艾利丹尼森 (AVY) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Avery Dennison second quarter 2007 conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded, Tuesday, July 24, 2007.

I would now like to turn the conference over to Miss Guenther, Vice President of Investor Relations. Please go ahead.

Thanks. Hello, everyone and thank you for joining us. Just a few quick announcements. First I'd like to direct you to a document titled second quarter 2007 financial review and analysis. We filed that today with our 8-K and it is posted at the investor section of the website. Our discussion will follow this handout in general and refer to information that's in the slides, so I do encourage you to have that in front of you as you listen to our remarks.

Note that we've included references to GAAP operating margin in our earnings release that includes interest expense as well as restructuring and other charges. Those items that are in the other expense net line of the P&L, and items in that line tend to be fairly disparate in amount, frequency, and timing so in light of the nature of those items we will focus our margin commentary on pre-tax results before their effect and before interest expense. That's all detailed in Schedules A-3, A-4, and A-6 of the financial statements accompanying the news release.

In addition, this quarter we've provided our earnings per share margins and spending ratio before the effects of the Paxar acquisition. The Paxar related adjustments are included in the reconciliation schedules I just highlighted. They are also on Slide 17 of the handout. The impact of the acquisition reflects a number of factors including two weeks of results from operations and one-time integration costs. For purposes of the comparison we have identified the full effects of Paxar for you this quarter, since our prior earnings guidance excluded the impact of the deal, but going forward, it's going to be difficult, not really possible to accurately carve out Paxar's operational results as the integration of Paxar and RIS is already well underway. We will continue to report earnings per share before the effects of one-time integration costs and restructuring charges but we will be unable to isolate the sales and underlying operating profit that's directly attributable to Paxar. Our key performance metric for the back half of this year then is going to be earnings per share with Paxar but before one-time integration costs and that will be regardless of where they impact the P&L, as well as before restructuring and asset impairment charges and other items that are in that other expense net line.

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 1-A and the MD&A section of our most recent Form 10-K discusses 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, 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 afternoon. We have two important topics to cover today. Our short-term results which are coming in lighter than expected and then some comments on our medium to long term outlook. With regard to the latter, I'll spend some time talking about the catalyst that would drive an acceleration in our earnings trajectory over the next 12 to 24 months. But before I do that, let me address second quarter results and our near term outlook.

Q2 was another quarter with a lot of moving parts. Not the least of which was the impact of the Paxar acquisition on our existing RIS business. Also, the North American raw materials market continues to be softer than expected. We have seen some improvement in underlying market demand but not the pick-up that we've been anticipating, and we're slightly behind in the execution of some of the productivity improvement strategies that are in place to offset expected price erosion. As a result, we've lowered our expectations for core earnings for the full year. That is before Paxar dilution, by about $0.10. We'll touch more on our earnings outlook later in the call.

Dan will explain the pluses and minuses impacting our reported numbers for the quarter, but let me give you some of the operational highlights for the period. Reflecting continued weakness in underlying demand, the raw label materials business in North America has performed below expectations, but we're definitely seeing some things pick up. In fact, the business delivered the first quarter of positive volume comparison since the start of the inflationary cycle in the first quarter of 2005. Market data indicates that we picked up close to 1 point of market share compared to the first quarter of this year with strong volume growth in film products. We're seeing continued interest by food and beverage manufacturers to switch from alternative labeling technologies to Pressure Sensitive with several brand new food and non-alcoholic beverage applications that will begin to ramp up in the second half of the year, and new beer label applications are also coming online in North America.

The Roll business continued to deliver solid growth in international markets as well. In particular, sales in Asia were up nearly 20%. As expected, we are seeing heightened price competition, both in North America and Europe, and that did hamper progress against margin improvement targets. As I mentioned before, we are behind in executing some of our productivity plans but we have the strategies in place to continue profitably building this business. Specifically, we're going to continue to execute what we've been doing for the past 18 months, and that is move production to our widest, fastest assets and to retire older less productive ones and we'll make sure that our underlying volume, our capacity is commensurate with underlying market demand and our targets for share gain.

Now, returning to short-term results, sales and operating profit for Retail Information Services came in below our expectations. Paxar has been growing faster than our pre-acquisition RIS business, primarily due to their relative strength with European retailers who have been growing much faster than their U.S. counterparts. They've also gained share from RIS since we announced the acquisition since all of the European growth we had planned essentially defaulted to Paxar following the announcement. This result highlights the complementary nature of the two businesses, and over time, we expect the combined strength of the two businesses coupled with substantial cost synergies to create a business that delivers above average sales growth with expanding profitability and return.

Wrapping up the Q2 review, the Office and Consumer Product segment delivered results a bit above our expectations due to early shipments related to back-to-school. As we've told you before, the timing of back-to-school orders is quite unpredictable. Several millions of dollars of sales can easily swing between the second and third quarters depending on the needs of our customers. We are expecting a solid back-to-school season overall with better than 5% net sales growth for these products over the entire season, excluding some low margin business we decided to exit last year, and we do anticipate a sequentially stronger second half for office products driven both by higher top line sales as well as savings from cost reduction actions initiated during the first half of the year.

Now, I'll return to the long term strategy and outlook for the portfolio. There are three key reasons why I view the next 12 to 24 months to be transformative for the Company. First, we've completed the Paxar acquisition and integration is well under way. Following our announcement of this transaction in late March, my expectations have grown, both in terms of ultimate value potential from the consolidation as well as our ability to capture that value much earlier than we originally contemplated. In fact, we now expect the acquisition will be earnings accretive before the end of this year, excluding integration related costs. I'll focus first on the cost synergies.

We've had 18 post-merger integration teams working hard to ensure rapid consolidation of the two businesses while keeping customer satisfaction our top priority. Importantly, we've implemented effective retention plans to maintain the institutional knowledge we need during this rapid integration. The leadership team for the group was announced shortly after the close of the transaction and that team consists of a good blend of Avery and Paxar executives with 6 of the 14 members of the team coming from Paxar. We've raised our target range for net annual savings to 115 million to $125 million and we expect to achieve 60 to 70% of these savings by this time next year. With most of the balance coming through in the six months that follow. As an added bonus, we had originally expected to see an increase in our overall tax rate following the merger, but with tax savings associated with the financing of the transaction we now expect the tax effect will be neutral to positive over time.

So within 24 months of a close we expect the two businesses to be fully consolidated and our cost synergy targets achieved. For some solid growth in underlying operations we expect that to translate into $0.40 to $0.50 of earnings accretion next year and close to $1 when we're finished. While we expect to continue driving superior value creation through this business well beyond the integration phase. By the time the consolidation is complete we expect that the business will be generating an operating margin above the corporate average with top line growth also growing faster than the Corporate average. We have a significant opportunity to grow this business through geographic expansion and product line extension and will do so both organically and with additional acquisition.

I'd like to thank the people in both the Paxar and Avery Johnson organizations that have been working very hard against an accelerated time line to pull this integration plan together, and a quick execution against that plan. The teams have done an exceptional job of maintaining customer focus while integrating two very large organizations. I believe we have the best combination of complementary strength in the new RIS business. The strong, commercial and innovative capabilities of Paxar combined with the operational strength of Avery Dennison. Since this business has been a relatively small part of our portfolio to this point we haven't spent that much time explaining our business model. Let me talk briefly about why this business should generate outside growth and returns over time.

(Inaudible) for use in retail applications are part of a highly complex supply chain. The products are inexpensive relative to the total costs of the goods, but these products are vital to ensuring a rapid cycle, accurate supply chain, before ready merchandise for retailers and brand owners. The market we're after is much more fragmented and much larger than we thought just a few years ago. Labels and tags for retail and apparel alone represent an estimated $4.5 billion in sales for the established markets of Europe and North America. Similar products for as yet untapped market segments like toys, electronics, and other hard goods, represent another $3.5 billion in sales in these regions. And other pieces of the addressable market, printers, supply chain management services, and packaging, contribute another $6.5 billion. In total, we now estimate the market serving North America and European retailers and brand owners at over $14 billion, and that's before we begin tapping into the retailers serving the growing local economies within emerging markets like China and India. Clearly, as the largest global supplier of tickets and tags for retail, we're ideally positioned to capture share in this large, fragmented industry.

The combination with Paxar makes us over ten times larger than the next largest competitor, which gives us an outstanding platform to drive unparalleled customer value in the form of product innovation, quality, and service, and it enables better returns as well. That covers RIS.

Now, let's move on to the Roll business which represents about half our total revenue. We're poised for accelerated growth and margin expansion in this business. We've been earning superior returns on capital here for many years benefiting from strong, secular growth drivers and market leadership positions in every key region in which we compete. Scale really matters in this business, in terms of product offering, cost to manage, and ability to offer superior service.

As you all know, we have a competitor who is committed to share gain in key markets, including a meaningful addition to capacity in North America that's expected to come on line before the end of this year. We've been through this cycle before and it can be disruptive in the short-term. But make no mistake, our strategy is to increase share and as the global market leader with strong and sustainable competitive advantages, we intend to maintain this leadership position. Why am I confident that we can accelerate growth? Well, first, we're recapturing the share we lost in the last cycle of price increases in North America, some of which we just recently left. Second quarter volume growth was about 2% for our Roll label business in North America compared to a 2% decline for the full year of 2006, and we do expect underlying demand in this market to pick up, and we believe that industry volumes increased about 1 to 2 points sequentially and if that sustains, that will translate into healthy annual growth for the domestic market. Meanwhile, emerging markets are now over 25% of sales for Roll materials, growing roughly 15%, and the growth in Western Europe remains solid.

We have an aggressive set of strategies in place to exploit our competitive advantages in every region in which we operate. In mature markets, we are in the process of redeploying a portion of our productivity savings to drive share gain. In North America, for example, we've generated substantial productivity improvements over the past 18 months, closing a plant last year, shutting down six coating lines and adding a films coater that's allowing us to further optimize production across the network. To continue gaining share in today's market, we'll enhance our customer value proposition. Our number one strategy is to be the innovation leader in this market. We've launched a number of new products including several new proprietary film products that provide enhanced clarity and squeezability at lower costs. We're investing in application development, especially in the food and beverage market to replicate the success that we've had in beer, and we're accelerating our service programs with additional exact offerings. Our most recent customer survey data tells us that customers ranked our service and new product capabilities highly because we help them grow their business.

I'm also proud of our margin improvement track record. We have improved margins during the most significant inflationary period in the last ten years. We're continuing this strategy with another new round of productivity improvement to be accomplished over the next 12 to 18 months. While it's too early to provide the specifics, we're going to continue to move production to our widest, fastest assets and retire older, less productive ones. Our strategy for the Roll business in emerging markets has been very successful in the face of increased competitive capacity there. In fact, our business growth accelerated in China over the last six months. Our strategy there remains unchanged. We'll continue to invest ahead of the growth curve, we have rapidly to qualify local sources of raw materials and maintain our leadership position with a superior customer value proposition. In essence, our strategy for this business is the same in all regions, offer higher value add products at competitive prices, deliver superior service through programs like Exact and Fasson optimum performance and continue to help our customers grow by investing to capture new application growth.

In summary, the Roll business remains healthy. Just to provide a little historical perspective, 2003 was the first full year of results following the JAC acquisition. Since then, operating profit for the business has increased by over 15% annually and return on total capital is up by about 6 points. Even in North America where we face the highest raw material inflation and competitive pressure, we've increased operating profits and boosted return on total capital by about 2 points over the past few years. We continue to expect growth and margin expansion for this core element of our portfolio.

Finally, growth of radio frequency identification represents a third key driver of future value creations. We expect to continue to bring traction in this business over the coming months as carton label applications and item label applications expand. With our proprietary low cost manufacturing process coupled with our technical expertise and tag design, we intend to be one of the largest suppliers. The inlay supply agreement we signed recently with Motorola is one step in that direction, opening up major opportunities in airline bag tag and a host of other closed loop applications around the world, and with Paxar, we have the largest retail item level application in use today. The Paxar acquisition in fact gives us a lead position in item level tagging at retail and offers another significant opportunity for growth.

Now, we've accomplished a lot in the last year. We've hit our market share goals in the compliance labeling area. We expanded our reach in non-compliance markets and we've achieved our unit cost in yield goals. That said, the overall market for RFID inlays is developing slower than most experts predicted. We will be much more aggressively reducing our spending levels, commensurate with slower than expected market ramp to reduce the breakeven rate, through both revenue growth and cost reduction, we expect to substantially reduce the loss from RFID in 2008 and we'll update you on the next call regarding our 2008 plans for this business. Now, I'll turn the call over to Dan For a closer look at the quarter.

Thanks, Dean. Let's start with slide 6 of the handout. Reported sales were up about 8% compared to the prior year. Currency translation added about 3.5 points of top line growth and $0.02 of earnings to the quarter. The Paxar acquisition added about 2.5 points while the effect of changes in pricing and product mix reduced sales by about 0.5 a point. That leaves us with core unit volume which increased by an estimated 2.5%. There are a few factors that affected the underlying volume trend this quarter mostly related to office products. Adjusting for these comparability factors, we estimate underlying volume growth at about 3% comparable to what we saw last quarter. As Dean mentioned the acquisition announcement did have some negative effect on the underlying results for RIS, and sales growth for the raw materials business in North America came in a bit lighter than expected, notwithstanding the divisions sequential improvement.

Looking at ex-acquisition sales trends on a regional basis, sales were about flat in the U.S. Before the benefit of currency, sales in Europe were up about 4% while Asia and Latin America were up 8% and 3% respectively. Take a look at margins.

As Cindy pointed out, we've excluded the effect of Paxar from the margins you see on slide 7. The reconciliation to GAAP figures is provided on slide 17. Ex-Paxar, operating margin declined by 10 basis points.

Slide 8 summarizes the key factors driving the change in total Company operating margin. Gross margin declined by 110 basis points driven by a variety of factors. Netting out the transition cost associated with new productivity measures, savings associated with restructuring efforts added about 40 basis points to gross profit margin. These benefits were more than offset by the impact of price competition, higher raw material utility costs, and other increases. Year on year raw material costs were up about $5 million which was in line with our expectations. Partially offsetting the gross margin decline, the MG&A expense ratio improved by 90 basis points to 16.9%. In absolute terms, MG&A expenses were about flat with the prior year as productivity improvement covered the effects of currency and general inflation.

In terms of EBITDA impact, we realized a total of about 10 to $11 million of incremental savings from last year's restructuring actions in Q2, and that number reflects both a reduction in year on year transition costs as well as incremental savings compared to prior year. Restructuring savings from new actions initiated in the first half of 2007 have been more than offset by transition costs largely associated with these actions. In the second quarter these costs totaled about $3 million. We can expect to see about $6 million of net savings from these actions during the second half of this year.

The next few slides provide a few details on our segments. First, sales for Pressure Sensitive materials were up about 9%. The benefit of currency translation added about 4 to 5 points of growth. Unit volumes were up about 5% while price and mix changes reduced sales by about 1 point. Pulling out the effects of currency, sales grew organically by approximately 4%. Dean talked about the Roll Label materials business in some detail but let me just recap the growth rates. Starting with our largest division within the segment, the Fasson roll materials business in Europe grew at a mid single digit rate on a local currency basis. North America was roughly comparable to the prior year which represented a solid improvement for this business compared to Q1. In fact this was the first quarter of positive volume comparisons for the region since late 2004 when the inflationary cycle was just kicking in. Asia delivered another great quarter of strong double digit growth, nearly 20% with South America around 10% And finally, our graphics and reflective business grew local currency sales at a low single digit rate. Excluding restructuring and other items, operating margin for the segment was unchanged at 9.8% as our productivity initiatives covered the effects of heightened price competition and unfavorable product mix.

Sales for the RIS segment increased by about 21% due to the Paxar acquisition. Taking out the effect of the acquisition and about 2 points of benefit from currency, sales declined 1% on an organic basis. The effect of price and mix changes was neutral, so the organic sales decline was entirely volume based reflecting soft retail sales among key U.S. customers and share loss in the woven label and fastener product lines. As Dean pointed out, RIS also lost share in Europe to Paxar following the acquisition announcement as customers there apparently defaulted to the much larger player in anticipation of the Company's merging. We estimate that the impact of the decline in woven labels and fasteners plus the share shift in Europe took about 3 points off the top line for RIS.

Excluding acquisition and restructuring costs, operating margin declined by 200 basis points compared with the prior year to 10.7% as productivity was unable to cover higher costs in this slow growth environment. Major sources of cost increase included investment in information technology and employment costs in Asia as well as complexity related costs increases associated with smaller order sizes. As we pointed out in the past, lack of sufficient scale in Europe and Latin America have constrained profitability in those regions, providing another source of synergy through the integration with Paxar.

Slide 11 covers office and consumer products and other specialty convertings. Sales for office and consumer products were down about 1%. Currency added close to 2 points to reported sales while the effect of price and mix was a modest negative. Customer reduction of inventories related to the price related forward buy in the fourth quarter of last year continued to impact results in the second quarter. Together with the impact of exited low margin business, this represented about 3.5 points of lost sales. These factors were offset by an earlier back-to-school order pattern, adjusting for the comparability factors both positive and negative, we estimate that sales declined by about 2 points on an organic basis.

Pro forma operating margin for the segment declined 30 basis points to 16.2%. Now, recall that we don't start seeing the savings related to current year restructuring actions until the back half of the year. Sales for the other Speciality Converting business grew by 6% or about 5% on an adjusted organic basis. The operating margin for this collection of business is expanded by 70 basis points to 4.2% reflecting a reduction in the loss from our investment in RFID.

Now as you see on slide 12, our debt to total capital ratio at quarter end was about 57%, up significantly from prior year due to the Paxar acquisition. As we mentioned last quarter we've modified our internal 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 before the impact of Paxar for the quarter was 14.8%, up from 13.7% in the second quarter last year. This increase was largely due to an increase in Accounts Receivable reflecting timing of cash receipts from customers.

Year-to-date cash usage for capital expenditures was $95 million with another $29 million used for software investments. For the full year, we continue to expect investment in fixed assets at roughly the level we've spent in each of the last two years, about 165 to $170 million before any spending for the Paxar business. About a third of 2007 capital spending will be dedicated to emerging markets, including capacity additions in China and India that will support both the materials and RIS businesses. We stepped up our spending on software in 2006 and we have increased that budget again this year to an estimated $50 million to $60 million. While it's a bit early to set expectations for future CapEx and software spending, I would estimate that 2008 levels will be about $20 million to $25 million higher than the current level reflecting the addition of Paxar. The overall spending level should begin to come down in the 2009 to 2010 time frame as we get some of the large software projects behind us.

Now we've laid out the key financial targets for Paxar on slides 13 and 14. Let me highlight some of the significant changes from our March estimates. Keep in mind that our original estimates were made before the integration planning started in earnest, we now have the benefit of some intense planning by the various integration teams. First our expectations for earnings accretion from the acquisition are close to 50% higher than our original estimates with about $0.40 $0.50 per share of accretion in 2008 and close to $1 when the integration is complete. The earnings targets include a sizeable increase to our estimate for amortization of intangibles so that roughly $100 million of net income should translate into about 120 million of operating cash flow. There's several factors driving our increase in expectations.

First, the detailed planning of our integration teems has uncovered more cost synergies. We're now targeting net savings of $115 million to $125 million up from an original estimate of $90 million to $100 million. We're also targeting a higher performance of the underlying combined business than our original model reflecting substantial cross-selling opportunities identified by the integration teams. And finally, we had originally expected the acquisition to have a modest negative impact on our overall tax rate reflecting the higher than average tax rate for the Paxar business. We now believe the deal will be relatively neutral to our tax rate based on expected tax savings associated with the financing of the deal.

These three factors more than offset increases to our original estimates for amortization of intangibles and interest expense. One-time charges to accomplish these savings are now estimated to be in the range of $175 million to $210 million, about 85% of which will be cash costs. I have to tell you the one-time cost estimates are very rough, especially in the area of information technology where there is still a lot of planning work ahead. Timing of severance and other charges is an also unknown at this point, and we won't know what percentage of the costs will hit the P&L until site specific plans are completed. We will update you on this outlook in the October teleconference.

Now, we've lowered our earnings outlook for 2007 to reflect the softer than expected second quarter, the effects of the acquisition, and other considerations. Excluding restructuring and one-time interest integration costs, we anticipate 2007 earnings per share with Paxar will be in the range of $3.90 to $4.10. Key assumptions underlying this expectation are summarized on slide 15.

We're anticipating a pick up in core unit volume growth in the back half of the year worth about 2.5 points compared to the first half growth rate. Part of that's due to easier comparisons in some of the businesses and our expectation of continued trend improvement, but we also pick up about 1 point of core volume growth in the back half due to Paxar as we expect the integration to contribute to faster growth for the combined RIS business. Note that what we attribute to acquisition effect is just prior year sales for Paxar since it will not be possible to break apart Paxar from the legacy RIS business.

We've assumed a modest increase in the negative impact from price and mix, something in the range of 0.5 point to 1 point-of-sales decline, and we've bumped up our expectation of growth from currency translation to something in the range of 3.5 to 4%. We've also pulled down our margin outlook for the full year reflecting some of the pressures we've seen over the past couple of quarters. That said, we do expect a healthy pick up in operating margin by the fourth quarter, and we expect our tax rate for the full year to be within our original guidance range of 20 to 22% likely towards the lower end of that range.

While we don't provide quarterly earnings guidance you should know that second half results will be heavily weighted toward the fourth quarter for a number of reasons. Office product sales in Q3 will reflect the shift of back-to-school orders that benefited the second quarter. Second, timing of synergies from Paxar will drive a significant earnings ramp between the third and fourth quarters for the retail information services business. Next, we expect our year-to-date tax rate to come down in the fourth quarter which will drive a large reduction in the effective quarterly tax rate in Q4, and we do believe several of our core businesses will see profitability ramp up over the balance of the year due in part to productivity actions that are under way. Now let me turn the time back to Dean for some closing comments before we take your questions.

Thanks, Dan. Well, there's a lot of noise in this quarters results so I just want to recap how we're feeling. Paxar was a big impact on the quarter. Our RIS management team was definitely focused on acquisition integration planning and we did not move forward with some of the share gain plans. But I'm extremely pleased with our progress so far with the integration. Paxar has got excellent management talent and we retained them. Our teams are working very well together. They are commercially minded, pragmatic, and decisive. They found more synergy and they've got a real will to win, so I think we have a huge upside in this business and again, it will be a big contributor in 2008.

Now, in Roll, some mixed feelings here. We did not hit our commitments for the quarter, market volumes were softer than we expected and we did not achieve all the productivity improvements that we had planned. Pricing was an impact. It was an impact but it was not lower than we thought it would be. On the positive side, we did gain share in North America and we accelerated our growth in Asia, especially in China, and raw materials Europe is still on track. So we're doing what the customers want and they're boarding with their feet and we need to accelerate and execute more productivity improvement projects which are definitely under way.

Office products, our big issue there is a relatively soft retail environment in North America, but I feel good about back-to-school. We have gained some share but we haven't seen the sales yet, we're promised some of those sales especially in the back half of the year. And again in RFID, I think we're executing very well against the things that are under our control. Now, it's time to lower our burn rate and pace our spending more in line with the market adoption rate. So with that, we're happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) The first question comes from the line of Ghansham Panjabi from Wachovia Securities. Please proceed with your question.

Hi, guys, good afternoon.

Hi.

Could you comment on how you're gaining share in North American PSM without exaggerating some of the price erosion you're seeing at this point in this market?

Well, a lot of the, a lot of our growth came in films, Ghansham, and that comes from new application development as well as we offered some new products that customers really liked, so that's kind of been our sweet spot. But that was a big factor for the quarter.

And in terms of the global economic landscape, does it seem any different than over the last couple of quarters or is it pretty much the same? It sounds like you're still growing very nicely in China.

Yes. I mean, Asia has been, continues to be fantastic, especially China. Our growth actually this year is faster than last year, so I'm feeling very good about the team over there that's executing. India, we've got a new plant starting up, that's been really solid growth. Europe, still continued solid growth. It was a bit of a weird quarter. It was a little soft in the beginning and kind of roaring at the end so on the average it was just fine.

And that's true for Western and Eastern Europe?

Well, Eastern Europe of course is, it's got a higher growth than Western Europe but we still had a decent growth in Western Europe as well.

Great. Thanks so much.

Thank you very much. Our next question comes from the line of George Staphos from Banc of America Securities. Please proceed with your question.

Thanks, hi, everyone. Good morning or good afternoon.

Hi, George.

Just could you remind us when you went through this last cycle in pricing and capacity expansions in North American Pressure Sensitive, what was the trough in pricing percent of exchanges, would you happen to remember was it a minus one, was it a little bit worse?

Well, George, if you look back over a number of years, for many years, the price mix combination in that business was negative 2 or 3%. That's sort of the run rate when you consider that year on year, you've got people migrating to lower cost labels like the labels that are sold into the beer market.

Right, but if there was a--?

--pure price was never a big part of what pit have been a 2 to 3% price mix impact. Price s generally half of that or something in that range if you looked over the last five years.

That was also during the deflationary period in raw materials, so that would be the worst trough.

But I think the worst numbers that we've reported in that segment are in that 2 to 3% negative price mix combination range.

So the conclusion there would be you feel pretty comfortable given what you know right now that 0.5 point to 1 point, perhaps 1 point within the segment itself covers you for whatever competitive activity you might see here in the next year.

Yes, for the total Company, I think we're on solid ground there. For the Roll materials business itself, that percentage is higher as I made in my remarks or said in my remarks, it's been about 1%, so the total company I think we got it covered.

Okay, fair enough. I'll come back a little bit later on PSM. Just a quick question on RIS and Paxar. Now, I realize the periods involved might not be comparable but we remember on our team that Paxar in its last quarter before it became acquired by Avery had a somewhat weaker than expected margin performance, perhaps that wasn't your view, but I was trying to reconcile that with your comments that Paxar took some share from you which resulted in RIS not doing as well as you had expected. Could you help us with some of the pieces there? Thanks, guys.

Yes. I guess there's kind of two questions there, George. First is yes, I would say that Paxar's first quarter, they had good growth and the gross profit margins were a little bit lower than, or the margins were a little bit lower than they had projected. They were running or they had a project called Ontario where they were running a lot of productivity programs and they had some transition costs that impacted them and then they had some issues in one of their Latin American businesses.

For us, what we had, we actually had a plan to grow in Europe, and we had a number of programs that customers were going to give us, and literally, a lot of that was coming from Paxar. Paxar is five times our size in the European market, and literally, the week after we announced the transaction, the customers just said well gosh, I'm not going to bother to switch the business now, you're going to get it anyway. So that hurt the results and there was a bit of a distraction factor. We had a lot of people doing integration planning during the May, June time frame to get ready for what frankly was an accelerated integration plan, and in the beginning we thought we had six months and then when we got the quick nod from the government, we had to move pretty quickly.

All right, so--?

George if I could just add one or two other comments to that as well. If you looked at Paxar's results for the quarter and we're certainly not the ones that would release the results for the early part of the quarter but they had a strong April and a very strong May and then of course the deal closed in mid June, and so we have about two weeks in the Avery books of reporting and there were a couple of weeks of June left over in their books, in both two week periods, the numbers were heavily distorted and there were unusual expenses that are not indicative of the run rate but they have very solid double digit earnings growth in the early two months of the quarter.

Secondly, the impact of our underlying core retail Information Services business in some ways is a bit difficult to recognize. Dean talked about some of the business that shifted to Paxar, on top of that which we think was worth a $0.01 or $0.02 per quarter for RIS in terms of earnings per share, there was about a $0.02 per share tax rate hit on the Avery underlying tax rate that was driven by the merger of the companies. So there was about $0.02 to $0.04 per share of negative earnings impact driven by the acquisition that didn't make sense to put into our bridge schedule that pulled RIS earnings lower, so the picture is not nearly what you might see if you're just looking at the business run rate for the quarter.

Okay. That's helpful. I'll turn it over. Thanks, guys.

Thanks.

Thank you very much. Our next question comes from the line of Jeffrey Zekauskas from JPMorgan. Please proceed with your question.

Hi, good day.

Hi, Jeffrey.

Do you expect to generate any free cash flow next year? And if so, order of magnitude, how much?

Well, the answer is yes, but we have to adjust for the cost of integration and I can't tell you what the timing is of a lot of those integration costs. We're still working on that and we have a better feel for the cost that comes out than we do the timing and the location of the spend, so I don't have yet a 2008 free cash forecast for you. We certainly will improve the operating cash flow of the Company if you exclude the integration cost, but we'll be updating that over the next couple of quarters.

All right in your increase in the amount of cost savings from the acquisition, you said that you see cross-selling opportunities, so how much of the increase has to do with the cross-selling opportunities and what are your base assumptions for the underlying market growth?

Yes, I think the cross-selling opportunities we didn't really bake into certainly our guidance for the balance of the year, but it's basically the cross-selling offsets some of the down, some of the share loss assumptions that we had put into our original assumptions. Most of the synergy increases have come from areas like procurement. There's more flight consolidation savings than we had initially thought. There's more SG&A savings that we had found as well. I think the underlying market growth for us, Jeffrey, it depends on your definition of the market. I mean, our work with customers has basically taught us over the past month or so that there are are a lot more areas of their business that we can participate in. For example, packaging. I'd say half the customers said, we would really like you guys to help us manage some of our packaging items around the world, and you don't do a lot of that today, so from a market growth perspective, for just tickets, tags, and labels, it's probably low to mid single digits but when you add in the other market opportunities we have, it's a bigger number.

I guess I didn't ask the question well. What I meant to say was what organic growth do you expect from the RIS business in your assumptions for '07 and 08?

Yes, 5%.

Okay, thank you very much.

You're welcome.

Thank you. Our next question comes from the line of Reik Read from Robert W. Baird & Company. Please proceed.

I was wondering if you guys could just go back to the pressure sensitive materials business, Dean I think sa part of your comments you said the pricing really wasn't worse than you thought. Does that mean that the margin pressure really came from the productivity issues that you talked about and can you put a little bit of color in terms of why those productivity issues didn't come along as quickly as you had hoped?

Well, there's two reasons. One, we had planned for more volumes so we had more capacity and cost in the system given where our planned volume was so we're in the process of scaling back down to a level that's more commensurate with the market growth and on the productivity question, the other part of the productivity, I'd say that -- I can't point to one or two things. We have a lot of productivity programs going. We had a couple of freight reduction programs that didn't get executed until very late in the quarter. We had hoped that they had been executed early in the quarter. We had some capacity shifts that we were going to move around again that we thought were going to come earlier and they came a little bit later, so you have to understand with our kind of lean Six Sigma philosophy, there's probably 100 projects per quarter and some of the bigger ones slipped unfortunately, but I feel confident that these are are going to get back on track for the back half of the year.

Okay, and then in the RFID business, I guess two questions with respect to Europe. I think as part of your comments you were talking about Paxar being involved in the big retail opportunity and I assume you're talking about Marks and Spencer.

Yes.

Currently that's not a Generation Two product. Is that something where you have an opportunity maybe to convert that now with some of the things that you're doing and secondly, can you talk a little bit about Metro and any of the benefit you may be seeing out of their recent announcements?

Yes. We're in the process actually of qualifying our inlays right now for Marks and Spencer because we think if we can do a good job there and they are continuing to ramp up their volume. I think Metro is still early days. We're in there and we're providing product to several different converters, but it's still early.

Okay, great. Thanks.

Thank you very much. Our next question comes from the line of [Troy Halfenstein] from RG Capital. Please proceed with your question.

Hi, guys. When I take a look at your earnings, it looks like you're somewhere around the neighborhood of $4 a share this year and then over the next couple years you'll have roughly $0.90 to $1 in additional cost savings and I think I can add back for free cash flow another $0.20 to $0.30 eventually in some of the intangibles which I think is taken out of that $4. Correct me if I have any of that wrong first of all, that's the first question. And secondarily, when we look at the $4 and you kind of don't include the cost savings, can you give me kind of a sense of what you think the core kind of growth rate over the next couple of years should be when you really don't factor in all of the cost savings of just kind of your ongoing business?

Well, yes. The midpoint of the guidance range that we've just given is the $4. I think our task next year is to drive the Paxar savings to the high end of that $0.40 to $0.50 per share that we talked about and to keep the underlying business growing as well and we've talked about a lot of the issues there and that's what we'll be working on, so we don't have guidance for next year. I think you're thinking of the math sort of the same way that we're thinking of it, with an awful lot of things to accomplish between now and then. We'll update guidance for next year and do that in January as we always do.

Now, the underlying growth rate for the business has been improving a bit. The back half of the year, it improves between 2 and 3 more points over the first half of the year, and we expect that run rate to follow right through into next year and continue to improve, particularly in our North American Roll business so I think you're doing the math kind of the same way that we are are but we're early in our planning process for next year and we'll provide that guidance in January.

And how about if maybe another way I think you said the organic growth an the tax business was somewhere in the neighborhood of 5%, I believe that must have been kind of top line is what you guys are thinking there?

That's right.

How about the other two businesses, assuming the office products is flat to down slightly and the Roll business might have some kind of organic growth also?

Yes, the office products business, we anticipate still between flat and minus 2%.

Yes, okay.

But that's a long term objective. The Roll business we still expect to be in the mid single digit range and it has been improving in North America and we'll watch the other economies and see if they hold up. We had a great quarter in Asia as Dean mentioned, so yes, we still expect midsingle digit growth globally in the Roll business.

Got you, and so if I kind of look at that, that's the top line and then maybe the bottom line assuming that we don't have any kind of margin improvement, if you have margin improvement by just kind of driving scale on the revenue side you might be able to get that up above what you are thinking on the cost savings, right?

For the Company in total, we still expect some margin improvement and some of that coming in the Roll business. We're near the 10 to 12% operating profit margin in the materials sector that we intend to be, and with the price pressure that we got out there, we're probably going to sustain but not build on that over the next year. There are some opportunities in our graphics business that we think will drive some productivity and so we feel like we can offset any negative pricing pressure but right now our expectations for our margin expansion are somewhat limited in that segment. They are highest in the retail information segment of course. There there's a lot of opportunity both in the underlying RIS business and of course with all of the Paxar synergies so that will be a significant source of margin expansion for us.

Okay, great. Thank you, guys.

You bet.

Thank you very much. We have a follow-up again from the line of George Staphos from Banc of America Securities. Please go ahead, sir.

Thanks, hi, guys. When we look at Office Products it sounds like in the quarter you're still being affected to some degree by the fourth quarter pre-buy. Given how much that pre-buy affected your results thus far, do you think it's a comparative issue from the time we get into the fourth quarter '07? I'm assuming that you had built that into your guidance, guys?

Well, George, the fourth quarter is always difficult to predict and there's several things going on because it tends to be a very very strong season for mailing labels which is one of our more profitable products. On top of that, you have last couple of years we've had price increases of one kind or another in there, so incenting some customers to buy at the year-end and then we always have customer rebates that impact the year-end too, so some customers try to reach another level of rebate and they will tend to buy a little more than they need and it can impact it so it's really too early to tell. We know the fourth quarter is always our strongest in office products, but trying to guess exactly how strong it will be and how much is going to carryover is very very difficult.

Specific to our guidance though, George, we have taken into account prior year comps in setting our Q4 targets.

Okay, now when you've looked at it, I'm assuming there's obviously logic and you think you create value by offering these rebates in the fourth quarter, but given what happened last year in the fourth quarter and the volatility it created, might there be some logic to maybe lessening the incentives or trying to do what you can to keep '07 volume in '07 and 08 volume in 08?

Absolutely. And all of those have to be negotiated with your customer kind of one at a time, so it's definitely on our radar screen to talk to the customers. Our programs are basically designed to incent customers to buy branded product and sell branded product and that is really how they are designed at the end of the day.

Just a quick question on pricing in PS, and I just want to make sure that we have it down correctly for the record. It's been a growing negative for you in Pressure Sensitive materials but in line with your expectations for what the delta or the change would have been and that's not the reason why you reduced guidance here? Did I phrase that correctly?

Yes. We had built into our guidance already the expectation coming into the last couple of quarters that price mix would be a negative 0.5% for the Company driven primarily by PS. Our guidance right now says 0.5% to 1%, so we have provided for some additional pricing pressure over the next couple of quarters and it's still driven by the same business.

But the rate of change has not been worse than you expected, that is what I'm getting at.

Not the rate of change, though coming into the year I will say that there is more pressure today than what we thought. I guess that is a rate of change. It has gotten worse since the very beginning of the year and that's part of the reason in the last couple of quarters. In the second quarter that we didn't have the strongest of earnings as we expected to.

Do you think, last question, guys, do you think all the actions that are being taken in the market in Pressure Sensitive are being timed to coincide with what you need to do with Paxar and maybe that's not possible given the lead times on bringing on facilities, but in turn, more practically, how do you feel about the bench's ability to manage both some restructuring or price competition in Pressure Sensitive material while trying to obviously integrate Paxar which hopefully will be a very good acquisition for you? Thanks, good luck in the quarter.

Thanks. The two are kind of independent events and I'm not sure, I've got a very good experienced team in the pressure sensitive business in place and they've been in place for a number of years, so I'm very very confident in their ability to execute against their plans and I feel good about the RIS team. In fact if you sat in the combined team, you would think these guys have worked together for a couple of years. So I'm actually feeling pretty confident about it and it's not difficult to manage those two things simultaneously.

All right thanks, Dean. Thanks, Dan.

I know it's a lot to absorb this quarter so if there are a couple of other questions out there, we're at the hour but we could take another couple questions if you'd like.

There are no further questions from the phones at this time.

Okay, terrific. Thanks very much, everybody.

Thank you.