艾利丹尼森 (AVY) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Avery Dennison Corporation first quarter 2007 conference call. During the presentation, all participants will be in a listen only mode. Afterward, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Tuesday, April 24 of 2007. It is now my pleasure to turn the conference over to Ms. Guenther, Vice President of Investor Relations. Please go ahead, ma'am.

Thanks, Shana. Hello, everyone and thank you for joining us. As usual, just a few quick announcements before we start. First, I'd like to direct you to a document titled First Quarter 2007 Financial Review and Analysis which we filed today with our 8-K and posted at the investor section of our website. Our discussion will generally follow this handout and refer to information contained in the slides so I encourage you to have that document in front of you as you listen to our formal remarks.

Please note that we have included references to GAAP operating margin in our earnings release which includes interest expense as well as restructuring and other charges included in the other expense net line of our P & L. Items included in this line tend to be fairly disparate in amount, frequency and timing. In light of the nature of of these items we will focus our margin commentary on pre-tax results before their effect and before interest expense as detailed in schedules A3 and A5 of the financial statements accompanying our earnings news release for the quarter.

Finally, let me remind you that we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to uncertainty. Item 1A and the MD&A section of our most recent form 10-K discuss some of the most important risk factors that could cause actual results to differ from our expectations. Dean Scarborough, President and Chief Executive Officer, Dan O'Bryant, Executive Vice President and Chief Financial Officer, and Mitch Butier, recently appointed Vice President and Controller are here for today's call. Dean and Dan will start with some formal comments and then we'll open up the call for Q & A, and now I'll turn the call over to Dean.

Thanks, Cindy, and good morning, everyone. I'm pleased to report that we delivered profit improvement in line with our expectations. We're right on track again our earnings guidance for the year. I'm even more pleased with the news of the early termination of the U.S. Government's anti-trust review in connection with the Paxar acquisition, and I'll touch a little bit more on that later.

Reported sales were up about 4% due primarily to the benefit of currency translation. Core unit volume came in a bit softer than our expectations reflecting a very weak start to the year in some of our businesses in North America. We did see a nice pick up in sales during March for our North American roll label material business and we do expect an improvement in the underlying unit volume growth over the balance of the year. Operating margin improved modestly.

You may recall that the first quarter is generally the weakest quarter of the year for us from both the sales and profitability perspective, and as expected, we had some added headwinds in this year's first quarter with the sizeable pull forward of orders in the office products business into Q4. We also incurred about $5 million of transition costs related to new productivity actions that will start saving us money in the second half of the year, so we do anticipate additional lift in our operating margin as the year unfolds. Now, Dan's going to provide a more detailed review of our financial results for the quarter, so let me just give you some of the operational and strategic highlights for each of our key businesses. Pressure sensitive materials delivered outstanding profit improvement in the first quarter, with nearly 20% growth in adjusted operating income. Sales growth accelerated internationally and improved in the North American market in March after a slow start.

I'll give you some more color on the results for the roll label business by region but before I do that, I think it's worth describing our global strategy. Though individual product and service offerings do vary from market to market, our fundamental approach to this business is consistent across every geographic region. I can't overstate the role that customer service has played in our success. We've long expanded our global market leading position by introducing new service innovations including fast on exact, next day delivery, and Slice Free, and our newest service offerings include fast on optimum performance and contract per value.

I've spoken before about how we're using the fast on optimum performance program to bring the benefits of Six Sigma to our customers. We deploy our black belts to improve the productivity of a customer's manufacturing and supply chain system, in exchange for commitments to purchase more base material and we're now implementing a new program that we call contract for value, that extends the success we've had with optimum performance and in this way, we're helping drive growth for our customers instead of just productivity. With this initiative, we bring the tools we developed through the Horizons program to help our customers capture near term growth opportunities, once again in exchange for volume commitments.

Our growth strategy also includes initiatives to continue leveraging our competitive advantages in films which is the fastest growing segment of the market. Demand for clear film labels for beer and other food & beverage applications continue to grow. In North America, Q1 sales for beer applications were actually down compared to prior year but that's due largely to a scaleup of an application during the first quarter of 2006 that didn't repeat. Demand here will pick up over the balance of the year with a number of new applications being added, and we're anticipating 2007 growth at better than 15% for this segment in North America with even faster growth internationally.

We're also seeing some nice volume gains from other food & beverage applications outside of beer. This is a highly under penetrated segment that we're addressing with a focused marketing and a lot of new product development initiatives as well. Separately in the films area, we've had just terrific commercial response to the introduction of our new GCX product, which uses the proprietary film that's manufactured in house by our performance polymers division. We've launched this product in both North America and Europe with initial sales exceeding our plan.

Our growth strategies are working. In the first quarter, international sales in the pressure sensitive segment were up 7%, compared to 4% in the preceding quarter. Emerging markets remain robust with healthy, double digit sales growth and improved profitability in the quarter. Sales for both our roll label and graphic materials businesses in Asia were up over 15%. Results in China and India were particularly outstanding. Sales for the roll label business in China were up over 20% and India up over 35%, and we're continuing to invest in these high growth markets. In the process of commercializing a new coater in India and we're adding new coating and adhesive manufacturing capabilities in China as well.

A big improvement in sequential performance came from our pressure sensitive materials businesses in Europe, with mid to high single digit sales growth before the benefit of currency, alongside improved operating margin. The roll label business in Europe now surpasses North America in total sales, partly driven by currency of course, but this is clearly an important market for us. Rapid growth in Eastern Europe has contributed to our success in the region as well, but growth in the West was also quite solid. Needless to say, I'm very pleased with the ongoing growth and profitability improvement in this market. Our investments in this region are truly paying off. Internal measures of customer service, delivery flexibility, and reliability have never been better and our quality metrics are improved as well. But external metrics are perhaps more telling. Overall customer satisfaction as measured through customer surveys has increased significantly over each of the past two years with improvement in all key categories, and our sales growth reflects that improvement.

Strong overseas demand for pressure sensitive materials was offset by weakness in North America. The significant slowdown that we saw late in 2006 continued for the first two months of the year followed by a solid improvement during March. It's too early to say if the March pace will be sustained, but it is rare for the industry to post negative volume comp s for more than a couple of quarters. Based on two months worth of data, our latest industry statistics are showing overall market volumes down 1-2% in Q1. That followed a fourth quarter unit volume decline of 2-3%, weaker by the way than our previous assessment of industry demand in Q4. History tells us this trend won't last much longer.

We did regain share in the back half of last year, and we have an aggressive strategy in place to drive solid profitable growth in this important region. Providing best-in-class service is a key part of that strategy. The film segment is likewise an important part of our growth strategy in North America, notwithstanding the temporary slowdown in beer label sales that we felt in Q1, total film volumes still increased. We executed a flawless start up of the new films coater in Pennsylvania during the first quarter. Not only does this new coater improve the profitability for clear film label products, it also allows us to load other existing assets to optimize the manufacturing efficiency across our entire supply chain. This process of optimization enables us to meet competitive price points for lower end products, what we call the fighting core, a portfolio of over 40 lower cost products. With the realignment of our supply chain, we expect to deliver a new level of productivity, allowing us to grow the business while continuing to expand operating margin.

So with some improvement in underlying demand and the successful execution of our strategies to recapture share, I'm confident that we'll see the volume picture brighten for North America over the next few quarters. In the meantime, we continue to pursue our productivity improvement initiatives which almost completely offset the net income effect of the year on year sales decline in the first quarter. Outside of roll label in North America, we faced a couple of other top line headwinds this quarter. The secular trends in office & consumer products remain a challenge. The volume shift to 2006 and customer inventory reductions combined with transition costs we're incurring to secure future cost savings will constrain progress against our long term growth and market improvement objectives for this segment during 2007. Now, while our overall forecast for the year calls for operating income to be flat to down slightly in this segment, the profitability run rate picks up considerably in the second half. In fact, we expect operating margins to be at or above our long term target in the back half of the year and for that improvement to carry through into 2008.

Finally, retail Information Services had a disappointing quarter, especially on the top line. Our fastener business had a strong fourth quarter, but unfortunately, that took volume out of Q1. We also experienced a large decline in our woven label business. We have a small share of this business, and we're competitively disadvantaged because we act as a broker rather than a manufacturer. As a result, our service and responsiveness as well as our geographic footprint just isn't competitive. The Paxar acquisition goes a long way to helping us address this shortfall, given their in house manufacturing capabilities.

Speaking of which, with the recent news regarding termination of the Hart-Scott-Rodino review, we hope to complete the Paxar deal in the summer, and we've already begun our post-merger integration planning. Over the past few weeks, I've had the chance to visit several Paxar facilities and meet with many of their Management team, and I have to say that I'm more enthusiastic than ever about the opportunities that will be created through this acquisition. As I said when we announced the deal, this kind of perfect fit doesn't come along very often. We have a common strategic vision and highly complimentary strengths, combined we'll be much better equipped to achieve our top line growth objectives while realizing annualized synergies worth 90-$100 million as we integrate the two businesses.

Now, just a couple quick comments on the radio frequency identification business. We've commercialized a new tag, the AD 222 that offers improved performance characteristics while reducing manufacturing costs, and we continue to see a nice improvement in the sales trajectory as we reported during our investor conference last month. The tagging of promotional items and high velocity SKUs remains the major focus for large consumer packaged foods companies and we're seeing growth in orders from the Department of Defense. We're also seeing increased interest in durable tags and other applications for closed loop systems and we're working on several pilot projects for potentially large pharmaceutical applications.

Now I'll turn the call over to Dan for a more detailed review of the financial results.

Thanks, Dean.

Dean covered the key points summarized on slides four and five of the presentation so let me start with slide six. As Dean said, reported sales were up about 4% compared to the prior year. Currency translation added 3.5 points of top line growth, and $.03 of earnings to the quarter. The impact of divestitures reduced our reported sales growth by about one point while the effective changes in price and product mix was essentially neutral. That leaves us with core unit volume which increased by an estimated 1.5%. You'll recall that we benefited in the fourth quarter from an increase in orders related to a January price increase in office products. Those early orders pulled sales out of the first quarter for an estimated one point reduction in volume. We also had a small loss of sales associated with some low margin business we exited in our Specialty Tapes business.

Adjusting for these factors, our underlying unit volume growth in the first quarter was about 2.5%. That represents a solid improvement compared to the underlying volume growth we experienced in the fourth quarter. This improvement was driven by faster growth in both the Pressure Sensitive material segment and other Specialty Converting businesses offset by weaker results for office products and retail information services. As Dean said, we expect further improvement in underlying unit volume growth over the balance of the year.

Looking at sales trends on a regional basis, sales declined by 4% in the U.S. Or about 2% adjusted for the comparability issues which represent the modest improvement compared to the fourth quarter decline. On local currency basis, sales in Europe were up about 5% before the product line divestitures. Local currency sales in Asia and Latin America were up 10% and 9% respectively.

Let's take a look at margins. Our gross profit margin declined by 35 basis points compared with prior year, while MG & A expense improved by 45 basis points for a net operating margin gain of ten basis points. We delivered significant improvement in operating margin for the pressure sensitive materials segment and other specialty converting businesses. As expected, operating margin declined in office and consumer products, driven largely by the volume shift in the prior year, and margin declined in retail Information Services on weak sales and some cost increases which I will discuss in a moment.

Slide eight summarizes the key factors driving the change in total Company operating margin. Our gross profit margin was 26.2%, down 35 basis points compared with the prior year. Netting out the transition costs associated with new productivity measures, savings associated with our restructuring efforts added about 25 basis points to gross profit margin. These benefits were more than offset by unfavorable segment mix and the effective volume loss in the high margin office products segment.

Year on year, raw material costs were up about $3 million which was in line with our expectations. We anticipate a modest amount of additional raw material inflation for the year which we plan to offset primarily through global sourcing strategies and material cost out efforts. MG & A expense as a percentage of sales improved by 45 basis points compared with the prior year to 17.9%. In absolute spending, MG & A expense increased by about $4 million. Courtesy translation accounted for an increase of about $7 million, and transition costs associated with productivity actions added another $2 million. Net of these increases, nominal spending was lower, driven by productivity from last years restructuring initiatives and lower stock option expense.

In terms of EBIT impact, we realized a total of about $10 million of incremental savings from last year's restructuring actions in Q1. That number reflects both the reduction in year on year transition costs as well as incremental savings compared to prior year. We're currently on track to achieve more than $40 million of incremental savings from last year's actions during 2007. Restructuring savings from new actions initiated in the first half of 2007 are being offset by transition costs largely associated with these actions. In the first quarter, these costs totaled about $5 million. We're still incurring some transition costs in Q2 but should begin seeing annualized savings of 11 to $13 million during the second half of the year.

The next few slides provide a few details on our segments. Sales for pressure sensitive materials were up over 9%. The benefit of currency translation at the about four points of growth. Unit volumes were up over 5% while price and mix changes reduced sales by less than a point. Pulling out the effects of currency, sales grew organically by about 5% which compares to adjusted growth of about 3% in Q4 of last year.

Dean talked about this segment in some detail but let me just recap the growth rates starting with our largest division within the segment, the fast on materials business in Europe grew at a mid single digit rate on local currency basis. North America declined at low single digit rate but improved as the quarter progressed, and local currency sales in both Asia and Latin America once again grew on a double digit pace. Finally our graphics business grew local currency sales at a mid single digit rate driven by strong growth internationally.

Excluding restructuring and asset impairment charges, operating margin for the segment increased by 80 basis points to 9.7% reflecting an improved rate of growth as well as the benefit of restructuring and other productivity initiatives. Sales for office and consumer products declined by over 10%. Currency added about two points to reported sales while the effect of price and mix was neutral. The divestiture reduced sales by 3.4% while the impact of price related buy in the fourth quarter represented an estimated five points of lost volume in Q1. So adjusting for the currency, divestiture and the comparable issues, sales declined by approximately 4%. This decline was due in part to customer inventory destocking on top of those associated with the Q4 overbuy.

Excluding restructuring and asset impairment charges, operating margin for the segment declined by 270 basis points to 12.6%. We incurred $4 million of incremental transition costs, largely associated with 2007 restructuring actions which represent 70% of the margin decline. The balance of the decline is attributable to reduced fixed cost leverage due to the shift in volume to the fourth quarter of last year which more than offset the benefit of restructuring and other productivity initiatives.

Slide 11 covers retail Information Services and other specialty converting. Sales for the RIS segment increased by about 2% due to the benefit of currency translation. On an organic basis, sales declined slightly. The effect of price and mix changes was essentially flat so this decline was entirely volume based, reflecting loss of sales in the woven label and fastener product lines. Excluding these two product lines, sales for the segment were up 4%. As Dean indicated we do have a competitive disadvantage in the woven labels segment with no internal source of supply in Asia.

The synergies we expect to yield through the Paxar acquisition will allow us to compete more effectively against the small regional and local suppliers. Excluding restructuring and asset impairment charges, operating margin declined by 180 basis points compared to the prior year, to 4.6% due to investments in information technology and employment costs in Asia. Lack of sufficient scale in Europe and Latin America continue to con strain profitability in those regions providing another source of synergy through the integration with Paxar. Sales for the other specialty converting businesses grew by 2% or about 3% on an adjusted organic basis. The operating margin for this collection of businesses expanded by 280 basis points to 6.8% due to both productivity improvements generally as well as a reduction in the loss from our investment in RFID.

We don't talk much about these businesses given their relative size but we've got some nicely profitable niche businesses here with exciting growth opportunities, particularly in specialty tapes. Excluding the RFID business, the operating margin for this group was 11% in the first quarter and we anticipate an acceleration of top line growth for the group over the balance balance of the year. As you see on Slide 12, our debt to total capital ratio at quarter end was approximately 40%, notwithstanding the the 690,000 shares we bought back early in the quarter. This ratio is at the low end of our target range. We'll obviously hold back on significant share repurchase in light of the Paxar acquisition, but we will be in a position to resume this program within about two years of the completion of that deal.

We have modified our working capital ratio to eliminate the non-operational elements that tend to drive volatility from quarter to quarter, like the recent shift in tax accruals related to the Fin 48 implementation. Our new metric which we call Operational Working Capital includes Accounts Receivable and inventories net of payables. Expressed as a percentage of sales, Operational Working Capital for the quarter was 14.5%, up from 12.9% in the first quarter last year. This increase was largely due to an increase in inventories in Europe, due in part to inventory build in advance of a maintenance related coater shut down as well as increased Accounts Receivable reflecting late quarter pick up in sales.

By the way, while the implementation of Fin 48 had a sizeable effect on our historical measure of working capital , the impact of this accounting rule changed on retained earnings was immaterial. Only a few million dollars which speaks to the effectiveness of our tax accounting over the years. Cash usage for capital expenditures totaled $56 million in the quarter, with another $15 million used for software investments. For the full year, we continue to expect investment in fixed assets at roughly the level we spent in each of the last two years and that is 160 to $165 million. About a third of 2007 capital spending will be dedicated to emerging markets including capacity additions in China and India, that will support both materials and retail Information Services businesses.

We stepped up our spending on software in 2006 and we've increased that budget again this year to an estimated 50 to $60 million. Taking these investments into consideration, we expect that free cash flow for 2007 will be in the range of 350 to $400 million, as usual, free cash flow will be weighted toward the back half of the year.

With that, let me address our financial outlook for the year. We have not modified our guidance for the impact of the Paxar acquisition given the uncertainty of timing and the early state of integration planning. We will update our guidance for the year when the deal closes, so excluding the Paxar effects and with Q1 results in line with our expectations, we have narrowed our earnings guidance range for the full year to $4.05 to $4.30 per share before restructuring and asset impairment charges.

Our underlying assumptions for this expectation have not changed appreciably from those we provided last quarter. They are summarized on Slide 13. Based on current exchange rates, we have raised our guidance for the benefit of currency translation, but we're leaving our overall reported revenue guidance unchanged at 2 to 5%, reflecting first quarter results as well as the expectation of a modest decline from pricing and mix changes.

Now, I'll turn the time back to Dean for some closing

Thanks, Dan. Once again, the first quarter represented a solid start to the year. I'm pleased with the progress we've made so far and we're right on track with our internal estimates and I'm optimistic that we'll drive superior financial performance over the next few years. So just to recap, our volume trend is improving, costs are coming down, and our underlying operating margins expanding, while we continue to invest against our long term growth priorities. Now we would be happy to take your questions.

Operator?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Jeff Zekauskas with JPMorgan Securities. Please go ahead.

Hi, good afternoon.

Hi, Jeff.

A few questions. So what I look at UPM, it looks like they're expanding their capacity in the U.S, now in Poland, in China. Does that bother you? And over the next couple of years, will you have to make substantial investments to expand your own capacity in Pressure Sensitive Adhesives, or are you content with your capacity utilization rates right now?

Well, as you know, Jeff, we are continuing to expand in Asia. We've got two new coating lines going in right now, one in China, and the other in India, and that's an obvious market for expansion. In Europe, we expanded our operations ahead of the curve to execute the Jack integration, and I think we're actually sitting in pretty good shape for the next couple of years, although if the current growth rate keeps where it is we might have to expand our capacity a little bit sooner than we planned.

And then in the U.S, we just finished a capacity expansion for a new films coater in Pennsylvania which has started up very well. I think one of the benefits we get when we add capacity and especially in either North America or Europe is that we're trying to do two things simultaneously so we're putting in more modern assets that are more productive and very focused assets which enable us to not only grow but to get more productivity at the same time, so you'll recall last year, we shut down a factory in Canada and five or six coating lines, and were able to capture a lot of the new growth that we have on this more efficient capability that we just put in place in North America, and likewise, if we expand in Europe, we would do exactly the same thing.

A question for Dan. It looks like there was a reallocation of revenues and profits from out of retail information and into other. It looks like about $11.5 million of revenues and $1.5 million in operating profits. What was that?

There hasn't been any new reclass, Jeff, unless it was last year's reclassification, which was a business media division, but that was already restated in last year's fourth quarter results.

Okay. I can follow-up on that. And then lastly, why does Europe grow faster than the U.S. In Pressure Sensitive adhesives? Is it that the market is under penetrated there or is there some other reason?

Well, Eastern Europe, we report that as a region, is very, it's rapidly growing because it's an emerging market, so that's a fairly large percentage of the total. Also, some of the Southern European economies are still relatively under penetrated from a Pressure Sensitive penetration point, so Northern Europe looks more like North America and southern Europe is probably a hybrid between Eastern Europe and Western Europe.

Okay, thank you very much.

Our next question comes from the line of George Staphos with Banc of America Securities. Please go ahead.

Thanks, everyone, good morning.

Good morning.

I just want to piggyback off Jeff's question. So to conclude then, Dean, in North America, your view is that whatever capacity does come on among the various players that growth will more than absorb it? I mean, it seems that's clear in your answer for Europe and Asia but I just want to make sure that's the case in North America as well.

Well, no. In North America, (overlapping speakers) yes, let me just, again, clarify what I said. In both North America and Europe, we have the opportunity to add capacity and when we can use that capacity in one of two ways but likely we'll do both simultaneously. For example, in North America we put a new films coater in and we needed a specific coater designed for clear on clear films for beverage and this new coater is so much more productive than what we've ever had before. It runs faster at much lower scrap rates. We can use lower cost materials. That allows us to reconfigure our supply chain where we had that volume running on other assets so we can either fill that up with volume as we grow our share as the market grows or we'll take it out and get a productivity benefit. So I actually, my point is we actually have options. We can use a new capacity for growth and/or productivity improvement in those markets.

Okay, that's clear, Dean. Forgive me. There was a lag on the phone connection. Didn't mean to cut you off. In terms of North America, do you feel you have some remaining pockets of capacity that are more apt to be in the latter, likely to be taken out say the two years where you think you'll be able to grow into that capacity in the next two years?

Well, we'll do both, okay?

Okay.

We definitely are continuing to grow our films business, Especially in those beverage applications, because we've got a very large share of that business and we got a lot of new product innovation and converters look to us for that volume, and then we have the opportunity to grow in some of the other product categories or rationalize capacity, whatever makes sense.

Okay, fair enough. In terms of volume, you're not the only Company that we track who has seen a pick up later on in the first quarter and into early second quarter, and I know this is always hard to gauge, Dean, because of the lead times in your business. Do you think at all what we're seeing is rather than a real pick up in demand, it's just a shift associated with Easter and Passover a little bit earlier in the year versus last year, and how do you gauge that?

Probably be able to gauge it better in a few weeks, so it is a little tough to gauge, although we saw pretty good surge just about everywhere, even in the non-Easter kind of related countries.

Yes.

So again, it's too early to tell.

I will add too that we were still raising prices in the first quarter of last year and if you look at our year on year growth rates there's still a couple of points of growth that is missing this year because of business that we still have this time last year that we eventually lost as a part of that price related share loss that we had. So it takes us all the way into the third quarter before we're completely clean on a year to year basis so in Q2 we get most of the remaining year on year comp back.

Thanks. I'll turn it over and I'll be back.

Thank you. Our next question comes from the line of Ghansham Panjabi with Wachovia Securities. Please go ahead.

Hi, guys, how are you doing?

Good.

Looking at the PSM profitability, do you have a sense as to how much of the operating margin improvement was from volume gains versus restructuring and FX? Is it half and half? Or some color there would be appreciated.

While there were a number of factors, we got a pretty good lift from the restructuring from last year and then we had some things that went against us. We've been making additional IT investments in that business as we've talked about in the past that begin to impact us there, and we had some small transition costs in the quarter as well, leftover from a plant that we closed in the fourth quarter. But the main lift was productivity driven, more so than the volume impact.

And just in RIS, can you just comment on customer sentiment at this point? There's obviously some concern on the retail channel being weak and so on and so forth. Thanks.

Yes. Our read from the customers generally has been positive about, I assume you're asking about the merger of the business with Paxar.

Yes.

And it's been pretty positive. I mean, I've heard a couple of customer concerns, but most of the time, I think a lot of what we heard from customers is this kind of simplifies my life because I'm not looking to necessarily expand the number of suppliers I have in the trim area because of the complexity and the two of you together can be a really powerful entity and give me great service, and the high quality that I expect, so I'd say it's pretty much what I expected.

And what about overall market fundamentals there in terms of product innovation and inventories and stuff like that?

I haven't seen any major changes, so I think the market looks to me, it's pretty consistent where it's been the last few months.

Okay, great. Thank you so much.

We're building the season now for the Fall and Winter.

Okay.

So it's a bit of a lag time.

Okay, great. Thanks.

Our next question comes from the line of John McNulty with Credit Suisse. Please go ahead.

Yes, good afternoon. Just a few questions. On the consumer and office business, I was a little bit surprised at how negativity actually was given that there was if I remember correctly there was a price pull issue the prior year as well, so can you give us a little color as to what that pull was the prior year and why things, maybe that will help to clear up why things were as bad as they were?

Yes. Well I was surprised as well. This is so hard to predict. I mean, the problem we have is that when customers place their orders for the fourth quarter, they just place orders, and they don't say, this is for pre-buy and this is not for pre-buy. This is for our regular business. So unfortunately, I think the numbers we give are are as good a guesstimate as we can put on a piece of paper. The second thing I know for sure is that a number of customers have decided to destock their inventory and continue to rely on our supply chain. It's a little bit of a two edged sword. We got a couple of awards in the first quarter for supply chain excellence from a couple of our big customers in Office Products, and that's good news. The downside though is that we're getting so good that they figure they can just simply run with less inventory so we definitely saw more of that than I expected in the quarter.

And in terms of communication with those type of clients, how do you know that it is destocking? Is it just they tell you and kind of give you a change in terms of maybe the value that you're providing so maybe you can get a little bit better price? How do you know it's destocking versus maybe just the consumer rolling over?

In some cases the customer just tells us. We set specific objectives in our supply chain group to get inventories down this year, and this is what we expect for the next couple of quarters.

And do they pay you for that? If you're going to basically be managing their supply chain essentially because that's what you're almost doing do you get paid for that do you think?

I think we do in terms of, and we don't get paid money for it so to speak, but certainly when you're a very good supplier and you're running an efficient supply chain, I think the advantage we get is that it makes the transition costs a lot higher for another supplier who is in the same category so we get paid sort of a share of the business over the long term.

Okay, and then just a question on the RIS business. It looks like if you back out kind of the woven label issue, you had somewhere in the neighborhood of about 4% growth there. That's still kind of below the 5 to 7 or 5 to 8% target that you guys have been targeted longer term so I'm wondering what's driving the softness there?

Yes. It is a little bit softer. We're still not getting the sales that we have wanted to get in Europe and Latin America. Again we're more competitively disadvantaged so that was one of the issues. The other, just anecdotally, I think the season started a little bit late for us this year and as you know, the first quarter is always our softest quarter and volumes shift either before the quarter or after the quarter depending on things like Chinese New Year and when Easter is, etc, So it's not, I don't think there's any kind of long term trend here that I'm concerned about.

Okay, great. Thanks a lot.

Thank you. Our next question comes from the line of [Robert Rice] with Bear Stearns Asset Management. Please go ahead.

Hi. Thanks for taking my call. One of the questions was just answered. I just wanted to get one question about the acquisition you're making because I've lost touch. Are you guys doing all cash or are you going to load the balance sheet up with that and when, do you expect the acquisition to be done by the end of this year? Do you think it will be? Because I thought I saw data that said it more or less passed the FTC hurdle, so is that correct?

Yes, Robert, we do expect it to close earlier now given the early clearance in the U.S. We expect to be able to close the deal some time in the Summer and it will be an all cash deal for us.

And the second, what are you borrowing on that, just curious, what do you think it will cost you? How much will you be putting on the Balance Sheet debt?

Well the purchase price is $1.34 billion.

And what are you borrowing at?

So that will be put early on and we'll be paying debt down pretty quickly as we go out of normal cash flow for the Company.

And the last question, just relating to the acquisition. Do you expect that the synergies you've talked about to be pretty much in line for next year? In other words this year, you've given guidance which I read but I'm just saying next year, would you expect to start seeing 90 to $100 million of synergies or I just wanted to understand that again.

Yes, well, we have said that we would get the 90 to $100 million in total synergy and all of that would be in place within two years. We are early in the planning around specific actions so we have not provided any guidance yet by quarter on when that synergy will be in effect, but during 2008, particularly with the Summer close expected in '07 we should get a substantial amount of the savings.

And one last question going back to office and consumer products. Are you starting to see business turn around there?

Well, I think that it's a little difficult to say because the POS data is still not in for the quarter. We did see an improvement in our branded media POS in the fourth quarter, but I haven't seen the results yet for the first quarter yet.

Okay. So that's like you can't tell me whether it's turning around or not; is that correct?

Well we did see some improvements in Q4. I just haven't seen the numbers.

Okay, all right thank you.

Our next question comes from the line Arun Viswanathan, from J. Goldman & Company. Please go ahead.

Hi, guys, thanks for taking my question.

Sure.

Just following up on the last question, what or why would the deal close earlier I guess or what gives you the confidence now that you've closed the U.S.? You still have a lot of other I guess approvals to go through, right?

Well, the reason that we thought it would, that the deal might take until the end of the year was that we thought going in that there might be a second request from the DOJ on HSR, so and that can take some time and it's uncertain, but clearly, we did a good job of submitting the filings and all that and making our case, so we got clearance pretty quickly.

And how are the other, what's I guess what's the process for the other approvals outside the U.S, sorry?

Yes, we're in process of doing that now, and there we don't expect any major hurdles.

Okay. That's great. I guess the next thing is we've heard some issues with some of the retailers out there, yesterday I think Target had some negative news. Does that impact any of your businesses, I guess principally RIS?

Well, I guess it could have some impact. Basically, what we are selling are products that manage the supply chain for retailers, and it tends to be somewhat volume sensitive, although year-over-year, I don't really see any big looming issues here.

And you expect the reacceleration I guess in March to kind of continue through the year?

Well, here is my perspective. Once we get the two companies integrated together, we'll have an ability to grow faster because we'll have a much richer and fuller product line. We can cross-sell opportunities both across products and geographically, and at the same time, we can get a heck of a lot more productive because of the synergies we have, so we definitely made this acquisition because we thought we would accelerate our growth rate in this segment.

Okay. And then I guess the last thing is just on office. When is all the pruning I guess of the portfolio done and when can we expect this to get back to a more reasonable run rate?

Well, there's a small amount of pruning still going on. A lot of what we've cut out via divestiture in Europe last year is behind us. In the first quarter, there was a little bit of remaining overhead, not a lot. In the U.S, we have pruned some business in where we've manufactured private label product and there's only about 5% of our sales is now in private branded label type products so there's not nearly as much to prune but there's still some going on and probably continue the rest of this year.

Yes, there's low end binder business that we're not manufacturing anymore and that will hit us throughout 2007. Actually as a positive for us on the bottom line, but it does hurt us on the top line, and so we'll see that for the balance of the year.

But do you expect, I understand that you may not necessarily see sales growth but the margin dollars, do you expect those to kind of get back to where you were the last couple years?

I expect it to be in our target range of 18-20% in the back half of this year.

Okay, good enough. Thanks.

(OPERATOR INSTRUCTIONS) And we do have a follow-up question from the line of Jeff Zekauskas with JP Morgan Securities. Please go ahead.

I think earlier in your presentation, you said that you realized about $10 million of the $40 million in costs or cost reduction you were going to get for the year. How would you distribute that $10 million across the segments ?

Heck of a question, Jeff.

Yes.

I thought you were going to ask me a timing question. We haven't talked specifically segment by segment about where those savings are coming from, but a lot of it was materials based. We shut a plant down in the fourth quarter that drove a lot of the incremental cost there, and some of it was G & A cost spread across all the businesses, so I can't get a lot more specific than that with you right now.

Jeff, I do have that back up, but I can't get my hands-on it but we could take that on after the call.

Okay, that's good. And it sounds like it's mostly PSA and office products though from what you say.

Yes, that's right.

Second thing is, as I understand your commentary, RIS average prices were down a little bit, and why is that? What is it about the market that leads to a slightly negative price bias?

Yes, remember that's a price mix comment, so across all the product lines we have and the fact we're in a custom business, I think probably much of that is mix related more than anything else.

So then there isn't a negative price bias? There's a positive price bias? Is that the conclusion I should draw?

Prices were slightly negative in the business but it was again slightly negative. In the woven label business, there's been more price pressure but because we're not manufacturing there, we don't have the ability to drive a lot of the productivity to sustain that so we've lost business there but we haven't yielded a lot on price.

See, what's interesting about your cost targets is that you were able to achieve the cost reductions you expected even though your retail information system was down year-over-year, so what is it about that business that makes it so recalcitrant to profit improvement? Is it just volumes are lower and have you sort of cut out more costs in the other parts of your business?

Well the volume leverage was significant enough in that business to impact our margins in the quarter. That was the major issue or the most significant issue going on there. I think we will see margin improvement. This was an unusual quarter for us but particularly with the Paxar merger, we expect to get up into the 10 to 12% operating profit range that we've been talking about. Paxar makes that a lot easier to do but this quarter is not representative of a normal quarter. It's the softest quarter of the year, and we had specific volume issues to pull margins down.

I guess lastly, if you're going to get up to 18 to 20% operating margins in Office Products in the second half of the year, I'd presume that means that sales growth has to be meaningful in the second half of the year; is that correct?

Yes. I do expect sales to pick up. Part of this also for us always comes down to the timing of back-to-school, which is --

Yes.

-- an impossible thing to predict but if it follows the path of last year, and as you know, the fourth quarter is always strong for us in Office Products, we should have a good back half of the year and I think sales growth will be, we will definitely show a little bit of improvement in the back half year-over-year. That's based on customer input, what they're telling us and then also, we had a transition costs will be over that we're carrying in the first half of this year, so that's last year , even though we of this year, so that's last year , even though we had a fairly strong Q4, we were still carrying all the raw material inflation costs and we've now passed through in the price increase so a lot of pluses hit in the back half of the year for

Okay, thank you very much.

Thank you. Our next question comes from the line of Richard O'Reilly with Standard and Poor's Equity Group. Please go ahead.

Hi, good afternoon, everyone, there.

Hi.

Just an accounting question more than anything else. You took a restructuring charge and then in addition to that , the 5 million is in transition cost, is that how I should understand

Yes, we had a small charge in the quarter for actions that we are just starting in '07 but the bigger impact was accelerated depreciation and some overhead costs associated with these new 2007 actions. So in the first half of the year, what you're seeing is the costs associated with those actions. In the second half of the year we'll get the benefit. For the full year, they will offset and then we get the value in 2008 but we will see the net savings impacting the second half of the year.

Okay. So you think the total cost for the year will be that 11 million or so equal to that 11 million or so?

No. It's about 6 million of costs incurred in the front half offset by about 6 million of savings in the back half and then you'll see annualized run rate.

Oh, okay. Fine. Okay, thanks a lot then.

Yes.

Operator? If that's all the calls, we can sign off now.

Thank you. There are no further questions at this time.

Thank you for joining us, everyone. We'll talk to you again next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation, and we ask that you please disconnect your lines. Have a great afternoon, everyone.