Avery Dennison Corporation (AVY) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] Welcome to Avery Dennison's earnings conference call for the first quarter ended April 1, 2017. This call is being recorded and will be available for replay from 12 PM Pacific Time today throughout midnight Pacific Time April 29. To access the replay, please dial 800-633-8284 or 402-977-9140 for international callers. The conference ID number is 21820265. I’d now like to turn the call over to Garrett Gabel, Avery Dennison’s Vice President of Finance and Investor Relations. Please go ahead, sir.

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 A4 to A7 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 Mitch Butier, President and Chief Executive Officer, and Greg Lovins, Vice President and Interim Chief Financial Officer. I’ll now turn the call over to you, Mitch.

Thanks, Garrett. And good day, everyone. We’re off to a great start to the year, with another quarter of excellent progress against the long-term strategic and financial objectives for all three of our operating segments. Adjusted EPS was up 18% for the quarter, driven by solid sales growth, margin expansion and a lower tax rate. We raised our earnings guidance for the year and expect to deliver our sixth consecutive year of a double-digit increase in EPS and solid organic sales growth. Our consistently-strong financial performance speaks to the strategic foundations we’ve played and the depth of talent within each of our three operating segments. Since we had the opportunity to speak at length about our strategies and key initiatives within each of our segments during the analyst meeting last month, I’ll just quickly touch on first quarter results for each. The Label and Graphic Materials segment delivered another excellent quarter, sustaining strong margins on 5% organic growth. As you know, this group is both our largest and highest return business. Over the past four years, the business has consistently generated organic growth within our target range of 4% to 5%. We maintained that healthy pace in the first quarter, driven by continued strong demand and share gain in Western Europe and the emerging markets. Now, in North America, following a relatively strong fourth quarter last year, volume growth was modest during Q1. Although market data isn’t available yet, we do believe that market demand moderated somewhat in the US relative to the back half of last year. Globally, the high-value product categories, which include graphics as well as specialty labels, grew at a mid-single digit rate on an organic basis as continued strong growth in specialty was offset by slower growth of graphic materials, particularly in North America. As I mentioned, the operating margin for the segment remained strong and I am pleased with the team’s focus on consistently delivering solid growth and continued productivity improvement in this high return business. Shifting now to Retail Branding and Information Solutions. The team continues to execute extremely well on the business model transformation, enabling market share gains, while driving significant margin expansion. The base business delivered roughly 2% organic growth for the quarter, a meaningful improvement compared to last year, reflecting low single-digit volume growth and a moderation of the impact from the strategic pricing adjustments initiated late in 2015. The high-value product categories within RBIS – radiofrequency identification and external embellishment – continued to deliver as well. As expected, growth of radiofrequency identification products slowed to a mid-single digit pace, reflecting the difficult comparison to prior year when adoption by a large retailer drove growth of more than 70% for the quarter. We continue to target better than 20% compounded annual growth for these high-value products over the long-term. But as we’ve said, the growth rate will be choppy based on the timing of new program adoptions and expansions by retailer and brand owners in RFID. And finally, our new Industrial and Healthcare Materials segment came in a little better than our expectations for the quarter. Organic sales growth for the industrial categories continued at a strong pace, largely upsetting the anticipated sales decline in the healthcare categories. We expect this segment to return to a solid growth trajectory by the middle of the year when the bulk of the headwinds in healthcare are behind us. Now, since we recently created this segment, let me remind you of our strategic intent here. We’ve aligned a number of smaller businesses that share common end markets and favorable secular growth trends, as well as the ability to leverage our key competencies in material science and process technology. This has been, and will continue to be, an area of focus for investment, as evidenced by our recently announced acquisition of Yongle Tape that we described in detail during our analyst meeting last month. Now, coming back to the total company view, we have raised the midpoint of our adjusted EPS guidance for the year by $0.18, reflecting an improved outlook for our operational performance and lower expected full year tax rate. We are confident in our ability to consistently deliver exceptional value over the long run based on the execution of our four key strategies. First, we’ll drive outsized growth in high-value product categories that will improve our portfolio mix and bolster our position in this market. Second, we will grow profitably in our base businesses, by remaining highly disciplined with respect to pricing, reducing complexity and tailoring our go-to-market strategy. Third, we’ll continue to relentlessly pursue productivity improvement to expand operating margin, while improving our competitiveness and less differentiated product categories. And, of course, we will continue our disciplined approach to capital management, both with respect to how we allocate capital for growth, productivity and acquisitions, as well how we distribute cash to shareholders. Now, I’ll turn the call over to Greg. As we announced last month, Greg is serving as interim CFO. Many of you met him when he was in charge of finance for our largest business, the Label and Graphic Materials group. More recently, he served as corporate treasurer. Greg has extensive knowledge of all of our businesses developed during his more than 20 years with the company. And we have benefited from his strong business acumen over the years. I know you'll enjoy getting to know him better and benefiting from his insights. Greg?

Thanks, Mitch. Appreciate that. And hello, everybody. As Mitch mentioned, we’re off to a good start to the year. We grew sales by 7% excluding currency and 4% on an organic basis. And we delivered an 18% increase in adjusted earnings per share, driven by strong operating performance and a lower tax rate. Currency translation reduced reported sales by about 1% in the first quarter, with an approximately $0.03 negative impact to EPS. Our adjusted operating margin in the first quarter improved 40 basis points to 10.1%. This was driven primarily by the margin expansion in RBIS. Productivity continues to be a key driver of the year-on-year margin improvement, including about $11 million of incremental savings from restructuring actions net of transition costs. Our adjusted tax rate was 30% in the quarter, reflecting our revised outlook for the full year rate, which is lower than prior year, due largely to geographic and income mix and the adoption of new accounting standards that impact the accounting for taxes on share-based compensation. We now expect the impact of this accounting change to be approximately $0.14 for the year, roughly $0.07 higher than previously anticipated due to the rise in our share price during the quarter. Free cash flow was negative $22 million, which is $15 million better than Q1 of last year. Higher net income and improved operating working capital performance was partially offset by higher capital spend to support our growth strategy. We continue to expect free cash flow conversion for the year of approximately 100% of GAAP net income. We also repurchased approximately 500,000 shares in the quarter at an aggregate cost of $35 million and paid $36 million in dividends. Including dilution, the company’s share count increased by roughly 600,000 shares in the quarter, half of which relates to the tax accounting change. Additionally, you may recall that dilution always has the biggest impact in the first quarter of our year. Overall, our balance sheet remains strong and we have ample capacity to invest in the business, as well as continue returning cash to shareholders in a disciplined manner. As you know, in March, we issued €500 million of 1.25% senior notes, which are due in 2025. We used approximately €200 million of the proceeds to repay short-term borrowings associated with last year's acquisition of Mactac. The remainder will be used primarily to support further investment in the business, including acquisitions. We’re pleased with the results of this first euro offering, which is consistent with our large and growing footprint in Europe and provides us a natural hedge for our balance sheet. On the acquisition front, we closed the previously announced Hanita Coatings deal in March and the integration of that business is underway. The announced acquisition of Yongle Tape is on track to close in the middle of this year as well. Both of these acquisitions will accelerate our ability to grow faster in higher-value categories. We expect the impact to 2017 EPS to be immaterial for each of these transactions as we move through their integration phases. Now, let me turn to the segment results for the quarter. Our Label and Graphic Materials sales were up 9% excluding currency and up approximately 5% on an organic basis. The solid organic growth continues to be led by the emerging markets and Western Europe. The strength in emerging markets continues to be broad-based, with double-digit demand growth in the quarter. We also had a modest benefit from pre-buy activity in China, ahead of our price increase that took effect in late March. Within the mature markets, we continued mid-single digit growth in Western Europe and that was partially offset by some softness in North America, as Mitch indicated. Our high-value categories were up mid-single digits on an organic basis, with low single-digit growth in the combined graphics and reflective businesses, offset by some continued strength in specialty labels. The slower growth in graphics was due mostly to timing of customer purchases as well as a challenging comparison in North America, where the category grew at a mid-teens rate in Q1 of 2016. LGM's operating margin of 12.7% was unchanged from last year as the benefit from higher volume and productivity was offset by unfavorable product mix and higher employee-related costs. The year-over-year impact of price and raw material costs was negligible in the quarter, but we did see some modest sequential raw material inflation and we expect that trend to continue into the second quarter. As I mentioned, we have raised prices in China. And if current inflationary pressures in other markets persist, we will look to raise prices again where appropriate. Shifting now to Retail Branding and Information Solutions, RBIS continues to show good progress from our business transformation, with organic growth of 3% despite a lower contribution from RFID than we have seen in recent quarters. And we had continued meaningful improvement in our operating margin. In the base apparel categories, we continue to see volume growth outpace apparel unit imports in what remains a challenging environment. In addition, the impact of strategic price reductions to improve our competitiveness moderated in the first quarter. As Mitch mentioned, the RFID was up mid-single digits for the quarter, in line with our expectations. We continue to expect this business to deliver 20%-plus growth per year, with volatility in the growth rate from period to period. RBIS’ operating margin improvement reflected the benefits of productivity initiatives and higher volumes, which are partially offset by higher employee-related costs. As the team continues to execute its business transformation, we anticipate continued margin expansion over the balance of the year. In our Industrial and Healthcare Materials segment, our sales also came in better than anticipated, with growth of 4% excluding currency and an organic decline of approximately 1%. Mid-single digit organic growth in industrial categories largely offset the expected decline in healthcare. Operating margin declined in this segment overall due to the sales decline in healthcare categories as well. Let me now turn to our outlook for the balance of the year. We have raised the midpoint of guidance for adjusted earnings per share by $0.18 to an updated range of $4.50 to $4.65. Roughly $0.07 of this increase reflects the stronger operating outlook and another $0.07 comes from the higher-than-expected impact from the tax accounting change. The remainder reflects the reduced headwind from currency translation, which is partially offset by modestly higher share count. We now also expect the impact of restructuring charges and other one-time items to be approximately $0.30 for the full year, a $0.10 increase versus our previous assumption. This reflects the shift in timing of certain charges associated with our restructuring actions and the inclusion of transaction costs from the Yongle Tape acquisition, which was not previously in our guidance. We outline some of the key contributing factors to our EPS guidance on slide nine of the supplemental materials. I’ll focus on the factors that have changed from our previous outlook. We now expect organic sales growth of 3.5% to 4.5% for the full year, reflecting our solid results in the first quarter. At recent foreign exchange rates, we estimate that currency translation will reduce net sales by approximately 1% and reduce pretax earnings by roughly $10 million. As discussed, we’re also expecting interest rate of approximately 30% for the full year. And we expect average shares outstanding, assuming dilution, of 89 million to 89.5 million shares. Our other key assumptions essentially remain unchanged from what we shared last quarter. So, overall, to wrap up, we’re very pleased with the start to the year and our continued progress against our long-term strategic and financial objectives. So, thank you and now we’ll open up the call for your questions.

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

Hey, guys. Good morning.

Hello, Ghansham.

Hey, everyone. So, first off, on RBIS, the 2.9% core sales growth, was that consistent with what you thought going into the quarter? I know you had very tough comparisons from a year ago. And also, with all the retail store closures that seem to be accelerating, do you foresee any sort of disruption in demand as inventory levels get adjusted in the supply chain?

Yeah. As far as our expectations, we did expect a moderation within RFID specifically within the quarter, not obviously for the year over the long-term because of the tough comp that you commented on. And we did talk about last quarter that we’re starting to cycle through the strategic pricing adjustments we started making in late 2015. So, we did expect that – we’ve been talking through. We’ve been seeing volume gains within the base business, so excluding RFID and external embellishments. And we expect as the strategic pricing adjustments cycle through, we’ll start to see the growth on the sales line as well from the base business. So, little bit better than we expected. Overall, strong performance. As far as what's going on within the market, yeah, there is a significant amount of store closures and focus on inventory reduction as a part of that. For us, that just really reinforces the strategy shift we've had about getting faster, simpler and more competitive, lowering our variable costs, so we can be more competitive in the marketplace; and lowing our fixed cost, so we can expand margins; and focusing on speed and delivery of service to ensure that, as our customers look for faster lead times, we’re able to meet that need. So, a little better than expected, Ghansham, and I’d say, overall, the trends that we’re seeing definitely aren't great overall from the market, but we think reinforces our strategic strength within the market.

Okay, that’s helpful. And then in terms of RFID, you had a press release out in early April regarding a partnership with Target. Can you define for us what that actually means for Avery? Does Target, in that case, actually specify Avery RFID labels across their supplier base? I’m just trying to think of the mechanics of that partnership.

Sure. So, don't like to talk too much about specific customers here, but we have a very strong partnership with Target and this is not a new partnership. So, we just announced publicly this last quarter. It’s not a new partnership. We are their primary partner in rolling out of RFID as they roll it across their stores.

Okay. And just one final one sort of on the LGM side. Can you just give us more color on the cost inflation trendline, which raw material prices in particular have an upwards bias to them and why with that backdrop would you not want to be more proactive on price increases because it seems like the trendline is higher? Thanks so much.

Yeah. Thanks, Ghansham. Overall, we did see some modest cost inflation in the first quarter and we are seeing some sequential modest further inflation in the second quarter, but largely coming from acrylics and propylene at this point. There are some indications that this could be temporary. So, we’re evaluating that and staying on top of that with our procurement folks as well. Overall, we continue to be focused on material reengineering as well to drive productivity on our raw material costs when we see these kind of slight inflation upticks. We did increase prices in China, as we talked about. And if inflationary pressures persist, we will look to continue increasing prices in other regions as well as we go through the quarter.

Okay, thanks so much. I’ll turn it over.

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

Thanks. Good morning.

Hello, Scott.

Mitch, when I look at the adjustment to the full-year organic sales growth target of 3.5% to 4.5% from 3% to 4.5% before, you said it was from the solid 1Q. But can you parse that out a little bit more? Is it more within retail branding or more within label and packaging materials? Where do you expect a little bit of an uptick there for the full year guidance?

Yes. I think it's just the strength we saw in Q1 and going into Q2 from what we’re seeing. So, that's really what causes to raise the low-end of our guidance on the top line. You recall, when we set guidance and talked about it, particularly back in January, while we gave a range both for growth as well as for earnings per share, we said our target and our objective is to be in the upper end of that range. And so, we hit or exceeded our expectations in each of the groups and the company overall, top and bottom line. And so, you should expect the bottom to drift up through time, assuming we keep hitting our expectations.

Okay. So, that sounds a little bit more broad-based higher-than-expected rather than…

Absolutely. I’d say if you wanted to parse it out even further versus expectations, Europe and emerging markets came in a little better than we expected. North America was softer than we expected three months ago, specifically within the quarter.

Okay. And then, just on that – on the EM better, obviously, you had the pre-buy in China, can you kind of help us size that a little bit? How should we expect that to flow through in the 2Q?

Yeah. Overall, in China, we had a good quarter with growth in the mid-teens. Even with the pre-buy, I think we're in the low double digit range. We would expect potentially between the pre-buy and a little bit of the timing impact of Easter in the other regions, which was in March prior year and April of this year, maybe roughly $0.02 falling between the quarters as a result of those pre-buys.

Okay. And last one, Greg, for me. I heard you mention something about higher share-based compensation. Is that included in your adjusted EPS number? And can you just re-highlight that again, so we can track that?

Yeah. So, it’s not actually higher share-based compensation. It’s the tax impact on share-based compensation. So, that was the change in the quarter. So that’s related to an accounting standard change. So, we have removed the impact of taxes on share-based compensation from an equity to the income statement. So, that was really what the challenge was. It’s not necessarily an increase in share-based compensation overall.

Okay. All right. Thanks.

Thank you, sir. Continuing on, our next question comes from the line of George Staphos with Bank of America Merrill Lynch. Please proceed.

Hi, guys. Good morning. Thanks for all the details. Maybe segueing off of Scott's question, so I missed the number. I think you said – guidance is up $0.18 to the midpoint. I think you said $0.07 was from operations. $0.07 was from the tax rate. And the residual was from which sources, guys?

Yeah. Really, the impact of a smaller headwind on currency, given where we are right now versus where we were at the beginning of the year, net of a little bit of a headwind on the share count.

Okay. And then, on the tax rate and the fact that you're dropping another $0.07 to the bottom line from the accounting adjustment, does that mean also more cash flow for you from that or is it more or less a non-cash, at least initially, effect from the lower tax rate in terms of what hits the bottom line?

In terms of the cash tax, not a major change from where we’ve been historically at this point. That accounting change also did have a small impact on our cash flow as well, but overall not a big change from a cash tax rate.

Okay. Thanks for that. In terms of North America and the somewhat-softer LGM volumes, can you put a little bit more detail in terms of what was driving that? Recognizing you have very, very short lead times, have trends improved into April, so that we shouldn’t worry as much about that, Greg? And then, there was some color on specialty and graphics and the interplay of volumes in the quarter, if you could review that again, that’d be great. And thanks. That’s it for me for the first round.

Yeah. I think on graphics in particular, we did have a little bit of low-single-digit growth in North America in the quarter. And that was coming off of Q1 of last year where we grew, I think, in the mid to high teens in the graphics business. If you look at kind of a couple of year comp there, we’re still up in the mid-teens from where we were a couple of years ago in Q1. So, still feel good about our overall trajectory in graphics. Just a little bit of a blip in this quarter with the high growth we had a year ago. Overall, as Mitch I think mentioned in his comments, other volumes in North America were up slightly year-over-year, particularly in our base business, then offsetting part of that kind of slower growth rate in graphics.

But any view in terms of why this slowdown or was it just purely comparison? It’s just like it wasn’t graphics.

It was relatively broad-based and there’s no particular one or two insights we’d have. I’d say it’s variable information labels, barcode labels trended better than the rest, which we think is linked to just the increased growth of e-commerce.

Right.

Other than that, relatively broad based.

Okay. Thank you, guys. I’ll turn it over.

Thank you, sir. Our next question comes from the line of Anthony Pettinari from Citigroup Global markets. Please proceed with your question.

Hey, good morning. You indicated that IHM margins kind of declined as expected. I'm just wondering if you can give a sense of what those run rate margins might be in the second half of the year as you lap some of the headwinds that you called out in IHM.

Yeah. Our overall long-term guidance for this business is to be 12.5% to 13.5% plus. So, we don’t give individual guidance within quarters and so forth. So, we would expect the business organically to show the expansion as we’ve talked through. One thing that does – you need to factor in that isn't specifically in our guidance is Yongle, the acquisition closes, which we expect sometime middle of the year. There will be an impact on what we actually report. But the base business that we have, you should expect some modest expansion as we go through the year.

Okay, that's helpful. And then maybe just piggybacking on Scott's question, the $0.07 of the guidance raise came from better ops. When we think about the better ops, is there anything more than just the revision to organic growth? Are you running better or is there specific categories that are doing better than others? Just any kind of color you could give there?

It’s broadly the volume flow-through from what we’ve changed on the top line by and large. Obviously, individual divisions, there's different things going on. But that's one – I’d say overall what’s happening.

Okay, that’s helpful. I’ll turn it over.

Thank you, sir. [Operator Instructions]. Our next question comes from the line of Jeffrey Zekauskas from JPMorgan Securities. Please proceed.

Thanks very much. In the quarter, was RBIS flat, exclusive of the growth in RFID, or flat to down?

No. Excluding RFID and external embellishments – external embellishments grew roughly 20% – excluding both of those, the base business was actually up a couple points, Jeff.

Okay. And how do RBIS orders look for the second quarter year-over-year?

Overall, the orders are consistent with what we’d expect to see. They’re relatively healthy. However, as we’ve talked about in the past, the key thing for this business as we go through the peak season is really what happens in the month of May. You can sometimes see surges. And then, if the peak, if you will, drops off a week early or extends a week late, is really what determines what will happen for the second quarter.

Okay. So, it sounds like April orders, though, are up year-over-year. Is that right?

Yes. And a big driver of that being RFID because we’re passing the tough comps and we’ve got some pipelines still going on.

I meant exclusive of RFID.

The second is excluding RFID? Then, yes, it’s coming at a healthy clip, relatively consistent with what we saw in the first quarter.

Okay, great. And then, the thing about Avery's financials is that your SG&A expense in the first quarter tends to be relatively high versus what you might report in the second and third quarters. Why is that? If you look at last year – I’m sorry.

Yeah. Jeff, so I ought to take this one.

Sure.

We issue equity-based compensation within the first quarter. And people who are retirement-eligible, that tends to have a disproportional hit at the point of grant on the P&L, not only necessarily vesting. So, that’s one of the reasons that it hits in Q1 a little bit more than elsewhere.

Okay. And then finally, do you expect your gap between price and raw materials to widen in the second quarter or contract or stay the same?

Yeah. I think the gap is negligible in the first quarter. As I said, we do expect some modest inflationary pressure sequentially into Q2. So, you might have a slightly bigger gap, but still relatively modest overall. And we’d expect it to narrow again in the second half.

Okay, great. Thank you so much.

Thank you, Jeff.

Thank you, sir. Continuing on, our next question comes from Christopher Kapsch from Aegis Capital. Please proceed with your question.

Yeah. I had a follow-up on the discussion around raw material cost inflation. Generally, when you think about paper being the biggest and then some of these petrochemical, acrylic monomer, propylene, propylene derivatives, generally, these are global fungible commodities. So, I’m just curious about the price increase in China. What is it about that regional business in LGM that necessitates a price increase whereas you're not seeing the impetus in Western regions, like Europe and North America? If you could speak to that, does it have to do with the competitive dynamics that you're seeing in Europe and North America or what's unique about China that you're needing to execute on a price increase currently?

Yeah. I think we started to see some increases in China, in particular, a little bit earlier in acrylics, in particular, I think, earlier this year that let us to do the price increasing action in March. We are starting to see the pressures in the back half of Q1 and into Q2, increased a little bit, as I said, in some of the other regions, and that's where we’re evaluating other actions. But, again, also looking at how we look at productivity in material reengineering to help abate that as well. But, overall, we’re seeing a little bit, again, modest increases across the regions, a little bit earlier in China, which is why we took the action there. And we’re evaluating actions in other areas. But we do see some signs that this inflation could be a bit transitory across the year. so, we’re making sure we’re staying on top of that and we’ll increase prices as appropriate and where it’s necessary.

And just to build on that, so why is China different? It was a couple of factors. You have – while they’re global commodities, you have still local capacity and there was some capacity constraints upstream within our markets within China that drove some of that. And also, as we’ve talked about before, while these are global markets, you have currency adjustments as well. Obviously, it can influence the actual local inflation. And the Chinese currency has devalued relative to the US dollar, and so that, obviously, would create a little bit more inflationary pressure as well. I think the key thing here is, we’re seeing some pressure. We expect it to abate. But if it does not, we will be looking at price increases. But our overall focus here is to continue to use our productivity initiatives and material reengineering that Greg spoke about earlier, to continue to find new ways to reduce the cost, so that we can offset any inflation. And to the extent we can't, we’ll then be looking at pricing beyond that.

Okay, that's helpful. And then, I had a follow-up just on your revised organic growth forecasts. And I realize, under the new segment reporting, there could be some comparing apples and oranges. But focusing on the Label and Graphic Materials business, I think you had an organic plus 5 in the quarter, and again maybe not apples to oranges, but I think the first quarter was the easiest comp, notwithstanding your earlier comments about graphics in North America having a tough comp. So, I think, overall, that the first quarter was an easier or is the easiest comp perhaps of the year. So, just curious about your confidence in the revised organic growth for the full year with what could be viewed as much tougher comps coming in the second half for that business. Thanks.

Well, this being our largest business, the whole range of our guidance that we have, 3.5% to 4.5%, we came in at 5%. You’re asking specifically about LGM. So, at the low end, you’d have to have a moderation for the rest of the year. And at the high-end, you would basically have a consistency with what we saw on Q1.

Okay, fair enough. Thank you very much.

Thank you, sir. Our next question comes from Rosemarie Morbelli from Gabelli & Company. Please proceed with your question.

Thank you. Good afternoon, everyone. Mitch, I was wondering if you could talk a little bit about the industrial side of your business. Once you exclude healthcare, what type of growth – and I apologize if you gave it and I missed it – and are there any particular segments of market that are doing better or worse than others?

Yeah. So, overall, so we’ve had strong growth within the industrial businesses. And the particular segments, US – both US and Europe, but in the US, building and construction is the biggest area that’s driving growth right now. And modest growth within the automotive space and very strong growth within building and construction.

Are you seeing a decline or anticipating a decline in the other category?

Well, if you’re talking about broadly what’s going on within the market, as far as our perspective, the market may go through may go through a bit of a slowdown or could continue along the pace that it’s been seeing. We have significant share gain opportunity within our business, though, and that's what we’re focused on. And with the acquisition of Yongle Tape, that gives us access to OEMs that we think we can leverage across the product portfolio and really go after new opportunities. And remember, within automotive, there is a general secular trend towards light-weighting and so forth and a conversion from mechanical fasteners to tapes and adhesives. And so, even if there's a shift on the general automotive build trend, we think that the market overall has good secular tailwinds and we will have share gain opportunity as well.

Thanks. That is very helpful. And then I was wondering if you could give us a little more on the healthcare side.

Sure. The healthcare, there is two aspects to that, if you recall. One, Vancive basically comped through some declines in the middle of last year, so we’ve cycle through that in the middle of this year and we should return to growth in that business. And then the other aspect was, there is the program loss because of the technology chain within the healthcare side of our tapes business. That basically has been declining and will cycle through by Q3 of this year as well.

So, what do you think – I understand you are going to anniversary the declines. But what is going to generate growth for that particular business as well as the margins. Are you coming out with new product lines? Are you counting on acquisitions? Can you help me understand?

Absolutely. Yeah, if you recall, one of the changes we made as we reconnected the business with tape, specifically to leverage some of the synergies that we have within tapes for development of new products and so forth, and so we’ve got a number of new products from antimicrobial wound care packages, IV bandages and so forth, and have a number of partnerships with key end users that we see a lot of opportunity for growth and margin expansion. And the margin expansion is going to be around both driving growth, but getting much more focused and disciplined in having a much more cost-effective service delivery model.

Thank you.

Thank you.

Thank you. And our next question is a follow-up from George Staphos with Bank of America Merrill Lynch. Please proceed.

Hi. Thank you, guys. Two questions on RBIS for me to finish up. In terms of employee costs, I think there was a mention of that, Mitch, in your remarks at the beginning. Should we be expecting some deceleration in the year-on-year growth in employee cost, 2Q, 3Q, et cetera? Or is whatever the run rate was in 1Q likely to continue over the balance of the year? And if you had that handy or if it was available, what was that trajectory on employee cost? So, that's broadly question number one. And number two, on RBIS, I just want to make sure, now that you're lapping the strategic price adjustments that you had in the business, do you think the price levels are such that you can continue this volume momentum? Or is there any – I don’t know how to phrase it – lingering concern that once you lap that, you may start to see some of your share momentum also decelerate? How would you have us consider that? Thank you, guys. And good luck on the quarter.

Thank you, George. Yeah. So, first, on the employee cost inflation, this business is more employee intensive than our other businesses, and that's why we call it out as far as the wage inflation that we have within the business. You would expect – I won’t comment specifically about in this year, but over the trend of the transformation that we have that that headwind would moderate a bit. The key thing we focus on is our general wage inflation – because we have this in all of our businesses – getting it to a size where it’s at or less than our general productivity that we have. So, non-restructuring productivity. So, using Lean Sigma and otherwise. And that is our focus and that's something that we've achieved within the quarter and reached. And then, as far as our share gain opportunities, you asked about the – we cycle through the strategic pricing adjustments, but talking about price going forward within this business is tough. It’s a custom business, so you're moving from a 3 x 3 tag to a 3 x 2 tag and going from four color and five color and so forth. So, what we really focus on are the variable margins within that. And we think that we can continue to maintain the variable margins and continue to drive more competitiveness and gain more share. And the share isn't just about price. A big move here has been our improved service, both preorder and our design capabilities, as well as post-order, so how quick we can deliver the products to our customers. That is a key part of the value proposition that we’ve dramatically improved over the last 18 months.

Mitch, you may have mentioned it before and I forget if you have. Can you put some kind of numbers around how the service levels have improved for you over that interval or whatever you think is a relevant interval?

Sure. So, our flexibility rates, which we measure as what percent of orders that we can deliver on time based on the customer request on our promised date, these were around 60% 18 months ago. They’re north of 90% now and closing in on what the materials businesses have, which are in the high 90s.

Okay. Okay, I remember that now. It’s very impressive. And just on employee costs, is it typical that you have the most pressure early in the year, just broadly. And so, whatever that headwind that you offset with productivity was in 1Q, the nut gets less lodged to step over in the subsequent quarters or is that not sure? Thank you, guys.

Year-over-year, it’s relatively consistent. Sequentially, Q2 is when you have the big headwind because wage increases tend to happen in early April.

Okay. Thank you, guys.

Thank you.

Thank you, sir, for your question. Mr. Butier, 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.

Great. Thank you. Well, again, we’re pleased with the performance in the first quarter, of consistently strong performance that we've been delivering. It really is a testament to the depth of talent we have in the organization, the resilience of our leadership positions within each of our businesses and the strategic foundations we’ve laid. And I just really want to thank the team for their continued dedication, creativity and focus. Thank you.

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