艾利丹尼森 (AVY) 2011 Q4 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 fourth-quarter and full year-ended December 31, 2011. This call is being recorded and will be available for replay from 1 PM Pacific time today through midnight Pacific time February 3. To access the replay, please dial 1-800-633-8284 or 1-402-977-9140 for international callers. The conference ID number is 21543229. I'd now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may proceed, sir.

Thank you. Welcome, everyone. Today we'll discuss our preliminary, unaudited fourth-quarter and full-year 2011 results. Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The Company's Office and Consumer Products business is classified on our Income Statement as a discontinued operation.

The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP in Schedules A-2 to A-5 of the financial statements accompanying today's earnings release. We 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 made subject to the Safe Harbor Statement included in today's earnings release.

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

Thanks, Eric. Despite the challenges of over $200 million of raw material inflation, and a sudden downshift in volume in the second quarter that lasted the rest of the year, the businesses delivered more operating income than last year before restructuring costs as well as nearly $300 million in free cash flow. Our ability to raise prices and to accelerate productivity enabled us to hold our margins in difficult market conditions.

We further reduced our leverage, increased our dividend and contributed $70 million to our pension plan. Our intention was to return even more cash to shareholders last year, but we were restricted due to the Office and Consumer Products divestiture plans. Net sales increased 4% for the full year, mainly due to pricing and currency, which offset sluggish unit volumes caused by lower market demand in many of the vertical end markets we serve. We took a significant step forward with the agreement to sell our Office and Consumer Products business, consistent with our strategy to maximize its value for shareholders.

Now, turning to the businesses. In 2011, sales for the Pressure-Sensitive Materials segment grew about 4% in local currency due to the pricing actions we took. We held segment operating margin, excluding restructuring, roughly flat year-over-year. I'd like to note that in challenging market conditions, Pressure-Sensitive Materials' operating income, excluding restructuring, is roughly $80 million higher than it was two years ago at the low point of the recession.

Our Label and Packaging Materials business, which is by far the largest component of this segment, is a market leader with strong competitive advantages. We have differentiated products, especially in the faster growing film categories. We have scale, which enables us to run more efficiently and buy raw materials more effectively than competitors. Label and Packaging Materials is an innovation leader as well. Last year, with relatively modest investments, we introduced nearly 20 product innovations that will help us accelerate profitable growth and extend our leadership position in key markets over the mid- to long-term.

Retail Branding and Information Solutions was impacted by volume declines more than Pressure-Sensitive Materials. Full year sales were down 3% in local currency. Record high cotton prices caused retailers and brand owners to raise prices dramatically, which caused unit volumes to decline. In the fourth quarter, for example, apparel unit imports to the United States dropped more than 12%. Despite this drop, we successfully held RBIS operating margin through a combination of productivity actions and lower employee-related costs. This was a major accomplishment in this high, variable margin business.

The major challenge for RBIS has been achieving our margin improvement objectives with almost no sales growth since 2008. We made major progress in 2010, as sales rebounded from the 2009 recession, but last year's challenging unit volume environment stalled our progress. Given the more unpredictable market environment going forward, especially with challenges in Europe, we're accelerating our efforts to reduce fixed costs in RBIS. We enjoy competitive advantages in apparel branded and information solutions. No one else has the global reach that matches the scale of the apparel supply chain, but we can be more efficient while preserving these advantages.

During 2011, we accelerated productivity actions by consolidating production and making our factories more efficient. The benefit of lowering our breakeven point enabled us to maintain margins, ex restructuring, in a slower volume environment. Over the next few years, we'll continue to shrink our square footage in manufacturing as the benefits of Lean Six Sigma and new manufacturing and information technology enable us to serve customers more efficiently. We'll continue to invest in RBIS at less than our rate of depreciation and amortization, insuring that the business delivers solid free cash flow in this more volatile market environment. Our goal is to continue to drive down our breakeven point so we can reach our margin targets with lower buying growth.

We're continuing to invest in organic growth for the business. Apparel unit tagging with RFID grew by 60% this year, and we have several new retailers adopting the technology in 2012. There is strong interest from customers in our new Agility HD line of heat transfer solutions for high-definition exterior graphics. This is a great example of using our materials science capability to provide new solutions for existing customers. And finally, we made solid progress this year in building our offerings to retailers and brand owners in new and emerging markets, including Japan where we have very low market share.

To sum up, 2011 was about maintaining the leadership positions of our two core businesses. With disciplined pricing and improvements in productivity through restructuring and Enterprise Lean Sigma, we delivered operating income growth before restructuring; and we generated strong free cash flow. These accomplishments are a tribute to our employees who did an outstanding job executing price increases and taking other actions to mitigate raw material inflation as well as driving productivity and working capital improvement. I want to thank them for their efforts.

For 2012, the economic environment remains uncertain, especially in Europe; and we're assuming a continued lack of momentum. We expect modest growth in sales with higher contributions from emerging markets. We'll continue to focus on increasing our operational efficiency, and we expect to see improvement in earnings and another year of solid free cash flow. We're committed to increased returns of cash to shareholders; and at the same time, we're continuing to invest modestly in organic growth programs to strengthen our competitive advantages. And now, Mitch will go over the quarter and the outlook.

Thanks, Dean. Starting with slide 6 and talking through to slide 8 of our financial review and analysis. Sales in the fourth quarter were up about 0.5% organically as the impact of our price increases was partially offset by lower volume. Volume for the Company was down approximately 1.5% and in line with our most recent expectations. Volume was flat in PSM and declined in RBIS and in our other specialty converting businesses. The negative volume trend that we began to experience in Q2 lessened again, but we continue to experience soft end market demand and uncertainty, particularly in Europe.

Fourth-quarter operating margin was down 80 basis points compared to last year due to the impact of restructuring costs and other items. The biggest increase in restructuring costs was in RBIS, as we've accelerated our productivity measures in that business. I'll comment more on that in a moment. Adjusted operating margin was roughly flat to last year as pricing and productivity initiatives offset increased raw material costs. While we are seeing inflation of some of the commodities we use, raw material costs in the aggregate have stabilized, but they still remain high. As we discussed last quarter, we've successfully offset the raw material inflation that we began to experience in mid 2010 by implementing price increases and productivity initiatives.

Our fourth-quarter effective tax rate on continuing operations was 22%, and our full-year tax rate on continuing operations increased from negative 1% last year to 34%. You may recall that in the fourth quarter of 2010, we had a significant tax benefit due to a discrete planning event. The difference in discrete events, with a gain last year and charges this year, is the primary reason for the major swing in the full-year and fourth-quarter tax rates.

The major discrete event last quarter was a settlement of a tax matter in a foreign jurisdiction, mostly related to Office and Consumer Products. This resulted in a charge to earnings of $0.12 per share, $0.09 in disc ops and $0.03 in continuing ops. Additionally like last quarter, a contributing factor to the increase in the tax rate for the year and quarter was lower pre-tax income. As we discussed last time, this impacts us in two ways. First, lower tax rates in certain jurisdictions outside the US are achieved only when we pass certain income thresholds. And second, lower pre-tax income diminishes our ability to utilize tax loss carryforwards and other tax credits. Now, these comments relate to the GAAP tax rate. As we've said before, the 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 rates. Our cash tax rate has been in the mid to upper 20% range for the past few years and has been trending down modestly.

Looking at earnings for the quarter, adjusted EPS from continuing operations was $0.36. Adjusted EPS from discontinued operations, that is Office and Consumer Products, was $0.03, for a combined total of $0.39. And if you exclude the impact of the tax settlement I referred to earlier, it would be $0.51.

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 full year, our free cash flow came in at approximately $290 million. This is ahead of the expectations that we provided last quarter largely due to a continuation of the significant progress we made in Q3 and returning to more typical working capital levels as well as lower capital expenditures.

Turning to slide 9. Our Pressure-Sensitive Materials segment delivered 3% organic sales growth driven by pricing. PSM's volume in the fourth quarter was flat, an improvement over the third quarter's 2% volume declines. This improvement in the trend reflects Label and Packaging Materials North American volume swing positive in the quarter while the level of the volume decline in Europe moderated. LPM's volumes in the emerging markets grew in the mid single digits, a modest improvement from the Q3 pace, but below its historical and expected average. In PSM's graphics and reflective solutions business, sales in volumes were up mid single digits in the quarter. And PSM's operating margin was essentially flat as the benefit of pricing actions and productivity initiatives offset increased raw material costs.

Retail Branding and Information Solutions sales were down approximately 4% on an organic basis in the fourth quarter. The lower sales were due to a continuation of the trend we saw in the second and third quarters with lower volume reflecting unit softness in the apparel market. As in the second and third quarters, the fourth-quarter declines were most pronounced among mass market retailers and in Europe. RBIS's operating margin was down due to the additional restructuring actions. Adjusted margin was roughly flat compared to the prior year as the benefit of productivity initiatives offset the impact of lower volume.

In the past, you may have heard us talk about how we will expand the margins in RBIS through both growth and through productivity. Now, we remain confident in our ability to grow this business faster than the market. However, given the soft market environment of the past couple years, we are not going to rely as much on volumes to get the margins and returns up in RBIS, and are expanding and accelerating our productivity initiatives to reduce operating costs as much as its capital base. This strategy will enable us to improve the returns in this business without so much reliance on volume. Sales of our other specialty converting businesses declined 3% organically due primarily to softer demand for tapes. Adjusted margin was down due to the lower volume.

Moving on to the outlook for 2012. On slide 11, we've summarized the key factors that we expect to contribute to our P&L and cash flow in 2012. Slide 12 has our EPS and free cash flow guidance. We estimate organic growth, sales growth, in 2012 between 1% and 4%. As you know, our level of sales growth can be difficult to predict and even more so in a period of uncertainty. Reflecting this, we are using a wider range than usual for both sales growth and earnings. As for currency, in 2011, currency added 2.5% to reported sales for the full year and $16 million to EBIT. In 2012, currency at January rates would reduce reported growth by about 3% and reduce EBIT by approximately $18 million. The major headwinds against operating profit in 2012 are expected to be currency, employee-related expenses, and general inflation.

In 2011, we implemented restructuring actions that cost $45 million to achieve $55 million in annualized savings, of which 25% was realized in 2011; and the remainder is expected largely to happen in 2012. Part of this was done in anticipation of the divestiture of Office and Consumer Products. In 2012, new restructuring actions are currently estimated to cost about $25 million; and as you know, we are always evaluating further opportunities to reduce costs. As for taxes, in 2012 we're planning for an effective tax rate for continuing operations in the low to mid 30% range and a cash tax rate in the upper 20% range. Our cash tax rate is lower than our P&L rate due to the benefits of past planning activities.

We are expecting pension contributions of at least $75 million in 2012. We say at least, because we'll likely make a pension contribution with a portion of the proceeds from the sale of OCP. In terms of where we stand on the pension, at year-end 2011, our US plan in total was $285 million underfunded. Despite our pension contributions in 2011, the underfunded amount increased year-over-year primarily due to a lower discount rate.

As for the sale of OCP, we estimate that the combination of net proceeds and free cash flow from the sale of office products will total approximately $400 million. For now we're going to talk about net proceeds and free cash flow from OCP as one number, because they are so inter-related. As we said when we announced the signing of the Definitive Agreement, we intend to use the proceeds from the transaction primarily to reduce debt, make additional pension contributions and repurchase shares. We expect the majority of the combined proceeds and cash flow from OCP will be used for share repurchases.

Turning to guidance for EPS and free cash flow. Based on the estimated sales and other assumptions, including the listed factors, we expect adjusted earnings per share from continuing operations in 2012 of $1.80 to $2.15, and free cash flow of $275 million to $325 million. Earnings in the first quarter are expected to be between 20% and 25% of our full year earnings guidance.

Overall, while 2011 was a challenging year, we took a number of important steps in executing our strategy. We successfully maintained our margins despite significant inflation by raising prices and driving productivity. We demonstrated once again the strong cash flow potential of our businesses regardless of market conditions. We announced the planned sale of Office and Consumer Products, and we've reaffirmed our commitment to financial strength and returning cash to shareholders. This commitment is clear from our debt position, the increase to our dividend and the promise of more share repurchases. Now we would be happy to take your questions.

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

Thanks, hi, guys, good morning and good afternoon. The first question I had is on Pressure-Sensitive Materials. The margins that you posted in the quarter, obviously as you reported were impacted by input cost raw materials that you had not offset yet. If you had 100% caught up to those raw materials in the quarter, at the beginning of the quarter I should say, what do you think your percentage margin would have looked like as opposed to what you posted?

George, hi. It's Dean. Good afternoon. Actually, we've caught up on the price inflation gap in the quarter.

Okay, so you were totally caught up, so is that margin then a normal margin going forward?

No. Overall, I think George, there's a couple things changing because of several factors that are putting pressure on the actual margin. One is because we've broken out in discontinued ops, the sales from Pressure-Sensitive to Office and Consumer Products are now reported as sales for Pressure-Sensitive, but that doesn't change the earnings, because that was already in the baseline. That does have a permanent adjustment overall to the margins within the business.

We also, since the beginning of the whole inflation cycle about 6 quarters ago, raised prices about 5%. That puts us at about a 50 basis point headwind on the margin itself, so protecting margin dollars, but the margin percent goes down somewhat because of the higher sales prices. So those two effects overall have an impact on your normal baseline of how you'd be thinking about it. If you look within the quarter just on the restated basis, you can see that the operating income in Pressure-Sensitive was lowest in Q4. That's just because of the timing of certain costs, as well as the volume was a little bit lower on a sequential basis in Q4 than, say, it was in Q3.

Okay.

The average for the full year came out to 8.3%, so mid 8% is what it was for 2011.

Thanks for that. One last question and I'll turn it over. I realize that the free cash flow, if you will, will be somewhat inter-related with, ultimately, what you receive net for OCP. But could you tell us, as of December 31 what the basis is for OCP, and even if you can't tell us that, what tax rate will be applied to that net difference between proceeds and basis when you finally do close on the transaction? Thank you.

Yes, George. It's a complicated question because there's a number of moving factors. Let me comment on a couple of the key moving parts. Our basis in this business can move quite a bit throughout the year. Because it's a seasonal business, as you know, we build inventories, and then it's transferred to receivables in the second and early parts of the third quarter, raising our basis which would reduce our tax charge, if you will, when we sell this thing.

But at the same time, that consumes free cash flow to be able to build that working capital balance. So the reason we're looking at it and just talking to one number, because it really depends on if this were not go to second review and close sometime in March or close in June or July or close in September, October, it has a significant impact on the individual components while not having a significant impact on the overall net proceeds.

To your question about the tax rate, a big part of the proceeds, the value will ultimately be assigned to the US. We have a normal tax rate that you'd expect within the US, 35% -- actually 37.5% when you consider the state taxes and so forth. And the elements assigned outside the US, there's quite a few different jurisdictions with different tax rates.

Okay, thanks, I'll pass it along.

Our following question will be from the line of Ghansham Panjabi from Robert W. Baird. You may proceed.

Hi, guys, how are you?

Hi, Ghansham, how are you?

Good, thanks. Can you help us reconcile the difference on the earnings guidance and also free cash flow guidance? At the mid point, you're roughly $2 per share in EPS and $2.90 for free cash flow. I understand the CapEx to D&A spread, but how should we think about working capital also in there?

Working capital, you should assume we're going to keep the productivity at the levels that we had in 2011.

Okay, and what is the D&A estimate for 2012, post the sale of OCP?

Well, there was about $50 million of D&A in OCP, so it's about $230 million is what it was in 2011. It will trend down modestly, obviously, because our reinvestment ratio is below 100%.

Okay, because I'm still having trouble with the bridge between earnings and free cash flow.

Yes, there's a number of moving parts between free cash flow from continuing ops versus disc ops. Are you talking about from 2011 to '12?

No, just looking at the earnings guidance for '12, which excludes OCP, right?

Ghansham, this is Dean. I think probably the reason is that we're not paying out very much Management bonus this year, if any; and so that's why the number would look as large as it would for 2012.

Okay, so maybe $250 million is the more sustainable number for free cash flow? Is that fair?

No, I mean, we would certainly say that we expect our earnings to increase, especially as our business -- hopefully, the economy and our businesses continue to improve, so our goal is to continue to drive free cash flow at a level close to $300 million.

Okay, but wouldn't that also imply, Dean, based on what you just said that CapEx would go up in that scenario also?

Right now we don't see a need to increase CapEx. Certainly, if business improves dramatically, yes, we would have to make some more investments, but we're really getting more and more productivity out of our existing assets.

Okay. And just finally, a bigger picture question, the vision for the Company, post the Office Products business, do you see yourselves purely focused on the two existing businesses and returning more cash flow to shareholders over time or should we expect some sort of a growth focus by M&A on the existing businesses, both RBIS and PSM? Thank you.

Certainly, for the short-term, our focus is returning more cash to shareholders. We think we've got two strong businesses, both which throw off good free cash flow. We are making investments on organic growth, so beefing up a little bit of marketing spend and some of the R&D and innovation spend, which I think will certainly help us for the long term, but we don't have any plans for, certainly, any large acquisitions on a go-forward basis.

Got you. Thanks so much.

The next question is from the line of John McNulty with Credit Suisse. You may proceed.

Good afternoon. Just a few quick questions. In RBIS, with the restructuring and the focus on deeper cost cuts, and also it seems like maybe a little bit lower CapEx spend, should we be thinking about this business more as a cash-cow type business going forward? I don't think when you bought Paxar that was what you were thinking, but I guess I'm wondering how you're thinking about that business going forward.

Well, it throws off great free cash flow; and we've always said there have been two paths to getting to the margin. One is through growth, which is frankly an easier path, because we have high variable net margins in the business. But given the volatility we've seen in the marketplace in terms of unit volumes, the other path, frankly, is to drive accelerated productivity.

And I think the other thing we've learned, especially over the last 18 months or so -- and this is very similar to what we've learned in the Pressure-Sensitive Materials business. We have released a lot of capacity through our work in Lean Six Sigma and that will allow us to shrink the amount of manufacturing footprint in the terms of square footage, so we can get a lot more out of our existing asset base on a go-forward basis.

We've made investments in digital printing and work flow; that will pay off. And we've also figured out to invest in information technology instead of investing in a big ERP system, which would take years and years to get a payback. We're really focused on more of the high value and quick turnaround payback, so we've got both growth and productivity baked into the business. I don't expect apparel unit volumes to decline forever. I just don't think that's going to happen. But we've just got a different path forward so we're going to execute against that. In any case, we will have positive free cash flow out of this business.

Okay, fair enough. And then with regard to the Pressure-Sensitive business, I'm wondering if you're comfortable right now with how the pricing environment is. Are we starting to see the pricing discipline? I know a few years ago we had really been focusing on and hoping for, but when I look at the margins, it doesn't seem like it's really coming through. So is the industry acting disciplined and how should we think about that going forward?

It's hard for me to speak for our competition, but my sense is that the players in the market are focused on making money. And so, the other thing that we're doing, frankly, is we've got a lot better information about how pricing works in the market, so our own strategy, regardless of the way competitors behave, seems to be working out pretty well. So especially given this last round of inflation, we are seeing a good market here; and there hasn't been a lot of additional capacity added to the business in a number of years, so that's helpful as well.

Okay, great, and just one quick housekeeping. Your tax rate guidance, I'm a little bit surprised that we're not seeing it down a little bit given the sale of Office Products, so what's driving that or what's holding the tax rate up where it is?

What's holding the tax rate up is the sale of Office Products, given that it's more weighted to the US. I think intuitively we'd say, selling that business would reduce the tax rate otherwise, but it also requires further additional repatriation of cash and so forth into the US. And while we've got a number of things in place to keep the cash tax rate into the 20s, consistent where it's been for the last five years, the GAAP tax rate will actually go up. So there's a nuance of just the geographic mix of income on a pre-tax basis with the sale of Office and Consumer Products that's actually not having the effect that you're probably thinking it would.

Okay, great. Thanks for the clarity.

Our following question will be from the line of Jeffrey Zekauskas from JPMorgan. You may proceed, sir.

Hi. Good day. Will you begin your share repurchase program in 2012 when you receive the proceeds from the sale of the Office Products business or would you begin it before then?

Jeff, we don't comment on the timing or amounts of share repurchase. I'll remind you, though, that we have about 6 million shares, I think, currently authorized for repurchase, and that we are well below our target debt rating right now.

Okay. The second thing is, it looks like your Pressure-Sensitive adhesives business has about $70 million in revenues, which I assume are sales of adhesives to Office Products. Is there a long-term agreement or some kind of agreement in place with 3M, so that we might view those as ongoing sales? Or once the business goes, then those incremental revenues also go?

So we have, as part of the deal a three-year supply agreement in which they will buy roughly those amounts over the next three years. And in return, we give them exclusivity; and that agreement could be extended for another couple of years. And our goal in Pressure-Sensitive will be to make ourselves, just like we are with any other customer, viable and attractive. And 3M will make a decision whether or not they want to make it or buy it.

In the quarter, how much overhead was reallocated to the ongoing businesses?

For the full year, there's about $20 million of overhead, once we sell Office and Consumer Products. For now that's being reallocated. You'll recall though, Jeff, at the middle of 2011, we announced an acceleration of restructuring to reduce some overhead costs, a portion of that was at the corporate office, if you will, in anticipation of the sale of OCP. So it's $20 million is the allocation impact, but our goal was to actually reduce the total amount of overhead allocated to reduce the actual margin hit, if you will, to the remaining businesses.

Okay, how much are the cash restructuring charges next year for 2012?

About $25 million.

Those are cash, okay. And then lastly, did your raw materials in Pressure-Sensitive come down sequentially in the fourth quarter as propylene came down? And do you have additional price increases in Pressure-Sensitive planned for next year for 2012?

What we saw was a flattening out of the inflation. We obviously were still in somewhat of a catch-up mode in the back half of the year. There are price increases that are currently being implemented in Pressure-Sensitive Materials today in some segments and in some geographies so, yes, that's where we stand. Our expectation next year is, there won't be a big impact in our earnings from either pricing or raw material inflation. In other words they will net out.

They will net out. Okay, thank you very much.

The following question will be from the line of John Roberts from Buckingham Research Group. You may proceed.

Afternoon.

Hi, John.

Does the high tax rate, back to the question earlier, imply flattish global volumes in 2012, up in some areas, but down maybe in Europe and offsetting so that we're flat?

The tax rate assumes a range of the growth of 1% to 4% total. It's different by geography, obviously growing faster in both ends of the range and the emerging markets and slower than that in the mature markets.

Okay.

And the assumption is Europe will be a little bit slower than North America.

The average shares outstanding guidance of 103 million, that's actually down 3.5% from the average that you had in 2011; is that correct?

Yes.

So you are going to buy back stock in the second half of the year, I would guess, then with the proceeds. You got the question earlier on it.

Yes, that's the expectation. We built that -- while we don't comment on the timing or amount, we wanted to give some clarity as to what we estimate the full year average will be.

And if the full year was down, you say at 3.5%, you'd have to buy back double that really in the back half of the year to move the full-year average down, right?

Yes, that would be the amount.

And how did the forward orders look in RBIS? Are we going to see any restocking effect? Your volume numbers would imply, although I didn't ask you RBIS separate from PSM, but the volume numbers would imply you're not going to expect any restocking activity in 2012 by customers?

We expect -- if you look at last year, you'll notice we had buying declines of about 6% to 7% in the second and third quarter. In the fourth quarter, it was down about 3.5%. What we saw was actually improvements in the US trajectory and some deprovement in the European trajectory. Right now it's Chinese New Year, so we have zero visibility on those forward orders for the fall season; and we'll start to see those in March, April, May, so we'll have some visibility.

We're not expecting, certainly at the low end of our guidance range, a massive restocking; and we expect some moderate improvement at the high end of our guidance range. This is the one element I think that is probably the most difficult for us to predict, especially in Europe where we just don't know how retailers are going to respond.

Okay, good, thank you.

(Operator Instructions) We do have a follow-up question from the line of George Staphos. You may proceed, sir.

Thanks, hi, guys. The first question I had, back to Pressure-Sensitive Materials, if I look at the incremental margin for the year, which would include the effect of your pricing action and the reduction in percentage margins that you'd get from raising prices, I think the incremental I got was something around 6% or so, a little bit above that. Obviously lower than the 8%, 8.5% range you showed for many of the quarters in your restated financials.

How much of that do you think is lost operating leverage? How much of that is perhaps pricing that you didn't recapture? And I ask that because I think in answering John's question, you said you don't expect much net pricing in 2012, so help me understand that 6%.

Sorry, George, just want to understand. Are you trying to understand what the movers are on the Pressure-Sensitive operating margin from '10 to '11?

Maybe more, just very basically, your incremental margin in Pressure-Sensitive was like 6% in 2011, if I did it correctly, yet you said you were already caught up to raw material pricing; that seems low to me. Is there any impact from pricing competition despite the market being somewhat balanced and rational? Is there anything that will lead to a higher margin in 2012, since you said that net pricing versus inflation will have limited effect in '12.

Right, so the overall impact, if you look first of all, from '10 to '11, volume was actually down for Pressure-Sensitive, so that actually -- we had less fixed-cost leverage, if you will, so that put some pressure on the margins overall. And then that was also largely offset by productivity and other lower costs. As you go forward to 2012, the biggest single factor in 2012 versus '11 is going to be volume, given the variable margins of this business, so if we're at the low end of our range, Pressure-Sensitive is the largest business, then that's -- 1% volume growth is really, all other things being equal, just enough to offset inflation, if you will. I'm talking about non-material for at the higher end of that range, then it starts dropping through to the bottom line much faster.

Thanks for the clarification on that, Mitch. Appreciate it. The 1% to 4% organic sales growth that you're guiding to, I realize it's your best estimate. It's bottoms up driven by your teams. How comfortable are you about the low end of that range being achieved, given what's obviously a very difficult environment to call relative to Europe in particular?

Well, it's a really good question. At the bottom end of the range, George -- let me step back for a second. So we tend to be an early cycle business. When we saw conservatism in our end use, market supply chains, where we saw price increases driving lower unit volume, we really got hit in the second quarter. We were driving 7% or 8% volume growth in the first quarter. Everything looked great; and then Q2 happened, and we slowed down dramatically.

We have seen some stabilization in that trend throughout the year. The US has gotten sequentially better. Europe has gotten sequentially worse. For me, if we see just a relative stable economy, that should be a benefit to us, because we won't see the inventory destocking that obviously happened to us in the second quarter. That should help, certainly on a comp basis. If Europe gets hit hard, because of financial crisis or the economy there just doesn't respond very well, that's going to hurt us, because now we have an even higher percentage of our sales and volumes driven by Europe than we did without Office Products. I hope that helps.

It does. And look, I realize it's a difficult situation trying to call the rest of the year being that we're end of January here. Next question I had, when I look at the severance in RBIS, for example, $6 million in fourth quarter and at least -- actually more than that, in the third quarter, can you comment how many -- what's the impact of headcount reduction behind that amount of severance? It's a fairly large number.

The impact of headcount reductions, it's --

Well, how many people are no longer with Avery as considered in that severance impact?

So the biggest single impact from the most recent round of restructuring was around reducing the overhead, our operating expenses across the business. And so those tend to be, on an average, higher-cost employees. When you look at this business, it's dangerous to talk about the averages of headcount, because you have some really low cost employees in emerging markets. And then you also have some employees with higher costs in the SG&A. So overall, if you look at the percentage headcount, it's lower than you would expect relative to the amount of savings on average because most of it was SG&A reductions. We talked about reducing the SG&A within this business by a few percent.

Okay. That answered my question. A couple others and I'll turn it over. Again on RBIS, Dean, we've talked about it before, at one point in time you had looked at a 12% operating margin as being realistic and other times when we've added all the profitability of the business acquired, what you started with, the restructuring, EBIT would be something like $200 million. How much do you think you've lost to the market from competition or do you think all of the margin degradation has been purely decremental margin because of volume? Or essentially -- (multiple speakers)

I think it's volume, because if you look at US import data for the fourth quarter, unit volumes are down 12%. And our sales which -- and that would have really been a second/third-quarter sales trajectory for us. We were down 6% to 7%, so I don't think we're losing share. I certainly didn't expect unit volumes in apparel to drop like they have in 2011.

So on the margin comment, remember that there are almost two full points of margin on RBIS that come from amortization of intangibles. That goes away in 2015, so from my perspective, certainly from a cash perspective, we've got two full margin points there. And if this kind of more volatile environment continues, we'll get our cost and our footprint in shape to achieve the margin objective, and that's the goal. We'll just get there using a different formula.

George, I think what you're hearing is, in RBIS the sales in 2011 were roughly flat with where they were in '08, because of the volatility.

Right.

As you know, a good portion of the cost base of this business is in the emerging markets, which, with wage inflation and so forth, that's a constant headwind. And if you have flat sales, it makes it more challenging to expand margins, which is why we talked about continuing to focus on growth, but redoubling our efforts around productivity, both to reduce costs as well as reduce the capital base of the business.

So you think -- (multiple speakers)

We're not giving up on growth, George. That shouldn't be the headline.

Okay. I'll turn it over. I have a last question after everybody else goes, thanks.

Sure.

Mr. Staphos, you may continue, sir.

Okay. When I look at the fourth-quarter tax rate, and I add back the $0.03 for the discrete item that was attributable to the continuing ops, I get a rough operating, if you will, tax rate of around 22%, which matches what you said the effective rate is. Maybe I missed it before. How do you reconcile that with what you think your ongoing tax rate of low to mid 30s is going to be?

Well, in the fourth quarter -- overall you should be focusing on the full year, because the fourth quarter is a squeeze, if you will. When we were giving our full-year guidance for 2011, we were considering Office Products not being a discontinued operation. If you want to bridge our 2011 tax rate, if you will, to what we're guiding in 2012 for continuing ops, overall it's just the impact of a couple events that we had, discrete items which were some modest benefits in 2011 that we don't expect to be there in 2012.

What's the effect of the divestiture and other specialty converting and what's your normalized CapEx, guys? Thanks and good luck in the quarter.

Mr. Scarborough?

Was that two? I think there were two questions there. I think one was around CapEx, which is about $150 million, is what we're planning for the year. And we'd sold the product line in other specialty converting back in the early part of the fourth quarter, so that definitely had an impact on the sales and earnings.

Sales were only about $20 million in that business.

Yes.

And proceeds were about $20 million as well. And the EBIT, for George, in that business was just a few million.

Thank you.

Okay.

Mr. Scarborough, there are no further questions at this time. I will now turn the call back to you, sir.

Thanks, and I'd just like to make two final points about the Company. First is that we have strong businesses with many competitive advantages. Our emerging market footprint, now approximately 40% of sales without Office and Consumer Products, positions us for higher revenue growth. We're making modest investments in organic innovation in our core businesses to strengthen competitive advantage and modestly improve our growth trajectory.

Second, we have a strong culture of productivity embedded in the Company, which has enabled us to become more efficient and allows us to invest at less than the rate of depreciation. Working capital productivity is another focus. And together, that enables us to generate strong free cash flow. We intend to significantly improve the amount of cash returned to shareholders now that we've met our debt reduction and leverage targets. Thanks, everyone, for joining; and we look forward to speaking with you again.

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