Avery Dennison Corporation (AVY) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison’s Earnings Conference Call for the First Quarter Ended April 2, 2016. This call is being recorded and will be available for replay from 9 a.m. Pacific today through midnight Pacific Time April 30. To access the replay, please dial 800-633-8284 or 402-977-9140 for international callers. The conference ID number is 21782906. [Operator Instructions] I would now like to turn the call over to Cindy Guenther, Avery Dennison’s Vice President of Finance and Investor Relations. Please go ahead, ma’am.

Thank you, Pamela. Today, we will discuss our preliminary unaudited first quarter results. The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP on Schedules A-2 to A-4 of the financial statements accompanying today’s earnings release. We remind you that we will 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 Dean Scarborough, Chairman and CEO; Mitch Butier, President and Chief Operating Officer; and Anne Bramman, Senior Vice President and Chief Financial Officer. I will now turn the call over to Dean.

Thanks, Cindy and good day everyone. We are off to a very good start to the year on several fronts, including better than expected earnings growth. Both of our core businesses delivered solid organic sales growth and significant margin expansion driving mid-teens growth in adjusted earnings per share. We also signed a definitive agreement to acquire Mactac Europe from Platinum Equity. This acquisition aligns perfectly with our strategy to enhance our competitiveness in high-value pressure sensitive materials for graphics applications. Mactac complements our existing business with a strong brand and loyal customer base expanding our product offering, capabilities and distributor network. Our consistently strong operating performance, along with the disciplined execution of our long-term capital allocation plan is testament to the strategic foundations we have laid as well as to the strength and depth of our leadership team. I am happy to say that the leadership transition we have had underway has been seamless. As we announced in February, I am formally handing over the CEO reins to Mitch this week. I will stay on the board as Executive Chairman, with Mitch joining the Board following his election at tomorrow’s shareholder meeting. Since joining Avery Dennison in 2000, Mitch has worked in various businesses and regions across the company and in roles of increasing responsibility. He has been a close partner of mine and has been at the center of our most successful business strategies. Most recently, he was the driver behind our focus on the high-value market segments of our portfolio, while making the investments necessary to be competitive across all product segments. Just as important, Mitch is a champion of the values, integrity and high ethical standards that define Avery Dennison. I am handing off my CEO duties to Mitch with complete confidence in his ability to guide Avery Dennison toward an increasingly prosperous future. I will save my closing remarks for after the Q&A. So, now I will turn the call over now to Mitch and Anne. Mitch?

Let me start by thanking you, Dean, for your leadership, counsel and support over the years, not just from me personally, but on behalf of the entire organization. You have taken Avery Dennison to new heights and I am extremely honored to be able to build on your legacy as I become the next CEO and I am grateful to be able to continue to tap your vast experience in your role as Chairman. This is a great company with great people and I could not be more confident in the company’s position nor more excited by our prospects. As CEO, my focus remains the same ensuring the long-term success of the company by delivering exceptional value for our customers, our employees and our shareholders. Our two industry leading core businesses are well-positioned for profitable growth. That growth combined with our constant focus on productivity and capital discipline will enable us to continue to deliver strong returns for our shareholders. As Dean said, we are pleased to report a very good start to the year. We beat our expectations for Q1 EPS by a few cents, reflecting continued outperformance in pressure-sensitive materials. Our consistently strong performance speaks to the strategic foundations we have laid. We are focused on driving profitable growth through differentiated quality, service and innovation with the specific goal to accelerate growth in high value market segments that have above average growth and margin potential, such as tapes, graphics, RFID and emerging markets. We will continue to invest disproportionately here both organically and through bolt-on acquisitions. Over time, this will improve our portfolio mix and bolster our leadership positions in these key segments. In addition to driving growth in high value categories, we are also focused on driving more profitable growth in those that are less differentiated, such as base materials for barcode labels in pressure-sensitive and the value and contemporary segments of RBIS. We are increasing our competitiveness here by lowering our cost and tailoring our go-to-market strategies. And finally, productivity improvement remains a top priority. This has been the core strength of ours over the years and it is something we will continue to focus on through continued deployment of Lean and Six Sigma, ongoing innovations and product reengineering and investments in automation and restructuring. I want to stress that our productivity focus is not just about lowering cost and expanding margins, both of which are crucial, but also about becoming more competitive so we can grow profitably and better serve the less differentiated segments of our markets. Now, let me describe how these strategic priorities are playing out within each of our businesses. As you know, our goal in PSM is to create value by growing the top line of this high return business at 4% to 5% organically, while expanding operating margins. And I am pleased to say that the team continues to deliver on both fronts. This business has consistently generated solid organic growth for the past 4 years and Q1 was no exception, with 4% organic growth driven by emerging markets and strength in graphics and specialty label materials. We see opportunities to continue expanding in such high-value categories and are investing to support this growth, including through acquisitions. The Mactac deal is an excellent case in point. I will comment more on that in just a moment. As for the less differentiated product categories, I am pleased to say we have made good progress on this over the past year and saw a continuation of that trend in Q1. We have more to do on this front, but overall, good progress. As I said, our acquisition of Mactac Europe demonstrates the execution of our strategic priority to further penetrate high value segments as this acquisition enhances our position in both graphics and tapes. This is a classic bolt-on acquisition that meets all of our strategic and financial criteria for acquisitions. Mactac is known in Europe for its high-quality pressure-sensitive graphic materials, with products and capabilities that are complementary to our existing business. It has a loyal customer base and gives us access to new distributors. Incidentally, given the high customer loyalty and opportunity to broaden our distributor network, we intend to maintain the Mactac brand in Europe and Mactac’s manufacturing facility in Belgium adds new capacity to support growth for both graphics and tapes. Shifting now to Retail Branding and Information Solutions, the RBIS team continues to win in high value categories. Sales for radiofrequency identification products grew by more than 70% in Q1 and sales growth for the performance athletic brands was solid once again. Furthermore, the team continues to execute well on its business model transformation, which will enable this business to win in the less differentiated value and contemporary segments while driving significant margin expansion. To this end, we are executing an aggressive set of restructuring and other productivity actions designed to put RBIS back on the margin expansion trajectory necessary to achieve our long-term financial goals. Let me remind you that this multiyear transformation what it entails. We are reducing our fixed cost, localizing our material sourcing and responding more quickly to changes in our customer needs by decentralizing decision-making. In short, we are rapidly moving to a business model that is making us more competitive. We are seeing early signs of success from this change as we have realized core volume gains in the value segment. Now, volumes for core products among the department stores, what we call contemporary segment, are still down due in large part to the challenges that these customers face in their own markets. Overall, the RBIS team is making solid progress against the transformation. And we are pleased with the results on the top line and bottom line in the quarter. That said, the second quarter will be a key test for us as it is the seasonally most important quarter for this business. Turning now to Vancive Medical Technologies, first quarter results were simply disappointing with a significant drop in sales. While our long-term new product platform continues to gain traction, we have been losing ground with respect to our core product pipeline. We began taking actions mid last year that are beginning to refill that pipeline, but it will take time to recover due to the long sales cycle in this business. We are committed to achieving consistent growth in our long-term margin objectives for Vancive. Coming back to the total company view, in terms of our outlook for 2016, we have raised the midpoint of our adjusted EPS guidance by about $0.08, reflecting some relief from currency headwinds as well as the strong results we delivered in the first quarter. Even more important, we remain highly confident in our ability to consistently deliver exceptional value over the long run based on the execution of our key strategies. We plan to continue to drive outside growth in high value segments, relentlessly focus on productivity to improve our competitiveness in less differentiated segments and drive margin expansion, maintain our high degree of capital efficiency while increasing investments to support profitable growth and continue our disciplined approach to returning cash to shareholders. Now, I will turn the call over to Anne.

Thanks, Mitch and hello everyone. I will provide a little more color on the quarter. In Q1, we delivered a 16% increase in adjusted earnings per share on 4% organic sales growth. Currency translation reduced reported sales by 5.6% in the first quarter with an approximately $0.06 impact to EPS. Adjusted operating margin in the first quarter improved 130 basis points to 9.7% as the benefit of productivity initiatives and higher volume more than offset higher employee related costs. We realized about $27 million of incremental savings from restructuring charges net of transition costs. The adjusted tax rate was 34%, consistent with the anticipated full year tax rate in the low to mid-30% range. Free cash flow was a negative $37 million. About $18 million lower than Q1 of last year primarily due to higher bonus payments associated with our strong performance last year. We repurchased approximately 1.5 million shares in the quarter and paid $33 million in dividends. Net of dilution, we reduced our share count by 0.8 million for a net cost of $80 million. Our balance sheet remains strong and we have ample capacity to fund both the Mactac acquisition as well as to continue returning cash to shareholders in a disciplined manner. As Mitch mentioned earlier, the Mactac deal aligns with both our strategic and financial criteria for acquisitions. Not only do we expect to be EPS accretive within 12 months, but we also expected to generate a rate of return in excess of our cost of capital within 18 months. We expect to close this deal within a few months and we anticipate that this transaction will have an immaterial impact to EPS this year and expect an approximately $0.10 benefit to EPS next year. That $0.10 benefit is net of interest costs, amortization of intangibles and certain transition costs and it corresponds to EBITDA of roughly €25 million next year. Now looking at the segments, Pressure-sensitive Materials sales were up approximately 4% on an organic basis. Traditionally, emerging markets have been a big driver of our growth in PSM. We saw a reverse of that trend last year when faster growth in mature markets picked up the slack for slower than usual growth in China and other parts of the world. In Q1, we returned to the normal trend. Specifically, we saw a return to more modest growth in North America and Western Europe, low single-digits for both, while emerging markets grew at a high single-digit rate. As noted previously, we continued to see strong growth within PSM’s higher value segments. Within Label and Packaging Materials, we grew faster than average in specialty films and papers. And Graphics grew by more than 10%. PSM’s adjusted operating margin of 12.9% was up 140 basis points compared to last year as the benefit from productivity and higher volume more than offset employee related costs. Once again, the team delivered the vast majority of this quarter’s margin improvement through ongoing productivity efforts, including engineered reductions in raw material costs as well as restructuring initiatives. While we saw a benefit from deflation net of price in the quarter, it was very modest. Shifting now to Retail Branding and Information Solutions, coincidentally the organic growth and margin expansion for RBIS was identical to PSM. Sales were up approximately 4% on an organic basis and adjusted operating margin expanded by 140 basis points. Sales growth for the segment was driven largely by radio frequency identification products. RFID sales exceeded our expectations for the quarter with organic growth of more than 70%. The comps for RFID got significantly more challenging in the second half, but we continue to expect better than 20% growth for the full year. Adjusting for the impact at RFID, we saw solid growth in the performance segment. This was not withstanding a tough comp up against last year’s first quarter. Sales of external embellishments were soft in the quarter mostly due to timing of orders. We are confident we will see this part of the business pick up over the course of the year. As Mitch indicated, the growth trend for core, less differentiated products remains mixed. Q2 remains the key parameter for us here. In contrast to recent quarters, sales growth among European retailers and brand owners outpaced their U.S. counterparts, partly due to easier comparisons. RBIS operating margin improvement reflected the net benefit of productivity initiatives and higher volumes, which more than offset higher employee related costs. As the team continues to execute its aggressive transformation program, we anticipate continued margin expansion over the balance of the year. Sales in Vancive Medical Technologies declined by approximately 18% on an organic basis due in part to a difficult prior comparison related to the specific customer. Even with the lost profits associated with the sales decline, the segment’s operating loss came down modestly, reflecting the actions we took last year to set down our investment in wearable sensors. We expect improvement over the balance of the year in terms of both the top and bottom line. Turning now to our outlook for the balance of the year, we have raised the midpoint of our guidance for adjusted earnings per share by $0.08, with an updated range of $3.75 to $3.90. We outlined some of the key contributing factors to our EPS guidance on Slide 8 of our supplemental presentation materials. The only assumption that has changed here is the impact of currency. Specifically at recent exchange rates, we now estimate that currency translation will reduce net sales by approximately 2% and pretax earnings by roughly $15 million or an estimated $0.11 per share. This compares to our previous estimates of reduction of 3.5% to sales and $0.18 to EPS. The rest of our key assumptions remain unchanged from what we shared last quarter. So just wrapping up, we are very pleased with our strategic and financial progress we made against our 2018 goals this past quarter. I am confident we will continue to deliver exceptional value over the long-term through superior execution of our strategies including the disciplined allocation of capital. Now, we will open the call up for your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Ghansham Panjabi from Robert W. Baird & Company. Please proceed.

Hi guys. Good morning.

Good morning.

Good morning.

Dean congratulations. Best wishes to you for the future and same to you as well, Mitch.

Thank you, Ghansham.

Thank you.

I guess first off on Mactac, in the context of this business being sold by BMS in ‘14 for less than what you are purchasing European assets for, can you give us some color on why you passed on the asset 2 years ago, was it being sold one asset including North America and so the antitrust maybe kept you away?

Yes. So we are not going to comment actually on the process that BMS ran a few years ago. I think the key thing we comped to what us buying this business for more than what the Platinum bought the whole business for, including the U.S. a few years ago, actually only 18 months ago or so, they have done a phenomenal job. The leadership within Mactac particularly in Europe in really turning that business around improving the profitability, leaning out the organization, so that’s – they have created a lot of value in the last 18 months and we see opportunities to leverage it from here and create even more value going forward.

Okay. Then Mitch, do you see any additive technology that you are acquiring with these assets or?

It’s complementary technology overall. So, they have number of coding lines with various different adhesive capabilities. But if you look at within the graphics space, there is graphics and tapes to smaller degree within this business, but there is very long life in casting films, which is something that we do quite well like shrink wrap and so forth and then there is shorter life promotional films for graphic materials. And they have a very strong brand and complement our strengths with how they go to market in their approach.

Okay. And just one final one on the customer loss in PSM, you called out last quarter. Just to clarify, does that start impacting the first quarter? And is it 1% or so top line loss for that segment any different than your previous year? Is that still the right way to think about that loss? Thanks.

Yes. So, we are still looking at about 1% impact for the year. I would say it’s more back loaded in the second half of the year where you are actually going to see the exit in that business.

Okay, thanks.

Thank you. Our next question comes from the line of Scott Louis Gaffner from Barclays Capital Incorporated. Please proceed.

Thanks. Good morning.

Good morning.

Just a follow-up on the Mactac for a minute, any regulatory hurdles that have to be overcome in regards to the acquisition?

We are making filings in a couple of jurisdictions call it Germany specifically, normal customary filings that we need to go through. This is a highly competitive space and we see that the acquisition that we are making is going to even increase the level of innovation in the space. And so I think that the regulators will look at that favorably.

Okay. And one of the issues around that business was the prior owner hadn’t invested very much capital in the business. Did the buyer from Platinum, did they invest significantly in that business from a capital perspective do you know?

They invested in restructuring that business over the past year and a half streamlining the organization.

Got it. When I look at the pressure-sensitive margins in the first quarter, up 140 basis points year-over-year, is there something or any items that sort of falloff as we move through the year that would keep you from that kind of variance year-over-year as we move through throughout 2016?

Yes. So, I think we are in a record cycle from a margin perspective and really kind of at the peak for PSM. So, I would anticipate we are going to have margin compression in the back half of the year. And we talked about this before, in the last couple of quarters, we have seen some modest benefit from deflation net of price. And so, it would be really reasonable to assume that the business cycle would see offsets of this gain. Additionally, we are seeing some signs of modest inflation in the commodities markets. And as I mentioned earlier, we are seeing some 1% change for performance tapes with the customers’ program that’s exiting and that was a margin that was little bit higher margin than above average in the business as well. So, it’s a little bit of the impact in the second half as well.

Okay. And when you say margin compression, you mean lower margins year-over-year in the back half of 2016 or just lower than we had...

I think what we are talking about is right now, we are at a record – Q1 is really a record quarter for PSM from a margin perspective. So, it’s less about year-over-year and more about we are at a peak right now.

Okay, alright. And then in the quarter just around the organic volume for pressure-sensitive, 4%, how much of that was price and how much of that was volume?

So most of that came from price or from volumes sorry and then about 3% of that came out of emerging markets.

Okay, great. Thank you.

Thank you. And our next question comes from the line of George Leon Staphos from Bank of America Merrill Lynch. Please proceed.

Hi, good morning. It’s actually Alex Wang sitting in for George. Congratulations on the quarter. First question, it sounds like PSM was really a driver of the positive variance relative to your expectations. Can you talk a little bit more about the higher value ad segments in emerging markets, how sustainable you think those trends are? And then on a related point, having now four or five quarters with the operating margins at the high end or above the long-term guidance range, are you in a position maybe to reevaluate the margin target for PSM?

Yes. So, as far as your first question, the performance on the margins within PSM, so yes, it was basically margin beat and PSM was what caused us to beat our own expectations of the total company. And essentially, just the mix came in a little bit better and we continue to drive growth within the high value segments, so that was a key contributor to that factor. And within the emerging markets, we did see within China, we saw some modest growth. As China, the level of growth as we have been talking about for four out of the last five quarters or so have had moderated from what we have seen traditionally. So, it was in the low single-digits. However, that’s being offset by pretty phenomenal growth in ASEAN as well as in India. So, that’s what’s going on with the growth trajectory and the margins. One of the other things that came in a little bit better than we expected, we are expecting essentially neutral benefit on the net impact of price and raw material inflation. It came in a couple of million dollars better than our expectations. So, that was a positive contributor as well. And remind me, Alex, what was the second question?

Mitch, just on the long-term target and whether you are in a position maybe to reevaluate that?

Yes. So, we are not going to reset targets. We established those targets for 2018. As we have always said, this business is an extremely high return business even at those levels. And we have never seen them as a ceiling or a cap and we are continuing to test our limits and continuing to push this business both in the top and bottom line and that’s something we will continue to do. So, we think it will be at this point, after a few – 5, 6 quarters of outperformance, so this could change the long-term trajectory or long-term target is not the right time to do it.

Understood. And just as a follow-up, maybe switching over to RBIS, if you could talk a little bit about why maybe the core products we are not seeing some more acceleration in that, maybe what your expectations are as we progress through the year and what you are hearing from your customers as we move into a heavier selling season? Thanks very much.

Yes. So, in the core products, we are actually I think what I commented on is we are starting to see early progress from the actions we have been taking. Now, the revenue is actually down modestly. But recall, we said we were going to be more aggressive on the pricing front with certain – in certain categories and we have done that. And so the volumes are actually up with value and that’s – and I am excluding RFID right now. They are significantly up if you include RFID, but volumes in our core products are up. And so we think we are seeing good signs and consistent last few quarters from the volume growth perspective. Good trajectory there. In the contemporary or the department stores, we are still seeing volumes down and a lot of that has to do with some of the challenges that the number of the department stores are seeing in their own marketplace today. As far as what customers are telling us, it’s hard to give you an average. If you look at it, there is a number of customers that are doing quite well, a number of retailers and brands, and there is a number that are having their own challenges that they work through things. So overall, we are coming off of a winter season that was a little lackluster from a retail sales perspective. And so, a number of the retailers have more inventory than they want to be having right now and that is factoring into their thinking. On a broad base, if I had to characterize, I would say cautious optimism is what the retailers and brands are looking at. And those that are even struggling, everybody is looking to get more productivity out of their existing retail footprint and it’s something what we can help them achieve that, particularly with RFID and that’s the focus of the conversations.

Appreciate the thoughts. Thank you.

Thank you. Our next question comes from the line of Jeff Zekauskas from JPMorgan. Please proceed.

Thanks very much. How do you feel about your working capital? I think your receivables were up year-over-year. Your sales were down. Do you think that you are managing working capital as well as you might – do you expect it to be used this year or benefit?

So in general on our working capital, we – a big part of the change is that we have some planned investments in inventory, primarily in the RFID space to support the accelerated growth that we have seen in that business. So over time, we expect that that will even out. But we did plan on in making those investments to make sure that we meet our customer commitments.

And you are...

Just quick on their receivables that there is a regional impact as far as regional mix, the higher growth in the emerging – some of the emerging markets where we have long, slightly longer terms has an impact on that. I say overall, we can do a little more here on the working capital perspective. And so we saw some deterioration. Part of that is just due to mix and some strategic decisions that Anne commented on inventory. We think we can do more here.

Okay. Your corporate costs year-over-year were up a couple of million dollars, but your SG&A was down, I don’t know, $22 million, why was corporate up and SG&A down so much?

So in general, we are going to see over each quarter, there is a little bit of variance that goes on with the corporate expenses, so you should expect to be near from $20 million to $25 million a quarter. So it’s within that variance that we see just say from timing on some of the expenses. As far as SG&A, as we have talked about, we have had a significant restructuring program, especially in RBIS, where a majority of their savings are coming through the SG&A line. So when you look at SG&A savings, the productivity coming as restructuring is driving the improvement overall. We had some favorable in currency with the currency change that are also favorable, but it was offset with higher employee costs.

Okay. Are RFID margins higher or lower than the RBIS average margin or is there…?

The EBIT margins are above the RBIS average.

Okay. And often you get a sense of the order pattern going into the second quarter, retail sales in the United States have been a little bit on the weak side, is that something that you are seeing or when you look at your order patterns so far, how does that appear to you?

Order patterns are consistent with the guidance we are giving overall, but just a real test is not entering the quarter. It’s really how long the peak lasts throughout Q2. So if it ends a few weeks early, that obviously has a big negative impact to us. So it’s consistent right now, but it’s really not an early read. As we have said, we have limited for visibility. Last year, the peak season actually ended relatively early and that was one of the reasons we had the decline last year in Q2. So consistent, but I would say, it’s too early to give you any more color on how that will play out.

How will you finance Mactac or how...?

So we have ample capacity through both cash and our current credit lines.

So do you expect to borrow the whole amount or partly borrow, what’s your plan?

So we are – so specifically, we have plenty of capacity available on our credit lines that we can fund this transaction. And we will look at long-term what this means for us from a financing prospective. So we generally – we have a CP program and we have got some other credit available for us that we can use.

When you give your accretion calculation for next year, do you assume cost cuts or that’s without cost cuts?

So there is very – as I mentioned in my comments, there is very little that we have got into the number for next year for synergies. We really – we will have some from the procurement side. But the team, the Mactac team has done a phenomenal job of investing in the business and really streamlining it. So what we are getting is a business that’s really complementary to our Graphics business in Europe.

Okay, great. Thank you so much.

Thank you. [Operator Instructions] Our next question comes from the line of Christopher John Kapsch from BB&T Capital Markets. Please proceed with your question.

Yes. Good morning and kudos. I had a follow-up on Mactac, just so if I remember, I mean this is going back a while, there is probably over a dozen years ago that UPM-Kymmene tried to acquire all of Mactac globally, that was challenged domestically by the DOJ and obviously didn’t go through, I am just wondering, back then was there any challenges on the European side and I guess, if you could comment on that first? I realized...

Chris, this is Dean. So the answer is no, so only the U.S. Department of Justice was looking at anti-competitive practices. There was a – in Europe, there was also an investigation of the industry that happened around the same time, but the two weren’t linked in terms of an antitrust linkage, so to speak. So they were independent investigations.

Okay. And then could you just maybe provide some color on what sort of physical assets come with the acquisition. And then you did mention in your formal comments some of the things that the private equity sponsor had done to improve that business in Europe, just wondering if that improvement was more a function of productivity and cost outs or do they also grow the business, you could talk about maybe the growth trends for Mactac Europe in the last couple of years and how it looks going forward based on your due diligence?

Sure. So as far as the assets that we are acquiring, so with eight coding lines and they have the capabilities across all different three primary adhesive categories emulsion, hot melt and solvent. So that’s what we are acquiring. And as far as what the company has gone through the last year and a half, they basically restructured down to the single manufacturing facility. They used to have more than one and that’s been the area of focus. And as far as the top line, this business is – Mactac has extremely well respected brand in the graphic space and tape spaces. And this business used to have some other unprofitable categories specifically bulk roll label materials that they have exited over the last year and a half as well that were unprofitable and pretty low end. So the trajectory for the overall business isn’t really indicative by what was going on in the underlying core. And yes, we know them as from what we have seen in the due diligence and also as competitors that are well respected in the market. And it’s a platform that we expect to be able to leverage and continue to grow profitably.

Okay. And then one follow-up on just regulatory and I am going to go back even further but when you guys acquired Jackstadt many years ago, was there any antitrust issues or questions in Europe on that transaction. And then I guess that was more a play and roll stock materials versus it sounds like Mactac is exclusively on the higher end graphics, is that correct?

So you have got a good memory, Chris. So the Jackstadt acquisition, we did have filings in multiple jurisdictions around the world. You are correct also in that about 80% of Jackstadt sales were in the bulk roll label growth category although they did have a decent sized graphics business as well. And we went through a second round of process with some of the regulatory authorities in Europe, specifically in Germany. So it took on, I think four months or five months and then we have got the approval. So Mactac’s business is primarily a graphics business. And by and large, with a little bit of tapes, it’s a nice add-on to what we are doing. And these are both categories where we have relatively low market shares respectively. So we have got – I don’t want to project how regulatory agencies will react, but suffice it to say that we wouldn’t have done the deal unless we had some level of confidence that it would go through.

Sure. Thanks for the additional context. And then if I could just follow-up on – one on the just the comment about peak margins and some expectation that there will be compression in the second half, if you look at some of the drivers setting aside the raw material benefit that you got in this quarter, it seems as though you guys have been optimizing your customer mix, you have been driving growth in higher margin more value added product lines and you always have been terrific at optimizing your manufacturing both from, I guess contenting out the material content as well as just enhancing your operational run rates. And none of that seems like it’s in jeopardy in terms of not being sustained, so I am just wondering, why the commentary about maybe this flattening out or compression of operating margins over the balance of 2016? Thanks.

Yes. Chris, so overall, I think the way you have characterized is right and then I will answer your question. We will continue to drive growth in looking to have outsized growth in the high value segments that obviously improves mix. And we have also been talking about instilling more discipline in our less differentiated segments with how we grow and ensuring that it’s profitable growth there. And our productivity initiatives that is the core strength of ours, we continue to execute on and have consistently done that and we will continue to do that. As far as – if you look at where the margins are in Q1, hence comments we are comping from Q1 where we are expecting it to go forward, you normally have a seasonal reduction in those margins in the second half late in the year. So we just want to highlight that there were some seasonal adjustments. We got the impact of lower – the tapes decline of one customer, which will have an impact. And the – just purely from the purchase prices we have for raw materials and the selling prices, it was a modest benefit. And there was definitely some deflation in North America. And as we have talked about last time, we have actually been adjusting our own prices to our customers in those segments that are impacted the most. So it’s – we are at peak levels. You don’t want to lock on this time you can get to a new level and say, this is something you should baseline your models on and how you are thinking about it. I will tell you our focus here is about growing this business and growing it profitably and continuing to see opportunities for how we can further expand margins, which also fits and this is a great business and a great platform. That links right into to why we are trying to penetrate this space even more aggressively with acquisitions like Mactac.

Okay, thanks.

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

Thanks Pamela. Well, I would just like to say I am excited about the company’s future, probably more excited than when I joined more than 33 years ago. And I would also like to say that the course that we have set in late 2011 and then committed to the longer term targets in 2012, it’s working. And – but there is more to come. I am proud to have been part of making Avery Dennison the leading company that it is. I want to thank the leadership team, our employees, our customers and our suppliers for their creativity and commitment to our success. And I have enjoyed engaging with investors and financial analysts over the years and I really appreciate the relationships that we have built. Thank you.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day.