Welcome to Avery Dennison's earnings conference call for the first quarter ended April 3, 2010. This call is being recorded and will be available for replay from one 11 a.m. Pacific Time today through Midnight Pacific Time April 30, 2010. To access the reply, please dial 800-633-8284 for international callers, 402-977-9140. The conference ID number is 21438866. I would now like to turn the conference over to Eric Leeds, Avery Dennison's Head of Investor Relations.

Thank you. Welcome everyone. Our discussion today will reference the earnings release that we issued earlier along with the slide presentation titled first quarter 2010 financial review and analysis. Both documents were furnished today with our 8K and posted at the investor section of our website at www.investors.averydennison.com. We remind you that these results are preliminary as we've not yet filed our 10-Q. Our news release references GAAP operating margin which includes interest expense, restructuring and other charges included in the other expense line of our P&L. Also referenced are transition costs associated with acquisition integration. Restructuring charges and integration transition costs tend to be fairly disparate in amount, frequency and timing. In light of the nature of these items we'll focus our margin commentary on pretax results before their affect and before interest expenses. This detail is been schedule A2 to A5 of the financial statements accompanying today's earnings release. We also remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These statements are based on certain assumptions and expectations and future events that are subject to uncertainty. The Safe Harbor statement included in the documents that we provided today along with our 2008 Form 10-K address certain risk factors that could cause actual results to differ from our expectations. On the call today are Dean Scarborough, Chairman, President and CEO, and Dan O'Bryant, Executive Vice President and CFO. I'll now turn the call over to Dean.

Thanks Eric. The first quarter was an encouraging start to the year. Well, the results benefit from comparison with one of our toughest quarters. We saw meaningful increases in demand especially in raw materials, graphics and reflective products and retail information services. Our volumes are not all the way back to pre-recession levels, but we are pleased none the less. We saw a solid top line growth across all regions and we had double digit growth in all emerging markets. Gross profit margin was more than a point better than the fourth quarter and more than four points better year-over-year. The operating leverage from restructuring and other productivity initiatives enabled gross margins more than 250 basis points above 2008 levels on 5% lower sales. Operating margin before restructuring charges and other items improved 170 basis points from the fourth quarter in 2009. We did see raw material inflation accelerating. We did raise prices in the first quarter, but it wasn't enough to offset the inflation that we felt during the last two quarters. We've announced price increases going forward in many of our businesses, and while we do expect that we will cover the raw material increases there likely will be some lag. Turning to the businesses, the pressure sensitive segment delivered very strong margin growth. Raw materials momentum in the fourth quarter continued especially in emerging markets. Our end user marketing programs are creating a pipeline of new opportunities for decoration transfer which will enable above market growth as we continue to implement those programs. Graphics and reflective products benefited from restocking to accommodate a modest increase in promotional spending. This division is also launched two new products, a new cast film that has superior conformability and new reflective sheeting that makes signs more visible at night. Retail information…

Thanks Dean. I'm going to start with slide five if you have the handout that we provided. Sales in the first quarter were up organically about 7% contributing strongly to the improvement trend over the last third quarters. We experienced solid volume growth across all regions and almost every key business across the corporation. Emerging markets in particular continue to surge ahead with Asia leading the way growing nearly 30% in our materials businesses in China. Emerging markets represented over 35% of our total sales for the quarter. Operating margin also improved due to the continuing positive impact of restructuring and productivity initiatives. Margins were up sequentially as well. Volume, restructuring and productivity initiatives more than offset the net impact of raw material inflation and selling price changes. For the year, we expect inflation and pricing to be a headwin to margins, which I will discuss later in the outlook section. Sequentially MG&A was roughly flat although in dollars and as a percentage of sales it was up versus last year. In the first quarter of last year, we were in the throws of the economic decline running MG&A in severe austerity mode well below was healthy for the business. In the first quarter of 2010, variable costs associated with higher volumes along with the increase growth-related and infrastructure investments were partially offset by restructuring and productivity initiatives. Currency translation represented a $10 million increase versus prior year, and for reasons that Dean mentioned namely increased volume in the benefits of restructuring and productivity, gross margin for the company is up in the first quarter both year-over-year and sequentially. And looking ahead will and we will reiterate this in our outlook section. We both expect both gross margin and operating margins to come under pressure from raw material inflation in…

(Operator Instructions). Our first question is from the line of Ghansham Panjabi, Robert W. Baird. You may proceed. Ghansham Panjabi – Robert W. Baird: Hi guys. How are you?

All right. Hi Ghansham. Ghansham Panjabi – Robert W. Baird: Was there a negative mix in the office products business on a year-over-year business, core sales were down 2%, but operating profit was down over to 20% and this is unpresumably a lower cost structure, so just trying to understand the disconnect between the two?

Yes. I don't think there is much of mix impact. Ghansham, we're investing money to in both innovation in the space on new product development. We are also spending some money to improve our marketing programs with customers, so that's really the major impact on the quarter. Ghansham Panjabi – Robert W. Baird: Okay and then in terms of the competitive environment to the IRS business, there is I think one of the competitors in particular that seems to be targeting this business more aggressively, curious in whether its this impacted pricing?

I don't think so. Right now, we are in a situation where the order books are pretty full. I think not only for us, but across the whole industry my sense is that retailers are trying to catch up with that and as a result their focus is on getting products rather on reducing cost. Ghansham Panjabi – Robert W. Baird: Okay, and then finally Dan you gave some perimeters on 2Q, but isn't that also true that RIS typically is stronger 2Q versus 1Q?

Yes. Absolutely, first quarter is the weakest quarter in this business seasonally and we are feeling the effect of the typical seasonal orders served right now. Ghansham Panjabi – Robert W. Baird: Okay, thanks.

Our next question is from the line of Mr. George Staphos, Banc of America\Merrill Lynch. You may proceed. George Staphos – Banc of America\Merrill Lynch: Thanks everyone. Good morning. First question I had when I -- as far as some of your comments along with the guidance commentary as to back of this PDF, what I'm wondering up which is that maybe inflation this year net, we have a pricing getting costlier about $0.20, $0.25 from what you would have otherwise earned. Would you provide any additional color or agree or disagree with that number?

Well, I think I'm not going to put a number on it. George, it's tough to predict exactly the rate of inflation and how fast you can get your prices up, but just as we had 7, the January call one of their concerns we had was if the economy was rebounding quickly that we would see an imbalance in supply and demand in some raw materials and that's exactly what we are starting to experience now. So, we will get the prices where we need to get them, but it's awfully hard as you know to match that quarter-for-quarter. We saw a little bit of that in the fourth quarter last year, and we managed to catch up somewhat in Q1 and the raise in prices now. So, fundamentally that is from my perspective they just drag on the year. I think even longer and it won't be a drag within a year's contact, it will be.

I would add to it George. Then in the low end of the guidance range we gave versus the high end, the raw material inflationary impact in our ability to cover pricing early versus late is a key factor in moving us between the two ends of the guidance range.

I think the other thing George too, don't forget we are going to be spending some more money in office products as part of our offence is a good defense strategy in that sector, so that's a little bit more than we had anticipated in the beginning of the year as well. George Staphos – Banc of America\Merrill Lynch: Okay. I appreciate that. Maybe as a follow-on to that. Within your inputs, are you seeing more pressure at this juncture from resins and related products or are you seeing it more from specially papers?

Well, it depends on the categories. Let me be specific. Right now acrylic monomers are pretty tight and while we -- it has not impacted our ability to shift, we've had to go out in the spot market and buy some product to insure supply which is obviously a little more expensive at this point. Pulp is also still high and then especially because I think after the earthquake in Chile, demand is up a little bit as well. There is a bit of tightness there as well as in the specialty paper category, especially for liner. We'll see how long that lasts but it's a little tight in a few categories. A lot of producers frankly cut way back last year when demand was down and now we're feeling the other side of that equation. George Staphos – Banc of America\Merrill Lynch: Yes. Hopefully there should be some relief there given some things that we've seen but I'll leave my comments there. I guess the last question I have and I'll turn it over, specifically within Europe, what kind of trends have you seen with either RIS or pressure sensitive materials. Have you seen some improvement in volume from what you might have been seeing earlier in the quarter, year-on-year, how are trends progressed? Thank you.

Yes, Eastern Europe has actually been quite strong and I feel that has brought up the average. If you look at Europe as the average, actually the organic growth rate was similar to the U.S. But if you pull out Eastern Europe the number drops. I think from an RIS perspective, retailers in Europe are not seeing the increases in demand that U.S. retailers are. I still think they're a little bit lagging behind. The pressure sensitive business actually had a pretty good quarter in Europe in Q1. So I'm not sure what that says yet but my sense is we're still not at the same level of as robust a recovery as we see in North America. George Staphos – Banc of America\Merrill Lynch: Hopefully it means RIS will pick up in six months right?

It'd be great if everything in Europe picked up in six months. George Staphos – Banc of America\Merrill Lynch: Okay. Thanks. I'll turn it over.

Our next question is from the line of Jeff Zekauskas from JPMorgan. You may proceed. Silke Kueck – JPMorgan: Hi, this is Silke Kueck for Jeff. How are you?

Hi Silke. Silke Kueck – JPMorgan: A couple of questions. On the pressure sensitive materials side, where are you in terms of price increase. It seems that some price increases were announced earlier in the year and so could you just talk about like what has been announced and where are you trying to get to by year end?

We started raising price as you said in January. We have a little bit of negative pressure in some markets in the late stages of the third quarter in to the forth quarter. Obliviously the inflation has reversed that trend and we've started raising them in the first quarter. As the inflation has accelerated, we're accelerating additional price increases. So most regions of the world are seeing a second round happening as we speak that will roll out during the second quarter. I think all of the competition is feeling the same inflation and it seems that most players in the market are raising prices at the same time. Silke Kueck – JPMorgan: Okay, and when it's all implemented, which may take until next year, should that lead to like 1% higher prices or 2% higher prices? It seems that (inaudible) you would need to offset a 3% raw material head.

Well that's right. We expect to fully cover that on a dollar basis but that's going to add a couple of points at least to the revenue line. It's not all of our businesses here that are experiencing inflation in the same way. So it will be higher in our materials factor obviously but lower in some other parts of the business that don't get hit with inflation. Silke Kueck – JPMorgan: Okay, and in terms of volume growth, these are very nice results in the pressure sensitive materials business. Do those seem sustainable to you, given that maybe, I know that its hard to quantify were there seasonality in any quarters but normally it seems that the second and third quarters always do a little bit better than the first and the fourth. So are the current volume rates that we see sustainable going to the next quarters?

It's sort of a big question. I definitely think we saw some inventory rebuilding, restocking and certainly the comps were not easier than normal in the first quarter. We do see continued strength into April and I mentioned earlier in the call that we've been adding a lot of marketing capability to call on end user segments. So our pipeline of forward projects continues to grow. So I would characterize the market as having lots of activity and much of that activity has not yet translated into top line sales. So I'm definitely more optimistic than I was a few months ago. Silke Kueck – JPMorgan: Okay, that's helpful. And is RIS, as you've mentioned a few times that normally the second quarter also seems to be a seasonally stronger quarter and so it seems activity on the RIS side looks also positive. Should we see the incrementally higher margin benefit in the second quarter versus the first?

Absolutely. Q2 was always RIS's strongest quarter. So the volumes will be higher and as a result the incremental margins are higher as well. Silke Kueck – JPMorgan: What we should expect is that incrementally the operating margin should begin to -- should improve from the first or the second quarter meaningfully?

Yes and that's generally the case. Silke Kueck – JPMorgan: Okay. And lastly on office products, how much of the negative organic growth was due to the competitor on the label side?

From a volume perspective, here is the way I kind of look at it. So we saw the impact of a little bit less de-stocking than we saw the prior year. POS trends are still negative. This is probably going to be the last to recover in an economy because its pretty much based on while collar employment. So a lot of it is just again investments that we have for new products, for innovation and more attractive consumer programs as we defend the category. So the good news I've heard lately that's more anecdotal is that the port of the business that hurt the most last years was the contracting commercial side of the business versus retail. They both were down but the contracting promotion was down a lot more. The comps looked a little more promising on the commercial side of the business these days. So I've got my fingers crossed but we'll see, hopefully a little recovery again than we anticipate. The big impact will be the impact of back to school in the second and third quarter. I think we're well positioned to have a decent back to school this year. Silke Kueck – JPMorgan: And if I can ask a final question on -- can you discuss where you are in terms of cost savings. I remember the target was to go -- to get to a run rate of $180 million by mid 2010. So where we are at the end of the first quarter and is that still the target or is it higher?

No, the target is still $180 million. We've pulled that up over the last quarter or two. We're virtually finished with the program now. By the end of the second quarter it will be fully implemented and the run rate will be the full 180. We'll still have some cash that will trick a lot in coming months obviously but we delivered about $25 million in incremental savings over the fourth quarter because of these actions but we're nearing the end of the program we started in the fourth quarter of '08. Silke Kueck – JPMorgan: Okay, that's helpful. Thanks very much. I'll get back into queue.

Our next question is from the line of John McNulty, Credit Suisse. You may proceed. John McNulty – Credit Suisse: Yes, good afternoon. Just a couple of quick questions. With regard to the pressure sensitive markets, prior to the recession it looks like the industry had kind of finally found discipline and I was wondering, because that got a little bit cloudy through the recession but now that we're starting to come out, what are you seeing in terms of the competitive environment and how is the discipline holding up right now?

I think that certainly a couple of our competitors were actually losing money or having negative operating margins for a few quarters after the round of inflation and then the recession hit. I sense, certainly a renewed focus on making money and I think that's a good thing. And we're going to continue to raise prices and then raw material inflation occurs. So I feel confident that customers want to continue to buy from us and we need to pass on those costs and I think folks understand that. John McNulty – Credit Suisse: Okay, great. With regard to the RIS business, you had indicated that your -- it looked like there was a little bit of restocking that was in inventory or there would be restocking coming and the inventories looked like they were relatively light throughout your customer channel and at the same time you indicated that the back to school season might be coming later than expected. The two don't exactly jar. So what gives you confidence that the back to school season does come later than expected and doesn't hit in the second quarter?

Okay, so on the first one, obviously RIS is driven by apparel. The inventory to sales ratio for apparel dropped to its lowest level ever at least on our charts in a number of years in February. So at the same time I think March apparel sales would actually be down quite nicely. So I think we're starting to see some restocking. Frankly what we're seeing anecdotally is retailers giving us a forecast of that and then saying, when they actually order, saying, oh no, its X+15 or X+20 and so my sense is that in the U.S., for U.S. retailers and brand owners, there's a lot more confidence and so we're feeling pretty good about the trends. Lets say apparel is kind of one of those low cost luxuries and as consumers get a little more confident, buying that extra outfit isn't huge. Back to school is all about binders and dividers for us and so the two are necessarily linked. I have got to tell you, every other year it's the same. So one year it's early, the next year it's late. And we actually from a couple of customers who want their back to school season to run a little later and longer, that we just simply expect the orders to flow through a little more in the third quarter than the second quarter. However it's always tough to predict. They could change their mind in the next two weeks and we just don't know.

I think specific to your question, the restocking that Dean refers to is primarily going on in RIS and the apparel space. The delay in back to school is in the office space. John McNulty – Credit Suisse: Okay. That's helpful. I think I misunderstood it. I thought you were talking in the RIS segment as well.

Sorry, yeah. There is a back to school apparel season as well obviously in the fall season and that's basically what's happening right now and my sense there is that retailers again are chasing orders and that they need to get their inventory top up a little bit what they had before. When you add that to the positive demand that we're seeing, I think RIS will obviously have a better year than last year. John McNulty – Credit Suisse: Okay. That's definitely helpful. Thanks for clearing it up. Last question is just, in the office products area with regard to your investing in it and trying to defend I guess relative to some new competition in the space, how long do you think this plays out in terms of some of the incremental margin pressure you may be feeling. It seems like the competitor that's pushing into the market is pretty big and has some brand awareness as well. So how should we think about this playing out in terms of the margins over the -- say the next year or two?

I think a year or two is about right. I think -- we've got a number of new application and product areas that we've been doing a lot of qualitative and quantitative research in and we'll be launching some new products at the end of this year but most of the activity on new products will likely really hit in 2011 and also we feel good in the test markets that we had versus our competitor in the States as we've done quite well. So I guess maybe the real answer is as long as it takes to defend the category, we're confident we'll be successful. John McNulty – Credit Suisse: Okay, great, thanks for the color.

Our next question is from the line of Joe Naya from UBS. You may proceed. Joe Naya – UBS: Hey, I had a question. I realize that this was just a broad scenario but looking back at -- you gave in your fourth quarter results, you were looking at a scenario with a 5% organic sales increase driving our $2.70 to $3 EPS number versus the $2.50 to $2.80 where are now. It seems though inflation is probably the biggest mover there but are there any other issues that we should be thinking about in terms of that chain?

The two factors, that are ones that we've talked about, inflation and our ability to catch up with that through pricing is the single biggest change. As I've mentioned we've seen twice as much inflation on its way to us as we had anticipated coming into the year and the other is the effort to grow and defend at the same time the office product spaces that's hitting margins a bit. So those are the reasons sales would be strong. We'll still have a good earnings growth but we're going to have some margin pressure. Joe Naya – UBS: So you're planning to probably invest a little bit more now than you were back in your fourth quarter?

You bet. Joe Naya – UBS: Okay. I apologize if I missed this but did you give the kind of the inflation impact in 1Q?

We weren't specific about it. No we haven't done that. We quantified what will hit us for the year and that hits us primarily through the first two and into the third quarter. We'll still have some inflation coming in the third quarter as well based on what our suppliers are indicating to us.

We had some inflation in the fourth quarter we recall and so we caught up with some of that inflation in Q1 although we did see additional inflation in Q1 as well. Joe Naya – UBS: Okay and then just in terms of your expectation for uses of cash. You mentioned potentially returning some cash to shareholders but could you just kind of refresh us on your priorities and if you have any expectations in terms of debt pay down as well?

Sure, while the first priority remains debt pay down, based on the cash flow forecast we've provided for the year, late in the year we'll achieve our debt targets and at that time start thinking about the dividends. So the board looks at the dividend every quarter. Our current discussions would indicate some willingness to start moving cash back to shareholders because we'll hit those debt targets late in the year. So we obliviously cut the dividend last year. We'd like to see the dividend start moving back up in the direction where we had pre-recession and that will be discussion. But we intend to look at share repurchases as well. We have another round, a final round of our converts that come due late this year and so there is a couple of million shares that we'll issue. We would like to not see those additional shares outstanding for very long but debt comes first. Joe Naya – UBS: Thanks a lot.

Our next question is from the line of Peter Ruschmeier from Barclays Capital. You may proceed. Peter Ruschmeier – Barclays Capital: Thank you and good afternoon. A couple of questions. I was hoping you could help us better understand the improvement in the margins. You've mentioned 410 basis points PSM margin improvement year-over-year, I think with 250 basis points sequentially. How much of that margin improvement would you attribute to the 8% organic volume growth versus other factors?

It's about a third of the total that came from volume. We still were carrying year-on-year much of the benefit of price increases that we're happening a year ago that caught us up with the last round of inflation. So still as we came into the first quarter, the net of price and raw material was a positive year-on-year but about a third was volume and the rest was restructuring and productivity that we drove as the year went back. Peter Ruschmeier – Barclays Capital: Okay, that's helpful. Shifting to the RFID opportunity, you mentioned increased item level marking interest. I'm curious if you can further elaborate on what you're seeing from customers, what types of applications, what types of customers, what types of geographies are you seeing the increased interest?

We've seen it kind of across the board to be honest, both in industrial applications but certainly in retail for item level marking. There has been the highest level of interest we have ever experienced and we're definitely going to see a ramp up in the back half of the year as we implement a couple of key programs and I anticipate actually a sort of a higher scenario level. We may have to actually increase our capital budget a bit, internally, not externally at this point but invest in some capacity because I think we're close to a tipping point in item level marking for RFID and we'll see. We've been kind of there before but there is a lot more serious discussion about this technology from a lot of retailers. Peter Ruschmeier – Barclays Capital: And Dean, what kind of investment is required from your customers? Are these large customers, small customers? Are these large capital investments to enable the technology? Can you elaborate on that?

It's a expense on the retailer of course but its anywhere from $5,000 to $15,000 to $20,000 per store in terms of investment, in terms of the readers in the other devices required to read from a capital perspective. Of course it changes the consumables cost as well and you're taking a tag that costs $0.02 and your making it cost $0.10. So there is an investment there. But the business case is solid in terms of reduced inventory, increased sales from having products in stock and the balance between those two is actually what retailers are focused a lot on right now. So, it's happening. Peter Ruschmeier – Barclays Capital: And not to cut this too finely, but do you think that your customers have already budgeted for these types of expenditures, or do you think they are just closer to the edge of pulling the trigger on allocating capital for all these kinds of expenditures?

Some had definitely allocated capital and are moving forward, and others are still in the decision phase, and I believe we will see some rollouts in the back half of this year, starting in the back half of this year; easy as they take a number of quarters to rollout especially if it's in large store chain and certainly in 2011, we will see some increased interest as well. Peter Ruschmeier – Barclays Capital: Very helpful. Thanks very much.

Thank you.

Our next question is a follow-up question from the line of George Staphos, Banc of America Merrill Lynch. Please proceed. George Staphos – Banc of America Merrill Lynch: Thanks. I got a couple of follow-up questions. When we look at your performance over the years and math it against EVA per share, and I think you've seen this as well. It's a very strong correlation between the main economic profit that you generate and what it means to the stock price relative performance, and we've seen obviously recovery in both over the last year as you pull back on spending and generated more cash. Given the investments that you made in office products and some of the things you're hinting at with our RFID and maybe other areas, what kind of confidence should we have that you can continue to drive the economic profit higher from here or maybe should we expect given what you're looking at it right now maybe a plateauing until you reach another ramp later on the decade.

I think we've got the bars pretty low frankly right now George, so I feel very confident moving forward. Our businesses generate great free cash flow. We've used a lot of that free cash flow to invest in restructuring over the past few years. So, as well as that recently paying down debt. Now I believe we're going to get to a situation now where we won't need the cash for restructuring. We will use some of that cash to invest in organic growth and we still have plenty of cash to return to shareholders and keep our debt equity balance right on target. So it's low risk spending I guess as well I would put and more high quality spending in terms of the returns we get. We expect to get top line growth with good returns. George Staphos – Banc of America Merrill Lynch: At this juncture we look at or should we still expect that RIS is the biggest driver of the improvement in returns from here where you know like this quarter is pressure sensitive material is still the horse that drives the train.

Well, pressure sensitive materials is the core business of the company, and we are making some investments for growth in that business as well. I do expect it to continue to generate good, solid growth top line, bottom line and free cash flow. That's a great business, and with our investments in end use marketing now, we really are building an interesting and excellent pipeline of needs from a number of end use sectors. That being said, we promote relative basis, RIS is the most upside simply because of its current performance level, and what we believe this business can do. So, I also believe that RIS given it's got all, it's got the cost up, we are still going to continue to do that. We have growth opportunities on both the branded solution side, but as well as the information solution side especially if item level RFID takes off, this brings a whole new trajectory to that business. George Staphos – Banc of America Merrill Lynch: With RIS, do we get to the types of margins that we could have calculated based on where the businesses were pre-recession, the restructuring that was done and so on, and $1.4 billion or $1.5 billion or do we really need to get back to like $1 billion of revenues within that segment?

We need more rapid growth and we need some more productivity to get to the margin charges that we had, so it's not going to happen instantaneously for sure, but and I don't want to get into your formula but I still have a strong belief that this business, it will be an important contributor to economic profit for the corporation going forward. George Staphos – Banc of America Merrill Lynch: Okay. I will turn it over. Thanks Dean.

Speakers, we've no further questions at this time. You may resume with your presentation or closing remarks.