艾利丹尼森 (AVY) 2012 Q2 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 second quarter ended June 30, 2012. This call is being recorded and will be available for replay from 1 PM Pacific time today, through midnight Pacific Time July 27. To access the replay please dial 1-800-633-8284 or 1-402-977-9140 for international callers. The conference ID number is 21543231.

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.

Thank you. Welcome, everyone. Today we'll discuss our preliminary unaudited second quarter 2012 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 A2 to A5 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 will now turn the call over to Dean.

Thanks, Eric. The quarter came in just about as expected. Sales were up nearly 4% on an organic basis and adjusted operating profit was down modestly. We're pleased with where we are on a free cash flow year-to-date, and we're on track to deliver earnings growth and free cash flow within the ranges of our guidance for the year. We're committed to returning more cash to investors, and we bought back an additional 2.4 million shares during the quarter to meet that commitment.

As noted in our press release, we are accelerating our productivity and cost out plans to improve our competitive position and meet commitments to shareholders in an uncertain economic environment. The $100 million-plus restructuring program announced today will enable us to deliver earnings growth in this unpredictable economy and provide nice upside when conditions improve. I'm also glad to say that we can fund this restructuring while meeting our free cash flow targets as well. I'll provide additional color in a few minutes.

Turning to the segments, Pressure Sensitive Materials had a solid quarter, both on the top line and the bottom line. Despite uncertain economic conditions in North America and Europe, Label and Packaging Materials had good sales growth in both regions. And we gained back the share we left in Europe a year ago. And as we expected, emerging markets returned to double-digit sales growth. Graphics and Reflective Solutions' top line results were significantly weaker than LPM's. GRS is more economically sensitive, and a larger proportion of its business is in Europe, where it was especially hard-hit. As you know, we've been investing in marketing and innovation in Label and Packaging Materials. We're gaining traction with a number of the new products we launched late last year, and we have a pipeline of new products that will introduce at Labelexpo in September. At the same time, LPM has been improving its already good service delivery time. And the combination of innovation and improved service are enabling us to gain share and we're seeing this in our top line.

Retail Branding and Information Solutions results were disappointing in what has always been the seasonally largest sales quarter for this business. The retail apparel market is rebounding more slowly than we had expected. The second quarter did end positively after starting off with sales declines, and that positive trend is continuing into July. Despite sluggish market conditions, we made progress on our growth initiatives and believe we are continuing to gain share in our target segments. Sales of external embellishments were up nearly 60% over last year, and item level RFID sales were up 35%. And our RFID division, which was integrated into RBIS at the beginning of the year, had its second profitable quarter in a row. Now, recall that the RFID division results are reported in Other Specialty Converting. The RBIS team's done a great job improving both the RFID top and bottom lines. RBIS margins were down more than expected due to lower volumes and higher employee related costs. We did raise prices, and we will see the full impact of the price increase in the third quarter. At the same time, as we noted in the May investor meeting, RBIS is focused on reducing its fixed cost structure, and has an objective to organize manufacturing more efficiently and reduce its footprint by 20%. Now that the second quarter is over, we are accelerating our cost out actions.

Office and Consumer Products is reported as a discontinued operation. We still anticipate closing the transaction in the second half. In the business, net sales and operating profit declined from second quarter last year. As you know, the back-to-school season is spread over the second and third quarters, so it's hard to measure the full season's impact today. But based on what we've seen so far, we expect modest growth in back-to-school products this year. Also, OCP's new products, including the Martha Stewart line, are being well received by consumers.

After the office product sale, we'll be focused on two core businesses, Pressure Sensitive Materials and RBIS, and a group of smaller specialty converting businesses. Our core businesses are market leaders in their respective industries with great competitive advantages. We are going to build on these advantages and further strengthen our ability to deliver on our long-term targets for double-digit earnings growth and improve returns by accelerating our restructuring initiatives to achieve more than $100 million of savings by mid-2013, with most of the savings coming next year. First, we're going to continue the streamlining of the corporate organization that we began last year to eliminate the stranded costs from the OCP divestiture.

Over the past few years, our core businesses have developed scale in support functions, moving their organizations from small regional teams to globally managed functions. This enables us to reduce the amount of corporate support and better align these functions with the specific needs of each business. The streamlining will include the disposition of our headquarters building in Pasadena, California, and a move to a lower cost, smaller leased location here in the San Gabriel Valley.

Second, we are fully integrating Graphics and Reflective Solutions into Label and Packaging Materials. We've already integrated the GRS supply chain, procurement and operations into LPM, and so now we are integrating marketing, sales and R&D functions to help Graphics and Reflective become more competitive as well as improving returns.

Third, as you know we've been investing in marketing and innovation to get more external and to drive faster growth rates. We know from our experience so far that having technical people co-located with marketing professionals makes innovation faster and more efficient. To that end, we are consolidating our corporate R&D resources into Pressure Sensitive Materials research centers in Ohio, the Netherlands, China, and India. We want to move innovation closer to customers, accelerate time to market, and focus activity on clearly defined opportunities. This will save us some money and enhance our innovation capability.

Fourth, now that we're past RBIS's peak quarter, we'll move forward with lowering its breakeven to improve its returns in the slower growth environment. As I said before, we have a 20% reduction in the RBIS footprint underway, and we're also identifying further opportunities to take cost out of this business. We're moving quickly to achieve more than $100 million of annualized savings in a little under 12 months. This leaner cost structure will make us more competitive and enable higher returns, despite an uncertain economic environment. We have terrific core businesses with strong free cash flow, the ability to drive productivity, great capital discipline, and innovation leadership. We have a high sense of urgency to achieve the targets we committed to in the investor meetings in May, and thus are moving quickly and decisively to accelerate productivity.

To sum up, with the first half behind us, we're tightening guidance ranges for full-year EPS and free cash flow, and we are on track for the year. We're moving aggressively to deliver on our long-term targets and at the same time we continue to increase cash returns to shareholders. And now Mitch will provide more detail on the quarter and our initiatives.

Thanks, Dean. Starting with Slide 4 and talking through to Slide 7 of our financial review and analysis, overall, results for the quarter were consistent with our expectations with adjusted earnings per share at $0.56 as strong performance in Pressure Sensitive Materials was offset by lower than expected results in RBIS. Net sales in the second quarter of 2012 grew approximately 4% on an organic basis, as the Pressure Sensitive Materials business recovered from the slowdown in volume that we experienced in the second quarter of last year. RBIS sales were flat and Other Specialty Converting delivered modest growth.

While we delivered solid organic sales growth, adjusted operating margin declined 30 basis points as higher employee related expenses more than offset the benefit of higher volume and productivity. The higher employee related expenses relate in large part to higher bonus expense versus last year. We had unusually low bonus expense last year, particularly Q2, due to poor business performance. The net impact from raw material inflation and price increases was relatively modest in the quarter as commodity costs continued to be relatively stable for us. Our second-quarter effective tax rate on continuing operations was 33%. The year-to-date adjusted tax rate increased from 29% to 34%. We continue to anticipate a full-year tax rate in the low to mid-30% range, similar to the full-year rate for 2011.

Our year-to-date free cash flow in 2012 is significantly improved from last year, due to the lower bonus payments in the first quarter of 2012 versus Q1 2011 and the continued strong management of working capital. I'm pleased with the capital discipline we've demonstrated over the past few years and where we are on achieving our free cash flow objectives for the year. Net debt is down by approximately $150 million from last year, but higher sequentially from March levels due to the seasonality of our cash flow. We are committed to maintaining our strong balance sheet and expect to keep our net debt to EBITDA less than two times for the year. With the strength of our cash flow and balance sheet, we continue to repurchase shares in the second quarter, 2.4 million shares at a cost of $70 million. Year-to-date through the end of the second quarter, the Company repurchased 4.8 million shares at an aggregate cost of $142 million. Now, Dean talked about our restructuring program earlier. These actions will structurally reduce our overhead costs and save more than $100 million. These actions will add to our ability to achieve our financial targets even with uncertain market conditions.

Now, turning to Slide 8, Pressure Sensitive sales were up 6% on an organic basis. An improvement in the year-on-year growth rate versus recent quarters, as we have now lapped the slowdown that began in the second quarter of last year. Label and Packaging Materials volume improved in all regions with mid-single digit growth in North America, high single digit growth in Europe, where we had the biggest decline last year, and double-digit growth in emerging markets. While the sales growth benefited from easier comps to the prior year, volume was good in absolute terms as well, particularly in the emerging markets in North America. Sales in Graphics and Reflective Solutions declined low single digits. The market of this business is more discretionary in nature, and a disproportionate amount of this business's sales are in Europe. PSM adjusted operating margin was up slightly year-over-year as a benefit from higher volume and productivity was largely offset by higher employee related expenses, including incentive compensation.

Retail Branding and Information Solutions sales were flat on an organic basis. As you know, we were hoping for growth in RBIS but the market just isn't there right now. We saw improvement in all segments in the US with the exception of the mass-market channel, while we experienced a general decline in Europe. RBIS's adjusting operating margin declined 160 basis points due to wage inflation, partially offset by productivity initiatives. As you've heard us say, given RBIS's current cost structure and manufacturing footprint in markets with rapidly rising labor costs, this business needs between 1.5 and 2 points of growth in order to deliver incremental margins. As you can see in this quarter we didn't have that, hence the margin compression and our strong push to reduce costs in this business.

Sales in our Other Specialty Converting businesses grew 2% on an organic basis, due primarily to a strong showing in performance tapes. Adjusted operating margin improved 80 basis points as the impact of higher volume and productivity initiatives more than offset higher employee related expenses and other items. The productivity savings in Other Specialty Converting were largely driven by the vertical integration between our RFID division and RBIS.

Moving on to the outlook for 2012, on Slide 10, we've highlighted the key factors that we think will contribute to our P&L and cash flow in 2012. Slide 11 has our EPS and free cash flow guidance. While there remains uncertainty in the macro environment and limited forward visibility, now that we're halfway through the year we've tightened our sales, earnings per share, and free cash flow estimates. Our estimate for organic sales growth is between 2% and 3%. Based on recent exchange rates, the impact from currency on EBIT is now estimated to have an approximate $19 million negative impact versus 2011. Our estimates for the tax rate, capital expenditures, pension costs and average shares outstanding remain unchanged for 2012 from what we shared with you just last quarter. We also continue to expect that the combination of free cash flow and net proceeds from the sale of OCP will total approximately $400 million.

For the big changes to our near-term financial outlook this quarter relate to the cost reduction actions that we described earlier. We anticipate more than $100 million in annualized savings from this restructuring program with approximately $15 million realized this year and most of the remainder to be realized in 2013. To implement these actions, we estimate that we will incur approximately $80 million in restructuring costs, $55 million in 2012 and $25 million in 2013.

Based on estimated sales as well as other assumptions, including the listed factors, we expect adjusted 2012 earnings per share from continuing operations of $1.90 to $2.05, and free cash flow from continuing operations of $280 million to $310 million. Note that the midpoint of our free cash flow guidance has only changed modestly despite the incremental costs of the restructuring program. This is because we expect to offset most of the incremental 2012 restructuring costs with continued tight management of working capital. Earnings in the third quarter are expected to be between 20% and 25% of our full-year guidance.

In summary, the second quarter was in line with expectations. We've demonstrated our commitment to maintaining financial strength while returning more cash to shareholders. And the next phase our cost reduction program will save more than $100 million, adding to our ability to effectively manage through an uncertain macro environment and giving us greater upside when conditions improve. These actions reflect our continued cost and capital discipline and our commitment to delivering better returns. Now, we'd be happy to take your questions.

(Operator Instructions) John McNulty, Credit Suisse.

Just to flush out the cost cutting a little bit, you highlighted four major buckets where you expect the bulk of the savings to come from. Can you quantify how we should be thinking about each bucket in terms of what those savings might be roughly give or take a little bit in each of the segments?

John, yes, this is Dean, good question. I don't think we want to do that at this time because we have not announced all the actions in terms of different parts of the Company. I will tell you that about 80% of the actions we are taking they'll impact SG&A versus the balance obviously coming above the gross profit line.

With regard to the timing of when they hit, I know you said you were hoping by the end of '13 to be at a run rate of $100 million. How should we think about incrementally in '13 versus '12 what the cost saves should be looking out to 2013?

We want to get to the $100 million run rate savings by mid-2013, so a lot of the actions we will be taking between now and the end of the year, I do expect some actions will take a little bit longer, and bleed over into the first quarter of 2013.

Of the $100 million, we are expecting $15 million net to hit this year and the following $85 million to mostly hit 2013 with a little bit blending into '14 for things that are implemented in Q1.

One last question, on your guidance for the full year, looking at the two remaining core businesses, normally your first half of the year seems to be a little bit stronger in terms of earnings than the second half, and yet your guidance isn't really implying that, so I'm wondering what you're thinking starts to improve in the second half of the year so that you have a more even balance this year compared to normal years?

I think, John, the biggest difference is last year, in the second quarter, we basically reversed out our bonuses for the whole first half of the year, so the comps, frankly, get a bit easier in the back half of the year, both on the top and the bottom line.

George Staphos, Bank of America Merrill Lynch.

I wanted to come back to the restructuring relative to the environment. If I was tallying correctly, I think you mentioned an uncertain economic environment being the environment you've got around seven times or eight times on the call, so did anything change over the course of the year that prompted these actions? Or were these actions, Dean and Mitch, that you had been more or less planning on once OCP was done? And if you could provide a little bit more color on that, that would be great.

Certainly, the thinking about eliminating stranded cost after OCP, we took some actions in the back half of last year. But frankly, as we look forward and realize that the economic environment's probably in the near term not going to get much better, that we needed to take actions that would accelerate our earnings power now, and not just simply wait for a rebound in the economy.

On the corporate overhead part, one of the things that we've realized is that we've added a lot of capability to the businesses. We can eliminate activities that formerly were done at the center that can now be done in the businesses. At the same time, the needs of the businesses are different, so they can choose much better how to or what to invest in and at what levels. And I think it will get us definitely a better end result.

There's one other factor here, and that is for some, for example of our businesses, a good example is Graphics and Reflective Solutions, we had decided a couple years ago, after we had integrated the supply chains, that we would leave additional infrastructure in the front-end of the business to try to accelerate growth. And we had set an internal milestone of 2012 being the key when we would be able to demonstrate our ability to grow faster in that business. Now the near-term prospects, given the economy, don't look good, so we simply triggered a milestone and decided to integrate that business and improve the returns immediately.

I think a number of factors have played into this. I would attribute that to, frankly, disciplined management and looking for opportunities for us to hit our commitments to shareholders as fast as we can, even given potentially uncertain economic environment.

Yes, our goal with this, just to add to Dean's points as we both mentioned, is to ensure we can hit the earnings and free cash flow targets that we laid out in May, even if we come in a little bit on the low end of the sales growth. And these -- we're always looking for opportunities to reduce costs. These things have been on our radar and, as Dean said, triggered a few milestones and we are in the works of implementing these things and finalizing the planning in Q2, we are now in a position to announce most of it.

That is very helpful. I appreciate the color on that. One question I had regarding the goal -- in terms of hitting your goals despite the environment, you're purely referring to what you've laid out for 2012, you weren't putting any kind of stake in the ground for '13, i.e., you still expect to be able to grow earnings despite the environment because of the savings that you generate here. Would that be fair that you're only looking at '12 right now in terms of promising on your goals?

We are committed to hitting 10% to 15% net income growth and 15% to 20% EPS growth, but we are not giving 2013 guidance here. And we certainly don't have any insight at this point about what 2013 is going to look like. Again, it just comes back to us achieving those targets, even if the economy looks worse. Let's face it, if it doesn't get worse or it gets somewhat better, there is upside for the business.

George, those are the targets we discussed in May at the investor --

I understand. Was not sure whether you are laying it out for '13 yet. Doesn't sound like you are, but --

No, we're not.

How much of the savings will be actual cash? Will it all be cash, the $100 million? Or will it be some non-cash expenses that you avoid here? What might those be?

Those are pretax cash savings.

The last thing, as you are integrating the labels and the graphics and reflective's businesses, what are the obstacles if any to integrating? What thought have you put into that you can share here about areas that you may eliminate that are key points of connection between the two areas that, if it's now eliminated, might hamper your ability to integrate those groups? And more broadly, are there any areas that you may be looking to eliminate that again our key focal points in terms of how the organization communicates from one end to another that are challenges during the integration? Thanks, I'll turn it over from here.

I'll take a shot at your question, George. I'm not sure I understand it 100%. I don't see any challenges in integrating Graphics and Reflective Solutions into the business. We still will have a separate sales team going after specific markets in reflective and in the graphics business. What we've basically taken out is a lot of the overhead -- we will take out the overhead and infrastructure and some of the G&A costs associated with that activity. And we'll continue to leverage the scale of the Label and Packaging Materials supply chain and procurement operations.

If you are referring to linkages between, let's say RBIS and the materials businesses, there really aren't very many. Actually -- potentially, I think what we have is dyssynergy, trying to manage some things at the center that should be more appropriately managed in the businesses with a focus on what's really driving value there. In other words, RBIS obviously is a different business situation than Label and Packaging Materials and, therefore, may choose not to invest in some things at this point in their evolution.

I was referring to linkages but I will turn it over here, I'll come back in my next queue. Thanks.

Ghansham Panjabi, Robert W. Baird.

Maybe this is a good one for you, Dean. The 3.5% sales growth that you saw on the core basis for the quarter, thinking Q2 '12 versus last year, is this purely a function of easier comparisons from the volume inflection you saw last year or is it some encouraging signs on underlying volume growth?

It's better than just the comparisons. When I look back to 2010, I don't have the numbers here in front of me, I'm feeling pretty good about where we sit today. First of all, as you know, we lost some share in the second quarter last year in Europe in the Label and Packaging Materials business as we pushed prices up. Over this last 12 months, we've recovered some of that market share.

But interestingly enough, we don't have the market data yet, but market conditions still remain stronger than maybe I would have expected, especially in Europe. Emerging market growth has also rebounded quite nicely. We saw double-digit growth in Asia, we saw double-digit growth in Latin America. I'm pleased with how the businesses are tracking there. So far we haven't seen maybe early warning signs of economic slowdowns in emerging markets like we've all been reading about in the newspapers.

And RBIS is a different story, though. RBIS we did expect to get a better rebound in the second quarter. It turned out that April was negative, May was flat, and June we saw some sales growth. And that sales growth has continued for at least the first three weeks of the third quarter. It's modestly looking a little more positive, but we're not taking that to the bank just yet.

To continue that thought on RBIS, why would -- what do you anticipate -- what you allocate that improvement in the intra-quarter trajectory? It seems like the economy's worse, generally speaking, June versus back in April, so why would RBIS improve and continue into the third quarter?

Again, the sales that we capture in the second quarter are really for the fall and winter programs. It really relates to retailer focus on their inventory, on what their prospects are for the coming season. We saw modest improvement in US sourced apparel items, so we saw a plus figure in Europe. It was down very low single digits. And the two sort of offset each other.

I do think we're gaining share in some of our key market segments. It's just not happening fast enough and we're getting zero help from the market. It's really up to us to reconstruct this business model, so we can drive earnings growth with -- in a very conservative market, which I don't believe retailers are going to invest a lot in inventories, at least for not the foreseeable future.

One final question on PSM, Mitch, I think you mentioned labor inflation as it relates to operating margin variance year-over-year. Not a lot of your peers are talking about labor inflation. Just curious as to what's driving that for Avery specifically?

Yes, so my comment on labor inflation was more focused within RBIS, given the high labor content of that business. I commented on PSM about higher employee related expenses, but specifically calling out most of that for PSM was around bonus expense. Last year, Q2, we had very poor performance in PSM and basically reversed out all the bonus accruals that we had from the first quarter as well as the second.

Scott Gaffner, Barclays Capital.

Just wondering, is there any benefit on the tax rate from moving some of these corporate functions overseas into the businesses?

There is not much benefit on the tax rate. There is a modest amount, but most of this activity is not -- with the exception of some of the R&D activity and so forth, is not moving overseas. It's migrating within the US or actually being eliminated.

Moving to PSM, obviously a strong result out of Label and Packaging Materials, but can you talk a little bit more about which end markets were strong? Was it more in the packaged goods end markets or was it more in variable information end markets? Can you parse that out a little bit for us?

I don't have the details here. My sense is that we saw kind of strong growth across most of our product categories, certainly in emerging markets we definitely saw that. We generally have good strength in the films product categories, which tend to be more consumer packaged goods related.

How much did price cost help you out in PSM in the quarter? Was there any big lift from lower resin costs in the quarter and do you expect any lift in the third quarter from the drop in resin costs so far?

Commodity prices have really stabilized for us the last couple quarters, as we've been saying. We're seeing the continuation of the same and the year-over-year organic growth we've talked about in this business and it holds true for all the regions is basically driven by volume. Small puts and takes on price, whether carryover from some price increases that happened last year in some regions or rolling back of some of the surcharges we implemented, but very modest. Overall all the organic growth is largely attributed to volume.

We are actually still raising prices in some economies, especially where currency -- certain currencies had devalued, so there's still some pricing activity going on again and some geographies with declining currency.

I think in RBIS you mentioned that mass market was weak in the quarter? Was there any strength -- any particular strength in any of the other end market channels that is noteworthy?

Yes. I think for us the global retail -- global brands has continued to be an area of strength for us in the US. The premier in mid market was also a strong driver for us. We're definitely seeing some lift because RFID uptick, as well as some of the new embellishments we're selling, so we are gaining some traction there.

Lastly on the sale of OCP, I think you said before you thought it would close in 3Q, early in the third quarter? You still anticipate that early in 3Q and how are you thinking about the proceeds at this point from the sale, the net proceeds?

We've said in the back half of the year, so we'll continue to say that. It's in the hands of the government right now, and they have their process, so when they get done with their process, we'll proceed. In terms of the use of proceeds, I think it's exactly the same as we said before.

Yes. Essentially if you look at the $300 million, just using for simplicity of free cash flow we are expecting from continuing ops plus the $400 million of the net proceeds and free cash flow from OCP, $700 million in total, $100 million will go towards dividends of course. We said we'd pay down some debt commensurate with the amount of EBITDA we're losing and office products. Then the remainder for focus on share repurchases.

So no change from what we showed before.

(Operator Instructions) John Roberts, Buckingham Research Group.

When you take the footprint of RBIS down 20%, is that taking the machines out of the customer site locations that install the ticket tags and what happens to those when they're pulled out if that's what's going to happen here?

No. These are our own facilities that we're talking about, so we have equipment -- printers located -- I would say probably several thousand customers today, so that doesn't get impacted at all. In fact, we are encouraging customers to use more implant printing, because it provides the best response capability for certain market segments.

The imprint plant printing footprint doesn't come down at all?

That's correct.

Secondly on the updated guidance, the $4 million increase in the foreign exchange headwind, how much of that was in the second quarter just reported and how much of that is in the second half of the year?

Very little of it was in the second quarter given that where the rates were at the time because for the second quarter, most this is driven by the Euro, our average FX rate at that time that we used was 1.3. It's now -- what is baked into our second half is roughly 1.25. Knowing rates are slightly lower than that now, so of the extra $4 million I think it's like $1 million or so in Q2. The rest of it is for second half.

Is there any hedge below the EBIT line?

Hedge below -- no. There's no hedge below the EBIT line.

That incremental floor flows all the way down to EPS?

Yes.

Rosemarie Morelli, Gabelli and Company.

I am new to the Company so you will forgive me if I ask a question that everyone knows the result of already. Costs you said have stabilized for you, but they seem to be coming down particularly on the adhesive side of your pressure sensitive? Have you seen some customers waiting to see where the low-end is going to be and holding off on placing orders? Or is that not a factor in your business?

It's generally not a factor, Rosemarie, because the label converting business tends to be a custom on demand business. So customers order when they need the product, so literally, we ship out about 80% of our orders within two days. It's very unusual for customers to -- literally don't have the physical ability to store a lot of our products, so we don't generally see that kind of activity.

Okay, that is very helpful. I was wondering if you could talk a little bit about the different businesses in your other specialty converting, what you saw for each one in the quarter, and your expectations for the second half in 2013?

The largest business in other specialty converting is our performance tapes business. It's a business that serves two primary markets. One is tapes for diapers, frankly, and the other one is tapes used for bonding in a number of industrial applications including things like automotive and electronics. We've seen a decent growth in the business the last couple of quarters, and expect that to continue going forward as we've been able to capture some new business that's going to rollout now over the next couple of quarters.

The second largest business is designed and engineered solutions, which is a specialty label converting business that serves a diverse set of markets including things like pressure sensitive postage stamps, battery labels, labels for automotive, and other functional product, things like valves for coffee bags or for food products. That business showed, as well, decent results for the first half. Then we have a small medical converting business, which has been an investment business for us, good top line growth. It's still an investment, so it doesn't have that much profitability at this point. Then finally, our RFID division is in that category, and we've had a pretty significant year-over-year EBIT improvement in that business that's now been profitable for two quarters in a row.

The RFID is closely linked to RBIS, isn't it?

It is. Much of the sales of that division are sold to RBIS, correct.

If we see RBIS sales growing, then we can assume safely that it is the same case for RFID?

We are growing both externally and with other markets, and the RBIS/RFID sales went up about 35% in the second quarter, so we continue to see growth there.

Thank you and if I may ask one last question. Have you seen any change in the Chinese demand for their own domestic consumption on either the pressure sensitive or the retail business, RBIS?

For pressure sensitive, probably 80% to 90% of the product that we sell in China stay in China on consumer goods. We've seen a rebound since the first quarter and we expect continued double-digit growth there. RBIS is completely the opposite story. Most of the products that we sell in China are attached to soft goods, apparel and shoes, that are exported to Western countries. We have actually a small but growing domestic business for China's retailers and brand owners.

George Staphos, Bank of America Merrill Lynch.

The embellishments business is an interesting business and certainly it's leveraging what you have in RBIS, but it seems like it would be an even more difficult supply chain model than even what you do with tags and tickets. Do you agree with that assessment or disagree and what challenges are you finding there? You mentioned I think 60% growth in the business from a bottom line of revenue standpoint. What's that contribute in the quarter?

Yes. It's pretty small. It's sub $100 million in terms of revenue. It's actually, I think, fairly easy to execute. We are selling to the same customers and we're also using existing assets to do it. I actually think it's a nice add.

It tends to be sold -- the product tends to be sold more to designers. And therefore, it has a slightly longer selling cycle because you've got to get the designers to basically specify the product a couple of seasons ahead when they are planning their work. We're pleased with the traction so far.

Okay, I appreciate that. Back to the question of linkages, I guess what I was getting at, within Pressure Sensitive Materials, to the extent that you are eliminating much of what was the corporate infrastructure, a lot of that was in R&D, are there any areas where you're going to be particularly concerned about sharing of R&D, sharing of best practices since you're now driving a lot of that to the divisions and to the field as opposed to having it in Pasadena?

Yes. I actually think it's a real positive. Our learnings have been that, the more you can get your technical people and your marketing people together, you really accelerate the innovation process. While we have a number of great people here at the research center, frankly, it's isolated as a bit of a silo. We don't have any businesses, especially now with office products being sold, located anywhere close to hear.

We are relocating some people to some of these other locations, and there is a small group of engineers that will also stay here at the corporate center because -- in this case it tends to be more for the manufacturing and engineering part of the business where they don't need to be co-located necessarily. I'm not all that -- I actually think this will enhance our effectiveness.

To your point earlier that maybe having the corporate creates some dyssynergy's, this is what is what you referring to as well?

I think the needs of the businesses, George, are sufficiently different enough that if you try to manage things at the center, trying to average things, when in that case, are probably wrong. We're going to get down to a smaller holding company structure that's very small. We will still have some shared services where it makes sense, where scale really matters like buying things like IT, data management, health and welfare, pension, et cetera. We will still be managed by the center, but fundamentally the businesses are going to drive what services they want and what investments they want to make.

That makes a lot of sense. I wish you well in that endeavor. The last question I had, just housekeeping, your again expecting proceeds on OCP of I think North of $400 million is how you phrased it. When I look at the balance sheet, when I look at the assets and the liabilities held for sale, the net of those two is roughly around $350 million. Does that simplistically, when you do ultimately collect those proceeds, should we assume there's a gain of whatever, $50 million or more that hits you across those three figures or from those three figures? Remind me, initially when you announced the deal I think there were proceeds that you talked about of $550 million but the net of that is the working capital? When it's all said and done? Thanks, guys and all the best in the quarter.

The net of $550 million down to the $400 million it will vary depending upon when this deal closes. If it were to go all the way to December, obviously since it includes free cash flow, as well as the net proceeds, that number would go north, so it's sensitive to when the deal actually closes. The difference between the $550 million and the $400 million, is due to deal costs and taxes essentially are the two largest components. To answer the last part of your question, George, and so that's overall what we are expecting from the transaction. We said approximately $400 million but it can vary depending upon the timing of the close.

As far as the gain question that you asked, yes, we are expecting a gain. Depends again if it were to close today, cost basis of that business is a little bit higher given the working capital investments you have due to BTS. Whereas if it were later, the working capital would be lower and so you have a slightly higher gain salute move quite a bit through the year given the seasonality of the business.

Mr. Scarborough, we'll turn the call back to you for now for closing remarks.

Well, I'd just like to say that we're on track for the year. We're pleased with the performance in our Pressure Sensitive Materials business, and we realize we need to accelerate the performance improvement in RBIS. We have a real urgency to deliver on our long-term targets. And that $100 million plus restructuring improvement plan really enables us to enhance our returns, deliver on those margin targets, in an uncertain economy, but frankly give us some really nice upside when the economy improves. We continue to be committed to capital discipline and returning more cash to shareholders. Thank you.

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.