is largely tied to consumables which tend not to move as much even in periods of uncertainty. So that’s what gives us the confidence of what we’re being going to be able to deliver here.

A quick one on LGM. I mean for the fourth quarter, you’ve noted that the organic growth was mostly from pricing. So was there any volume growth in any of the regions or any of the products or is it purely pricing that you got in 4Q.

Yes, we did a volume growth in the quarter in LGM in the low single-digit range. So I think price was a bit more impactful in the quarter than volume, but overall volume growth was in the low single-digit range in the quarter overall for LGM.

And one on RBIS, as you’ve noted like the margins are almost at your target for 2021. So do you see, I mean can you improve from where you are right now or do they stay where they are in terms of those margins?

Yes. I think you’ve seen over the past we don’t consider the margin targets that we set as limitations. There are expectations we have and commitments that we make, and so we definitely have quickly moved to exceed the 2018 long-term target we established and are quickly a little bit above the midpoint. So right now, our focus is getting to the high end as the long-term targeted range and then once we get there, we'll look at reassessing our sights from there.

I wanted to spend the first question on the restructuring benefits and the cadence when we should expect over 2019. So just being simplistic about it guys, in the first half of the year we should expect all else equal about $19 million of negative comparisons from the transition costs since we're netting to $35 million for the year. Does that mean that we're well over $50 million positive in the second half which then would have a residual until 2020? Am I thinking about that correctly?

Yes, I think - so George, I think our transition costs in the first half, we're expecting to be around $10 million related to the European restructuring. So that would be the headwind in the first half. And in the second half, we'll see the benefit of that project, as savings start to kick in in the second half and that also comes some transition costs we had in the back half of 2018. So the first half we’ll see a headwind and in the second half, we'll start to see the benefits from that action. So about three quarters of the net savings will be in the second half of the year.

The other question I had and then I'll turn over. Can you give us some color - Ric, I know it’s really early in 2019. What kind of volume rates, what kind of exit rates did we see across China both in LGM and IHM in some of the end markets can provide that, that’d be great? Thank you.

Yes, so overall as far as the volume trends that we saw within China, within LGM in the second half, we had some lumpiness as Greg and we’ve talked about between last quarter and this quarter because of pre-buys around pricing and so forth, but low single digits which is below the long-term trend we have seen and expect to see long term, so low single digits for volume trends in LGM and then within the industrial automotive that was down 20% reflecting the big decline in auto builds that you've seen in China. Now I remind you that the auto exposure to China is 1% of the total company revenue, but just if you want to focus in on that, that's what we're seeing.

Thanks for taking my question. It looks like you're making some headway in the IHM segment. I guess now that things have kind of started to right in terms of the ship there. I guess how should we think about the improvement through to your 2021 targets? Like is this something that we can kind of think of as a linear margin improvement or is it going to be a little bit lumpy or I guess how should we be thinking about that?

Yes, I think so from where we finished 2018 to our progress towards 2021. As we said, we're still confident we'll be within our target range in 2021, but we’d expect that progress to be more steady across the next couple of years, so we do see continuing to make progress from 2018 to 2019 targeting somewhere around 10% margin in IHM in 2019 and looking to continue making steady progress from there as we progress towards 2021.

And then just a question on the margins in RBIS, I mean you are at your 2021 target already. I guess if you kind of looking back I guess what got you there faster than you expected was it the mix of RFID, or was it higher sales volumes in general or efficiency? I guess? What are kind of the bigger buckets where maybe you’re a little bit surprised in terms of how quickly it happened and I guess, help to put that in perspective as we look forward where there may be future improvement?

It's really a combination of the transformation we’re driving in the base and RFID. A few years ago, we initiated this transformation and made significant strategic adjustments to bring decisions closer to the market, enabling us to move faster, simplify processes, and enhance our competitiveness. We've discussed this before and recognized a great opportunity in making these changes. I would say we are meeting and even exceeding our aspirations in this area. For RFID, we’ve mentioned that we expect growth of 15% to 20% or more, and it has actually been growing at 20% or more over the past couple of years, which is significantly boosting our overall business. Essentially, both factors are at play, and for us, it’s about continuing to elevate our performance and executing to find the best balance between top line growth, margins, and capital efficiency within the business.

Just looking at your CapEx guidance, you're stepping up again in 2019. I'm just wondering if it's possible to say if there are large projects that are part of that, or regions or categories where you're specifically accelerating investments versus the last couple of years.

Sure. The biggest investments are coming from the North America expansion that we've talked about previously, that's coming through as well as some investments in South Asia in particular that we are making. Those are some of the bigger items.

And then maybe just shifting gears to RFID. You talked about the growth opportunities in non-apparel categories. Is it possible to say, you know our margins in the non-apparel categories, would you expect them to be sort of similar, a little bit better, maybe a little bit worse than the apparel segment?

We'd expect them to be similar and that's what we're experiencing today, though it's less than 10% of the total revenue right now. But, yes we would expect them to be similar.

You should be doing great. It’s a strong quarter. Greg, you mentioned in your commentary about, you know through the fourth quarter, you felt like you were back to where you needed to be from a price cost perspective, but can you talk about it, where you have actually positive price cost spread in 2018 and do you think there's any carry over from a price cost spread perspective into 2019?

So I think we entered, we ended 2018 a little bit short from a cumulative in terms of covering the inflation we've seen with pricing as well as material reengineering as we've talked in the past. We do expect that with the pricing actions, we took at the tail end of 2018, most of which went into effect in Q4 very early here in 2019, so that will help close the gap that we had cumulatively from the inflation that we've seen over the last 18 months or so. As we ended Q4, we saw inflation relatively stable for us. And right now, Q4 to Q1 we've continued to see relatively stable raw materials as well so assuming there nothing changes there - we expect to be largely covered by the pricing actions that we've implemented at this point.

And then just focusing on share repurchases for a second. And just when we look at the timing of that, I mean I know you have an intrinsic value model that gives you buy signal or not? But was there anything else in regards to the return of capital in the fourth quarter? And sort of how should we think about the repurchases going forward? Is there anything built into the $84 million to $85 million share assumption for 2019? Thanks, guys.

Yes, I don't think of anything out of our normal practice. So you know historically, as we've said, we'll look to continue managing share buyback based on our intrinsic value models as well as using a buyback grade and in periods where we may see the stock accelerating, we might decelerate our buybacks a bit; if we see the stock decelerating that may increase a little bit. And I think that's what you saw here happen in 2018. And so nothing unusual in terms of how we approach that in the past and our expectation is we said with the share count range that, I gave in the guidance, is what you would expect us to purchase in 2019.

In describing the profit prospects for LGM you said that it would be at the lower end of its longer-term range and RBIS would be above its longer-term range. Can you discuss the factors behind those two claims? What lies LGM below and why is RBIS above for 2019?

Yes. I think so for RBIS, I think its extended strength we see in RFID as we continue to target the 15% to 20% or higher growth there in RFID, as well as some of the strength in the base of apparel business that we saw as we coming out of 2018. In LGM, as we've talked about, we're looking at 1.5 or 1 to 1.5 of price next year for this year in 2019. And you know it's alluded to a couple of times a little bit of softness we saw in some of the markets in China, Europe, etc. as we ended 2018, so a little bit more cautious on the volume as we go into 2019, offset by some of the carryover pricing actions as we mentioned here. So overall, that's the direction on the 4% growth roughly for LGM in 2019.

And the only thing to add, Jeff, the expectation outlook for LGM for 2019 is just for 2019 given some of the macro uncertainty we're seeing now. From a long-term perspective, we still expect this business to grow between 4% to 5% organically.

And from my follow-up in your funds flow statement, your changes in assets and liabilities and other adjustments was almost negative $400 million and I guess maybe there's $200 million of pension in there, so maybe it nets out negative $190 million or negative $200 million ex-pension. What's the number for next year, that is are you still going to have a large negative value there or is it smaller or positive?

Yes, Jeff, so I think that was mainly driven as you said by the pension adjustments as well as some tax items related to the pension adjustments that moved that so much year-over-year. I think if I could step back broadly for 2019, if I think about free cash flow, we'd expect free cash flow to see somewhat of a modest improvement in 2019 versus where we were in 2018. As we look at continuing to spend a little bit more in capital investments as Mitch mentioned earlier in his comment. We also expect to have some of the cash restructuring charges from the European action that we announced a year ago. Much of that cash will hit us in 2019. So, we see some continued improvement on our profit side as we’ve talked about and then we’ll have some higher CapEx and a little bit higher restructuring cost. Overall, expect a modest improvement in free cash flow in 2019.

Just Greg or Mitch, just back to, following up on one of Jeff's questions about your volume expectations for China and Europe specifically. Can you just give us some sense of roughly what those expectations are just compared to what kind of volume growth you've seen in China, and in Europe in the years past, just again given everyone's concerns about weakness in China, in Europe?

So overall versus what we've seen in years past, we’ll talk about them separately. China, we talked about that growing mid to upper single-digit growth trends, up until a couple of years ago and it's been a mid-single-digit growth, kind of market since then. And then we saw in the second half, it start to decline to low single digits reflecting all that we're seeing going on within China. We expect the long-term return to a mid-single-digit growth market overall. So, we're seeing that in the second half of 2018. So, I would expect that to kind of continue at least as we comp the tougher comps in Q1 in the first half. Obviously, we have limited forward visibility. So that's kind of what we're seeing and what we're thinking. China Automotive, a very small part of the business, was down pretty significant, will comp through that here after the first quarter or so. I know that the Chinese government is putting new incentives around automobile manufacturing and so forth. As we, so that’s something else that may have an impact. So overall, we expect China to continue to be a long term, a very good market for us here in the near term, but at a lower pace. Europe, same thing. We saw the volumes growth moderate a bit in the second half. We’re expecting that may continue here into the first part of the year with Brexit and everything else going on. If you think about long-term Europe, up until a year or so ago, had been growing faster than we would otherwise expect. I’m talking at the market level and now it’s growing in the low single-digit level, which is what we’ve consistently expected up until again the last four months or so when it’s gotten very low-single digits, if you will. So that is our - what we're seeing. We’re basically assuming a continuation of that at least for the first part of the year, depending on if you're at the low end of our guidance range, it would continue a little bit longer, with the high end of the guidance range, it would correct itself rather quickly.

And just Greg on the price cost question, someone asked before just to make sure I understood. So it sounds like it was a slight negative for the year as a whole, and did I hear correctly from a you're expecting it to be roughly neutral in 2019 and just relatedly in some paper markets are coming under pretty significant pressure. Same on the chemical side, so are you seeing any relief on it – on paper and chemicals, and you mentioned I think inflation would be flat sequentially Q4 to Q1, but just a little more on your price cost expectations for 2019 would be really helpful. Thank you.

Sure I am. So yes, as I said, we ended Q4 is still a little bit short of covering for the year. In the quarter, we expected pricing actions we took in the back half of the year which went into place largely in Q4. But again, we expected price deductions we took in the back half of the year, which went into place, largely in Q4 with those pricing actions we expect to build recovery and be a little bit favorable in 2019. In terms of what we’re seeing in the material markets, I think sequentially Q3 to Q4, we saw just a little bit of favorability on chemicals, a little bit of unfavorability on paper. And right now as we've gone from Q4 to Q1, it's a little bit of the same trend, but overall relatively minimal impact sequentially Q3 to Q4 and then Q4 to Q1 at this point in time with what we've seen.

I was wondering looking at RBIS, if you could - you have expressed strong gain in the share base – share gain. I was wondering if you could give us more details regarding the product line submarkets, geographies, where you are gaining share?

Yes. Our share gain in the base is pretty broad-based across multiple customer categories as well as all the various product categories and it really just goes back dramatically to the strength of our position being in every region of the world and our focus around speed and lower cost competitiveness is really resonating with customers. The fact that in this period of uncertainty, I think it really resonates with customers to partner with us. So it's broad-based, Rosemarie, across the board, and if you look at apparel import units, they are roughly up by 3% so far year-to-date. So a pick-up in the last couple of months and if we look at our volume trends, it's still well above that. Clearly, RFID is a clear value driver. In RFID, but I’d say it also creates a halo effect across the rest of RBIS as we are clearly the partner to go to for adoption and then just continued rollout of this technology.

Do you think that in the growth rate of 3% in apparel imports, there was some pre-buying given the trade war going on with China, which may or may not resolve?

Perhaps, I think that's more – there's more discussion going on about the migration of where products are sourced from, but that is largely what's happening. And it's really at the discussion level still. Apparel imports did surge quite a bit in the most recently available month, which may indicate some of what you're referring to. But on the flipside, inventory levels continue to be extremely lean at the retail level, and those have actually declined over the last year as retailers continue to get more lean overall. So, there are some signs that maybe that did happen. I don't think so. It is part of the active discussion we're having with the retailers and brands. That said, I think this level of uncertainty really just increases focus on the importance of having a global presence for us as well as the importance of having lean inventory levels for retailers, which really plays to our strengths and the strength of RFID, which is one of the other reasons we're continuing to see increased pace of focus around RFID adoption within apparel.

Just one follow-up on the RBIS dynamics that you were describing. If there was a pronounced migration of apparel manufacturing from China elsewhere. Are you any different or would you look at that as an opportunity to take share given the breadth of your footprint and your presence in essentially all countries where there's apparel manufacturing?

So I mean we're available and ready to partner with our customers for whatever they choose to do. In a period of change like that, it does play to our strengths and historically has enabled more share capture. So we saw that years ago and there's a large migration from Latin America to China as an example. Having said that, I think the pace of migration, I mean it will depend on what's going on at the trade discussions going on between the various governments. There is, of course, a large footprint within China and there is a huge network benefit of cluster benefit within China around this. So I'm not sure how quickly it will exactly move, but we're prepared to work with our partners to move as quickly as they individually wish to do.

And then I did have a question focused on LGM and specifically the regions where there's been most exposure to the economic softness that you've talked about and just wondering and presumably we're talking about China and Europe. Can you just describe if there's been any indications of a change in competitive behavior in those regions and the price increases that you've implemented during the course of 2018. Have they been holding in here most recently against that more uncertain backdrop and how do you see those dynamics playing out in 2019?

Yes, so overall, the competitive dynamics I think remain fairly consistent with what we've seen over the long-term no big shift competitively. Clearly, when you go through a period of change like that, we've maintained or gained share in the key regions where we have visibility, the market data for the full year 2018 versus 2017 increasing and so forth, you will see share positions, particularly in some of the less differentiated categories, have a little more variability throughout the course of the year and we saw that. That is just part of the normal practice and we, as we've discussed in the past, willing to take some near-term share risk during a period of price increase because we know we can recapture it within the near-term. So a little bit more volatility on that, but that is absolutely the norm we've seen over cycles as far as the competitive dynamic.

The first one is more of a modeling question. So, I think your guidance for interest expense this year is $75 million to $80 million and that seems to be a bit of a step-up from the run rate from 2018, you know aside from perhaps short-term rates being a little bit higher. Is there anything else that's driving that? And if you'd called it that earlier and I’d missed it, apologies in advance. That's question one. The question two when we think about RFID, is there a point in the, I don't know three to five year horizon where it is so effective at allowing your customers now and prospectively to reduce their supply chains such that it actually leads to a reduction in demand overall for smart labels if you get what I'm getting at. Thanks.

This is Greg. I'll start with your first question on interest. So much of the step up that we're seeing as we go into 2019 is really driven by the fact that we did issue a $500 million senior note offering in the fourth quarter, late in the fourth quarter, which really took effect in December. We'll have to carry over impacts for that as well as a little bit higher interest costs. That debt issuance was really to fund the pension as well as some of the share - other increased CapEx in the quarter as well or in the year, sorry. Yes. So, George, I think it's - if you focus just on apparel, it's got a much longer runway than three to five years as far as the trajectory that we're looking at. If you look at penetration rates and so forth, overall you would expect this to enable some inventory reduction. So over that time you gradually retailer by retailer should expect to see some inventory reductions which is a near-term impact to demand if you will, but it's overall enabling us to gain more share of the overall apparel labeling space. We see that it's a good thing. It plays or shrinks. It supports overall sustainability objectives of the retailers. We see that as absolutely a good thing, and I think that's probably part of what even in the period of retail apparel shrink, where I mentioned we still see very lean inventory levels. That’s already happening to some extent. Some of that could happen. I think it will not be a – it’ll be a gradual if you will, but it's part of the overall objectives that we've laid out for this business and are confident we can achieve or exceed the organic growth rates within RBIS as a result.

Mitch, this is like a big picture question for you on M&A opportunities. For a while the focus was in IHM, but given some of the issues there, is the focus still on that segment or are there opportunities outside of IHM going forward?

Yes. So we see opportunities in all three of our segments. And it’s relative to its size just proportionally we’ve said, it’s IHM. So our overall focus is on acquisitions that are in high value segments as well as acquisitions that add capabilities in IHM. There is more white space and more kind of bolt-on size acquisition targets that are possible. As far as the cycle that we’re going through, know it doesn’t change our point of view, this is actually the time to actually as I said lean forward as others may be pulling back. So that is something we will continue to pursue. But we continue to see opportunities within LGM as well. Little bit less just given the size and the dynamics of that market. And then within RBIS, it will be more on the capability building and technology plays and so forth. We've seen that with a couple of the startups that we've invested in such as Pragmatic which is around removing silicon from the integrated circuit for RFID, as well as the recently announced Williot which is basically a Bluetooth RFID. So we've been doing that through venture investment and so forth. When we think about M&A, it’s more around expanding more on the technology front to really drive the intelligent labels platform.

So thanks to everybody for joining the call. Just to wrap-up, you know clearly the fourth quarter kept another strong year for us. We are well positioned going into 2019 and expect to deliver another very successful year even in the face of the uncertainty that we're all seeing. I really just like to finish by thanking the entire team for their continued resilience and commitment to the success for our customers and our communities and our shareholders. So thank you.