艾利丹尼森 (AVY) 2003 Q1 法說會逐字稿

Please stand by. We are about to begin. Good day, everyone. Welcome to the Avery Dennison Corporation first quarter 2003 earnings results conference call. Today's call is being recorded. Now at this time for introductions at this time for introductions and opening remarks I would like to turn the call over to the head of investor relations, Ms. Cindy Gunther. Please go ahead.

Thanks, Steve. Hello, everyone. Thank you for joining us. Dan O’Bryant, senior vice-president and chief financial officer is here to discuss our results for the quarter and outlook for the balance of the year. First, a reminder concerning forward-looking statements. Any such statements made during this teleconference are subject to certain risks and uncertainties. Actual results and trends may differ materially from historical or expected results depending on a variety of factors, including those that are referenced in the company 's SEC filings. It is our policy to provide forward-looking statements and updates on business trends only in news releases and public forums such as this conference call.

As previously announced, the teleconference is being simultaneously broadcast via the Internet . An audio replay along with the press release and hand outs will be posted on our Web site. After the presentation we will be opening up the call for your questions. As usual, we will be limit s limiting the duration of the call today to one hour . To give everyone an opportunity to ask their questions in the limited time that we have, we do ask that you please limit yourself to one question and two follow-ups. Then return to the queue if you have additional questions.

Now I'll turn the call over to Dan.

Thanks, Cindy. To start, I'm happy to report what has to be characterized as a very solid quarter. We grew our top line by nearly 24%, roughly in the middle of our guidance range for the quarter. And I'm very pleased to report that profitability was in line with expectations. So bottom line, we delivered 9.3% net income growth and nearly 8% growth in EPS in line with our guidance. And our return on investment was outstanding, with 26% return on shareholders' equity and nearly 16% return on total capital.

These results are especially gratifying given the challenging economic and geopolitical climate which included rising petro-chemical feed stock prices and generally weakening of the consumer confidence in spending

Before I return the returns for the quarter, I know you're anxious to hear the action taken by the Department of Justice last week. Let me summarize what happened to date. Last Monday we learned from about the complaint from the DOJ's anti-trust division. The department sued to block the acquisition of Venus Mactac subsidiary by UPM. At the same time, we are were advised that the Department initiated a criminal investigation into the competitive practices in the North American label stock industry and a subpoena would be forthcoming.

As most of you know, our Fasson business competes against Mack tack and Raflatack [ph], a subsidiary of UPM, in the sale of paper of label stock. This is and has been a highly competitive business . Sales for this portion of our business totaled $650m last year , or less than 15 percent of projected 2003 sales.

UPM is also a key supplier to the industry of specialty papers used to manufacture label stock. In 2002 we purchased approximately $100m of material from UPM. We have not yet received a subpoena in connection with the criminal investigation. We are not a party to the complaint filed and no charges have been made under the current investigation . We did, of course, cooperate with the Department in its evaluation of the proposed UPM Mack tack deal and we will continue to cooperate with this inquiry . As I said, since this process is in its early stages, there's really nothing more we can tell you until we hear more from the D.O.J.

In the end, the fundamentals of our business are the key drivers are our value. Our fundamentals really are outstanding. Now I would like to return to the financial details for the quarter. As I mentioned earlier, net sales were up by nearly 24%, within the guidance range we provided in January . Roughly 60 percent of the incremental sales are attributable to acquisitions net of divestitures. And another 20 percent to favorable changes in currency exchange rates. Currency added about four cents to the bottom line in the quarter, about a penny more than we had anticipated.

As you may recall, we saw our order trends across all businesses soften in December after robust results early in the fourth quarter of 2002. This weakness continued during the first few weeks of January. So we were cautious about the outlook for the first quarter.

Consistent with our expectations, year-on-year growth rates did slow compared to last quarter's strong performance. As you may recall, the low end of our guidance did factor in an assumed economic impact from war in the Middle East. This reality along with other global issues did appear to have some effect on our growth. In fact, compared with the robust performance robust performance in Q4, organic top-line growth slowed across every geographic region.

Our Fasson rolls materials continued to deliver with high single digit growth before the benefit of the Jack acquisition. Our specialty tapes, retail information services, and industrial and automotive label businesses delivered high single digit growth or better.

Partially offsetting these strong performances, office products reported modest sales declines relative to the prior year. So in the aggregate, core unit volume growth was up an estimated 4%, half the level we saw in the preceding quarter. But still within our guidance. The impact of price and mix was essentially flat, but better than expectations, which partially offset the lower than expected volume growth.

Contributing to the better than expected price and mix effect we successfully implemented select price increases at several of the businesses which had experiences increases in raw material costs associated with oil derivatives. These included our Fasson films and graphic graphics businesses in Europe, and our specialty tapes business in the U.S.. In addition, several businesses also contributed to better than expected product mix. Our North American roll materials experienced higher than experienced growth in the premium packaging segment which carries higher average selling prices than other segments of the business . This was, however, offset by slightly negative pricing in this market. With unit volume growth of roughly 4% and essentially no impact from price and mix, core sales increased by roughly 4 percent for the quarter.

Moving on down to P&L. Our gross margin of 31.6% reflect the decline of 160 basis points relative to the prior year . As we have indicated during the last few quarterly calls, this year on year decline is attributable to the Jack acquisition. Importantly on a sequential basis, gross profit margin improved by 40 basis points, driven by cost reduction associated with the Jack acquisition.

By the way, that gross margin includes $2m worth of transition costs associated with the office products plant closure that we announced in Q4, which we will recoup as the year progresses.

I know that the rapid rise in petrochemical based commodities was a source of concern for investors. As many of you know, we do spend approximately 45 percent of sales on raw materials, with roughly 40 percent of that spend tied to petrochemicals in the form of films, resins, adhesives, and so on.

Looking forward, it 's clear we will see some increases in raw material costs, but we do expect to largely offset those through selective price increases and productivity improvements

For example, we announced price increases on film products at our Fasson roll materials businesses in North American and Europe in the range of 3% to 6%, depending on product. On the paper side of the business we are also seeing cost increases associated with chemicals and adhesives, which we expect to offset through productivity improvement rather than price.

Marketing, general, and administrative expenses increased by $13m sequentially, about $4m of which is attributable to the full quarter impact of the RVL acquisition, as compared to the roughly eight weeks we own owned this business in the fourth quarter.

As anticipated at the start of the year, spending also increased for pension and medical benefits, along with other insurance costs. We also spent incrementally on our horizons growth initiatives which I will speak to later in the call.

As with gross profit margin, year on year comparisons of operating expense ratios are not meaningful due to the combined impact of both the Jack and RVL acquisitions. Operating margin increased which 170 basis points sequentially. 150 of which was attributable to the negative impact of the restructuring and asset impairment charges in the fourth quarter Interest expense increased by $5.6m versus prior year to $14.9m, at the high end of our guidance range , reflecting higher debt levels and higher interest rates following the rebalancing of our short and long-term debt.

Our tax rate declined slightly to 29%, below our guidance of 29.5%, reflecting the continuation of structural and operational changes, as well as some changes in geographic income mix. We do believe that this rate is sustainable.

Before I shift gears to discuss results by sector, I would like to comment on our cash flow and overall financial position. Our financial condition remains solid. Our total debt to capital ratio stood at 52.7 percent at quarter end, up slightly relative to the start of the quarter. We will begin paying down debt later in the year as our cash flow is always back end weighted due to various seasonal factors. I do expect to be back within our target 45 to 50 percent debt to capital range by year end. Interest coverage remains strong with EBITDA close to 11 times interest expense for the quarter.

As expected, our working capital needs increased in the quarter relative to Q4, with bonus and trade rebate payments driven by last year's results and inventory billed in several divisions. Year on year working capital increased by nearly $50m. Considering the Jack, RVL and L&E together added about $100m at the time of acquisition, we are very pleased with our progress in this area.

Operating cash flow was up modestly compared with the prior year. Capital expenditures in the quarter totaled approximately $41m. Major project s for the year include two new coders. We are installing in our roll materials Europe business along with a number of investments to expand capacity in China and other parts of Asia. Although first quarter spending was higher than usual due to the carryover of projects started late last year, we continue to expect capital spending of approximately $175m this year.

Now, I'll spend a few minutes on the first quarter results by sector. First, in the pressure sensitive materials sector. Net sales in the quarter were up nearly 32%. Between 55 and 60% of the incremental sales are attributable to acquisitions, and approximately 15 percent to favorable changes in currency rates. As a result, core sales growth for the sector is estimated at seven to 8 percent for the quarter. Now, as I mentioned before, we have integrated the Jack business into our Fasson business. Spoke by now it's impossible to split the two. As a result, our estimates of acquisition impact on the sector and total company are purely estimated guesses at this time.

With this caveat in mind, let me point to some highlights for the sector. Fasson sales continue to remain strong in North American North America with mid-single digit growth driven by strength in the premium packaging business. Due to the continued economic slow down in Europe, our roll materials business has slowed in that region . Nevertheless we estimate that sales increased modestly in Europe before the impact of the Jack acquisition.

Reflecting global events, the raw material business in Asia and Latin America slowed due to the extraordinarily high growth in the fourth quarter. Nevertheless we delivered healthy growth before the impact of Jack in these regions.

Outside of Fasson, our specialty tape s businesses worldwide remain strong across most product lines, especially in the medical arena. Sales in the graphics and reflective materials businesses declined modestly before the benefit of the Jack acquisition. However, thanks to rigorous cost reduction efforts, the Profitability for this group of businesses is up significantly compared to the prior year. The operating margin for this sector improved by 190 basis points sequentially. 160 of which was attributable to the negative impact of restructuring and asset impairment charges taken in the fourth quarter.

Shifting attention now to the consumer and converted products sector. Net sales increased nearly 13 percent for the quarter, about 60 percent of which was attributable to the RVL and L&E acquisitions net of divestitures and another 35% of the impact of favorable currency exchange rates. As a result, core sales for the sector increased by about 1%.

Global sales for the office products business declined by roughly 3%, reflecting weak economic conditions impacting ends user demand. Modest inventory reductions by the super stores and the expected shift from branded to private label products. For example, our decision to walk away from some of our lower margin private label binder business represented about $2.5m in sales shortfall in the quarter. Sales in Europe were especially weak reflecting economic conditions in the UK and Germany. On a more positive note, the commercial side of the super stores continues to grow as does the mass market channel. Importantly, profitability improvements in the office products business preserved earnings for the business in this challenging environment.

We are very pleased with the retailer acceptance of our new products such as the clean edge digital photo papers and retractable highlighters and markers. Since we are still in the process of filling the distribution pipeline for these products, sales were modest in the first quarter. But we are looking for a significant pickup throughout the balance of the year .

Elsewhere in the sector, our industrial and automotive products group continues strong with high single digit revenue growth. After relatively weak January and February, our retail information services business deliver delivered strong results in March. We are continuing to gain share in our ticket and tag business and are investing to maintain momentum there.

In this regard, I am especially pleased to report another great account win for our info chain express business. Kohls has mandated implementation of our solution among its 900 apparel manufacturing sites scattered throughout Asia, Latin America, and Europe. The addition of Kohls brings the total number of retail customers of our info chain solution to 13. Kohls has over $9b in sales and carton count of 20m, growing at 20% annually. While it will clearly take time to bring all of these sites on to the system, this is a major win for us.

Finally, the operating margin for the sector improved 20 basis points year-on-ear and 280 basis points sequentially, 130 of which was attributable to the negative impact of restructuring and asset impairment charges in Q4. These results include $2m of transition costs associated with the shut down of the office products plant that I referenced earlier. The solid margin improvement for the sector reflects the success of our manufacturing cost reduction and six sigma efforts as well as very tight cost controls.

Now, before I turn to our financial outlook for the year, let me update you on some of our major strategic initiatives. The Jack integration process continues to proceed better than our original business case in terms of sales retention and working capital reductions . Our expectations for both savings and head count reduction continue on track and on schedule. We closed the plant in Brazil during the quarter ahead of schedule, bringing total plant closures now to four. We also closed another three distribution centers, bringing the total count to 17.

Our first quarter integration actions reduced head count by roughly 100 positions for total head count reductions to 425. An additional 225 positions will come out later this year, with the remaining 350 positions coming out during the first quarter of next year. The integration of the RVL acquisition is also underway. Let me remind you that unlike the Jack acquisition, this deal was not about cost synergies. The goal of this acquisition is to broaden our existing product line and grow the combined business faster than both companies could have on their own.

Our sales force has already been integrated, resulted in successful cross selling of services and new opportunities for growth. In fact, the account win at Kohls is partial partially attributable to the strong relationship that our RVL colleagues forged with this customer over the past seven years.

On the manufacturing and distribution front, plans are in place to optimize the locations of our ticketing centers . For example, the RVL, L&E and Avery Dennison businesses in Mexico have moved into a new shared facility. Where appropriate similar moves are in process around the globe

Overall, employee and customer support for the integration of these companies is strong and morale is high. We look forward to continued share gain, accompanied by double digit sales growth and improved profitability for this business in the years to come.

Our horizons growth acceleration program is also picking up speed. We now have over 100 horizon one projects either completed or underway, with a target of delivering a run rate of approximately $50m by the end of the year. Completed project s already delivered $8m of sales in the first quarter alone. Over 700 employees are now involved in this truly exciting new approach to accelerating top line growth.

Now, a few words on our financial outlook. Although overall order trends for the first couple of weeks of April have tracked closely to plan, we have lowered our expectations for top line sales growth based on generally weaker economic conditions around the world. We anticipate that these effects will be offset by a better than originally expected boost from currency exchange to the tune of about eight to ten cents for the year, compared with our previous guidance of four to eight cents . As a result, we are reducing only the high end of our earnings guidance for the year from 325 to 320.

We also want to point out that as noted in our safe harbor statement, there is some new downside risk to this guidance due to the increase in legal and administrative costs associated with the D.O.J. 's investigation. We are not in a position to speculate as to the potential magnitude of these costs for the balance of the year. So we have not included any impact in our guidance.

For the second quarter, we are targeting earnings per share in the range of 77 to 82 cents reflecting the following current assumptions. Reported revenue growth of 16 to 18%, included an estimated 8 to 9 points of growth from last year's acquisitions and 5 points from currency. And operating margin in the range of 10 to 10.3%. Interest expense of 14 to $16m. And a tax rate of 29%.

I want to reiterate that the outstanding fundamentals of our business have not changed, as evidenced by the solid results we delivered this past quarter. And our expectation expectations of high single digit earnings growth for the year. We continue to strengthen our already compelling set of competitive advantages with superior products and services, innovations and technology and highly efficient manufacturing and distribution networks. We expect to accelerate our rate of top line growth in the coming years. We expect to expand our margins and deliver superior returns on investment.

That concludes my formal remarks and I would be happy to take your questions. As I stated earlier, however, we are unable to provide any further information related to the D.O.J. investigation beyond the comments I already provided.

Thank you. Today's question and answer session will be conducted electronically. To ask a question, press the star key followed by the digit one on your touchtone phone. Make sure your mute financial function is turned off. Star one again if you would like to ask a question. Our first question is by Karen Gilsenan with Merrill Lynch.

Good afternoon.

Hi, Karen.

First, your corporate expense number, when you look at your segments was pretty high at minus $14.7m in the quarter. Is there something unusual in there? What should we think about for the rest of the year?

We do expect it to remain about at the level you see this quarter. It's up in part because of pension and medical costs, expenses which have increased which we indicated would be the case last quarter, other insurance costs, other benefit programs. There is some spending for growth initiatives in here as well, and a few other things that together added another $3m that makes up that difference.

Okay, great. Another quick one. Is it possible to estimate the impact of Jack to the bottom line? Was it neutral? Did it actually turn accretive in this quarter?

We can estimate it. And that estimate is primarily based on the guidance that we gave a couple of quarters back, actually. Today we've combined product sales management, distribution centers. So it would be purely conjecture. But what we said originally is as close as we can get today. That is that after losing four to five cents a share last year in the third and fourth quarter, we are somewhere closer to break even right now. Our expectation has been that we would remain around that point for the first half of this year. And start to see some increase late in the year. The really big impact that we expect still happens later next year after we have further opportunities for plant consolidation.

Okay. And then in your office products business, you mentioned , I think it was down 3% globally. Did you give us a figure for North America? And can you talk about whether certain product lines that were hurt more so by in decline or weakness than others? You certainly have differences in profitability related to different product lines . I'm wondering to what degree mix was an issue in the quarter.

Sure. Let me draw a bit of a comparison in the negative rates and the office products business. We have not seen negative numbers of this nature since the quarter or two directly following 9/11. We had anticipated consumer confidence would be impacted by the events in the Middle East, which everyone knows did unfold. Having said that, I didn't comment on North America, but Europe was hurt worse than the U.S. was . We didn't get stellar growth from either market. Mix was better than expected there. A lot of impact was in the binder business, which is a profitable business for us but lower than average margins. Mix was a bit better than there than we expected it to be

Dan , just to follow up and then I'll pass on. Was the U.S. office products business flat? Up? Down?

It was slightly down .

Slightly down. Thank you.

Our next question, Richard Hollihan, Smith Barney, asset management.

It's actually Smith Barney, sell-side. I want to see if you can talk a little bit about your hedging strategies or any hedging strategies you might use for your petrochemical expenses. Could you describe that to the extent that you might see gains on the derivative side of that in the near term? In the coming quarters, you might see as rising prices work their way through the supply chain that might have an impact on you?

Sure, Richard. Good question. We do not hedge against petrochemical costs. We do, however, have plans in place for every one of our business units that are anticipated to be impacted or have been impacted by petrochemical feed stock prices. Across the business is to date, we have been able to offset virtually all, if not all of the impact of rising raw material costs through a combination of some price increases, our European roll business and its films business saw some price increases. Our special specialty tapes and graphics business have raised prices where they have been impacted by this. Then other divisions and those same divisions where they have seen some price increase have been able to offset much of the impact through purchasing programs and other productivity improvements.

So far, including the quarter that we just ended, we have been able to manage this and not see negative impact on our margins . Our anticipation in the next few quarters is the same. Certainly for the year we believe where we stand today that we will not see margin deterioration because of this. And that it is a manageable issue. We also expect that we will see some relief as is already happening in oil prices come down in the next few quarters so the spike we have seen will not be sustained for a long period of time.

: Terrific . Thank you very much.

Sure, Richard.

Next question. Ghansham Panjabi with Lehman Brothers.

Hi, good afternoon. Sort of as a follow-up to Karen's question and looking at the consumer business. You shoring the 20 basis points improved margin while the most profitable business was down 3%? Can you help us reconcile this ?

Sequentially, I think you're talking strictly about consumer and converter product sector.

Exactly

Mix helped us sequentially. As I said, a lot of the drop off in sales was in the binder business. Overall, the margin did improve.

Okay. And any forecasting any effect from SARS in your Asian business in Q2? Seeing any effect?

What we have seen so far is limited to a few businesses that have canceled meetings, some travel curtailed. We haven’t seen anything more significant than that. We are taking action s over there, as everyone else is in that region of the world, to ensure we don't contribute to any of the SARS issue. I’m talking about plant maintenance and that kind of thing.

So right now it doesn't appear that we have any issues. We have heard reports of economic slowing there, though in China in the quarter we had excellent growth. Our roll materials business was up, for example, 35 percent in the quarter. So we haven't seen dramatic improvement. That was down from fourth quarter which was unusually high. Right now we are looking at growth across most of our Asian businesses that looks a lot like the averages from last year . Until something more dramatic happens on the economic front, it seals feels to us like we are okay for now

One final question. Can you give us color on the 11.2m shares you have in the employee stock trust and why they are not included in the number of diluted shares? That 's it. Thanks.

Sure . Yeah, the 11.2m shares in the trust that you are referring to are held basically as treasury stock . And therefore, we don't vote them .

You do pay dividends on them, right ?

Yes, actually, we do vote those shares. They do have voting rights. We do pay dividends on them. Essentially you're paying the dividend back to the company. It 's net-net. There's no dividend outflow associated with those shares. Treat it like treasury stocks.

Okay, thank you.

Next question, Jeff Zekauskas with JP Morgan.

Hi, good afternoon.

Hi, Jeff.

Was there an accretive effect or dillutive effect from RVL and L&E?

It was about break even for this quarter. The operating, they were making money and we have had acquisition costs. They are breaking even and that should improve. We will have the first couple of years of this acquisition where this business will report slightly lower profits than we expect them to over the long run because of some things associated with the integration, retention costs and so on. But at an EPS level for the current quarter they were roughly break even.

Okay. And in terms of your sort of general segment s of PSA and consumer. I know that everything netted out so that the price was about flat . But how did the prices change in each of the large segments ?

Well, we had - in fact, both segments were roughly about the same place, around neutral neutrality on price mix . Both saw some benefit on the mix front. So there was some downward pressure in real price in both businesses. Overall they were both right around that zero-point.

Okay. I guess sort of a conceptual question. If you had a four-cent currency benefit, you earned 66 cents last year. So that gets you to about 70. You reported 71. And in general, your volumes were pretty good . You know, across your various businesses. So in general, why weren't your earnings per share higher?

Well, I would link two economic things that happened in the quarter together. One is that volumes were relatively weak because of economies. The volume from continuing business was at the very low end of our guidance range. Some of that was offset by the extra cent or so above guidance that we got on currencies . The two kind of basically netted out together. Again, we have those spending increases from pension, medical, and some spending for our growth initiatives that have added a bit of expense in the quarter and will pay for themselves at least on the growth side as the year goes by .

Okay, thank you very much.

Sure.

Our next question Robert Ottenstein with Morgan Stanley.

Dan, we've kind of hinted around this a little bit. I want to get confirmation. I think in your prior guidance a quarter or two ago you talked about Jack being eight to ten cents accretive this year, RVL four to eight; and then the startup costs on the two new coders of reducing earnings by about five to seven. I just want to get a sense if those ranges still look right and whether on any of them you are towards or thinking a little bit more towards the high end or low end of those ranges.

Well, on the Jack side again, we are estimating. But we don't have any expectation that that is going to change. The RVL four to eight-cent guidance kind of depends on what happens economically, Robert. And hopefully consumer confidence will improve and pull us up off of the low end of that range. Last quarter when we gave that guidance we indicated that the low end of the range for the year and indicated the kind of softness that we are seeing today economically, indicated some of the consumer confidence concerns that have been out there.

So the things that we see happening now are the things that would take us to the low end of that guidance range and RVL certainly impacted by consumer confidence. The start up of coders in Europe are about where they will be. Some of the expenses are coming in a little earlier than planned. For the year they are about where we expect expected them to be.

Did you have expenses this quarter on them?

No, but we will have expenses in the second quarter for start ups. The original guidance, as I recall indicated more of that hitting in the third and fourth quarter rather than second quarter and it is spread across three now.

I guess from listening to the discussion, pricing is toughest for you in the North American paper side of the roll business. Can you give us a sense of how much pricing fell from, let's say, the beginning of 2000 to the end of 2002 there?

Beginning of 2000 to the end of 2002? Over the two-year period?

How much pricing fell on the paper side of the roll business in North America.

Robert, I don't have actually with me those specific numbers, but in general we have talked about a couple of points a year of negative price mix in that business. I would say without looking at specific figures, that's been what we have seen over the last couple of years. The competitive market through a lot of that time frame, we saw pulp prices declining. Only in the last few months have we started to see some increases in pulp. So I would have to characterize that market as steadily declining prices . We have been able to improve our margins, as you know, in that business through productivity gains, particularly the investment we made in Greenfield Indiana which has reduced our manufacturing costs. Overall, prices have been consistent with the long-term trends. That is generally down each year in that business.

Would 5% be a reasonable guess?

No, I'm not going to go there, just because we've never gotten that specific about a slice of our market in North America. We've always talked in more general terms. Secondly, I really don't have a specific number I can give you with me

Thanks a lot, Dan.

Sure.

Next question, Skip Berents [ph] with North American Management.

Did D.O.J. ever contact you directly or are you all listening to third-party information about their search?

We were advised that they were opening the second investigation in writing and I believe verbally as well. They have had that contact with us.

You don't know yet whether it's roll stock or specialty papers?

I can reference you back to the language that is in the complaint that they filed against two of our competitors, which tends to reference the paper roll stock industry in North America .

Thank you, sir.

Sure.

Our next question, Chris Kepsh [ph] with Black Diamond Research.

I wanted to follow up on the North American Fasson business. Can you just maybe characterize what the current capacity utilization is, either in the industry or specifically with your business? I guess not just North America, but also in Europe. As a follow-up, could you give us a general sense of where that has been over the last say three to four years?

Yeah, over the last few years there has been new capacity come online. We invested in the coder I earlier referenced in Indiana. A competitor put another coder in the North American business as well. Both of those were fairly large coders. And both of them started up over the last couple of years or so. So not any significant investment since then in North America.

And as I characterized before, this is an industry that can regulate its capacity on a shift by shift basis to a great extent. The fact that we have a coder sitting somewhere does not mean we necessarily have to run that. The cost of that is fairly variable relative to a paper machine, for example. Much lower fixed cost. So we have also are in the process of adding similar capacity in Europe. But as it stands now, we don't sense a huge over capacity that has been putting any unusual amount of downward pressure on price.

There has been some capacity coders come off line over the last two or three years as well. Several competitors and some customers have closed down coding operations. And that has offset some of this added capacity, for sure .

Just curious, are your coders better used in the paper roll stock business, for example? Are those dedicated just to paper? Are they sort of swing machines that can be more on the specialty film side?

Well, they are actually some of both, Chris. We have coders that are exclusively used for one type of face stock or another. Others that can do both. Our green field coder is capable of running both paper and film.

Then you reference the smaller, more regional competitors that have taken out capacity. Some of that you actually absorbed. Just curious if the competitors have taken out capacity, is that in any particular -- would that be capacity specifically in paper or is it just really general roll stock capacity? And then I just have one follow-up on the European business as well .

Yeah, I'm thinking here mentally about who is taking capacity out. I don't have a full understanding. We don't always see that. I'm aware of competitors that have taken paper capacity off line as we speak. And there may be others that doesn't come to mind right now.

Right. Then just in Europe, I guess the coder that you anticipate bringing on stream in Luxembourg - is that the extent you are seeing the costs coming in earlier than you expected, is there any chance that capacity could be on stream and you can accelerate some of the leverage take you anticipate to get kind of the Jack business upon consolidating some of the assets in European roll stock business?

Not really. I think that the calendarization of those expenses was more of a budgeting issue for us, rather than some fundamental change in the implementation schedule. We are still anticipating begin beginning to run that coder commercially late in the third quarter and then growing in the fourth quarter.

Okay. Thanks a lot.

Sure.

Our next question, Tim Burns, Cranial Capital.

Hey, Dan, Cindy. How are you?

Good.

One question for you, relative to the market and demand. Historically the company has always had numerous singles, doubles in developing new films . Isn't the majority of that activity on the plastic film side?

Oh, a lot of it is. Not so much because of our development, but many of the applications which we produce product to support are simply in the films area. It 's a big part of why pressure sensitive outgrows other labeling technologies because we do have clear films. So as people upgrade brand images, quite often they turn to film to do that.

But we still see growth in paper. The variable imprint products that we produce are growing in many pardon parts of the world as bar code labeling still is taking hold. These days we are seeing an awful lot of growth just geographically as pressure sensitive in general takes hold. And becomes a labeling technology used in these markets.

I gotcha. What you are saying is that growth in China and other parts of the world are starting out the way the U.S. market did in a paper base substrate? And as time goes on they eventually would convert to filming structures ?

That 's true to a great extent. We do see local product manufacturers who have to compete with global suppliers who have film on their products immediately going to film products.

Gotcha.

There's a variety of things happening there. The other things in these emerging markets is simply that consumer products are coming of age. So we get growth just because those kinds of products are outgrowing the gross domestic products of those nations on their own.

Gotcha, okay. And it sounds as if the consumer products, as I call it packaged goods area - you know, personal care, food, wine, et cetera, is rebounding. Is that fair to say? And are the consumer product companies in a more active state of developing new products that might be might eventually benefit the PS materials business?

I think what is happening here in our business is that markets which we didn't previously serve with pressure sensitive are opening up to pressure sensitive . The wine market, for example, over the last few years, over the last maybe five years has gone from virtually no pressure sensitive to being 50 or 60 percent pressure sensitive, labeling for spirits, for the food industry . There are a lot of new applications that come along. We've talked about labors that go into the beer market. All of those are new areas where pressure sensitive continues to take share from other labeling technologies which we compete with actively. And because of the superiority of our product's appearance and often times the cost at which we can provide the labels, we continue to take share from these other technologies. And it kind of happens in markets, one market this year and another year it may be a different market . Right now food is active, beverage is active across quite a few fronts

But none of these markets individually, even if the whole beer market were to convert to a PS label, would make a material -- well, material is a big wide open space. But I mean, they are all kind of still small markets, right ?

Some of them are and some of them aren't. Beer could be huge if it ever all converted to pressure sensitive, which is not our anticipation. We are really selling into high end beverage markets and promotional markets today. But it's still volume for us. Beverage is picking up on its own and becoming a significant part of our total business.

So some of those can be larger markets than others. Our business is usually characterized by a lot of singles, as you point out. It's application by application and there are hundreds of those every year which we serve. It's unusual for us to find one big one that generates millions of dollars of sales in a single application .

Gotcha . Last question. Do your technical and sales people give you the feel that the consumer product companies are accelerating their new product development? Have they come out of the shock of the geopolitical scare and what have you?

I have not seen any evidence of a turn there really that I can speak of from our divisions.

It's mostly still replenishment of depleted inventories?

No, it's not really that. There's an ongoing stream of new products that come out. And applications that upgrade from different labeling cooling technologies into pressure sensitive. And that ongoing stream from where I sit feels pretty steady. We haven't seen a big resurgence, but this is not inventory replacement. We don't have any sense there has been a big inventory depletion in the packaging and labeling markets that we serve.

Okay. We felt there was a lot of pre-buying to avoid resin cost increases. It may have been a head fake for the general consumer packaging market. I'm trying to get confirmation there. You know, Cindy Gunther does a lot of research on these alcoholic beverages. I'll give her a call and I'm sure she'll fill me in on the latest trends.

Absolutely.

By the way, the D.O.J. is about three years late for whatever that's worth. Thanks very much. Good quarter.

Next question Alexander Mitchell, SAC Capital Management.

I have two questions. Can you talk about the private label and in the office product market, how that impacts you in terms of trends and mix?

Sure can Private label is an issue that we have been dealing with for quite awhile in the office products market. It has had greater emphasis over the last couple of years from the retail side of the super stores. If you went back a few years ago, we talked about 5 to 10 percent of volume being from private label. Today it 's 10 or 15%. Some of the super stores target a higher rate than that. We still anticipate $5 or $10m a year for the next couple of years, migrating from our branded product to private label product. It's a fact that we have been living with and we deal with, and it is going to continue here for awhile. But we don't anticipate much of a change in that overall rate. At some point we anticipate it will stabilize. Private label tends to get up in the 20s from studies we've seen. A good part of that market is there today. We do think at least in some of the super stores, one or two in particular, there's still some room for private label growth over the next couple of years.

And I missed your guidance in terms of raw materials and whether it was impacting you, whether it will impact you and whether there was any impact in I guess the new guidance.

The short version, which I did cover, is that we are seeing some increases but through productivity, purchasing programs and some price increases. We are compensating for the impact on our margins.

Okay. You are seeing something, but obviously it's not that important?

Well, it's important, but we are dealing with it.

Okay. Thank you.

Our next question Jeff Cianci, UBS Warburg.

Thanks. First, corporate expense is a bit high. Is that normal? Does that have integration costs at one time in there?

Well, there are some integration costs out in the divisions. We have had some corporate expense increase because of acquisitions just the fact that we are a larger company, things like audit staff have increased incrementally. But most of the corporate expense increase you are seeing is driven by pension and medical costs, other employee benefit types of costs.

Some from growth initiatives, other insurance programs. There 's a variety of things there. Those are the ones that are really driving the sequential increase that you've seen.

Would you run it at 14, 15 a quarter?

I think we will be in that range for the balance of the year.

One more quickly. Have you seen anything in the IT space - printers, labels, software, any activity pickup there?

I'm trying to think of any new trend there. I don't believe so, no.

Okay. Finally, it's a bitterly on the back to school strategy, but you have easy comp with last year. I presume it might start to impact the second quarter. Is there any outlook for this year? You had a weak year ago Is it an easy comp? A heavy spend promotion? What are you looking for this year?

We hope for a normal back to school. We had a couple soft ones now. The consumer confidence numbers I have seen lately look better than what they look looked just before things started heating up in the Middle East. So some reason for confidence. Our order trend mass picked up a bit in the first two or three weeks of April. And it looks like we are getting earlier back to school orders than we did a year or two ago, last year or the year before. Whether that is just early orders that would have come any way or an optimistic trend is hard to say, because it has been only two or three weeks. But the trends looks pretty nice after only a short period of time.

Great, thanks.

We have a follow-up question, Jeffrey Zekauskas, JP Morgan .

Earlier in the call you talked about 3 to 6% price increases in parts of Fasson. When were the price increases issued? And in what geographies ? If I understood it correctly?

Yes, you did. We have announced and implemented increase s in Europe already in the films part of their business. We are in the process of announcing additional increases there. In the U.S. market we are early in the process. And it is limited to the films business, but those announcements are out and in the process of being implemented now.

Other parts of our business include, as I mentioned, our specialty tapes business, our graphics business. Both of those have been impacted on the raw material line and have already implemented some price increases.

Okay, thank you very much .

Due to time constraints, this does conclude today 's conference . Thank you for your participation. You may now disconnect.