艾利丹尼森 (AVY) 2005 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Paxar Corporation third-quarter earnings 2005 teleconference. 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, Investor Relations for Paxar Corporation. Thank you sir. You may now begin.

Thank you, Donna. Good morning and welcome to Paxar's third quarter 2005 conference call. On the line from management will be Rob van der Merwe, President and Chief Executive Officer, and Tony Colatrella, Chief Financial Officer. This morning before the market opened, Paxar reported third 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 conditions, the performance of the Company's operations within its 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 of Paxar's earnings release.

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

Thank you, Bob, and good morning, everyone. I would like to thank you all for joining us to review our third-quarter results and provide you with updates on our business operations and strategy. I will spend a few moments recapping the highlights of the quarter and we will then walk you through the announced changes, as well as our strategy for growth. Tony will then discuss our financials in greater detail before opening up the call for questions and answers.

Third-quarter results were broadly in line with our prior guidance and exceeded our record third-quarter sales last year. We experienced continued success in the Asia-Pacific market (technical difficulty) including the previously announced acquisition of our joint venture partner in India. Europe, Middle East and Africa results improved for the second consecutive quarter despite (indiscernible) economic conditions. We expect results within the region to continue to improve over time as we make changes to build customer relationships and streamline operations.

Bar Code and Pricing Solution systems business continued to grow at or ahead of the category and new products were successfully launched during the quarter. In addition, cash generation remained healthy in that business.

U.S. apparel market consumption remains largely unchanged, while imports from China continued unabated. And it is very clear from recent press reports that there is still no agreement between the U.S. and Chinese governments regarding safeguard quotas. Now, this as you know continues to create a level of uncertainty and is driving customer buying behavior to shortened order leadtimes and to spread their sourcing choices to a broader set of geographies in order to offset risk. Now, to some extent, this plays to Paxar's strength of having a broad global footprint, but it is important context for some of the changes that we announced today.

I would like to take a step back and provide you with more information for some of the changes we announced and the direction we will take going forward. Let me state that the primary goal is to drive long-term shareholder value. We have a great heritage of innovation and have built very strong market positions organically and through strategic acquisitions, focusing on building customer relationships and being responsive to customer needs worldwide.

After six months in this position, and in reviewing our top-line performance of the recent past, there is no doubt in my mind that Paxar has an opportunity to grow. Our initial goal is to swiftly grow Paxar into a $1 billion company, one that can consistently deliver operating margins in excess of our current goal or recently stated goals of 10%.

Now, we're going to achieve this in a number of ways. Firstly, by accelerating our day-to-day responsiveness to customer needs. Secondly, by building customer relationships. Thirdly, by accelerating meaningful innovation into the marketplace. And finally, and most importantly, by making strategic acquisitions.

Now, how quickly are we going to get there will depend on a number of factors, of course. The degree to which we exceed customer expectations, in my view, will largely define our level of success. And that is why we must focus on improving our apparel model now and quickly in order to adapt to some of the changing needs.

The apparel sourcing landscape, as you know, has changed, and that is very well documented. Migration has advanced with an estimated -- and this is according to various sources -- 97% of U.S. apparel consumption now being imported, for example. Global competition has intensified. So, in order for Paxar to continue winning and grow its leading market share, it must make the appropriate changes as well.

Today we announced a program that will significantly improve apparel operating efficiencies and move the remaining U.S. and European capacity closer to the customer. This move is essential in a time-sensitive business such as ours. This is not just cost-cutting, but a very strategic move to make us more competitive across a broad front of activities.

Now, to ensure we execute with excellence, we will employ best practices change and program management, placing the highest priority on ensuring our customer needs are met at all times during the transitions. We are not announcing any site-specific information nor statistics relating to the streamlining changes today. However, further information will be made available to you at the appropriate times.

Further, we have concurrently initiated programs to, firstly, improve our ability to segment and target customers globally, and secondly, to better focus our customer service organizations to provide seamless worldwide coverage. Both of these initiatives will help grow our business and increase market share.

Susan Garin, who recently joined our global leadership team, will lead these initiatives and she brings the necessary experience to Paxar. Susan has had very successful careers in the apparel and consumer product industries. She has global experience as a solid strategic marketing, acquisition and financial set of skills.

Moving on, as I mentioned before, we will continue to invest in expanding our Asian apparel footprint and we will continue to add capacity and additional sales coverage there in 2006. Our Indian business will be rapidly expanded further, and we are entering Thailand and Pakistan to better service our customers and grow in 2006. This is an important consideration for customers who are balancing their sourcing needs given the uncertainty around Chinese safeguard quotas.

Now, innovation is another theme you will constantly hear from us and it is a big part of our growth plan. Paxar is known as an innovator. We develop and market quality products and solutions better than any other company in our space. In order to increase share and drive growth, we must not only leverage our great ideas globally, but must further develop our core innovation capability to enable us to provide a continuous stream of new, value-added solutions to our customers globally. We will have more news on specific launches during 2006.

George Hoffman, who previously led our Americas Apparel Group, was recently appointed to lead innovation, and will quickly turn his attention to seeking out technology partners and acquisitions for our global apparel business.

Now, as for RFID, there has been much speculation about prospects for RFID and how Paxar will capitalize on pallet, case, and item marketing opportunities. Wal-Mart has publicly stated now that it has seen quantifiable success in this area. Following the recently announced price reductions of certain inlays, agreement to next-generation standards, and the removal of patent-related obstacles, we continue to anticipate that the market for RFID products will grow. I will share our plans for this very important opportunity area in the future.

So, in conclusion, we have significantly strengthened our management team and with the right experiences to drive global growth. We have identified near-term opportunities to significantly cut costs, improve efficiency and customer responsiveness, enhancing our competitiveness to grow. We have reallocated key resources to accelerate innovation, and it is clear that we have a very strong balance sheet and the capacity now to make the strategic -- the necessary strategic acquisitions to hit our first milestone of $1 billion in the near-term.

Once again, I am clearly very excited about Paxar's growth prospects going forward. I would now like to turn to Tony to take you through the financials.

Thank you, Rob, and good morning, everyone. For me, it's certainly been an interesting and exciting first three months at Paxar. While there's still considerable work to be done, we've taken significant steps in the quarter to improve the competitive position of our global apparel business.

As Rob mentioned, we've initiated a sweeping plan to rationalize and, ultimately, transition high-volume production from U.S. and European manufacturing sites to more cost-competitive facilities in Latin America and the Asia-Pacific rim, where demand for our products has clearly shifted. I will talk a bit more about the anticipated cost benefits and timing for these initiatives in a few minutes.

We've also spent considerable time discussing and analyzing ways to optimally leverage Paxar's balance sheet by better matching the Company's borrowing capacity with its strong offshore cash flow streams. Concurrently, we have been working with a consortium of banks to establish a new $150 million five-year multicurrency revolving credit facility that will be utilized along with excess foreign cash to complete the repatriation of $110 million of foreign earnings.

As many of you know, the Jobs Creation Act of 2004 -- which, incidentally, expires as of December 31, 2005 -- provides a unique onetime opportunity to repatriate distributable earnings from foreign subsidiaries, generally exempting 85% of the remitted funds from U.S. taxes.

In addition, the Company has disclosed a plan to prepay $150 million of 6.74% senior notes that would otherwise come due on August 11, 2008. The prepayment of these notes will result in pre-tax charges of approximately $9 million, of which approximately 8.5 is cash and about half $500,000 represents non-cash costs related to deferred financing costs from the senior note issuance of seven-plus years ago. And this will generate 4 to $5 million of annual interest savings commencing in 2006. We expect to complete the dividend repatriation program and prepayment of the senior notes once the new credit facility is in place before the end of the year.

Now, let's begin by reviewing the income statement. Sales were $201 million in the third quarter, an increase of 3.3% compared to the third quarter of 2004. Sales increased approximately 1% due to organic growth, with the balance of the growth coming from acquisition revenue, which contributed roughly 2% to the third-quarter sales increase.

We continued to experience soft demand in the European markets, as well as the accelerated migration of global apparel manufacturing from the U.S. to the Asia-Pacific region, which happily reported a healthy second-quarter sales increase of 22%, including 17% from organic growth and 5% due to the impact of our mid-June 2005 acquisition in India. This increase was essentially offset by declining sales within the Americas Apparel Group, while European sales were roughly flat for the quarter compared to the third quarter of 2004.

Gross margin was 36.6% in the third quarter of 2005 versus 38.7% in the third quarter of 2004. While we realized noticeably higher margins in our growing Asia-Pacific region and in our Bar Code and Pricing Solutions business, margins were lower in the Americas Apparel Group, due primarily to under-absorption of fixed factory overhead costs, again, related to the accelerated migration, as well as inventory write-offs and other onetime costs attributable in part to the transfer of manufacturing capacity from our Hillsville facility to our Weston site. In addition, we incurred incremental maintenance spending to improve operational efficiency at our Weston facility. These costs, as well as certain other related onetime expenses, shouldn't -- we believe will not repeat again in the fourth quarter.

SG&A expenses were $58 million in the quarter, or 28.9% of sales, compared to $59.2 million, or 30.5% of sales a year ago. This favorable quarter-to-quarter comparison in SG&A expenses was largely attributable to a combination of stringent expense controls in the U.S. and European businesses, coupled with lower bonus and sales incentive requirements than a year ago. SG&A expenses grew somewhat faster, however, in Asia-Pacific as we continued to make strategic infrastructure investments to support future growth and geographic expansion.

In the quarter, we recorded $1.9 million of restructuring and other charges in connection with the closing of our Hillsville, Virginia plant -- again, that was announced and initiated in the first quarter -- and initiatives that we've already spoken about, more recently in the second quarter, in our European, Middle East and Africa business. There were no restructuring and other charges recorded in the third quarter of 2004.

In addition, as you all know, we disclosed this morning -- in this morning's earnings release that we announced an important strategic initiative to improve operational efficiencies and realign our North American and European manufacturing base closer to our customers. We believe these initiatives, which will be rolled out over the next 12 to 18 months, will lead to ongoing cost savings of 20 to $25 million by 2007, and potentially higher thereafter. We believe we have been appropriately conservative in our assumptions with respect to this program and, obviously, will provide further details as time goes on.

We anticipate onetime cash costs of 25 to $30 million beginning in the fourth quarter of 2005 and that this program will largely be completed by the end of 2006. In addition, we also anticipate certain non-cash charges of 10 to $14 million which we expect will be incurred during the same time period. These charges will include severance, facility consolidation costs, and related asset write-offs, primarily impacting the Company's domestic operations.

As a reminder, we are not announcing any site-specific information or other specific information regarding the cost savings or related expenses by site, but will disclose further details at the appropriate time.

Operating income in the quarter was $13.6 million, or 6.8% of sales, including restructuring and other charges. Excluding these expenses, operating income for the quarter was $15.5 million, or 7.7% of sales. There were no restructuring charges in the third quarter of 2004, and in that quarter, operating income was $15.9 million, or 8.2% of sales.

While we did realize a substantially higher operating margin in the Asia-Pacific region -- 15.3% versus 13.7% for the same quarter the prior year -- this increase was offset by lower gross margins in our Americas Apparel Group as discussed earlier, and we experienced some margin pressure in EMEA during the quarter.

In the quarter we provided income tax at a rate of 64%. This rate reflects -- obviously reflects a onetime charge of $4.4 million pursuant to management's decision to repatriate $110 million of foreign earnings under the provisions of the Jobs Creation Act of 2004, which were previously deemed to be permanently reinvested from low effective tax rate countries. The normalized tax rate for the third quarter of 2005 excluding the impact of the restructuring initiatives and the repatriation program was 23.9%, and this was in line with our guidance.

For the quarter, net interest expenses was $2.2 million compared to 2.6 million for the third quarter of 2004. The net reduction in interest cost is essentially due to the additional interest income we earned in the quarter because of the higher cash balances we had versus the comparable period the prior year.

Turning to the topic of guidance, for the fourth quarter 2005, we are estimating that sales will be in the range of 205 to $210 million, with pro forma earnings per share in the range $0.27 to $0.31. For the full year 2005, we project pro forma earnings per share in the range of $1.04 to $1.08 on sales of 807 to $812 million. As a reminder, our 2005 outlook excludes the impact of the restructuring initiatives, as well as the onetime tax repatriation charge and expenses related to the early prepayment of the 6.74% senior notes, which we expect will be recorded in the fourth quarter.

Now, turning our attention to the balance sheet, we finished the quarter with a record $119 million of cash and cash equivalents, up significantly from $92 million as of December 31, 2004. The increase is primarily attributable to $51 million of cash generated from operations, plus $15 million of proceeds from the exercise of employee stock options, partially offset by 24 million of capital expenditures, $3 million from the EMCO Labels acquisition which we announced earlier in the year, and $10 million in cash utilized to acquire the remaining 50% of our Indian joint venture.

Consistent with the last quarter, there were no borrowings under our revolving credit facility since its complete paydown in the first quarter of 2004. Long-term debt remained constant at 163 million. Our ratio of total debt to total capital improved from 27.5% at the beginning of the year to 26.5% at the end of this quarter, and compares favorably to 28.9% as of September 2004.

Also, it should be noted earlier this month we reentered the market and purchased 343,000 shares of Paxar stock at a cost of approximately $6 million. We still have $22 million under the current authorization remaining and will continue to strategically evaluate further share repurchases, as appropriate, to drive shareholder value.

Now, focusing on cash flow for just a minute, as I mentioned, cash flow provided by operations was $51 million in the first nine months of 2005 versus 66 million for the comparable 2004 period. The decrease of $15 million resulted from -- one, lower operating earnings in 2005, and this was largely due to the week first-quarter which we've already reported; two, higher annual bonus and incentive payments; and lastly, cash restructuring payments this year of $4 million for which we had none in 2004.

Depreciation and amortization was $24 million versus $23 million in the same period last year. Our year-to-date capital expenditures were 24 million versus 25 million in the same period last year. For the full year, we project capital expenditures of 34 to $36 million and depreciation and amortization expense of approximately $32 million, both in line with our prior guidance.

As Rob indicated, we have a very, very strong balance sheet and believe together with the announced repatriation and refinancing plans that we've put in place, that the Company clearly has the resources and financial flexibility to successfully execute an aggressive growth plan.

That concludes my prepared remarks on the third-quarter financial results. Now I'd like to open the call up for questions.

(OPERATOR INSTRUCTIONS). Bob Labick, CJS Securities.

The first question I wanted to ask, obviously (inaudible) but in terms of your savings of 25 -- 20 and 25 million, could you maybe expand upon where we should be seeing that? Will that be in SG&A savings? Will that be gross margin? And also, off what base are you saying you're going to save 20 to 25 million?

Bob, this is Rob. As we said, the majority of those savings are coming from the manufacturing area.

And as a result, basically, you'll see that in the cost of sales, essentially. And primarily it's driven by savings in direct labor costs.

Great. Actually, just stepping back -- Tony, it sounds like you have the numbers. Could you give us just sales and operating profit by your three regions?

I think we (indiscernible) not give you the segment numbers right now.

Okay. So, wait for the Q for that?

We have to.

Next question. In terms of repaying the $150 million of notes, it sounds like you're going to be using your new revolver and that new revolver is about 3% and, therefore, you're getting 5 million in savings. Or could you just walk us how you get that savings?

First of all, we're trying to be as prudent as we can in estimating the savings. But essentially, we are going to take on the revolver -- it's a multicurrency revolver, and we'll be establishing some local borrowings in some of the countries where we currently have large (technical difficulty) earnings. I think you can guess where those might be. You're right; the costs will be lower. But it's also important to mention that some of the savings is (indiscernible) the result of redeploying excess cash we have around the world towards the refunding, if you will, of the notes. And so, the combination of essentially establishing lower costs, more flexible offshore borrowing under the terms of the new revolver, as well as utilizing excess cash, are what's driving the savings that we've anticipated and provided to you in today's release.

So, to be clear, you'll still have 150 million in debt that you will be carrying. You're not using your cash to pay down the debt; you're just getting a cheaper form of debt that's better aligned.

No, that's not quite right. The debt should drop by 50 to $60 million in total, because we're going to redeploy some of the $119 (ph) million of cash we have on the balance sheet for that very purpose. Our total debt balance will drop; you'll see a benefit from that. We'll be more efficiently investing our cash. It will be better aligned -- the borrowings will be better aligned with where we have our cash flow streams globally, and we think it's a win-win.

Why would you decide to repay 6.75 debt with 50 million in cash versus buying back stock? If your debt is 6% or 5% after tax, and your stock -- cost of capital is probably north of 10%, what makes the decision to repay the debt (indiscernible) buying back stock with that money?

First of all, we're not limited as to -- they're not exclusively independent of one another. We can do -- they are exclusively independent of one another. We can do one as well as the other. The balance sheet for the Company is extraordinarily strong. And you can do the math. We generate about $100 million of EBITDA. We're talking about roughly $100 million, give or take, in debt. Going into next year, obviously, we expect to generate cash flow as well next year. So, this is a near-term decision that we think is prudent. Frankly, I think it's fair to say we probably should have taken this initiative to refinance the senior notes sometime ago. But that said, we're going to continue to evaluate share repurchase, as I mentioned. And we'll look at it strategically and we'll look at it in terms of driving shareholder value. We can do both. We don't need to look at this as one versus the other.

Eric Autio, SunTrust Robinson Humphrey.

Talking about what seems like a more aggressive kind of global realignment of your operations, are you going to look more towards acquisitions to develop capacity in the more emerging markets, or is this something where you want to develop these sites internally?

Eric, we will do both as appropriate. What I talked about earlier suggests that we're going to expand internally as quickly as we can. Where we can't do that and where we find acquisitions will help us, we will do that as well.

Turning to RFID, you had a few announcements over the quarter on that. Could you give us a feel for where sales stand for that and where you see that as far as growth, say, over the next two to three quarters, not necessarily a long-term view?

Eric, as we talked about in our last quarterly review, we are a little off the numbers that were published earlier in the year of about 8 to $10 million. That has not changed. So, there's no change in what we said versus last quarter. Going forward by quarter, I don't want to get into that at this point. I certainly will get back to you on our outlook when we release fourth-quarter results, where we anticipate giving you a view -- a better view of 2006.

Turning to new products, the sew-in EAS and SNAP printers -- can you give us an update on how those are going?

SNAP printers continues to do well. EAS, we are continuing to see excellent progress. EAS is one of those areas that I will talk to when we share with you new product introduction activity in 2006.

And just real quick on the numbers for the expense you expect to incur over the next, I guess, five quarters. Can you give us a feel for how those will spread out? Is it more back-loaded, evenly distributed? How does that work?

First of all, the expenses will be spread out over the next, roughly, five quarters that we have identified. With respect to the savings, we expect the savings to pick up in the second quarter of next year and to gain further momentum in the third and fourth quarter. I think broadly, we are thinking that we believe we will save about half of the amount we targeted for '07 and '06. But it will be a bit more in the back-end of the year.

You have some, I guess, projects as far as realignment, I guess, specifically in Europe you'd announced earlier in the year. Are those included in these numbers or is that completely separate?

That's actually separate and in line -- the savings are absolutely in line with what we provided to you in the last quarter's call.

Any thoughts on any holes in management that you're looking to fill as you make these (indiscernible)? You, obviously, had one announcement recently.

I think that for the time being, the management team is the right team to take this company going forward.

Chris Kapsch, Black Diamond Research.

I have a question about the growth in Asia-Pacific, 17% organic growth. I was just wondering if you had a feel for how the market grew in the quarter in that region, and if you feel like you are at least gaining or maintaining share in that area?

Chris, statistics across Asia-Pacific, which is a very substantial region, are difficult to come by. Our estimates are that we're holding our position if not growing in some areas in Asia-Pacific.

Rob, and this might be tough to speak to, but the savings that you have outlined here that you anticipate, is there any way -- do you feel like -- I know it's going to be mostly in the manufacturing area there for cost of goods sold. Do you feel like that will be able to drop to the bottom line, or is this savings that ultimately will end up being at least partially passed along to customers? How do you see that dynamic playing out?

I think the numbers we've shared with you we largely expect to drop to the bottom line. I think we've been relatively conservative in how we expect the transition to occur. And I think the numbers we have shared with you are prudent. So, you can count on those numbers, all things being equal, flowing to the bottom line in the period that we have shared with you.

Just a follow-up on, Tony, your comments about some of the onetime items that affected the gross margin in the quarter. I think you said inventory write-downs and maintenance and facility costs related to the Virginia plant. Are those -- those are separate then the 1.9 million integration and restructuring costs that you called out, correct?

Yes.

Can you give us an order of magnitude what the impact there was in the quarter from those items?

I think you can assume it was -- well, it was not just those items, first of all; there were also some other costs related to specific programs that we have initiated where we had some initial ramp-up costs. But in essence, if you look at it in total, and I think it's safe to say that those costs were in excess of $1 million.

So, a little more than 1 million?

Yes.

So, if you back those out, then the gross margins would have been over in the low 37% range for the quarter?

Roughly (indiscernible)

You said none of that really spills over into the fourth quarter, those costs?

I think it's safe to say we're still going to have some challenges with equity overhead absorption. That's not a new phenomenon for us, though, as the sales migrate out of the U.S. And obviously, we are doing an awful lot here to address specifically the issues of domestic manufacturing. But the costs that I specifically talked about just a minute ago that you asked about should not repeat in the fourth quarter.

Ajit Pai, Thomas Weisel Partners.

A couple of quick questions. The first one would be -- Rob, you mentioned that the sellthrough in the U.S., (indiscernible) sellthrough was actually still quite strong. How do you feel about that going forward? Has your guidance (indiscernible) continued to be robust right through the seasonal strength that your customers see? And what do you think the effect of higher oil prices has been right now, and where do you think high interest rates might impact that over the next six months?

Ajit, let me start with the second part first. Raw material cost increases have been somewhat modest for us up to this point. They could work their way through going into 2006. Having said that, we have some very aggressive cost and purchasing mitigation plans that we have introduced which should largely offset those.

As far as sellthrough is concerned, there is some speculation out there as to exactly how consumers are going to react to pump shock and other factors in the marketplace going through the back-end of this year. I don't think anybody knows. I know that a lot of retailers have talked to additional promotions in order to attract consumers. Apparel consumption as opposed to retail consumption in the U.S. has been largely flat. That was unchanged from quarter three. And we are expecting that to be largely unchanged for assumption purposes in quarter four.

What we don't know at this point is when you look at the quotas that have been agreed or otherwise between the U.S. and Chinese governments, there have been a number of new quota requests. The decision dates for those start running from November through January. So, that could affect how customers place their orders, if you will, between now and the end of the year. I want to be somewhat conservative around that. But other than that, I think that the consumer dynamic probably will be largely unchanged from where it is now going through the end of the year.

Okay. And then, the second one would be about competition. So, are you seeing competitive behavior right now sort of stay the same as it has been? Is it deteriorating? Are you seeing greater pricing pressure, or is it the same?

I think pressure generally continues much as it did in previous quarters. Competition, regional competition is there. It has been there. So, we don't see any major changes. We, certainly, in this last quarter did not see any major changes to that dynamic that were not present in the earlier part of the year, Ajit.

Okay. And then, when you're looking at the international business that you have in terms of relative -- the way for us to gauge what your profitability in the future is going to be, is it better or worse if business increases in China relative to Thailand or India, etcetera?

I think the business is attractive in that region. I think our margins are good. Out growth momentum is good. Our cost structure is good. So, we're excited about it. Because the issue we have to deal with, as we said today, is making sure that we get the balancing right and do that quickly. And we're going to do that decisively. I think what you've seen from us is continued restructuring along the lines of the migration trend up to now. What we wanted to do is give you some visibility over the next year or two as to exactly what that means for the Company. And we have done that. And more importantly, that we have combined that with becoming a lot more competitive day-to-day and more responsive with our customers, which is where we think we can generate growth and start increasing market share.

Rob, when you look at -- right now when you're looking at this whole restructuring program, you also are trying to predict where the business is going to move in these different geographies. So, because of the level of uncertainty and you don't want to lose share, you're probably going to still, once you complete this program, have some overcapacity. Or are you modeling -- the cost structure and streamlining that you're giving us right now includes like what the final configuration is going to be, even though you don't know exactly where that might be in different countries.

Ajit, one of the things that this company is extremely good at is having the flexibility to move -- or have it located in the right areas or move it in order to case it to changing customer needs. And the moves that I outlined for you today -- including going into Pakistan, expanding in India, Thailand, we're also expanding in Bangladesh -- are catering to the needs that our customers currently have. The plan that I shared with you is a near-term plan. I don't think in this industry, unlike others, that you can predict the asset base going out more than three-odd years with any certainty. So, we are planning to remain flexible and we are building that into the way we operate from this point.

David Sachs (ph), Hake (ph) Capital.

I have a series of questions. One, just about -- comment on the $1 billion revenue target and what your timeline is for that percentage you think will come from organic growth versus acquisitions. And then, I think you said you had a target of a 10% or more operating margin. I just wanted to make sure I heard that correctly?

David, you're absolutely right. We are not counting on only acquisitions to make this number up. We think there is a lot of opportunity to increase our market share organically. That is built in. I'm not going to break down those numbers today. But the organic growth portion is material. The 10% is what you heard. That is correct. We have talked of 10% before. The objective now is to exceed that and that is our plan.

And if I were to take the cost savings that you're saying is largely cost of goods-related, that would suggest maybe a 40% gross margin target. Is that the way you're looking at the business?

I don't believe we have broken that down at this time.

In terms of the growth businesses within the portfolio -- aside from looking at it apparel versus bar code, but going back to RFID, EAS, anti-counterfeiting -- could you group those in terms of percentage of revenue day and sort of the embedded growth rates of those businesses, and how you see each of those categories developing? I know you want to save some thunder for next year or next quarter. But is there anything you can do to help us understand those businesses and the trends and optimism or reasons for concern there?

Well, no reasons for concern. It's all optimism. We are excited about it. And you're quite correct; that's what we would like to share with you in 2006. We will do -- we will group them. We will be able to give you some idea of what we see going forward when we come to the market.

Nothing to (multiple speakers) today?

I can't help you today, no. We'll simply tip our hand to the competitors.

Robert Hoffman, Candlewood Capital.

I'm trying to dig a little deeper on this on the cost save that you're projecting. And is it -- if you transition business to the Far East where you are already getting a much better margin, if you -- let's say you had a 10% operating margin in the U.S. and you transfer that business to Asia-Pacific and you get a 13% margin, does that 3 percentage points counts as cost saves in your book or is it coming fro somewhere else?

Robert, I will pass that question on to Tony.

The cost savings itself, first of all, will be -- while we do see a significant opportunity to leverage the differences in labor rates between the U.S. and Europe, for that matter, to the emerging markets, I want to make it clear that not all of this is a movement from the U.S. to the Asia-Pacific Rim; we're also making investments to grow our business in Latin America. We have a significant presence in several countries -- Mexico, Honduras, etcetera. And we see opportunity there.

With respect to the global cost savings, the only thing I would add is that we're trying to be as conservative as we can. We don't want to overpromise and underdeliver. We are still developing the plan and more will follow. So, I guess if you can just be a little bit more patient, we'll be able to provide you with further details within the quarter.

Then a follow-up. You keep talking that these are conservative numbers. You also mentioned that they also should fall to the bottom line; these are not savings that you should have to pass along to -- in price. We're talking a significant bump-up in after-tax earnings per share just from this on a steady-state business. Correct?

Yes.

Chris Kapsch, Black Diamond Research.

Rob, I know you don't want to speak quantitatively about RFID trends and opportunities. But just qualitatively, if you will indulge me for a second. I remember a brief conversation when you first started, I think it was at the board meeting early this summer. You seemed pretty enthusiastic about the RFUD opportunity. So, I'm just wondering if after having rolled your sleeves up a few months that you're equally enthusiastic, and if you feel like that effort is adequately positioned or appropriately positioned to capitalize on the growth in that area?

I am as, if not more, excited today. I think some of the catalysts for change, as we talked earlier, are coming about. I think we are well positioned with our customer base to deliver solutions globally. And that is one of the subjects that I will get back to you on, is exactly how Paxar will position itself to grow in this area going forward. So, at least as excited if not more, Chris.

Fair enough, thanks. Just a follow-up also on the buyback. There has been -- although the authorization has been in place, the activity has been pretty dormant. So, I was surprised to see a little bit of buyback activity in the quarter. Tony, can you just speak to is there a change of philosophy in terms of the financial position, or what really spurred that?

I think it's fair to say we're trying our darnedest to optimize our cost of capital and to look at opportunities to improve return. So, this is just one element of a broad strategic set of initiatives that are designed to improve shareholder value.

So, the buyback activity is going to certainly go above and beyond any creep in the share count?

It really depends on what the uses for that cash are. And at this point what you're hearing us say is that we think growth acquisitions -- expansion -- organic expansion and acquisitions is what we want to do with that money. Now, we have the option, as Tony said, to buy shares back at this point. We are needing to grow very, very quickly.

(OPERATOR INSTRUCTIONS). Ladies and gentlemen, at this time I would like to turn the floor back over to management for any additional or closing comments.

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

Thank you.

Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference.