艾利丹尼森 (AVY) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison's earnings conference call for the second quarter ended June 28, 2014.

(Operator Instructions)

This call is being recorded, and will be available for replay from 12 PM Pacific time today through Midnight Pacific time July 29. To access the replay, please dial 1-800-633-8284, or 402-977-9140 for international callers. The conference ID number is 21676582.

(Operator Instructions)

I would now 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 second-quarter 2014 results. Please note that, unless otherwise indicated, today's discussion will be focused on our continuing operations. The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP on schedules A2 to A5 of the financial statements accompanying today's earnings release.

We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor Statement included in today's earnings release.

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

Thanks, Eric. Good day, everyone. I'm happy to report another quarter in line with our expectations for consolidated results at both the top and bottom line. We anticipate solid results for the full year, with organic sales growth of roughly 4%, adjusted EPS of 12% to 16%, and continued return of cash to shareholders.

The pressure-sensitive materials segment delivered organic sales growth of 6%, above our expectations for the quarter, driven by volume growth in Europe and emerging markets. In addition to delivering another quarter of solid growth in labels and packaging materials, we continued to make good progress with graphics and performance tapes. Those of you who joined us for our investor meeting in May know that these product lines represent an important strategic focus for us, with opportunities for significant share gain in these relatively high variable margin product lines. Year to date, we delivered mid single-digit organic sales growth for graphics, while performance tapes had another strong quarter with double-digit sales growth across all regions, and in both the industrial and personal care product line.

Operating margin for the PSM segment was down compared to the same period last year, due in part to tough comparisons, as well as a few other headwinds, including transition costs related to the European consolidation. We've experienced a few challenges associated with this restructuring action, but I'm pleased with the progress the team has made on this large, complex project, and we continue to expect $15 million of savings when the project is completed next year.

We are focused on maintaining operating margin for the segment within our recently increased target range of 10% to 11%. We're targeting the high end of that range over the coming years.

Now, turning to retail branding and information solutions, the team delivered [solid] bottom-line results in the face of some tough market conditions in the quarter. While top-line growth remained strong with our Europe-based retailers and brand owners, driven largely by RFID, sales to US-based apparel retailers and brand owners were soft. A key factor appears to be retailers in the US exercising caution with their orders, presumably reflecting the anticipation of weak end-market demand. This top-line weakness has continued into the first few weeks of the third quarter, but I want to remind everyone that year-on-year comparisons do get easier for the segment as we move throughout the second half of the year.

I'm pleased to say that sales of RFID products were robust, particularly among European retailers. We continue to expect RFID to be a key long-term growth driver for this business.

Notwithstanding the challenging end-market conditions, RBIS continued to make good progress in executing key productivity initiatives, reporting another quarter of strong earnings growth, and taking another step forward on the path to our long-term margin target. As you know, we targeted a full point of margin expansion for this business each year through 2015, and recently projected continued margin expansion through 2018.

Finally, Vancive Medical Technologies continues to make progress against long-term strategic objectives. Although sales for its new product platforms haven't begun to ramp up yet, sales for the core products were up 6%, in line with expectations, as we continue to target break-even profitability for the business by next year.

Again, another solid quarter for us overall. As I've said before, while I'm generally pleased with our progress, we won't be satisfied until we achieve all of our long-term goals.

Now, I'll turn the call over to Mitch.

Thanks, Dean. Hello, everyone. In the second quarter, we delivered 4% organic sales growth, and a 13% increase in adjusted earnings per share, reflecting sales growth in pressure-sensitive materials, and continued margin expansion in retail branding and information solutions. Adjusted operating margin in the quarter grew 10 basis points to 8.1%, as the benefit of our productivity initiatives and top-line growth offset the negative impact of higher employee-related expenses and product mix.

As part of our productivity initiatives, we realized approximately $10 million of restructuring savings in the second quarter. This is net of $3 million of transition costs in pressure-sensitive materials due to the consolidation of our European operations. We also incurred restructuring charges of about $40 million in the quarter, driven primarily by this one action.

Our effective tax rate was 42% in the second quarter and 30% year to date. Our adjusted tax rate for both Q2 and year to date was 33%, in line with our expectations, as we continue to anticipate the full-year tax rate to be comparable to last year.

Free cash flow in the second quarter was $85 million versus $105 million last year. As a reminder, last year's free cash flow was relatively high, as it included $26 million of proceeds from the sale of some buildings, including our former corporate headquarters in Pasadena.

We also had a headwind in the second quarter of this year in connection with the final phase of implementing a new financial system. During the transition to the new system, we paid certain vendors approximately $40 million in advance of our standard terms. This will not impact full-year free cash flow, as it is a timing item that will be recovered in the second half.

We expect to deliver free cash flow of approximately $300 million in 2014 versus our previous guidance, which had a floor of $300 million for the year. We have reassessed the possible timing of vendor payments and customer receipts at year end, and no longer see $300 million as a clear floor, given the inherent volatility of working capital balances at year end. Any reduction in free cash flow in 2014 related to these factors would simply represent a deferral into early next year.

With net debt to EBITDA at 1.4 times, we remain below our long-term targeted leverage position, with ample capacity to continue to return cash to shareholders over the coming years. Along these lines, we repurchased 3.1 million shares in the first half at a cost of $153 million, more than offsetting dilution, and reflecting an increased level of share repurchases in the second quarter. We will continue to be disciplined and opportunistic when buying back shares. In addition, we paid $61 million in dividends in the first half.

Looking at the segments, pressure-sensitive material sales in the second quarter were up approximately 6% on an organic basis, again exceeding our expectations. Label and packaging materials sales grew mid-single digits, and the combined sales for graphics, reflective and performance tapes grew low-double digits.

On a regional basis, North America sales for the PSM segment were roughly flat. Western Europe grew mid-single digits, and emerging markets grew almost 10%.

PSM's adjusted operating margin of 10.1% in the second quarter was 60 basis points lower than the peak margin reported in the second quarter of last year. During Q2, higher employee-related expenses, the impact of changes in product mix, and a modest headwind from the net impact of pricing and raw material input costs more than offset the benefit of higher volume and productivity initiatives. As mentioned earlier, we also incurred transition costs related to the restructuring in Europe, which reduced margins by about 25 basis points in the quarter for this segment.

While retail branding and information solutions sales declined about 1% in the quarter, we delivered significant margin expansion in this segment. RBIS's sales reflected weakness from US-based retailers and brands, particularly in the value segment, largely offset by continued strong demand from Europe-based retailers and brands, principally from RFID. As expected, RFID revenue is growing again, as we have now lapped the tough comps we've discussed in the past. RFID revenue was up 40% in Q2, and 14% through the first half.

Despite the sales decline in the second quarter, RBIS again demonstrated continued margin expansion, with adjusted operating margin improving 110 basis points to 8.2%, as a benefit of productivity initiatives and other items more than offset the impact of higher employee-related expense and lower volume. The impact of higher employee-related expenses was moderated in the quarter, due to lower incentive-compensation costs in this segment relative to last year. Sales in Vancive Medical Technologies grew approximately 6% in the quarter, while the operating loss was reduced by roughly $1 million to $1.7 million.

As for the 2014 outlook, we are narrowing our range of guidance for adjusted 2014 earnings per share from continuing operations to $3 to $3.10. This guidance is based on a number of assumptions, including the key factors listed on slide 8 of our supplemental presentation materials.

We now estimate approximately 4% organic sales growth, which excludes the benefit of an extra week of sales this year. We expect average shares outstanding, assuming dilution, of between 96 and 97 million shares, reflecting our increased share repurchases in Q2.

As I mentioned, we now anticipate 2014 free cash flow of approximately $300 million, and we increased our estimate for restructuring charges by $0.05 per share due in part to modestly higher costs for the European consolidation. The rest of our key assumptions remain unchanged from what we shared last quarter.

While our second-quarter results for the individual segments came in somewhat different than expected, the overall results for the Company were in line. We are on track to deliver adjusted earnings-per-share growth of 12% to 16% for the year. As we articulated at our investor meeting in May, we are continuing to drive solid organic sales growth, maintaining our cost and capital discipline, and returning capital to shareholders, all of which continues to enable us to deliver double-digit EPS growth.

Now, we'll open it up to questions.

(Operator Instructions)

Our first question from the line of George Staphos, Bank of America Merrill Lynch. Please go ahead, sir.

Thanks. Hi, everyone. Good morning. Thanks for all the details. Good to hear from you.

The first question I had, the incremental margins in pressure-sensitive remained fairly negligible. I was wondering if you could provide a bit more color around that? With the context being, in part, in the past you had taken on additional revenue SKUs that was low in margin, but good from an EVA standpoint. As you answer that question, help me reconcile that other comment as well, in terms of why it's positive on an EVA basis?

George, this is Dean. One of the factors that impacted the quarter were transition costs from our European restructuring. Some of those costs are difficult to predict because basically we were negotiating with the Works Council and various unions, which have ended up being successful for us with some of those.

We probably had higher than anticipated costs for transition in the second quarter. We would have expected some of that maybe a little bit earlier in the year, so that's definitely one factor.

Okay, and can you --

Mix -- George, sorry, mix is the other factor here and I think it's partially geographic mix. It's partially, again, the mix of some of the products. I think I said last quarter that this is -- the way I look at the quarter, if I exclude the transition costs, it's within the normal band of variation that we have in the business. It was lower than we thought might be in the second quarter.

Okay.

George, I think the other factors, what I mentioned was, we did talk last quarter that we saw modest. And it is, again, modest gap between price and raw material input costs and that continued, carried over into Q2 as well, which was another factor.

I think overall what you're seeing is a continuation of the trends that we've been talking about for the last few quarters. Our target is 10% to 11% operating margin for this business. It's in that range for this quarter, as you see, and our objective is to get it to the high end, for sure.

Mix and more recently the price of inflation has been a very modest headwind and we're working to offset that. It reinforces our objectives of reducing fixes costs as we go forward.

My follow on, and I'll turn it over and come back, We've been talking about mix as a headwind for a while, certainly, I think since fourth quarter last year probably dates back to third quarter. If mix is a headwind, by this juncture I would have expected, perhaps, some corrective actions to have been taken with it? Or if it's positive from an EVA standpoint, as you said, can you explain how it can be negative in mix and positive in EVA terms for us?

Lastly, again, we've been talking about price cost compression for a while. At this juncture, should we have not seen from Avery Dennison some effective enough moves to have put that in the rear-view mirror? Thanks, guys, and I'll turn it over.

Yes, George. If you take out the transition costs in the quarter, there would be incremental profit in the business and that is EVA positive. We're, again, pleased with the overall trajectory there.

Our next question from the line of Ghansham Panjabi, Robert W. Baird. Please go ahead.

Hi, guys. Good morning.

First off, on North American PSM, again, I think you mentioned that the sales were flat in the quarter, maybe Mitch did. Any sub-categories meaningfully weaker than others? Just curious as to what you think is actually going on in the market there?

It's been very choppy, Ghansham. As I look at the growth last year from a market perspective, and I can't share the specific numbers with you, but we had a very strong first half of 2013.

Then, we had a softer quarter, talking about market now, a better fourth quarter and then the first quarter dropped and we talked about some of the factors there. I would say it's sort of across the board. I don't see one sector or another being impacted.

It's a little bit perplexing, to be honest. We continue to be really pleased with growth in every other region. As I look at the US economy, I realize that a lot of the economists are feeling pretty robust about the second half, but there's something about the fact that GDP will be flat for the first half of this year that's connecting in with our business, so it is a little bit perplexing.

We have talked to customers, on the anecdotal basis, and they are basically saying things are okay but they just don't see a lot of growth or robust forecasts from their customers. I like it a little bit -- it's interesting that our RBIS business in US-based brands and retailers also was soft. There, I think, retailers are just being conservative about what the fall season is going to look like this year.

Okay. That's helpful.

Then on the flip side of that, you mentioned initially that PSM came in above expectations in total. Of the other regions that you're exposed to, which one really came in above, was it Europe, the emerging markets, or a little of both?

Both. Europe had, I think Mitch mentioned, mid single-digit growth, and the market growth in Europe has continued to accelerate. Just wanted to tell everybody we don't have second quarter numbers yet for either region, from a market perspective, but there I continue to be surprised, pleasantly, about the growth in Europe.

Latin America continued to be strong, as well as Asia-Pacific. All those regions, actually, are firing quite well.

Okay. I'll turn it over. Thanks so much.

The one thing I'd add is within emerging markets, Eastern Europe is a little bit soft still compared to the rest of the emerging markets.

Mitch, on that, was there any improvement versus the run rate from the previous quarter, or no? In eastern Europe?

No.

Okay. Thank you.

Our next question from the line of Anthony Pettinari, Citigroup.

Good morning. You discussed higher employee related expenses in both segments. I was wondering, is that just wage inflation, or is there some new hiring going on?

Is it possible to quantify the expense in either segment? Should we expect that to continue to be a headwind in the second half?

It's normal wage inflation. There's no big investments or anything going on. We, obviously, have some modest investments. We're making some investments in tapes, for example, where we're seeing high growth and high margin expansion, but very modest. It's 95% normal wage inflation.

We always comment on it, just as being one of the key factors as we talk through it. The one thing I would comment on is what I said earlier, is just that wage inflation is a headwind for RBIS in particular, but it was more moderated than we normally see, just because the adjustments with incentive comp within that business.

Okay. That's helpful.

In your prepared remarks, I think you reaffirmed full-year cash guidance, but if I heard correctly, you said some cash may be deferred or pushed out from 2014 to 2015 at the end of the year. Did I get that right? If that's correct, is there an order of magnitude of how much that could be on free cash?

Before, we were expecting modestly above $300 million and we had set $300 million at the floor. Now we're saying approximately $300 million, so there's a subtle change, just because we don't see that we can guarantee, if you will, $300 million as a floor in our guidance right now. If you recall at the beginning of this year, $30 million moved from 2014 into 2013, more than we expected. We commented on that in January during the earnings call.

When we just look at it, there's just too much volatility. When you combine the 53rd week and so forth, there's a lot of volatility. It really doesn't matter. We're talking about cash moving a week or two. Anything short within late Q4 should be coming in early Q1 of next year.

Okay. That's helpful. I'll turn it over.

Our next question from the line of Rosemarie Morbelli, Gabelli & Company. Please proceed.

Thank you. Good afternoon, all. Following up on George's question, when do you think your price increases will catch up on the raw materials and you will close that gap?

Rosemarie, it's a very modest gap. Most of the places that we've been raising prices have been due more to currency shifts in markets like South America or India, again, where we have currency-related inflation.

I think that this gap is modest enough that we'll get it through a focus on mix improvements, price and targeted pricing actions, et cetera. It's certainly not like it was a few years ago when we were getting rampant inflation.

What do you see happening in terms of raw material inflation over the next few months?

Relatively, stability, I would think.

Yes. Sorry. Go ahead, Mitch.

Relative to Q1, we had talked about pressures. If you heard, we didn't talk as much about pressures. Year-over-year, we still have some pressures there, but as far as sequentially, we have seen them ease a little bit.

We're still seeing it, obviously, within paper and then specialty chemicals as well. I'd say relative speaking, a little bit of moderation.

Okay, thanks. Looking at the graphic reflective tapes top line growth of 10% to 11%, what is behind that strength? Is it that you are getting new accounts? Is it new products, just because it is smaller? Do they have a smaller margin than the rest of PSM, and therefore this is why you had margin pressure?

No, actually the graphics and tapes and reflective product categories all have higher variable margins than the core labels and packaging business. As we said during the investor presentations, these are markets where we have relatively low market share. And our teams have done a great job of providing some new product innovation and improved quality in service and graphics.

Our performance tapes business has seen excellent growth in both the personal care side of the business as well as in industrial business. We have a couple of new adhesive product platforms that we launched a couple of years ago. And our commercial teams are doing a great job executing new -- driving mainly a lot of new applications, both with existing customers and new customers in that business.

Okay. If this is the case, if you have a stronger growth for your higher margin products, why was label's margin then, they have to have been down. What is behind those margins?

While the graphic's variable margin was up, a lot of that, frankly, was chewed up by the extra transition costs that we had in our European restructuring program, which, frankly, is all about improving our fixed costs in that business. That's definitely one reason.

The other thing was, if you look at it, we mentioned this, but last year's Q2 was a peak quarter. It was 10.7%. The average for the year was about 10.2%.

If you compare against that average, now Q2 and Q3 are usually a little bit higher than the average, so maybe the right comp is 10.3% or 10.4%. But the point is, if you adjust just for the transition costs, you basically get -- and for those two factors alone, you get in roughly flat margins.

Product mix was still a headwind. That's why we commented on it, because for 6% top-line growth, we traditionally saw a little bit more additional flow through. We're just seeing a continuation of trends within the labels and packaging materials business that we've seen in the last few quarters. It really reinforces the strategy of focusing on graphics and tapes, as being commented on.

Thanks. I appreciate it. If I may ask one quick last question?

In terms of Eastern Europe, how big are Ukraine and Russia? Do you see an impact on your business going forward, if it doesn't quiet down?

It's a timely question, because we've literally just opened the new distribution center for pressure-sensitive materials in Ukraine and actually it's been growing quite nicely. Now, it's very, very small, so it really doesn't have a material impact on materials in Europe.

Okay. Thank you.

Our next question from the line of Scott Gaffner, Barclays Capital. Please go ahead, sir.

Good morning.

Hello.

Hi. Mitch, I just wanted to go back to the free cash flow guidance for a second. Could you just clarify for me, did you say that $30 million of cash at the beginning of 2014 got moved into 2013? Or was it the reverse?

Yes. No, that happened and we talked about that back in January and that's not the reason we're adjusting our guidance now. I had shared that, what happened last year, as indicative of the amount of volatility that there can be around year end and it really just moved.

If you recall, we beat our guidance for free cash flow in 2013 and we attributed $30 million of that just due to timing. If you saw in Q1 of this year, free cash flow was worse than it normally is in Q1 and $30 million of that was attributable to that reason.

Okay.

Does that make sense?

Yes, that makes sense. So, $30 million got pulled from 2014 into 2013, made the free cash flow guidance lower than maybe some of us originally would have anticipated. Now we have free cash flow going from 2014 into 2015.

Maybe.

Maybe, okay. Alright. So, it's a maybe.

Scott, our fiscal year end ends this year ends, I think, on the 3rd of January. It really is hard to predict. As you can see last year, we thought we had come in around $300 million and we came in $330 million.

So, this is mostly related to receivables within the working capital line in? Is that how to think about it?

Receivables and payables. A lot of terms are end of month and so those payments can come in a couple days early or a couple days late, including our own payments.

Alright. Fair enough.

When we look at the RBIS business, Dean, I thought you mentioned something about growth in European RFID. Can you talk about the growth within Europe? Is that maybe more meaningful than we've maybe thought about before? How does sort of RFID break down Europe versus US, as a percentage of that $100 million or maybe it's $120 million in sales now, who knows, of that business?

Sure. I recall we actually commented a little bit on this at the investor meetings. The take up of RFID in Europe has been faster than for US brands and retailers. Frankly, if anything, we see an acceleration of that impact.

So it's pretty much when a leader in a category decides to go into RFID, there is a lot of followership. We have definitely seen a step-up in activity across the board in Europe.

The US, still a lot of ramp-up type activity is going. But there are more vertical retailers in Europe and I think some of them have a natural, well-defined business case and they are moving forward. It's all good. I think the same thing will happen in the US, but it will just lag behind a little bit.

Okay. Lastly, I think you mentioned the, you took the restructuring costs higher, modestly higher due to the European restructuring effort. Are you finding more opportunity, or is the restructuring just costing more to get that done?

The increase, it was roughly half from the European restructuring and a little bit more, another action within RBIS that's going to deliver more savings next year as well.

Okay. Thank you.

Our next question from the line of Jeff Zekauskas, JPMorgan. Please go ahead, sir.

Hi, there. Was your average price mix in the quarter for the Company as a whole up or down? And by how much?

The price mix for the total Company was a slight headwind overall. If you look at it, the product mix that we've talked about within the materials business, but then also as you recall, we discussed that the RBIS business had higher variable margins. So, when that's down and PSM is up, that also has a segment mix effect, if you will, overall.

Okay. Were you surprised that the RBIS volumes or not?

Yes, we thought we would have more robust sales, especially from North American retailers, so from that perspective. They countered that too, and very positively surprised by the continued strength in Europe.

All things being equal, are your expectations for the fourth quarter in RBIS lower or higher or the same in light of the sales and order patterns you have seen so far?

Jeff, we don't give segment guidance, but I will say this. That is that the comps for RBIS get easier through the back half of the year.

A lot of this, frankly, will be determined how back-to-school sales go for apparel. If the current consumer confidence index is an indicator that people are going to buy more apparel and the sales are robust with back-to-school, I would anticipate that retailers will feel a little bit better about putting more items in stock.

If you look at just apparel sales, generally as a category, in the first half of the year, it hasn't been very good. The year-over-year sales comps just haven't been very good. I think there's just a little bit of conservatism baked in there.

Jeff, if you look at the range of our guidance, we don't give guidance by segment. If you look at the range of our guidance, the low end is roughly a continuation of some of the trends that we saw in Q2 and the high end is somewhat of an improvement from that. That's like the range --

I wasn't trying to crowbar a forecast out of you. All I meant was that -- no, that normally if the second quarter is weaker, the fourth quarter tends to be a little bit weaker, or that is what I call --

Well --

No?

It's really different season. I remember back in 2012, we had a really tough first half and then we had a really robust second half for RBIS in terms of buying drills. Because of the seasonality in the business, every major season is considered to be a whole new outlook for retailers.

Okay. I think there are $3 million in transition costs included in the pro forma operating income in pressure sensitive in the second quarter. Does that go to, I don't know, $1 million in the third quarter and then it disappears?

The timing isn't precise as when the transition costs flow through, but we are expecting a few million more between Q3 and Q1 next year, so it does moderate.

It moderates, okay. In terms of cash restructuring outlays, if you hadn't said it before, how much have you paid so far in the first half of the $50 million you intend to pay this year?

Of the $50 million, we have not paid that much. A lot of it's ahead of us still in the coming couple quarters.

$40 million?

I don't have that right in front of me, Jeff, sorry, but I can provide that to you offline.

Okay. What's pricing in RBIS like, or as you look forward? Is that pretty flat or is there a negative mix there as well?

No, it's fine. Recall in that business, it's a custom business, so there's a constant repricing as new programs come up.

I think, if anything, the team has done a good job of continuing to improve the variable margins in the business. I feel actually pretty good about that. What we're really focused on is getting more volume growth.

If we'd have had 3% sales growth on top of some of the productivity that we've delivered in the quarter, it would have been a pretty incredible result. As we look, again, at the back half of the business, I think the good news is that comps get a bit easier. Our commercial teams are targeting to take some additional market share, because it will really help us. We feel, again, pretty good about some of the programs in RFID and external embellishments ramping up.

Avery is often a good bellwether of which way the global economy is going. Does it feel to you like the global economy is accelerating or staying the same or slowing down? Or do you not have a sense?

Boy, that's a big responsibility, Jeff. I would say --

I won't hold you to it.

Okay. Well, that's probably good.

The one market that has uncertainty still for me, and I'm a bit confused by it, is North America. Every other market seems to be doing just fine, frankly, and I'm pleased with it. Our teams are executing well. Things are just fine.

In North America, the slowness in pressure-sensitive typically would say that we have a softness coming. Again, as I've looked at the market growth rate, it's been choppy. We'll have a quarter flat, a quarter up, a quarter flat, again, and then a quarter up. On this case, we know we have some weather-related effects in pressure-sensitive in the first quarter.

The second quarter really didn't rebound as much as, certainly, the economists were talking about. We just haven't seen that kind of rebound yet.

Okay. Thank you very much.

Our final question is a follow up from George Staphos, Bank of America Merrill Lynch. Please go ahead, Mr. Staphos.

Thanks. Hi, guys. I think I know the answer to this, but I just want to confirm.

If we looked at your average pricing in pressure-sensitive year-on-year on a per-unit basis, would it be safe to say that pricing was down year-on-year, recognizing that mix is probably a big chunk of that? How would you answer that question?

George, we actually just comment on the net trend between raw material costs and price trends. You actually see quite a bit of difference region by region, significant input cost inflation in some regions, largely due to currency that require price increases, and in other regions, you may see the opposite. We've been commenting on it net from an impact and we talked about it being neutral for about four or five quarters consistently until Q1, and we are now seeing a modest headwind from that.

Okay.

Maybe I'll just add, George, we already got a comment here, and Mitch said it before. I know we've been talking about this.

This quarter looks more severe than I really feel is, for two reasons. We had the highest operating margin ever in pressure-sensitive materials, last year second quarter. As you know, it moderated a bit in the back half of last year, but still above the 2015 targeted range we had established for the business. This year, we have the combined impact of, we'll put in the same mix trends, but with the transition costs on top of it.

I believe that we are going to continue to operate the pressure-sensitive business focused on innovation -- continuous innovation, focused on growing our graphics and performing tapes business at higher margins. We're going to be in that 10% to 11% margin range, again, targeting the upper end. I think if folks are looking for catalyst or breakthrough, that will certainly come when we complete the European restructuring program because we'll get a big lift next year because we get the benefit of the restructuring, plus we won't have the transition costs hitting the P&L at the same time.

Sure. That makes sense. Again, I'm not trying to flag one way or another a concern we have or not, I'm just trying to get at the data best we can to model it.

So, I appreciate your patience with our line of questioning. The targeting of --

I was trying to sound confident. Hopefully, I didn't come across as impatient.

No, understood. In terms of the targeting of the 11%, I'm assuming that's not for the full year next year. You're hoping to get towards 11% as the year progresses, so maybe second half of next year would be where you're beginning to -- where you're approaching that on a quarterly basis. Would that be a fair pictorial?

Actually, what we said was, for 2018, we wanted to be in the 10% to 11% range and we were targeting the high end of the range. So I don't --

I thought you said --

(multiple speakers) we're happy to give next year guidance, but we're going to maintain in the 10% to 11%, shooting for 11%. That's what we said.

No problem, Dean. I thought you said during your prepared remarks that you hope to be approaching 11% in the next year off of these programs. I must have misheard you there.

No, what -- no, definitely we were -- that's a longer-term goal. You recall last time we set a target range, we exceeded it in the middle of the quarter. Again, I'm more confident about the 10% to 11%, and we're going to stretch for the high end. It would be great if we hit the high end of the range next year, but we're not predicting that right now.

Understand. No problem on that.

Can you remind us, what is it about the comps getting easier for RBIS that we should remember? Obviously remember RFID, but is there anything we should reflect on as we're modeling out our volume comparisons?

I think the value segment for us in North America was particularly strong in the first half of 2013 and then got a bit softer in the second half. Just to remember having real strong comps there. The comps just get easier. I think that's the main factor.

Okay, and last, and I think you touched on this before, July trends, it sounds like in PSM have been more or less the same from what we saw in the Q2. Could you affirm that or correct, if it need be? Within RBIS, how have early 3Q trends looked like? Thanks, guys, and good luck on the quarter.

Thanks. I think the trend's consistent with our guidance range and pretty consistent with how we came out of the second quarter. Just remind everybody that July is a really tough month for us to predict and then August tends to be definitely impacted by European holiday, so September always is the key month.

Really, some of the retailers start to order and purchase for that Q4 season in September as well. That's what really gets us at end of season and how it's going to go.

Actually, one last one and I'll finish up with here. Historically, if we go back to the 1990s and even early 2000s, if I recall, free cash flow for the Company would accelerate in the second half versus the first half. In turn, that was often a reason why the Company could accelerate repurchases of its stock.

Are there any lessons from that as we look out to 2014? Or would you not draw any conclusions, you're just going to be disciplined and opportunistic about repurchase? Thanks, guys, and again, good luck in the quarter.

Thank you, George. We will continue to be disciplined and opportunistic and we don't look at the seasonality of our free cash flow as a key driver of when we would repurchase shares. We're under levered, as I had mentioned, and so we have ample capacity between our cash flow and our current leverage position and we'll continue to be disciplined and opportunistic, George.

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

Thanks, everyone. Well, I would like to conclude by saying our playbook is working. We're delivering mid-single digit organic sales growth driven by emerging markets, innovation, and share gains.

We're executing productivity actions and driving capital efficiency. We're on track to improve our returns, and we're returning cash to shareholders. We will continue on this path.

Thanks for joining us, and we 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 and kindly ask that you please disconnect your lines. Have a great weekend, everyone.