艾利丹尼森 (AVY) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Paxar Corporation second-quarter 2005 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Bob Powers, Vice President of Investor Relations for Paxar Corporation. Thank you, Mr. Powers, you may begin, sir.

Thank you. Good morning, and welcome to Paxar second-quarter 2005 conference call. On the line for management will be Rob van der Merwe, President and Chief Executive Officers and Tony Colatrella, Chief Financial Officer.

This morning before the market opened, Paxar reported second-quarter 2005 results. Management will now provide additional commentary on those results, as well as a look to the future. At the conclusion of that commentary, any questions you have may be addressed to management.

Please be advised that certain statements about the future outlook related to Paxar Corporation involve a number of factors affecting the Company's businesses and operations that could cause actual future results to differ materially from those contemplated by forward-looking statements.

Those factors include general economic condition, the performance of the Company's operations within it's prevailing business markets around the world, as well as, other factors set forth in Paxar's 2004 annual report on Form 10-K. For further explanation participants are asked to refer to the final paragraph Paxar's earnings release.

Rob van der Merwe will now begin our management presentation. Rob.

Thanks, Bob, and good morning, everyone. I am very pleased to be talking with you this morning, since this is my first Paxar conference call as host since join as CEO in late April. As I mentioned to you very briefly during last quarter's conference call, my first priority was to get my hands on the wheel, to understand the dynamics affecting our business, and then to development my thinking around the longer-term strategic agenda.

During the quarter, I visited all of our facilities in North America, both manufacturing plants and regional offices. I met with the teams. I met with many of our top customers face-to-face. I have also visited a number of our key suppliers, and of course, I have spent time with both my buy and sell-side analysts.

Last week I returned from an extended trip to Asia, Europe, and the U.K. doing largely the same things. Now my initial impressions prior to joining Paxar as you know, included it having significant growth potential. My recent travels have confirmed this. And there is no doubt in my mind now that Paxar has what it takes to win. We have a truly global presence and a remarkable ability to innovate. Not just in terms of products, but in all aspects that help our customer drive growth and reduce costs.

I will be providing you with more color around the medium term and longer term strategy development process and timelines at later date, once I have met with our board, and once I have had a chance to work the details through with my leadership team.

Turning to the quarter's results, let me say that after a disappointing first-quarter performance, we were very pleased with the turn around in sales and profits for the second quarter. This seasonally strong quarter, we realize sequential top line growth of 15%, and more than a 2.5 fold increase in EPS growth.

Compared to an exceptional strong second quarter last year, we matched both sales and earnings per share. As expected, the second quarter 2005 generated an operating margin of 10.9%, excluding restructuring and other charges.

I would now like to refer, briefly, to market conditions in each of our major businesses and geographies.

First North America. As you know, the retailing environment for consumers in North America was positive this past quarter. However, for apparel suppliers, we continued to see growth in lower-priced imports from Asia, and we continued to see retailer consolidations both placing some pressure on margins.

However, our market share in apparel, we believe, remains stable despite the migration trends. I think the team has done extremely well to manage those dynamics associated with migration, so I expect margins will continue to hold up due to the constant innovation and consistent and continuing cost mitigation programs that we have underway.

Sales of our Snap printer continued successfully in the quarter, and results also benefited from the continued rollout of innovative solutions to help our customers manage variable data around the world.

We have in the past also spoken about the growing opportunity for Paxar with a sewn in EAS solution. We have seen more activity this quarter from our customers who -- who are evaluating this application and some customers who are actually going forward with implementation. And that's very encouraging.

Turning to Europe, Middle East, and Africa. As you may remember, we talked about the softness in the European markets in the first quarter, particularly in March. We did experience a 5% sales increase sequentially this quarter, however, we were down quarter-on-quarter versus 2004. Weakness in these markets is not specific to Paxar, as you know, nor is the migration issue a new phenomenon.

To address the continuing softness in Europe, we announced in the first quarter that we had initiated a review of initiatives that would lower costs and improve margins in that region. And as you have seen from our press release, we will continue to consolidate and reduce head count in 2005. And Tony will talk some more about those initiatives later in the call.

During the quarter, we acquired the remaining 50% of our joint venture in Bangalore, India. We believe the growth opportunities in India are substantial. This acquisition continues the strategy to strength Paxars position in the worlds fastest growing apparel markets.

Regarding Asia-Pacific, once again, sales in this region were up double-digits despite tough competition. We continue to expand our infrastructure there. We continue to add head count and invest in product development.

Further, we are also simplifying and standardizing our IT systems around the world and, in particular, in Hong Kong and China, to reduce costs and improve productivity with the introduction Orocal (ph).

I have mentioned before, we have -- we have and we continue to be very active with RFID for implementations for carton and pallet labeling and for apparel tagging. We continue to believe that RFID provides an immense opportunity for Paxar. Our customers continue to successfully test RFID solutions and mark expenses rollout at the item level remains on track.

We continue to be pleased with the strength of our balance sheet and during the quarter we were able to improve our cash position. As you know our strategy for the use of cash remains unchanged, and we will seek out strategic accretive acquisitions. That strategy, again, remains unchanged.

Finally, it should be noted that Paxar completed the searches for and appointed a Chief Executive Officer, a Chief Financial Officer and a Controller in the quarter. This was a major achievement. Tony Colatrella's excellent track record with the Scotts Company and United Technologies boasts well for a fast start-up and contributions to results. Tony is more than qualified to take over as the CFO, and we are very pleased to have him on the team. Rich Maue was also appointed as Controller in the quarter, and he too has an excellent track record, including experience with Protivti (ph).

So the executive team is in place now. It has excellent chemistry, and it is already starting to positively influence results and shape plans for 2006 and beyond.

So in conclusion, I'd like to make three points. We recovered in the quarter, and we met expectations. We are quickly right sizing our organization as the need arises, and finally, we significantly strengthened the management team, as we promised we would. Now I'd like to hand over to Tony to take you through the financial results.

Thank you, Rob, and good morning, everyone. It's an exciting time at Paxar. I'm certainly excited to be here and look forward to also getting my hands on the wheel, and helping you, Rob, and the rest of the executive team drive substantial earnings growth, and help development a long-term strategic vision for the business.

Let's begin today discussing by discussing reviewing the income statement. Sales were $215 million in the second quarter. Essentially unchanged from the second quarter. A robust second quarter of 2004. Organic sales declined 2 %, offset by a 1% increase resulting from acquisitions and the 1% favorable impact coming from foreign exchange.

We continued to experience soft demand in the European markets, as well as, the migration of apparel manufacturing to the Asia-Pacific region, which did translate into healthy second-quarter growth in our Asia-Pacific markets.

Specifically our Asia-Pacific region grew 11% in the quarter, also up more than 40% sequentially, offsetting a 6% decline in the America's region, and a 2% decline in our you European region.

First margin was 39.1% in the second quarter of 2005, essentially comparable to prior year gross margin of 39.3%. Notably, we saw a 140-basis point sequential improvement in the quarter, primarily attributable to increased absorption of fixed factory overhead costs, particularly in the Asia-Pacific region.

SG&A expenses of 60.4 million in the quarter were 28.2% of sales, essentially unchanged from $60.7 million or 28.4% of sales a year ago. As we continue to execute on our restructuring initatives, we expected to realize corresponding cost reductions and SG&A and, of course, in manufacturing expenses as well. In connection with the closing of our Hillsville, Virginia plant ,which was initiated in the first quarter of 2005, we recorded restructuring charges of approximately $0.5 million in the second quarter.

In addition, as many of you know, in April 2005, we announced that we were going to look at a series of initiatives to improve margins and lower cost in our Eastern -- in our Europe, Middle East, and Africa region in light of recent sales declines in Europe, primarily due to softness of the economy within that region. We recorded restructuring charges of approximately $1.3 million in the second quarter of 2005, related to these European initiatives for which only a nominal tax benefit was derived due to accumulated net operating losses in some of the affected countries.

Total restructuring impacts for the second quarter was $1.7 million, net of approximately $100,000 tax benefit, which was equivalent to $0.04 per share. For the remainder of the year, we expect additional restructuring charges related to the Hillsville and Europe initiatives of 3.5 to $4.5 million with annualized savings by beginning of 2006, approximating $6 million.

Our operating income in the quarter was $21.6 million or 10% of sales, including restructuring and other charges. Without these items, 2005 operating income was $23.4 million or 10.9% of sales.

In the second quarter of 2004, there were no restructuring charges, and operating income was $23.3 million or 10.9% of sales. Net income in the second quarter was $16.1 million or $0.39 per share on a pro forma basis, which, of course, would exclude the impact of restructuring other charges, compared with $15.8 million or, again, $0.39 per share in the second quarter of 2004.

In the quarter, we provided income taxes at an rate of 25%. However, excluding the impact of restructuring initiatives the effective tax rates were at 23.4% and 23.2% for the three, and six-month periods respectively.

Turning to guidance, for the third-quarter of 2005 we are estimating that sales will be in the range of 198 to $203 million with earnings per share in the range of 0.23 to $0.26. For the full year of 2005, we project earnings per share in the range $1.06 to $1.12 on sales of 807 to $817 million.

As a reminder, our 2005 outlook is on a pro forma basis and as such, excludes the impact of the closing of our Hillsville, Virginia plant, and the earlier mentioned European cost-reduction initiatives. These actions are projected to impact the third quarter in the range of 5 to $0.06 per share, and 15 to $0.17 per share from a cost perspective for the year.

Turning our attention to the balance sheet, we finished the quarter with approximately $104 million of cash and cash equivalent, up from $92 million as of December 31, 2004. The increase is primarily attributable to the $28 million of cash generated from operations, plus about $12 million of proceeds from the exercise of employee stock options, partially offset by $15 million of capital expenditures, $3 million that was expended for the EMCO label acquisition, and 10 million in cash utilized to acquire the remaining 50% of our Indian joint venture, which Rob referred to earlier .

Consistent with the last quarter, there were no borrowings under our resolving credit facility since its complete pay-down in the first quarter of 2004. Long-term debt remained constant at $163 million. Our ratio of total-debt to total-capital actually improved in the quarter from 27.5% at the beginning of the year, to 26.9% at the end of the quarter. And compares very favorably to 29.5% as of June, 2004.

Focusing now on cash flow. As I mentioned, cash provided from operations was 28 million in the first six months of 2005, versus 42 million for the comparable 2004 period. The decrease of 14 million really resulted from three specific items . One, lower earnings in 2005, obviously, due to the weakness we experienced in the first quarter performance. Two, higher annual bonus and incentive payments, which as many of you may know, are paid out typically in the first quarter of the year, but really relate to prior years performance. And three, higher payments related to our -- the stepped-up restructuring activities which we've discussed.

Depreciation and amortization was $8.1 million in the quarter, versus 7.5 million in the same period last year. Our capital expenditures were $6.9 million in the quarter, versus $6.8 million in the same period again a year ago.

For the full year, we project capital expenditures to be in the range of $35 million and depreciation and amortization expenses should be approximately $32 million. Rob, that concludes my prepared remarks on the second-quarter financial results.

Thank you Tony. We will no open up the call to any questions you may have.

Thank you, sir. Ladies and gentlemen, we will now be conducting a question and answer session. [Operator Instructions] Our first question is coming from Eric Audio (ph) of Sun Trust Robinson Humphrey. Please state your question, sir.

Good morning, couple of questions for you. On the guidance you are going forward, it looks like it is pretty much flattish year-over-year in the second half of the year, can you talk about the break out on that, and when we should see the improvements in the cost of the restructuring program going on?

This is Tony Colatrella. I'll take a stab at that, Eric. I think it's safe to say that we're trying to give you a picture for though year that we feel comfortable with. Clearly, we don't want to over commit. These numbers are intended to be numbers we feel are in the range of -- of achievement.

As far as the -- your question specifically about the cost savings, it is fair to say some of the cost savings, I would say roughly half, should be realized on a run-rate basis within the third and fourth quarter. And as we mentioned, we're expecting about $6 million of annualized savings, effectively for the fiscal year 2006.

And turning to the India buyout. How scalable is that business. Is that something you can grow with the size of the market? Are there other acquisitions in the area?

Eric, this is Rob. The -- the Indian export market is growing very quickly. We have had a limited exposure in India.

We think that there's tremendous prospect for growing, not only locally, but in terms of participating in the export markets, and I'll provide you with more color with that later in the year.

But for the question. Yes, there's tremendous opportunity for us to expand well beyond where we are currently performing.

All right. Then turning to RFID, I know you touched on Monarch, and there's been articles about other certain jeans manufacturers, and that sort of thing. Anything other things you can talk about as far as RFID potential results -- that kind of line?

I think that is pretty much in line with what we previously discussed. The various customers we discussed that are testing RFID solutions at the item level are those that are known, and we'll have to wait for them to make announcements, I think before we -- we could go forward and detail exactly who they are.

All right. Then regarding new products, such as the sew in EAS product, how far along is that in the ramp up, as far as customer acceptance.

Well, I think again, if you look at some of the announcements that were made this week. It's ramping up very quickly. It's difficult to tell exactly where we on the curve. I would certainly say we're on the front end.

And the Snap Printer?

Snap printer has been very successful for us here in North America and in particular, in Europe. We're not going to disclose the exact numbers, but as you know that helps our customers manage variable data through implants and bureau solutions. Those are very attractive solutions, particularly with the challenges our customers are facing with regard to migration. So the trend that Paxar saw last year and so far this year continues and we're very pleased with it.

We -- we talked to you before about Vantage Point, which is a solution we -- we offer to help customer manage their variable data around the world, which again, as you know, with the fracturnating supply network is a challenge. Paxar offers a very attractive solution there, and our customers are recognizing that.

Thanks very much.

Thank you. Our next question is coming from Mr. Rob Labick of CJS Securities. Please state your question.

Good morning and congratulations to Tony on his new position.

Thank you very much.

First question. You certainly had good SG&A control. I think it was first time since '01 when you had year-over-year decline in dollar sales. Did this level around 60 million, is this a sustainable level? Or was there anything unusual in this quarter? Where should we expect SG&A going forward?

Just talking to sales and we can refer back to SG&A, Bob. This is Rob. The quarter was a good seasonal quarter and typically, if you look back at 2004, you'll see our SG&A drops when volume is good. Clearly, the Company's infrastructure responds well to increased sales.

So we'll talk about that and how we intend driving sales more so than where the category growth is at later in the year. But I would expect in the second half, we would probably drop back largely to where we were at the back end of 2004.

So you're going to see numbers in the region of -- around -- 20 -- you know, the high 20's in -- in the second quarter and that will drop back to around 30% the back end of the year, if you do the arithmetic.

So 30% on average for the back half of this year?

Correct. Which is typically where we were in 2004.

Right, that's exactly where you were at for '04. If that's the case it would imply -- with your guidance, I think it would imply gross profit would be down a little bit, to your guidance, and also it was down 20-basis points year-over-year. Anyway, what is the pressure on gross profit? Is it pricing or is it raw materials, and what is causing that and what is causing that in our guidance going forward?

Again -- again that's a good question. There's nothing new in terms of pressure on the top line. We're seeing for apparel manufacturers, as retailers continue to consolidate and as migration continues to occur, more and more players at the contract level, of course, are offering capacity and customers are exploiting that. So again, that's not a new dynamic .That's one source of pressure.

I think to the other point you made, the recovery in the second-half of this year, to some extent, is where we're seeing the benefits of the restructuring starting to kick in. So we'll -- we'll be able to hold our position, despite the slight weakness or -- or pressure on the -- on the top line.

Yeah, but I think to be clear, the -- we're not forecasting a dramatic decrease in -- versus the comps of a year ago in -- in gross margin, you know, we should be within 10 or 20-basis points of where we were a year ago. And perhaps a little bit better, depending on customer restructuring issues.

Yeah, and I think Bob, I think we're been able to demonstrate we have done a good job, despite the migration and some very uncertain market conditions. Paxar has done an excellent job in holding on to that margin.

We do that through bringing new products and innovative ideas to market and controlling our expenses in a very disciplined way, and we'll continue to do that going forward.

Great. We look forward to additional details when you have them, and to seeing you at our conference. Thanks.

Thank, Bob.

Our next question is coming from Mr. Chris Kapsch of Black Diamond Research. Please state your question, sir.

Yes, hi. I just had a follow-up on the softness in Europe in the quarter. I was just curious if most of it is related to this migration issue, or are we also seeing residual effects from disruption caused by the Chinese quota in tariff scenario that played out earlier in the year or was it economic malice in Europe, or is it just a combination of all of the above?

Yes,Chris, in the second quarter as compared to the first, really the dynamics with respect to migration has not changed. If anything, there may have been a little acceleration but nothing outside of what we expected. You are largely seeing economic factors at work.

Your are seeing the U.K. retail scene now, following parts of the rest of Europe. And I don't think -- you know, the dynamics in terms of the the retailer consolidation and the advent of private labels putting pressure on the brands. Again, that's no change from previous periods.

Okay. And just -- more broadly speaking, Rob, as you spent the first roughly 100 days with the Company, getting your arms around the Company, and its global footprinting, and the landscaping, I'm jury curious what -- what surprises you have seen either positive or negative, your know, in contrast to our original due diligence and impressions with the Company.

Chris, as I said at the beginning of the call, there's tremendous opportunity at Paxar. I'll be sharing -- to grow and to improve results -- I'll be sharing my views with the board next week, and based on the board's reaction, I plan to be spending time having discussion, and deciding on how to deal at least with opportunities in the short-term with my management team. At which point, probably in the month of September, I'll will give you -- I will be able to provide you with some indication of the direction.

Bear in mind, what I said at the very beginning, is there would be a two-phrased approach here. One, how are we going to deal with the (inaudible) term, and in particular, what are the directions for 2006?

And then secondly, we need a little more time -- I'm going to need a little more time with the board and with the management team to develop and to articulate strategy for the enterprise going out five to ten years. Now, you'll see that in 2006.

Okay. We look forward to that. Finally, a specific follow-up on RFID at recent investor conferences, the Company mentioned an expectation for us, I do revenues for both carton, as well as item level in the range of 8 to 10 million. Do you feel like that's still achievable, and is it right to assume there's no item level RFID in the second quarter results in terms of revenues?

Very little in the second quarter. I think what we said in the past was that would kick in in the third and fourth and in particular with market expenses rolling into their various seasons. We would see that in the second quarter not -- not in the second quarter -- we're broadly on plan -- I mean the numbers move around, it's very very difficult to call a number. I think Mark and Spencers is reviewing this situation and deciding how to go forward and our results are going to be very much dependent on what triggers they call and when.

Again, I was with Mark and Spencers at the board level meeting with them last week. As you know Mr. Wilson, who headed up logistics there, and is a key player in the whole RFID initiative is leaving Marks and Spencers. So it was important for me to understand from him, you know where they stood on -- on the RFID business case, and it was a very positive meeting.

So again, I think calling numbers out as we go into months or -- or quarters specifically, we will miss the point that this is a big idea and we probably should be looking to the overall opportunity as opposed to, you know, just couple of short-term numbers here. So the long and short of what I'm saying is that I'm kind of reluctant to quote the numbers. It's on plan. If anything, it's probably a little short of the number that you got earlier. But It's not far off.

Okay. Fair enough. Thank you very much.

Thank you. Our next question is coming from Ajit Pai of Thomas Weisel Partners. Please state your question.

Good morning, gentlemen, and congratulations on getting the team together.

Thanks Ajit.

A couple of questions. The first one would be about the ES opportunity in products that you talked about. Could you just give us some color as to whether you are working with one of these major vendors of that in terms of the system? And, you know, a little more about what the time line of that actually ramping fee would be?

As yet -- yes, we are working with some very big customers. They have been in the press recently. The time line is that it's already kicked in, and it's simply going to ramp up with -- with those customers that -- that are in the public domain with -- with their activities. As I said earlier, there are more and more coming on board. I think we're at the front end of what could be, you know, a very exciting trend.

Right, but what -- is it a sort of -- when you are looking at the venders that you are working with, how much of it is internal development? How much of it is working with partners?

In terms of the technology?

Yes.

Well, I think we -- we're working with two suppliers to -- to bring in the technology. And that hasn't changed.

Okay. The next question would be just looking at the European business. Especially, in terms of, you know, the system side of things and source tagging, could you give us some color as to whether you think your labeling services business over there is sort of relatively stable in terms of market share? I think in North America, you mentioned you have stable market share. One of the compares this morning talked about the business growing about 44% in -- in Europe. So I just wanted to get some color there.

Which business are you referring to? Did you say labeling in Europe?

Right, labeling.

When you say labeling are you talking about pricing?

Yes.

Okay. Pricing -- the -- our pricing solutions business in Europe is relatively under traded to the total market opportunity. And so that's something that I -- I would like to get back to later in the year and certainly when you look at the longer-term strategy of the Company, and -- and give you more color on that. It's a relatively small business for us in Europe.

And when you do -- when -- actually when -- not the pricing in terms of the labeling of any pricing over there, but more in terms of the service (inaudible) labeling?

Well, the -- the -- the service business in a number of countries is developing very positively, and as there is migration to the eastern geography, of course, those opportunities open up. I'm not sure if I'm tracking what the question is I don't think I'm answering your question, am I?

No, it doesn't seem like it. The business that you would be competing directly with Dennison and the Paxar, and the check point systems?

Are you talking about our price marking business? Is that what you are referring to?

The source tagging business.

But moving on to the next question, maybe I can address this later and more detail later, but looking in terms of geography, and what you are seeing in terms of shift, just because of the global photo system lifting, could you give us some idea of you know, what kind of dislocation or the expectation that have changed from the beginning of the quarter, looking at what business you expected from China and what actually came through in the quarter? And going forward, are there any further shifts there?

No, it came through very much as expected in the quarter, but as you know, the apparel import is moving to the second half of the year, we faced -- or they faced new and pretty uncertain restrictions. Although, quotas have been lifted, there's not talk of additional safeguards being brought. Are you familiar with though details or - ?

Could you --

For example, and again, just quoting some of the media that's been published recently. In order to protect the remaining U.S. textile firms, which primarily sell to regions that compete with China, such as Central America and Mexico, the Bush administration applied safeguard quotas in May, which was during the quarter to seven categories of goods -- seven categories of imports.

The safeguards which China agreed to when it joined the WTO in 2001, restricted the goods to 7.5% growth and those are renewable annually through 2008. So in short -- in the short absence of quotas, if you will, since the beginning of the year, the market forces reshaped the sorting scene quite dramatically. With the U.S. imports or apparels and textiles from China growing by something like 45%, and again, it depends on who you -- what quote you are using. So faced with a dramatic growth like that, the various groups have petitioned the U.S. government to implement safeguards.

I guess the long and sort of it, is we don't really know yet whether additional quotas are going to be brought to bare in the second half of 2005. Some of those categories of apparel have already met their quotas, and there's been a mad rush on the part of some of the contractors, and -- and the brands and the retailers to fill those orders very quickly.

Some -- some of those products, if you will, are still sitting at the border, we understand, and will -- will affect some retailers. Now I couldn't tell you where that sits.

I'm also aware that in Europe, the European union also moved to a safeguard, but didn't quite get there. Instead, they reached a deal with China, keeping the annual growth to -- in 10 categories to the range of 8 to 12.5%. There were products that contracted to ship in to try to get ahead of some of those deadlines. And that is in the media right now as to how exactly how that's going to play out.

The bottom line here is that the first half saw a tremendous shift in the supply network for the contractors and for the people playing in the industry, and I think everyone has dealt with that adequately. Some uncertainties still remains, though, as the various governments jockey for position going into the second-half of 2005.

Now the point that I think should be made about Paxar, is that we're one of a very few Companies that are extremely well-positioned right across the globe to take that business no matter where the retailers or the brands source from.

So again, I think there's going to be some reluctance to place all eggs in the China basket. Paxar is very well-positioned to pick that business up no matter where it falls in the second-half of 2005 and on-ward. So it has affected the industry but I think played well to our position.

Okay. Thank you.

Thank you. Our next question is coming from Debra Fiakas of Crystal Equity Research. Please state your question.

Thank you. Could we move on then to the restructuring costs? And I wonder if you would give us a bit of an update with the progress that you have made with -- do you think facility as well as Europe -- do you think you'll be substantially completed with that work by the end of the year?

Yeah, Debra, let me just quickly jump in on the Hillsville part and then I'll hand it over to Tony for the numbers with more color on Europe. Hillsville -- the production was moved -- it was moved very successfully. There was some remaining service level -- service activities taking place -- pardon me?

And production scheduling.

And scheduling that will be complete by the end of the fourth quarter. So that is on track with the original plan as -- as we communicated. I'll turn to Tony for more color on Europe.

Before I move to Europe, I will also add for Hillsville. It is on track and on budget as well. Relative to our cost estimates and the expected savings. So that's good news.

Regarding Europe, we have a couple of significant initiatives going on involving the U.K. and then we have also some restructuring occuring in really downsizing some -- some staff function and activities in Germany and France. The plans are on track as well. They are being well monitored.

The costs -- we have given you what we think will be the balance of the year cost. You can expect when you put the two initiatives -- the European initiatives together with the Hillsville initiative that we are going to realize in the back half of this year -- about half of what we would expect starting in the beginning of 2006, and we have said at that point, we should save about $6 million a year. So essentially, you could assume that's about a $1.5 million run rate per quarter. We could be realizing, somewhere around half of that, over the last two quarters of this year. Obviously, we have seen some (Indiscernible)

Very good. And in your release, you mentioned that you'll be incurring another 3.5 to 4.5 million in charges for those two efforts. Is it possible that there might be additional costs that bleed over into 2006?

Debra, I tell you, we continue -- as I said earlier, the whole migration following the lifting of quotas in the industry is not complete. We -- we have to continually look at that in terms of capacity management.

We continue to look to improve productivity and provide better service for our customers, as the customers move around, so we move around, so we can provide prompt and reliable service. So it's an ongoing process, at this point. We couldn't give you any more information on it.

As it relates to these specific initiatives, we are expecting they will be completed by the end of the year. We're comfortable on track, that the costs are being reflected, and forecasted properly and we can get our hands around the savings.

And you expect most of the accounting for those costs -- the expenses that are associated with the restructurings to occur yet in 2005?

Absolutely.

Okay. Good. Part of your planning effort you mentioned earlier, your more long-term strategic effort, is part of that to perhaps evaluate and determine whether or not your facility positioning, I think you mentioned this is an answer to another question just a few moments ago -- that you feel you are well positioned based on the location of your facilities to tap into the sourcing, wherever that ultimately ends? Are you satisfied that -- you know, you have facilities in all of the right places? Or do you feel like you need to do more planning in that regard?

Again, you -- you correctly pointed out, Debra, that I will provide more detail on that later in the year. I will tell you with the lifting of quotas, competition has intensified, a lot more competition from Asia-Pacific now. Competition is faster, and is offering great services. Paxar will continue to address that going forward.

So it's not just a question of price, it's a question of time sensitivity, and it's a question of reliability and quality. So as we drive to provide, in a world class capability in all of those areas, there may be an impact. That's something that we don't have site of yet, and we'll certainly provide you with more information later in the year, and to the extent it's a much longer term initiative, that's will be information I'll provide you in 2006.

Obviously, as you look at the initiatives, in addition to the service and quality issue, that of course, come first, we're also taking a very -- very close look at the payback and the opportunity -- you know, to save some money. So all of these programs have to stand on their owns as -- as cost justified and with strong payback's.

Right. And then just one last question regarding the tax rate. It seemed to click up just slightly in the quarter. What would be your guidance for the balance of this year and then on into 2006?

As I mentioned, the tax rate on a quarter basis, came in at 25% and that was driven by specific restructuring initiatives in a couple of geographies, where, quite frankly, we have net operating losses and we, therefore, did we take a tax benefit related to those restructuring charges.

If you strip that out the tax rate in the quarter remain in the low 23% range. Essentially in line with where we have been in the past. If there's any change at all, it's really a function of where the earnings are coming from. The geographic mix of earnings, and I not expect a significant change vis-a-vis of what you saw in the second quarter.

Thank you.

Our next question is coming from Mr. Rob Health of RMI. Please state your question, sir.

Good morning. Was it a 6% decrease in the Americas, is that correct?

The -- that's correct.

And of that -- you know, if you would break that down, the 6%, how much would you say I guess is migration to Asia-Pacific? How much would you say is related to whether you think it could be potentially economic or maybe price mix things like that? Is it all -- it is all migration?

Let me break it down for you a little bit. First of all, in the quarter we did consolidate an acquisition, although, a fairly small one. So when you peel that out, that's actually -- and then a small impact from foreign exchange, that's worth about 2%. in terms of growth. That has helped us by about 2%. So on an organic basis, we're down about 8%, and I think that it's safe to say, although, you know, two weeks on the job, I am probably not the expert here, but, it's safe to say that that business migrated to -- as part of our global migration strategy, and our customers are asking of us that business migrates to the Asia-Pacific rim.

Once you are qualified with that customer do you automatically -- maybe you could explain how -- how easy it is to pick up that business in your form-based operations, whether it's China or --

Rob, this is Rob. We -- clearly that's the strategy once we have been qualified to pick up the business on the other side, and I think we're very well positioned to do that because of our geographic footprint, and because of the work and the penetration we have with Vantage Point, which is a very secure method that our customers can use to ensure there's no diverting and very little counterfeiting. As the contract is complete the garment and ship it back in. They can keep back as an order trail, if you will, of what has been produced to the original order. So I think we have held on to our market share very well.

Could we do better? Yes, we could, and the reason is because there's an opportunity to pick up competitive business where they don't exist geographically. So migration -- we did see some acceleration of migration in the second quarter. But not -- not out of line with our expectations.

The competitiveness amongst the retailers has been well documented. As you know, there's consolidations taking place. The brands are competing with private labels now. So more and more, they are buying smartly and they are opening up to more bidding. And you are seeing some of that but again, that's not new. We expect that to continue and that's reflected in our numbers going forward.

And what are the -- what would be the breakdown -- you know, America's, Europe, Middle East, Africa and Asia at this point? Has that changed dramatically in terms of how much business you doing in each geography?.

We have got the numbers here. I don't think it's changed dramatically.

There's clearly a migration trend and a path that we're on. Remember that the -- the large global customers are originating the sales in Europe and in North America, which is where most of the apparel is consumed the world today. So where the supply network actually executes the manufacturer of the garment is -- is another story. And that moves around quite a bit. But we look at our business in a number of different ways.

Just as a point of information, Rob, in the second quarter we had a historic high for our Asia-Pacific region, with respect to sales, and clearly Asia -- Asia Pacific has been growing very robustly for us over a good many quarters, and we look to that to be -- realizing the most significant growth out of any of our regions.

Is it 30% of the mix now?

About 30%.

30%.

And obviously that number we would expect would grow further.

Sure.

The other point that Rob made, I would like to clarify -- is that for any business sourced out of the U.S., if it's produced in one of our factories over in the Asia-Pacific region, we're reflecting in our segment result the sales from that business in the Asia-Pacific region, but obviously, is still supporting the very important U.S. apparel business back in the states.

Got it.

Okay.

Lastly, if you talk about the CapEx number for the year -- maybe I'm trying to get out a question that was asked earlier, but the CapEx number for the year was $35 million.

Yes.

Can you break down where those dollars go to in terms of America's, Europe, Middle East, Africa and then Asia? Is it a third a third a third or --

No. It's not at all. The investment is certainly much more heavily weighted than the Asian-Pacific rim. It's less than that, but it's certainly significant.

Okay.

Okay.

Okay. Thanks a lot.

You're welcome.

Thanks, Rob.

Thanks you. Our next question is coming from Mr. Robert Hoffman of Candlewood Capital. Please state your question, sir.

Good morning and welcome aboard. I have two questions. I'll ask them one at a time. The first one is on your patent litigation with Zebra.. As you know the Paxar -- I mean, the Zebra CEO explicitly talked about the Paxar suit on their earnings call and cited significant legal expenses. So a kind of a two-prong question on that. One, can you give us some color on where the legal expenses have been running for you?

And, you know, it's -- if there's resolution there, what -- what -- what little kick we can get from a reduction in SG&A from -- from that? And I guess more -- more importantly, do you think there's any resolution on the -- on the horizon, as well as, if you can, I guess, quantify, the -- the magnitude of the suit in terms of how many -- how many patents you think are being violated?

Yeah, Rob -- Robert, this is Rob. The -- it's been well published. We published the fact that we were alleging that Zebra had infringed on a number of patents, and that case goes to trial on October the 3rd, in the southern district of Ohio.

I really don't think it's appropriate that we speculate on that. I think the allegations are clear to the extent that our legal costs have been increasing, I'd say, no, not -- not to any material extent that they would show up in a modified SG&A result later, and regarding the resolution, again, I think that we must leave that to the courts to decide.

Great. On another front, back to kind of RFID growth going forward, you have talked about that Marks and Spencer has an order in for -- that will hit in this third quarter that we're in today for their spring line. Can you give us any color as to whether or not you believe that that will be a -- kind of a one-shot test where they test the spring quarter, and then -- and then decide whether to continue?

Or will the -- will the fourth quarter bring orders for the following summer season, et cetera?

The information that I have, Rob, is that they will run multiple seasons, one after the other. So I don't expect it to be a once off test.

I think that my expectation is that once they have done their initial rollout, they will consider expanding from the six categories to many more across the range. So, again, it's -- it's -- it's multiple seasons. We're expecting orders for the subsequent seasons to follow. So --

And are those subsequent seasons kind of in your second half guidance or -- or how would you categorize what role RFID -- what SG&A plays into your rim?

I don't believe the subsequent seasons are in the numbers. They will occur in 2006 -- very late in the year or in 2006.

And, again, it depends on how quickly they scale up to more stores, and more categories as to what 2006 will look like.

And just to follow up on that, is there others that you think are pursuing that kind of test with the same magnitude? Do you think we can expect over the next six-months, let's say, other like prospects?

I -- I don't know that within six-months you'll see any others that I'm aware of to the extent of Marks and Spencers. But I can tell you there is a lot of testing taking place.

There -- there have been public announcements made by a number of companies. One in particular that came out in June, to suggest they were testing very aggressively, and subsequently, very successfully. But we have to leave it to them to announce, I think, to the public, what they are going to do with that.

Great. Thank you.

Thank you. At this time there are no further questions in cue. I would like to turn the floor back over to management for closing statements.

We thank you very much for your interest and participation in today's conference call, and we look forward to speaking with you during the next -- next quarter's conference call. Rob.

Thank you very much. I'm very pleased to have a full team on board. We're excited about the prospects. I think, we are very pleased that we delivered on our commitments in the quarter. We're, again, very excited about the plans that we're working 2006, and I look forward to talking to you in the weeks and months ahead. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.