AVY
#And hello, everybody
As Mitch mentioned, we’re off to a good start to the year
We grew sales by 7% excluding currency and 4% on an organic basis
And we delivered an 18% increase in adjusted earnings per share, driven by strong operating performance and a lower tax rate
Currency translation reduced reported sales by about 1% in the first quarter, with an approximately $0.03 negative impact to EPS
Our adjusted operating margin in the first quarter improved 40 basis points to 10.1%
This was driven primarily by the margin expansion in RBIS
Productivity continues to be a key driver of the year-on-year margin improvement, including about $11 million of incremental savings from restructuring actions net of transition costs
Our adjusted tax rate was 30% in the quarter, reflecting our revised outlook for the full year rate, which is lower than prior year, due largely to geographic and income mix and the adoption of new accounting standards that impact the accounting for taxes on share-based compensation
We now expect the impact of this accounting change to be approximately $0.14 for the year, roughly $0.07 higher than previously anticipated due to the rise in our share price during the quarter
Free cash flow was negative $22 million, which is $15 million better than Q1 of last year
Higher net income and improved operating working capital performance was partially offset by higher capital spend to support our growth strategy
We continue to expect free cash flow conversion for the year of approximately 100% of GAAP net income
We also repurchased approximately 500,000 shares in the quarter at an aggregate cost of $35 million and paid $36 million in dividends
Including dilution, the company’s share count increased by roughly 600,000 shares in the quarter, half of which relates to the tax accounting change
Additionally, you may recall that dilution always has the biggest impact in the first quarter of our year
Overall, our balance sheet remains strong and we have ample capacity to invest in the business, as well as continue returning cash to shareholders in a disciplined manner
As you know, in March, we issued €500 million of 1.25% senior notes, which are due in 2025. We used approximately €200 million of the proceeds to repay short-term borrowings associated with last year's acquisition of Mactac
The remainder will be used primarily to support further investment in the business, including acquisitions
We’re pleased with the results of this first euro offering, which is consistent with our large and growing footprint in Europe and provides us a natural hedge for our balance sheet
On the acquisition front, we closed the previously announced Hanita Coatings deal in March and the integration of that business is underway
The announced acquisition of Yongle Tape is on track to close in the middle of this year as well
Both of these acquisitions will accelerate our ability to grow faster in higher-value categories
We expect the impact to 2017 EPS to be immaterial for each of these transactions as we move through their integration phases
Now, let me turn to the segment results for the quarter
Our Label and Graphic Materials sales were up 9% excluding currency and up approximately 5% on an organic basis
The solid organic growth continues to be led by the emerging markets and Western Europe
The strength in emerging markets continues to be broad-based, with double-digit demand growth in the quarter
We also had a modest benefit from pre-buy activity in China, ahead of our price increase that took effect in late March
Within the mature markets, we continued mid-single digit growth in Western Europe and that was partially offset by some softness in North America, as Mitch indicated
Our high-value categories were up mid-single digits on an organic basis, with low single-digit growth in the combined graphics and reflective businesses, offset by some continued strength in specialty labels
The slower growth in graphics was due mostly to timing of customer purchases as well as a challenging comparison in North America, where the category grew at a mid-teens rate in Q1 of 2016. LGM's operating margin of 12.7% was unchanged from last year as the benefit from higher volume and productivity was offset by unfavorable product mix and higher employee-related costs
The year-over-year impact of price and raw material costs was negligible in the quarter, but we did see some modest sequential raw material inflation and we expect that trend to continue into the second quarter
As I mentioned, we have raised prices in China
And if current inflationary pressures in other markets persist, we will look to raise prices again where appropriate
Shifting now to Retail Branding and Information Solutions, RBIS continues to show good progress from our business transformation, with organic growth of 3% despite a lower contribution from RFID than we have seen in recent quarters
And we had continued meaningful improvement in our operating margin
In the base apparel categories, we continue to see volume growth outpace apparel unit imports in what remains a challenging environment
In addition, the impact of strategic price reductions to improve our competitiveness moderated in the first quarter
As Mitch mentioned, the RFID was up mid-single digits for the quarter, in line with our expectations
We continue to expect this business to deliver 20%-plus growth per year, with volatility in the growth rate from period to period
RBIS’ operating margin improvement reflected the benefits of productivity initiatives and higher volumes, which are partially offset by higher employee-related costs
As the team continues to execute its business transformation, we anticipate continued margin expansion over the balance of the year
In our Industrial and Healthcare Materials segment, our sales also came in better than anticipated, with growth of 4% excluding currency and an organic decline of approximately 1%
Mid-single digit organic growth in industrial categories largely offset the expected decline in healthcare
Operating margin declined in this segment overall due to the sales decline in healthcare categories as well
Let me now turn to our outlook for the balance of the year
We have raised the midpoint of guidance for adjusted earnings per share by $0.18 to an updated range of $4.50 to $4.65. Roughly $0.07 of this increase reflects the stronger operating outlook and another $0.07 comes from the higher-than-expected impact from the tax accounting change
The remainder reflects the reduced headwind from currency translation, which is partially offset by modestly higher share count
We now also expect the impact of restructuring charges and other one-time items to be approximately $0.30 for the full year, a $0.10 increase versus our previous assumption
This reflects the shift in timing of certain charges associated with our restructuring actions and the inclusion of transaction costs from the Yongle Tape acquisition, which was not previously in our guidance
We outline some of the key contributing factors to our EPS guidance on slide nine of the supplemental materials
I’ll focus on the factors that have changed from our previous outlook
We now expect organic sales growth of 3.5% to 4.5% for the full year, reflecting our solid results in the first quarter
At recent foreign exchange rates, we estimate that currency translation will reduce net sales by approximately 1% and reduce pretax earnings by roughly $10 million
As discussed, we’re also expecting interest rate of approximately 30% for the full year
And we expect average shares outstanding, assuming dilution, of 89 million to 89.5 million shares
Our other key assumptions essentially remain unchanged from what we shared last quarter
So, overall, to wrap up, we’re very pleased with the start to the year and our continued progress against our long-term strategic and financial objectives
So, thank you and now we’ll open up the call for your questions
Question-and-Answer Session
Yeah
So, it’s not actually higher share-based compensation
It’s the tax impact on share-based compensation
So, that was the change in the quarter
So that’s related to an accounting standard change
So, we have removed the impact of taxes on share-based compensation from an equity to the income statement
So, that was really what the challenge was
It’s not necessarily an increase in share-based compensation overall
Yeah
Really, the impact of a smaller headwind on currency, given where we are right now versus where we were at the beginning of the year, net of a little bit of a headwind on the share count
In terms of the cash tax, not a major change from where we’ve been historically at this point
That accounting change also did have a small impact on our cash flow as well, but overall not a big change from a cash tax rate
I think on graphics in particular, we did have a little bit of low-single-digit growth in North America in the quarter
And that was coming off of Q1 of last year where we grew, I think, in the mid to high teens in the graphics business
If you look at kind of a couple of year comp there, we’re still up in the mid-teens from where we were a couple of years ago in Q1. So, still feel good about our overall trajectory in graphics
Just a little bit of a blip in this quarter with the high growth we had a year ago
Overall, as Mitch I think mentioned in his comments, other volumes in North America were up slightly year-over-year, particularly in our base business, then offsetting part of that kind of slower growth rate in graphics
It’s broadly the volume flow-through from what we’ve changed on the top line by and large
Obviously, individual divisions, there's different things going on
But that's one – I’d say overall what’s happening
Jeff, so I ought to take this one
We issue equity-based compensation within the first quarter
And people who are retirement-eligible, that tends to have a disproportional hit at the point of grant on the P&L, not only necessarily vesting
So, that’s one of the reasons that it hits in Q1 a little bit more than elsewhere
Yeah
I think the gap is negligible in the first quarter
As I said, we do expect some modest inflationary pressure sequentially into Q2. So, you might have a slightly bigger gap, but still relatively modest overall
And we’d expect it to narrow again in the second half
Thank you, Jeff
I think we started to see some increases in China, in particular, a little bit earlier in acrylics, in particular, I think, earlier this year that let us to do the price increasing action in March
We are starting to see the pressures in the back half of Q1 and into Q2, increased a little bit, as I said, in some of the other regions, and that's where we’re evaluating other actions
But, again, also looking at how we look at productivity in material reengineering to help abate that as well
But, overall, we’re seeing a little bit, again, modest increases across the regions, a little bit earlier in China, which is why we took the action there
And we’re evaluating actions in other areas
But we do see some signs that this inflation could be a bit transitory across the year
so, we’re making sure we’re staying on top of that and we’ll increase prices as appropriate and where it’s necessary
Well, this being our largest business, the whole range of our guidance that we have, 3.5% to 4.5%, we came in at 5%
You’re asking specifically about LGM
So, at the low end, you’d have to have a moderation for the rest of the year
And at the high-end, you would basically have a consistency with what we saw on Q1.
Thank you, <UNK>
So, first, on the employee cost inflation, this business is more employee intensive than our other businesses, and that's why we call it out as far as the wage inflation that we have within the business
You would expect – I won’t comment specifically about in this year, but over the trend of the transformation that we have that that headwind would moderate a bit
The key thing we focus on is our general wage inflation – because we have this in all of our businesses – getting it to a size where it’s at or less than our general productivity that we have
So, non-restructuring productivity
So, using Lean Sigma and otherwise
And that is our focus and that's something that we've achieved within the quarter and reached
And then, as far as our share gain opportunities, you asked about the – we cycle through the strategic pricing adjustments, but talking about price going forward within this business is tough
It’s a custom business, so you're moving from a 3 x 3 tag to a 3 x 2 tag and going from four color and five color and so forth
So, what we really focus on are the variable margins within that
And we think that we can continue to maintain the variable margins and continue to drive more competitiveness and gain more share
And the share isn't just about price
A big move here has been our improved service, both preorder and our design capabilities, as well as post-order, so how quick we can deliver the products to our customers
That is a key part of the value proposition that we’ve dramatically improved over the last 18 months
