Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison's Earnings Conference Call for the first quarter ended April 2, 2011. This call is being recorded and will be available for replay from 12:00 p.m., Pacific time, today, through midnight Pacific time, May 1. To access the replay, please dial 1(800)633-8284 or (402)977-9140 for international callers. The conference ID number is 21496534. I'd now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may proceed, sir.

Thank you, welcome, everyone. Our discussion today will reference the earnings release that we issued earlier along with the slide presentation titled First Quarter 2011 Financial Review and Analysis. Both documents were furnished today with our 8-K and posted at the Investor section of our website at www.investors.averydennison.com. We remind you that these unaudited results are preliminary as we have not yet filed our 10-Q. Our news release references GAAP operating margin, which includes the interest expense restructuring and other charges included in the other expense line of our P&L. Restructuring charges 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 non-GAAP operating margins, which reflects pretax results before their effect and before interest expense. This and other non-GAAP financial measures that we use are reconciled with GAAP in schedules A-2 to A-4 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 forward-looking statements are based on certain assumptions and expectations of future events that are subject to uncertainty. The safe harbor statement included in the documents that we've provided today, along with our 2010 Form 10-K address certain risk factors that could cause actual results to differ from our expectations. I'm sure you noticed in our documents that we've changed the names of some our business to better reflect what we deliver to customers. Our Roll Materials business is now called Label and Packaging Materials and or our Retail Information Service business segment is now Retail Branding and Information Solutions. On the call today are Dean Scarborough, Chairman, President and CEO; and Mitch Butier, Senior Vice President and CFO. I'll now turn the call over to Dean.

Thanks, Eric. During the year-end earnings call, I outlined our priorities for 2011. First, to close the price inflation gap from the second half of 2010. Second, to continue the positive trajectory for RBIS, improving both sales and margins. Third, to invest in the turnaround of Office and Consumer Products by launching a pipeline of new products. I'll discuss the first quarter in terms of these priorities. All of you know that the first quarter is our lowest revenue quarter because of the seasonality of RBIS and Office and Consumer Products. Given that seasonality, our results were consistent with our plan and we remain on track for 2011. Pressure-sensitive Materials delivered another quarter of solid top line growth with net sales up 10%, with continuing strength in emerging markets as well as in Europe. More important though, was the sequential improvement in margins for this segment. Our ability to pass through price increases make material substitutions and increased productivity all contributed to this sequential improvement. Inflation continues to accelerate in this sector as we see increases in paper, film and chemicals. As a result, we are increasing the magnitude and frequency of our price increases and as well as raising our targets for material reengineering and productivity improvement. I'm confident we'll continue to make progress in margin improvement. Retail Branding and Information Solution had another strong quarter. The 9% sales growth was driven by market volume growth as well as customer program wins resulting from our improved service, RFID rollouts and new products. There is some concern among retailers and brand owners about the consumer's reaction to higher apparel prices, as well as the pocketbook squeeze from higher food and fuel prices. So far, apparel sales had held up well and the inventory to sales ratio for soft goods continues…

Thanks, Dean. Starting with Slide 5 and talking through to Slide 8. Sales in the first quarter were up as reported and organically about 7%, currency had little impact on sales in Q1. As Dean mentioned, Pressure-sensitive Materials and Retail Branding and Information Solutions again delivered solid top line growth, more than offsetting the decline in Office and Consumer Products. Our consolidated operating margin declined in the first quarter as expected to 5.4%, driven largely by inflation in PSM and margin compression at OCP, offset somewhat by another quarter margin expansion in RBIS. Raw material cost in the first quarter came in pretty much as expected and we made good progress offsetting inflation by implementing the productivity initiatives and price increases that we discussed last quarter. Now inflationary pressure again picked up significantly in both March and April, and we are implementing further actions to offset this new inflation. I'll talk more about that in a moment. While our marketing general and administrative expense ratio was flat in the prior year, MD&A increased in absolute dollars. As we've discussed, we've stepped up growth in IT infrastructure related investments. We also had a warehouse fire in Brazil that cost about $4 million in the quarter. Now before getting into the segments, I just want to point out that our adjusted tax rate increased from 22% to 25% in the first quarter, reflecting our expectation of reduced benefits from discrete tax events this year. Turning to Slide 9. Our Pressure-sensitive Materials segment again delivered strong organic revenue growth of 10%, driven by volume gains and price in both our Label and Packaging Materials businesses and in Graphics and Reflective solutions. PSM's volume growth was a little over 5% led by emerging markets. While PSM's operating margin in the quarter was down 90…

[Operator Instructions] Our first question is from the line of Ghansham Panjabi, Robert W. Baird & Co. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: The 1% operating margin in office products, I just want to clarify, Dean, was that what you initially forecasted the quarter as for your internal plan? And also, how should we think about the bridge between where you ended at 1% in the upper single digit margin threshold you're still backing for the year?

Yes. We knew when we got the big full guide from some of our customers in the fourth quarter that Q1 would be unusually soft. And if you read some of the announcements from the office superstores, you could see the retail foot traffic was down pretty substantially, especially in January, because of the bad weather. And as you might expect, they weren't really interested in building inventories so pretty much came in right where we thought. And you have to realize given our strong seasonality, especially for back-to-school and the fact that most of the new product programs that customers are excited about really won't hit until the back half of the year. That revenue for us was less than 20% of the full year guidance. So it will be a much different story for the back half -- for the next three quarters, actually. Now it's still going to be lower than it was in the prior year and I think we've been really clear about that. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: Yes, yes. Switching to RIS, operating margin is up 250 basis points year-over-year in the first quarter. Is that a reasonable trend line for the full year and also can you comment on trends in April so far?

Yes. The trends have continued or maybe a little choppier for the first few weeks of the second quarter, but Easter is right here, so it's always a little difficult to call that. I think retailers are going to be somewhat cautious about putting products into the pipeline. That being said, our services has never been better, so it appears to me, we're taking some market share, we've got some new products and new programs, especially RFID, it helps us on the upside as well. So I'm feeling reasonably confident about us going to our most important quarter, frankly. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: Okay. Sorry, one more. Just a clarification. The warehouse fire, why is that expense for the P&L? I assume you have some sort insurance to cover the loss?

Yes. The cost that flows through the P&L is the amount of our deductible, Ghansham. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: Oh, okay. Got you.

Our next question is from the line of George Staphos, Bank of America Merrill Lynch.

I just want to come back to office products. Was there any residual impact in the 1% margin from, well, remaining competitive action that had taken place last year? Have you seen any change in the pace of competition in the market as the year has progressed thus far?

No. Our share position remains the same as it's been for the last couple of quarters. As you know, it dropped in the third quarter of last year, but it's been essentially pretty flat. I just think it was, again, the main impacts were the inventory buy-ins by customers at the end of the year and a somewhat slower POS than we expected, but that was across the whole industry for the first quarter.

Okay. But -- and just to conclude on that. Yes, your share did not change, you didn't have to defend with any more spending to maintain that share from what you're saying, Dean, correct?

That's correct. We are, though, as we've communicated before, investing in new product development, in advertising and promotional spending. And that, I hate to think about sequentially, but that rate has been going on for a couple of quarters now, so maybe a little more incrementally in the first quarter.

Okay. Within Pressure-sensitive Materials, you mentioned that -- I think you said the sales growth was about 5% led by emerging market. If you mentioned before, I missed it, I apologize but...

10.

What was that?

10% growth for Pressure-sensitive Materials.

Okay. Could you just give us a regional walk around then on the sales growth trend that you saw for PSM?

Sure. So North America grew mid-single digits, Europe was in the low-double digits and the emerging markets was in the mid-teen.

Okay. And do you think -- as we think about margin compression and your ability to close the gap, you did a nice job in the first quarter given the acceleration in cost that you saw towards the end of the quarter. Could we not see some maybe widening out of that price cost spread for a period until you catch-up again on pricing? Thanks. I'll turn it over after that.

Well, George, our goal is not to -- and we had definitely accelerated the pacing and the size of our price increases. What could happen though, is if we get another unexpected round, mid-quarter or something like June because that has happened to us before, where we just simply don't have enough time to recover for the quarter. But from a full year perspective, we're still committed to closing that gap.

Yes. The way to I think -- just to add to that point is we talked about we're committed to closing the gap. This area is one of the areas with the greatest uncertainties. So it's one of the biggest reasons for the range in our guidance that we provided. Think about this morning, that term's as far as the timing of when we close it. So from where we were a quarter ago, given the ramp up in inflation that we've seen and that it takes us a couple of months to pass along the inflation through pricing and productivity, you'd expect for that for Q2 in particular and things just to be pushed out a little bit. But overall, we expect to close the gap.

Okay. I understand.

Our next question's from the line of Jeffrey Zekauskas from JPMorgan Securities. Jeffrey Zekauskas - JP Morgan Chase & Co: Your inventories moved up about $110 million sequentially and your accounts receivables are up, maybe about $100 million. And I would imagine that part of that is a function of raw materials, part of it is a function of demand. So it seems though that with raw materials relatively high, you'll need to use more working capital this year. So in your $325 million of free cash flow, for your assumption, what kind of working capital do you assume and is working capital use a risk to the free cash flow estimate?

Overall, what our assumption is, is that working capital -- that we basically keep working capital productivity at the same levels as what we had at the year end 2010 so that we're holding on to that productivity. Now we do expect working cap amount, dollar terms, to increase approximately $40 million, $50 million, just given the growth. So when you look at the -- what we've commented on about the level of increase, there is a good amount of currency in some of those changes. And most of the changes are due to just growth overall, with the one exception being inventory. In inventory, there was a couple of additional things that we built inventory in the first quarter. One was around just -- we potentially did in Europe around the system implementation around the end of the quarter. We were going to shut the plant down for a little bit, so we built up some inventory for that. And two, is also because of the inflation, we pre-boxed some materials ahead of some price increases. So overall, for the full year, we expect to hold on to the productivity. We've demonstrated our ability to do that. We feel confident with our ability to do that. In Q1, you did see that it slipped from prior year for those reasons. Jeffrey Zekauskas - JP Morgan Chase & Co: Okay. And then -- so we've seen propylene move up about $0.15 a pound in April. And it should move up again in May. So do you think that that's going to lead to your margins and Pressure-sensitive shrinking a little bit in the second quarter or do you think your prices can stay ahead of the current propylene outlook?

Well, Jeffrey, this is always the -- it's a difficult question. And again, I think Mitch stated it well. It's the reason for the range in our guidance because we can't really actively predict when we'll get those next price increase or two. And it takes us a couple of months. The answer is, sure, that's always a risk, if inflation accelerates way beyond what we projected for the quarter and what we have out in our current pricing. And then we have to make it up with the next round of price increases. Jeffrey Zekauskas - JP Morgan Chase & Co: Okay. And then lastly, in terms of your office products margins, this used to be sort of a high mid-teens operating margin business with the competitive environment that you're in now, has that sort of secular margin moved down? And how do you see that going forward for this year and then the out years?

Well, we indicated that we'd be in the upper single-digit margins this year. And that's a combination of, certainly, what we had to do to tend the brand. But also, a fairly significant investment in brand building and in new product development. So we expect to see the first net in the back half of this year. And then in 2012, we'd start to see those margins climb again as those products start to get an annualized [indiscernible] than we have more products and categories coming on stream. So I don't think we've given guidance on where we think office products will settle out there. I think it's reasonable to assume it's probably not going to be at the high double-digit margins than it was before. Jeffrey Zekauskas - JP Morgan Chase & Co: All right.

Our next question's from the line of John McNulty with Credit Suisse. John McNulty - Crédit Suisse AG: Just a couple of questions. With regard to your raw material inflation number where you're looking for $220 million, what does that assume in terms of raw materials from the current level? Do they -- are you expecting further inflation later on this year or things to level off?

No. So basically our raw material assumptions just assumes what we see today which isn't just what's priced in today but where we've had communications from vendors or discussions around what's actually happening in the market as of this time. So we don't forecast or speculate what Q3 or Q4 will turn out to be because that moved pretty wildly both up and down over the past few quarters. John McNulty - Crédit Suisse AG: Okay, fair enough. And then just one question on the tax rate. It looks like it's -- you're indicating it's coming -- it's going to come in toward the high end of what you were expecting. And historically, you kind of have a -- had a very low tax level and I guess I'm wondering how we should be thinking about directionally the tax rate going, say, into 2012 and beyond?

The mid-20% range we've talked about in the 20s is the more normalized rate. We've had a number discrete tax planning events. Every year, we expect to have discrete tax events. The past couple of years, we've had a couple very large ones, but that we expect to dissipate over time and to be more just a normal level and bring us in to the mid-20s or so. John McNulty - Crédit Suisse AG: Okay, great.

[Operator Instructions] Our next question's from the line of Christopher Kapsch with BDR Research Group.

I just wanted to come at this pricing -- the raw material cost inflation and price increase from another angle. And I'm just curious if the -- my understanding is you have some price increases on the table this spring. I'm just wondering if those go through along with the adhesive surcharges, if that's enough to offset and close this gap in what you perceive now to be the inflation for the rest of the year?

Well, we're planning more after that. So these current price increases were actually announced, I don't know, 30 or 45 days ago. And so we've received additional inflations since that time, so we're planning more increases later.

Okay. And then just on a cost accounting basis, do you go -- is it a LIFO or FIFO cost basis? Because the reason I asked, I'm just wondering if the sequential margin improvement that you saw on this segment in the first quarter wasn't -- if it's on a -- if you're on a LIFO basis that would be -- had been in spite of, I guess, some more raw material cost inflation later in the quarter?

We're on a FIFO basis overall. The way I think about it is if the inflation started mid-last year and that's when the margins, if you're focusing on PSM, dropped from around 10% down to 8% in Q3, Q4. Because of some of that lag in pushing in the pricing, the inflation frugal and prices will productivity. So we started to narrow that gap. And so with this new round of inflation, we're now passing off price increases just as fast as the new rounds are coming through right now. And so that's how you should think about it overall.

Got you. Are there any regions where converters are more resistant to the price increases versus other regions? In other words, is it easier to get through in emerging markets versus North America?

Never easy.

All right. Okay, fair enough. And I just had a one follow-up question on the RBIS segment. You mentioned the share that you're gaining. I'm just wondering if what's -- in terms of your value proposition to the ultimate customers there, is the share being driven more from your efforts to help them in differentiating their brands and their products, and so more on the branding identification side of things or is it really more driven by you just having a better mousetrap with helping them with supply chain logistics or is it a little bit of both?

I think it's both. Certainly, the RFID implementation is where we captured quite a bit of business there. It's all about in-store solutions and supply chain management. We've also -- we dramatically improved our service as well. And as you can imagine, retailers are ordering in smaller batches and they want faster turnaround. It's a way that they can react to their markets more quickly. And that's really helped us a lot and we just, in fact, did a recent customer survey and we definitely saw -- the customers indicated they saw improvements in our service capability which was great news. On the branding side as well, we watched a number of new initiatives, especially on the exterior branding environment, although that hasn't impacted sales yet, it's something that we've had a lot of interest in. So it's pretty much been across-the-board.

Our next question from the line of Peter Ruschmeier from Barclays Capital.

I wanted to ask, Dean, if you could elaborate on your comment of inventory to sales being low, and I imagine that's affecting both PSM and RIS, but is it affecting both those businesses equally and as you talk to your customers, what is your sense out there that this is a new normal that we're dealing with? Or is there something that you'd anticipate, a change in that going forward?

Yes. Pete, specifically, I should have a been more clear. The inventory to sales ratio that I was referring to has to do with footwear and soft goods, which we have talked about in various seminars and of course, investor meetings. And that remains at historical lows. So speaking specifically for RBIS, what we see there is that retailers are still planning. Their season's well but then, they always keep this open to buy. So it's the reorder points that -- they're just being cautious, very similar to -- they have been in the last year or so. They don't want their inventories to get out a whack with sales. Some are raising prices on certain apparel items right now and they're trying to make -- they're trying to test and see what the consumer reaction will be to some of those apparel price increases. I don't think we've had apparel price increases for 20 years in this country, so it is a little bit new territory that they're breaking into. So far, it doesn't seem to have impacted overall volume, but we'll see as the year progresses. On the pressure sensitive side, I've been pleasantly surprised, especially in Europe with overall buy-in demands, and when I read the all the news coming out of Europe, sometimes it surprises me. Some of that of course is related to Eastern Europe which still remains pretty strong, but even Western Europe has been strong. And I think North America's also held up pretty well. So that is something I watch very closely because, typically, the pressure sensitive businesses and the volume in the market tend to be a leading indicator for what what's going on in the economy. So far, no warning lights.

So far, so good. Okay, that's helpful. Maybe a question for Mitch, if I could. I was just trying to reconcile if I have my numbers right here, net debt rose by $193 million sequentially and part of that I appreciate was working capital related, but I can't seem to connect all the dots. Were there other cash items that affected the balance sheet looking at that comparison?

Well, overall Q1, traditionally, seasonally, is the lowest quarter and it's always cash flow negative and it was quite a bit more negative in Q1 this year than Q1 last year, which we anticipated. So it's the -- overall, just the results in the free cash flow -- I mean, the working capital dynamics that you're seeing there, one thing specifically is just every year, we do pay our annual bonus in Q1. And so that is one of the reasons for the seasonal -- for being seasonal lower. But there's nothing else beyond that.

Okay. And then maybe just lastly, Dean, as you mentioned returning cash to shareholders. How do you think about that against the backdrop of expectations for higher taxes going forward as it relates to dividends? So if you're comparing contrast dividends versus buybacks, I think previously, you said you wanted to ratchet back your dividend to prior levels more quickly. But is that really part of your focus still or how do you think about that?

Certainly a discussion on the board room and we're going to use both levers as we go forward. So we bought back 3 million shares at the end of the fourth quarter last year. And so, used quite a bit of capital to buy back shares. And as you know, the board authorized another 5 million shares for -- authorized for purchase as well. So again, we'll use both and I don't think it's a good idea for me to get into specific -- breaking that down.

Fair enough.

Our next question is a follow-up question from the line of George Staphos, Bank of America Merrill Lynch.

There's been some recent announcements within the paper industry that what's been traditionally a put in writing capacity as demand has been declining, maybe moving into the production instead of special grade like base stock, police liners and the like. Do you think that, that might be able to have a beneficial effect at some point in the next 12 months in terms of the inflation that you're seeing right now? Whatever thoughts you have around that? Then taking it from a different tech, can you just update us on what your capacity expansion plans are for this year and if there any coders that you know of from some of your larger competitors that are going up this year?

Sure. George, I'm hopeful that more people get into this business. I don't think it will impact us much this year. We've spent a lot of time over the last few years developing new sources of supply in emerging markets in the film area and in the paper area. And that's actually helped us, especially in times of somewhat tighter supply. But typically, unfortunately, when someone announces they're going to get into the specialty paper business it's capital investment, it takes time and then they've got to figure out how to actually makes the grades that we buy. So I'm not too hopeful for 2011, and maybe in 2012 will -- that will help us. In terms of our capacity expansion, the number one expansion that we're executing right now is in India. In fact, I was there over the last couple of weeks and that projects is right on track to come online in the back half of the year. Still, very solid growth in South Asia. And in other parts of the world, frankly, we're able to -- China, we made a big investment a couple of years ago, so we're still in pretty good shape there. And in Europe, in North America, we're handling the volume increases simply with the ongoing productivity. I would expect though with emerging market growth continuing at the rate that it's growing that, that will be the next area for somewhere in Asia or even South America, we're going to need to make some more investments in capacity going on. I've not heard of major investments in capacity by competitors. There might be some small ones if there are, I'm not just aware of it.

Dean, on the emerging market capacity, when that does come in, if it does come, is that a -- do you have enough capacity in these markets to get through 2012 or could we, in fact, see the next coder coming in 2012? And I would imagine with the coder, you have some additional splitting in distribution capacity that you have to put in place. Obviously that's not going to be as capital intensive but nonetheless, it would seem that, that would also have to go hand in glove?

Sure. I mean, that's a normal part of the process. Now normally we don't put in all the finishing capacity at the same time as you do coding because the coder's capacity generally last for two or three years in those markets. So we do split that out a little bit. My guess is -- and we haven't done our planning yet. We normally have our planning meetings in June on capital is that -- we'll likely be doing something in emerging markets in 2012. I just don't know exactly where yet, we're still trying to figure that out.

And, George, when we've look at -- talked about the capital expenditure for this year, we said about 1/3 of that would be to growth, most of that investment's in the emerging markets. So there's the coder capacity that's also adding some more splitters, more investments within the RBIS space and so forth. So overall, that is getting a disproportionate share of the capital going forward.

Okay. Thanks for the reminder on that, Mitch. The last question and then I'll turn it over. What materials are you finding, if you can talk about it, that you're able to buy on an advantage basis in emerging markets in Asia on chemical? I imagine to some degree that this region would actually be at a costless advantage versus, say, U.S. suppliers. But maybe I'm wrong, but if you could help us fill in some of the gaps here, that would be great.

George, I'd love to, but I would don't want to give away our -- sort of our trade secrets.

Mr. Scarborough, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you. Well, just to sum up, we made progress in the first quarter against our three main priorities. We made progress on inflation, it's accelerating again and we're taking further actions to close the cost in price gap. Retail Branding and Information Solutions continues to build momentum, improving both sales and margin. And Office and Consumer Products is on track for improvement later this year. And as Mitch said, we're maintaining our full year earnings guidance and free cash flow target and remain committed to returning cash to shareholders. Thanks, everyone, for joining, and we look forward to speaking with you again.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and kindly ask that you please disconnect your line. Have a great day, everyone.