艾利丹尼森 (AVY) 2012 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 September 29, 2012. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session.

(Operator Instructions)

This call is being recorded and will be available for replay from 1.00 p.m. Pacific time today through midnight Pacific time October 26. To access the replay, please dial 1(800)633-8284 or for international callers, please dial 1(402)977-9140, the conference ID number is 21543232. I would now like to turn the conference over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may begin, sir.

Thank you. Welcome, everyone. Today we'll discuss our preliminary, un-audited third 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 statement 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. I'm pleased to say we had a solid third quarter. Sales were up nearly 6% on an organic basis, the strongest organic growth we've had since the first quarter of 2011. Our strong topline results were driven by continued momentum in pressure sensitive materials and a rebound in the core business of retail branding and information solutions including the accelerating adoption of RFID by retailers.

The impact of higher sales and significant productivity improvements drove higher adjusted operating profit. As a result, we raised our guidance for full-year EPS. We are on track to hit our full-year guidance for free cash flow. As you know, one priority is to return more cash to shareholders. And, through the first nine months of the year, we met that commitment with a dividend increase and by repurchasing 7.7 million shares.

In total we've returned $312 million of cash to shareholders in the first three quarters. Now, turning to the businesses, pressure sensitive materials had another solid quarter on both the top and bottom line. Label and packaging materials grew sales in every region with double-digit growth in emerging markets.

We had a very successful Labelexpo in Chicago this year, launching more than 14 new product and winning the Labelexpo green award for our new bottle to bottle film portfolio which uses a special adhesive that enables more effective recycling of pet bottles. The graphics and reflective businesses also increased sales. And, we have begun to see the savings from that integration with labeling and packaging materials.

RBIS delivered modest growth in sales in the early part of the third quarter, but then finished the quarter with a very strong September. Sales growth was strongest among US retailers and brand owners, reflecting rising confidence about next year's spring season coupled with lower cotton prices.

Not surprisingly, end market demand in Europe remains weak. But, we still delivered mid-single digit sales growth among European retailers through share gains. In fact, we believe we are taking share in both the US and Europe through improved service and new products including our exterior embellishments.

In addition, RFID sales to apparel retailers were up nearly 70% over last year. Item level RFID is clearly accelerating. It took about six years to shift our first billion inlays, but we shipped the second billion in less than 18 months. Demand for RFID inlays in the RBIS business translated into a big improvement in profitability in the RFID division, which is reported as part of other specialty converting.

I'm very pleased with our progress in RFID. At office and consumer products, third-quarter sales were roughly flat compared with prior year. And, we saw improvement in underlying operating profit primarily through productivity gains. Obviously, we're disappointed that the proposed sale of office and consumer products to 3M was terminated.

We have restarted the sale process and have several interested buyers both strategic and financial. That said, even if OCP isn't sold, we expect this business to continue to deliver solid free cash flow. Our restructuring initiative is on track to deliver more than $100 million of annualized savings by mid-2013.

We are creating a leaner cost structure that is enhancing our competitive position and strengthening our ability to increase returns. Turning to the outlook, our updated full-year guidance reflects some caution about the top line. We had a very strong September, but that followed moderate growth in July and August.

Given the short lead times we operate on, we'll need more time to call this a sustainable trend. Now, the first three weeks of October, look right on track with our -- the guidance that we provided in today's press release. Thanks, and now I'll hand it over to Mitch.

Thanks, Dean. As noted, we had a solid quarter with adjusted earnings per share of $0.53. Reflecting continued momentum in pressure sensitive materials and solid progress in RBIS. Sales came in better than expected and we delivered bottom-line results at the high end of our expectations for the quarter.

Net sales grew approximately 6% on an organic basis, as RBIS experienced a rebound in demand especially in September, and pressure sensitive materials continued to recover from the slowdown in the middle of last year. Along with solid organic sales growth, adjusted operating margin increased 110 basis points as a benefit of higher volume and productivity initiatives more than offset higher employee related expenses and the impact of unfavorable product mix.

You'll recall that the higher employee related expenses relate in part to higher bonus expense versus last year. We had unusually low bonus expense last year due to poor business performance. The net impact of raw material input costs and pricing was neutral in the quarter.

Our year-to-date free cash flow in 2012 is significantly improved from last year, due to lower bonus payments in the first quarter of 2012 versus first quarter 2011, and the continued strong management of working capital. We continue to be pleased with the capital discipline we've demonstrated over the past few years. Our net debt is lower than it was at this time last year.

Consistent with our strategy of maintaining a strong balance sheet, net debt to EBITDA from continuing operations was two times at quarter end, and 1.8 times including discontinued operations. With leverage in our targeted range and with our consistently strong free cash flow, we've continued to deliver on our commitment to return cash to shareholders.

In the third quarter we repurchased an additional 2.9 million shares at a cost of $86 million. We talked last quarter about our cost reduction program that will structurally reduce our overhead cost and save more than $100 million annually. We are on track and we continue to expect to achieve these savings by mid-next year.

Turning to the segments, pressure sensitive materials sales were up 7% on an organic basis. An improvement in the year-on-year growth rate versus recent quarters driven by continued momentum and the fact that we have now lapsed the slowdown that began in the second quarter of last year.

Label and packaging materials grew organically in all regions with mid-single-digit growth in North America, low single-digit growth in Western Europe, and low teens growth in emerging markets. While sales growth benefited from easier comps to the prior year volume continued to be good in absolute terms as well. Sales in graphics and reflective solutions increased mid-single digits driven primarily by sales in the reflectives product line.

PSM's adjusted operating margin improved 40 basis points in the quarter as the benefit of higher volume and productivity initiatives more than offset higher employee related expenses and the impact of changes in product mix. Retail branding and information solutions sales grew 7% on an organic basis reflecting increased demand across most of our product lines including another strong quarter in RFID.

As Dean mentioned, the strong growth in the quarter appeared to be driven by retailer confidence in the US and continued share gains in both the US and Europe. As I said earlier, September was a particularly strong month and actually delivered the vast majority of the quarters topline growth for this business. The fourth quarter will represent a better indicator of the strength of underlying demand.

RBIS's adjusted operating margin improved 90 basis points as a benefit of productivity initiatives and higher volume more than offset higher employee related expenses and the impact of changes in product mix due to strong RFID sales. Sales in our other specialty converting businesses declined 1% on an organic basis due primarily to weak performance in performance tapes.

Despite the lower sales, adjusted operating margin improved 500 basis points driven by the increased RFID profitability. Note that the negative mix impact of RFID in the RBIS segment is offset by the profitability generated by RFID in other specialty converting. Moving on to the outlook for 2012, I'll start by commenting on the key factors that we think will contribute to our guidance for the year. Our estimate for organic sales growth is now approximately 3%.

This narrowing of the full-year estimate is due to the fact that we only have one quarter to go. The macro environment remains uncertain and we continue to have limited forward visibility. Based on recent exchange rates the impact from currency on EBIT is now estimated to have an approximately $17 million negative impact versus 2011.

Our estimates for the tax rate and capital expenditures remain unchanged for 2012 from what we shared with you last quarter. And, as for pension, we expect that pension contributions in 2012 will be approximately $75 million now. Free cash flow from office and consumer products in 2012 is expected to approximate $55 million before deal related costs of about $10 million.

Average fully diluted shares outstanding for 2012 is expected to be between 103 and 104 million. The delay in the anticipated sale of OCP to next year has had a minimal impact on our original estimates of average shares outstanding in 2012. The share count at the end of the quarter was approximately 101 million on a fully diluted basis.

So, based on estimated sales as well as other assumptions including the listed factors, we expect adjusted 2012 earnings per share from continuing operations of $2 to $2.05 and free cash flow from continuing operations of $280 million to $310 million. In summary, the third quarter was a solid one with better than expected top and bottom line performance.

Our cost reduction program to save more than $100 million is on track. And, our continued cost and capital discipline enables us to maintain our dual commitment to financial strength and returning more cash to shareholders. In fact, we've already delivered $312 million to shareholders in the first three quarters of the year while maintaining leverage in our targeted range. Now, we'd be happy to take your questions.

Thank you.

(Operator Instructions)

George Staphos, Bank of America Merrill Lynch.

Thanks, hi everyone, good morning. Congratulations on the performance. First question I had, in RBIS, to the extent that your customers could comment and relay what they were seeing in the market what was giving them more confidence in the spring selling season for 2013? And, in general what was behind the September pickup in demand?

Well, George, first of all September usually is the start of the ordering season for the spring. So, that's normal. This September --.

No, I understand that. But, it sounds like it was a year-on-year improvement.

It was definitely a year-on-year improvement. So, a couple of factors. We talked before about how high cotton prices impacted unit demand. Right now, apparel unit costs are about 10% less than they were in the first half of the year. Mainly due to lower cotton and other raw material costs.

Retailers buy, when they buy in an open to buy, they buy on dollars, they don't by on units necessarily. So, what we're seeing there is the impact of lower unit costs for apparel so they're buying more. So, it's the reverse effect of what we saw in 2011. In the US, there is more retailer confidence as they look at consumer confidence rising.

So, I think there's just a little bit more optimism, although I do believe that retailers are still going to keep their inventories under control because we have not seen a significant change in the outlook for -- in terms of the inventory to sales ratio. In Europe, I'd say there's more pessimism. But, we have been able, with our new products and focusing on our innovation center, executed pretty good market share gains in Europe. So, I'm pleased about that.

Dean, Mitch, I'll ask a few questions and turn it over to follow on. Is there a way to quantify how important the RFID capability is in terms of RBIS's improvement in outlook? And then, with office products I realize you're obviously in discussions and hopeful of ultimately selling the business.

Is there a time out in the future whereby if you don't find an offer that's acceptable, that you may consider bringing the business back as a continuing ops segment and when might that be? Thanks.

So, RFID is increasingly becoming a part of the story. I'd say close to one-third of the growth that we had in the quarter was due to RFID adoption. I do want to make the point, though, that the core business of RBIS came back. And so, it's not just an RFID story. The RFID is definitely an add-on.

And, we do see an acceleration of adoption by major retailers. So, we're feeling, I'd say, bullish about the impact on RFID and we are clearly well-positioned as the go to player as companies implement item level marketing using RFID. So, I'm happy about that.

As far as office consumer products goes, we are doing two things in parallel. We clearly have a sales process under way. We have a number of interested buyers both strategic and financial. And, I'm hopeful we'll get more clarity about that -- I'm hopeful that we'll have more clarity during the first quarter. These processes have a life of their own, so it's sometimes difficult to predict.

At the same time, we are working very diligently to understand if we don't get a good offer for the business, how would we manage the business to optimize free cash flow over the next four to five years? We have not invested a lot of restructuring money in this business over the last couple of years because our number one priority is to sell it. But, in my mind, that restructuring plan and the cash that we can get provides a floor versus what we could potentially get in the sale process.

Makes sense. I'll turn it over. Thanks, Dean.

Ghansham Panjabi, Robert W. Baird.

Hi, guys, how are you doing?

Hi, Ghansham.

Okay, Ghansham.

Just to clarify on the RBIS strength in September, first of all, was that equally true in both Europe and in the US? And then, Dean, when would we know whether this was pure pull forward of demand from 4Q which, I think, is one of your stronger quarters versus underlying demand improvement?

We'll probably know the answer to the pull forward in December. Because that's when sales start to taper off. I'd say right now, again, I'll just reiterate the first three weeks of October, pretty much across the board, are reflective of the guidance we put into play. We just won't know. We just don't have that much forward visibility.

Got it. And then, in PSM, a couple of consecutive quarters of nice positive growth and it seems pretty consistent across the major geographies. Can you give us an update on what you're seeing in the world? It seems to be very counterintuitive to what we're hearing from a lot of other companies with a lot more industrial exposure. So, just wondering why there's a deviation here.

Recall that we had somewhat easier comps year-over-year because we started to see a slowdown and we did have some share loss beginning with the second quarter of 2011. I think the teams have done a great job, though, recapturing some of that share with some of our new innovative products as well as a focus on some certain product segments.

And, I feel, we don't have the numbers yet, but I feel pretty confident we've regained some of that market share. North American business, though, seems to me to be trending a little bit with the market. In terms of we definitely hear from label converters in the US, business conditions are more positive than we hear from Europe.

Although, I have to say, most European customers, based on what I hear, their outlook is a lot more positive than when you read the financial times. Which is focused probably mainly in the financial sector than it is basic operations and consumer sector.

Got it. And, just one final one on RFID. Where are you seeing the most momentum from a geographic basis? Is it Europe? North America? Equal?

It's North America right now, for sure.

North America. Okay, great. Thanks, so much.

Scott Gaffner, Barclays Capital.

Good morning.

Good morning.

Good morning.

Just following up on that RFID question, are you seeing most of the adoption within the vertical retail channel? Are you seeing it throughout the various retail segments that you cover? Can you just give us some color there?

Yes. Mainly in what we call premier and midmarket, which includes department stores, is probably the major driver right now. And then, I would say following that would be vertical retail.

And, is it really just loss prevention that you think is driving this? Or is it more an idea that your customers want to control their inventory levels? Which is -- what do you think is the driver?

It's 90%, it's 90% all about inventory. And, making sure that you have exactly what you're supposed to have on the floor to enhance sales. And, what we then find is that once retailers get those systems put into place, you can enable loss prevention at a very low incremental cost to that. So, that comes as a secondary benefit.

And, are you saying -- I think a lot of these retailers are actually using their stores more for their -- as warehouses for their e-commerce businesses? Is that -- have you heard that as a driver as well?

I don't think that's the main driver. We do know that retailers -- when they sell online and at the store, those stores become places where customers return things as well as pick them up. So, it actually provides, in a way, more opportunity for us because now remarking items at a store is actually more important than it's been before. So, we do have a number of solutions that we offer retailers that allow them to price mark and remark garments right in the store. And, it's very much synchronized with their overall systems.

Okay. Thank you, very much.

John McNulty, Credit Suisse.

Hi, this is [Abu] sitting in for John. A couple quick questions. On the restructuring, of the total savings in the restructuring program, could you maybe provide us with the run rate level that you had at the end of the third quarter? And, maybe what level you think you'll exit the year with?

Yes, so, we are -- what we provided last time is we said we expect about $15 million of the $100 million plus of savings to hit this year. We are expecting a little bit more than that now to hit this year. Closer to $20 million. And, a lot of that is back half weighted, so the run rate's obviously higher than that. With the remainder of it hitting in 2013 and it will be in the run rate by mid-next year.

We do have some transition costs, though, that will also impact us in the back half of the year.

Yes, so, that roughly $20 million is net of some transition costs. If you look sequentially, Q4 versus Q3, there's actually the incremental savings you'd expect in Q4 versus Q3 is offset by some transition costs we have for one of the specific actions.

Okay, got it. And then, just a quick follow-up. Earlier this year you laid out a target of $1 billion to $1.5 billion to be returned to shareholders over the next several years. Could you maybe provide an update to this range given the delay in separating OCP? As well as maybe how this would be split up between buybacks, dividends?

We haven't provided an update to the range. But, the way to think about this is if the sale does not go through, we've provided some data points for 2011, what the EBITDA was, you can see free cash flow for this year. So, we will still have free cash flow for that four year period.

But, in addition to that, we would not need to deleverage as much as what was in that model because we still have the EBITDA from office products. So, if you go through the math, you'd see that we're definitely looking at well over $1 billion of cash flow to distribute to shareholders over that timeframe.

Okay, great. Thanks, very much.

You're welcome.

John Roberts, Buckingham Research group.

Good afternoon and nice quarter.

Thank you.

Your tax rate used to be a lot lower before you went through the dip in the regional shift in business. I don't expect it will change in the fourth quarter here, but as you get into 2013 has your mix shifted back enough towards the back half of the year here that you might have a lower tax rate next year?

Yes. So, our tax rate isn't where it is right now, and we're not providing guidance for next year. We did say as earnings go up, it will have a little bit of downward pressure on our income tax rate.

One of the biggest factors for us, though, and uncertainty for tax rates in the future is really around the repatriation of cash into the US and what the laws will be prevailing over the coming years. So, that will have the biggest single impact. The cash tax rate, so how much cash we actually pay, has been in the upper 20%s and has continued to trend down. And, we would expect that still to be in that upper 20% range next year as well.

Thank you.

Silka Koopf, JPMorgan.

Hi, good afternoon, it's Silka Koopf for Jeff Zekauskas. How are you?

Doing well.

Good, hello, Silka.

Have prices in the pressure sensitive materials segment begun to reset given that raw material costs are also moving lower?

I'd say the trend is fairly stable. And, we did lower -- on a year-over-year basis, we had used some surcharges in 2011 as a way to raise prices and some of those surcharges have rolled back, definitely. But, when you look on a net net basis, between pricing and material costs, essentially it's neutral.

So, neutral means you don't think you had any margin expansion from raw material costs moving lower?

No.

Okay. Do you expect to see any going forward if you're prices hold stable?

Depends on what raw material prices do. I'm expecting more of, I think, a stable raw material environment going forward. The big factor, actually, that we had in the quarter was more mix. We're growing faster in some of the paper and durable information product categories which has a little bit of a downward impact on the margin. Still a profitable business, just not as profitable as some of our films business.

Okay. And, I also have an RFID related question. My recollection is that your goal was to maybe have RFID item level sales maybe at a run rate of $100 million? And, I was wondering how far you've gotten so far?

We'll be pretty close on a run rate basis by the end of the year.

Okay. And, the way it works is that the label itself is manufactured in other specialty converting and then it is transferred in some form, I guess, on a cost basis to the RBIS business. And so, if I look at other specialty converting is that business now breakeven? Or is it profitable? Or how do I think --?

It's profitable.

It's profitable?

Yes, so, what we do is we buy chips. And, we make antennas and we attach the chips to the antennas and put it on plastic, basically a roll of plastic. That plastic inlay, once it is delivered to RBIS and inserted into tag or care label, whatever the form factor is for the retailer, the RFID business has been profitable for three quarters in a row. And, I expect that to maintain on a go forward basis.

Okay. And lastly, I was wondering what -- how much of the pension contributions that are required for this year have already been made.

A majority of them have already been made for the year. Not all, but --.

So, at $50 million contribution already, something like that?

We made something north of that. So, most of them have been paid but not all of t hem.

Okay. Thank you, very much. I'll get back into queue.

Chris Kapsch, Topeka Capital Markets.

Hi, I had a follow-up on the RBIS segment. Just wondering if you could qualify or even quantify how your margins for that item level RFID business compares to the core products within the segment? And then, just curious if looking at that business and your goal to double operating margin by 2015, wondering how important the growth in RFID plays into that goal or projection?

Well, if you look at the RBIS segment alone, the actual margin percent for RFID is lower than the average. Mainly because we're selling -- instead of selling at, say, $0.01 to $0.02 tag, we're selling at a $0.09 to $0.10 tag. So, the margins per-unit are higher but the margins on a percent basis are lower. Now, that doesn't include the profit we get from making the inlays at the same time. So, overall, I think from a company perspective, it's good for us.

Right. It sounds maybe like your RBIS segment could beat up its supplier a little bit for a little bit better price, right?

Well, we may decide to change --.

I'm kidding.

They manage it today so they'd be beating themselves up.

Right. Okay. And then, I just had a follow-up also on the commentary around market share in that segment. Obviously, there's one of your competitors has been struggling and internally focused on rationalizing that business.

I'm just wondering if the nature of the share gains that you've seen, is it something that -- is it where you're doing something that customers are coming to you because you have a better proposition? Or is it really just a case here where one of your competitors is feeding share because they're in a rationalization mode?

Well, we've been gaining market share over the last, I would say, 8 to 10 quarters. And, I believe it's because we fundamentally have been improving our value proposition. We've improved our service, we have more innovative new products out there, like the external embellishments, we've invested in inundation and innovation center for customers to visit.

So, I think we've been doing a good job there. Clearly, there have been some customers that have come to us and said, we need some help. And so, I would say that's a small part of our share gains during the quarter. It's certainly not the majority.

Okay. Well, thank you, very much.

Scott Gaffner, Barclays Capital.

Thank you. Just a follow-up on -- two follow-ups on OCP. One, you mentioned that you thought the process could play out into 1Q '13. I just wonder if maybe some of these potential bidders, whether strategic or financial, were in the process before, such that the process could actually take less time this time around?

Well, that's exactly the case. And so, we have a number of potential buyers that were in the first process. So, I think for them, it will be relatively rapid. And, again, I'm always cautious. These processes always take a little bit longer than the bankers tell you that they take. So, the last time, it took almost a year. So, just a little over a quarter for me is certainly a shortened time frame.

Okay. And then just following up on George's question from earlier about bringing this business back into continuing ops. Is there anything from a regulatory standpoint where you have to bring this back into continuing ops at a certain point in time if a sale does not occur?

Well, technically after a 12 month period, but because we've restarted the new process, the clock starts again.

Okay. All right. Thanks a lot. Appreciate it.

George Staphos, Bank of America Merrill Lynch.

Thanks, hi everyone. Dean, quick question. Just -- you mentioned surcharges rolling off that had been put into place in '11 over the course of this year. Would that suggest that there was some margin capture this year that might not recur in 2013 as we're thinking about the forecast? Or is that really a nominal factor, if you will, as we look at two '13?

Yes. I -- there's so many factors that come in to the impact of the margin. So, there's volume, there's mix, et cetera, et cetera. I don't think we'll be anything material in there, George.

I think one of the things Dean mentioned earlier, George, is when we're talking year-over-year recall we did lose some share, particularly in Europe, last year. So, part of that recovery is just recovering what was lost.

No, I understand. But, that would be separate from any incremental price that you've had this year that you won't have next year. But, again, hopefully you'll offset that with the operating leverage from the share gain. Could you also discuss what the margins are for RFID within specialty converting? Are they above or below average relative to the segments total?

The segment -- our margins for RFID in other specialty converting, is that your question?

Correct.

Yes, so the margins are actually relatively high, because you've got profitability without a whole lot of sales because the sales are actually eliminated within other specialty converting for what's sold to RBIS. So, yes they are higher than the average.

Okay. And, could you remind us, what -- that suggests that there's been a fair amount of drop off in that segment in other businesses, given the economic choppiness over the last two to three years. Could you remind us what's left in that business that's not RFID? That was around, say, three, four years ago as well?

So, we have our performance tapes business. Our design and engineered solutions business, so it's basically an industrial converting business that includes some things like stamps and batteries. And, I don't think -- there's not been a material change in the performance of those businesses. Every -- it's such a small segment, it's not even technically a segment, but it's so small that a little bit of changing profitability makes the margins swing quite a bit.

I'll give you an example. We do postage stamps for the US Postal Service. They ran out of money in the third quarter. And so, they didn't or anything. Now, they're starting to order a gain. So, that had given -- even in a small segment like that it had an impact.

Understood. I guess the last question and I'll turn it over, have you seen any impact -- any impact's not the right term, have you seen any increases in capacity in pressure sensitive material in a meaningful way in any of your geographies? One of your competitors has announced here and there some smaller things, but I'm not sure that that's really a meaningful impact to capacity. But, wanted to get your thoughts, thanks.

We haven't seen any material adds in capacity. Really, in any region. I mean, of the investments that I'm aware of, there's been some limited additions to capacity in China. You mentioned one of our competitors added some specialty capacity, but that tends to be for a small segment of the market. It's just not material.

That was wine, correct Dean?

Say again?

Wine labels. That was for wine labels?

That was likely one of the target segments, sure.

Yes. Okay. Thanks, very much.

Ghansham Panjabi, Robert W. Baird.

Yes, hey, guys. Just a quick follow-up. On the PSM business on a geographic basis, was there any major deviation in trendline during the quarter in terms of growth year-over-year? And, also, can you just comment on what's on October as well? Thanks.

I think North America grew in the mid to high single digits, Europe was in the low single digits. Latin America was very strong, double-digit growth as well as Asia-Pacific. So -- and, I haven't really seen in three weeks -- I wouldn't call any other trends -- the first week of October is Golden week in China. So, it's slower right now, but I expect it to pick back up as the quarter progresses.

Just to confirm --.

And, Ghansham, as far as the trend within the quarter, the growth was pretty consistent throughout the quarter. It builds up a little bit later in the quarter but on a modest level. RBIS was the standout where it had exceptional and most of its growth all in September.

Okay, great. Thanks, so much. Good luck in the quarter.

Thank you.

Todd Wenning, Morningstar.

Good morning, everyone.

Good morning.

Could you give us your general take on what you're seeing in China over the past few months?

It's been -- China has been choppier than I recall. And -- but, still it's been growing the last couple quarters at a double-digit rate. So, I feel like at least the consumer sector of China is what drives our pressure sensitive materials business.

I think the export and the investment sectors of China have had the biggest part of the downturn. Whereas consumer side seems to be doing okay. Even though it's relatively -- the developed market is a smaller percentage of the economy.

Excellent, thanks. And then, based on the prices you bought back stock in the third quarter it seems that most of the transactions were made early in the quarter before some of the concerns about the deal surfaced. So, has the delayed OCP sale affected your approach to buybacks at all?

Well, the timing of when you receive that amount of proceeds obviously impacts how much share you're going to buy back and the timing of that. But, we don't comment on the pace or timing of when we do share repurchases. You can see it had a modest impact on the amount of shares expected to be outstanding for the full year.

We were at 103 million before, we're now saying it's going to be between 103 million and 104 million. So, it did have some impact but we're not going to comment on the specific timing.

All right, great. Thank you, very much. Good luck in the quarter.

Silka Koopf, JPMorgan.

Hi, thank you. I have a short follow-up. So, it says the reported earnings including discontinued operations was $0.57 in the quarter. Was that excluding the -- is this an adjusted number excluding the nonrecurring items?

So, the $0.57 is GAAP including discontinued operations.

Is GAAP. How much would be in non-GAAP including discontinued operations?

So, it's -- in this quarter, the $0.20 GAAP that you see for discontinued ops is the same for pro forma. So, you can just add the $0.20 to the $0.53 that you see to get $0.73.

So, you get $0.73. So, versus $0.53 that means the office products division earned $0.20 this quarter.

Yes.

And so, $0.20 is 101 million shares out. Now a tax effect it, I don't know, 3%. So, that means the business is at a run rate of like $29 million in EBIT? Something like that?

You have to recall that this business is -- has had a lot of seasonality to it. And, Q2, Q3 are the peak for back-to-school. And, we talked last quarter that some of the back-to-school timing had shifted into Q3. So, Q3 was relatively strong relative to the rest of the quarters.

Those are higher than any of the numbers I remember from 2011 when you still reported the business. So, it seems to be doing well.

I think the third quarter, again, because seasonality back-to-school moved more in the third quarter, than it did in the fourth quarter -- sorry, than last year, so I mean, they did have a good third quarter.

Yes.

Yes, but even the second quarter --.

Silka, back before we reported it separate, Q2 and Q3 were always the highest EBIT quarters for that business.

But, last year, it was around $22 million in the second quarter and the third quarter was $21 million. So, these numbers -- these are still much higher than what it was in ' 11.

If you're trying compare to the old information when it was in continuing operations, you must recall that the corporate allocations that get pushed back in the segments are no longer happening for a discontinued operation. So, these results are not apples to apples with the numbers you're talking about for Q3 of last year.

I see. So, what are the stranded costs --?

Silka, we restated and gave multiple quarter information. I think it was back in February, and we'd be happy to go over that with you as well and help identify where those prices are.

Right. Just a ballpark number of stranded costs on annualized basis that you would allocate to the business?

The stranded costs are changing dramatically given all of the cost reduction and so forth that we're going through between the cost reduction we get now this last July and the July before that. So, there's a lot of moving parts. And, talking about the stranded costs I think would not get to the end you're trying to achieve. So, we'd be happy to go over it with you later.

Okay.

We've eliminated all the stranded costs related to office and consumer products. After doing that, were also structurally reducing the amount of overhead as well. So, if you think about it just in those terms, those stranded costs are gone. But, that still won't give you the comparison I think you're looking for.

Okay. Thanks, very much.

You're welcome.

Rosemarie Morbelli, Gabelli and Company.

Thank you for taking my question. Considering the change in leadership, and what I believe is going -- or at least what I read is going to be approved to help consumers as opposed to growing towards infrastructure, how much help could you get if something actually does happen in that particular category? And, what is your overall exposure into China?

So, China -- it's a good question. I don't believe that the new leadership change in China they're going to want to see the economy slowdown. So, I anticipate that there will be some more stimulation measures taken. The pressure sensitive business really is, I'd say, 80% dependent on consumer demand in China.

And -- which I think is a good factor. And, I know the Chinese government wants to continue to shift a higher percentage of their GDP over time to being driven by consumer spending rather than infrastructure or exports. So, anything that helps the Chinese consumer will help our pressure sensitive business on a go forward basis.

The RBIS business, though, is really driven by apparel. And, worldwide apparel trends and how much of that is made in China. It's still a very important factor for us. But, I think the factors impacting RBIS are more about apparel costs and consumer confidence in mature markets.

And, what is your overall percentage of your overall business in China? If that is a relevant number?

We don't disclose that, but more than one-third of our sales, about 35% of our continuing operations, are in emerging markets. And, that includes the emerging markets in Asia, Latin America, and Eastern Europe.

And, if I may ask one last question. If my memory serves me right, which is never sure, but aren't you planning and pushing your RBIS business into other regions in Asia like Vietnam or, I don't remember, Thailand, I believe? Is there some kind of a shift going on?

So, we have manufacturing operations for RBIS where for apparel is made. So, for example, we have large operations in South Asia, which would include India, Bangladesh, and Sri Lanka. So, those are -- especially Bangladesh is a growth area for apparel production. Just as Vietnam and Indonesia are growth areas for apparel production. They're taking some share from China. So, we're well-positioned to capture apparel demand pretty much no matter where it's manufactured.

Okay. And, there is no difference in the profitability in one of those new regions versus China? For example?

Some are better and some aren't.

Okay. All right. Thank you.

Mr. Scarborough, I will turn the call back to you now, sir, for your closing remarks.

Thank you, friends. So, just to summarize, we are pleased with our third quarter performance. Our pressure sensitive materials business is executing well. With continued growth in emerging markets. And, innovation driving decoration transfer and share gains all over the world including Europe and North America.

And, I'm also pleased with the ongoing integration of our graphics and reflective businesses as well as the research center. Those remain on track. The RBIS core business has rebounded sharply now that apparel unit costs have dropped. And, there is some rising retailer confidence in the US.

RFID continues to penetrate. And, we're also delivering nice returns from that business as well in both the RBIS sector and other specialty converting. And, we're going to continue to drive RBIS, drive topline performance while continuing to reduce our fixed costs. That's a big part of the story.

The office of consumer products business, obviously disappointing news with the termination. But, again we have restarted the sale process and we're hopeful to get resolution on that in the first quarter of next year. We're on track with free cash flow. And, I'm really happy and just delighted to deliver more cash to shareholders in 2012 and certainly we have the past couple of years.

And then, I really need to thank the Avery Dennison team from around the world who are continuing to work safely, working to improve quality and service, and focused on customers while also driving big productivity gains from a number of the actions that we're taking all around the world. It's not easy. And, I want them to know I really appreciate their results. So, thank you, operator, and we look forward to talking to you in the new year.

Ladies and gentlemen, this does conclude 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.