艾利丹尼森 (AVY) 2008 Q4 法說會逐字稿

Welcome to Avery Dennison's earnings conference call for the fourth quarter and year ended December 27th, 2008. This call is being recorded and will be available for replay from 2:00 PM Pacific time today to midnight Pacific time January 30th, 2009. To access the replay, dial 1-800-633-8284 or 1-402-977-9140 for international callers. The conference ID number is 21411859.

I would like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. PLease go ahead, sir.

Thank you. Welcome, everyone. Our discussion will reference the earnings release we issued earlier along with the supplemental presentation materials titled Fourth Quarter Full Year 2008 Financial Review and Analysis. Both documents were furnished today with the 8-K and posted to the Investors section of our website at www.investors.AveryDennison.com. Our news release references GAAP operating margin, which includes interest expense, restructuring, and other charges included in the other expense line of our P&L. Also referenced are transition costs associated with acquisition integrations. Restructuring charges and integration transition costs tend to be fairly disparate in amount, frequency, and timing. In light of the nature of these items, we will focus our margin commentary on pretax results before their effect and before interest expense. This detail is in schedules A2 to A5 of the financial statements accompanying today's earnings release. Slide 18 of the presentation contains a reconciliation of the effects of acquisition and integration costs.

We also 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. The Safe Harbor statement included in the documents that we published today, along with our recent forms 10-K and 10-Q, address the most important risk factors that could cause actual results to differ from our expectations. Here today are Dean Scarborough, President and CEO; Dan O'Bryant, Executive Vice President and CFO; and Mitch Butier, Corporate Vice President, Global Finance. I will now turn the call over to Dean.

Thanks, Eric. Thank you to everyone on the call for joining us today. While 2008 was a tough year, I want to emphasize that despite the challenging global economy, we did deliver record free cash flow. In response to the economic environment, we are accelerating our cost reduction and productivity initiatives. These actions will reduce our cost structure, increase our competitive advantages, strengthen our balance sheet, and add operational flexibility. Despite the recent economic turmoil, we will continue to generate robust cash flow, and will emerge with even greater market leadership when the economy improves.

So let me describe some of the actions that we are taking. We launched a major restructuring effort in the fourth quarter, with a target to achieve more than $150 million of annualized cost savings. We eliminated merit increases for 2009, except in countries that have very high inflation or where we are legally required to do so. We are adding free cash flow as a key metric for our management bonus programs. New and more aggressive targets have also been set to reduce working capital. We are reducing capital and IT spending to $135 million, which is a 30% reduction from an already reduced level in 2008. We are accelerating or investment in enterprise lean Sigma, which enables us to capture cost savings while at the same time improving service to customers. We renegotiated our loan covenants to improve flexibility, and to enable our cost reduction actions. And we will soon offer to exchange our HiMEDS convertible securities, which would result in further deleveraging. These actions to improve liquidity assist us in the event of a protracted downturn, while generating the cash flow to pay dividends and reduce debt.

The uncertainties of today's economy have limited our ability to forecast with confidence our 2009 results. We have no visibility on the timing of a recovery. Raw material and pricing trends are also very difficult to forecast in this environment. So our mindset is to prepare for the worst case scenario and focus on cash generation. In the absence of giving guidance, we have provided examples of our scenario planning which indicate that even if recent revenue trends continue, we still generate significant free cash flow.

Just turning to a quick review of our segments, in the fourth quarter, all of our businesses felt the effects of the slowing economy. In each segment, customers curtailed orders and in office products in particular worked off inventories to preserve cash.

In pressure sensitive materials, after showing signs of improvement earlier in the year, sales declined in the fourth quarter in the US and European markets. Sales in emerging markets continued to grow in the quarter, but just slightly as we felt the impact of the slowing economy everywhere in the world. Raw material inflation persisted, driven primarily by constrained capacity in specialty paper markets. Once again, inflation outpaced our price increases, and the benefits that we were able to gain from our restructuring and other productivity initiatives.

In retail information services, sales declined further in the fourth quarter as retail condition in North America and Europe continued to decline. We essentially completed the Paxar integration, capturing over $120 million in savings. Moving forward, we will focus on two major initiatives. We are moving quickly to reduce our fixed cost in anticipation of another poor year in retail and apparel. We are also investing in new capabilities to streamline and standardize our order to delivery process. This will enable RIS to provide industry leading service with much lower operating costs. This will require some investment this year, but will enable us to achieve our operating margin objectives when the market recovers.

Office product sales continued to decline, reflecting the softening retail environment and customer destocking. Inflation continued to put pressure on margins despite increased productivity. We have carried a fair amount of inflation in this business throughout 2008, and while we seen some improvement, our January price increases are important step in margin recovery. I want to emphasize that even in the current market conditions, we are still investing in key growth programs that are critical to our long-term future. We are protecting R&D spending. We are continuing our investments in radio frequency identification and will expand into the high frequency market later this year. Our entry into Japan has been enthusiastically endorsed by key customers and partners in that market, and we do expect significant growth there in 2009. We are investing in two new decorating technology capabilities in the pressure sensitive business and we have a number of new product introductions slated in our tapes, graphics, and RIS businesses. With that, I will turn the call over to Dan.

Thanks, Dean. Let's begin with a overview of full year 2008 on slides 4 and 5 of the handout. Reported sales for the full year 2008 were up almost 6.5%, with the growth attributable to acquisitions and the benefit of currency translation. Full year sales on an organic basis reflect the progressively softening market conditions faced throughout the year, with sales declining just over 3% for the full year. While emerging markets continued to outperform developed markets during the year, the slowdown has been global. Two of our largest businesses -- pressure sensitive materials and retail information services -- were among the first to feel the impact of the recession early in the year. Hopefully they will be among the first to feel the turnaround when it occurs. But as Dean pointed out, so far we haven't seen much improvement from the fourth quarter run rate. The cost reduction and productivity improvements that we're implementing should provide us with significantly increased operating leverage when market conditions do improve.

Let me start with comments on 2008 in total and I will provide detail in the fourth quarter. As we been discussing over the last few quarters, we incurred significant raw material inflation in 2008, approximately $125 million of higher cost than in 2007 combined with a period of weak underlying demand. These were the primary factors that drove 2008's consolidated operating margin down 2.5 points versus 2007. While we were able to get some selling price improvement during the year, our price inflation GAAP is still sizable. Some are surprised we are still facing inflationary pressure. With pulp and oil prices both declining, there is a question of why our material costs haven't come down. Most of the materials that we buy, particularly on the paper side, are specialty grades. Material suppliers have been reduced in capacity, refocusing their businesses, and consolidating keeping material costs up in a number of key raw material areas. So while we are experiencing relief in some of the materials we procure, the declines in pulp and oil prices have not driven meaningful deflation for us.

To help offset the high inflation, we implemented price increases in 2008, and we put in place additional price increases at the start of this year. As we are still behind the curve of inflation, we are continuing to work to reduce material costs through global sourcing and reengineering of our products. While we believe raw material costs will moderate if the current economic environment persists, it's difficult to predict the timing and overall impact of raw material declines on our pricing. So finishing up slide four, you may recall that at the beginning of 2008, we targeted achieving 85% of the Paxar acquisition synergies by year end, with the remainder realized in 2009. As Dean mentioned, in 2008 the Paxar integration was essentially complete, and as we go forward we will have the full $120 million of recurring benefit.

Turning to slide five, I will give more specifics on our restructuring plans, which once implemented are expected to yield significant recurring savings. Again, our primary goals here are to rightsize our fixed cost to current market conditions to maximize the operating leverage when market conditions improve. So in the fourth quarter of 2000 we began to implement a restructuring program targeting more than $150 million in annualized savings over the next two years. Our actions will impact approximately 10% of the company's global work force, and we expect roughly $70 million of incremental restructuring savings from these actions in 2009. We will not be providing a lot of detail on locations and business impact because we have not finished announcing our plans internally.

So summing up 2008, some facts we think are the best examples of Avery Dennison's resilience to tough market conditions. Notwithstanding the challenging environment, we achieved record free cash flow of $365 million and retained uninterrupted access to capital throughout the market turmoil. We deleveraged our balance sheet by $160 million since our second quarter 2008 acquisition of DM Label. We remained in compliance with our bank covenants and amended the covenants going forward to create a carveout for our restructuring program. The new terms will also provide additional operating headroom for the next couple of years.

While on the topic of deleveraging, in a separate news release issued today, we announced that during the first quarter of 2009, we intend to offer to exchange our HiMEDS converts. While their conversion isn't mandatory until November of 2010, taking the dilution now instead of then is appropriate given the benefits that the company will receive from having lower leverage in today's environment.

Let's turn to slide 6 to begin the discussion about the fourth quarter of 2008. Reported sales were down 11.8% compared to the prior year. Sales on an organic basis were down 8.1%. Currency translation explains 4.4 points of the difference with a roughly $0.05 impact to earnings per share. While we don't normally talk about the results of months within a quarter, the fourth quarter of 2008 merits exception. Revenue on a organic basis declined approximately 4% in October, 5% in November, then 14% in the month of December. In December 2008, many of our customers simply shut down. In office products, December is usually a strong month for us, as customers build inventory at a price increases and work to hit volume-based rebate tiers. The opposite occurred this December as customers are managing for cash and curtailed their purchases. While it's way too early to predict the first quarter of 2009, I will say that orders are looking a lot like the slow month of December. It appears that the normal holiday slowdown has been deeper and continued through much of January. We seen marginal improvement over the last week or two, but not enough to call a trend. Fourth quarter operating margin before restructuring and asset impairment charges and transition costs declined to just under 5%.

On slide 7, adjusted earnings per share of $0.65 in the quarter excludes $0.22 for restructuring charges, asset impairment, and transition costs. Our effective tax rate for the quarter was negative 51%, bringing our full year 2008 effective tax rate down to 2%. The negative 51% in the quarter reflects a net benefit of $25 million from tax planning actions from changes in tax reserves and statutory rate changes, and there were also changes in geographic income mix that impacted the quarter and the full year rates. Now the ongoing annual tax rate expected to be in the low 20% range, although it can vary significantly from quarter to quarter.

Let me walk you through the story on fourth quarter sales on slide 8. Looking at organic growth trends on a regional basis, sales in the US declined approximately 14%. In Europe, sales before currency were down 6%. Asia declined 6% on a organic basis, primarily due to the weakness in apparel exports to the US and Europe that impacted retail information services. Our raw material business in Asia grew very modestly in the quarter. Sales in Latin America were down 6% versus the prior year on a organic basis, in part due to retail information services, but also due to raw materials.

Looking at margins on slide 9, on an adjusted basis operating margin declined to 4.9%. Our price increases in the fourth quarter continued to work into the inflation gap we have had all year. But the rapid volume decline in most businesses really drove the margin story. Dean has already gone through the segment discussion, and we talked about cash flow, let's skip ahead to slide 15 where we will provide the detail in our covenant amendments.

Last week we completed the amendments to our bank agreements, which are outlined on slide 15. These changes enable us to proceed with the restructuring actions that we described and give us more headroom to run the business during this economic cycle. In the fourth quarter, we were in compliance with our covenants.

On slide 16 and 17, we list some of the contributing factors to 2009 financial results. We are providing these so you can better understand the models in the 2009 section of the news release and at the bottom of slide 17. While we are not providing a 2009 earnings forecast, we want to provide you with the key factors that are going to drive our results over the next year. Our focus is on generating free cash flow. We been reviewing several scenarios to prepare ourselves for very uncertain outlooks. For example, if the fourth quarter 2008 revenue trend continues through 2009, meaning an 8% decline for the year on top of the slow 2008, we could deliver approximately $1 per share of adjusted earnings and most important, approximately $260 million of free cash flow. If 2009 revenue on organic basis is down about the same percentage as it was for all of 2008, which was 3%, we estimate approximately $2 per share of adjusted earnings and about $300 million of free cash flow. The good news is that under either scenario we continue to generate significant free cash flow. Before turning the call back to Dean, we want to stress that these models are not guidance. They are for illustrative purposes only. And with that, let me turn things back to Dean for some additional comments before we take your questions.

Thanks, Dan. 2008 was a tough year, and I believe that 2009 will be just as if not more challenging. Now we are fortunate that most of our products are on some kind of consumable rather than durable products. People still buy apparel and shampoo and beer during a recession. Only about 15% of our business is impacted by the durable goods sector. We are a market leader in most of our core market segments. These strong market positions and competitive advantages enable us to generate strong cash flow in a down market. We are managing the company with a plan for the worst mentality. We are reducing fixed cost aggressively. We are reducing capital spending and focusing management on generating free cash flow. We're taking steps to ensure our liquidity, and we are still investing in a few focused areas that will help enable our future success. All this will enable us to endure a protracted downturn if we need to and will enable significant upside when the recovery comes. Now we are happy to take your questions.

Thank you. (Operator Instructions). First question coming from the line of Jeffrey Zekauskas with JPMorgan Securities. Please go ahead.

Hi, how are you today?

Hi, Jeff.

In the office and consumer products area, your profits held up very well excluding charges. I think your sales decreased about $35 million sequentially. But your operating profits were up a couple of million. How did you do that?

Well, we have been raising prices in that business as we carried inflation for a good part of 2008 that had not been passed on to customers. That's part of the equation. We also driven a lot of productivity in the business, they are out ahead of the rest of Avery Dennison in terms of their use of enterprise lean Sigma principles, and have really driven an awful lot of productivity. So they have managed their business under pretty slow circumstances.

So there is no asset sales or or gains in those numbers?

Nope. Those are the real operating numbers.

Those are good. If I recall, you're now on FIFO instead of LIFO? Are there any FIFO effects that you will feel either in this quarter or the fourth quarter or in the coming quarter? The first quarter?

Can you clarify the question? I'm not sure what you mean. We've been on FIFO for two or three years, or one year.

Aren't your raw materials going to come down as you purchase new raw materials? But what you have to do is use your raw materials in inventory which are much higher cost.

If you look at our inventory turns, there is a lag between -- if you're talking about raw material inflation or deflation. There is a couple months' lag from when we procure to when it actually hits the P&L, if that's your question.

I guess the restructuring you have, you are going to layoff about 10% of your work force, which I think is about 3,700 people. But the savings is only about $70 million. Why is the savings so small relative to the number of people?

The restructuring we are doing is weighted toward our retail information services business. We've completed the integration, and this next wave of savings there in productivity is going to be substantial. A lot of those people are not in the US -- they are in Asia, many of them in China. So there is a little bit of a disconnect between the total savings and total headcount. The real impact on that business is the improvement it'll have on our customer service. We really are driving a transformation in that business that will benefit us in the marketplace. That's why the dollars and the headcount may not run in parallel.

Lastly, what's the GAAP that you got between your raw material price inflation and pricing either for the 2008 year or for the quarter?

We've been running with a GAAP of $20 million to $25 million a quarter, if you started back to the beginning of 2008, looking forward. We made a little progress against that in the quarter -- we raised our prices on annualized basis of about $50 million to $55 million. We saw inflation in the quarter of about $10 million less than that. We closed the gap a bit, but not substantially, and we raised prices in several businesses again in January. Hopefully we will see raw materials begin to turn in our favor and that will give us benefit over the next couple of quarters. But right now we are fighting most of that margin gap that we have been fighting all year.

Thank you very much.

Our next question coming from the line of Reik Read with Robert W. Baird and Company. Please go ahead.

Good morning, guys.

Hi, Reik.

Could you guys spend a little bit -- in your slide you talk about incremental weakening in the apparel market in Europe. Can you spend a little time and tell us what you are seeing there? Basically the same thing we have been seeing in the US over the last couple of quarters. I think Europe is behind the US in terms of recessionary trends by at least a quarter or two. Consumers aren't spending and it's showing up in the retail statistics. Nothing beyond what you view as the market trend?

No.

How is the weak -- last quarter you talked about a lot of the RFID projects that you have in the pipeline which is pretty sizable, perhaps as many as 30, but they are significantly weighted towards the apparel market. How is the weakness in that market impacting those projects at this point?

As you might guess, in this environment retailers are being cautious about spending money. They're reducing their capital budgets, although my sense in talking to some retailers -- they are still going to be spending some money on information technology, because customers even though they are buying less, still expect to have good service in the stores. So I think what we will see is a continuation of pilots -- we haven't seen that many cancellation of pilots, but we seen delays or slower rollouts in the business. Still interest in RFID, but I would say overall more caution in that -- in the current environment.

You mentioned, Dean, in your prepared remarks that you were going to do more in the way of high frequency later in the year -- is that going to be done with existing equipment or will you need additional capital?

No, it will be done with our existing equipment.

Okay. Then just last question on the RFID space with [Indigo] announcing a $0.058 inlay, how is that something that you think you need to respond to and how might that impact the RFID loss?

Gosh -- it's not that big of a deal. And our -- we got plenty of productivity in the business. We are planning to see a reduction in the RFID loss for 2009.

Okay. Great, thank you.

Our next question comes from the line of Joseph Naya with UBS Research. Please go ahead.

Good afternoon. Can you give us guidance as to how should we be thinking about pension going forward?

Sure. We will see some pension cost increases this year. The P&L effect of that will be about $10 million. So it's not substantial. We will make some cash contributions as well. We expect to put in about $25 million into the plan this year. We have done a couple of things to reduce the impact of the potential negative impact of the pension. First off, we have had two plans operative in the company for the last almost two decades, and we have now merged those two plans together. One was substantially overfunded last year, and the other one was underfunded. Of course in the environment we are in today, they are both underfunded, but this takes pressure off of having to manage the one plan that's traditionally not been as well funded. Secondly, we have frozen the defined benefits plans now all for future employees, and moved to define contribution plans, which will also take some pressure off. In a down year like the year we are in, we certainly have had some impact, but I think we are managing this carefully as we can -- the P&L in fact this year will not be so substantial.

Okay. Just curious on the $1 to $2 EPS number that you threw out there, given the different scenarios, does that incorporate different shares for the HiMEDS?

Sure. Yes.

Can you give us an idea of what you are thinking there?

The original terms of the HiMEDS provides for first of all a conversion in November of 2010, but there was a maximum number of shares that could be converted, which was 8.6 million shares. We will be offering something in that range with other consideration, so we modeled something like that into these scenarios -- but of course the way the HiMEDS turns out is a bit dependent on the offering, how well it's received. That also assumes that 100% of those are exchanged. We will probably get less than 100% once we are finished with this.

The added share count is the take and the put of the interest expense savings.

Sure. Okay. Thanks.

Our next question coming from the line of George Staphos, Banc of America Securities. Please go ahead, sir.

How are you?

Hi, George.

Good afternoon, good morning. I guess maybe related to Rick's question there, within the free cash flow range you provide or the scenario range you provide, does that also incorporate any costs for restructuring -- so in other words, that's $260 million or $300 million free and clear or would we then have to back out something something for restructuring down the road?

No, that's got the restructuring built in to it as well.

Okay.

It has a restructuring built in for the free cash flow, on the earnings per share -- before the restructuring charges.

That's what I was getting at.

Okay, that's fine. In terms of the covenant adjustment, could you remind me, maybe it was in the presentation -- what did you have to pay to have that flexibility built into the covenant?

The biggest impact is on the interest rate associated with the term loan now, which goes up to 225 basis points over LIBOR. I don't -- I'm sorry?

What was it before?

We were running around 50 basis points or a little bit lower, so it's nearly 200 basis points added on. We have been well below market on our variable interest for the last couple of years. It's brought us basically back to market.

The new term loan -- by the way, we attached the amendment to the 8-K that was filed today, so you can see them there. They're exhibits. The term loan has a modest downwardization of about $60 million annually, so we'll be reducing indebtedness, not just in the revolving credit facility, but also in the term loan. There were customary amendment fees.

With the restructuring program, what kind of volume in the environment would you need to see to net that benefit to the bottom line so we could actually see it in the results? Obviously Paxar you generated the synergies that you thought you would. It's been a difficult volume environment we haven't necessarily seen it in the EPS results. If we are seeing down 3% to 8% revenue growth organically, let's say, does much of that $150 million benefit get to the bottom line or do you need to be growing in line with GDP at that point?

The biggest question and the thing we can't answer is we don't have visibility is the volume. So what we are -- cost takeout is basically against our current cost level. That's the way I look at it. And the $64,000 question is how much drops to the bottom line. That has to do a lot, unfortunately, with the amount of volume we get.

Part of your question, George goes back to the kinds of savings coming out during the integration of Paxar. Some of those were volume dependent because they were raw material savings, and we only got them if volume stayed at where it had been. There is little if any of that in the restructuring. This is fixed cost we are taking out, so it's not so volume sensitive.

I will turn it over, thanks guys.

Thank you ladies and gentlemen. (Operator Instructions). Our next question is from the line of John E. Roberts with Buckingham Research Group. Please go ahead, sir.

Good afternoon, guys.

How are you doing?

Are there new analyses that you have been able to do to track the channel inventory of labels, either looking at turnover of retailers or some other metric that would give you a sense that you're bottoming in the supply chain there? Obviously I think the labels are coming out of the supply chain at retail faster than they are going into the supply chain from you.

You're talking specifically, John, about the pressure sensitive business?

Both. You got the issue on both sides, don't you?

Everywhere actually. Here is what we are hear -- here is the issue. In pressure sensitive, in the roll business, remember we are selling to thousands of customers that are selling to tens of thousands of end users, so it's almost impossible to track that. I could tell you anecdotally in talking to customers, what they are saying the behavior of their customers is, pretty much ordering a lot less and more frequently. So customers tell me my normal order size has been cut in half. So people are just being very, very cautious about inventory levels. In retail information services, again, here is another business we don't have a lot of forward visibility, but fundamentally what we are seeing is retailers cutting their open to buy requirements for future seasons. So again, I think retailers are going to be extremely cautious about putting products in the inventory until they feel the consumer is ready to begin spending again. There was an amazing amount of discounting going on this last holiday season.

Is there a minimum order size that you can watch as customers are ordering in smaller amounts more frequently? Is that stabilized at least? I'm trying to think of what metrics you might look at to get a sense of stability along the supply chain.

Order sizes and retail information services continue to drop. Some of that is driven by a trend by from many retailers to have more seasons instead of four seasons as year to replenish stores more frequently. Obviously some of it is the fact they are reducing their reducing their inventory levels. So it's difficult -- customers don't tell you when they place orders, on how they are thinking. This is going to continue -- smaller order size is going to continue to be a trend.

Okay. Just to check the math here. And I think this is right, but you got two scenarios with $1 a share difference in EPS for a 5% swing in revenue. So I can assume a 1% swing in revenue, or $67 million in sales is $0.20 a share, roughly, and if you back that up through the P&L it's like a low 40% variable margin.

I wouldn't describe that decimal point accuracy. The reason we built these scenarios is to understand what kind of liquidity and what kind of fixed cost reduction we would need to generate strong cash flow even in a very serious downturn. So that is the way we are looking at it.

So if I wanted to assume halfway between, mathematically it would work out to halfway between $1 and $2, if I had a sales decline of say 1.5%.

When we were looking scenarios that we might put in front of you, it was less about where we thought the high end and low end would come out, but looking for trends. So the 8% trend is a continuation of what we saw in the fourth quarter that would last all the way through the year. It was not intended to be a bottom end of the range. It was simply if things keep looking like they are looking, how do things come out. Looking on the other end we use the average for the year, which would be a bit of a recovery, up to 3% decline levels. Finding the midpoint is not what our intention was. We were trying to look at the trends we have been experiences and evaluate how they would look if they lasted for the year.

I understand. I was asking if it's somewhat linear -- I, as my own assumptions, wanted to assume a 5.5% decline, or halfway between the two scenarios I would come up with a halfway number between your scenarios.

That sounds reasonable.

Okay, thanks.

Our next question coming from the line of Ghansham Panjabi with Wachovia Securities.

Hi, guys. Good afternoon.

Hi, Ghansham.

Back to the adjusted EPS and free cash flow slides, can you help us understand why there is only a $40 million swing in free cash flow with the different EPS scenarios, $1 versus $2? And also isolate for us how much cash restructuring charges are embedded in there -- you may have mentioned that, I might have missed that, thanks.

To the the first part of your question -- I'll try to remember the second part as we get there, but our cash flow is stable than our earnings might be under the circumstances. That has shown to be the case. If sales are stronger, then we are going to require working capital. While the income may produce higher earnings, some of that will get absorbed into the balance sheet, and the opposite is true if sales decline significantly. So there is a offsetting factor in that respect between what the cash flow would be and what the earnings would be. In our numbers, as far as restructuring, we assumed we will spend most of the roughly $120 million to $130 million during 2009. We used some of that in the fourth quarter already, a number in the neighborhood of $15 million. Most of the difference over $100 million would be used during '09.

That includes the non-cash component, right?

In the earnings it does not. We have not included the effects of the restructuring charges cash or non-cash in the earnings side. In the cash flow, we taken the cash component.

Okay. And also just looking at the many [rights] and areas for the global economy at this point. The most obvious one relates to an extended period of retail industrial weakness -- has that prompted any conversation on the dividend policy at the board level?

Well, the board is certainly realizes the importance of the dividend to investors, and in fact that's one of the reasons we are so focused on cash flow. I mean, I think the good news in almost any scenario is that we have cash flow sufficient to pay a dividend and pay down debt even in a very, very poor year. It's certainly something that the board talks about.

Okay, thanks.

Our next question is a follow up question from the line of George Staphos, Banc of America. Please go ahead.

Thanks. Hi, guys. Can you tell us are there any additional steps or ways that you need to manage a restructuring when more of the headcount is coming from a place that's farther away from your main markets like in China or Asia? Or is it pretty much the same protocol and procedure, since you've done it so many times and have so many processes in place already?

Unfortunately the latter. So we'repretty good at executing restructuring and integration plans. A lot of the integration plans that we've done for Paxar were in markets outside the US. To be -- in Europe actually it was the most complex, but that's where we have a lot of experience. It just takes longer and it costs more.

So from a control standpoint, Dean you don't still get any more or less issues to worry about, given that you're cutting out a fair amount of heads? From over in Asia?

I don't really see a lot of execution risk there.

Okay, one last question -- obviously we're in the midst of a significant downturn. My sense is probably RIS adds a little bit more volatility to the downside, given the end markets it was in. Hopefully this will add upside volatility when markets recover. At this juncture -- not at this juncture -- if we look in to future, if RIS doesn't perform as you ultimately expect it will, presently, is that a business that ultimately could be separable from the rest of Avery Dennison? And are there any parts within Avery that for whatever reason could not come out from the overall parent and whole of the organization? Thanks, guys.

George, we are not throwing in the towel.

I know. I wouldn't do it at the bottom. I understand that,.

A, I still think this business is a good business. We have in this -- even in this dark hour -- this is the worst retail recession in at least three or four decades. When you talk to retailers, they're really feeling it. I do think -- a little bit of a paradox, there is a lot of business transformation we can execute in retail information service business by streamlining and standardizing a lot of processes. Both Paxar and our business were built over the years with a lot of acquisitions in a very decentralized manner. The reality is that we can run this business in a much more standardized way, with a little bit of information technology and a lot of process discipline improvement that will generate the kind of savings we got in the integration process. This slow period actually gives us the ability to execute a lot of change in the business without disrupting customer service. So we knew we were going to do this anyway -- we were going to take a number of years to do it, but we are going to accelerate our plans and get that in place. In the future, retailers are going to need smaller order sizes delivered more frequently, and with even more accuracy. There are going to be more demands for information technology with RFID and we are in a unique position with that business. So I think when the economy recovers, certainly in retail, we are going to see a huge rebound in a business that has very high variable margins along with the opportunity to reduce cost. So that's our vision. And we will -- it's going to take us a couple of years I think to show the reality of that vision, but we intend to be there.

Okay. Guys, appreciate it. Good luck.

Thank you.

We have another follow up question from the line of Reik Read with Robert W. Baird and Company. Go ahead, sir.

Just off the comments you guys made before on specialty paper and the capacity there. Do you have visibility what the vendors may be telling you? Are they still cutting or is it at least a stable situation that's more market dependent now?

My view is probably a couple of months old. This has been going on for a while. It's mainly a US phenomenon, where we have a lot of paper companies bought out by private equity companies. They have shed underperforming assets. They've cut capacity. They also, frankly, when the dollar was low, they had a lot of other markets that have looked a little more attractive than selling in the US. As the currency, the dollar starts to strengthen and as demand, overall demand starts to go down, I'm figuring that things will likely change. So far they haven't. We are working hard to find alternatives, and we will because we have in other markets.

Okay. Great, thank you.

Mr. Leeds, I will turn the call back to you for closing remarks.

Thank you everyone for joining us. Have a good day. Thank you ladies and gentlemen. This concludes the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Have a great day.