艾利丹尼森 (AVY) 2013 Q4 法說會逐字稿

Hello ladies and gentlemen. Thank you for standing by. Welcome to Avery Dennison's earnings conference call for the fourth quarter and full year ended December 8, 2013.

(Operator Instructions)

This call is being recorded and will be available for replay from 12 PM Pacific time today through midnight Pacific time February 4. To access the replay, please dial 1-800-633-8284, or for international callers, please dial 402-977-9140. The conference ID number is 21676580.

I'd like to turn the conference over to Eric Leeds, Avery Dennison's head of Investor Relations. Please go ahead, sir.

Thank you. Welcome everyone.

Today we'll discuss our preliminary unaudited fourth-quarter and full-year 2013 results. Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The company's office of consumer products and design and engineered solutions businesses are classified on our income statement as discontinued operations. The company completed the sale of these businesses on July 1, 2013.

The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP in the appendix of our fourth-quarter and full-year 2013 financial review and analysis and on schedules A-2 to A-5 of the financial statements accompanying today's earnings release. We remind you that we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements remain subject to the Safe Harbor statements 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 turn the call over to Dean.

Thanks Eric, and good day, everyone.

I'm very pleased to report our sixth consecutive quarter of better than 30% growth in adjusted earnings per share, reflecting the successful execution of restructuring actions and other productivity initiatives, as well as better than expected sales growth in both of our core businesses.

2013 represented another year of excellent progress toward our strategic and long-term financial goals. We've accomplished a major milestone with the sale of office and consumer products and designed and engineered solutions businesses. The midyear completion of this transaction has streamlined our portfolio and allowed us to focus on our two industry-leading core businesses to drive long-term sustainable growth and economic value.

Both PSM and RBIS delivered strong financial results, while continuing to invest to drive future growth and productivity improvement. Both businesses beat their sales growth targets for the year. As a result, we accelerated total organic sales growth by nearly a full point compared to the pace of the prior year, delivering results near the high end of our long-term target range of 3% to 5%.

Within the Pressure Sensitive Materials segment, the Label and Packaging Materials business continued to benefit from the relative strength of emerging markets, as well as solid growth in North America and Europe, driven by innovation and share gain. The smaller divisions in Pressure Sensitive Materials grew faster than the segment average. Performance tapes delivered exceptional growth in the fourth quarter, due in part to the successful execution of a strategic partnership with one large customer, while the Reflective Solutions business sustained double-digit organic growth throughout the year.

Our investments in innovation are paying off in terms of both new product sales, as well as material cost reduction. About one third of our growth in 2013 came from innovation projects launched since 2011, and that exceeded our target for the year.

Retail branding and information solutions delivered excellent growth in the first half of 2013, against relatively easy comparisons and solid growth in the second half against tough comps. Overall, the business beat its sales growth target for the year, driven by share gain and continued momentum in RFID and brand embellishments.

I'm particularly pleased with the gains we're seeing in RFID. Even with the headwind of the prior year pipeline fill, the team delivered 24% growth during the year. 20 of the top 30 retailers in the US are now testing or already using RFID. We are seeing several new installations taking place in Europe, as well.

Finally, Vancive medical solutions, our small but high potential medical products business, achieved a number of key milestones, including the commercialization of new antimicrobial dressings that are more effective in preventing wound infection in hospitals and also more cost-effective than existing products. This and other key developments with wearable sensors position the business for double-digit growth and improved returns this year.

Overall, 2013 was also a pivotal year in terms of our operating efficiency as the aggressive organizational changes we undertook in 2012 really paid off. With the successful execution of this program, we established a new baseline for our underlying cost structure, further strengthening the competitive positions of both PSM and RBIS.

We also delivered free cash flow above the high end of our expectations. As Mitch will explain, some of that over achievement was due to timing, and we will see that offset here in the first quarter. But, even adjusting for that timing affect, we delivered solid free cash flow for the year.

As promised, we are using proceeds from the divestitures and ongoing free cash flow to enhance shareholder returns. In the past year, we returned nearly $400 million of cash to investors through dividends and the repurchase of 6.6 million shares. We will continue our disciplined approach of returning excess cash in 2014 and beyond.

Of course, the year was not without its challenges. The graphics business within PSM came in short of our expectations, especially in Europe, where sales declined and we failed to achieve our profit improvement targets due in part to a negative shift in product mix.

Negative product mix in the Label and Packaging Materials business likewise worked against us this past year. So we didn't see as much of the benefit of the incremental sales growth as we would have expected, particularly in the fourth quarter.

In response to those challenges, we are putting more emphasis on improving product mix. In addition, we recently announced our intent to close an old manufacturing plant in the Netherlands, while consolidating operations and investing in new production capabilities elsewhere, to improve the competitiveness of the European graphics business. This restructuring plan represents a modest headwind to adjusted earnings in 2014, but will drive savings when completed in 2015 and deliver a strong return on investment.

While we are pleased with the progress we've made over the past two years, we won't be satisfied until we achieve all of our long-term goals. And, our objective for 2014 is to continue to deliver on these commitments.

We are investing in innovation and capacity expansion in key growth markets. Specifically, in pressure sensitive materials, we are adding assets in Asia for performance tape and specialty coating.

In RBIS, we are investing in RFID and heat transfer assets to support growth and productivity improvement in these key segments. We are also continuing to execute our digital investment strategy to better meet the rapid turnaround times that customers require while improving operating efficiency on the quality and consistency of our products.

We increased digital printing capacity by over 60% over the past two years. Over one third of graphic tags and labels are now produced with digital printers, and we are targeting to increase next year to over half our total production.

I mentioned in last quarter's call that sustainability has become a key theme for many of our investments and innovation. I believe that sustainability can become an important competitive advantage over the long-term, and we will continue to invest in opportunities that benefit both our businesses and the communities in which we operate.

Finally, identifying and executing ongoing productivity initiatives will continue to be a top priority for all of our businesses. Besides the major restructuring plan for Europe, PSM will continue its ongoing efforts to reduce material and manufacturing costs through process innovation and material substitution. RBIS is right on target with its footprint reduction strategy, taking out close to 20% of its square footage since 2011.

Our financial guidance for the year assumes 3% to 5% organic sales growth. Consistent with our long-term range, which we believe to be prudent, given our limited forward visibility. We expect adjusted earnings per share to grow between 8% and 19% this year. We expect to deliver solid free cash flow and continue to execute our disciplined capital allocation strategy and returning excess cash to shareholders.

Now, I will turn the call over to Mitch.

Thanks, Dean.

As you can see, we had a strong year with adjusted earnings per share growth of 37% reflecting the successful implementation of a restructuring program and solid growth in both pressure sensitive materials and retail branding and information solutions. We achieved organic sales growth of 5%, adjusted earnings per share of $2.68 and free cash flow of $330 million for the year, all in line with our long-term targets and at the higher end of the guidance that we provided at the beginning of the year.

In the fourth quarter, we delivered solid results was 6.6% organic sales growth and adjusted earnings per share of $0.69. As Dean mentioned, fourth-quarter sales were well above expectations, particularly lower margin products in pressure sensitive materials. Adjusted operating margin in the quarter grew 110 basis points to 7.4% as the benefit of our productivity initiatives and continued solid top line growth in both segments more than offset the negative impact of product mix and PSM and higher employee related expenses.

As part of our restructuring program initiated in the first half of 2012, we realized $15 million of savings in the fourth quarter, and $75 million in the full-year. Restructuring costs net of gains on asset sales were about $3 million in the fourth quarter, and $23 million for the full year.

Full-year free cash flow from continuing operations was $330 million, above the high end of our range, primarily due to the timing of both receipts and payments at year-end. The timing of receipts and to a lesser extent payments is relatively volatile around year-end due to the holidays. Based on past trends, we estimate approximately $30 million of cash flow was pulled from the first weeks of 2014 into 2013.

As expected, the net proceeds from the sale of OCP and DES came in at about $390 million. As we mentioned in October, we used $50 million of the net proceeds to make supplemental pension plan contributions in the fourth quarter and, as a result, we are currently comfortable with our current pension funding status.

Given our solid free cash flow and the proceeds from the divestitures, we are below our targeted leverage position, giving us ample capacity to continue to return cash to shareholders over the coming years, and we will continue to do so in a disciplined manner. Speaking of which, we repurchased an additional 1.3 million shares for $60 million in the fourth quarter, bringing the total for 2013 to 6.6 million shares repurchased $283 million.

Turning to the segments, Pressure Sensitive Material sales were up approximately 8% on an organic basis in the fourth quarter and 5% for the full-year. Label and Packaging Material sales were up mid single digits on an organic basis in the quarter, while the combined sales for Graphics, Reflective and Performance Tapes increased low double digits. Performance tapes had a particularly strong quarter with growth of 20%, while Reflective's business continued to be in the low double-digit range.

On a regional basis, North America grew low single digits, Western Europe grew upper single digits, and the emerging markets grew low double digits. PSM's adjusted operating margin improved 100 basis points to 9.6% in the quarter as the benefit of higher volume and productivity initiatives more than offset the changes in product mix.

The higher than expected sales in the quarter did not translate into as much profit as one might otherwise expect, as the unfavorable mix trends we have been talking about over the past few quarters continued. As Dean mentioned, we are putting more focus on improving mix in this segment. Despite the mix challenges, PSM delivered an adjusted operating margin of 10.2% for the year, an expansion of 1 full point versus 2012.

Retail Branding and Information Solutions sales grew about 3% in the quarter, and up 5% for the full year. The quarter sales growth was relatively strong given the tougher comps in RFID that we have been speaking about. This strong growth reflects continued solid demand among North American retailers and brands and strong demand for European retailers and brands.

RFID in the quarter declined almost 5%, yet grew nearly 25% in 2013, contributing almost one third of RBIS's overall growth for the year. RBIS's adjusted operating margin improved 140 basis points to 7.5% as productivity initiatives and higher volume more than offset higher employee-related expenses.

For the full-year, RBIS's adjusted operating margins was up 120 basis points to 6.3%. Sales and other specialty converting, which is now solely comprised of our medical business, grew 7% in the quarter and had an operating loss similar to that of last year.

Two years ago, we established long-term targets to aggressively improve returns through profitable growth, productivity and further capital discipline. We are on track to deliver these 2015 goals.

PSM has increased its growth rate to 4% on average over the last two years, and has expanded the adjusted operating margin of the business from approximately 9% to 10%, achieving the high end of our target. RBIS continues to make excellent progress towards its long-term goals. Adjusted operating margin of this business has expanded by over 100 basis points in each of the last two years. We know we need to continue to deliver over 1 full point of margin expansion in both 2014 and 2015, in order to achieve our goals, and that's what we intend to do.

As for the total company, organic sales growth has come squarely within our range of 3% to 5%, with growth just over 4% for the past two years. Adjusted EPS has increased at a compound growth rate of almost 30%, consistent with our 15% to 20% plus target. And, as I mentioned earlier, we are below our targeted leverage position, which combined with our consistently solid free cash flow enables us to continue to return cash to shareholders.

Now, these targets are all focused on 2015, and as 2015 is getting closer on the horizon, I want to mention that we will be hosting an investor meeting in May where we extend our long-term targets. We will be reaching out to you all shortly on this.

So, looking more closely at 2014, we expect adjusted 2014 earnings per share from continuing operations of $2.90 to $3.20, reflecting growth of 8% to 19%. This guidance is based on a number of assumptions, including the key factors listed on slide 11, to highlight a few.

To start, our 2014 fiscal year contains 53 weeks ending on January 3, 2015. The extra week will be in the fourth quarter and is expected to add about 1% to recorded sales with no impact to organic sales growth.

The extra week crosses over the New Year's holiday, so it's usually a low-volume week with little to no earnings. The extra week is also expected to have a negative impact on free cash flow due to the timing of a number of factors, including an extra payroll payment. Our estimate for organic sales growth in 2014 is between 3% and 5%, consistent with our long-term targets.

Now, we've recently experienced some modest inflationary pressure for certain raw materials, some of it currency induced. We are working to mitigate these challenges to our global sourcing organization and productivity actions. Should these actions prove insufficient to recover rising costs, we will raise prices. Speaking of which, we recently announced modest price increases in a few select regions and product lines.

Incremental savings from the restructuring actions are estimated at approximately $40 million for the year, more than half of which represents carryover savings from actions already taken. Total restructuring costs that are adjustments to GAAP results in 2014 are expected to approximate $45 million pretax, which includes the cost for continued restructuring within RBIS and the intended consolidation of our graphics capacity in Europe that Dean referenced earlier.

Free cash flow is expected to be in excess of $300 million after investing approximately $185 million in capital expenditures. And, we are estimating 97 million shares outstanding on average, which includes an estimate of roughly 2.5 million shares of additional dilution in 2014.

In summary, 2013 was a pivotal year for us, a year in which we focused the portfolio, made a step function improvement in our operating margins and returned almost $400 million to our shareholders. Our two core businesses are market leaders and are well positioned for profitable growth, which, combined with our continued cost and capital discipline, enables us to expand margins, maintain our financial strength and return cash to shareholders.

We are pleased with the progress we've made toward our long-term targets, but we are not content. We are as focused as ever on driving profitable growth and further increasing returns.

I will open it up to questions.

(Operator Instructions)

Scott Gaffner with Barclays.

Just looking at the restructuring expense you are going to back out in 2014, you talk about $45 million. Mitch I think you mentioned net $23 million of spend in 2013. As far as the $45 million, you mentioned some RBIS and some consolidation of the graphics business.

Why the acceleration of the restructuring spend, though in 2014? Are you identifying more projects? Or, any color you can provide around that would be great.

Scott, the decision around graphics is something we hadn't communicated previously. As we looked at the market there, we realized that we could get another step function level of improvement by closing an existing factory and putting a new, more modern asset -- a new coating line and another facility in Europe, basically take out the fixed cost of that factory.

So, this is a new program. But, one we think will really accelerate our competitiveness in that business.

As far as the comp versus 2013, the 2013 number includes gains on the sale of a number of assets, our headquarters and some other facilities. If you exclude all those gains, we are actually in the low $40 million worth of spend in 2013, as well.

Okay. I guess if I look back to 2011, 2012, it looks like you spent somewhere between $40 million and $50 million a year then, as well, on restructuring expense.

Should we think of restructuring as being more of a normal item going forward? Or is there a point in time where you think this can drop-off.

A couple things. If you look at the restructuring trends over time, it ramped up in 2012, kind of peaked in 2013 and started to trail off with the exception of this action in Europe that we've been talking about.

RBIS, we said, will continue to be restructuring for the next few years. We are far along, but still have equipment consolidation to do.

As we look at further expanding the margins by over 1 point every year, we are pretty consistent in saying that we should expect that for the next few years. As far as the normal level of restructuring, if you will, we think the $20 million, $25 million level for the next few years is the right number to use.

Okay. Lastly, I realize you have an analyst day in May, and we will probably get an updated thought around operating margin for PSM at that point in time.

Looking at 2014, if we assume you go back to the long-term target, that's actually down operating margin for PSM. Is there a mix issue in 2014 that would cause operating margins to come down slightly from the 2013 level?

Scott, our goal is to continue to improve margins. One of the objectives of the European restructuring is to improve our operating margins in PSM in Europe.

So, I think you will hear -- you will obviously hear a summary of that in the May meetings. Certainly, as you might guess, it would be really unusual for corporations to set targets for businesses lower.

Then next year, after you just completed a pretty good year. It's just not our mentality.

Thank you.

Anthony Pettinari with Citigroup Global Markets.

Given that you've had close to two years of fairly stable mid-single digit organic growth and your organic growth guidance for 2014, is it maybe in a little bit of a tighter range than what you gave for 2013? Do feel that your visibility into underlying demand has improved over the last year, or do feel maybe a little bit more confident about your end markets?

I'm just wondering if you could compare your outlook for 2014, in terms of visibility into demand. Has that changed or improved versus this time last year?

I think we feel more confident in the overall economic situation. We feel more confident about the strategies in our businesses around innovation, around taking market share.

We feel good about things like RFID taking hold in the apparel retail industry. But, I would say our visibility in the short-term, in terms of predicting quarter by quarter what's going to happen isn't any better now than it was before.

Okay. So, --

If you look at Q4, we were well over our expectations for the fourth quarter because of visibility.

So, the confidence is more in internal things that you can control within the company, as opposed to maybe a brighter view on your customers or global macro or anything like that?

I think, for us, especially on the long-term targets, we feel good about, let's say, packaging markets for PSM; they are consistent. We feel like emerging market growth is going to continue. We know what the long-term trend for apparel, 2% to 3% growth every year, and it can be somewhat volatile.

We feel really good about the trend in RFID, and we feel good about our competitiveness and our ability to capture market share. So, I think it's a combination of both.

If you are comparing to last year, the fact that our low end guidance started with 1%, part of that is the macro, there was more uncertainty a year ago as to what the macro environment would be. So it's both things.

Okay. That's helpful. Maybe just following up on RFID.

You referenced 24% growth in 2013. Do you have a target or rough estimate for what you can accomplish in 2014?

Then, you referenced large retailers entering trials, if not already using RFID. Are you finding the speed of those trials are accelerating or shortening as the technology becomes more commonplace?

Yes. I think every retailer goes at their own pace. Although, the process is somewhat predictable, they start with some pilots in a few stores. Then, they expand it to certain product lines, and eventually, we have had a couple of customers literally go wall-to-wall for all of their items.

I just attended the National Retail Federation show in New York a couple of weeks ago. There was a panel discussion about RFID, and there were major retailers there, as well as an industry pundit.

It was clear, from the conversation, that the ability to manage your inventory much more tightly is of enormous value to retailers, especially in an omni channel world. Because, as retailers do more online selling, those retail stores are also acting as warehouses. So, they can direct the consumer to come and pick it up or even ship it out from the store and not just from the warehouse.

So, what I see, is it's picking up momentum, and the tide has really turned from RFID -- if you are not on board for RFID, you are really behind the curve. For me, that's a really positive move.

Great. That's helpful color. In terms of the growth rate for 2014, is that something that you can -- ?

Again, it's tough to predict. Retailers sometimes accelerate, they delay.

The shorter the time period, the harder it is to predict. But, I think 20% to 30% compound growth rate over the next few years is a decent forecast.

Great. I will turn it over.

Ghansham Panjabi with Robert W. Baird.

Just sort of staying with RBIS. Obviously, this most recent fourth quarter for apparel retailers in the US was one of the worst in many years.

What are your customers saying about the outlook as we progress through 2014? Particularly for 2Q, which was one the strong quarters for that business.

We haven't seen major shifts. I think, the challenges are different, depending on the segment. The performance athletic channel did really well, fast fashion did well.

I think mass merchandise and the department store, the fashion type channels had a little bit more of a challenge. But, I would say that we don't anticipate any major changes.

We did see some slowdown in US, our shipments were -- if you net out RFID, which is the right thing to do because we had some enormous head winds there, we grew in the low single digits from US retailers. I don't really expect that to change going into the next season.

Of course, the proof is in the pudding. We don't really have visibility of that until March.

Okay. Along the same vein on RBIS for Europe, what's going on there?

We grew in the high single-digits. We have a number -- again, we believe we are taking market share there. On top of that, the has been an acceleration of RFID implementations there with a number of different retailers, and that helped us quite a bit.

Okay. Maybe a question for Mitch. I'm sorry, go ahead.

High single digit growth from European-based retailers and brands.

Got you. Mitch, just kind of looking at the cash on the balance sheet, if you look over the last few years, it's basically above 2 times the average level over the last few years. Fair amount of healthy free cash flow being projected for 2014, as well.

Can you, first off, reconcile the end of the year share count versus your guidance for 97 million average for the full year? What does that embed in terms of actual repurchase?

Well, if you just look at average, the average of 97 million, it's about 3 million less than what we were at the average for 2011 -- I mean, for 2013. I said 2.5 million share dilution. Basically, comping that out, you're looking at 5 million and change of share dilution on average.

In terms of the -- one final one -- on the raw material side, you mentioned some inflation. I assume that's along the emerging markets. What's the environmental shaping up here in the US as well as polypropylene pushed higher and so on and so forth?

We are experiencing pressures here in the US, as well. We are working to offset all of that, but we are actually -- the US is one of the places where we are implementing some price increases and putting in a surcharge for propylene and freight and so forth.

Okay. Thanks a lot.

John McNulty with Credit Suisse.

With regard to RFID and the RBIS business, in terms of incremental margins, can you differentiate the two so that we can understand how to think about the earnings progression as RFID way outpaces RBIS business?

It's definitely accretive. I would say, currently it's at or above the margin range that we are at. So, it's a good drain for us.

I guess, maybe looking -- cutting it a different way, if I think about $1 of incremental revenue in RFID versus $1 in the rest of your RBIS business, how should we think about what that incremental revenue brings to the bottom line?

If you talk about dollars, dollars per unit are higher than the rest of our business. If you look at the variable flow through on percent, it is somewhat lower because they are higher price point items.

If you look at the fully absorbed EBIT margins, it is higher than the average of the rest of the business. That does, in the early days, we've got quite a bit of business development cost in that, as well, that we're funding for future development of getting new retailers up and going. So, we haven't quoted specifically flow through per units or anything else, and we are not going to comment on that.

Fair enough. Just last question would be on the pressure sensitive business. Looking at kind of -- the revenue looked pretty solid.

Actually, the margins on a sequential basis didn't improve the way I would have thought; the operating leverage didn't seem to kick in as much as I would've guessed. What's driving that?

Is that a seasonal issue, a mix issue? How should we be thinking about that?

Generally, Q4 has lower margin than Q3. That's a typical trend for us.

A number of factors, graphic sales tend to be lower. Those are higher margin products.

People aren't wrapping cars or putting up graphics on buildings when it's in cold weather. So, those tend to be a slower period.

We would have expected higher flow-through, and we don't really have a complete understanding, yet. I suspect that there was just higher growth and lower margin categories than there were in higher margin categories.

We don't have the market data yet. So, that the hypothesis. But, we are continuing to take share, and we have lower share in lower margin categories.

The business is profitable. And we like the business. So, part of it is just that as we grab some share.

We certainly had more volume than we expected, so we did have some extra expenses that we didn't anticipate in the quarter, either. If you look at our guidance range versus what we actually performed, there was a bit of a surprise. There were some extra costs in the business that because we weren't prepared for it that I don't expect to repeat.

The other thing I would add, when I talked about some of the inflation that was currency induced with some of the currency movements that we had, a couple million dollars worth, it takes time to raise the prices and push that through as well. That was an impact in the fourth quarter, too.

Got it. That's helpful. If I may, maybe one last question.

Your 2013 margins in PSM for the full year did land above your 2015 targets. So, I guess the question is, in terms of what drove that or how you got there, where in your mind were the surprises?

Was it on the productivity or pricing? Were volumes better? When you look back and see your progression, what drove you to already exceed your 2015 target?

Well, I think good execution in the business -- it's a number of factors here. We had better than expected sales growth in the year. We had good productivity during the year.

Innovation was another key driver for us. I mentioned that we had almost a third of our products that were new and improved.

Some of that is lower cost products, some of that is new to the world products. Those are all a whole bunch of factors that were positive.

So, we will update our guidance ranges for the sectors in our May investor meeting. I think we've got a good trend.

Again, we did go above our target range for investing in restructuring on our European operations for our graphics business. Which won't help us in 2014, it's actually bit of a headwind, but it will certainly help us in 2015. All that will be reflected in our new targets for the next three years in May.

To add to that a little bit, when you set what surprised us, it actually didn't surprise us. Our goal, we set the targets for 9% to 10% for pressure sensitive, we were hovering around 9% when we said that.

And we said this is a range where this is a good business and we should focus more on driving profitable growth, but that our internal target was to get the high end of the range. So, that was our expectation, and that is what we've been doing.

Whereas with RBIS, when we set the range, it was just to get inside the range by over 1 full point of expansion every year. I wouldn't call it a surprise.

Great. Thanks very much for the color. Appreciate it.

George Staphos with Bank of America Merrill Lynch.

Congratulations on the year. I wanted to pick up on pressure-sensitive, maybe to start.

Can you give us a bit more detail -- you mentioned you are adding a coder somewhere in Europe, you're going to be shutting down your facility. I think you said in the Netherlands. Will this add capacity, or is it purely a cost take out?

You were mentioning in responding to John's question, I think before, as well, that there is a cost headwind associated with this action. Can you quantify that headwind for us?

George, we are replacing a 40-year-old asset in the facility. So, I would say we are replacing it.

Yes, there is a little bit of net add to capacity for the graphics business, but we intend to grow that business. We are replacing it with a modern asset that's a heck of a lot more efficient and productive than the one we are replacing, and therefore, that's why this investment has such a good payback.

I would say as an investment -- graphics coders tend to run slower. They are not like the LPM coders, et cetera, et cetera. It's a whole different product category.

We shouldn't expect pricing pressure from the standpoint you are adding a new coder? Again recognizing that you are placing older capacity with this new coder?

I don't really expect it.

Okay. And on the headwind, you were saying?

I don't know. I would say $0.02 or $0.03, something like that here.

Okay. Now, on RBIS, were you pleased with the operating leverage you saw in the fourth quarter?

From our calculations, this is neither here nor there, you actually had a little bit more op leverage and incremental margin than we would've anticipated. If you could provide your thoughts there on what went well, what didn't go so well from a margin standpoint.

Yes. We had a nice combination of stronger than expected volume growth against some pretty tough comps. We had better contribution margins, and with the footprint reduction that we've been executing, the productivity helped all at the same time.

So, I would say, again, we are happy but not satisfied. Actually, I think we could've -- the team thinks they could've squeezed out a little bit more.

So, they are driven to hit their targets. We were very pleased with the performance of RBIS in Q4.

Is this an incremental margin that we can continue to see, if you continue to put up this kind of volume given what you've already done with the cost structure and what you plan to do additionally?

If you just do the math, right? So, we have improved our operating leverage in the business by over 100 basis points the last two years. We need to do about the same pace to get to the 2015 targets by 2015. So, our internal objectives are set to do that.

I think that one of the pacing items for us, is as you can imagine in a network business where service is critical, you have to pace how you move this capacity around, how you take some of the fixed cost out. I think one of the things I've been really delighted about, is even with all the footprint reduction actions we've taken in the business, our service, our quality, our safety have all improved at the same time.

That tells me that the team is operating very effectively to, in a way, reduce footprint and increase sales at the same time. It's not an easy thing to accomplish.

Sure. In terms of pressure-sensitive, back to that, I forget whether it was last year or two years ago you talked about there being good EVA business to get after, particularly in Asia, as I recall. Even though it was lower margin business, and maybe that's been one of the factors that's been driving, as we fast forward to today, the margin or mix not being as buoyant as you'd like.

If I heard you correctly, you now have some initiatives to improve mix. Do you feel that perhaps the strategy went too far in driving for the lower margin, albeit higher EVA or positive EVA business? Or that this is a turnaround from that strategy? Or, how would you discuss it?

I wouldn't describe it as a turnaround. We had 100 basis point improvement in margins year-over-year in Q4, and we exceeded the top end of our range.

So, I think this is -- there's variation in any improvement path. I think this team has done a really good job of adjusting to the environment and being incredibly agile. Again, we don't have that much for visibility.

So, I feel good about our ability to manage mix and price and productivity over the long-term. I think it's rare when you can sort of plot a super steady course the whole way. So, I think the team is doing a great job.

We've got more product activity planned again with European restructuring. I think we are intending to continue to take share, to continue to innovate.

We had good performance in tapes and reflective. That should continue, as well. I feel good about where we've been.

I think, if you catch a little disappointment in our voice, it's like we had a really good quarter, and it could've been even better. I think that shows more ambition in our voice and intent to continue to drive the business forward and, the margins up.

Totally understand. Last question, and I will turn it over. Can you quantify, perhaps you did and I missed it, what the impact of these targeted price increases and surcharges are thus far in pressure-sensitive, what you've announced to your customers?

No. We didn't quantify. It's modest, George. A few million dollars in North America.

Everywhere else, we go through different levels of price increase, depending on what's moving with the currencies. For example, we commented in 2013, but in South America, we've been raising prices throughout the year, effectively, to offset some of the currency movement. Not going to comment on that because it's looking to offset wherever the currency moves.

Makes sense. Thanks for the details. I will turn it over.

Rosemarie Morbelli with Gabelli and Company.

Thank you and congratulations. I was wondering -- if I heard properly, you did say that the game plan was to improve the mix in PSM. If I understood properly, what do you think needs to be done?

Is it a change in tactic or change in marketing, eliminating lower margin product lines? Could you help me understand what you mean by that?

Rosemarie, I think it's more about tweaking our strategy. There's nothing -- I would say -- major here. It's, again, driving more innovation, a little bit of cost out here.

Our overall strategy is the same, and that is to continue to grow our business through innovation, and a lot of the innovation helps us take market share. Continuing to execute well in emerging markets. We had a great quarter in emerging markets.

So, I don't think there's anything major here. It's just a matter of keep focusing on driving the business forward.

Okay. Not a question of eliminating some product lines that have lower margins inherently?

No. Our mentality is, let's figure out a way to either innovate in those product categories where we might need a little help, or to get more productive.

Okay. That is helpful.

One of the questions we got in RBIS. Once adopted by retailers, have you ever seen a case where money ran short and they canceled the program, or once they adopted, they most either stay where they are or go forward with more of it?

I would say, generally, most retailers continue to expand it, and we had one major retailer who has moved -- a couple major retailers that have moved to mark everything in the store. Once you get 60% to 70%, it just makes sense to convert.

We did have a retailer last year who scaled back some of their ambitions. They didn't cancel the program, but I think that was more about their overall market position strategy than it was related to RFID.

Okay. If I may, and I will note that. Why the big range in the EPS guidance between 8% and 19%? Where does the major uncertainty come from, retailers, or something else?

I think it's a reflection of our inability to really get a good forward look. It's actually narrower this year than it has been in the last couple of years.

We just don't have -- we don't have much forward visibility in our business. We don't have backlogs. We ship out a huge percentage of our orders in just a few days.

It's just kind of a reality for us. So, one thing I will tell you, and that is from an internal objective point of view, we target the high end of the range.

Okay. And what do you need to get there? Do you need outside help from the economy from any particular area?

We need a continuation of the economic environment we saw in 2013 and continued execution both topline as well as the productivity initiatives we've laid out.

Okay. Great. Thank you.

Jeff Zekauskas with JPMorgan.

It's [Jill Gocook] for Jeff. A couple of questions.

It looks like your depreciation and amortization expenses went down by $60 million this year. That's sort of like a diamond benefits to your earnings. Is that sustainable, or do you expect charges to continue to move lower as you close on facilities?

You would expect it to continue, a longer-term trend, it has been going down. Our CapEx for a number of years has been below the level of depreciation expense.

A big part of that was just when we moved OCP to disc ops, we had some depreciation expense in Q1 of last year and all of DES, as well. A bigger reduction than you normally would see. As CapEx and depreciation trends start to convert, which they are getting close to doing, you would expect it to start to plateau a little bit.

Okay. That's helpful.

One thing to point out -- talking about investments in the business, we have said the amortization on the acquisition and intangibles in RBIS start to drop off in 2016 in 2017.

What is the magnitude of that?

About $20 million.

A year?

Yes. $20 million total amortization expense, about half of that drops off in 2016 and 2017.

Okay. Thank you.

Secondly, the raw material pressure you are seeing on the propylene side, do you think those are more seasonal nature? It seems like propylene prices move up every year, early year and end of the year, then they come down in the spring.

The spike seemed to happen a couple months earlier than we had seen in the past. I know you are very close to this, but it seems to come a little earlier, so we put it through as a surcharge.

And if it comes back down, the surcharge will come up. That's one of the reasons we use the mechanism of the surcharge.

Okay. The surcharge is always temporary, like a quarter or so, rather than being annualized?

They are tied to -- if we do a surcharge, they are tied to something specific, whether it be freight cost or propylene and so forth. One of the surcharges is tied to propylene.

Okay. Lastly, I was wondering what the size of the RFID business is now?

I guess that contributed another $8 million or so to sales this year, which is very nice. Was wondering what the size of the business is?

It's around $100 million, a little over.

A little over, okay. Thank you very much.

Chris Kapsch with Topeka Capital Markets.

Follow-up questions on the pressure-sensitive division in particular. When you reported third quarter, there was some hints of softness late in the quarter, I think in September and early into the fourth quarter for the first couple of weeks into October.

Given the strength of the pressure-sensitive segment and overall in the fourth quarter with the 7%, 8% organic growth, I'm curious what the sequential trends look like throughout the quarter. And if you could provide that by region, like where you saw the more pronounced strengthening during the course of the quarter and what does that sequential trends look like it thus far into the first quarter?

I think when we spoke last time, the trend was going down, particularly in September, and October is consistent with the guidance we provided which would imply starting to come back. It did come back, November had the best month of year-over-year comps and was pretty strong in most of the regions, actually.

Europe came back stronger, as I quoted, the high single digits overall for the quarter. Europe was particularly strong throughout the quarter, but really ramped up in November, and December trailed off a little bit from a year-over-year endpoint. Strong, I would say pretty consistently throughout the quarter.

Can you talk about thus far into trends into January?

January is our lowest sales month, so it's not really indicative, and we actually look to February to see it give a decent read. We are not going to comment on where it's coming out.

I'd say overall it's consistent with our guidance expectations for the year. It's not a good barometer.

Okay. Just looking on page 10 of the review presentation, a couple questions on that.

Your outlook for 2014 free cash flow, calling it $300 million plus. I'm just curious given the extra pension payments that you made in 2013, considering the higher discount rates, I'm just wondering how much, if any, pension contribution does that free cash flow guidance contemplate in 2014?

The free cash flow in 2013 excludes the supplemental pension plan contribution, is that your question?

Just wondering if the 2014 guidance contemplates any incremental pension payment or contribution?

The guidance is just a floor. We're saying it could be more than that.

It's going to be at least $25 million of pension contributions in 2014. That's what we are required to do We haven't locked down exactly what we're going to contribute.

Okay.

The key factor there is the floor. I think the bigger factor as you look at 2014 for free cash flow, bigger than pensions, is the $30 million I commented on that seem to move out of the first weeks of 2014 into 2013, as well as the impact of the 53rd week.

In this net debt to adjusted EBITDA metric, you don't incorporate underfunded pension obligation, right?

We do not. It's a proxy just for how we really look at it, which is full leverage, which is including the pension obligation.

This is kind of a shorthand for how we look at it, where we do look at total leverage. Our pension obligations, our underfunded pension obligation is below across all the geographies, less than $300 million now where it was north of $400 million last year.

Right. Considering this target of 1.7 to 2 on that shorthand version of your leverage metrics, although you say on average it was 1.5 in 2013, it looks like you are around 1.0, roughly 1 times at the year-end 2013. Considering where the EBITDA is likely to be, considering the free cash flow looks, like you have substantial capacity for incremental buybacks. I don't know if this target is a year-end 2015, but the year-end target for 2015, you get the benefit from another year of free cash flow in 2015, which would suggest potential of over $1 billion in capacity for buybacks.

I'm just wondering, when would you -- I guess in conjunction with the board, decide to take action on pursuing, just a more appropriate leverage ratio? Using buybacks to get there.

A couple comments. This isn't a year-end target; it's actually the average throughout the year. Q4 is always the lowest point on the leverage.

I think you are right to call it the 1.5, it's a little bit higher than if you would normalize our average for 2013, because the first two quarters we didn't have the proceeds in. So, somewhere between the 1 and the 1.5 overall, if you were to adjust for that, which would imply, as I mentioned, some good amount of balance sheet capacity, and we do have additional free cash flow in 2014 after the dividends of a couple hundred million dollars.

So, we recognize that, and the key thing here is we've said we are going to continue to be disciplined, as we deploy cash to shareholders and through increasing dividends as well as through share buybacks. If you look at last year, we did deploy almost $400 million, which was more than our free cash flow from the business. We will continue to follow the same approach we have been.

Okay. Fair enough. Just one final one.

Just on the, I guess, the Investor Day you are planning for May. Did you say you are going to update the 2015 targets or more likely extend the targets beyond what the current metrics are for 2015? In other words --

We will extend the targets probably another three years. We update the 2015 targets, we essentially give guidance for 2015, and we are not going to do that in May of 2014. So, these will be longer-term objectives for the Company.

Thank you very much.

George Staphos with Bank of America.

Two last questions, I will ask them in sequence, piggybacking on Chris's last line of questioning. Over time, where do you think the dividend, how should it proceed? What kind of pace should it grow at relative to your earnings or if you look at it more from a cash flow standpoint.

And capital allocation overall, I noticed that capital spend in your guidance doesn't really move all that much versus 2013, despite the fact that you are adding a coder. How are you -- what are the offsets there, relative to the investment you're making in the coder, and do you expect EVA per-share this year to actually move up more or less in line with your earnings guidance? Thanks, guys, good luck in the quarter.

Thanks, George. On the first question about capital allocation, dividend versus share buyback, this is something the board obviously spends quite a bit of time on.

We are going to make our dividend decision every year at the end of the first quarter. So, in coincidence with our annual meeting, that's how the board wants to deal with it. I think both are important, and it's something we look at.

On the second question, actually, it's a selling more than one coder next year. Typically, especially in emerging markets, are adding a coder or maybe two per year or so.

It's not a huge -- obviously, we are increasing capacity meaningfully in emerging markets because we need it for the volume growth. One in Europe is really more about upgrading our capability and efficiency and driving more productivity.

So, I think on the overall offsets, we are spending on IT has been up the last couple of years and putting in a new financial system. We've had -- we are in the midst of building a new headquarters building for our materials business in Europe. So, that's a little bit of a one-time thing.

We don't do that every year. So, there are some puts and takes.

I will say, if RFID accelerates next year or we see substantial volume increases, we may have to spend a little more in capital spending, and it would be a delight to do so. It's a high-class problem to have. Mitch, did you have any comments?

Overall, it's just that every year we're making investments in different places, and there is not one general theme to what's funding these increases. The overall investment, if you look at it relative to 2013 and 2014, there's increases in Asia, increases for the graphics coder in Europe and modest increases in investments in tapes in RFID businesses that are both growing.

If that's normally the case, EVA per share should grow at least in tandem with earnings overall would be the conclusion.

Our goal is to continue to expand returns.

Thanks for all the details. Good luck in the quarter.

Mr. Scarborough, back to you for closing remarks.

Thanks. I'm very pleased with the excellent progress we've made over the past two years against our long-term strategic and financial goals.

Innovation will continue to be a hallmark for our businesses, further strengthening our industry-leading positions in all of our key markets. Our value creation formula remains straightforward. Modest top line growth, ongoing productivity improvements and highly disciplined capital management will continue to drive double-digit earnings growth and solid free cash flow, most of which we will give back to shareholders.

I would like to thank the Avery Dennison team members for delivering another solid year. I look forward to working with you to achieve our targets for 2014. Thanks for joining us today, and I look forward to speaking with you again soon.

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation. Have a great weekend, everyone.