Avery Dennison Corporation (AVY) Q1 2012 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, March 31, 2012. This call is being recorded and will be available for replay from 1:00 p.m. Pacific time today through midnight Pacific time, April 29. To access the replay, please dial toll-free 1 (800) 633-8284 or (402) 977-9140 for international callers. The conference ID to enter is 21543230. [Operator Instructions] I would now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may begin, sir.

Thank you. Welcome, everyone. Today, we'll discuss our preliminary, unaudited first quarter 2012 results. Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The company's Office and Consumer Products business is classified on our income statement as a discontinued operation. The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP and schedules A-2 to A-4 of the financial statements accompanying today's earnings release. We remind you that we'll make certain predictive statements that reflect our current views and estimates about 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, President and CEO; and Mitch Butier, Senior Vice President and CFO. I'll now turn the call over to Dean.

Thanks, Eric, and good day, everyone. First quarter earnings came in as we expected on somewhat lower than anticipated sales volume while free cash flow was somewhat better than we expected. Sales declined modestly, reflecting the slowdown in volume that started in the second quarter of last year and impacted all regions. Run rates were generally in line with recent trends. Asia, however, was weaker than we expected for the pressure-sensitive Materials segment, and I'll touch on that just a bit more in a few minutes. Despite lower volumes, we increased the operating profit through productivity initiatives and higher prices. And I'm pleased to say we're delivering on the commitment to return more cash to shareholders. We repurchased 2.4 million shares during the quarter and paid a higher dividend. Now let me comment briefly on the 2 segments before turning the call over to Mitch. Pressure-sensitive Materials continues to deliver solid results. Despite lower volume, operating profits were up. Results for North America and Europe were pretty much in line with our expectations, but sales in Asia came in weaker than planned for Label and Packaging Materials. We knew the comparisons to prior year will be tough for this region, but LPM sales in Asia ramped up more slowly than we anticipated following the Chinese New Year. The run rate has picked up for this business, so we expect to see a return to double-digit growth for LPM Asia over the balance of the year. To that end, we completed the expansion of LPM's plant in Pune, India where we continue to see exciting growth opportunities. Globally, this business has solid, long-term growth drivers, stable to improving operating margins and generates a lot of cash. You'll hear much more about our strategies and outlook for this business from LPM's President Don Nolan during the May Investor Meeting. First quarter results for Retail Branding and Information Solutions reflect the trends we saw in the back half of last year. We expect to see improvement in the RBIS growth rate over the balance of the year, with both easier comparisons and the success of our growth strategies. Recall that we have now passed the anniversary of retailer decisions to reduce unit volumes to beat the anticipated higher impact -- or impact of higher prices. Given the seasonality in this business, the second quarter will be an important benchmark for assessing how this market is progressing, as well as testing the traction of our key growth initiatives. As discussed in previous calls, the major challenge for RBIS has been achieving margin improvement objective in a lower growth environment. Over the past few years, we've been steadily restructuring this business to reduce fixed costs. We ramped up this activity in the second half of last year and expect to continue these efforts over the next few years. The next wave of actions is focused on factory efficiency and the further consolidation of production. We'll shrink square footage in manufacturing and invest at less than the rate of D&A to deliver solid free cash flow in this more volatile market environment. As with LPM, you'll hear much more about the strategies and outlook for this business from RBIS President, Sean Neville, during the May Investor Meeting. Moving on, in light of the previously announced agreement to sell Office and Consumer Products, this business is reported as a discontinued operation. OCP increased sales on a year-over-year basis due to the new products we launched last year, including a healthy lift from the pipeline fill associated with Martha Stewart. The sale of OCP is in regulatory review, and we expect the transaction to close in the second half of the year. So to sum up, with the first quarter coming in as expected, we're maintaining the full year EPS and free cash flow guidance we provided in January. As you know, the second quarter is the strongest of the year for us, so we'll wait to see how things progress here before updating guidance. In the meantime, during this uncertain environment, we are managing all businesses against a range of volume and inflation scenarios to ensure that we meet our earnings and free cash flow targets for the year. I'm looking forward to seeing you all at the meeting next month. And now Mitch will go through the quarter in more detail.

Thanks, Dean. Starting with Slide 5 and talking through to Slide 7 of our financial review and analysis. Net sales declined about 3% or 1% on an organic basis as the slowdown in volume that started in the second quarter last year continued largely as anticipated. Lower volume was partially offset by the impact of last year's price increases. Volume for the company was down low single digits, reflecting declines on both segments and the Other specialty converting businesses. As you may recall, we had a relatively strong first quarter last year followed by declines beginning in the second quarter, so the comparisons to prior year will ease across most of our businesses for the remainder of the year. Despite the sales decline, operating margin improved 30 basis points compared to last year on a GAAP basis or 60 basis points before restructuring costs to both productivity and higher prices. We continue to drive productivity across the company. RBIS was the biggest source of productivity in the quarter, reflecting the accelerated restructuring actions we've discussed. As we've mentioned in previous calls, we offset the raw material inflation that we experienced over the past 2 years through a combination of price increases and cost reduction. Commodity pricing has been relatively stable for us recently, but if we do see inflation heat up again, we will again move quickly to mitigate the impact of rising raw material costs through both raw material substitution and further price increases. Our first quarter effective tax rate on continuing operations was 29%. The adjusted tax rate increased from 24% to 34%, in line with expectations. We continue to anticipate a full year tax rate in the low- to mid-30% range, with a cash tax rate in the upper 20% range, similar to the full year rate for 2011. So looking at earnings for the quarter, adjusted EPS from continuing operations was $0.45. Before I turn to the segments, let me touch on free cash flow and the balance sheet for a moment. Free cash flow came in a little better, that is less negative than anticipated and was much improved compared to last year. While our first quarter operating results usually represent a net use of cash for us, the results for the first quarter of this year -- of both this year and last were atypical. Bonus payments for prior year performance are made in the first quarter. These payments were above average in 2011 and were below average this year. You may also recall that we had higher than usual working capital early last year that we worked down by the second half. We maintained this tight working capital to management in Q1 and will continue to do so. All things considered, I'm pleased with the strong performance we had in the first quarter as we strive to achieve our free cash flow objectives for the year. As for debt levels, we are within the range of our targeted leverage, with net debt to EBITDA of 1.9x. With the strength of our cash flow and balance sheet, we repurchased 2.4 million shares during the quarter at an aggregate cost of $72 million. Now turning to Slide 8. Pressure-sensitive Materials sales were roughly flat on an organic basis, as the price increases we implemented last year were offset by the impact of modestly lower volumes. The PSM volume decline reflected a slowdown in Label and Packaging Materials globally, partially offset by growth in the Graphics and Reflective Solutions business. Breaking apart LPM's volume by region, we experienced low-single-digit growth in North America, while Europe declined at a low-single-digit rate. Volume trends for both of these regions were consistent with what we saw in the fourth quarter. In contrast, the trend for emerging markets deteriorated somewhat compared to recent quarters. On an organic basis, LPM's emerging market sales were comparable to prior year due in large part to the tough year-on-year comps in Asia that Dean described earlier. To put in context, LPM Asia grew by approximately 20% in the first quarter of 2011. In addition to these tough comps, we also experienced softer-than-expected demand in Asia following the Chinese New Year. Now sales in Asia are rebounding, and we expect this region to return to above-average growth rates for the remainder of the year. PSM's reported operating margin improved 50 basis points or 40 basis points before the impact of restructuring due to productivity initiatives and pricing actions taken last year to offset higher raw material costs. Retail Branding and Information Solutions sales were down approximately 4% on an organic basis. The sales decline was consistent with recent trends, reflecting lower unit demand from retailers and brands in the U.S. and Europe. RBIS's operating margin declined 130 basis points or 60 basis points before restructuring charges and other items due to the impact of lower volume, which we partially offset to productivity initiatives. As a reminder, Q1 is usually the year's softest quarter for this business while Q2 is the peak. Reported sales for the other specialty converting businesses were up 1% on an organic basis due to pricing. Operating margin improved 130 basis points or 280 basis points before restructuring due to the benefit of pricing and productivity actions. Year-on-year margin improvement for other specialty converting also reflected one-time costs in the prior year related to a warehouse fire, which were largely offset by the impact of other factors, including a product line divestiture. Moving on to the outlook for 2012. On Slide 10, we've highlighted the key factors that we think will contribute to our P&L and cash flow in 2012. Slide 11 has our EPS and free cash flow guidance. Given our seasonality, uncertain global economic conditions and limited forward visibility, our estimates continue to reflect a relatively wide range. Given this, we continue to estimate organic sales growth in 2012 between 1% and 4%. Based on current rates, the impact from currency on EBIT is now estimated to have an approximate $15 million negative impact versus 2011. Our estimates for the tax rate, restructuring, capital expenditures, pension costs and average shares outstanding remain unchanged for 2012 from what we shared with you last quarter. We also continue to expect that the combination of OCP's free cash flow and net proceeds from the sale will total approximately $400 million. Based on the estimated sales, as well as the listed factors and other assumptions, our EPS and free cash flow guidance remain unchanged. We expect adjusted 2012 earnings per share from continuing operations of $1.80 to $2.15 and free cash flow from continuing operations of $275 million to $325 million. Earnings in the second quarter are expected to be between 25% and 30% of full year earnings. Overall, the first quarter was in line with expectation, and we've demonstrated our commitment to maintaining financial strength and returning more cash to shareholders. Now we'll be happy to take your questions.

[Operator Instructions] Our first question from the line of George Staphos, Bank of America Merrill Lynch.

I want to go through some of the volume trends to the extent that you can comment on them early in the second quarter by region. At this juncture, what are you seeing early in the quarter? And then the second question would be specific to Asia. Aside from what we've seen in the macro press, was there any -- in the macro from the press, what was some of the factor that drove the weaker than normal recovery post new year and, again, what kind of growth are you seeing right now within Asia and specifically within China?

Yes, George, it's Dean. I -- going through it by region, really for Pressure-sensitive, because I think it's the most relevant comparisons. We saw growth in the first quarter in North America, and we're continuing to see growth going into the second quarter. It's only been 3 weeks, and Easter, of course, is a bit of a factor in that first 3 weeks. But it still looks about the same. Europe was weak. It was down. Again, it was what we expected it, and continuing to see the same trends. I think maybe a little slower than expected rebound after Easter, but this [indiscernible] to be a holiday period in Europe and so I never really put much stock into it until we roll into, frankly, late May and early June. So again, I think it's really the same trend. Asia, the #1 factor for us in Pressure-sensitive was the amount of pre-buy that we had seen from label converters. At -- right at the end of the quarter, we had announced that Q2 price increase, and it was much stronger than we expected. Looking backward, it's easy to see what the trend was. And now, what we're seeing is an acceleration of growth. We had a strong March, and April looks to me to be even a bit stronger on -- especially on a year-over-year basis, and China especially seems to be rebounding. So I feel pretty confident that we'll be back on track there. I think that after Chinese New Year, there -- people will just trade in inventories, and you're reading the macro press about China slowing down a little bit. I wish we would slow down to an 8% growth rate but -- here in the U.S., so I'm not panicking about it, believe me. Besides, the Chinese government's really focused on generating more demand for consumer spending in China. That's a good trend for us. So again, I remain pretty confident there. And I guess, did that answer it all, I'm not sure.

It did. I had 2 follow-ons. One, you mentioned that the second quarter will be an important benchmark for RBIS. What type -- if you have the type of quarter that you would like relative to the growth initiatives that you'd had -- that you'll have, what type of performance should we expect from RBIS? I mean, what kind of volume growth would you like to see on a more normal basis? And then, the other question I had would be, we've seen it really over the last 1.5 years where the brand owners and the retailers have kept inventory very low, and so you get this on-again, off-again order pattern. Are you seeing any kind of -- if you agree with that premise, are you seeing any kind of change in that behavior from your customers or their customers at this juncture?

Yes. I think at a high-level, 2% to 5% top line growth for RBIS mix would make sense to me, given the overall market demand, given there were some pre-buy from last year into the first quarter to these high cotton prices versus this year where we don't really have that impact. And here are some other factors. I mean, retail apparel sales, for example, in the U.S. have trended up quite nicely at the consumer level in the first quarter. Some of that was due to warm weather, some of that was due to a little bit earlier Easter. But the inventory-to-sales ratio dropped down by quite a depth at the end of the quarter, which, for me, is a good sign. That means retailers' inventories are in really low -- they're low, which is a good thing for us. The early read on the import data for Q1 shows that imports were actually down double digits in the first quarter. We haven't got all that -- all this sorted out yet, which is an indicator that, again, that retailers were pretty conservative in Q1 against pretty good sales trend. It also tells us we'll likely gained some market share, given our growth was a little better than that. And so, I don't think retailers are doing on-again, off-again, George. I think they're transitioning more from a batch mode to a continuous slow mode. And so it may feel like on-again, off-again, but retailers are just placing smaller orders, trying to get them delivered more quickly and chasing demand rather than trying to predict what's going to happen in the future, which overall, is a good thing for us. It does represent occasionally some choppiness if some inventory flows out of the system. So I'm moderately optimistic, actually, about the second quarter, especially in the U.S. I think consumer trends are looking good. And again, the wildcard for me is still Europe. Both Europe -- both European retailers and U.S. retail, our business, was down about the same in the first quarter. So I couldn't really get -- I didn't get much insight from that.

Our next question from the line of Ghansham Panjabi, Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Dean, on the weakness in Asia, were there any specific end markets that were particularly soft? And can you sort of parse between some of the more consumer staples end markets you sell into versus some of the more macro-sensitive?

I think China is obviously our biggest country in emerging markets in Asia, and things were pretty soft the first couple of months of the year. And -- but March was a lot stronger, so I felt good about the trajectory. And again, probably 80% to 90% of that business is all focused on local consumer demand. It's not really focused on export markets or export volumes, whereas RBIS in China is definitely -- it's related to apparel exports from the region. So that was the big factor. We saw good growth in South Asia. That looked okay, but China was really the big swing factor. We saw -- we did see some slowdown in the ASEAN region. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay, okay. And then on RBIS, you'd mentioned volume sort of being comparable between Europe and North America, which frankly seems a little surprising. The apparel sales, as you referenced in the U.S., was pretty strong. Do you have a sense as to what point of sale is doing in apparel for Europe in aggregate?

I don't really had anything right here in front of me. My sense is that POS is weaker in Europe. We've been doing a pretty good job in taking market share there, so I think fundamentally, that helped. Also we're much more -- we have a higher percentage of sales in the mass market in the U.S. than we do in Europe. And mass-market sales had been hurt more than, let's say, vertical retail or some of the global brands. And so that tends to sort of dampen the U.S. results a little bit when things are soft.

Ghansham, on point of sale, that's based on sales level, not units. And given that there were some price increases overall, there is some pricing into that, whereas our volumes obviously -- our sales are obviously based on volume. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay, all right. And just finally, on RBIS, can you just sort of update us on the restructuring program there, what's been done? And also are you investing in technology as well as looking at some of the redundancies on, perhaps, manufacturing side there?

Sure. I mean, the -- a lot of the restructuring we did in the back half of last year was really around SG&A and taking out some of that infrastructure. And as you know, we've had a continuous process of driving more productivity. We have platform teams, we call them. So for every product category, we have a global view on how each type of production platform is going in every single plant in the world, and those teams have done a terrific job driving improved productivity, improved quality, improve service and actually creating a lot of capacity. Some of that capacity has also come from our investment in digital technology. So converting some of our offset and some of our roll-to-roll flexo manufacturing into digital, that simply allows us to be heck of a lot more efficient and requires less overhead to manage. And so we've been continually investing in that over the past few years. And so that's been a powerful influence. We don't tend to do a lot of restructuring in the second quarter. We did some in the first quarter from a manufacturing footprint perspective, but because Q2 is such a busy season for us, that -- moving equipment around and doing a restructuring activity during the quarter usually doesn't make a whole lot of sense. So we'll probably be doing more in the second half of the year.

And Ghansham, on your question on the investments and technology, we are making the investments in digital that Dean mentioned as well as we've talked about investments in some information systems. We're doing some in the order entry right now, as well as -- or just went live with one big plant, and we got a couple of more plants for manufacturing system implementations later this year.

Our next question from the line of Scott Gaffner with Barclays Capital.

So organic sales growth you said was down 1% in the first quarter, and yet -- and it was below your expectation and yet you held the organic growth guidance at the 1% to 4% range for the full year. Can you just talk to us a little bit about what keeps you comfortable that you can still get to the lower end of that guidance range? And then maybe what needs to happen in order to get to the higher end of the range?

It's -- you know, I think the -- it came in pretty close to our expectations. We would have liked to see a little bit stronger sales trend. But again, the second quarter is so important to us that we prefer to leave the guidance range kind of where it is. I mean, the big factor, frankly, is going to be in the back half of the year. That's when we expect -- the comps get easier in the back half of the year. We expect traction from some of our growth initiatives. And we just -- I think that's what we're really counting on.

Okay. And does it -- how much of it is -- you think that volumes are actually going to get better or is it any price increases that you still have in the system now? Or -- you sort of mentioned you might be lapping the price increase?

If you're trying to trend rate versus what we saw, you start it off with a discussion about our year-over-year growth rate in Q1. Remember that the comps get much easier for the rest of the year. And so, if you think about what has to happen for the low end of the guidance, actually, pretty anemic year-over-year growth for the remainder of the year despite the easier comps. At the high end, we need to get into the mid-single-digit growth rates for the company by the second half. And so that's the range of what needs to happen.

As far as pricing goes, we've been having a number of practical price actions still ongoing. They're pretty small. And we just anticipate if we see inflation, we'll raise prices. If we don't, we won't. So that's pretty -- I think pretty typical, and hopefully, we've established a pretty good track record of showing we can pass on raw material costs when they happen.

Okay. And the share buyback in the quarter, was that an anticipation of the closure of the OCP sale or should we think of this as a separate return of capital to shareholders?

Really had nothing to do with OCP. We had been committing to return more cash to shareholders, and we were really restricted from doing so last year because of the pending OCP transaction. Our balance sheet was in really -- was really good shape at the end of the year. So this is just part of our ongoing strategy, and frankly, we're pleased to be able to actually demonstrate it.

Our next question from the line of John McNulty, Crédit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: Just a couple of quick questions. First of all, with regard to raw materials, I know they were surging, I guess, early this year. Have they crested for you yet or are you still continuing to see raw material inflation? And then tied to that, are you caught up on pricing or is there still more catch-up to go?

We're caught up on pricing at a high level. There's still a couple of regions in the world where due to currency impacts or some material issues, we're still in the process of raising prices, especially in the Materials businesses. I see the current level of inflation is moderating. I wouldn't really characterize it either way. We've managed to be able to push back some potential increases from suppliers, I mean, suppliers are always out there testing our resolve. And so far, we've been able to -- our procurement guys have been able to do a great job there, and just frankly, they've created lots of options for us from a sourcing perspective. John P. McNulty - Crédit Suisse AG, Research Division: Okay, great. And then just -- the last question would be, when you close on the sale of the Office business, it looks like your leverage ratio will be somewhere around 1.1x EBITDA, something like that. What do you think is the right ratio for you if that level seems, based on your cash flow, to be pretty low? And I guess, I'm wondering could we see a more aggressive use of cash in terms of how it's returned to the shareholder? How should we think about that going forward?

Sure. What we've said is that our target is, just using this simple calculation, to be less than 2x. And we haven't actually commented on how much of the net proceeds in the free cash flow from this year, the $400 million, are going to go towards debt and share repurchases. The 1.1 sounds like that would be getting very low.

Our next question from the line of Jeff Zekauskas with JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Your other specialty converting business has sales of, order of magnitude, $550 million. And it makes no money. Why is that? And what should be the normalized margin of that segment?

Yes. So there's a number -- so it's a sort of mixture of different businesses in there. The largest single business in that category is our performance tapes business, which is profitable. And then we also have some of our converting businesses, the stamps, battery labels, automotive products, that's also a profitable business. Both those businesses had kind of a tough year last year and are on a recovery track, so we feel pretty good about that. There -- we also have a number of our start-up businesses in there. So for example, our RFID inlay business sits in that portfolio, it's been running at a pretty significant loss the last few years. It actually made a little bit of money in the first quarter. So it really started to track upward. So I would -- I don't think we've actually set a target for what other specialty converting should be from a margin target. But it will be on an improvement trend again, as there are a number of our investments in growth start to pay off. And as we start to see an improving trajectory on our performance tapes business on a go-forward basis. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Does it make sense to sell any of the businesses that are in there? Or are these all businesses that you see as strategic?

The performance tapes business is really in adjacency to Pressure-sensitive Materials for reasons that I don't really understand. We have to report that in Other rather than in Pressure-sensitive Materials and I'll defer to our auditors on why that is, kind of silly. But it's a business we've been in for a long time. For any one of our businesses in the portfolio, especially the smaller ones, if we saw a way for us to create more value for shareholders by selling it to someone who would value it more than we would, we do, and I think we've demonstrated that with the OCP transaction. So I'd say an ongoing portfolio review is something we do at the board every year. We sold the product line last year, you'll recall. We believe that, that was the right thing to do with that particular part of the business. But I think the tapes business, it's a good part of the portfolio. I expect to see an ongoing improvement trend. And with RFID, frankly, we did take some actions to integrate that business into -- under the management of RBIS. So we've taken out some overhead, because all the growth frankly -- or a lot of the growth is coming from the apparel sector. We really want to make sure we're focus in on that. And we've kept a small team to make sure we keep in touch with other verticals that may emerge. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. Just a couple more. What's the timing of the Hart-Scott-Rodino decision from the government? When do you expect them to rule?

So we're in the second review process, which is exactly what we expected. I would expect to hear from the Department of Justice sometime in the middle part of the summer. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: In midsummer?

Yes. Again, they always have the option to extend, so it's really in their hands at this point. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: And what's your pension expense this year and your pension funding?

Mitchell, can you...

Sure. So our pension is underfunded, $285 million, that's all the various funds that we have in the U.S. And it's another -- the foreign pension is about $90 million on top of that, but the total underfunded position for the corporation. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: So how much will you put into your pension this year?

We're expecting to put about $70 million to $75 million into the pension this year. $50 million into the U.S. and 1/3 of that outside the U.S. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: $75 million. And what was your pension -- what will your pension expense be this year?

$20 million.

Our next question from the line of Todd Wenning with Morningstar.

I was wondering if you'd give us some insights into some of the qualitative findings from your latest PSM price increase? And if those results have changed or confirm the way you'll increase prices going forward?

Sorry, I didn't quite understand the question. Can you repeat it?

Sure. I was wondering if you'd give us some insight into the -- some of the qualitative findings from your latest PSM price increase, and if those results have changed or confirmed the way you'll institute your price increases going forward.

One of the things last year that seemed to work pretty well was in a couple of markets, we used surcharges that were based on some public commodity indices to institute price increases. And that, frankly, enabled us to recoup some of that inflation on a more rapid basis. I think customers appreciated that. And some of -- in other words, some of the price increase was -- we announced was firm, and the rest was -- could be negotiated. And a couple of those surcharges have actually rolled back in the first quarter. So I think customers actually appreciate the fact that we are willing to move it up when it goes up, and then we'll move it off when these commodity prices come down. So I think that has actually worked pretty well, having kind of a balanced approach.

Great. And could you just give us a quick update on labor cost in China? Has wage inflation improved or does it remain a concern?

Well, it's the same for everybody there. It's 15% to 20%, especially at the minimum wage level where governments basically turn to drive wage rates up, especially in the South of China. So that's -- that affects everybody, but certainly affects the entire apparel industry.

Our next question from the line of John Roberts with Buckingham Research Group.

This is actually Gaji Balakaneshan in for John. I guess the comment was made about retail apparel sales trending up in the U.S., but the sales-to-inventory ratio went lower. Is that indicative of what you're seeing globally? And is there a potential continuation of inventory correction for RBIS going on?

I think, and I don't have the chart here in front of me, I actually think it hit a new all-time low. And so -- I mean, sure, it's always a possibility it could go good lower, but I think for the most part, retailers are chasing demand and chasing orders. They don't like to lose sales, so there's always a limit to that. So I actually think given where the ratio is, it's probably at a 20-year low. There's probably more upside for us than downside.

Have you seen any signs of stabilization there?

It's been pretty -- I mean, we saw a major shift in the inventory-to-sales ratio after the 2009 recession, and it pretty much stayed in a fairly narrow band. We can send you the chart. You can see it and -- although it really, the last couple of ones have ticked down quite a bit.

Okay. And then for your Asian LPM, kind of like a hypothetical scenario here. If the normalized rate excluding the Chinese New Year was, say, 100, could you give a sense of what first quarter was or -- and maybe what the second quarter could be?

Well, we normally grow in a double-digit rate in China. We didn't grow in the first quarter, but we grew, I think, 20% in the first quarter of 2011. Some of that 20% was borrowing from the second quarter of 2011. So we'll be back at a double-digit rate in the -- I'd say low- to mid-double-digit rate in the second quarter, and that's how it's tracking now and I'm pretty confident that will continue. So that I'd see -- I'm not sure how to index that, but that's how the trend has been working.

We have a follow-up question from the line of George Staphos with Bank of America Merrill Lynch.

Very quickly. Is there any capacity that we should be aware of coming on in Pressure-sensitive that you know within your network or elsewhere in the industry? Pretty benign at this juncture in terms of capacity. And then just a quick question. I thought you would have had maybe a little bit of pressure on adhesive cost in the quarter. Certainly had a good quarter in Pressure-sensitive overall, but was that a cost factor that now hopefully maybe is abating for you in 2Q through 4Q?

There's been -- and first of all, the only major capacity, it's really been us in India and South Asia, that was an important investment for us. I haven't seen anything of significance, though, anywhere else in the world. And there's been some investments lately in South America that's been over the last couple of years, so nothing really recent. And your second question was about...

Inflation.

And adhesive costs in particular.

Yes. As far as that goes, if you look year-over-year, we're not expecting much inflation for the full year. If you look sequentially, George, there was a spike in some of the chemical commodities that we buy, adhesive components specifically. We've been able to defer a lot of that out of Q1. There is a potential for some modest inflation in Q2 sequentially, and we're working to manage that as we speak.

Mr. Scarborough, there are no further questions at this time. Sir, I will turn the call back to you.

Okay. Thank you, France. Well, just to sum up, we're focused on execution, delivering on our sales, EPS and free cash flow targets despite a somewhat uncertain outlook. Emerging markets, we believe, will be back on track and, of course, that's a key element of our growth plans on a go-forward basis. We're also going to continue to drive sales growth with many of the new products that we launched in the second half of 2011. We expect to see that gaining some traction in the back half of the year. We're going to continue to drive productivity, and if sales growth doesn't emerge, we'll continuously assess new actions like we always do. As well as continue to monitor inflation, work hard on the procurement side. But again, if inflation rate is up, we'll be out raising prices again. And we'll be continuing to invest in the businesses at a rate less than depreciation and amortization, which will enable us to return more cash to shareholders. Thank you very much.

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