艾利丹尼森 (AVY) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Avery Dennison's earnings conference call for the third quarter ended October 1, 2011. This call is being recorded and will be available for replay from 1PM Pacific time today through midnight Pacific time October 30.

To access the replay, please dial 1-800-633-8284 or, for international callers, 1-402-977-9140. The conference ID number is 21496536. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may 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 Third Quarter 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 un-audited results are preliminary, as we've not yet filed our 10-Q.

Our news release references GAAP operating margin, which includes the 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 pretax results before their effect and before interest expense. The non-GAAP financial measures that 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 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 Forms 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'm now turn the call over to Dean.

Thanks, Eric. The soft volume trends we saw in the second quarter continued into the third quarter, and caused sales, ex-currency, to decline 2%. Unit demand in all key markets continues to reflect low consumer confidence, which is translating into tight inventory management throughout the supply chain. And, we expect this trend to continue into the fourth quarter. I am pleased that, despite the lower volume and ongoing high raw materials costs, operating results were in line with the third quarter of last year. The combination of continued pricing discipline, accelerated productivity, and lower employee-related costs essentially offset the impact of lower unit volume at the EBIT line.

At the net income level, the change in our tax rate had a significant impact, which Mitch will discuss in more detail. We made solid progress in generating free cash flow in the third quarter, as well. Our teams did a good job of tightening expenses, while at the same time protecting investments in innovation and new products. As the past quarter demonstrated, we are launching an increasing number of new products to enhance our competitive advantage and enable faster growth once the economic situation improves.

Turning to the businesses, organic sales growth for the Pressure-sensitive Materials segment was 2%. Volume in the quarter was still soft. But, we did see a slight improvement in the trend over the second quarter. Margins expanded year over year as the impact of price increases and higher productivity offset the impact of inflation. The recent Labelexpo show in Brussels was well attended, and customers were very enthusiastic about all the new products we had in our stand. However, European customers were understandably concerned about the next few quarters, due to the uncertain economic conditions in that region. But, even in a slowdown, or maybe even because of it, converters were very interested in our new technology and products, and that's because they see innovation as a way to grow faster.

Our labeling and packaging materials business introduced 16 new products with some significant innovations. We are especially excited about Binstream, a new liner material that is 50% thinner than anything else on the market, and which enables better economics to penetrate high volume food and beverage segments. We also introduced a new face film, with lower caliper and greater conformability to better meet the needs for more sustainable lower cost materials in the household and personal care segment. Now, wrapping up the segment, sales at Graphics and Reflective Solutions were flat compared with last year ex-currency, but lower than in the second quarter, which indicates a downturn in advertising and promotional spending.

Retail Branding and Information Solutions continue to feel the impact of unit volume declines, as high apparel input costs, such as cotton, work their way through the retail supply chain. We do expect unit volumes to gradually improve as lower input costs begin to come into play, subject, of course, to retailers gaining confidence in consumer spending. We are projecting an improvement in volume trends in Q4, as retailers begin to order for the spring season. We continue to see adoption of RFID unit tagging, which is up more than 50% from last year. Additionally, we expanded our new line of heat transfer solutions, called Agility, which enables apparel brands to enhance garment exteriors with new high-definition graphics that was not available on the market before. Even with a 7% decline in organic sales, RBIS maintained margins during the quarter through our ELS productivity programs, lower employee-related costs, and an acceleration of some planned restructuring. This positions us well for margin expansion when unit volume recovers.

Office and Consumer Products volumes, sales and margins, declined as expected due to weak end-market demand. One notable event for the business was the partnership we announced with Martha Stewart Living Omnimedia and Staples for a line of home organization products that will be available for consumers starting in early 2012. We do anticipate sales from this new line in the fourth quarter of 2011 as we prepare for that launch.

Summing up for the total Company, we expect volume to be restoring in the fourth quarter as well. Although we saw a slight improvement in volume trends in September, we believe that any increases in the fourth quarter will be marginal at best, especially in Europe. We've reduced our full-year guidance to reflect this volume outlook, as well as the increase in our tax rate. Our employees have done a very good job of reducing expenses and focusing on maximizing free cash flow, and will continue to do so. We also did some targeted restructuring during the quarter to reduce fixed costs. We're always looking for ways to improve productivity, including restructuring, and we're evaluating further opportunities to do so. At the same time, we are continuing to develop and market innovative new products.

Now, Mitch will take you through the quarter in more detail.

Thanks, Dean. Starting with slide 5 and talking through to slide 7, sales in the third quarter were up as reported by 4%, but down about 2% organically. As Dean discussed, we saw volume declines across all segments.

Volumes for the Company were down just over 4%, somewhat below the low end of our expectations. The negative trend in demand lessened late in the quarter, with sales being roughly flat on an organic basis in September. Our third quarter operating margin was relatively flat with last year, as the negative impact of the lower volume was mostly offset by a reduction in employee-related costs, including lower expense for incentive compensation.

Prices for the specialized raw material that we buy remain high but are stabilizing. As we discussed last quarter, we've essentially offset the raw material inflation that we began to experience mid last year by implementing the productivity initiatives and price increases that we've been talking about for the past few quarters. As for marketing, general, and administrative expense it declined versus last year due to lower employee related costs and productivity partially offset by currency. We are reducing costs across the Company through both restructuring and general belt tightening while we continue to protect our investments in growth that Dean discussed earlier.

Next, let me elaborate on our tax rate. Our year-to-date adjusted tax rate increased from 23% to 34%. The increase in the expected tax rate for this year was the key reason for the shortfall in third quarter EPS, and, along with lower volumes, is a key contributing factor to our revised earnings guidance for the year. The primary reason for the increased tax rate is our reduced expectation for pretax income outside the US.

This impacts us in 2 ways. First, lower tax rates in certain jurisdictions outside the US are achieved only when we pass certain income thresholds. And second, lower pretax income diminishes our ability to utilize tax loss carry-forwards and other tax credits. Another factor relates to discrete tax events, which we now anticipate will have a negative impact on the rate this year. If pretax earnings continued at the current level, we would expect our ongoing tax rate to be in the low 30%s in the midterm. As earnings increase above certain income thresholds outside the US, we would expect the tax rate to be modestly below this range.

Now, these comments relate to the effective tax rate. The ultimate goal of our tax planning is to reduce the amount of taxes actually paid in any given year, and we measure this through the cash tax rate. Our cash tax rate has been in the upper 20% range for the past few years, and has been trending down modestly. We expect the cash tax rate to again be in this upper 20% range, and continue the downward trend in 2011 and for the midterm.

Now, before getting into the segments, I want to comment on our free cash flow. In the first half of the year, our free cash flow was well below prior-year levels due to lower operating results and higher working capital, as well as the timing of pension payments. Looking at the third quarter, our free cash flow came in at $189 million. This is in line with our expectations, and well ahead of last year, due to the significant progress we made in Q3 in returning to more typical working capital levels.

Turning to slide 8, our Pressure-sensitive Materials segment delivered 2% organic sales growth driven by pricing and partially offset by lower volumes. PSM's volume in the third quarter was down approximately 2.5%, an improvement over the second quarter's 5% volume decline. This improvement in the trend reflects a moderation in Label and Packaging Materials declines in Europe, and an uptick in Asia Pacific, which returned to positive volume growth in the quarter. In addition to experiencing general softness in our markets, we also commented last quarter that we thought we lost some share in lower margin categories in Europe. Well, we in fact did. While we do not yet have market or share data for Q3, we believe that we may have regained a modest amount of the share in the quarter.

And, my last point on sales in PSM relates to Graphic and Reflective Solutions. The volumes in this business held up in Q2, but have now experienced a decline, due primarily to softness in Europe. You'll remember that this business is more cyclical in nature than PSM's larger business, Label and Packaging Materials. PSM's operating margin increased 50 basis points from prior year as the impact of lower volume was more than offset by lower employee-related costs. Our pricing and cost reduction actions have offset the inflation that we began to experience mid-last year. With pricing of raw material costs now stabilizing, we feel that we've achieved a good position on the price cost front in PSM.

Retail Branding and Information Solutions sales were down 7% on an organic basis in the third quarter. The lower sales were due to a continuation of the trend we saw in Q2, with lower volume reflecting unit softness in the apparel market that Dean discussed earlier. As in the second quarter, the declines were most pronounced among mass-market retailers. RBIS margins were flat in the quarter, as the negative impact of volume was offset by productivity and lower employee-related costs.

Office and Consumer Products came in as expected. The third quarter is typically a seasonally higher quarter for this business as it includes part of the back-to-school season, which starts in Q2. The operating margin in this business declined, due primarily to the effect of lower volume and higher raw material costs partially offset by lower advertising spend and employee-related costs. 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 modest sales growth in the quarter driven by pricing on lower volume. Margins were down due to the lower volume partially offset by productivity initiatives.

Moving on to the outlook for 2011, on slide 11, we've summarized the key factors that we expect to contribute to our P&L and cash flow in 2011. Slide 12 has our EPS and free cash flow guidance. I'll highlight just a few key assumptions that have changed from what we discussed last quarter. We now estimate organic sales growth in 2011 to be roughly flat. The reduction primarily reflects a change to our assumptions for the fourth quarter. We've 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 now expected to total approximately $55 million, with about a quarter of the benefit to be realized this year. We continue to evaluate further opportunities to reduce costs, potentially including additional restructuring actions. I've already discussed our increase in expected tax rate for the year, that is, the negative tax rate impact from our lower outlook for pretax income and other discrete events. And, we made an additional $10 million pension contribution to the US plan in the third quarter, and we expect to contribute another $10 million in the fourth quarter. Full-year pension contributions will approximate the level of last year.

Based on estimated sales and other assumptions, including the listed factors, we now expect adjusted earnings per share in 2011 of $2.15 to $2.30 and free cash flow of $215 million to $235 million. The low end of our EPS guidance assumes volume trends in Q4 that are consistent with what we experienced in Q3, and the high end reflects volume trends consistent with what we saw in September. Now, we'd be happy to take your questions.

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

Thanks. Hi, everyone. Good afternoon or good morning. I guess I had a question first on the tax rate. Mitch, would it be possible to parse the effect of the geographic dispersion of income or the change relative to your expectation versus what was the discrete tax item? And, can you provide a bit more detail on what is that discrete tax item?

Well, a couple of things. As far as what is the amount of the discrete tax item versus the effect of just lower pretax income, to answer that part of the question first. It depends. We said that the full year guidance is expected to be in the low to mid 30%s, it depends on where we ultimate settle out. But, roughly about half of that is from the discrete items that we are flagging here. As far as what those discrete item are, they specifically relate to just as certain tax audits get finished out throughout the year, we anticipated that some of those would favor -- complete more favorably than they actually ended up doing in foreign jurisdictions.

Okay. And just -- even just so we have our facts right or for the record, the third quarter rate was 43.6%, on an operating basis. Is that correct then? Was it more -- or more geographic in terms of the third quarter? Or was it just a catch up?

It's just a catch-up. What it does, it gets the year to date rate up to 34%.

Okay. The last question on this, and then I'll have one quickie follow-on and turn it over. As we look out to next year, it would appear we are building in somewhat more of a structurally higher tax rate that we should forecast. Would that be the low to mid 30%s on a going forward basis?

Well, my comments were if income was to stay at the current levels, which we are not giving guidance, but if they were, we would sustainably be at the low 30% range. As pretax income rises, we would expect that a geographic mix and our ability to take advantage of some of the lower tax jurisdictions would increase. And therefore the tax rate would moderate somewhat from that level. Perhaps getting back to upper 20%s that we had talked about before, so.

Okay. Organic sales decline for RBIS were 7%. Do you happen to have a volume number that would coincide with that?

It's roughly the same, George.

Okay. Thanks. I'll turn it over.

Our next question from the line of Ghansham Panjabi from Robert W. Baird. You may proceed.

Hi, guys. How are you?

Hi, Ghansham.

On the new cost savings plan, $55 million, $25 million of which is expected to flow into fourth quarter, that basically suggests that your profit outlook for the quarter is materially worse on a core basis relative to perhaps your -- relative to surface anyway. Are you expecting a bigger year-over-year core sales decline in the fourth quarter than 2Q and 3Q?

No, Ghansham, I think when you hear us talk about the $55 million -- just to make sure I understand the question right, the $55 million of savings from the restructuring program, we said quarter of it would benefit this year from these actions we've already started implementing and started having some effect already.

Got it.

A quarter of the $55 million, yes.

Okay. All right. And, in terms of the commentary on RBIS, volume declines in Europe, where do you think we are? I mean, did you see a similar volume decline in the second quarter? Is it worse now? And, is there any sort of parallel between what they're seeing right now versus what the US saw in '08 and '09?

Actually, for RBIS, it got sequentially a little bit worse. Q3 is normally not a strong quarter for us anyway. And I think that many retailers continue to delay orders, waiting for some of those lower input costs to flow into pricing for garments that will be ordered now for the -- mainly the spring and a little bit of the summer season. That's the orders we'll take in the fourth quarter. Actually, the US has been marginally worse for us -- actually, quite a bit worse than Europe. Europe has been better, its downward trend has been a lot less. Part of that is because I believe we're taking some market share. Part of that is because many of the retailers and brand owners we serve that are based in Europe also have a global footprint, so they're not just focused on European retail sales. And finally, we just don't have as much impact from mass market. We just don't have that high a share of mass-market retailers in Europe as we do in the US. All those factors together actually have made Europe appear to be okay. And, so far, we haven't really seen a change in that trajectory.

Got it. And, just finally, Mitch, how should we think about working capital for the full year?

For the full year, we expect to maintain the working capital productivity we had at the end of last year. And, you saw in the first half, we had slipped from that level, and then we recovered a good amount of that in Q3. So, you'd expect it to recover to the previous levels we had.

Got it. Thanks so much.

And, that's focused on operating working capital. One thing to point out is we have talked about lower incentive-based compensation. So, there will obviously be fewer accruals this year, so that impacts working capital as well, Ghansham.

Got it. Thank you.

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

Yes, good afternoon. Just a couple of quick questions. It does look like raw materials seems to have leveled off and in some cases are starting to come down, especially on the propylene and acrylics-based side. In terms of the pricing that you've been getting to offset the raw materials, what is your belief in terms of your ability to hold the pricing and/or when might you have to start giving it back?

Well, that's a great question, John. First of all, I want to give our teams, especially in our materials business, full credit for doing a great job of managing in that inflationary environment. We basically have been able to close the gap, and that required a significant amount of work during the quarter -- or during the last four quarters. The inflationary environment I would characterize as stable. Some of the input costs have gone down, but still, some of the specialty materials that we buy, we haven't seen a lot of relief on pricing. I would just characterize the market is roughly stable at this point. And, right now, and certainly throughout the third quarter, there's been -- I would characterize the market as stable, from a pricing perspective. So, we don't see necessarily anybody really driving for volume by trying to lower prices right now. I think that's because input costs are still relatively high.

Okay. Great. And then, with regard to pension, it sounds like you're making some incremental contributions. Can you give us an update -- I know pensions obviously have taken a decent hit with where the discount rates are, and how the markets are looking. How should we be thinking about incremental pension expenses for 2012 if things just stopped right now?

Well, we're still going through that evaluation given the change in discount rates. One of the things that we know is regardless of what those assumptions are, that asset have taken a hit overall this year. And so, that's one of the reasons for us to increase the amount of contributions. As you'll recall, we froze the defined benefit plan in the US at the end of last year. And, since then we've said we have a concerted effort over the next few years to get that much closer to fully funded and start to shift the asset base to more conservative assets to take out some of the volatility going forward. So, as far as exactly what it looks like next year, there's still a lot of discussion about what the return on asset assumption should be as well as the discount rates. So, you would expect a modest headwind going into next year though.

Okay. Fair enough. Thanks very much.

Our next question from the line of Jeffrey Zekauskas at JPMorgan. You may proceed, sir.

Hi, good day. Can you let us know what the cash restructuring outlays would look like in the fourth quarter?

In the fourth quarter specifically? I think we've got about $35 million as estimate for the full year. I don't have it right in front of me, Jeffrey. We can go over that later, but it's going to be probably about half of that.

About half of half of that, okay. And, from a strategic standpoint, is the idea in the fourth quarter to run your pressure sensitive business at a relatively low operating rate in order to really work down your inventories? And then, see what happens to the raw material market?

Yes, Jeffrey. We've been -- the inventory levels in pressure sensitive are actually in pretty good shape right now. The real question mark we have about inventories has more to do about customer behavior. If market conditions are soft, a lot of label converters will simply just take the last couple of weeks of the year off and run their inventories down. And, if we trim our inventories too much, we'll have service problems when the year turns around, so I think we've got a pretty good handle on that. But, in terms of us actually trying to manipulate raw material prices by changing our inventory levels, that's generally not the way we work. We work to a demand forecast schedule, with a flow manufacturing philosophy. So, it's more related to lean operating principles than it is trying to do anything external like you're suggesting.

Okay. I understand that the volumes are tough in office products, but from a competitive standpoint, have conditions stabilized? Or are they still getting tougher?

No, I'd say they've really stabilized. The last few quarters, our market share's remained the same. And, the only thing that -- the only category that's lost share in the label business has been the private label share. So, it's been incredibly stable, actually, for the last nine months, the last three quarters.

So, from your point of view, the office products hit some kind of low point in 2011? And, you are more optimistic for '12?

Well, we are. Mainly because of a lot of the new product launches that we've been recently announcing. The Martha Stewart partnership with Staples is a significant one because it gets us into some new categories like home and home office. We have a line of sticky notes that use transparent films that consumers seem to like. And, we have some new product areas in the -- new products in the area of business builders for small office, home office type categories. So, as -- we're being very consistent with the strategy. Investment in innovation for new products. Where we've said 2011 was going to be the trough year. And, I don't want to give an outlook yet for 2012 because we haven't made the plans. There is, obviously, an impact to the overall economy. And, that's the one factor I can't relate to. But, we are going to see a significant amount of new product sales in office and consumer products in the fourth quarter of this year. So, it's a timely turn of events.

Okay. Thank you very much.

Our next question from the line of John Roberts with Buckingham Research. You may proceed.

Good afternoon.

Hi, John.

Just to stay with office products, I thought when Genuine Parts reported, the Recipe Richards business was up 4% in the quarter, and they guided for up 4% in the fourth quarter as well. Is the office side very different than the consumer side? Are you seeing differences in those two sides of your businesses?

We haven't really seen a huge difference on either side. They're both relatively soft. I think the contract side of the business actually in the beginning of the year was a little weaker.

Okay. It just seems like they did much, much stronger than you. I would've expected you to trend somewhat similar.

Well, I think our -- SP Richards is a large customer but our fortunes tend to be more determined by the superstores than the wholesalers.

Okay. Since the average tax rate is like 34%, that must mean you have some places where it above 34% and some where it's below. Where is your tax rate above 34%? Or do you have losses someplace that are bottled up, and that's what causes the average to be higher?

Well, so, we definitely have some jurisdictions where they're above 34%. A couple -- there's a mixed bag out there in our various jurisdictions. But, in the 34%, remember, there is a few points of the discrete items that I talked about, about certain tax audits from a few years ago not settling out as we expected them to be, and so forth. That often happens in the second half of the year. So, I wouldn't look at the 34% as the ongoing rate as I mentioned, it's more in the low 30%s. And, that would be -- we're in a lot of countries, so we have a high amount of variation between the various tax rates, depending on whatever the countries installed.

As your earnings improve, will the tax rate scale down? Or does it step down because of that threshold effect that it will jump down in a big amount at a certain threshold?

Yes, region by region, it can be a step function change as you start to grow earnings. But, across the entire company, because there's different impacts going on in the various regions, you're going to see it more of a slow sliding scale.

Okay. And, lastly, maybe Dean, in the past, you've talked about the apparel industry, days inventory levels. Are we back to the low levels of the financial crisis period in terms of days inventory at your apparel customers?

The inventory to sales ratio has stayed at historical lows now for the past couple of years, actually. So, obviously it spiked way up right at the financial crisis time. The biggest impact on us actually is unit volumes. If you read the newspapers, or the press reports, about how apparel retailers are doing, most of them are actually saying they're getting some sales increases, but those are all denominated in dollars. But, because clothes are anywhere from 10% to 20% higher priced right now because of input costs, unit volumes have definitely declined. Now, that trend is likely to start to reverse as raw material costs have come way down. And, frankly, right now a lot of the apparel manufacturers are scrambling for volumes. So, I expect that, again, another round of input costs would go down. So, we should see a gradual improvement as we move forward over the next couple of quarters.

Thank you.

Our final question is from the line of George Staphos from Bank of America Merrill Lynch. You may proceed, sir.

Thanks. A couple of questions on RBIS and then one on CapEx. The early fourth-quarter volume rate in RBIS, if I heard you, Dean, you said it maybe declined into the fourth quarter, so are we looking at the still high single digit volume declines?

No. Our current outlook as based in our guidance is that we will see low single-digit volume declines on a year-over-year basis in the fourth quarter.

For RBIS.

For RBIS

Okay. I thought I heard you say that -- maybe it was Ghansham's question, that it had deteriorated into the fourth quarter? I must have heard that incorrectly.

It deteriorated in the third -- so, it got a little bit worse in the third quarter versus the second quarter. But, we do -- it still going to be negative, we believe, in the fourth quarter from a unit volume perspective, not as negative as it has been.

Okay. Appreciate the clarification there. When we take a step back and look at RBIS, and PAXAR -- if we go back to history and look at the benefits that should have happened from the restructuring and from the synergies, EBIT for RBIS probably in a normal environment, you would've pegged that $200 million or so, and obviously it's been a much more difficult economic environment over the last couple of years then you would've envisioned. Given the backdrop though, you can't change that. How do begin to get and recover the value put into PAXAR above and beyond what you've already done? I realize you'll do some further restructuring and cost cutting, but is there anything else that you can do in the business within the business model that can help validate the RBIS business within the overall portfolio of Avery?

The biggest issue for us has been sales volume. Sales volume has been flat for four years. If you look across the past history, we overachieved on getting our synergies and cost out. So, because this is a high variable margin business, getting sales growth, a moderate level of sales growth, in this business is very important. At the same time, the playbook on a go forward basis is to invest in the business. But, a little bit of money for innovation and new products. We've launched, again, a number of new product in the business that help -- we're selling to the same customers, but we're able, for example, to take our heat transfer technology, which is used on the inside of the garment for care labeling, and use that on the exterior of garments, which is a whole new market segment for us, frankly. We've got some unique differentiated products there. RFID also continues to track up. So -- and then finally, the last element of what we're doing is we're getting a little more aggressive on selling those same capabilities to retailers based in countries outside of North America and Western Europe. So, that's Japan, Russia, India, and China and to a certain extent, Brazil. So, we really do need to get sales growth in the business. That's one. I think you noticed -- everybody noticed the increase in restructuring that we had announced as part of our third quarter reaction. And, frankly, a lot of that is focused on continuing to right size the fixed costs around the retail branding and information solutions business. So, the playbook is continue to focus on the top line with some limited investment, but to continue to work on taking capital out of the business as well as improve productivity.

Dean, have the efforts to market directly to the brand owners been paying increasing dividends, or has that been a little bit slower in terms of progress. And, hopefully it's upside for you as you hopefully consolidate to buy and gain market share from that standpoint?

I think it's working. The -- from my perspective, the ability to do brand embellishment is one key factor. The second one is RFID. We have a very large share of the RFID business, and that's a C level discussion with major retailers. So, we are differentiated in this space because of our footprint and the wide variety of capabilities that we can bring to bear. And, in fact, our unit volume declines in certain segments such as vertical retail or some of the performance athletic brands isn't down very much at all. Our biggest issued this year from a decline point of view has been unit volume declines in mass market, which has really pulled down the average.

Okay. I guess, that's very helpful, Dean. I appreciate that. The last question is, without necessarily projecting for next year, I realize you're not in a position to that, capital spending, can you more or less keep it at these levels over a trend line basis? Is it sustainable here? Or do you think you'll have to, at some point, bring capital spending up maybe a touch closer to depreciation? Thanks, and good luck in the quarter.

Thank you. As you said, George, we haven't really -- we are just starting the planning process for 2012. The answer to -- the simple answer to your question is yes, we can maintain the current rate of spend. Or maybe even take it down a notch or two. I'd rather be in a position of investing though, because that would mean we are feeling much more robust about what future top line growth looks like.

Understood. Thanks.

Mr. Scarborough, there are no further questions at this time. Sir, you may continue with your presentation or closing remarks.

Thank you. Well, just to sum up, our focus on a go-forward basis is to number one, continue to manage our expenses and drive productivity in the business. And two, at the same time, we are going to continue to invest in innovation to differentiate our product lines and to drive more top line growth. And, we're going to continue to generate free cash flow. Obviously, it's a priority to continue to strengthen our balance sheet and as well as return more cash to shareholders. Thank you very much.

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.