艾利丹尼森 (AVY) 2009 Q3 法說會逐字稿

Welcome to Avery Dennison's earning conference call for the third quarter ended October 3, 2009. This call is being recorded and will be available for replay from 1:00 PM Pacific Time today through midnight Pacific Time October 30, 2009. To access the replay please dial 1-800-633-8284, or 1-402-977-9140 for international callers. The conference ID number is 21411862. I would now like to turn the call over to Eric Leeds, Avery Dennison's head of investor relations. Please go right ahead, sir.

Thank you. Welcome, everyone. Our discussion today will reference the earnings release that we issued earlier, along with the slide presentation titled third quarter 2009 financial review and analysis. Both documents were furnished with our 8-K 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 is transition costs associated with acquisition integrations. Restructuring charges and integration transition costs tend to be fairly different in amount, frequency and timing. In light of the nature of these item we'll focus our margin commentary on pre-tax 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, Global Finance. I'll now turn the call over to Dean.

Thanks, Eric, and thanks to all of you for joining us today. In the third quarter we delivered a solid performance in the face of continued tough economic conditions, demonstrating the strength of our franchise businesses and the effectiveness of our operating model. Demand in all of our end markets remains soft and volumes in sales in all segments declined over the prior-year quarter. Even so, we expanded our operating margin and held net income virtually flat compared with last year. Organic net sales were down 6% compared with mid-teens declines in the first and the second quarter. We attribute this slower rate of volume decline to the fact that inventory left in many markets appear to be stabilizing, and while we did see some increases in demand in some emerging markets, it's too early to declare a robust recovery. Given the volume headwinds I'm pleased with the operating performance of our businesses. The 300-basis point increase in gross margin over last year to 28.1% suggests that we maintained our competitive advantages in all of our core businesses.

Our businesses demonstrated some real operating excellence. as well. We more than offset the impact of lower volumes with restructuring and productivity improvements, and we expanded operating margin to 7.3%. We increased our variable margins, generated free cash flow at about the same level as last year, made solid progress on debt reduction, and significantly improved working capital, while at the same time we invested in new products and processes for long-term growth. I should note that pricing and inflation trends also contributed to the operating margin improvement. As you know, our pricing was lagging inflation throughout 2008. We've closed that gap and we intend to keep prices in line with future inflationary pressures. Our pressure-sensitive businesses made solid progress in the quarter. Emerging markets are growing again as economic recovery takes hold. The declines in the US and Europe are moderating as destocking moderates, as well. Margins improved nicely, as our productivity actions offset volume declines and we closed the gap between pricing and raw material inflation.

I attended the Label Expo show in Brussels last month. Customers were definitely more bullish than last year, but still a bit conservative in their outlook going forward. Our retail information services markets continue to be played with the massive inventory destocking occurring in our core markets. We did see some nice growth with new products and packaging and E-transfer product line, and I didn't expect to see major product in Q3 since it is a seasonally soft quarter for RIS. We have more cost out still going on in this business and variable margins continue to be high, so when the inventory situation stabilizes we'll be able to better demonstrate the earnings power of this business. Office products did well in a lackluster back-to-school season for most companies in our industry, but POS for our core non-seasonal products remains negative and is likely to continue as white collar unemployment remains high. We did launch a new line of note tabs and pad products that have received positive early reviews from customers. And our specialty converting businesses had a recovery from a very tough first half, and although sales volumes are still down year over year, the rate of decline was half that of the second quarter.

Our employees have done a tremendous job keeping focused and delivering in difficult, uncertain times. I want to thank them for delivering better quality and service to our customers while improving our internal operations at the same time. And now I'll turn it over to Dan, who will take you through the quarter in more detail.

Thanks, Dean. Let's start with a summary of the preliminary results for the third quarter on Slides 5 and 6 of the handout. Starting on Slide 5, on an organic basis in the third quarter sales declined about 6% with the decline attributable to lower volume. Now 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 third quarter of 2009, were down 10%, and currency translation reduced reported sales growth by 4%. As Dean mentioned, the rate of decline in our sales improved versus the first half of the year, but we attribute this more to slowdowns in inventory reductions than to end-market demand, which remains soft. We experienced sequential improvement in every major region. Emerging markets actually showed growth compared to prior year, if you exclude RAS, which almost entirely serves the US and Western Europe.

Third quarter operating margin before restructuring charges and other items increased to 7.3%, as restructuring and productivity initiatives, including those to optimize our usage of raw materials, more than offset the operating margin impact of the volume decline. In addition, the affect of pricing and material cost trends offset the cumulative impact of 2008 inflation. which contributed to year-on-year margin improvement for the quarter. It's worth noting that, despite a $175 million reduction in sales, we held operating profits essentially flat in the quarter, which speaks to the success of the actions we're taking to deal with the slow economy. We are seeing some inflationary pressures beginning to build, which may put some pressure on fourth-quarter margins, but we're pleased with the underlying margin trend.

Turning to Slide 6, we're on target to achieve $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're estimating a $75 million benefit net of transition costs in 2009. We'll incur about $130 million of total restructuring charges associated with the program, with approximately $110 million incurred in 2009. In addition to the savings from the new actions, we're realizing about $40 million of carry-over savings in the year from previously-implemented actions. At the end of the third quarter we achieved a run-rate savings representing 70% of our restructuring target. Now our adjusted tax rate in the quarter was 7.5%, and the adjusted tax rate is expected to be in the low double digits for the full-year 2009. Adjusted earnings per share of $0.82 in the quarter excludes $0.23 of restructuring, asset impairment and other charges.

Slide 7 shows our recent sales trends. As mentioned, sales declined organically by nearly 6% for the quarter, which was less of a decline than in the past three quarters. In some emerging markets, end-market demand is improving, but improvement elsewhere is generally limited to inventory stabilization. Over time our sales are dependant on end-market behavior, specifically that of the consumer who. in mature markets, has not yet returned. Turning to Slide 8, the year-on-year and sequential margin improvements in our pressure-sensitive and other specialty converting businesses, again reflect the effectiveness of our restructuring and productivity improvements, and as Dean discussed, pricing and raw material trends all in the face of sales declines. And moving to Slide 9, with regard to MG&A we continue to control expenses; however, as the economy slowed we cut MG&A costs to levels that weren't sustainable, so expenses came up a bit this quarter. Going forward we intend to get more productivity in MG&A, but we'll also be making additional investments in some of our growth initiatives.

Slides 10, 11, and 12 describe segment results. Organic sales in our pressure-sensitive materials business were down approximately 3%. In our roll materials business, Europe was down mid-single digits, North America down low single digits, and emerging markets were up mid single digits. And within emerging markets Asia and Eastern Europe were both up. Roll materials, which is the Company's largest single business, has a large tie to consumer staples and we're confident that we'll see growth in this business when both the economy and inventory stabilize. Inventories may be stabilizing already, but our end markets are not. The graphics and reflectives business in this segment continues to experience sales decline, down low double digits, which represents an improvement in the decline in recent quarters. Pressure-sensitive operating margin increased, as productivity offset the impact of reduced fixed-cost leverage, while the effect of pricing in raw material trends continued to cover the accumulative impact of 2008 inflation.

The decline in sales in our retail information services business primarily reflected continued weakness in retail apparel markets in the US and Europe, and caution on the part of retailers. We experienced reduction in orders for fall season merchandise. Orders for fall typically occur in the second quarter, making it the segment's largest quarter. The third quarter is typically smaller. As you know from last quarter's report, the second quarter surge in orders for fall never really materialized. The next opportunity to see improvement is the spring season, which would begin to occur in the fourth quarter. We expect that the extent of these orders will be influenced by what retailers experience in term of holiday sales. Operating margin before restructuring charges and other items declined to a -2.1%, as reduced fixed-cost leverage, pricing, and employees-related price inflation more than offset the benefit of restructuring actions and other productivity. As you know, we're implementing significant restructuring measures to reduce RAS' fixed costs 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 12, the decline in office and consumer product sales reflected weak end-market demand, led by slower activity in the commercial channer -- channel consistent with declining white-collar employment. The sales decline was partially offset by strong back-to-school sales driven by strength in the mass market channel and consumer trade up to more durable binders. Operating margin declined, as the benefit of productivity actions was more than offset by the impact of reduced fixed-cost leverage. Exposure to the automotive and housing markets again negatively impacted our specialty converting businesses. Here. too. we're implementing significant restructuring measures, which had a positive impact on our operating margins.

Looking at Slide 13, our cash flow slide, year-to-date cash flow continues to be stable, flat year-over-year, despite declining volumes. We continue to reduce working capital with meaningful improvement in both inventory and receivables ratios. We remain committed to maximizing free cash flow in 2009 and beyond, even if poor market conditions were to continue. As you know, we did not provide a 2009 earnings forecast. In January, we gave you some of the factors that will drive our 2009 results, and we continue to update those as the year progresses. The left slide of -- the left side of Slide 14 provides our most-recent estimates for those factors. One notable change from last quarter is that 2009 CapEx is now targeted to be approximately $100 million, down from last-quarter's estimate of $115 million to $130 million. On the right side of the slide are a few items that will impact the fourth quarter sequentially from the third quarter. And as a reminder, the fourth quarter typically reflects lower seasonal volume and the effect of our fiscal calendar change reduces fourth-quarter sales by about $50 million. Additionally, it should come as no surprise that we feel raw material inflation pressure building, and may again be raising prices early next year. The impact may not offset the raw material increases in the fourth quarter.

Now I'll turn it back to Dean.

Thanks, Dan. To sum up the third quarter, thanks to excellent work by our employees we delivered a solid performance in soft markets and challenging conditions, with expansion of operating margin thanks to excellent work on costs and productivity. We kept free cash flow flat compared to last year, and made solid progress on debt reduction. And on the fourth quarter, as Dan noted, we will be watching both volumes and raw material prices very carefully. And on the future, please don't mistake our caution for pessimism. Yes, the economy has a way to go. We need employment and the consumer to come back. None of us have enough information yet to forecast the pace and the strength of an economic recovery, but we have a strong franchise and excellent operating model, and terrific employees. We're well positioned for profitable growth when markets improve.

Thanks for listening, and we're now ready to take your questions.

Thank you very much. (Operator instructions). And our first question comes from the line of George Leon Staphos of Banc of America-Merrill Lynch. Please go right ahead.

Hey, guys, good morning, how are you?

Hi, George.

Couple of questions on top line and then I'll turn it over. Do you have any details on physical volume for the quarter? You gave a lot of good detail on organic sales, but do you have any volume numbers for any of the segments or any of the businesses that you can share at this time? Also, on FX, while it's reasonably doable to parse what the total was across the segments, do you have any specifics on that for the segments?

Well, volumes were generally down. We've provided the organic numbers, as you pointed out. The overall price is still up about a percent or so from a prior year, which is carrying forward from what we did mostly clear back in the first quarter of last year, and the fourth quarter, but it's been hanging in there. Prices have held pretty well despite the tough market, so that's been healthy. But generally, in all of our segments, with the exception of emerging markets in the materials business, volumes continue to be down. On the currency front, there's about a 4% gap against the Euro from our accounting rates, third quarter to third quarter, so still a headwind. At current rates it would be a slight tailwind for the fourth quarter. We didn't have any substantial transaction issues during the quarter, it was mostly just a translation issue.

Okay, couple of follow ons. From what I remember from roll label, the organic sales were down low double digits in the first quarter, down, call it mid single digits, 6%, 7%, somewhere in that range, 2Q. Third quarter you saw a further improvement. Early in the fourth quarter, are you continuing to see that same sequential improvement in PSM roll label?

George, hi, it's Dean. I -- it looks -- it's been improving, just as you said, and we saw a general improvement during the quarter., that's continuing. The big question mark is December. This quarter, because of the extra week, we actually have two holiday weeks in the quarter and I'm also anticipating if anybody wants to adjust their inventories down they're going to -- any customer wants to do that they're going to choose to use the last couple of weeks of the year to do it, and so it's really difficult for us to forecast that month.

Yes, I wasn't asking you to forecast, Dean, that's great. I was just trying to get a sense for what you've seen early in the quarter, and it sounds like we're continuing along that path now?

No, it's still continuing and, again, I would characterize -- I was at the Label Expo show in Brussels, and I was stunned, actually, by the amount of participation. The halls were filled with people, and I certainly had a chance to talk to a lot of customers and all of them were relatively busy. But the customers haven't changed their behavior much, they're still ordering smaller order sizes more frequently, so they sense that anybody was building inventory, that they had probably gotten them down to a level that was more consistent with end demand.

All right, thanks. I'll turn it over.

Thank you very much. And our next question comes from the line of Ghansham Panjabi from Robert W. Baird & Company. Please go right ahead.

Hey, guys, good day.

Hi, Ghansham.

Looking at operating profit, 3Q versus the second quarter. it looks like the delta's about $23 million. Can you isolate for us in different buckets, cost savings, volume, sequential improvement, FX, et cetera, as to what drove that internal upside?

Well, the big driver has been productivity. Obviously, the restructuring program that we're going through got a lot of traction during the quarter, and as I pointed out, we moved to the 70% completion mark by the end of the quarter, so that had some significant impact. That was the big one. The volume declines weren't quite as bad, so sequentially we picked up some dollar revenue, and that was useful, as well.

Did you quantify the volume improvement sequentially?

Well, we didn't do it on a volume basis but our -- we obviously published --

Yes, our sales were up $100 million --

Certainly.

-- from the second quarter to third quarter. That obviously had a huge impact on -- as we reduced our fixed costs.

Okay.

That was the single biggest lever, actually,

And most of that is volume, some of it is currency.

Okay. And just on -- Dean, in terms of post Paxar we really haven't had a clean, call it, macro year, so what does the fourth quarter in a normal year typically look like relative to the other three quarters? Thanks.

It's -- the fourth quarter's -- generally the RIS business has its strongest volumes in Q2, it's second strongest in Q4, because that's when we see orders for the spring season, and then its softest quarter in Q1, and then Q3 is, obviously, number three on that list. The thing that I watch is the inventory-to-sales ratio for soft goods and we're making progress, but we're not quite at the trough level in prior quarters, so we have seen a bit of an uptick now in terms of sales. So sales are declining less in the retail and in the clothing accessories categories, but I still think we're probably a couple of quarters away from seeing any kind of robust turn around and a lot of this is going to depend on consumer behavior in Christmas. I will say this, retailers are all singing from the same hymnal right now, and that is they would rather be out of stock than mark something down, and so I think that's going to be their behavior for a while until they see positive comps in their same-store sales.

Okay, thank you.

Thank you very much. And our next question comes from the line of Jeff Zekauskas from JPMorgan securities. Please go right ahead.

Hi, good morning. Can you hear me?

Can't hear you. Hi, Jeff.

Hi. Your other specialty converting business earned about $6 million on an adjusted basis, is that a sustainable level of operating profit?

Well, yes, --

All things being equal.

Yes, most of that improvement in the operating margin came from restructuring costs, and we've weighted our restructuring initiatives towards that business, in part because the sales have been more impacted there by automotive and housing than elsewhere, so we've done a significant amount to reduce the ongoing fixed cost there and with a return to volume I think our margins will improve.

That is still improve from where we are now, or they'll improve from where you were?

Well, both. They've been improving. This quarter was a big step function in the right direction. There's more margin improvement ahead of us.

Second thing is, is it the case that your average prices in pressure-sensitive materials were up, and your average prices in retail-information systems down in the quarter?

That is correct. The --

Any --

Yes, sequentially, our pricing and materials didn't move much, but year on year they're still up about a percent or a little bit better because of increases over the fourth quarter and first quarter of this year, so they're holding steady, generally, in the materials market. In retail, we have seen some pressure and prices have moved down probably a percent or so, hard to measure in a custom business like that one, but we haven't raised prices recently in the materials business. It's carryover from earlier actions that made up for that 2008 inflation that we were bearing.

How much were your raw materials down for the quarter versus the year-ago quarter, or sequentially? What -- I know you are on FIFO, did finally some FIFO issues hit you positively this quarter?

FIFO was not a factor. We started seeing a bit of deflation in some areas and a bit of inflation in some other areas in raw materials, but the trend right now is towards inflation, and so we're out in our materials markets talking about the -- a need for a price increase to cover that in the beginning part of next year, so it's moving higher as we speak. Oil prices are up and paper's cost bottomed down and started up over the last quarter, as well.

And then lastly, do you still lose money in RFID and if you do, how much?

We actually just went through a little bit of restructuring in the inlay business., so moving forward we'll lose a little bit of money on a book basis, but be cash flow neutral. And then we make money in RFID business that we sell in retail information services, so net-net we make money on RFID.

Okay, thank you very much.

Thank you very much. And our next question comes from the line of John Roberts from the Buckingham Research Group. Please go right ahead.

Good afternoon, guys.

Hi, John.

Hi.

You had the caveat on Slide 6 when you're talking about the tax rate ongoing to very significantly from quarter to quarter. I can understand why it varied a lot this past year quarter to quarter, but unless earnings were to reverse and go back down to the levels we had earlier this year, would it still vary quarter to quarter a lot next year?

Yes, I'm afraid it will, and a lot of that variation is created by events out there where we're settling issues that have been -- we've been reserved against over the last few years or audits in foreign countries and that kind of thing, so we recognize in the GAAP tax accounting those events as they take place, not as they're anticipated so much, so it causes that chunkiness in the tax rate.

So you know you have a -- excuse me -- you know you have a lot of tax settlements, or decisions coming up in the next four to six quarters?

We have a number of items like that, and we also have tax planning that's going on that once a project is completed and we implement changes and so on, can have an effect on a rate in the quarter. So I think if you step back and look at it we're still operating over the long term at that 20% rate or so, but I think our tax function's done a great job of dealing with some of the opportunities around the world, and the result of that is that we've been able to consistently hold the rate lower, and I think as we stand right now, that's probably going to be the case for a while, but eventually there's an underlying rate there that's in the 20% range that we will move to over time.

Okay. And then, secondly, last quarter when you cut the dividend you talked about the pension as a potential funding issue coming up in the next couple of years, and you put $25 million in this past quarter. Will the discount rate that you use in the upcoming year be materially lower than what you used last year, and should we expect a material adjustment in pension liability here?

Well, interest rates are the big swing factor on pensions, along with market movements. I've heard it said that inflation and higher rates is the ultimate solution for under-funded pensions. I don't know where they're going to go, We don't have a significant change right now. They're down a bit for 2010 over 2009, but it's less than a percentage point, so that is increasing our pension costs for next year. But we have not yet made a contribution for the current year, we're not required to. With our cash flow running as strong as it is, we may well decide before the end of the year to make a voluntary contribution, but we do expect over the next two or three years to see some more substantial increases in the cash requirements to fund the pension unless the market really makes a turn.

Okay, thank you.

Thank you very much. And our next question comes from the line of John P. McNulty from Credit Suisse. Please go right ahead.

Hey, good afternoon. Just a question on the CapEx where you're cutting your CapEx to about $100 million, which I believe is less than half of what you saw in '08 and 2007, and I'm wondering is it because -- just because you had such a big enough downturn where you got plenty of excess capacity, or is it just being conservative on -- with regard to your cash flow for a while? What's actually driving that CapEx and how should we think about it in 2010? Admittedly you don't have a formal forecast, but are we going to be closer to 2009 levels, or 2008 and '07 levels?

Yes, John, $100 million's not sustainable over the long run bor sure, but I'd say there's a number of factors involved. One is, you're absolutely right, w'er got ample capacity in most of our businesses so we're not required to do that. And even where we run to the occasional capacity shortfall, or issue, the first approach is to use our enterprise Lean Sigma techniques to figure out a way to debottleneck our supply chain without the use of capital. That being said, the other factor is that we were focused on generating free cash flow this year, and so we deferred some stuff that could be deferred this year, so it's likely to come up a bit and we haven't done the planning yet for next year to know what range that'll be in.

Okay, that's helpful. Dean, also in your beginning comments you had indicated that you thought you'd have more success going forward with regard to price versus inflationary pressures on the raw material front. Is there something that's changed or -- in the organization itself or in your systems that gives you that confidence that you can -- if we do see a big surge in raw materials that you can keep up with them maybe better than you did in the past couple of years?

Well, I do think we have better controls over pricing in most of our businesses, so we definitely, this last couple of years put enhanced pricing disciplines into the mark -- into our marketing functions around the world, so that is -- that's good. And second, is that frankly, I think a lot of our competitors have really suffered through these last couple of years, as did we. We just happen to be sitting in a better relative position than most of our competition. So what I sense in the markets out there there, is more competitors realize, well, I actually do have to make money, so I don't anticipate the same amount of inflationary pressure that we had in terms of intensity, but we do intend to stay on top of it.

Okay, great. Thanks for taking my question .

Thank you very much. And our next question comes from the line of Joseph A. Naya of UBS Research. Please go right ahead.

Hey, guys, was wondering, you mentioned that you'd expect to see seasonally-slower volume in the fourth quarter, can you give us any help in terms of what sort of magnitude you would expect normally across the different businesses?

Well, I'll stop short of being too guidance oriented for the fourth quarter, we've given a couple of factors. One is that $50 million that we lose just because of the 53rd week, which changes the timing of the fourth quarter, so that's going to be a bit of a headwind. Dean already talked about RIS being a relatively-stronger quarter than the third quarter, so that will be a bit of a help, but we're still expecting general softness out there and I'm not going to get any closer than that to giving you a fourth-quarter revenue forecast.

Sure. No, I --

The biggest question, really, is going to be what companies do with their inventories at the end of the year and how they behave. Last year, ifyou'll recall, we a saw significant drop in December, and specifically we saw an incredible drop in the last two weeks of the year, and it's just too early to tell how that's going to look. So I actually think the seasonal factors that are normally in play here really don't matter all that much. It's all about what people are going to do with their inventories and orders in December.

Okay, fair enough. In terms of -- I guess following up along that line, you eluded to this, you discussed a little bit what you were hearing from your customers, have they offered any type of visibility in terms of what they're seeing, or where they might be going with volume trends?

It depends on the sector. I think as you walk through the raw materials business there, there's probably the most optimism, I'd say, from our direct customers and that comes from the fact that their order books are stronger than they've been in the last 12 months, and most of what I hear from them is that their customers have run their inventories down to a level sufficient to where the actual demand for the end products and the order rates are doing well. In office products if you, again, take out the impact of back to school, the big issue is on the commercial side of the business. Remember, we sell half retail, half commercial, but the commercial side of the business has been down quite significantly this year, and again, that's related to white-collar unemployment. I don't think we're going to see a huge magnitude of change there in the near term. And then RIS, I talked specifically there about the inventory-to-sales ratio, and right now retailers are all still using the same play book, which specifically means I'm going to get my inventories down and be very cautious about what I put in to the stores.

I think seasonally, though, back to school is going to be a significant factor. We're always lower in office products in the fourth quarter than we are the third, so sales won't be as robust sequentially as they were. We get some help from currency. Those are the factors, and I think that's about as far as we can go.

Sure. Just one last question on the office products. The piece that's tied to white-collar direct fulfillment, is that -- does that tend to be steady through the year, or is that -- you see seasonality there, as well?

It's pretty steady.

Okay. All right, thanks.

Thank you.

Thank you very much. And our next question is another follow-up question from the line of George Leon Staphos of Banc of America-Merrill Lynch. Please go right ahead.

Thanks. Hey, guys, let's deal with office products first. Within the commercial portion of the business, given what's been happening with employment, and for that matter, just given what's been happening with corporate budgets, do you anticipate any more pricing pressure than what you've seen over the last two years, let's say, within that portion of your business, or do you think you can hold it from here? Demand will be what it will be but margins should hold relatively constantly?

I'm not sure we'll see an intensity of margin pressure because of what's happening in the corporate world. We get plenty of margin pressure just from what I would characterize just normal competition and --

Sure.

-- competition from private label and other competitors. One of the things we're doing is doing a bit more innovation and widening our -- the areas we're going into. I mentioned in the comments that w've launched a new line of note tabs and label pads, which are products that consumers seem to really like that don't run through a printer actually, and we're actually targeting a different consumer base with those products, and we're seeing some pretty good traction. So it could be that margins might be a little softer going forward, but it probably would have more to do with investments in new product for the category, rather than price pressure itself.

Dean, switching gears here, if we look back over time, if pressure-sensitive material starts to pick up, that would suggest that your customers are getting a bit more optimistic, about what ultimately their retail sell-through will look like, and to the extent that you might see an improvement in packaging demand, which is -- you suggested by a pickup in PSM it means that maybe other things will follow, including, perhaps retail. Is there an actual relationship that you've seen over time where PSM will lead your other businesses, including RIS even before Paxar,, or it is too difficult to call that relationship looking back over time?

Yes, it -- I hate to make those kind of predictions, because the RIS is a much smaller part of the portfolio, but here's how I see it. So in pressure sensitive it definitely tends to have been a reliable indicator of overall economic health in both Western Europe and the US, and that's a good thing. I really believe that the number one factor in RIS is all about the inventory-to-sales ratio for clothing and apparel accessories. That's where it is going to be, and so I tend to look at those factors for that business. And then, again, for office and consumer products, it's about white-color employment trends.

That's fair, Dean. One last question, and I'll turn it over. This year we should assume that you got roughly $115 million of restructuring benefits, would that be the fair read? The $40 million carryover plus the $75 million?

Yes.

Yes, that's right.

So that would suggest, then you have roughly another $70 million plus next year, if I remember the restructuring program correctly? You're at $160 million and most of that'll show up next year?

Yes.

Okay. What's the amount of net transition costs that affected you this year, and would they normally dissipate after the first year of implementation?

The transition costs are about $20 million for the full program. They will dissipate over time, about $15 million of that is expected in 2009.

Okay, thanks for that, Mitch, I'll turn it over.

Thank you very much. And our next question's another follow-up question from the line of Jeffrey Zekauskas from JPMorgan securities. Please go right ahead.

Thanks. You said that the cash outlays for the restructuring are $110 million this year and $20 million next year, how much have the outlay's been through the first three quarters?

Through the first three quarters total restructuring costs are about $115 million is what we have in the first three quarters of the year. That includes some impairment charges. as well, though.

No, what I was asking is what are the cash outlays to do the restructuring? I thought that what you said is that it would be $110 million for this year and I was wondering how much you've already expended in your restructuring?

I'm not sure I can pull that number out of my hat this quick. I would be happy to answer that later on, if you'd like.

That's fine, maybe we can follow up. Are there more restructuring charges to come?

Sure. Yes, there'll be more this year and some during the first half of next year, but beyond the program that we've talked about,we don't have any substantial plans. There's an ongoing level that happens all the time, but we don't have any plans beyond the $160 million. We're pretty busy with that portion right now.

But how much --?

But the lion's share is going to occur in 2009 as far as from the charges perspective? .

Right.. Well, how much more charges are there to go over the next nine months?

e're expecting -- over the next mine months we're expecting it to be around $20 million or so.

Around $20 million, okay. Have you taken out enough costs in RIS yet to get it to break even for the fourth quarter?

That's -- that's going depend on volume, of course. We do have restructuring that's happening in Europe as we speak, which will begin to impact the fourth quarter, but not -- we won't see a substantial change, really, until 2010 for the European restructuring.

RIS broke even at the income line this quarter. It was negative with the operating profit level, but I -- we -- we don't expect that business to operate in the red over time. Q3 was seasonally soft. One thing to keep in mind here is that since we bought Paxar a couple of years ago the variable margins on this business have been expanding pretty steadily, by several hundred basis points, in fact., since we made that acquisition and they're north of 50%. We're very volume dependent here, and being said, when volume comes back this business should do well better than break even. We are still sticking to our commitment that we can have a 12% operating profit in this business with time, but we'll have to get back a big chunk of the volume that's dropped off, since the downturn in the retail apparel markets.

Yes.

Jeff, our focus, as we execute this final phase of the RIS restructuring this year, is really on volume, and gaining sales. That's going to drive the most value for the business going forward.

Don't you usually have a pretty good read on your fourth quarter volumes by this juncture in that. isn't there a lot of advance ordering in the RIS business so that you can assess the way you'll stand in the fourth quarter by now?

Not anymore. It's amazing, our order sizes in Asia have dropped anywhere -- depends on the product line -- anywhere from 30% to 70%, and it's just indicative of how retailers are planning their future.

And we're seeing inventory movements among our customers shifting our volumes around by 10% to 20% in certain quarters and that's not particularly predictable.

Okay, thank you very much.

Thank you. And our next question comes from the line of Peter Ruschmeier from Barclays Capital. Please go right ahead.

Thanks and good afternoon. I apologize if this question was asked already -- I was juggling calls here -- but the question has to do with pressure sensitive. I thought it was a very respectable result. and on the cost side, in addition to the cost takeout that you've managed I'm curious if you've been able to quantify some of the commodity cost pressures, whether they be transportation costs, energy costs, paper costs, adhesives, things like that, some sense, either on a year-over-year basis or on a sequential basis, what they may have contributed to the quarter?

We did cover that earlier. The short version of the answer I previously gave is that we've seen some deflation during the last quarter in material costs, but right now the trend is higher, so we're seeing paper inflation, we're seeing oil-based commodities go up, as well and anticipating some pressure on margins in the fourth quarter, as a result of that. So we're gearing up for price increases.

Okay.

(inaudible)

I'm look back at the --

Yes.

I'll revisit the transcript. Thanks very much.

Thank you.

Thank you. We do have another follow-up question on the line of John Roberts of the Buckingham Research Group. Please go right ahead.

Yes. When you, I believe, place equipment in your RIS customers' facilities, is that capital spending de minimus right now, or does that give you any indication about activity at the customers?

We actually had a pretty good third quarter in terms of our printer systems business in RIS, so we had sold some new applications to several retailers who actually used the equipment as a labor-saving device in their stores, so what we see is retailers and apparel contractors spending money if they can get a pretty good and quick payback. And the type of equipment we're selling isn't all that expensive actually, so it's not major millions and millions of dollars. It's -- but we make good progress there. So I think, again, there's an appetite from our end customers to invest in things that have a quick payback, especially, again, if it has got some labor-saving component to it.

Okay. And then in the specialty converting businesses you sell some wood grain laminates that are used in the automotive and housing markets, was there a stimulus benefit related to the auto stimulus and the first-time home buyers credit that we might see the sales actually drop back down and specialty converting?

We don't have very much in housing any more, that's extremely small, but in the automotive business, frankly, we exited the automotive laminates business. It just didn't make sense for us, given where we saw automotive volumes going in the long term, so we have been phasing out of that product category over the last couple of quarters. So we didn't -- if we did see a stimulus impact, it'll be the last time we see it.

Okay, thank you.

Thank you very much, and we do have another follow-up question from the line of George Leon Staphos from Banc of America-Merrill Lynch. Please go right ahead.

Hi, guys, two last questions. Quickly, what inflation are you seeing in paper? To be precise, what grades are moving up on you?

We haven't seen much yet. We have seen pulp prices bottom over the last few weeks and move up in relatively small percentages. That -- the paper side, we anticipate more impact in that next year, but we haven't seen too much. Most of it so really coming from the oil-based side; films and adhesive chemicals.

Right, you're buying specialty graded paper, you're not buying pulp for spec?

That's right.

My sense, George, is that some of the specialty paper suppliers are a little emboldened, so they're -- because volumes have gotten relatively better over the last couple of months their operating rates look a lot better right now. They had a really tough first half of the year, so I think they're testing the waters right now, and in some cases they'll probably get some price increases.

We --

But there's been some capacity closures, too, so that's another thing to be watchful for. Sorry, you were saying?

I was going to say that our strategy has been to offset some of those increases through material productivity and material cost-out programs and we've done an awful lot there over the last two or three quarters. In fact, even with softer volumes this year the efforts we've put in to engineering cost out have been substantial. The tide's beginning to turn. There;s only so much you can do in that respect and so paper is beginning to hit those films right now where most of the pressure is coming.

Last question I had regarding RAS, certainly if you did mid single-digit margin, or high single-digit margin that'd be a lot better than what we've been seeing the last couple of years, given the cycle. How do you determine whether the value proposition to your customers is the same relative to what might have been an appropriate target back a couple of years ago of 12% margin? If consumers are buying less apparel through retail, does that to some degree either lessen the logistics value you bring, or the security of supply and consistency of supply that you bring, or does it not and you still think that your value prop is still the same as it ever was? Thanks, guys?

I actually think the value prop is better because what we've seen, actually is our variable margins improve the last couple of years, which indicates that we could charge relatively more on a value-add basis than we did a couple of years ago. And the reason I think it's more is that the supply chain component of it is getting more difficult, because order sizes are smaller, cycle times are reduced, you have to have a much higher level of responsiveness, and that really plays into our sweet spot. And then on top of that, people are moving garment production around much more rapidly than they were before, so it's more difficult for them to be a supplier. I think the real upside for us comes in -- longer term from what I characterize as in-store solutions. Retailers today need to provide value, but also give customers good customer service and they're kind of struggling with, well, how do I do that? Well, reducing labor costs. And still see a significant amount of interest in item-level marking for RFID, and more pilots than ever. So I do think that, again, we're the -- well positioned to capture that trend, and I think the next couple of years are going to start to demonstrate that. It's tough to show it right now, I understand that.

Thanks, guys, bood luck in the quarter.

Thanks, George.

Thank you very much. Our next question comes from the line of Stephen Chick from FBR. Please go right ahead.

Hi, thanks.Just within the office and consumer products category -- and I'm sorry if I missed this, -- but the organic rate of decline, the improvement there from last quarter, I think it was down 11% to down 4%, was that sequential improvement strictly related to the retail and the back-to-school-level comments that you made with the commercial purchase activity being down the same amount? Can you speak to the mix there a bit?

Yes, it was clearly driven by back to school, where we had a relatively good back-to-school season. The rest of the business leveled out a bit, but it didn't contribute much to sequential improvement in the sales growth.

Okay. So I guess as we move for -- beyond the back-to-school level demand, I guess we should expect that organic rate to go back more towards, I guess, a little bit of a steeper decline, as the corporate purchase activity becomes a bigger piece. Is that to safe to say now that we're beyond the season?

Well, we clearly won't have the back-to-school impact in the fourth quarter or in the first quarter. I think Dean's comments earlier about the swing factor here being what the retailers decide to do with inventory is going to decide this. We traditionally in the industry see inventory build in the fourth quarter, but we're not anticipating it this year, and that would have a dampening effect on fourth-quarter revenue.

Okay. All right, thank you. That's all.

Okay.

Thank you very much. And there are no further questions on the phone lines. Please continue with your presentation or closing remarks.

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

Thank you very much, and ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you disconnect your lines. Have a good day, everyone.