艾利丹尼森 (AVY) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Paxar Corporation fourth-quarter and year-end earnings release 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.

Thank you, Joe. Good morning and welcome to Paxar's fourth-quarter and full-year 2006 conference call. On the line from management will be Rob van der Merwe, Chairman, President and Chief Executive Officer, and Tony Colatrella, Chief Financial Officer.

This morning before the market opened, Paxar reported fourth-quarter 2006 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 business and operations that can 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 2005 annual report on Form 10-K. For further explanations (technical difficulty) 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 thank you all for joining us this morning on our fourth-quarter and year-end conference call. I will make some comments, then Tony will review our financial results in more detail and provide our outlook for 2007. Then I will close with a few remarks before opening up the call for questions.

I'd like to make four key points today. One, we continued to post strong organic growth in the fourth quarter, implying growth well ahead of the category; two, the fourth quarter reflected a continuation of the costs associated with prudent spending to drive rapid capacity expansion and to clean up inventory issues as we necessarily realign apparel manufacturing capacity around the world. Three, the previously announced apparel manufacturing realignment plan to deliver savings commencing in 2007 remains on track; and four, we are poised to leverage our balance sheet to grow both organically and via acquisitions in 2007 and to achieve our stated long-term growth goals.

Beginning with the first point, I was particularly pleased with the strong organic growth we reported in the fourth quarter in excess of 9% that was well ahead of our projections. Organic sales growth in apparel was driven principally by growth in excess of 20% across our Asia-Pacific businesses, where we once again picked up market share. In a category where prices are flat to slightly declining, our volumes were up strongly. We continue to believe that, in 2007, apparel growth will remain strong in this part of the world.

Organic sales in bar code was driven by new products and technology in the handheld market here in the U.S., where we grew in excess of the category. I expect this trend to continue in 2007, given the proprietary nature of our products, particularly the strong market acceptance of our new Ultra Platinum Plus handheld scan, print and apply bar code machine.

Two, since mid-2006, we have consistently talked about the accelerated investments necessary to install capacity in Asia and Latin America to better cope with market trends, as well as position the Company to be able to shift most of its legacy apparel production capacity out of the United States, the United Kingdom and Western Europe to lower labor-cost countries. Headwinds in this area continued to impact margins as a result, as did prudent investment spending to add the heat-transfer capacity necessary to support increased demand for this rapidly growing technology. This spending is necessary to support both market-share growth and to help ultimately reduce our overall cost of doing business in the apparel category.

We were also impacted by adverse mix resulting from growth in RFID products. While the apparel-related RFID business will grow significantly in 2007 to approximately 15 to 20 million in sales, that's from 11 million in '06, it nonetheless remains a relatively small part of our overall mix.

We have also made significant progress in expanding our electronic article surveillance, or EAS sales base. That growth will continue to be strong into 2007. As is true for apparel-related RFID, the EAS business is generating lower margins during the initial ramp-up stage, so we anticipate about a 25 to 50 basis point drag on Paxar's consolidated gross margin as a result of these products in 2007. This has been factored into the 2007 guidance, which Tony will discuss with you in more detail later.

Finally, inventory management provided us a challenge when we necessarily had to build buffer stocks to protect customer orders during the manufacturing realignment program implementations. As the realignment plan is executed, we expect inventory to return to normal levels. Further, considerable emphasis was placed on cleaning up inventory balances, which resulted in higher inventory charges during the latter part of the year.

In 2007, we have added a metric to our global management bonus programs to retain focus in this important area.

Now, we had other one-off costs that impacted margins, and Tony will get into that detail shortly. However, with all the actions in-place and the one-off nature of both the realignment program and cleanup activity, I fully expect margin trends to improve in 2007.

Also, the new organization that I announced in November is being very successfully implemented, so I expect to see a number of benefits as a result, for example, accelerated speed-to-market with the introduction of new, higher-margin products by the second half of 2007, improved productivity, as we near the completion of the apparel migration program that frankly was essential but obviously disruptive, and improved buying or procurement of all our goods and services worldwide that hitherto were suboptimal.

Three, the apparel realignment program continues on track. As you know, this is a major program to shift large amounts of capacity offshore. Although we are largely through a substantial portion of the changes, it will continue to represent risk until it is fully completed. That said, I'm very pleased with the progress that we've made thus far. As we stated to you on our last call, we anticipated closing three production facilities in the U.S. by the end of this first quarter of 2007. We can now report that these operations have, in fact, been closed.

While the European initiatives identified in our global apparel realignment plan are substantially complete, there are still some additional costs to come out during 2007. Since last quarter's conference call, we experienced some difficulties in starting up additional capacity in Honduras and Mexico. I am very pleased with progress in Mexico--I beg your pardon--in Honduras, but we continue to work with our teams in Mexico to make sure they come up to speed more rapidly. The nature of the problem there stems largely from leadership issues that have now been corrected. I will report on progress in Mexico next quarter. It is important, however, to tell you that we are not changing our forecast on the benefits expected from the program in 2007, and this risk is built into our guidance for the year, whether it materializes or not.

Four, we're now effectively net debt free and need to leverage our balance sheet in 2007. Organic growth will continue to require additional working capital this year. However, we do anticipate the aforementioned inventory reduction levels to result in a 20 to 30 basis point improvement in our working capital-to-sales ratio in 2007 to obviously help fund the growth. Also, we plan to aggressively invest in more heat-transfer capacity and will additionally introduce new products in 2007.

We will also continue the modernization program to improve apparel productivity in Asia. So CapEx will be about 10 million higher than our depreciation rate in 2007. Again, Tony will comment on that in a few minutes.

On the acquisition front, I'm going to be very brief. We believe there are sufficient opportunities to help drive sales to over $1 billion by 2008. We want to keep our powder dry at this time.

I will now hand it over to Tony to take you through the results in more detail and to provide guidance for 2007. Tony?

Thank you, Rob, and good morning, everyone.

As Rob mentioned, we are pleased with our topline sales growth in the quarter, which reflects a continuation of the strong organic growth we've reported for the last three quarters. As you may recall, during the third-quarter conference call, we increased our full-year sales guidance by $10 million for the third time this year to a range of 860 to 870 million. I am very pleased to report that our actual topline results exceeded the high end of our range, topping $880 million for the year.

Although we are very excited about this accelerated sales growth, we are not satisfied with the drop-through resulting from the increase in sales to the bottom line, in particular the 90 basis point decline in gross margins for 2006. As we've discussed this past year, we have been very focused on specific issues to identify and realize cost-savings opportunities in both our legacy and emerging market locations, including of course successful execution--and perhaps most importantly, successful execution of our global apparel realignment initiative.

I'd like to begin the discussion by first reviewing how our full-year results compared to our guidance. Excluding the impact of restructuring and other one-time charges, we've reported pro forma earnings per share this morning of $1.09 per share, at the upper end of the range of $1.04 to $1.10 that we provided you at the last quarterly call. Notably, our full-year results benefited from interest savings and a lower effective tax rate that collectively helped to offset the aforementioned weakness in gross margins as we incurred duplicate infrastructure costs, which we've reported on before, manufacturing startup inefficiencies and inventory cleanup charges which were collectively really the same key profit drivers that we discussed on last quarter's call.

Let's begin by reviewing the income statement, starting with sales. Sales were 230.8 million in the quarter, an increase of 11.6% compared to the fourth quarter of 2005. Organic sales increased a healthy 9.2%, well ahead of category growth, as Rob mentioned, while acquisitions contributed approximately 1% to the quarter's sales growth. Exchange-rate movements in the quarter also contributed 1.4% to topline growth.

We continue to experience migration of apparel sales from North America and Western Europe to emerging markets, particularly in Asia Pacific, where sales increased an impressive 23.6% as compared to the comparable period a year ago, again primarily driven by organic growth of 22.7%. Further, we continued to realize strong sales growth from our largest operation in Hong Kong, in China, as well as accelerated growth in emerging apparel markets such as Bangladesh and Vietnam.

The Adhispress acquisition completed in the first quarter of 2006 contributed slightly less than 1% of growth to Asia Pacific's results in the quarter.

In EMEA, we realized a 7.4% sales increase in the quarter with exchange rate movements and acquisition-related growth contributing 5.1 and 2.7%, respectively, offset partially by a slight decline in organic growth primarily due to lower bar code and pricing-solution sales within the region. To accelerate bar code growth in our international operations, we announced a major global restructuring, our reorganization in November, that will provide better focus on our bar code business outside the United States, which will serve, we believe, as a catalyst for growth in 2007 and beyond.

In the Americas, organic sales increased 3%, driven primarily by our bar code and pricing-solutions product line, which generated organic growth in the quarter of 4.6%. This favorable comparison is due largely to our new Windows-based Ultimate Platinum handheld scan print and apply solution. Apparel sales in the Americas, as expected, were essentially flat in the quarter compared to the prior year, reflecting the continuing migration of apparel production to the Asia-Pacific region. In the quarter, we also experienced a noticeable ramp-up in the transfer of apparel programs from our legacy U.S. manufacturing operations to lower labor-cost operations in Latin America as we began to effectively execute key elements of our global realignment plan.

Foreign exchange had a negligible topline effect in the Americas region.

Now, turning to gross margin, gross margin was 35.7% in the fourth quarter of 2006, compared to 37% in the comparable quarter of 2005. Similar to last quarter, contributing to the unfavorable variants were capacity-related expansion and infrastructure costs, which totaled approximately $3 million, again primarily related to aggressive capacity expansion, including the addition of heat-transfer capacity in Bangladesh, India, Sri Lanka and Indonesia, to support growth and ultimately execution of our global realignment plan.

During the quarter, we also recorded additional inventory charges in our apparel operations totaling $2.5 million, higher material and freight costs, unfavorable product mix, and lastly, pricing actions which we reported on last quarter specifically related to strategically targeted customer initiatives, which in fact have increased our customer penetration and market share.

SG&A expenses were $67.2 million in the quarter, or 29.1% of sales, compared to $59.6 million or 28.8% of sales a year ago. The unfavorable quarter-to-quarter comparison in the ratio of SG&A expenses to sales was primarily due to continued aggressive infrastructure expansion, again as we reported on last quarter, in emerging apparel markets, specifically in Asia Pacific, Eastern Europe and Latin America, to support growth and execution of our global realignment plan, as well as infrastructure costs associated with new geographic expansion, most notably Pakistan and Thailand, which are both new operations for the Company this year. For the quarter, these costs totaled approximately $3 million. In addition, SG&A spending was also impacted by higher incentive compensation and employee-related costs, including expenses associated with the adoption of FAS 123R.

As discussed in last quarter's call, we continue to experience redundancy costs in our legacy U.S. and Western European operations and infrastructure build-out costs in emerging markets to support expansion as well as execution of our global realignment plan. These actions have, as anticipated, resulted in some near-term spending increases which will abate as we move through the second quarter and into the latter part of the year.

SG&A spending is clearly an area of immediate focus, and we're taking all necessary steps to reduce, as quickly as possible, duplicative costs in our legacy North American and European businesses while properly leveraging resources in emerging markets to realize efficiency gains as these businesses expand production.

In the quarter, we recorded $3.7 million of integration, restructuring and other charges in connection with the Company's global realignment plan. These charges were related to severance and retention programs, asset impairment charges, program management services, and other facility consolidation costs. Since inception of the plan which has, as you know, started in the fourth quarter of 2005, the Company has incurred one-time cash costs of approximately $15.5 million. We anticipate total one-time cash costs related to these restructuring initiatives will be in the range of 20 to $25 million, again consistent with our previous guidance.

Further, I'm pleased to reaffirm that we are on track to achieve the planned $15 million in cost savings in 2007 and to achieve ongoing savings at an annual rate of 20 to $25 million by the end of 2007.

Operating income in the quarter was $11.5 million, or 5.0% of sales. That includes restructuring and other charges. Excluding these one-time items, operating income for the quarter was $15.2 million or 6.6% of sales. As a reminder, operating earnings were also impacted for the quarter and for the full year by adoption of FAS 123R. Excluding the impact of FAS 123R in the quarter as well as the aforementioned one-time items, operating income was $16 million, or 6.9% of sales, compared to $16.9 million or 8.2% of sales in the fourth quarter of 2005.

In the quarter, we reported net interest expense of approximately $200,000 as compared to $9.4 million in the fourth quarter of 2005 when we recorded a one-time charge of $7.4 million related to the early prepayment of our 6.74% senior Notes. This significant reduction in net interest expense was primarily due to the refinancing and repatriation initiatives completed during the fourth quarter of 2005 and which we've previously reported on, as well as the utilization of cash proceeds from the Zebra settlement to pay down borrowings under our revolving credit facility.

In our 2006 guidance, you may recall that we anticipated interest savings of 4 to $5 million for the year. I'm very pleased to report that we exceeded our own expectations, realizing $5.5 million in full-year savings.

In the quarter, our pro forma and income tax rate was 16.3% compared to 24.0% in the prior year. This significant reduction in our effective tax rate for the quarter was due primarily to a tax rebate realized in our Sri Lankan operations, as well as the favorable impact resulting from the utilization of previously unrecorded state NOLs and state tax credits.

Now, turning our attention to the balance sheet, we finished the quarter with $40.2 million of cash and cash equivalents, down from $48.2 million as of December 31, 2005. Total debt at December 31, 2006 was $45 million compared to $101 million a year ago. Our ratio of total debt to total capital improved from 18.1% at the end of 2005 to 7.6% as of December 31, 2006. The decrease in total debt was primarily attributable to the repayment of borrowings, as I mentioned earlier, under the Company's revolving credit facility, again largely the result of cash proceeds resulting from the Zebra settlement and earnings generated by our Asia Pacific operations, partially offset by capital expenditures, higher working capital requirements to support sales growth and execution of our realignment plan, and cash requirements of $3.3 million and $1.4 million, respectively, for the previously announced Adhispress acquisition in France and the Alternative Labels acquisition in South Africa, which we just completed as of the very end of December, 2006. This acquisition, while relatively small in size, provides Paxar with access to major South African retailers for the first time.

Focusing now on cash flow, cash provided from operations was approximately $85 million in 2006, compared to $69 million in 2005. This $16 million increase in cash generated from operations was primarily attributable to cash proceeds, net of tax, from the Zebra settlement. During the year, we experienced a noticeable increase in working capital requirements due to higher Accounts Receivable balances, largely sales-volume related, and inventory levels which increased due largely to volume growth as well as the buildup of buffer inventories, as Rob mentioned earlier, to support execution of our realignment plan, partially offset by higher Accounts Payable.

Depreciation and amortization was approximately $35 million for the year compared to 33 million in 2005. Capital expenditures in 2006 were $45 million, in line with our guidance but higher, certainly, than the $31 million we reported in 2005. This increase in CapEx resulted largely from infrastructure investments related to capacity expansion, primarily in Asia Pacific, as well as plant modernization initiatives, specifically in Italy, and execution of our manufacturing realignment plan, which resulted in higher investment in Mexico and Honduras.

Now, I'd like to turn to 2007 guidance for a minute. For the full year 2007, we are estimating sales in the range of 925 to $945 million. We believe the low end of our range will match 2006 market growth while the high end of the range suggests share gains in the apparel segment. The plan assumes no additional acquisitions in 2007. Our guidance range also includes, of course, the full-year impact of the Adhispress and Alternate Labels acquisitions, which should result in about $4.5 million of incremental sales.

For the year, we expect gross margins will increase 75 to 100 basis points, while pricing and the cost of key material imports such as paper and yarn are anticipated to be essentially flat throughout the year. We do expect margins will benefit from favorable geographic mix as we begin to realize significant benefits from the global realignment plan which, as discussed earlier, will generate direct and indirect labor savings in 2007.

Today, we are reaffirming the cost savings resulting from the realignment plan will be approximately $15 million, again with the majority being realized in the gross margin line. Since the anticipated savings ramp-up quarter-by-quarter, as we transfer more production from legacy sites, we would expect the savings generated from the realignment plan to concurrently build each quarter. So while we are not providing quarterly guidance today, you should expect that our quarterly margin comparisons to prior year will improve as we move throughout the year.

In addition to our previously announced global realignment plan, we have begun to execute another important initiative that will result in the transfer of the majority of our Hong Kong manufacturing capacity to a new, state-of-the-art manufacturing sight near Shenzhen in southern China. Ultimately, this facility will rival our successful Panyu China operation in size and capability. The net cost of initiating this time-phased plan in 2007 is anticipated to be approximately $1 million. We expect to break even in 2008 from this initiative while realizing at least $4 million of sustainable annual savings beginning in 2009. Needless to say, we are very excited about this new initiative and confident it will further strengthen the Company's competitive position in the Asia-Pacific region where we are now focusing significant resources on improving direct labor productivity while investing aggressively to expand in lower labor-cost countries.

We anticipate our SG&A to sales ratio to be approximately 20 to 30 basis points lower in 2007, as Rob mentioned a few minutes ago. The anticipated growth in SG&A spending will abate by midyear related to growth related to infrastructure expansion as we begin to see the benefits of reduced staffing levels and legacy markets and better leveraging existing resources in emerging markets where, as you know, we experienced a ramp-up in infrastructure costs, particularly during the last three quarters in 2006.

We are forecasting interest expense to be approximately $2 million for the year. Further, the Company's effective tax rate is anticipated to be roughly 25% for the year. We do not anticipate that the tax rebate recorded in the fourth quarter of 2006 will be realized again in 2007.

Capital spending in 2007 is budgeted to be in the range of 45 to $50 million with the majority of spending again earmarked for expansion and modernization of plant and equipment to support our rapidly growing apparel business in Asia Pacific. Further, we anticipate that depreciation and amortization spending will be in the range of 35 to $37 million.

Consequently, earnings per share are projected in the range of $1.24 to $1.36. As a reminder, our 2007 outlook excludes integration, restructuring and other charges related to execution of our global realignment plan but do include all anticipated costs related to the adoption of FAS 123R.

That concludes my prepared comments. Now, I'd like to turn it over to Rob for his concluding remarks.

Thank you, Tony.

In conclusion, we delivered another record sales quarter, well ahead of overall category growth rates and therefore implying a further increase in market share. We have given revenue guidance, as you heard from Tony, of 925 to $945 million for 2007, suggesting we are now comfortably tracking to achieve our 1 billion near-term target with profitable growth by 2008.

To iterate, though--reiterate--we are not happy with the one-off costs experienced in 2006, but I will emphasize that the moves we have had to make to realign the apparel business were essential for near and long-term success. We expect these one-off costs will end by midyear 2007, as programs near completion, legacy costs are eliminated, and productivity improves. This, together with the additional elimination of SG&A, will provide leveraged to the excellent growth we are now finally experiencing, and that's an exciting prospect.

In conclusion, it was a challenging year with all the necessary changes, but we called upon all our leaders to step up, and they did. They made incredible progress to meaningfully drive organic growth and get our businesses positioned for significantly improved financial results commencing in 2007. So, I continue to believe that Paxar's future is very bright and that the new strategic focus put in place over the last 12 months will deliver increased shareholder value. We eagerly look forward to successfully executing on the challenges ahead.

With that, I will now open up the call for your questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Bob Labick, CJS.

The first question is I just wanted to clarify the guidance a little bit and get an understanding of really what goes into the cost savings you're talking about. Essentially, if you look at it simplistically, your (indiscernible) $1.09 this year excluding charges and your savings are estimated to be 15 million in '07, which is, depending on the taxes, roughly $0.25, plus or minus. That gets you to roughly $1.35. Your range is $1.24 to $1.36, which implies potentially that there is weakening in the core business or there's something else going on. Could you just help us understand the range of guidance you gave and what's implied and how it relates to the 15 million in cost savings?

Well, the 15 million of cost savings, Bob, has been fully loaded into our budget. This budget that we presented to you or at least obviously a number was in that range, without giving a specific number, is precisely where the management team is incented in 2007, so you should know that.

But I think the first thing you have to look at is we did have a couple of one-offs this year that favorably benefited our effective tax rate. Returning to a more normalized rate of 25%, which has historically been where we end, typically and where we have guided you guys to in the past, there are several pennies of change resulting from that of, if you will, erosion. But it's not erosion in operating earnings, in that sense; it's really a below-the-line effect of moving back up to a 25% anticipated rate from a 20.6% rate.

I also think it's fair to say that with $15 million baked in of savings that we have to deliver and you all expect--we want to give you a number that we're comfortable with and not one that is too far over the top.

Further, just as a reminder, Bob Powers kindly just reminded me that our number of shares are creeping up each year, as you would expect, when we looked our fully diluted shares, so I think we lose a couple of percent at least of EPS expansion because of that as well.

Okay. I guess what's the implied growth of the core business, I guess if you took out the cost savings and you just (indiscernible) you had already had the cost savings, what would be the underlying growth of the business?

I don't have that number handy, Bob. We can take a look at it, but I mean, the business is growing and I think our midpoint of the range gets you to, I don't know, 5% or so topline growth. We've already said I think--implied in that, though, is that some of that growth is in EAS and RFID, which are product lines, to no one's surprise, at least I hope not, at this point, which carry with it a lower margin rate and thus there is a drag on our gross margin, all other things being equal, of 25 to 50 basis points. So when you factor that in with the fact that our effective tax rate will revert back to a more normal 25% and look at the share creep, I think you can easily get there.

Got it. Then just understanding on RFID and EAS, I understand they are obviously very early in the sales cycle and development for these products. Where should margins be for these as they grow to be a more significant portion of your sales? Should this always be a lower-margin business? Is it lower because of scale or how should we think about that?

Do you want to answer that, or do you want me to, Rob?

No, you go ahead.

I think that, in truth, I think the margins will be somewhat lower for these product lines, certainly over the next couple of years. The margin dollars generated will be a nice contributor to the bottom line, because we already have really the SG&A structure in place. So the margin we earned, incremental margin should drop to the bottom line, but will be lower than our 38% margin. The reason is, in part, frankly, is because there is a much higher material content, specifically purchased-material content. In the case of the EAS tag, it's a security target; and in the case of the RFID product, it is really the chip and the inlay. While we do on a margin on those products, there's less value-add.

Yes, there is integration that occurs. We do provide the total solution, but thus far, unless Rob wants to comment differently, I think it's fair to say we haven't cracked the code on how to earn the same margin on those material inputs than we do from the value-add that we really provide.

Yes, Bob, I would just say that a large part of what's coming through in '07 has to do with already announced programs. You are aware of Marks & Spencer being one. The pricing and cost structure were fixed some time back. As we move to new customers, that will be either, in the case of the costs, reengineered and/or in the case of the pricing, structured a little differently to what the thinking was two to three years ago when that program was put into position. So I would expect, as new customers come on board and as we get smarter about how to implement, which we are now--we've got a tremendous amount of experience under our belts on the item marking side--we will do a better job. But you're not going to see that manifest in '07, hopefully towards the end of '07. At this stage ,I wouldn't commit to it, though, yet.

We still believe that this is an explosive growth opportunity for apparel. There's work to do. Don't plan those numbers into your '07 model. Wait for '08 and we will give you more information as we make progress during the year.

Yes, I'd like to further add that while we do think the margins will be somewhat lower than our core business for the reasons I already mentioned, clearly the cost-reduction initiatives and the opportunity to sell the total solution better in the future, we do expect that this will be, these two businesses will be very respectable-margin businesses, but perhaps not at the level of our overall gross margin.

Okay, that's very helpful. One last question on guidance and I have just one other questions after. Just, in the release, you reiterated the sales in excess of $1 billion and you mentioned it on the call as well, for '08. Previously, you've mentioned a margin goal of 10%-plus or to sustain at least 10% I guess is the way you phrased it at the analyst day. In the press release today, you just said "at higher margins". Is the 10%-plus still the goal out there or has there been a change in thinking?

No, it's still the goal. We've got some way to go and some of the programs we will implement this year will accelerate us to that position, but we will report on those as the quarters materialize, Bob. That's still the goal.

Great. Then my last question and I will hop back into queue--you mentioned, as you said ever so briefly, on acquisitions. I guess is it reasonable for us to expect some action in the next two or three quarters? If not, when does share repurchase start to make more sense? What's the timing on that? You discussed reducing your overall cost of capital and levering up a little bit to do that. If you can't find acquisitions, when does share repurchase come into the equation?

Well, Bob, what we've said--and I guess if I go back to the last couple of meetings and calls we've had, if we don't see any of the large acquisitions coming to fruition soon, there's nothing to stop us doing a combination of smaller acquisitions and buying back shares. So that proposition is always out there. At this point, we've decided not to do that because we see the prospects for fully utilizing the money, both through organic growth and acquisition. But the answer is yes; you should expect something to start in 2007, as stated in the strategy.

Great. Thank you very much.

Kevin Liu, B. Riley.

Good morning, guys. The first question, just wondering if--it seems this way from the results but just wondering if the pricing actions you took in the prior quarter have had the desired effect in terms of getting the market share you wanted. I'm just also wondering how the competitive environment has shifted based on that.

I'm not aware of the competitive environment shifting; it has always been tough throughout the world, Kevin. The pricing actions that were selective have been successful. Again, I stress that they were selective actions. I expect them to stick, in other words.

Then kind of going to the factors that affected your gross margin in the quarter, would you be able to kind of rank for us which one had the highest impact?

We can do that. I think it's safe to say that the biggest individual item we had really in the quarter was--well, there were a couple. One of the biggest items we had in the quarter was we did have about $3 million in capacity-related expansion and infrastructure costs. Those were split really between what I would refer to as normal aggressive expansion, particularly in Asia-Pacific, and the other half was related to basically properly fitting our facilities in Latin America particularly for the transfer of business occurring there as a result of our global realignment plan. So those two initiatives, if you will, cost us about $3 million.

We had about $2.5 million, as I mentioned, in inventory charges. They were not concentrated in any one location, but I think I would classify them as more to do about clean-up than anything else. There were a number of locations that we did this in. Some of those locations, interestingly enough, were locations that we either were implementing or are implementing soon Oracle. So there was a little bit of a discipline there in getting the clean-up completed.

Then specific to material costs and freight, we did experience higher material costs in freight. Those numbers were in the neighborhood of about $5 million for the quarter.

I think I may have missed this, but did you provide kind of a guidance for '07 gross margin? I thought I heard you guys say it would improve 75 basis points.

75 to 100 basis points, and that includes absorbing the headwinds resulting from increased RFID and EAS sales, which Rob stated would be on the order of 25 to 50 basis points.

I'm sorry, go ahead?

I was just going to say, so effectively, what we are saying is the Ontario program--or, sorry, we call it that internally. Our realignment program should generate north of 100 basis points improvement, but we factored in the effect of RFID and EAS, our Electronic Article Surveillance sales, on the mix next year. Then on a net basis, we do expect a 75 to 100 basis point improvement.

I see. Then the final question was just on the security labels. You guys have mentioned that EAS is appearing to gain traction there. I'm just wondering. In terms of the anti-counterfeit labels, aren't you guys seeing increased traction there and maybe what product lines are they being used in most right now?

We are seeing a lot of interest, Kevin, but that's continued and we've introduced some new products and technologies there. It's a relatively small part of the business, however. It's one that we're very strong in. But again, there's continued interest from all customers in that particular area. We see it in the woven labels; we see it in a variety of tags. So, there have been no major changes in that space in the last three to six months.

Okay, thank you. Congratulations.

Ajit Pai, Thomas Weisel Partners.

Good morning and congratulations on a very solid quarter.

Just looking at the margins in this quarter and the fact that Rob, early on, on the conference call, you mentioned that the fastest-growing part of your businesses right now have lower margins. Could you give us some color whether it is just RFID and EAS, or whether also the Asian business has substantially lower margins? What gives you confidence that, even if Asia keeps growing, that in case it has lower margins, that you would be able to get to the targets that you have in as little as 12 months from now?

Well, I will pick up the first part and then Tony can comment. RFID and EAS are growing quickly, but they are relatively small parts of the business. You know, 15, 20 million is relatively small, Ajit. The margins in Asia are higher.

To the third point, I would say that some of the other exciting areas of the business, like heat-transfer, the margins are a lot higher than RFID and so on and so forth. They are up at a corporate averages if not in some cases higher than that. So I wouldn't generalize at all.

Tony, would you --?

I really don't have much to add; I think you hit the nail on the head.

Does that answer your question, Ajit?

Yes, it does. Then looking at the Asian business, it's a higher-margin business you mentioned, and you also are seeing some pretty robust growth there. How sustainable do you think the growth is over there? How much more can grow at current rates?

Well, it's grown in the '20s for the last six quarters consecutively, and that's a function of a number of things, largely the capacity and geographic expansion that we've undertaken that has provided those headwinds. So we've been, for the last 18 months, heavily loading capacity in there, not only to take the market share but to importantly deal with the migration of apparel that's been occurring for some time and that accelerated in '05 and into '06. So, it's a function of how much more capacity.

I do think, though, that as you heard from us in 2006, we now need to better utilize the capacity that's been laid down there by way of improved productivity. So rather than just add increments of capacity, in '07, we will start paying attention to process improvement and taking a capacity gain that way.

Okay, thank you.

Craig Rosenblum, Millbrook Capital.

Congratulations on a good quarter, guys. Most of my questions were asked but I did want to know one thing. You mentioned, in a lot of detail, about these kind of one-time transitional and incremental costs related to capacity expansion and the realignment in the quarter. Tony, could you just tell us what that number was for the year and then what's in your projections for '07?

I can tell you what it is in the last two quarters of the year, which is the lion's share of the cost anyway, Craig, if that's okay. I don't have anything--I really think that most of it was in the third and fourth quarter. You could probably assume there's a little bit that we picked up in the second quarter as well. Unfortunately, I don't have that with me right now.

But broadly speaking, the costs in the last two quarters have run about $6 million a quarter, and that's split between SG&A as well as gross margin impact. So it's been about $6 million a quarter. I would say, just to sort of characterize it a little bit further, broadly, infrastructure expansion to support growth, largely in Asia Pacific and in some of the new emerging markets in Eastern Europe, for example, represent 75%, 80% of that number. The remainder is really related to putting the appropriate capabilities and capacity in place, technology capabilities and capacity in place in Latin America, which really is to support the global realignment plan or basically the shift of production from the U.S. into--largely into Latin America.

Did I answer your question?

Partially. Do you expect it to run at a similar rate for the first couple of quarters of '07, or how does it (multiple speakers)?

I would expect that we will have still a bit of headwinds in the first quarter of '07. I would be disappointed if we didn't cut that number down substantially by the second quarter and hopefully have most of it behind us as we move into the second half of the year.

Thank you.

Patrick Flavin, Flavin Blake & Co.

Rob, could you comment for us on competitive flash points or issues by geography and product type?

Well, let's just start with Latin America. I don't think there are any--there are no new news in the fourth quarter. We've seen local competition being fairly strong in Central and South America because of the migration that has occurred. There is capacity that's being released and most companies are turning to the local markets to chase growth, but no major change in the competitive set.

In Europe, there have been some moves but nothing notable at the global level. Europe has been a little more robust; you've seen those markets grow. There has been some growth that we've picked up in Germany and France and in particular in Italy, where our business was strong. No new competitive dynamic there. I mean, the competition remains very tough.

In Asia Pacific, across the businesses, again, I don't think--I mean one of our competitors released some senior executives from their organization. Those folks started a new, much more competitive business. We have not seen them affect our business. I believe most of them turned their attention to the company from which they had left, but they are out there.

More than that, I wouldn't be able to comment. I don't think there's anything at a global level, Pat, that I would draw out to your attention.

Excellent rundown. Thank you, Rob.

Richard Glass, Morgan Stanley.

Nice quarter. Good to see some progress.

Can you help us in how we should look at working capital, in particular inventory levels and receivables at the end of the year? I realize there's still a transition, but where should that--should that be a use of capital over the course of the next year, and what should those start to look like?

Yes, I can try to take a quick run at that. This is Tony speaking, Rich. Basically, I think you should think of--working capital for sure spiked up in the latter part, especially as we moved into the second quarter and into the third and fourth quarter, and in particular inventory levels. Our inventory levels unquestionably are too high right now; we are getting at it. We know why they are high. Again, buffer stocks were added to support the realignment plan and so we added an awful lot of stock, quite frankly more than we needed, in several of our emerging market locations, just to be sure that we could deal with customer service issues and there wouldn't be any interruptions.

In 2007, most of the focus will be on taking a few days out of our--taking at least a couple days out of our days in inventory. We believe we can do that and return back closer to a more normal level, really, if not back to where we were in 2005.

I think, in terms of absolute dollars, I think inventory will--average inventories will be a little bit higher in 2007 than they were in 2006 because we expect, again, further growth that has to be financed. But we would expect minimally a 20 to 30 basis point improvement in our working capital-to-sales ratio. Again, that's average working capital divided by our external sales. That's sort of the bare-bones minimum number.

Okay, and on the DSOs, is that much different?

I mean, our DSO days have been relatively constant and tend not to fluctuate more than plus or minus a day. I don't expect a big movement there one way or another.

Okay, over time being more in Asia isn't going to stretch out that receivables?

Yes, but I guess, by coincidence or maybe divine intervention, as it turns out, our Days Sales Outstanding in Asia Pacific basically mirror our consolidated results, and so there's no particular mix benefit nor harm as volume shifts out of the--out of Western Europe and in our legacy U.S. operations to Asia Pacific. It's kind of a push.

Michael Pak, Banc of America.

Good morning, gentlemen. Just Rob or Tony, can you just give us an early view on orders and backlog volumes in early 1Q?

Yes. What I would tell you, Michael is, come January, we've seen a continuation of the strong trend. Some of that--I mean, there was a lot of press about these gift cards that were purchased over the holidays but not yet realized, so there may have been a little of that moving around on reorders. I would tell you that the Chinese New Year is coming up soon and there seems to be a strong push for the brands to get their manufacturers and contractors to deliver ahead of the Chinese New Year, so that may have been a factor. But certainly, we've seen very strong volume momentum, particularly from Asia Pacific, continuing through January.

Great. Just a couple of housekeeping--what was the CapEx and D&A for the year?

CapEx in 2006 was $45 million and our D&A was I believe 35, yes, $35 million. Obviously--by the way, Mike, we've reported on this in the past but just so everyone is aware of what's going on, we had an unusually low level of capital spend in 2005. We actually deferred some projects as we worked on our global realignment plan. We've been reported all year-long that we expected about a $10 million or so spike in 2006, and that we would expect something on the order similar in 2007, again as we continue to build out our global footprint. We're right where we thought we would be.

Great. Thanks, guys.

I'm showing no further questions in queue. I would like to turn it back to management.

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

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