艾利丹尼森 (AVY) 2009 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Avery Dennison earnings conference call for the second quarter ended July 4, 2009. This call is being recorded and will be available for replay from 1:00 o'clock p.m. Pacific Time today through midnight Pacific Time August 3, 2009. To access the replay please dial 1-800-633-8284 or 402-977-9140 for the international callers. The conference ID number is 21411861. I'd now like to turn the conference over to Mr. 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 the slide presentation titled second quarter 2009 financial review and analysis. Both documents were furnished today with our 8K and posted at the Investor 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 cost 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 A-2 to A-5 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. On the call today are Dean Scarborough, President and CEO, Dan O'Bryant, Executive Vice President and CFO, and Mitch Butier, Corporate Vice President of Global Finance. Dan is participating remotely. I'll now turn the call over to Dean.

Thanks, Eric, and good morning and good afternoon to those of you on the east coast. I'll start with the announcement that the board of directors has reduced the quarterly dividend from $0.41 to $0.20 per share. Before we go over the quarter, I want to explain our decision and particularly the timing and the size of the reduction. We know how important the dividend is to our shareholders. The board is committed to paying a dividend and we did not take this decision lightly. But given the uncertainty about the timing and the extent of an economic recovery and given the increased cash requirements for pension contributions, we have a responsibility to take this action. The dividend reduction is prudent and in the long-term interest of the Company. In the first half of the year, we held the dividend at $0.41 a share through two quarters of declining earnings because we believed that market deterioration would start to moderate and business conditions would begin to recover meaningfully in the second half of 2009.

While conditions may have hit bottom, the pace and the strength of a recovery still remains highly uncertain. Our planning scenarios now include the possibility that we will see weak market conditions throughout 2010. At the same time, it's clear we'll have to make significant cash contributions to our pension fund and this could range from $200 million to $300 million over the next several years. The size of the dividend reduction reflects a combination of our near-term debt reduction goal, as well as our target to pay a cash dividend of 40% to 50% of normalized earnings over time. When our outlook improves, we expect to raise the dividend in line with this target. The new dividend rate will enable us to reduce debt to levels we believe will help us maintain our current credit ratings, our access to the commercial paper market, and to ensure that we comply with our debt covenants. We believe that this new dividend rate will be sustainable even under our low end scenario.

We will also maintain our ability to continue to invest in new growth platforms and emerging business opportunities, such as new label materials, RFID and Japan. Turning now to the second quarter, the challenging macroeconomic environment continued, especially in our retail businesses. Volumes for all of our business segments declined and drove net sales down 14% on an organic basis and adjusted profit down 42%. Operating margin contracted to 6.2%, as the lower volumes reduced fixed cost leverage. I am pleased that we maintained our gross margin in face of the substantial decline in volume, largely because of our cost out restructuring actions and pricing discipline. We also improved working capital efficiency and, in fact, ended the quarter with our inventory turns at the highest level in more than two years. I want to thank the employees of Avery Dennison for exceptional performance on these initiatives.

These actions, along with continued investment in growth, will position the Company for a stronger profit growth when volumes improve. And now I'll turn the call over to Dan, who will take you through the quarter in more detail.

Thank you Dean. Let's begin with a summary of the preliminary results for the second quarter on slide seven and eight of the handout. Starting on slide seven, on an organic basis in the second quarter sales declined approximately 14%, with the decline attributable to lower volume. 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. Reported sales for the second quarter were down 20%. Currency translation reduced reported sales growth by 6.9% with a $0.04 negative impact on earnings per share. Now the slowdown is impacting us globally, with the emerging markets declining substantially as well, with the exception of our raw materials business in Asia, which was up in the quarter.

First quarter operating margin before restructuring charges and other items declined to just over 6%, reflecting reduced fixed cost leverage partially offset by pricing, productivity improvements and restructuring. Now turning to slide eight, we continue our efforts to expand our restructuring actions. We have increased our target to in excess of $160 million in annualized savings from restructuring actions initiated since the fourth quarter of 2008 and we expect to reach this run rate in mid 2010. We are estimating a $75 million benefit net of transition costs in 2009. We estimate that we will incur about $130 million of total restructuring charges associated with the program, with the majority of these costs incurred during 2009. In addition to the savings from the new actions, we continue to expect about $40 million of carryover savings from previously implemented actions. At the end of the second quarter we achieved a run rate savings representing 50% of our restructuring target, so we are right on track.

Our adjusted tax rate for the quarter was 15%. 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 $0.56 in the quarter includes $0.18 of restructuring, asset impairment and other charges. Now as previously announced, in the first quarter of 2009 the Company began an interim goodwill impairment test that resulted in a non-cash impairment charge of $832 million. We reported this charge in our first quarter 10-Q. In the second quarter of 2009 we completed the test with no additional charges incurred. Slide nine shows our recent sales trends and, as mentioned, sales declined organically by nearly 14% for the quarter, which was similar to Q1. Turning to slide ten, it's worth noting again that consolidated gross margin was flat to prior year, notwithstanding the reduction in sales.

On a sequential basis gross margin was up 260 basis points from the first quarter. As Dean mentioned, our restructuring program productivity initiatives and pricing discipline are all making a big difference. In addition to gross margins holding steady, the other highlight for the quarter is the sequential improvement in margins in our largest segment, pressure sensitive materials. This segment Q2 margin grew 220 basis points from that in Q1. As you know, this is a relatively nonseasonal business, so sequential comps are meaningful here. Again this is evidence of the effectiveness of our restructuring, our productivity improvements and pricing actions. Moving to slide 11, we've already talked about gross margin. MG&A declined $41 million against prior year due to cost reductions and currency translation. The factors affecting profitability are the same across all segments, reduced fix cost leverage more than offset restructuring, productivity improvements and pricing.

Turning to slide 12, organic sales in our pressure sensitive materials segment were down approximately 10%. The sales decline in our roll materials business was less than 10%. Europe was down double-digits, low double-digits, North America was down mid single-digits and the emerging markets was down 11 -- was down low single-digits. As mentioned with the merging markets, Asia was up slightly. As we said last quarter, we believe that the stability of our roll materials business continues to be masked by high inventories. This business, which is the Company's largest single business, has a strong tie to consumer staples, so we are confident that we will see growth in this business when both the economy and the inventory stabilize. The graphics and reflectives business in this segment continues to experience sharp sales declines.

Graphics products generally represent more discretionary purchases by businesses, often linked to promotional spending, which has been dramatically cut by businesses just about everywhere, and fleet marking and other signage applications are delayed when times are tough. RIS's results are summarized on slide 13. The decline in sales primarily reflected the continued weakness of the retail apparel market in the US and Europe. Volumes continued to be negatively impacted by retail store closures and inventory destocking. We are experiencing delays and reductions in orders for fall season merchandise. As you know, we are implementing significant restructuring measures to reduce RIS's fixed cost, while introducing new products and improving value added services to increase its share of the large market for tickets and tags used in apparel retail.

Turning to slide 14, the decline in office and consumer product sales reflected weak end market demand led by slower activity in the commercial channel, consistent with declining white collar employment. And exposure to the automotive and housing markets again had a strong negative impact on our specialty converting businesses. Here, too, we are implementing significant restructuring measures. Looking now at slide 15, our cash flow slide. Year-to-date free cash flow continues to be relatively stable, declining just over $12 million versus 2008. As Dean talked about, we are steadfastly committed to maximizing free cash flow in 2009 and beyond, especially if poor market conditions continue. Now as you know, we are not providing a 2009 earnings forecast. In January we did provide to you some of the factors that will drive our 2009 results and we updated them in April.

Slide 16 provides a June update to some of these factors, namely that the currency headwind would be 200 basis points lower at current exchange rates, that CapEx is now targeted to be between $115 million and $130 million, down from a range of $120 million to $150 million. The third, that we had a class action settlement of $37 million, as reported in our first quarter 10-Q, and finally, that the non-cash impairment charge reported in our fourth quarter 10-Q will adversely impact reported EPS but not free cash flow. Before turning the call back to Dean I too wanted to say that the board's decision on the dividend was obviously a difficult one, but should volumes continue to be weak, the increase in debt reduction gives us some assurance that our balance sheet will continue to strengthen.

As Dean said, taking precautionary action at this time is the right thing for us to do. I'll turn the call back to Dean.

Thanks, Dan. I just have a few comments before we go to Q&A. Again, on the dividend reduction I want to re-emphasize we are not doing this because the Company is in a crisis, but in fact it's a difficult but sensible business judgment. I think the question is why now. Well, as we looked at the second quarter, we got thrown a number of curve balls. First of all, volume continues to be low and, in fact, the only upside that we see in earnings is coming from cost cutting and restructuring, not from buying improvement. We anticipate that the recov -- that there will not be a dramatic recovery in the back half of the year or even in 2010, and that is definitely a change from our outlook, and that has certainly been informed by the fact that none of our businesses are really showing any signs of volume improvement. And third, the additional headwinds with the cash needed for our pension expense is also new information.

We continue to operate with discipline in a very tough economy, noted by our gross margin trajectory in the business. And we still have great franchises with market leadership in very good markets and we are well positioned to rebound when volumes recover. Thank you, and we'll be happy to take your questions.

(Operator Instructions). And our first question comes from the line of George Leon Staphos from Banc of America Securities. Please proceed with your question.

Thanks. Hi, guys.

Hi, George.

How are you? I guess I wanted to go through the volume transfers. I realize that you said there's been no pickup from what you can see. Can you tell us, can you provide any color perhaps on what some of the early third quarter trends look like, adjusting for seasonality, if there's any factor there in some of the key businesses? And as a tag along question, you mentioned that you are seeing continued signs of cancellations and delays in orders specific to the RIS business, if you can give us a bit more color on that. Thanks.

Sure. George, first of all we are about three weeks into the third quarter and it looks just like May and June. So I'm also reluctant to take any judgments from that, especially because Europe will likely take the opportunity through their normal shutdown period to take an extended shutdown. I think a lot of businesses are thinking and talking about that. So I'm not optimistic that the third quarter is going to show any -- any kind of dramatic improvement. When you talk about RIS, in fact Europe really did play a role here. We were -- our order rates from European based retailers and brand owners were decreasing the last few quarters at a single-digit rate and they moved into double-digit territory in the second quarter. And in fact, that was probably the single biggest surprise that I saw in that business.

In the US most of the retailers I talked to have this attitude and that is I would rather run out of stock on something than to have to mark it down because I can't sell it. And in fact most of the retailers and brand owners have anywhere from a 15% to 20% inventory reduction target and even when they place initial orders, they are playing -- they're placing lower initial orders than they normally do and, again, will chase replenishment rather than having it kind of flow in in the past. So they've definitely changed their buying behaviors there. And then finally in pressure sensitive, because I think most of us see pressure sensitive or at least both of us have been around for a while, as a bit of a leading indicator. And I would say we've seen a little bit of an improvement in Asia, in the emerging markets of Asia, where we saw a bit of a rebound in the back part of the quarter. And maybe we've hit a bottom in the US, but I wouldn't characterize it as growth as well in Europe. I'm just not sure we've hit the bottom yet. Hopefully that is enough color.

Dean, that is helpful. I'll ask one quick follow and then turn it over. If -- one of the things we've been hearing about really during earnings season is companies, companies that we track and their customers finding it increasingly able to, possible to operate with low working capital, lower inventories. And that's good, but how could that affect the RIS business in the years to come? Do you think that might actually make the business more valuable to its customers? Do you think it leads to a continued drag on volume over time? How do you think that could play out relative to RIS and relative to its value to the whole Company? Thanks.

Well, I think it actually plays to our strength, because retailers are -- are basically moving to multiple seasons. They are placing smaller orders more frequently and, therefore, the complexity of their product offering and their supply chain goes up. And they are certainly not adding staff to deal with that complexity. So increasingly they've been -- I'd say it -- that's where Avery Dennison is able to step in and manage that for them. What we are fighting right now is inventory reduction and lower order sizes. If there's a bright spot, our variable margins have improved still a bit even with dramatic reduction in order sizes, so at least at that level I think we are -- we are handling that trend pretty well. But because this is a high variable margin business, it's really tough to show any progress, we certainly didn't in this quarter, until -- until buying start to improve.

Thanks guys. I'll turn it over.

And our next question comes from the line of Jeff Zekauskas from JPMorgan Securities. Please proceed with your question.

Good afternoon. This is Silke Kueck for Jeff. How are you?

Hi, Silke.

I have a couple of questions. There was a commentary in the press release which said that the -- the size of the dividend reduction reflects a combination of the Company's near-term debt reduction target and a target to pay cash dividend of 40% to 50% of normalized earnings. So is that to be interpreted that the dividend is now annualized $0.80, that would mean in normalized earnings are $1.60 to $2.00, is that the way to think about it?

Well, our goal here is to provide guidance. Obviously the dividend -- our 40% to 50% target is a historical target that the board has had for a number of years. And certainly for the last few quarters that our payout ratio is way over that target. So the Board has been looking at longer term factors and I would encourage you not to try to triangulate all this in a very short-term manner to try to estimate what guidance in there. So this is definitely not normalized earnings.

So -- right. So these are -- these seem too low for normalized earnings over a longer period of time?

Yes, absolutely. Yes. Absolutely. We are not normally in an environment where our volumes are dropping 13% and 14%.

Okay. And then a clarification on the pension funding requirement. So of the $200 million and $300 million to be spent over the next three years, I think there was a $25 million outlay in 2009 and do you know roughly how much it may be in 2010 and '11, just like near-term?

Sure. That's going to ramp up over the next few years and in 2010 it's roughly in the same range as what we've laid out for 2009, around $25 million, and then it does ramp up over that through 2013 to get to the $200 million to $300 million range and that range is based on a number of factors. Obviously, when you consider what your pension outlay is going to be, such as future return in the equity markets and discount rates and so forth. So it's not that much immediately in 2010 and it ramps up after that.

And then if I can ask a last question and I'll get back into queue. The restructuring cost of $130 million for '09, I think there's about $65 million that has been occurred so far and so this like another $65 million to come. Is that correct? Or is the loss on extinguishment of debt also part of this?

Sorry. So we are going to be spending $130 million for the current restructuring initiatives that we started in Q4, 2008. Some of the restructuring that you saw in the first half of the year related to some of the restructuring initiatives that started before that, but there's -- we've implemented 50% of the initiatives. We are hitting 50% of the run rate in savings as of the end of June and we have a little bit more than 50% of the $130 million from the Q4 actions left to spend and that will not all be in 2009, though, that will go into 2010.

So the $130 million in costs will go into 2010?

Correct. And there is a timing difference between when you see it in our P&L and when we take the charge versus what the cash outlay is.

Okay. That's helpful. I'll get back into queue. Thank you.

And our next question comes from the line of John McNulty from Credit Suisse. Please proceed with your question.

Yes, good afternoon. A couple of questions. With regard to cost cutting, of the $75 million that you expect to get this year how much of it hit in the first half and sequentially how much of an improvement should we be looking for?

Well, we are looking for $160 million overall annualized when we fully implement. $75 million of that is expected to hit this year. We are at 50%, so we've essentially -- if you take what we've implemented as of the end of June, we are $80 million run rate and year-to-date what we've seen from that, we've seen about -- it's about a third of the $75 million. Approximately $25 million of that so far.

So in the second half of the year we can be seeing something in the neighborhood of $40 million to $50 million of incremental cost saves?

Yes.

Am I thinking about that right?

Yes. So if you think of a just a ramping up curve of cost out, there is going to be a lot more in the second half than we saw in the first half.

Okay. And with regard to pricing in the pressure sensitive area, I believe, Dean, in your opening comments, or it may have been -- it may have been Dan, you spoke about how part of what drove the margin was your pricing actions. Can you give us some clarity as to what those specifically were?

Sure. You recall last year we had this pretty large gap between the inflation we were feeling and our pricing actions, so we finally just about caught up in that business. So we are raising prices, I think, two or three times last year and then we raised prices again in January and then during the first quarter, especially in countries where we had some pretty wild currency swings on top of the inflation in the first quarter. And those seem to be holding right now.

Okay. So what was priced up year-over-year in the pressure sensitive business?

Yes. I'm not sure we give that information by sector, but it's up definitely, especially over last year from a low.

Okay. Okay, fair enough. And then just one last question. Dean, you had kind of at the end of your discussion you had talked about as far as the dividend cut why now and the volumes haven't gotten better and you were worried about the pension requirements. It seems like those were kind of the two of the big ones, but your cost -- you put up actually a better quarter than I think most people probably expected. Your costs, it looks like you have got incremental cost cuts coming in. The pension hit of $25 million doesn't sound like it's kind of a deal maker or breaker. So is there anything else that is kind of concerning you or concerning the Board in terms of why such a dramatic cut in the dividend was necessary now versus, say, even in the first quarter?

Yes. All of the earnings and if we had a benefit and I take that likely because it was less worse in the second quarter than it was in the first quarter. I think it is all about -- it is all about cost cutting. There's no volume impact at all. We had assumed in our planning with the Board earlier in the year that we would see a recovery in the back half of 2009 and they -- relatively, I wouldn't say strong, but a decent recovery in 2010. And as we look at the -- at our worst case scenario, I guess our low end scenario, and saying well what if we don't have a recovery in the back half of 2009 and 2010 is flat or down a little bit, what would happen. And the what would happen is a series of events that would not look very good.

So we would potentially have problems meeting our debt covenants or lose our access to commercial paper that would cost us another $20 million or so a year. If we run into covenant trouble, that would not be a good thing. So, I think the Board took the prudent action of saying, look, in a really bad forward-looking volume scenario and with the additional pension cost that we've got looking at the business, what's the most prudent course of action, because the dividend reduction has accumulative benefit over time and if we wait 'til the last minute, it's too late. So, that was really the feeling. It's the volume, the pension over time, I mean, that is a headwind and just because it's not next year, I think is almost irrelevant. It's still $200 million or $300 million of cash outlay that we had not planned for in our earlier scenarios. So that's how we are thinking about it.

Okay, great. Thanks for the color.

And our next question comes from the line of John Roberts from Buckingham Research. Please proceed with your question.

Good afternoon. Did you learn anything new about the pension during the quarter, say, the impairment charge trigger any funding requirements. The markets have actually gotten better since the start of the year and so forth and I don't recall last quarter the pension coming up as a major issue.

The pension is something that -- one of the big reasons behind the funding requirements over the pension -- over the next few years is the decline in the equity values, obviously. So that's something that we are watching and monitoring, as well as the considerations around the legislative changes that we've seen. So it was completely realized in the second quarter about the magnitude and extent of the funding requirements over the next five years working with our consultants and actuaries on exactly what that requirement would be.

You completed a study or analysis that kind of came to a fruition here during this quarter?

Yes. Well, the impairment had nothing to do with that analysis.

Okay. That tax rate of 15% currently and then low 20s on a forward basis, the second half of '09 will be at 15% or at low 20s?

Right now it's -- low 20s is what our expectations for tax rate over the coming years, but that will vary from year to year and even more significantly quarter to quarter. Now the tax -- GAAP tax rate this year will be artificially low because of the size of the goodwill impairment charge that we took in Q1. So if you adjust for that, our tax rate that we are currently anticipating, and there's a range, but is around 15% and that's what we've used for the quarter and expect for the full year.

For GAAP book earnings in the third and fourth quarter?

Yes. So for pro forma earnings, which would be GAAP in the second half, yes.

Great. Okay, thank you. I'll get back in the queue.

And our next question comes from the line of Silke Kueck from JPMorgan Securities. Please proceed with your question.

Yes, I have a short follow-up. The -- so reiterate remarks, then you said things could be weaker throughout 2010. Is that everywhere or was it particularly in RIS and what does it sort of entail? Weakness does it mean volume growth is down 3% or it's down 8%, how does one think about it?

I would say that, again, remember we are looking at a range of scenarios, high, base case and low and in our low scenario we are looking at no recovery in the back half of 2009. So a continuation of the current trends and a slight decline, flat to slightly down in terms of volume in 2010. And I mean it's tough to get more granular than that, but fundamentally what we are saying is a very -- much an L shape recovery. In other words, no recovery. In our low case scenario and that's what the Board based their decision on.

And again, is that really everywhere or is that driven by particular the RIS business, not (inaudible)?

I think it's -- well, it's driven by all our businesses. I mean, pressure sensitive is down double-digit percent and that business, again, tends to be a leading indicator. We assumed in that scenario that Europe would continue to fall in the back half of the year and certainly the retail sector in office products, it is driven by white collar employment, which we don't expect will rebound very quickly, and then consumer spending for retail and apparel, again, in that scenario basically assumes that consumers are spending whatever income -- or sorry, saving whatever income they have and not increasing their spending levels as consumers continue to delever. So that's how that works. That may be -- that may sound really conservative, okay, but I think running the Company in this environment, it's prudent to do so.

I agree. Should the depreciation and amortization charges change with all of these restructuring charges being taken or are the restructuring charges largely employee related?

I think the question was will our depreciation charges go down over time, and yes, they will be declining and we've seen that because of the -- some of the write-offs that we've had in restructuring charges, but also you'll notice our capital expenditures we've ratcheted way down to reflect the current environment. So our depreciation is higher than our CapEx, so, yes, you'll see that.

So do you have an initial D&A target for this year and maybe next year?

We don't have specific targets for D&A and we are not providing guidance as far as 2009 and forward.

So if it goes down is it going down like single digit million, $10 million, just like just order of magnitude without giving an exact -- without an exact number?

It's going to continue the trend that we've seen over the last year.

Okay. Thanks very much. I'll get back into queue.

And we have a follow-up question from the line of George Leon Staphos from Banc of America Securities. Please proceed, sir.

Hi, guys. On the subject of the restructuring that you'll be doing within RIS and in the other markets, obviously the Company has been pretty aggressive in restructuring, cutting costs for many years now within its business and within those businesses over the last couple of years. What's next? What's left to do? What do you hope to accomplish with these restructuring? What will be -- if there are one or two tenants behind it, what will you accomplish with this restructuring and how will, perhaps, manufacturing and processes change within those businesses.

Yes, so, actually if you look over the last couple of years, I think the headcount is down almost 4,000 people in RIS and the first wave of that, and I would say that was really all about the first 18 months, was simply taking out the overlap and the duplication between Paxar and with Avery Dennison. Now we have two objectives. One is to reduce our fixed cost to a level that is appropriate given the reduction in volume in the business. But second we believe on top of that there's an opportunity for a significant amount of productivity that can happen through -- by basically standardizing the work processes that we have in customer service, in order processing, in -- as well as order fulfillment in our factory. And we made good progress, I think, so far in the factory this year, but we still have quite a bit of work to do in the front end of the business and some of that will require some automation and investment in information technology as well.

Is there a trade off that you worry about? These businesses, it's always been my impression you obviously know them a lot better than we do, are very decentralized, they are very much driven by reacting to your customers and to the extent that you perhaps add automation and try to centralize, do you risk perhaps having that very quick reaction time and maybe now is not the right environment to be worrying about that because demand is down so much. But do you perhaps impact the business's ability and its advantages when we finally do have that recovery, hopefully sooner rather than later?

Yes. Actually, here's the way I look at it. So right now, or I shouldn't say right now because we moved a long way from that. But day one when we bought the business, we had a lot of independent family run restaurants, okay, and now we are building Burger King, so that all the processes inside the restaurants all actually look identical, but the customers can still have it their way, if you will, because there's still a high amount of customization that can -- that needs to occur in the businesses. So what we've been doing is standardizing and streamlining processes.

The business is now organized globally on a functional basis, so we have people in charge of the supply chain around the world and in charge of customer service around the world, because our goal is to have the customer feel the same good, high quality level of service, no matter where they are. So, yes. I don't -- I actually see a bigger risk of not doing it than doing it today, because as cycle times decrease and customers expect to get the same service no matter where they are sourcing their garments, we are actually the only game in town that can actually provide that.

Okay. Dean, I guess the last question and, again, I know it's hard to gauge this given where we are right now economically, but you still feel that this is a 12% operating margin business or whatever goal that you have provided in the past, you still feel equally good now about the earnings power within RIS, courtesy packs or that you did a couple of years ago when we finally do get to that recovery?

At the risk of my creditability, I haven't given up on that goal for this business, because I think it's absolutely doable. It looks really far from where we are today, but, again, given the variable margins in this business, which have expanded, okay, it doesn't take that much more volume and it won't going in the future for us to realize that objective.

All right. Thanks, guys.

And our next question comes from the line of Ghansham Panjabi from Baird & Company. Please proceed.

Hi guys. Hi, Ghansham. There seems to be a fair amount of debate in Washington on changing the corporate overseas tax rates. Can you just give us some color on how you think that could impact on your overall tax rate, understanding it's well below at least your historical levels? Is this something that could go up maybe 3% or 4% or something more meaningful? Thanks.

Well, it's definitely a risk factor. I'm not very happy with a lot of the proposals that are sitting in Washington right now and here's the risk for us. We get an awful lot of our earnings from overseas corporations and for some reason the US government feels that that's just a pot of money they can dip into and it doesn't really impact anything. It could have an impact on us for sure, so it's definitely a risk factor going forward.

Okay. And then in terms of your RIS business, I assume CIT is a big provider of working capital to a lot of your customers. Just given the troubles there, have you seen any sort of volatility on your accounts receivables?

Actually, we did a check of our key accounts and all that and it's a pretty minor factor for us.

And that includes PSM too?

Given the nature of our customer base, it's just extremely distributed and we don't have a significant amount of concentration of customers within PSM, as well as RIS. So not a significant factor for us. We are, particularly in this environment, focused on the quality of our receivables and we continue to be comfortable with the levels where we stand. So, not a particular impact from CIT in particular, but overall the quality of our receivables is still within our comfort level.

Okay. Thank you.

And there are no further questions at this time, sir.

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

Ladies and gentlemen, that does conclude the conference call today. We thank you for your participation and we ask that you please disconnect your lines.