艾利丹尼森 (AVY) 2009 Q1 法說會逐字稿

Welcome to Avery Dennison's earnings conference call for the first quarter ended April 4, 2009. This call is being recorded and will be available for replay from 2:00 p.m. Pacific Time today through midnight Pacific Time May 1, 2009. To access the replay, please dial 800-633-8284 or 402-977-9140 for international callers. The conference ID number is 21411860. I would now 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 today will reference the earnings release that we issued earlier, along with slide presentation titled First Quarter 2009 Financial Review and Analysis. Both documents were furnished today with our 8-K and posted at the investors section of our Website at www.investors.averydennison.com. We remind you that these results are preliminary, as we have not yet filed our 10-Q. 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'll focus our margin commentary on pretax results before their effect and before interest expense. This detail is in schedules A3 and A4 of the financial statements accompanying today's earnings release. We also remind you that we'll 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 provided today, along with our 2008 Form 10-K, address certain 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 of Global Finance. I'll now turn the call over to Dean.

Thanks, Eric. As expected, the first quarter was an acceleration of the worsening trends we experienced in Q4. Continued soft end user demand and inventory destocking caused sales to decline more than 14%. The quarter began with a very weak January and then, run rates improved from the balance of the quarter. The slowdown impacted every business segment, as well as in every geographic region. Price increases and productivity, while positive factors, were not able to offset the impact of lower volumes, causing operating margins to fall.

While it's admittedly difficult to find a silver lining in this quarter's performance, I'd like to point out that despite a greater than expected shortfall in revenues, we beat our internal targets for earnings from operations. The first quarter is seasonally a weak quarter anyway but we reacted quickly to a soft January by accelerating the structuring plans and adjusting our other expenses downward. Business conditions in retail information services and other specialty converting were very tough, reflecting the difficult conditions in retail, automotive and housing markets. Our pressure-sensitive material segment was negatively impacted by very soft sales in our Graphis and Reflective Products Division. Products in this business are driven by promotional spending and that's obviously been dramatically cut by businesses just about everywhere.

After an extended period of significant raw material inflation, we did get some relief in the office and consumer products segment through a combination of price increases and productivity initiatives. I do believe we're in a good position to weather the storm. We are accelerating our cost out actions and are planning additional actions, if necessary. And we're continuing our focus on cash generation. We have reduced capital spending and increased our focus on working capital reduction. We intend to generate enough cash flow to pay down debt, fund growth and pay a dividend.

I'm pleased with our progress in new growth areas. For example, we were awarded the Hong Kong Airport RFID baggage tag business. Our new venture in Japan is gaining traction. And our investment in pressure-sensitive label conversion in food and beverage end use markets is paying off in new application growth. Now, I'll turn the call over to Dan, who will provide more detail on the quarter.

Thanks, Dean. Let's begin with a summary of the preliminary results for the first quarter, which you'll find on slides five and six of the handout. Starting on slide five, reported sales for the first quarter of 2009 were down 13%, with the decline attributable to lower volume and currency, the positive effects of the DM Label acquisition and the extra week in the quarter. Our fiscal calendar requires an extra week every few years, which occurred in the first quarter. Throughout my comments, all references to organic sales include results before the impact of acquisitions, foreign currency translation and the extra week in our 2009 fiscal calendar.

On an organic basis, in the first quarter, sales declined about 15%. As Dean mentioned, the sales decline moderated somewhat after a very weak January. The slowdown is impacting us globally, with emerging markets declining substantially as well. First quarter operating margin, before restructuring charges and other items, declined to just under 3%, primarily reflecting raw material inflation and reduced fixed costs leverage, partially offset by productivity improvement and pricing actions.

Turning to slide six. We continue our efforts to expand and accelerate our restructuring actions. We're currently targeting an excess of $150 million in annualized savings over the next two years from restructuring actions initiated since the fourth quarter of 2008. We're now estimating a $75 million benefit, net of transition costs in 2009. The restructuring includes reductions of approximately 10% of the Company's global work force. We estimate that we will incur about $130 million of cash restructuring charges associated with the program, with the majority of these costs incurred in 2009. In addition to the savings from the new actions, we continue to expect about $40 million of carryover savings from previously implemented actions, including benefits from the Paxar integration.

At the end of the first quarter, we achieved run rate savings representing approximately 30% of our restructuring target and we anticipate reaching 50% by the end of the second quarter. Our effective tax rate for the quarter was approximately 2%. And our ongoing annual tax rate is expected to be in the low 20% range, although it can vary significantly from quarter to quarter. Adjusted earnings per share of $0.11 in the quarter reflects $0.37 for restructuring charges and asset impairment costs, as well as $0.20 associated with the HiMEDS conversion. We achieved our target of converting 75% of the HiMEDS to common stock. We retired approximately $330 million of senior notes, strengthening our balance sheet. The exchange settled for 6.45 million common shares and approximately $43 million in cash on March 10.

Sales declined organically by nearly 15% for the quarter, as shown on slide seven, with the month of January substantially worse than the declines of the last two months of the quarter. Even with the sequential improvement, we still ended the quarter with double digit declines, which impacted our margins significantly.

Turning to slide eight. Margins in most of our businesses declined both year on year and sequentially due to the very low volumes in the quarter and the carryover inflation from 2008. Exposure to the automotive and housing markets particularly impacted our specialty converting businesses. Similarly, in retail information services, the story is fixed cost leverage with the seasonally lowest revenue quarter of the year being compounded by the general slowdown in retail markets. The majority of our restructuring activities are in retail information services and our other specialty converting businesses. And we're working hard to offset such impact of sales declines.

Moving to slide nine. Gross profit was mostly impacted by low volume in the quarter. Pricing did improve, though as mentioned, we continue to carry inflation from prior year. We reduced MG&A by $24 million against prior year due to cost reductions and currency translation, partially offset by costs associated with the extra week of sales. In today's earnings release, we noted that the Company commenced a goodwill impairment test that we believe will likely result in a noncash impairment charge. And that this charge will impact the Company's final first quarter 2009 financial results by the time we file our 10-Q. The charge being noncash, would have no adverse impact on debt covenants.

Now, let's turn to slide 10 and talk about segment results. The decline in pressure-sensitive material sales reflected a low double digit decline in Europe, a mid single digit decline in North America and low double digit declines in emerging markets. While the raw material business is ultimately tied to consumables where underlying consumption is more stable, in this environment, we believe that high inventories are masking that underlying stability. Our graphics reflective business was also down double digits. The decline in pressure-sensitive operating margin reflected reduced fixed costs leverage and the effects of raw material inflation. These factors outweighed the benefit of price increases, restructuring and other productivity initiatives.

RAS' results are summarized on slide 11. The decline in sales primarily reflected continued weakness of the retail apparel market in the US and Europe. Volumes are worsened by retail store closures and high levels of unsold inventory. We are now seeing signs of delays and reductions in orders for fall season merchandise. So, the decline in operating margin was driven by reduced fixed cost leverage and cost inflation. These were offset, in part, by incremental integration savings and the benefit of other productivity actions. Again, we're implementing significant restructuring measures in this segment in 2009 and we continue to transform the business to strengthen its competitive advantages and to drive future growth and profitability improvement.

Now despite the market challenges, the long-term value proposition in our retail information services business remains intact. We're building on our competitive advantages and enhancing our value to retailers and brand owners. The integration of the businesses we've acquired in this space continues and there remains a lot of opportunity to do what we do even better. Clearly, the current state of the retail apparel business prevents that value proposition from being monetized in the short run but apparel markets will return. And we're working aggressively to assure we're in a position to deliver strong results when they do.

Turning to slide 12. The decline in office and consumer product sales reflected weak end market demand offset by the effects of customer inventory management. The increase in OCP's operating margin reflected the benefit of productivity initiatives and price increases to offset raw material inflation carried throughout 2008. We've already spoken about the decline in sales in our other specialty converting businesses, much of which was driven by lower volume and products sold into the automotive and housing construction industries. The operating margin decline was due to reduced fixed cost leverage, which outweighed the benefit of productivity initiatives. As we have said, we're implementing significant restructuring measures in these businesses in 2009.

Now looking at slide 13, our cash flow slide. We remind you that the Company is typically a user of cash in the first half of each year and a source of cash in the second. So, the negative free cash flow in the quarter is expected. And free cash flow continues to be relatively stable, declining only slightly versus the first quarter of 2008. And we are steadfastly committed to delivering solid free cash flow this year.

As you know, we're not providing a 2009 earnings forecast. In January, we did provide you some of the factors that will drive our 2009 results. Slide 14 provides an update to some of those factors. Namely, that the currency head wind would be 100 basis points lower at current exchange rates. And the restructuring savings target for 2009 is now about $5 million higher. So with that, we'd be happy to take your questions.

Thank you. (Operator Instructions). Our first question is from the line of George Staphos from Bank of America Securities/Merrill Lynch. You may go ahead, sir.

Thanks. Hi, everyone. Good morning and good afternoon.

Hi, George.

The first question, I just wanted to make sure. Dean, you said and I am paraphrasing here, that you have a number of things that you expect you'll be able to accomplish with the generation of the strong free cash flow or solid free cash flow as you termed it. And one of them was to pay a dividend. You're not saying that you won't -- why not say maintain the dividend or is there some chance that you might not be able to maintain the dividend at the current level?

Well, basically, our goal this year, as we do have ample free cash flow, is to pay our dividend, as well as --.

Okay.

This year we maintained our dividend. And that's our goal, as well as pay down debt and continue to fund some of our growth programs.

Okay. Just wanted to double check on that then.

No hidden message, George.

Okay, fair enough. The second question, can you comment at all, in terms of what the sequential volume trends looked like over the course of the quarter and as we exited and entered into the second quarter? Particularly, in RIS and PSM?

Yes, well, RIS of course is very seasonal. So, sequential trends really don't tell us much. I would say that the -- it looked to me like the year-over-year declines were a little bit worse in the first quarter than in the fourth quarter. And especially, in some of the businesses in retail information services that tend to be more hardware related, like our printer systems division. The actual apparel business year-over-year declines were roughly consistent. Let's see, some of the other businesses, pressure-sensitive, I think sequentially about flat. And the other specialty and converting businesses were worse on a year-over-year basis. It's really starting to get much -- hit much harder by automotive and construction. Office products, again, very seasonal but I would say on a year-over-year basis because our customers did not reduce inventories as much in the first quarter as they did in the fourth quarter, you would say we have a little bit of a benefit there.

Okay.

I will add, George, that as the months progress, most of our businesses felt the greatest weakness in January, as I mentioned. And it improved but even by the time we got to March, we were still down in low double digits. So, we don't have enough of April to declare that it has changed and it looks kind of like March. So, it improved to a different level than January. And we saw an underlying point of sale data improve in our products in the office products stores, as the quarter progressed as well. So, things got better . It feels like January was the bottom and time will tell. And happier to be where we are than where we were in the month of January, anyway. But it was a tough quarter right through the

Okay. And just to confirm. March, for most of your business was still down low double digits. So sequentially, some improvements, so not a great place to be.

That's right.

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

Our next question is from the line of Jeff Zekauskas from J.P. Morgan Securities. Please proceed.

Hi, good afternoon. I hope I'm not asking George's question a second time. Previously, I think you said that free cash flow for 2009 would be $260 million to $300 million. Has that changed.

We did not provide guidance. In the January teleconference, we provided a couple of scenarios with different sales declines not being in a position to forecast the year. Those two scenarios did have a -- I think it was a $260 million free cash flow and a $300 million. But we indicated that those were not guidance and have not updated that at this time.

Okay. That was not guidance.

That was not guidance. We have not felt and still don't feel like we're in a position to call the volume for the year. So certainly, our free cash flow is going to be impacted by that. But we expect the free cash flow to be more stable than our earnings have been certainly. And that was the case in the first quarter. And we still expect to have adequate cash flow for our dividend and to pay some debt down. And we'll leave it at that for now until we have a better view of the outlook for the year.

The whole purpose of the scenario that we put out, were to show that subject to significant differences in revenue declines, we would have differences in EPS declines but not much difference in free cash flow declines or changes in free cash flow. To show that free cash flow is a lot more stable than revenue or earnings have been. Just to show some sensitivity but not guidance.

Okay. The second thing is, and again, I hope I'm not asking the same question again. In retail information systems, usually you have a pretty good idea of what the second quarter will be like by the order pattern that you see in March and April. What does the order pattern in March and April tell you about the second quarter?

I think it's going to be consistent with what we've seen for the last couple of quarters. Retailers are reducing inventories. Their sales are down. I think apparel imports into the US hit a record low in the fourth quarter of 2008. And I expect those trends to continue for the balance of the year.

Okay. And in terms of your SG&A expense, it was only down a little bit. Why wouldn't your SG&A have come down more, given how much your sales decreased?

Well, it was down, I think, the number was $24 million year on year and there were some factors involved there but we're early in our restructuring process and there is more SG&A coming in as the year progresses but it did come down, on a annualized basis, $100 million or so for the first quarter. So, it's moving in the right direction.

Okay. I'll get back in the queue. Thank you very much.

Okay. Our next question is from the line of Peter Ruschmeier from Barclay's Capital. Please go ahead, sir.

Thanks. And good morning. Question, maybe for Dan, coming back to the dividend. I wanted to just clarify a point. I believe in your slide 13, you indicated free cash flow definition, I believe, is before dividends. And I think that you said you'd have enough free cash flow to pay the dividend this year and to pay down debt. Can you just elaborate that that's -- you're at least comfortable in earning the dividend and paying down some debt?

Well, we have always had cash flow generation greater than our dividend over the period of the year, not in quarters because of the seasonality. And so, we're highly focused on the cash flow number and expecting to have working capital as a source of cash. And so yes, as things stand right now, we're still pretty intent on having excess cash after paying the dividend. Again, the economy is going to determine some of that but that is our target for the year. And that's what we're working towards.

If I'm not mistaken, I believe you have paid a dividend for decades and without interruption.I'm curious, if you got to a period where you would not earn the dividend, is that something meaningful or how do you think about it? Do you think about it over a two or three year period?

Well, first, I'll say it's a Board decision, whether we pay a dividend and how much. Our view and our discussions with the Board have to do with our ability to support the dividend over time, not in a quarter or perhaps even in a year. They, of course, would be concerned as any Board should be, if we're not earning the dividend. If that extended for a long period of time, that would impact us. But again, we expect the cash flow to be above the level of the dividend and we're working toward being able to support that. But they'll make that decision and I can't call it for them. But I think the best evidence of their intent is what they did last week when they sustained the dividend. We've raised the dividend, until this year, for 32 consecutive years. So we're a Company that puts a lot of emphasis on that dividend and we flattened it out this year in light of the economic conditions. So, I think our task, right now, is to maintain that and that's what we're doing so far.

Very good. That's helpful. Maybe on the organic sales rate, I believe you said down 15% in the first quarter but that January was weaker and March was stronger. Any guidance you can offer on how January order rates compared to March, just so we can get a sense of trajectory?

Yes, they were several hundred basis points worse in January. We declined in the high teens in the beginning of the quarter and the low teens later in the quarter. So, it improved quite a bit but still a double digit decline by the end of the quarter.

Okay. And just lastly, given the unusual cyclical weakness this year, any comments you can offer up as to seasonal trends that normally play out? Do you have any visibility in your business to be able to comment on whether you'd expect some normal seasonal trends in some of our segments?

I think the seasonal trends will all be deferred this year. And by that, I mean that when -- what I see in my retailers in the apparel sector are, that they're bringing in less on new items at first. So, they're open to buy orders have been reduced. And if they sell out and they need more product, they'll reorder later. Likewise, in office products, where we have a back-to-school season impact, I'm anticipating seeing most of that in third quarter, rather than the second quarter. As again, retailers are being cautious about how much inventory they're putting into their stores. So, I think all of this is -- we're going to see caution, we're going to see sort of a pushing back into our normal second quarter surge, I think, into later in the year.

Okay. That's very helpful. I'll turn it over. Thank you.

Our next question from the line of John Mcnulty with Credit Suisse. You may proceed.

Good afternoon. Just a couple of quick questions. On the pressure-sensitive side, you had talked about seeing price increases this quarter and that they were offset on the volume side. Can you give us some color as to what the price increases were and if you expect that to be kind of a sustainable rate going through the rest of the year or if you're starting to see push back on that now?

Yes. A couple of factors there. We had a number of price increases related to raw material inflation catch-up in the fourth quarter that we pushed through. And then in the first quarter, we've had currency related price currencies. So, for example, in the UK and in Latin America, where we've seen some pretty dramatic currency shifts, we're raising prices to offset those. Customers always want lower prices. And I don't see any more aggressive activity in that business than we've seen over the past few quarters.

Okay. And then, with regard to pricing in the RIS segment, can you give us some color as to what you saw seen in the past quarter there?

That's a tougher one, John because it's a custom business. I think, one -- we've seen two major factors. One, is that customers are, of course, ordering less and what they are ordering is certainly smaller quantities per order. And then, there's probably more of a shift to customers trying to cut the cost of their tags and labels by making them smaller or using lower cost materials.

Okay. That's helpful. And then speaking of materials, with regard to your raw materials, can you comment on what kind of pressure you may have continued to see that's lagged over from the fourth quarter, in this past quarter? And then, where you expect raw materials to go throughout the rest of the year for you?

Sure. While we saw inflation impacting us through the fourth quarter, particularly in specialty paper lines, it has peaked and we've started to see only relief in the first quarter. Clearly, not enough to offset the magnitude of inflation last year. So, there's still some progress on margins that we may need to make to get back to where we were. So, the good news is, we are starting to see the tide turn in many of our categories and it's slower than others. So I think for the year, it's hopefully going to be an improvement from where we were. Our outlook -- not our outlook but our scenario that we had in Q1, assumed a neutrality between our pricing and our raw material inflation. It could get better than that before the year is over. We'll watch and see.

Okay. Great. Thanks a lot.

Thank you. Our next question from the line of Tim Thein, Citigroup. Please go ahead.

Thank you. First question was back on the RIS business, do you -- in terms of the sequential trend there, would you, based on what you can see today, as you normally see a nice sequential improvement there, do you think you'll be profitable in the second quarter in that business?

Well, we don't give guidance and we certainly don't give it on a quarterly basis by business line. I certainly believe that volumes will be higher in the second quarter for retail information services than the first quarter. It's happened every year since I've been around here. And this business has high variable margins. So, I do definitely anticipate our earnings will be better in the second quarter versus Q1.

Okay. And switching gears, on the -- back to the pricing question that you just alluded to. Are you seeing more -- I'm just in thinking in the context of a greater private label push at some of the apparel and some of the retailers are driving. Are you seeing that, have you seen that accelerate? And you would see that not only in the office and the consumer but maybe also in RIS business. Can you just comment on that?

Well, in RIS, it really doesn't impact us. We make tags and labels for branded companies and we make private label products for major retailers. So, there's really no different -- it doesn't make any difference to us in retail information services. In office products, actually, it seems to me, the last couple of quarters, the share of our products versus private label is actually relatively stable. So, we haven't lost any share to private label over the last couple of quarters.

Okay. Thanks a lot.

Our next question from the line of Reik Read, Robert W. Baird and Co. Please go ahead, sir.

Could you guys -- just going back to the cash flow, what kind of modeling assumptions, Dean, have you guys made that would get you to a break even cash flow? ie. if things continue to get worse, just trying to get an idea of when they -- the issues that you've talked of. you couldn't make dividend or debt payments?

Well, maybe I can answer that. We've done a tremendous amount of modeling over the last six months. And we've modeled -- we've tried to find revenue decline levels that would cause us to hit a break even point on free dividend and free cash flow. You have to go a lot worse over a sustained period of time to get there, than we've been so far. So, we don't find that mark anywhere near the business conditions or today's business conditions. We've modeled it all, Reik. And the nice thing about this Company, is we are a good cash generator in several of our businesses, most of our businesses are. And so I don't think that's our issue. We're working to support the dividend, we're doing that, so far, quite successfully. And I think last year was a record cash flow year for the Company. And this year ought to be, still, a good cash flow year for us, unless we see something even more dramatic happen in the marketplace. So, we've modeled it all and the Board makes sure that we've considered every contingency, from a liquidity perspective to a solvency perspective. But as we sit here today, we're still happy that we're generating the cash flow that we are.

Okay. And then, Dan, just going back to your comments before about the specialty paper and maybe it's showing signs of turning. Is that simply capacity demand coming back in balance or are there some other factors that might be driving that?

Yes, we've seen tight capacity from suppliers in some of those specialty markets. But I think with the very weak demand across the industry, demand is coming down to where the capacity is. And so, it's starting to have that influence. So, we're seeing relief in a few places. And hopefully, we will sustain that for a few quarters here to make a difference to the industry.

Okay. Thank you.

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

Thanks. Hi, guys. A couple of follow-ons. You mentioned that the business was on plan this quarter in total. Did that include RIS or was RIS off your plan?

No, it included RIS, the overall Company. We anticipated a very soft, remember, it's a seasonally -- it's our softest quarter by far.

Yes.

And we had planned -- where we didn't make our plan is on the top line. So, our top line was worse than we anticipated. But frankly, our bottom line was a little better than we anticipated for the quarter. So, we were able to adjust our spending in the short term to make our internal numbers.

Okay. So, the $12 million was a little bit better than you had expected, in terms of the operating loss, given the volume hit?

Yes, you've got to remember, we came into the fourth quarter having declined by about 5% for the first two months. And then, in December, the bottom fell out. So, our expectations were that Q1 was going be a very tough quarter. In late January, we said that, as we started the quarter, it looked a lot like December. And January turned out to be a little worse than December. So, our expectations were very conservative. We've been managing the Company with those very conservative expectations and we continue to do so.

Okay. Now, April is looking much -- I don't want to put words in your mouth but the suggestion to one of the questions that was asked before, was that April is fairly similar to March. Does the ramp for RIS typically occur by now or did it normally occur much later in the second quarter, late May or June?

Yes, the comment I made about April looking more like March, was that from a year on year perspective, the growth rate, without having completed the month yet, it looks a lot like March looked. So we haven't seen a big upturn in April. Seasonally, we will get an upturn, as Dean pointed out, in RIS. So, it will improve that way but year on year, the growth rate is still pretty low.

Dan, I realize we are in the depths of a recession for you in terms of retail, one that you've never seen before. There's been a lot of restructuring within the business. You still seem to have confidence within RIS. If we're looking three years back from now, or into the future I should say, what do you think the normal return in this business is going to be when it's finally restructured and we're in a normal economy, either from a margin standpoint or a capital return on standpoint?

Well, that's a tough question and as you put it, in the depths of a recession. There's a small bright light here. That business actually showed the best variable margins we've seen in that business since we put the combination together. But unfortunately, volume just overwhelmed any of that benefit. So, I'm still optimistic that we can hit, again in a normal economic environment, the operating margins that we had initially targeted for that business.

So 10% or better?

Yes.

If memory serves.

Well, 12% is the target that we're working toward.

Okay. Last question and I'll turn it over. The tax rate, obviously, was lower than modeled in the first quarter, you're guiding to 22% over the rest of the year. Do you think you can sustain this rate for the foreseeable future into 2010, 2011? What kind of conversations, if any, have you been having with your representatives and elected officials about potential plans by the government to begin to tax foreign earnings to a greater degree? Thanks, guys.

Sure. Well, I think in this particular quarter, the 22% tax rate is not that meaningful. With earnings as low as they were, the percentage has moved pretty dramatically without much change in the actual tax expense. But over time, yes, I do continue to believe that the rate is sustainable and in the low 20's, we may have days or quarters better than that as well. So I think in low 20's, with a bias toward the low side, would be my expectation over the future. We don't have anybody -- none of the tax authorities are asking our opinion on the tax law. So, we're not getting much indication. We're obviously watching it closely, as we have a lot of overseas earnings. We've got planning in place that will help in whatever situation takes place but certainly, some of the things being discussed right now would have some impact on us if they actually become law.

We have pointed out though, to our legislative representatives in the House and Senate that taxing our earnings overseas will have a negative impact on employment in the United States. So, we've been very clear about that.

Okay. Appreciate the thoughts, guys.

Our next question from the line of John Roberts with Buckingham Research Group. Please proceed.

Afternoon, guys.

Hi, John.

Where are you in your discussions with Moody's? Are you all done and we're just waiting in the next couple of days for them to say something before the end of the month?

Well, we're keeping an open dialogue with them and we will certainly be talking with them, probably quarterly, as we have been. And with today's news, we'll be in touch. So they're not finished. They indicated last quarter that after this quarters earnings release, that they would make a judgment on their proceedings. So, I'm sure that will happen in the near future.

Are there any preparations you've made over the past couple of months in the event we get an adverse decision here?

Well, sure. And we've made quite a few preparations to work toward that not being the case. The HiMEDS that we took down during the first quarter is a pretty significant event. It reduced our debt and our interest expense quite a bit, it gave us more head room on our bank covenant. So, that's all good. I think having had a relatively strong quarter, given the seasonality factors on cash flow, is good news. And I think we've got actions in place to insure that we have the cash and liquidity that we need. If you look at this year, we're spending quite a bit of money on restructuring. That expenditure in 2009 turns to benefit in 2010. So, there's good reason to expect our bottom line performance to improve too. So, we are sensitive to the credit rating. We're doing all that is within our reach to protect it. If we don't, it's not the end of the world. It will cost us some money. But we'd like to see that not happen. And so, we're extremely focused on cash flow and intend to do all we can to protect the rating.

Okay. And just lastly, the deferral in fall orders that you're seeing, how far back can things get pushed before you can't make it up even if the economy recovers before the fall?

Yes, that's probably a better question for our customers. That would actually be a good thing because what would happen is there would be a lot of stock outs in retail stores. And then, we would start to see retailers beginning to stabilize and then, potentially even build inventory. And we'd see that in the next busy season for us, which tends to be in the fall itself.

Okay. Thank you.

Our next question from the line of Jeffrey Zekauskas with J.P. Morgan Securities. Please go ahead, sir.

Just a few more small questions. What's your CapEx and software spending this year?

Whenever you say a few more small questions, Jeff, it always makes me nervous. But -- small. Our CapEx, we indicated $120 million to $150 million last quarter. And so, far that's what we're on target to spend this year.

Okay. So that may come in a little lower, is that --?

It could do, there's still unanswered questions on some key initiatives for the year that could change that number around. So, we chose not to update it for the current quarter. We may by next quarter. But right now, that looks like the range we'll be in. Perhaps, we'll be at the low end of that.

Okay. And in terms of your head count reduction, where you said you were reducing your work force by about 10%, is the 10% reduction from the 35,700 as of the end of the year or is it from the 2007 total? What's the base?

It's the end of the year, 2008. It is off that 37,000 number.

Right. The 35,700 number?

Yes, right now, we're anticipating around 3,500 or a few more than that in total reduction, as we go through '09 and early 2010.

And is that really mostly out of the RIS business or do the other businesses really get touched as well?

It is weighted toward RIS. They're the most head count intensive business that we have, certainly. So, the savings and the head count reductions are weighted in that direction. There's quite a bit also happening in the specialty converting businesses. So all of our businesses are impacted but it is weighted toward RIS and other specialty converting.

In the writedowns that you expect to take in the second quarter, are they in the 10's of millions or the hundreds of millions?

In the second quarterly, specifically?

Or when you do your asset impairment reassessment?

Okay. I misunderstood your question.

Sure.

It's open to say, if we had a number and the surety of what that number was, we would have indicated it by now and booked it in the earnings release. So, you kind of go through a phase one and phase two test. We anticipate finishing our first phase and would have an estimate of that number just before the 10-Q is filed. So, I don't have a good estimate for you. It could certainly be in the hundreds of millions of dollars but I can't give you anything much more specific than that.

And are the cash restructuring charges in 2009, ballpark, about $100 million?

Yes, that's about right. There's another 30ish or so that is noncash.

Another $30 million. And in the first quarter, were the cash restructuring charges around $15 million?

Let's see. They were, there was about $37 million of total charges, of which about $15 million to -- $17 million of that was cash. That's right.

Okay. Good. Thank you very much for your patience in answering those.

Sure.

Our next question from the line of George Staphos of Bank of America Securities. Please go head.

Thanks. Hi, guys. Two last questions to finish up. Within specialty converting, can you go back to what was the biggest source of negative variance or negative trend in the quarter? Could -- you might have mentioned it but I missed it, what's the latest with RFID? And then, the second question is, there are been other companies that have started to see some improvement and even are seeing signs of restocking within the supply chain. I would imagine that, at some point, Avery would see that as well, if that was truly the trend. What are your thoughts on that? Thanks, guys. Good luck in the quarter.

Thanks, George. In other specialty converting, we have our highest concentration of automotive and housing-related product categories.

Got it.

In some of the automotive categories frankly, we saw volume declines as high as 50% to 60%. Given the fact that there weren't very many cars being built in the US in the first quarter.

Yes.

And so, that's really where the major impact is. We also have a number of industrial product categories, again some of them housing-related, other businesses, again, automotive related. So, it's just a tough time. The only place I've seen some relief from the inventory destocking really has been in office and consumer products. We saw a dramatic drop in our sales revenue in the fourth quarter. And in fact, I actually believe we got a little bit of a pick up in Q1 because our customers reached unsustainable levels of inventory, given their demand and they had some stock outs that they needed to recover from. And POS, also, in that business has started to improve. It's still negative but it looks to me like we've turned the tide. So, if there's a light in the distance, it's probably that.

And RFID?

RFID was relatively flat year-over-year. We're still on track in terms of -- and our business did pretty well last year. We definitely start -- saw a slow down but we've managed to capture some new application growth.

Okay. Thanks very much.

Speakers, there are no further questions at this time. I'll turn the call back to you for closing remarks.

Okay. Well, on behalf of all of us, thanks to everyone for joining. And we look forward to speaking with you again.