艾利丹尼森 (AVY) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Paxar Corporation fourth quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host, Mr. Bob Powers, Vice President of Investor Relations for Paxar Corporation.

Thank you, Megan. Good morning and welcome to Paxar's fourth 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 fourth 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'd like to also welcome you to our fourth quarter and year-end results conference call. Today I'll begin by providing a brief overview of our performance, then review the status of our realignment plans with you. Tony will then discuss our financial results in more detail and I'll make some closing remarks regarding our strategy and outlook before opening up the call for questions.

First, let me start by saying that despite 2005 being a challenging year, Paxar made significant progress on a number of important fronts and we are poised to emerge as a much stronger global competitor than ever before. During the year we witnessed migration of apparel production, particularly North America but also including the UK and Western Europe, to lower labor cost countries at a rate faster than in 2003 or 2004 and faster than we had predicted following the lifting of textile and apparel quotas in January of 2005. Notably, we embarked on a major realignment of our apparel capacity and related support infrastructure to better align our strengths with customer needs.

We are seeing encouraging signs that efforts to increase market share and drive organic growth should pay off in 2006 and beyond. We also entered 2006 with a very strong balance sheet, which positions us very well to finance both organic and acquisition growth going forward. Tony will provide you with further details regarding our recently completed refinancing and repatriation program in a few minutes.

Turning briefly to the fourth quarter, performance was solidly in line with sales and earnings guidance provided to you last quarter. Our Asia/Pacific apparel operations continued to grow at a rapid rate and represented 50% of our total global apparel sales in the fourth quarter. In addition, we saw profitable growth in just about every business and geography in that region. Most of the growth followed aggressive investment to support expansion in existing or new geographies, such as India, and to cope with the shift in U.S. and European originated business to these locations.

Markets remained mixed in Europe and we saw some adverse currency effect there. However, our prospect list for European based business in 2006 looks considerably better this year than it did this time last year. Within the Americas apparel group, U.S. reported sales in the quarter were down approximately 18% versus the same period year ago, due to the continuing shift in business to low labor cost countries. There is some margin pressure here due to the excess capacity, as you would expect, and this will be addressed by the streamlining initiatives.

Turning briefly to our bar code and pricing solutions business, demand was strong throughout the year and we saw modest increases in sales on a global basis and at healthy margins. However, we did see lower sales within the quarter compared with prior year due primarily to a large machine order that occurred in the fourth quarter of 2005 in the U.S., and that was essentially a one-off.

We continue to generate strong cash flow from the segment and believe we are growing at a rate faster than the industry, particularly in North America where the majority of the business resides today.

In summary, the global apparel market represented our main challenge during 2005. As I have mentioned before, the industry experts indicate that approximately 97% of all apparel and footwear products consumed in this country are now imported. Since many of our major customers have already moved or are in the process of moving their production needs offshore, it is essential that Paxar takes advantage of its very strong, broad geographic footprint and transition accordingly.

Let me provide you with more details regarding the streamlining that is occurring within our apparel business. First, the streamlining we announced in the third quarter is not only intended to rebalance capacity but to better focus and link apparel demand and supply globally and improve service.

As we exit our legacy operations in the developed countries, we will do so while speeding up our global responsiveness to customer needs, lowering costs and driving innovation faster than we have done before. All these measures play to Paxar's inherent strengths and will result in positive organic growth commencing in 2006 and beyond. Execution of the plans is progressing on schedule. We have announced and are in the process of exiting the majority of remaining capacity in the United Kingdom and certain other countries in Western Europe and relocating production to Italy, which, by the way, is an innovation center of excellence for the Company, and countries in Eastern Europe and Asia. We will continue to move forward in the U.S. on an accelerated basis over a 12 to 24 month period and at a pace our customers are comfortable with. We believe that the timing we have communicated today will be sufficient to cater to all their needs.

I mentioned that we were initiating programs to improve our responsiveness globally. We have a unique and one-time opportunity to reconfigure our resources and start introducing more sophisticated processes and systems to meet our customers' needs globally for one-touch service 24 hours a day. This approach ultimately should become a competitive advantage. These plans are now more specifically included in the numbers and timing we are sharing in our outlook with you today. We have modified our original plans and have now included a partial modernization of selected manufacturing policies and practices around the world. This will not only result in improved responsiveness but in improved productivity. We will not be sharing the specific details of these productivity plans with you today, but, as I said, they are now included in the financial assumptions and the timing we are sharing with you today.

On a separate note, we continue to believe RFID will be a significant opportunity going forward. Accordingly, we will increase our R&D investments in 2006 to further develop new pallet and case solutions and we will continue to lead in working with our apparel customers, like M&S, to pioneer item level RFID solutions.

Finally, I am delighted with the progress of Paxar's new global leadership team, which, as you know, was significantly strengthened during the year. We have modified our incentive compensation plans to ensure the leadership team is solidly focused on driving global solutions and improving return on invested capital. Now, while much of the talk has been around the realignment, it is important that we reiterate the fact that growth is very important. It is a very important element of the mix. We will be adding additional planning and analysis resources to assist with this process and be returning to acquisition activity during 2006.

I would now like to hand over to Tony to review the financials.

Thank you, Rob, and good morning, everyone. It's certainly been a busy and exciting period for the Company. As Rob mentioned, we've taken significant steps in the quarter to improve the competitive position of our global apparel business.

Specifically, we've completed the blueprint and are now beginning to execute a comprehensive plan to transition legacy North American and European production to more cost competitive facilities in Latin America, Eastern Europe, and the Asia/Pacific Rim. While these moves are focused on improving our competitive position, which we are confident will generate significant ongoing cost savings, they are also being undertaken to align our manufacturing and associated support resources with global apparel demand and customer requirements. I'll provide an update on the anticipated costs, benefits, and timing for the plan in a few minutes.

During last quarter's call, I discussed the Company's plans to optimally leverage Paxar's balance sheet by better matching the Company's borrowing capacity with its strong offshore cash flow streams. I'm pleased to announce that we have successfully completed all three of the initiatives outlined during the third quarter conference call. In early December, we completed a new $150 million five year multi-currency resolving credit facility, which was utilized, along with excess foreign cash, to complete the repatriation of $122 million of foreign earnings. This amount was in excess of the $110 million we originally targeted for the repatriation program.

Further during the third quarter call, we discussed plans to prepay $150 million of 6.74% senior notes that were due August 11, 2008. The prepayment of these notes was successfully completed in early December, resulting in a one-time charge of $7.4 million, below our initial estimate of $9 million. As previously indicated, we anticipate the refinancing will generate 4 to $5 million of annual interest savings commencing in 2006.

Now let's begin by first reviewing how results compared to our guidance. As you may recall, our third quarter guidance called for sales of 205 to 210 million in the fourth quarter and pro forma earnings per share, excluding the impact of restructuring and other one-time charges, in the range of $0.27 to $0.31. I'm pleased to report results were squarely within that range, notwithstanding some downward pressure on sales from exchange rate movements due to the strengthening of the dollar during the fourth quarter. Sales in the quarter finished at approximately $207 million, essentially unchanged from the record fourth quarter level achieved in the prior year. Organic sales declined approximately 1% due to an unusually large bar code printer order in the fourth quarter of 2004 that did not recur in the fourth quarter of 2005. We continued to experience significant migration of apparel sales from North America and Western Europe to developing markets, particularly in Asia/Pacific, where sales increased an impressive 21.3% including organic growth of 15.2%.

Sales from the India and EMCO acquisitions, which as you may recall were completed earlier in the year, contributed $4.9 million or approximately 2.4% of sales growth. Foreign exchange reduced sales by $3.1 million or 1.5%, due primarily to the recent strengthening of the dollar against the Euro and British pound. In the quarter, we were encouraged by the strength of EMEA originating sales, which on a local currency basis rose 4% when compared to the fourth quarter of 2004. Gross margin was 37% in the fourth quarter of 2005, compared to 38.7% in the fourth quarter of 2004. While we continue to realize higher gross margins in our growing Asia/Pacific region, margins were lower in our bar code business, due to changes in product and customer mix, and in the Americas apparel group, which as Rob mentioned, continue to suffer from under-absorption of fixed factory overhead costs due substantially to the impact of accelerated migration on domestic plant volumes, as well as somewhat higher material costs, specifically on yarn and other petroleum based products.

SG&A expenses were $59.6 million in the quarter, or 28.8% of sales, compared to $61.5 million or 29.7% of sales a year ago. The favorable quarter to quarter comparison in SG&A spending was largely attributable to continued migration to the Asia/Pacific region where we enjoy a much more efficient SG&A cost structure. In addition, SG&A for the quarter also benefited from favorable bad debt recoveries and lower bonus and sales incentive requirements, as compared to the fourth quarter of 2004.

In the quarter, we recorded $10.6 million of restructuring and other charges in connection with the realignment of legacy North American and European manufacturing sites. Of this amount, $8.7million represents primarily severance and certain asset impairment charges related to the global realignment plan that we announced during the third quarter conference call. The balance of the charges, representing approximately $1.9 million, related to the Hillsville and EMEA restructuring initiatives, which we shared with you earlier in the year. There were no restructuring and other charges recorded in the fourth quarter of 2004.

During the past three months, we continued to refine our global realignment plan and associated time lines. We expect to realize at least $15 million of ongoing cost savings in calendar year 2007. And we remain confident that we will achieve ongoing savings at an annual run rate of 20 to $25 million by the end of 2007. In addition, we now anticipate total one-time cash costs to be lower than originally estimated, ranging between 20 and $25 million. This compares fairly to our previously announced range of 25 to 30 million. We expect to incur, as well, approximately 5 to $8 million of non-cash charges, largely related to anticipated asset impairments, considerably below the original estimate of 10 to $14 million. Operating income in the quarter was $6.3 million or 3% of sales, including restructuring and other nonrecurring charges. Excluding these one-time charges, operating income for the quarter was $16.9 million or 8.2% of sales. There were no restructuring charges in the fourth quarter of 2004, as I said, when operating income was $18.8 million or 9.1% of sales. While we did realize substantially higher operating margins in the Asia/Pacific region, 18.9% versus 15.4% for the same quarter a year ago, this increase was more than offset by lower operating margins in the Americas and EMEA regions. In the quarter our effective tax rate was 60%, which included the impact of the restructuring initiatives and the debt prepayment penalty. The normalized tax rate for the fourth quarter was 24%, again excluding the one-time impacts related to restructuring, the prepayment penalty, and a tax charge that we took within the quarter resulting from the additional earnings we repatriated in the month of December. For the quarter, net interest expense was $9.4 million, including $7.4 million in one-time charges related to the early retirement of the senior notes. This compares to $2.6 million in the fourth quarter of 2004.

Turning our attention to the balance sheet, we finished the quarter with $48 million of cash and cash equivalents, down from 92 million as of December 31, 2004. This decrease was due to actions taken by the Company in the quarter to utilize excess cash on hand for the prepayment of the Company's 6.74% senior notes. Consequently, total debt as of December 31, 2005 was $101 million, as compared to $167 million a year ago, and our ratio of total debt to total capital improved significantly, from 27.5% at the end of 2004 to 18.1% as of December 31, 2005.

Focusing now on cash flow for a minute. Cash provided from operations was approximately $62 million in 2005 versus $86 million in 2004. The decrease of approximately $24 million primarily resulted from lower earnings in 2005, largely due to the weak first quarter performance, increased bonus and incentive payments that were made earlier in the year, higher foreign tax payments, and restructuring spending partially offset by improved collection performance and reduced inventory levels. Depreciation and amortization expense was $33 million for the year compared to $32 million in 2004.

Capital expenditures in 2005 were $31 million versus $39 million in 2004. For the year, capital expenditures came in about $4 million below our guidance, as several projects originally slated for completion in the second half of the year were delayed, pending completion of the Company's blueprint for completion of the global manufacturing realignment plan. As a result, in 2006 we do expect capital spending will be somewhat higher than would be typical and likely in the range of 45 to $50 million. Going forward, we would expect capital spending to be more typically in the range of 35 to $40 million on a sustainable basis.

For the quarter and full year, the Company completed share repurchases of approximately $6 million. Currently there are no plans to initiate any additional stock repurchases during 2006.

Now let's turn to 2006 guidance. Going forward, the Company will only be providing annual earnings guidance, which Rob and I will update regularly on a quarterly basis. The Company believes that this change is more consistent with best practices and in line with shareholder expectations to manage the Company for consistent long-term growth.

For the year 2006 we are estimating sales of 820 to $840 million. Our guidance assumes lowsingle digit market growth, continuing migration of global apparel sales to the Asia/Pacific region, accelerated acceptance of RFID for item and carton and pallet marking, albeit off of a very modest base. As has been our past practice, we are not including the impact of potential acquisitions but will update our guidance as appropriate for acquisitions once completed.

In 2006 we expect gross margins to increase 20 to 30 basis points, partially offset by continuing SG&A infrastructure investments to support growth in emerging markets and RFID market development expenses. We expect margins to benefit from favorable geographic mix, as more of our global sales shift to Asia/Pacific. Anticipated cost savings from the restructuring initiatives in 2006 are not expected to be realized until late in the year, thus we do not anticipate any significant program benefits until 2007.

With the completion of the fourth quarter refinancing initiatives, we are forecasting interest expense to be in the range of 5 to $5.5 million for the year. And we expect the Company's effective tax rate to be in the range of 24 to 25%. Consequently, earnings per share are projected to be in the range of $1.13 to $1.23. As a reminder, our 2006 outlook excludes the impact of expensing of stock options as required by FAS 123R and additional charges related to the realignment of our global manufacturing capacity. Including the impact of FAS 123R adoption, earnings per share are projected to be in the range of $1.07 to $1.17.

That concludes my prepared remarks on the fourth quarter financial results. Now I'd like to ask Rob to present his concluding remarks.

Thank you, Tony. As stated before, our near-term goal is to grow Paxar into a $1 billion plus company and that will come from both organic growth and through modestly sized bolt-on or tuck-in strategic acquisitions. In addition, all things being equal and based on the assumptions we have made, the streamlining we have announced will improve our gross profit margins and increase operating profit margins over 10%, while also improving our competitiveness on a number of fronts.

As I've stated on a number of occasions, our objective is to transform Paxar into a truly global company by being the first choice for all our key customers. To continue to win, we will focus relentlessly on being responsive to our customer needs everyday, everywhere by building lasting and meaningful customer relationships where we strategically sell across the range and offer value-added solutions by being first with meaningful innovation, by using information technology to our advantage and by having the best leadership and talent in our industry. We are focused on driving long-term shareholder value. And we are doing what is necessary now to improve our operations and our ability to generate sustainable and ongoing profits in the years ahead.

With that, I'll now open up the call for questions.

[OPERATOR INSTRUCTIONS] Our first question is coming from Bob Labick of CJS Securities.

Good morning, it's Bob Labick from CJS. First question I wanted to ask was relating to your $1 billion sales goal, I believe you said in the past that roughly half will come organic and half will be from acquisitions. If we start on an $800 million base, using that $100 million in organic growth and your guidance, which implies 3% organic growth, it would take us four years to get there. What will you be doing to stimulate organic growth to accelerate that process or is the four-year time frame what you were trying to suggest?

Bob, this is Rob. No. The plan is to do that faster than the four years. Many of the programs that we've initiated will stimulate organic growth. There are new products that will be introduced sometime during 2006 that are not yet included in our assumptions.

I was going to add that what we're suffering from slightly in '06 is with the recent strengthening of the dollar, there's actually a bit of an adverse year-over-year comparison in foreign exchange rate that we've tried to take into consideration in our guidance as well. It really doesn't affect the bottom-line, but it does have a modest impact on the top-line, Bob.

Bob, on that, I think we could give you a little more color on that. The 820 to 840 would imply $830 million, give or take. That includes the assumption that the current currency effects that we've seen in the recent past will continue through 2006. I think it's prudent but a very conservative assumption. Tony, do you want to comment further on that?

Again, none of us are foreign currency experts, but just if you take the current foreign exchange rates and apply them to our local plans, the fact is the results come in moderately lower than they would have had rates remained as they were three months ago. And so we've taken that into consideration in our guidance.

That makes perfect sense. I completely understand. Basically, you're saying that organic growth through new product acquisitions and other initiatives should be greater than 3% going forward on an equal currency basis.

That's correct, Bob.

Great. Just for the second half of that $1 billion through acquisitions, could you give us a sense of potential product areas or geographies or any further idea of what you would be looking at in terms of acquisitions?

The only thing we can do at this point is just confirm that we will continue to execute bolt-on or tuck-in acquisitions that would fall under the current definition of our business today. In that, I'm not including any transformational activity. We'll return to that in 2006. It could occur anywhere and at this point wouldn't want to comment further on the acquisition strategy.

Okay. I guess one more question. Regarding the realignment, it sounds like you're making the moves in Europe faster than the U.S., yet there's more pressure on the U.S. in terms of under-absorption and gross margin impact. Could you just walk us through the reasons for the timing of Europe first, U.S. second?

Well, Europe started earlier and Europe is smaller. I think that's probably the only comment I can make. The U.S. is much larger, of course. There's a different mix of customers and a different mix of geography that that business needs to transition to.

My final question would be the plan, obviously, seems logical and straightforward. Can you tell us what milestones we should look for to gauge your progress and what you're looking for throughout the year?

Well, we'll report on progress each quarter. 2006 is an executional year for us, as we move the production capacity. So we will be giving you quarterly updates on our progress there. As you said, we're much more advanced in Europe and we've provided more details on that. As we make acquisitions, we'll report on those. And as our assumption for 2006 changes, we’ve just talked currency, for example, we'll update you on those changes as it relates to the outlook that Tony provided for the year.

Terrific. Thank you very much.

You're welcome.

Our next question is coming from Eric Autio, SunTrust Robinson Humphrey.

Good morning. I was wondering if you would comment on the U.S. China trade pact that, I guess, came out in November. Has that improved the clarity as far as the manufacturing movement as how you're going to move your base? Is it more towards China? Are you still looking at other areas in Asia? And how that's all working out.

Yes, there is more visibility. That said, our customers have changed their buying behavior, not to put all their eggs in the China basket. So you're seeing Paxar expand on a much broader front in a multitude of areas. We will continue to do that. That said, the migration continues to move. Customers continue to make decisions. So I think, as we get closer to our customers' decision-making process, we'll get better clarity now going forward than we ever have before as to how they're going to switch those decisions within their supply chain. It's a new game for the apparel industry. I think we learned a lot during 2005 and we'll be a lot better at it in 2006. One of the things that we're very good at is being flexible within our supply chain. And we have a great footprint globally to be able to cope with that. So I think we're well-positioned from 2006 onward.

Can you give us a feel for where you think margins in Asia can go, let's say, once all this movement has finished, say 2007, 2008, as far as percent gains? Or do you see the competitive environment keeping them roughly around where they are now?

I guess I can try and field that question. As we've said, our margins for the apparel business in Asia/Pacific are considerably higher than they are in the Americas. Our margins are also very good still in EMEA. But within the Asia/Pacific region, where obviously a lot of the volume is shifting to, we do expect to see continuing benefit from that.

Again, our goal is to get our margins above 40% as a result of the migration of business to the Asia/Pacific Rim and obviously as a result of the streamlining initiatives that we've announced last quarter and provided further clarity on today. So when all is said and done, what you should assume is we're going to have a substantial amount of business migrating to Asia/Pacific, where our customer base is. And our goal is to drive margins north of 40%. And I think you can probably connect the dots from there.

Great, thanks. Just turning to RFID, can you give us what sales were in 2005 and then what your expectations are for 2006?

We haven't broken our sales out and at this point don't plan to do so. We'll tell you, though, that sales were within the range we expected for 2005. We expect that to be substantially up in 2006, in line with what you're reading about in the marketplace. That said, as that occurs we'll report on a quarter to quarter basis.

And then just quickly, what was the reason for the cost reductions as far as the streamlining initiatives? Was it fewer locations or just being able to do it more efficiently?

When you say cost reductions -- .

From your prior guidance, sorry.

I think we've just firmed up on our prior guidance. We expect the ongoing savings to be exactly as we said in previous calls. Any timing differences now, as we get deeper into the detail and start speaking directly with customers, are based on customers' wishes and the plans that they're making. I also mentioned the partial modernization of the way we approach manufacturing, investing in new technologies there to improve productivity. So those are all included. And for that reason.

Thank you very much. I'll pass it on.

Our next question is coming from Ajit Pai of Thomas Weisel Partners.

Good morning, couple of quick questions. The first one would be about the gross margins. I think you mentioned you expected 20 to 30 basis points improvement. Is that for the full year or is that the improvement in the run rate by the end of the fourth quarter?

Ajit, that would be for the full year.

That's for the full year. And then just looking at -- rather than look at Asia/Pacific overall, could you give us some further color into those numbers in terms of what percentage was China and India and what the growth rates in those two countries were?

Well, we don't typically break that information out. Suffice it to say -- I think the way I would describe it is, our business is growing nicely across the board in the Asia/Pacific Rim. We are in the process of modernizing and adding additional capability into our Indian business, so we haven't seen the growth rate there yet that we would expect going forward. And so the growth is, relatively speaking, fairly consistent across the board. Obviously we have a much larger base in Hong Kong and China and therefore that sort of influences over. It pretty much tracks with the overall growth within the region.

But when you look at your Hong Kong growth, is that purely sales in Hong Kong or does Hong Kong ship to China? Would you regard that as a Hong Kong growth?

To answer your question I think it's safe to say we do -- there's business fulfilled in Hong Kong as well as China. It's all managed through the Hong Kong office. Some of the orders that come to Hong Kong get filled out of Hong Kong, the others get [refulfilled] out of China and we report them wherever the production occurs.

Is it fair to assume that your China business is actually growing more rapidly than your overall Asia, the 21.3% that you just reported? And that your India business currently is growing slightly slower than that average?

Ajit, this is Rob. I think we've got to be careful with those conclusions because, in some cases, you've got a large base from which to calculate and in other cases they're still relatively small businesses, so the growth rates will be very different.

Okay. Then moving on to some of the RFID pilots that you had in place on the item level in the apparel industry, could you give us some color as to how successful they've been and going forward, some of the ROIC that you might have seen or some of the issues you might have seen? At what point do you actually expect some of those broader trials, not just pilots, but slightly broader trials to sort of become store-wide or chain-wide?

Ajit, the M&S work, which is where the leading activity in the world is occurring today, is in the process of rolling out into stores, so it is real. Their stated plans are to continue to expand into additional categories and to roll out into more stores progressively during 2006. That would indicate to me that that is -- while it is a pilot, it is a real test instore with consumers. So that is the current plan. And we'll have to wait and see what that program yields, but at this point I think M&S is planning on it to continue to expand.

Right. And when you look in Marks and Spencer and your involvement with them, there are other partners with Marks and Spencer in their rollouts. Could you give us some color as what kind of contract or how committed is the relationship right now? Is it a firm contract that you'll be the only parties working? Is it the status quo (indiscernible) or is it something that might come up for bidding again in a year or two?

Well, Ajit, we can't comment on the contract itself. We'll tell you that what's been published before is that there are other players involved, other consultants and companies that participate either in the computerized infrastructure, the middle ware or some of the hardware. We're the exclusive supplier in the areas that we're experts in. But there are, to your point, other partners. At this point, I do expect that the rollout will continue well into 2006.

Okay. Thank you so much.

Our next question is coming from Debra Fiakas of Crystal Equity Research.

Good morning. Earlier in your prepared remarks, you mentioned that your customers were making a faster than predicted transition to lower cost markets. And I wondered what impact that might have had on your customer relationships. Were you able to meet the orders that came to you? And if not, do you believe that that might have damaged any of your relationships? Will you be able to recover that business in months going forward?

Debra, that's a good question. The net effect was that our customers had to source from a broader set of geographies. And as they were dealing with time pressures, so their order sizes and turn around times decreased. And that is, I think, now the game going forward. Part of the modernization we referred to earlier will accommodate that. The earlier than predicted comment was really, to a large extent, a Paxar-related comment. Although no one could have foreseen that, as you know, during the earlier part of the year, there was not much visibility of the impact of the lifting of the apparel and textile quotas to anyone in the industry. So we were all second-guessing. I think that's clarified to a large degree. And as we go forward, I think we are just as confident that we can cope with dealing with our customers' requirements. I think we did a reasonably good job during 2005 notwithstanding those dynamics.

Very good. And also this is, I guess, a somewhat related question. If you could comment on your position relative to the competitors in terms of moving to the locations where your customers are?

I can't speak for them. I will tell you that our customers are dealing with these dynamics and continue to make those decisions that best suit their organization, so we obviously know that our competitors are dealing with it. I think we're somewhat unique in that we're much larger and/or more broadly geographically based than any of our competitors, so it's difficult to make comparisons. Many of those competitors are more regionally based as opposed to globally. They would, to some degree or another, have seen change but possibly not to the degree Paxar did.

Thank you.

Although one of our competitors has recently announced some additional restructuring, one of our global competitors, and it was after we announced our plan.

I think it's difficult to second-guess whether companies are making moves to improve on one front or another or moving internally directly as a result of the lifting of quotas. It's always difficult to judge that.

Very good. And then, in regard to competition and specifically in the RFID area, where are you seeing your most significant competition, if you could maybe name names.

I think we're leaders in the -- at the item level. As far as the pallet and case aspects are concerned, we're not market leader in that area. We are growing. We are excited about the prospects in retail and apparel. And of course there's Wal-Mart and other retailers bring their requirements forward. We're going to see a lot of activity in the consumer products area. We're pretty excited about some of the prospects we have to grow in that space. But I wouldn't say much more than that at this point. We'll provide you with more color on exactly how we're going to participate in the CPG vertical during 2006.

Thank you.

Our next question is coming from Rob Health of SMI.

Good morning, guys.

Good morning.

Maybe some thoughts on the model going forward. Rob, you mentioned a few times 40% goals on the growth side and 10% EBIT margins, it sounds like, as longer term goals, et cetera. Does that imply that we should be expecting sort of an SG&A number that's a tad bit higher than you guys are running currently to sort of fund product initiatives, growth, et cetera? Is that what the mind-set is? Or is there anything else in terms of the model that I'm missing?

I think for now that's probably right. We're holding in our assumptions the SG&A percentages, so the absolute dollars will go up as we grow, but I think you're spot on for now.

And maybe back to an earlier question. The growth rate for this year is sort of implied in a low single digit rate and I guess you maybe answered that a little bit more, but with the currency impact, could you just -- I guess that's probably below what you'd expect longer term. Is that fair?

Well, absent acquisitions, which are not included in there, any new innovations that we bring to market, which are not in there, that's correct.

Okay, thank you.

Our final question is coming from Chris Kapsch of Black Diamond Research.

I just had a follow-up on the gross margin guidance for '06, the 20 to 30 basis point improvement. If your restructuring program, you don't expect the benefits from that really until 2007. I'm wondering, in this environment with the modest organic growth, where you anticipate the gross margin improvement? Is it just a matter of mix of business shifting more to Asia/Pacific?

Yes. That will certainly help us, Chris, in 2006. We also have got some programs in place to mitigate some of the pressure of under-absorption within the Americas, as well, to keep the margins sort of where they are in spite of continuing migration. So that, in combination with the mix benefit we clearly see when we move business to the Asia/Pacific Rim, they’re fundamentally the two reasons why we believe we can improve our margins by 20 to 30 basis points this year.

Okay. But the real mix benefit with business shifting over there is kind of the SG&A leverage, it sounds like. I guess it's also on the gross margin line?

Well, as I said, our gross margins in Asia/Pacific are higher than our consolidated gross margins, so there's a benefit there. You're also correct, though, that our SG&A structure is quite a bit more efficient in Asia/Pacific than it is elsewhere. And so we do benefit there as well.

Okay. And then a follow-up on the discussion around migration. I'm just wondering do you guys have any confidence or any sort of metric to track your share as this is happening with your customer base?

Well, we do our best. It's a very fragmented industry, relatively speaking, so we do make estimates. And those are internal estimates that we typically don't publish because of the nature of the underlying data. In some markets, we have better information than others. You can imagine in the emerging markets we have no external information. We rely on internal information to calculate those numbers.

Okay. I just had a follow-up also on RFID. I was just wondering if you could talk a little bit more specifics about the increasing investment in that space this year. Is there going to be any -- if you could just talk about the nature of the investment and will you be expanding your Miamisburg production capacity at this point? Are there any plans for that?

That's a good question. The increased emphasis on RFID includes additional training for sales. We're going to invest in partnerships. There are engineering investments and then marketing type of investments to bring new products to market that are included in that.

And, Chris, we don't have, at this time, any plans to increase our production capacity.

Okay. And then one follow-up on that. The early days, as this Wal-Mart initiative was ramping on the CPG side and I guess also it's logical on the item level side, one perceived advantage from your efforts to commercialize RFID with your apparel customers would be to leverage the service bureau networks. So I'm just wondering if that was kind of conceptually an argument that could be made, say, 18 months ago. I'm wondering if that's still the case. Is this still a potential source of competitive advantage as RFID commercialization sort of gains momentum, which it will, I guess, in '06 and '07?

Yes. I think you're right. I think it is an exciting area. I don't want to comment too much further on that now. What I will tell you, though, is that we have some great prospects that we're working with that. Hopefully when they come -- well, they will come to fruition soon. Some of those contracts we have won and we'll come out into the market and, if we can, we'll share those with you in the months ahead. This is in CPG I'm talking about.

Okay, thanks, guys.

Thank you.

Gentlemen, there are no further questions at this time. Do you have any closing comments?

Thanks, Megan. We thank you again for your interest and participation in today's conference call. We are very excited about our prospects in the future and look forward to speaking with you during next quarter's conference call. Thanks very much.

Thank you, ladies and gentlemen, for your participation in today's teleconference. You may disconnect your lines at this time and have a wonderful day.