艾利丹尼森 (AVY) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session. (Operator Instructions) Welcome to Avery Dennison's earnings conference call for the second quarter ended July 2, 2011. This call is being recorded, and will be available for replay from 1.00 PM Pacific time today through midnight Pacific time July 29th. To access the replay, please dial 800-633-8284 or 402-977-9140 for international callers. The conference ID number is 21496535. 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 the slide presentation titled Second Quarter 2011 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 unaudited results are preliminary as we have not yet filed our 10-Q. Our news release references GAAP operating margin, which includes interest expense, restructuring charges, and other items included in the other expense line of our P&L. These items 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 non-GAAP operating margin, which reflects pre-tax results before their effect and before interest expense. The non-GAAP financial measures we use are defined, qualified and reconciled with GAAP and 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 forward-looking 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 2010 form 10-K and 2011 form 10-Q address certain risk factors that could cause actual results to differ from our expectations.

On the call today are Dean Scarborough, Chairman, President, and CEO, and Mitch Butier, Senior Vice President and CFO. I will now turn the call over to Dean.

Thanks, Eric. I want to start to say that I recognize the news we gave you last week was both unexpected and unpleasant. Organic growth ex-currency was down about 2% for the second quarter, compared to the 6.5% growth we saw in the first quarter. We experienced unexpected slowdowns in all geographies, and as well, most of our businesses, with the exception of our office and consumer products business.

Starting with retail branding and information solutions, sales decreased 6% on an abrupt decline in unit volumes across all customer groups and geographies, which pressured profits in this high variable margin business. A major factor in the order decline was the dramatic run-up in material and labor costs for apparel, which impacted retailers in two ways. First, it caused them to be very cautious about ordering garments with higher unit costs, with correspondingly higher prices, especially in an environment of uncertain consumer demand. Cotton prices and other material inputs peaked and then dropped rapidly in the quarter. This should cause unit costs for apparel to drop later this year, but because of that, our customers delayed or canceled orders to make sure they did not end up with large inventories of higher cost goods.

Combined, these dynamics have the most impact on apparel destined for the mass market channel in the US, with unit volumes down significantly due to the magnitude of price increases on lower priced garments as well as a lack of consumer buying power at lower income levels. While we expected a somewhat softer season this year due to the anticipated higher costs, we did not expect the rapid reduction in cotton and other input prices. We expect the softness to continue until later this year, and that's when retailers place their orders for the 2012 season.

Turning to Pressure-Sensitive Materials, it seems clear that overall economic activity slowed during the second quarter. We serve a wide range of end markets in Pressure-Sensitive Materials, including food, durable goods and health and personal care. We also sell to thousands of label converters all over the world, and that makes it difficult to link our sales to end consumer sales. However, historically this business has been a leading indicator for economic activity. Labeling and packaging materials saw unit volume decline in every region, including emerging markets.

Net sales on an organic basis were flat over last year, because pricing actions offset the volume decline. This represents a big change from the first quarter when net sales grew almost 10%. It appears that, like apparel retailers and brands, consumer packaged goods companies are being cautious about consumer spending in the second half and are managing inventories tightly.

Label and packaging materials has led the industry on price increases to cover inflation, and we made progress on narrowing the price inflation gap that developed in the second half of last year. As you know, we have been pushing prices up aggressively as raw material costs have escalated. As volumes softened in June, pricing became more challenging as competitors tried to hang onto volume, and this happened, especially, in Europe. Now at this point we don't have any share data from any of our markets. We believe we may have lost a bit of share in the quarter, as we prioritized getting our prices up. Now it is normal for us to lose a bit of share on the margin as we raise prices. So I am confident that most of the volume losses related to lower market demand.

Now, if there is a silver lining to this market softness, it is that we don't see inflation accelerating as it has for the last five quarters. I am pleased that we have recovered most of the margin loss caused by inflation. It is likely we'll have to raise prices, though, in certain geographies and product lines, to offset some of the remaining gap. It's tough to predict how the rest of the year will play out. We have limited forward visibility in this business, since we ship out 80% of our orders in a two-day window. We don't know yet if the lower activity level represents a short slowdown, or the beginning of a more protracted trend.

Our other Pressure-Sensitive business, graphics and reflective solutions, had a good quarter, led by strong sales of new capstone products. Office and consumer products volumes, sales and margin declined year-over-year, as expected. We're on track to launch new products in the second half, which combined with the back-to-school season, will help office and consumer products improve sales trends and meet its full-year margin targets. Given the trends in the quarter, we're assuming that a continuation of the market slowdown through year end is a real possibility, and our updated guidance reflects that.

We have built in some very modest improvement in volumes, but also uncertainty about when in the second half it might occur. We're cutting expenses, tightening our belts, and reducing capital expenditures by $25 million, as well as evaluating additional opportunities to improve productivity. Our goal is to reduce expenses without sacrificing investments for the future. Finally, although we reduced guidance for free cash flow for the year, we remain focused on generating substantial free cash flow in the second half. We're committed to maintaining our strong balance sheet, and returning more cash to shareholders. Now Mitch will take you through the details of the quarter.

Thanks, Dean. Starting with slide six and talking through to slide nine, sales in the second quarter were up as reported by 3%, but down about 2% organically. As Dean discussed, volume was a driver of the organic sales decline, particularly in our Pressure-Sensitive Materials and the retail branding and information solutions segment. Volumes for the Company were down approximately 5%, dropping off dramatically in June, historically the largest month in the quarter.

The volume in declines of course impacted our second-quarter consolidated operating margin. Our operating margin of 8.2% was down 80 basis points from last year as the negative impact of lower volume was partially offset by a reduction in employee-related costs, including lower expense for incentive compensation. We've talked a lot about rising raw material costs over the last few quarters, and they remain high. We've made great progress in offsetting inflation by implementing the productivity initiatives and price increases we talked about during our past few earnings reports.

As for marketing, general and administrative expense, it declined versus last year, due to lower employee-related costs. Last quarter we talked about stepping up growth in IT infrastructure-related investments. We're still making investments in our most promising and critical initiatives while we reduce costs across the rest of the Company, both through structural changes and general belt tightening. Before getting into the segments, I want to point out that our year-to-date adjusted tax rate increased from 23% to 29%, largely reflecting an increased portion of our profits now expected to be in higher tax rate jurisdictions.

I also want to comment on our year-to-date free cash flow, which included a net outflow in the second quarter, very atypical for us. This net outflow is largely due to the combination of lower operating results, an additional $25 million pension payment and changes in working capital. The changes -- the working capital changes primarily relate to the timing of cash payments for inventory. While we reduced inventories in the second quarter from the relatively high levels in Q1, the benefit to free cash flow will occur in the third quarter. These working capital changes and pension payments, while negative to the quarter and first half, are not expected to impact the full year. Now I am sure you have noticed that had our free cash flow is out of sync with earnings in the quarter. This is largely because reduction in our expectations for employee-related costs in 2011 are non-cash this year and will not benefit free cash flow until the first quarter of next year.

Turning to slide 10, our Pressure-Sensitive Materials segment delivered roughly flat organic sales growth, driven by declines in volume, largely offset by pricing. PSM's volume reflected year-over-year declines in all of label and packaging materials regions, and in most categories. Volume in graphics and reflective solutions was up in the quarter. Dean shared with you our insights to the volumes in the segment, so I won't repeat them here. PSM's operating margin in the quarter was down 20 basis points year-over-year, reflecting the decline in volume and lower employee-related costs. Sequentially, margin benefited from our narrowing of the price inflation gap.

Retail branding and information solutions turned in a 6% decline in organic sales in the second quarter, traditionally this segment's largest quarter of the year. The lower sales were due to lower unit volumes, reflecting the softness in the market for apparel units that Dean discussed earlier. With a decline in volume, the relatively high operating leverage in this business worked against us this quarter. More than you can see in the 140 basis point drop due to our lower employee-related costs.

Dean covered Office and Consumer Products, which came in as expected. The second quarter is a seasonally higher quarter for this business relative to Q1 as it includes part of the back-to-school season which concludes in Q3. We continue to expect margins for this business to be in the upper single digits for the full year, and our other specialty converting businesses delivered flat sales growth in the quarter with margins up 90 basis points from last year.

Moving onto the outlook for 2011. On slide 13, we summarized the key factors that we expect to contribute to our P&L and cash flow in 2011. Slide 14 has our EPS and free cash flow guidance. I will highlight just a few key assumptions that have changed from what we discussed last quarter. We now estimate organic sales growth in 2011 of approximately 1.5% to 3.5%, a big difference from the 7% assumption we made last quarter. Our current uncertainty about the market causes us to provide a pretty wide range for the top line in the second half. We have increased our restructuring actions since last quarter and have accordingly increased our expectation of the cost to implement these actions.

Annualized savings associated with 2011 restructuring actions are expected to total approximately $40 million, with about one-third of the benefit to be realized this year. We continue to evaluate further opportunities to reduce costs, potentially including additional restructuring actions, and we have reduced our estimate for capital expenditures for the year by $25 million. Based on estimated sales and other assumptions, including the listed factors, we now expect adjusted earnings per share in 2011 of $2.45 to $2.75, and free cash flow of $250 million to $275 million.

Notwithstanding the recent slowdown, we're confident about our position and prospects. Our businesses have market-leading positions with clear competitive advantages and even with our lowered guidance for free cash flow in 2011, we will maintain our financial strength, achieving our targeted debt level again later this year, and then increasing our return of cash to shareholders. Now we would be happy to take your questions.

Thank you. (Operator Instructions). Our first question comes from the line of Peter Bruce Ruschmeier with Barclays Capital. Please proceed.

Thank you. Good afternoon. I was curious, Dean, perhaps if you could help us to break down a 5% organic volume decline into attributable factors, and maybe you can help us to rule some out. Do you think there was any demand in the first quarter that borrowed strength from the second quarter, and do you think there is any demand in the second quarter that is perhaps being shifted to the third quarter, and I think you did mention there may have been some competitive behavior. Was that as much as 100 or 200 basis points? Any more color you can offer on the variances and the factors would be really helpful.

Sure, Peter. I would say there might have been a very small amount of shifting, and I can't really quantify it, because most of the evidence we have is anecdotal at this point. In Retail Branding and Information Services, the first quarter -- some of the first quarter sales I think were stronger than we had anticipated in the quarter because frankly, people were just trying to get ahead of some of the unit costs that were coming in, and people at that point expected input costs to keep going up at the time, so they were kind of buying early in an inflationary environment. That of course shifted pretty dramatically in the second quarter, once cotton prices started to collapse.

We may have had a little bit of pre-buying in the Pressure-Sensitive Materials business, but it would have been very small as a percentage of the total, so not really meaningful. As far as the share position, we did see in Europe, typically June is a pretty strong month for the labeling and packaging materials business there because people are doing a lot of work before the summer holidays. The food business sends to be very strong at that point of view, and we just didn't see the surge that we normally saw and some competitors I think in a weakening environment, could have deferred or delayed some price increases. The problem is, we don't have any market share data, and we won't have it for a few weeks. I wish I could be more precise on that, but we just can't at this point.

That's helpful. In RBIS, it sounds like it was perhaps more abrupt than the other businesses. Is it possible that was down as much as double-digit in terms of organic volumes?

No, it wasn't.

Not that much?

No, no, it really wasn't that much.

I think comparable to what you see on the organic growth of RBIS.

Okay. If I am understanding what happened, would it be logical if cotton were to bottom and turn the other direction, that would bring buyers off the side lines?

Well, I think it is actually seeing articles about this lately in the trade press, but also in places like the Wall Street Journal, so cotton prices are already down. The problem is, that cotton has not been turned into gray goods which can be put into yarn and fabrics. That really won't happen until later this year. So most companies are anticipating lower cotton costs and unit costs from a material perspective for 2012.

They won't start ordering those products from us until very late in the third and in the fourth quarter. That's when we really start to see our fourth quarter surge in that business. So, yes, I do see that, and I think there was actually even an article in the Wall Street Journal about some people trying to keep their prices up by adding units to their packs as a way of giving more to the consumer instead of giving in price, giving it in unit volumes, which would be okay with us, by the way. That would be a good trend.

Understood. Thanks very much. I will turn it over.

Thank you. Our next question comes from the line of George Leon Staphos with Banc of America-Merrill Lynch. Please proceed.

Thanks. Hi, guys. Good morning. I wanted to get into volume again a little bit. Can you say that both RBIS and Pressure-Sensitive material volumes were down 5% in the quarter? Was there any variation around that corporate average and what was the run rate? What's been the run rate early in the third quarter for both businesses?

The RBIS was down a little bit more than the 5%. The 5% is a company number.

Yes.

The RBIS organic growth was down 6% and their volumes were down slightly more than that. Pressure-Sensitive was around 5% as well.

Okay. So RBIS volumes were down -- unit volumes for RBIS were down more like 7, 8%, would that be fair?

6%, 7%.

Okay. And Pressure-Sensitive a little bit less in terms of rate of decline?

Right.

Okay. What's the run rate been thus far in the third quarter?

The trends when you look at during the quarter they were sliding through the quarter with June being the worst performance, particularly in the year-over-year basis, and we only got a few weeks of orders in for July, and things can be spiky at times but right now the order trend is similar to June, a little bit better but similar to June.

So it would be fair to say that June for both was probably down double-digits even if it wasn't that wasn't the case for the quarter, would that be fair?

June was worse. On the average we have -- it is five week month for us, so it definitely was lower than the average for June.

Yes. Pressure-Sensitive not down quite double-digits and RBIS down a little bit more. Again, a few weeks doesn't really tell too much about the business. We're definitely seeing a continuing trend, slight softening from what we saw in June.

Understand.

Further softening.

What's that, Mitch? I am sorry.

Softening of the trend, not further softening beyond what we saw in June.

Understand. And in emerging markets I think you suggested volumes were down there as well. Could you confirm that and discuss what types of trends you have seen there?

Yes. So one of the factors I look at is the purchasing manager's manufacturing index or the ISM I guess it is called now, and we saw declines in that index in all geographies including China, so we definitely saw a slowdown, even in emerging markets, so we did have a little bit of pre buy in the first quarter in the LPM business, but emerging market growth was also not good in the quarter, so thus the comment about we sort of see this in all geographies.

The Asia emerging markets fared better than the others, but they were also down and one of the reasons, particularly in Asia is where we did see a little bit of pre buy in Q1, so if you adjust for that, Asia emerging markets were up very modestly.

So --

Significant reduction in the trend every where.

Right.

Okay. So Asia, China, up a little bit and everything else was down then? In unit terms.

Yes.

Couple others and I will turn it over, guys. Can you explain a little bit more in terms of what drove the tax rate change and specifically what is the discrete tax event in the tax rate change and should we now be using 29% on a go-forward basis?

The primary reason for the change in the tax rate is related to the geographic income mix, so we now have -- when we lowered our income projections for the year, it was lower disproportionately in low tax rate jurisdictions. That's what caused the increase in the tax rate. The discrete event, what we commented there and that was just about 20% or so of the change, so a very small component of the overall change on the tax rate, was around some planning matters that we were looking at for later in the year that were not going to implement, given the current environment. So primarily geographic mix. When you ask about going forward, it depends on if you are talking about for the near term, it really depends on what the geographic mix is going to be, and really what kind of environment we're in, but I would say still mid-to perhaps high-20% range.

Thank you. Our next question comes from the line of Ghansham Panjabi with Robert W. Baird. Please proceed.

Good morning.

Good morning, Ghansham.

Going back to the pre-announcement from last week and the guidance for the year, you never actually gave explicit guidance on a quarterly basis, so just to clarify, what did you assume that Q2 EPS would be initially? Roughly $1 a share? Is that in the ballpark?

We had something less than that actually.

Okay.

Around $0.90.

$0.90. All right. And just based on what you're saying on the macro side, thinking back to office products, 1Q took a big hit just from a pre-buy in 4Q if I remember correctly, and you also are supporting new product launches, et cetera. Just given the weakness in the macro that you seem to be cautious on, are you scaling back some of those product launches?

No, we're not. In fact, office products, the current back-to-school view is still where we talked about the end of last quarter. I think it will be flat, flattish, maybe down 1% for us this year. Most of the new product launches we have got orders for in place, and again only a few of the products have hit the stores so far, and we'll start to see a lot more in late third quarter and during the fourth quarter.

Okay.

Pretty much already -- we've got the plan. We're executing, manufacturing, et cetera, so we're all locked and loaded and ready to go.

Okay. Moving onto your comments in the press release on returning cash to shareholders, on the share buyback issue specifically, even in what seems like a subpar year now, you're still going to generate healthy amount of free cash flow post your dividend. You have a share buyback authorization out there. Should we expect any sort of meaningful purchase in 2011 and if not, why not?

As you know, Ghansham, we never comment on the timing or amount of share repurchases, but I will reemphasize we're committed to returning more cash to shareholders.

Let me flip that around. Are you comfortable with where your balance sheet is right now?

We're comfortable overall with where our balance sheet is. One of the things you have to look at, we commented Q4 we achieved the targeted leverage position that we were seeking. Because of the seasonality of our cash flow, debt will go up during the year, did more so than usual this year, but when you look at the second half cash flow, we'll be looking to get back again to those leverage ratios and leverage position, and then return more cash to shareholders.

Got it. Thank you.

Your point, there is enough if you look at the free cash flow and you triangulate how much debt reduction we need from our current position there would be sufficient in our current guidance for share repurchases.

Got it. Thank you so much.

Thank you. Our next question comes from the line of John P McNulty with Credit Suisse. Please proceed.

Good afternoon. Just a couple of quick questions. On the raw material front did you say you were 100% caught up at this point or are you still working to catch up throughout the rest of the year?

We've got a little bit of a gap left and we still have some price increases planned for going forward, but they're very either product line or geography specific, so they're relatively minor. This I think this is the first quarter now over the last five quarters where we haven't announced additional inflation expectations over and above what we have had, so the environment we're in is more flattened out, and again there is still just a couple areas where we need to execute price increases to fill in that gap.

Okay. And then as best you can tell in the Pressure-Sensitive area, it sounds like there has been some increased kind of competitive pressure. Have you seen your I guess major competitor or competitors raise price yet or it was just a function they were delayed or are they just not actively going that way and they're actually pushing more for share?

I think we've had every one of our competitors felt the same inflation pressure that we have felt and so what we have seen is competitors following and raising prices in their markets. We just had -- heard an announcement earlier -- I am sorry, late last week, where one of our competitors in Europe has announced price increases again for certain geographies, so I still think that competitors in this industry want to make money and they know they have to get prices up in a time of rising raw material costs.

I think it got a little sloppy in June in Europe specifically, when the volume shortfalls, we had a market volume shortfall, so some folks sometimes on the margin some competitors feel they're better off trying to protect volume in the short-term rather than raise prices. We have seen this before. I do want to point out, though, that sequentially we improved margins again in this sector. That was a priority for to us fill that gap and all we have been talking about the last four quarters has been inflation. Unfortunately now we're talking about volumes. I think we have done a reasonable job of executing, and the teams have done a good job of executing, getting prices up in our key markets.

One last question in terms of your customer base, I know I guess in certain areas we have seen a lot of inflation and when prices start to roll over, you saw destocking around that, do your customers typically destock and try to play that pricing game, or is that something that we really don't see in the Pressure-Sensitive area.

Label printers and converters, it is tough for them to do, because they're in a custom business and we don't always know what their customers are going to order so they don't hold a lot of finished goods inventory, and most of these customers are relatively small, so they don't have a lot of space, so it is really tough tore femme to stock up a lot of our product or go to reduction, so we don't really see that kind of behavior. You see it again on the fringe.

Okay, great. Thanks for the color.

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

Good afternoon, guys. Can your apparel customers wait to see back-to-school sales before deciding what to do for the holiday season?

Sure. They're always looking forward. They're already planning the 2012 season, and in their mix will go things like what will apparel costs look like on a go-forward basis? What's the consumer appetite for spending, and certainly the back-to-school apparel season for them will be an indicator of how confident the consumer will be, and how much discounting they have to do during that specific season, so it is one of the inputs they look at to judge what their open to buy numbers will be for 2012.

The late Q3 and Q4 spend is usually purchases from us or for the spring season next year and I think if you were asking --

For holiday the answer is no, not so much.

But they are likely to sit on their hands at least until Labor Day I guess to get some sense or clarity on their visibility.

This typically is not a high ordering season for us anyway. What is in the stores now for back-to-school is already there, and we might get a few chase orders, that type of thing, but the activity level is actually relatively low in the third quarter.

Just trying to think of when you might have visibility yourself and to trend, whether things pick up or not. Sounds like you wouldn't expect it for a while.

Late third quarter. By the next earnings call, we'll have a decent feel for what apparel and retail open to buy and sentiment is.

Okay. Did you make all of your compensation accruals adjustments in the second quarter for your lower budget now, or will you wait closer to year-end to reduce bonus accruals and things like that you have to do if you don't make plans?

We adjust them each quarter based on our forecast for the year, and so in Q2 it was -- we did not accrue as much the normal amount you expect for Q2. We also reduced some of the accruals that we made in Q1.

Okay. You reversed them in Q1. Okay.

We reversed them -- no, no, sorry, we reversed them in Q2.

Right, for Q1 being over accrued.

Yes.

Lastly, the converter market, do they have in I financial health issues? Is this a pretty severe corrections for them? I know a lot of them are private, smaller, the debt markets haven't or bank credit markets haven't probably opened up to them that much. Is this going to put that customer base under financial pressure like they were back in 2009 or something like that?

I don't anticipate that. Again, the real question is how protracted will those markets slowdown be and could be just a pause. We had a bit of this in the fourth quarter when things slowed down and then things picked up very robustly in the first quarter. What I see is some relative choppiness out there. I am not anticipating any dramatic financial issues for our customers.

Thank you.

Thank you. Our next question comes from the line of Thomas Mullarkey with Morningstar. Please proceed.

Hi, guys.

Hey, Thomas.

First question I have is regard the reduction of your CapEx guidance by the $25 million. Is this going to be a timing issue where that $25 million reduction gets added into 2012 or do you probably permanently scale back any of your growth or IT infrastructure spending?

Well, it is a delay, of projects that we had planned. We won't automatically add it back to next year's capital expense budget. We haven't even really done our planning yet for 2012, and we'll look at 2012 in terms of what we expect our markets to look like and what our free cash flows will be and we'll prioritize around that, so with business being slower it made sense to soften up a little bit on the CapEx.

And I am curious to get an update on your RFID business. Is it performing as expected, or is that likewise slowing down?

Because apparel unit sales weren't at robust as the second quarter it certainly wasn't at our expectation, but it is up by 50% over last year, so still growth there.

Okay. Thanks, guys.

Thank you. (Operator Instructions). Our next question comes from the line of George Leon Staphos with Banc of America Merrill Lynch. Please proceed.

Thanks. Hi, guys. Dean, I know you said at this juncture you don't know whether this is a shorter term correction or the beginning of something larger. When you have seen this type of reduction to whatever high single-digit, maybe low double-digit declines at the end of a quarter, are there any precedents for what followed in terms of the macro environment that you could remind us about or is it not clear?

Now I am starting to feel like Ben Bernanke. Yes. The last time I did go back and we did go back and review a lot of the trends over the last couple years and I don't think we should draw any conclusions from this, but the rate of decline was similar to what it looked like in early 2008. You will recall that we were -- our sales started to drop off in 2008 and we had unfortunately a series of profit warnings during that year prior to people kind of recognizing the general economy had been slowing down. So that being said, I just -- that still doesn't really tell me what's going to happen on a go-forward basis. It is just something we're going to watch very closely over the next few quarters.

Okay. Appreciate that. Second question. Could you tell us what's the pre-and post tax amount for the restructuring and also the other item that was taken out of, if you will, the GAAP numbers for an adjusted basis, and what was in that other item, if you disclose it and if you could relay that now?

If you're asking for the full year what our charges are going to be or anticipated to be?

No. What was that other --

The tax rate on those items -- sorry, go ahead, George.

The other item I think was $5 million that you took out of earnings on a pre-tax basis and what was that and what was the tax effect on that?

The tax effect on all of those things is high 30% because charges tend to come in high tax rate jurisdictions to answer the question on the tax rate, as far as what the item is, a number of costs we have been incurring in the second quarter and we're not going to comment at this time as to what that is.

All right. Appreciate that. Two last ones and I will turn it over. One, just geographically again on the tax mix issue, sounded like perhaps incorrectly so on my part, but sounded like your developed markets slowed or declined more than emerging markets. I would imagine that would actually help you from a tax standpoint, but if you could provide any more color on that it would be helpful, and from a restructuring standpoint, obviously the Company has done a lot of this over the years. Where are the next areas where perhaps you can further improve and optimize your cost structure given that you have done a fair amount of this over the last number of years? Thanks, guys.

Sure. I will take the tax one first. As far as the taxes, I can understand why you think that our lower tax jurisdictions are in the emerging markets predominantly, but we actually have some low tax jurisdictions in certain areas, in mature markets as well, and so can't necessarily draw the conclusion that when I talk about high versus low tax jurisdictions that it is mature versus emerging markets.

Got it. And on restructuring?

On restructuring, George, so it is part of our DNA. We're not doing a massive acceleration of the restructuring we're doing. I think that our lean Six Sigma teams around the Company do a really good job of finding lots of productivity, and frankly we did some restructuring in the end part of the quarter, and early part of this quarter at the corporate level. That really has not much to do with the economy, the current economic situation, but had more to do with eliminating some functions and activities that we had traditionally done at the corporate office, that we believe our business units can more than easily handle it on their own, so working differently and eliminating complexity, et cetera, et cetera. Those types of things. So we went ahead and did that.

Okay. Thanks. I will turn it over.

Thank you. There are no further questions from the phone lines at this time.

Okay. Well, I want to thank everyone for joining the call today, and I want to emphasize that while the second quarter was tough, it doesn't change any of our fundamentals. Our key businesses are still market leaders with significant competitive advantages. We have managed effectively through slowdowns before, and we'll come through this one well positioned to grow earnings and increase returns and provide more free cash flow and return cash to shareholders. Thank you.

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