艾利丹尼森 (AVY) 2014 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 27, 2014.

During the presentation, all participants will be a in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

This call is being record and will be available for replay from 8:30 AM Pacific time through midnight Pacific time October 28. To access the replay, please dial 1-800-633-8284. And for international callers, please dial 402-977-9140. The conference ID number is 21676583.

I would now like to turn the conference over to Eric Leeds, Avery Dennison's Head of Investor Relations. Please begin, Mr. Leeds.

Thank you. Welcome, everyone.

Today, we'll discuss our preliminary unaudited third-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 over to Dean.

Thanks, Eric. And good day, everyone.

I am really pleased to announce Mitch Butier's election to the position of President and Chief Operating Officer, effective November 1. Mitch has played an integral role in defining and executing our value creation strategy. He knows our businesses extremely well, having held senior roles in both Pressure-Sensitive Materials and retail branding and information solutions, not to mention focusing the majority of his time as CFO on their strategies and plans for execution.

This move is consistent with the Board's long-standing practice of leadership development and succession planning. You may recall that I also held the role of Chief Operating Officer before taking the helm as CEO, as did my predecessor. All businesses will now report directly to Mitch.

In addition, Don Nolan, President of the Materials Group, is leaving the Company. As a result, Mitch will be assuming direct oversight for the materials businesses, and Don will stay on for a brief period of time to assist him in the transition. I am grateful for Don's leadership of the group over the past six and a half years.

Mitch will also continue on as CFO until we find his replacement. That process is underway.

I'm very much looking forward to working with Mitch in this new capacity. We've worked together now for more than a decade. I know that he has the experience, vision, and leadership to effectively partner with me as well as the rest of the leadership team to achieve our strategic and financial goals.

Shifting gears, I'll now turn to the results for the quarter. While we reported EPS in line with our expectations, I have to say it was a challenging quarter. We experienced pressure on both sales and gross margin, but those impacts were offset through tight management of operating expenses and lower incentive compensation.

The Pressure-Sensitive Materials segment delivered organic sales growth of 5%, roughly in line with our expectations for the quarter. Volume growth was solid across all regions and stronger in emerging markets and performance tapes.

We had another successful Label Expo show, in which we demonstrated several innovative new products. Our customers and end users look to us to bring innovation to this market. And our leadership, in doing so, continues to drive top-line performance.

Mitch will provide more color on results by region and product line, but let me just touch on one key issue that we faced in this business during the quarter. In January, we announced the large and complex project to consolidate PSM's manufacturing operations in Europe. The project is behind schedule, and we incurred higher transition costs than expected during the quarter due to problems with a new distribution outsourcing arrangement that led to delays in meeting customer orders for graphics material.

Given our long track record of success in executing these kinds of projects, this was a disappointment to the team. We estimate that the combined impact of the service disruptions and other transition costs associated with this project represented about $6 million pre-tax in the quarter, a few million dollars more than we anticipated.

That being said, we still expect a healthy payback on this investment. We should get a nice sequential boost in earnings in Q4 now that things have stabilized, and the project remains on track to deliver roughly $15 million of annualized savings when fully completed.

As you know, our strategy in PSM is to create value by growing the top line of this high-return business at a 4% to 5% level organically. The team has done a great job of driving growth by executing well in emerging markets and developing innovative new products to enable share gain and application growth. And while we are happy that our adjusted operating margin is in the target range, we are confident we can do better.

In addition to delivering the savings from the European restructuring, we are taking actions to improve variable margins and product mix in PSM. We're focusing our energy and resources to grow faster in higher-margin product categories, including specialty products, graphics, and performance tapes. We are also adjusting our pricing strategy for lower margin products in certain geographies.

At the same time, we will be accelerating our productivity and cost out actions. In other words, we're continuing to pursue the broad, strategic priorities that we've communicated in the past, fine-tuning where appropriate, and tightening up the execution of our commercial and operational initiatives.

Now turning to retail branding and information solutions. The team delivered another quarter of solid bottom-line results in the face of a continuing soft top line. While growth remains strong with our Europe-based retailers and brand owners, driven by both RFID as well as share gain across most market segments, US originated sales weakened further in the quarter with sales to [these] end customers down mid-single digits.

Consumer sentiment and retailer caution does remain part of the challenge domestically, but we have also lost some market share with US-based retailers and brand owners over the past few quarters. To ensure that we win across all market segments, we've been refining our value proposition, and we're continuing to bring innovation to the market.

For example, we recently opened a new innovation center in downtown Los Angeles to better serve the market here on the West Coast. And we created a joint venture with Ningbo Shenzhou, one of the world's largest athletic apparel manufacturers, to accelerate the adoption of our unique external embellishment technology.

I am pleased to say the sales of RFID products remain robust. We continue to expect RFID to be a key long-term growth driver for this business.

Finally, RBIS continued to make good progress in executing key productivity initiatives, reporting another quarter of double-digit 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 project a continuation of that trajectory through 2018.

With some of the issues I've described continuing into the fourth quarter, along with a new headwind from recent currency volatility, we have modestly lowered our EPS guidance for the full year. That said, we still anticipate another year of double-digit adjusted EPS growth for 2014.

In the near term, we are focused on completing the European consolidation to enable faster, more profitable growth in graphics, executing our commercial and operational strategies in the balance of the materials business, and driving share gain in RBIS. And we remain committed to achieving our long-term financial targets.

We'll continue to leverage our leadership positions and strong competitive advantages in both of our core businesses, growing through innovation and differentiated quality and service. We'll further expand margins through productivity and leveraging our scale. And we'll continue to execute our disciplined strategy for capital deployment.

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

Hello, everyone.

Let me start by thanking Dean and our Board for giving me the opportunity to play a greater role in the Company. I'm honored, excited, and confident in the Company's position and prospects. As COO, my focus remains the same -- ensuring the long-term success of the Company by delivering exceptional value for our customers, our employees, and our shareholders.

Now, let's review the results. In the third quarter, we delivered a 12% increase in adjusted earnings per share on 3% organic sales growth, with the top-line growth in PSM offsetting a decline in RBIS. The Company's gross margin declined 100 basis points in the quarter, due to declines in all three segments.

PSM continues to grapple with negative impacts from net pricing and mix shifts. We also had challenges associated with manufacturing costs in the quarter, primarily due to the higher than expected transition costs from the European restructuring that Dean described earlier. The lower gross margin RBIS was driven by lower volume. These factors more than offset the continued strong contribution from our productivity initiatives across the Company.

Adjusted operating margin in the quarter expanded 30 basis points to 8%, as the lower gross margin was more than offset by productivity, tight spending controls, and reductions in incentive compensation expense. The adjustments to incentive comp provided a 60 basis point benefit, while the European transition cost reduced operating margin by about 30 basis points. So the impact of these two items was a net benefit of about 30 basis points, or $0.03 in the quarter.

Our adjusted tax rate for both the third quarter 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 was $153 million in the quarter, and $82 million in the first three-quarters. While free cash flow in the quarter was strong and well ahead of last year, we now expect full year free cash flow of less than $300 million.

As we approach the close of the year, we have a better view to the timing of vendor payments and customer receipts. Our revised view also reflects the impact of lower operating results, including higher than anticipated working capital levels and currency fluctuation. Importantly, a good portion of the shortfall to our previous free cash flow estimate for the year will be a benefit to the first quarter of next year.

With net debt to EBITDA at 1.3 times, we remain below our long-term targeted leverage position and continue to be disciplined with our share repurchase program. We've repurchased 5 million shares through the end of the third quarter, at a cost of $247 million.

As we've discussed, we repurchase more shares when the stock trade is at a greater discount to our assessment of intrinsic value, within certain limits, relative to daily trading volume. To that end, we've recently ramped up our share repurchase levels, first, when the stock declined at the end of the July, then even further at the beginning of October, when there is a broad weakening in the market. So in addition to the 5 million shares repurchased in the first three quarters, we've repurchased approximately 1.5 million shares in the first four weeks of October.

Looking at the segments, Pressure Sensitive Material sales in the third quarter were up approximately 5.3% on an organic basis. At the product line level, label and packaging material sales were up mid-single digits. Combined sales for performance tapes, graphics and reflective products were likewise up mid-single digits, with another strong quarter for performance tapes being offset by relatively weak growth of graphics, due to the service issues in Europe that we discussed earlier.

On a regional basis, North America sales grew low-single digits, rebounding from Q2 levels. Western Europe sales grew mid-single digits, reflecting solid market demand. However, we are cautious about the outlook for the European market for the remainder of the year.

And emerging markets grew upper-single digits. This is slower than recent trends, as China slowed to low-single-digit growth this quarter. While some of this represents inventory correction, we have seen a general slowdown in our end markets in China.

PSM's adjusted operating margin of 10.3% in the third quarter was 20 basis points lower than last year. The net impact of raw material input costs and pricing; higher manufacturing costs, including the transition costs in Europe; and country and product mix more than offset the benefit of higher volume and productivity.

We've talked about the challenge of the pricing and mix dynamic in PSM, and we are working to address it. It is a top priority, but it will take some time to adjust. The manufacturing cost challenges are already being addressed and should be back in line by the end of the fourth quarter.

Retail Branding and Information Solution sales declined about 2% in the quarter, reflecting some share loss in the US value and contemporary segments, partially offset by continued strong demand from Europe-based retailers and brands, which reflects the growth of RFID and other share gains in that region. RFID revenue was up almost 20% in the third quarter and up 17% year-to-date.

Despite the overall sales decline in the 3rd quarter, RBIS expanded adjusted operating margins by 80 basis points to 6.7%, as the benefit of productivity and lower incentive compensation more than offset the impact of wage inflation and lower volume. As Dean mentioned, we're focused on driving share gain in RBIS while continuing to drive productivity and expand the operating margin in this business.

Sales in Vancive Medical Technologies were down roughly 5% organically, due primarily to the timing of orders. The operating income declined by about $2 million, due largely to an R&D milestone payment we received last year from one of our strategic partners.

As for our 2014 outlook, we now expect adjusted earnings per share to be in the range of $3.00 to $3.05. This reduction reflects continued softness in RBIS's top line, the pricing and mix challenges in PSM, and about $0.03 of currency headwind in the fourth quarter, largely offset by tighter spending controls and lower incentive compensation expense.

Our full-year 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 3.5% organic sales growth, which excludes the benefit of an extra week of sales this year.

At recent rates, we expect negative impacts from currency of approximately 1% to reported sales growth and approximately $6 million of EBIT. We expect average shares outstanding, assuming dilution, of approximately 96 million shares, reflecting our increased level of share repurchases.

As I mentioned, we now anticipate 2014 free cash flow of less than $300 million. And we increased our estimate for restructuring charges by $0.05 per share.

We anticipate the savings in 2015 from the restructuring actions implemented this year to be approximately $35 million net of transition costs. The rest of our key assumptions remain unchanged from what we shared last quarter.

In summary, we delivered another quarter of double-digit earnings per share growth, despite a number of challenges. We've had a couple of uncharacteristic hiccups on the execution front, which I'm confident we'll address quickly.

And we are refining our strategy in a couple key areas: specifically, optimizing the tradeoffs between price, volume, and mix in PSM and recapturing share in the US in RBIS. With these refinements, we are confident in our ability to achieve our longer-term goals.

As I said at the start, I am honored and excited to be named COO. This is a great Company with great people. Our two industry-leading core businesses are well positioned for profitable growth, which, combined with our continued focus on productivity and capital discipline, will enable us to further expand margins as well as increase returns and achieve our 2015 and 2018 targets.

Now, we'll open up the call to questions.

Thank you.

(Operator Instructions)

And our first question is from the line of Ghansham Panjabi with Robert W. Baird. You may begin, sir.

Hey, guys. Good morning.

Mitch, congrats on all these changes. Sounds like you'll be a busy guy, and I hope your business card can hold all these new titles.

Thank you, Ghansham.

You know, on the titles -- they all make sense. But one that stands out is on the PSM side. So just on that, first off -- what changes, if any, should we expect for the segment going forward with the leadership adjustment there?

Yes. Ghansham, I expect the fundamental strategy to be the same. And we were in the -- I'd say we're in the process of tweaking the strategy a bit.

Of the execution of the really complex project in Europe, we probably bit off a little more than we could chew and leaned forward pretty aggressively -- getting that back under control. And I think more of a focus on growing in higher margin segments. And by the way, this graphics transition, once it's done, will help us be able to do that.

So it's fundamentally the same strategy. Just a little bit of shift in priorities and execution.

And Ghansham, as far as from an organizational standpoint right now, given what Dean just said, for a period of time, I want to spend some time really -- I know this business well. But I want to do a deep immersion with the team and just spend more time in that organization.

Okay. That makes sense.

Then on free cash flow, can you just quantify some of these -- you mentioned higher clarity on the vendor payments, so on and so forth, and the impact that will have on 1Q at the expense of 4Q. But could you just quantify that impact for us?

We don't have -- there's a tremendous amount of variation around year end, as we've talked about, Ghansham. So we're not going to quantify it. And that's why we just said it's going to less than.

And there's -- it's the timing of vendor payments and customer receipts, as we talked about. But also, if we look at where we are on the productivity front on working capital, we are a little behind from where we wanted to be. And so the key focus here is, can we achieve our objectives by the end of the year, where we're going to be on working capital?

So we do expect it to be lower than $300 million at this point. Could be a pretty wide range -- a good portion of that. Any shortfall will come through next year.

Our overall focus here is continuing to maintain long-term capital discipline while we generate significant cash flow over the long run. So if you recall last year, we had a significant Q4 free cash flow -- $225 million -- and a big outflow in Q1. So we actually see a rebalancing of this as actually could be a good thing.

Okay.

Just one final one. The caution on Europe -- is that just being pragmatic, based on the news headlines you're reading about? Or is there something specifically that you're seeing right now? Thanks.

Yes. Ghansham, I was just over with the team last week. And we are still seeing decent growth, but it's just not as strong as it was. The last few quarters, we've seen good growth in Western Europe, good growth in Eastern Europe. But not at the high rate that we've seen before.

I actually think our results for Q4 will show okay, but they'll be different. In other words, our graphics sales weren't very good in the third quarter because we had some execution problems.

I believe those will rebound as we drive down our back logs. But in the labeling and packaging materials, we've definitely seen a little bit of softening, I would say, the last couple of months in Western Europe.

And, yes, we're being pragmatic about the news coming out of Europe especially.

Okay. Thanks so much, guys.

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

Thanks. Good morning, everybody. Again, Mitch, congratulations. Well earned on the new responsibilities.

Thank you.

I just want to piggyback a little bit off of Ghansham's question to start. Do you see yourself in the role of heading up PSM indefinitely, or do you think that is something that transitions to some other individual in the next year or two?

And then, similarly, can you update us -- I realize it's just perhaps started -- where you stand on finding the right CFO to run Avery from here and whether it's more likely internal or externally focused?

So as far as your question of do I see myself running it indefinitely, one thing I've learned is nothing is indefinite. So not making any decisions on that whole front right now.

To me, the key thing is we've got the right strategy. We've got a great team with the materials organization. We know what we've got to do. We know we've to make some course corrections.

And that's what the team and I will be focused on. And like I said before, I want to spend a period of time doing a deep immersion with the organization and on the strategies. And we'll evaluate as time goes by about how we adjust course on the organizational front.

George, as far as the CFO search goes, we have actually started the process. We are going to do an external search. We do have some internal candidates as well.

So we are going to be doing some very active benchmarking there. I expect it will take a few months because -- especially at this time of year.

Yes. Understood. Well, good luck in that process. Obviously, an important seat to fill.

If we switch to operations, can you talk a little bit about what you're planning to do to adjust pricing in some of your lower-priced geographies -- if I'm paraphrasing correctly?

Yes. So, George, we talked about -- in a few regions, we had been going after some lower-margin business. That was still EVA positive. I think we may have over-corrected there in a couple places. And so, fundamentally, we have adjusted prices in a few countries to capture that through a combination of factors -- either direct price increases or reducing rebates.

Okay.

I mean, just a quick question on that. If it's EVA positive, then why do you need to increase pricing? And then I had a follow-on RBIS, and I'll turn it over.

I think, on the average, it was -- the moves have been EVA positive. Especially even last quarter, if you take the extra transition costs we had in Europe into account.

But in some countries, in some product areas, it wasn't EVA positive. And that's where we're taking the corrective action.

Okay. Understood on that.

My last one and then I'll turn it over. With RBIS, given all that you bring to bear and all that you've told us about in terms of your value proposition, how is it that you're losing market share in the US?

And then, Mitch, a quick one on share buyback. Some numbers that the team and I were running -- it looks like the average share buyback price we would calculate for the third quarter was around $49 a share.

Is that correct? And if not, could you tell us what the average repurchase price was? Thank you.

Yes. George, on RBIS, we've had very effective share gain in Europe. And the strategies have worked extremely well there.

In the US, actually, there is some market segments where we're doing very well. Especially in the performance and athletic segment and some of the fast fashion segments.

The area where we've -- I would guess -- I won't say struggled, but we're trying to change value proposition, is in the value and contemporary fashion. Or probably easier to describe as department store sector.

We have a couple of issues. One is that the portfolio of customers that we have traditionally had, unfortunately, is doing worse in the market. And so one of the strategies here is to get and attract new customers. And we're having some early term success, but it does take some time for that to play out.

Also -- and I want to give the team some credit here -- we have been doing a good job of pricing for value in all of our segments. And I think we just, frankly, got a little bit out of balance in a couple of these market segments.

And so we're, again, in the process of adjusting that and capturing some new business. And here's a case where we've lowered our fixed costs and the variable margin is still very attractive.

So, again, I think it will take us a quarter or two to get back on track. But I think the team has good plans.

We've made some changes in our commercial leadership in North America and actually moved one of our senior European leaders to North America who had been successfully executing that strategy. So I'm confident we'll be fine.

And, George, your math is right. It's about $0.25 less than $49 a share, average for the quarter.

If you look at our absolute share buyback within Q3, it was 1.9 million shares, which is basically the same we had in Q2. So when the stock started declining at the end of July, we ramped up our share repurchase activity.

But as I said, we have limits based on daily trading volume. And, as you know, volumes drop quite a bit off in the summer months.

So we accelerated, but it's relative to trading volume. As I said further, we've accelerated even further in the month of October.

George, one more piece of color on RBIS, especially for the North American business. They're in -- especially the value segment, customers tend to buy a couple different ways.

They use either nominated programs. In other words, they say, you get 100% of either my business or programs. Or they qualify multiple vendors.

We have been focused more on nominating programs. We've had a lot of success there because that really leverages our scale.

But we've been less successful in the open platforms. So, again, we have the ability to go get some more of this open business. And that's really where the teams are focused.

Thanks for all the details. I'll turn it over.

Our next question from the line of Scott Gaffner with Barclays Capital. Please begin, sir.

Thanks. Good morning. Congratulations, Mitch.

Thanks, Scott.

Just wanted to focus on PSM for a minute and some of the negative price cost issues. Seems like they've been going on for a couple of quarters.

Does it make you sit back and maybe reassess whether or not you put that business on more of a contractual pass-through, going forward? Or do you think this is just a -- maybe your input costs are rising faster than you expected. And so it's just taking more time to get back to that price cost neutral situation?

Yes. I don't -- first of all, we're not seeing a lot of raw material inflation right now, as you might expect. I think the strategy here, overall, is the right one.

Grow the top line faster through innovation. Grow in higher margin categories. Accelerate growth in emerging markets where we tend to have higher than average margins.

So we like the fundamental strategy. What we've been faced with on the margin is that our variable margins in the short term aren't as rich as we would like them to be.

So how do we address that? We address that by more targeted segmentation around pricing, making sure that some of the business we go after is definitely EVA positive.

We didn't help ourselves with the operational hiccups that we had in the quarter. We would have had at least 20 or 30 more basis points of flow-through in the quarter without those hiccups. So we've got to hone in a little bit on the execution, and I'm confident that we'll get there.

So it's a number of factors. And I think the team is -- understands what we need to do. We've got really good clarity about what's going on in the market. So we'll start to make some progress.

And the thing I'd add on the mix front -- from a product mix standpoint, this is something that we have been looking to address and focusing more growth on specialty and so forth. And so we are seeing things. Despite the very slow graphics quarter in Europe, which is higher variable margin, we are starting to see a stabilization because of the successful implementation of those efforts. So that's one thing I'd throw out.

The other is, country mix I highlighted as well. So the very low growth in China -- China has higher variable margins as well -- also is an impact for us.

Okay.

And you mentioned maybe a focus on growing the graphics business, going forward. My understanding is that's a little bit of a leading indicator, that segment, just given its sensitivity to the economic situation.

Are you talking about growing it because you actually see things getting better? I know you mentioned Eastern and Western Europe maybe getting worse.

But maybe there's some underlying trends within your customers that makes you feel better about that business. Or is it just a long-term opportunity?

Well, we have had great growth in graphics in North America, in Asia, and I am going to carve out the piece of business that's been sourced from Europe for Asia, and in South America. And up until we had some of these operational hiccups, we also had higher than average growth in Europe at the same time.

So in the third quarter it wasn't good because, frankly, we couldn't get orders out the door. And we'll have that backlog driven down in this quarter and be back.

So customers like our value proposition. We're going to be more competitive after we complete the restructuring program.

So it's an opportunity for us. We have relatively low market share, and we have some fantastic new products.

And I think the one new product that is very popular right now is our Supreme Wrapping Film for automobiles. And it's a great product. It's got very nice margins.

Installers like it. Customers like it. So I encourage all of you guys to go out and spiff up your cars and try some of this new Supreme Wrapping Film.

Interesting.

And then just lastly -- on both segments and even on the corporate line, it looks like maybe you mentioned the lower incentive compensation. I assume there was maybe some reversal of prior accruals. Can you just quantify how much that was for each of the segments?

Well, so we're just going to provide the information, Scott, at the overall Company level. But if you're trying to get a feel for what was for the quarter versus reversal of some prior quarter items.

So I mentioned that it was a 60 basis point benefit to the quarter. So year-to-date, it's about a 30 basis point benefit year-to-date. So you can compare the impact to the various quarters and understand what the implications will be to 2015.

And then within the segments -- I won't provide specific numbers, but what I'll say is it's less for PSM and more for RBIS. Meaning, more of a benefit for RBIS and still a benefit in PSM, but less so.

Great. Thanks, guys.

Our next question is from the line of Anthony Pettinari with Citigroup. Please go ahead, sir.

Good morning, and congratulations to Mitch.

Thank you.

Just a follow-up on PSM. You've talked about this more targeted segmented pricing.

I'm just wondering how long it takes to implement this kind of change? Is this something we could see benefits from in 4Q, or is it a longer-term project?

And when you look within the organization in terms of people or systems or processes, what do you need to do to implement this kind of change in pricing? And again, what's the time frame for implementation?

Yes. Anthony, it takes time. And I think we have the data and we've got the capabilities to do it. So I don't think there is a lack of knowledge here.

So I don't want to put a specific timeframe on it because it's difficult to predict. And let's face it. There are a lot of factors in here -- mix, what product lines are growing, country mix as well as regional mix in terms of overall demand. But I think we will start to see some progression over the next few quarters.

Okay. Okay. That's helpful.

And then just on RFID -- I was wondering if you could talk a little bit about growth of RFID in the quarter and what kind of rate of growth you'll ultimately see this year. And then just early look into 2015, you've -- anniversaried customer loss earlier. What kind of growth you expect in RFID in 2015?

I think -- we're not going to give guidance now on RFID for 2015. We're happy to do that when we get to our Q4 earnings call and provide guidance for next year.

It's grown about 20% this year. And it's very much in line with our expectations. So we feel good about our position there and the market growth.

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

Our next question from the line of Rosemarie Morbelli with Gabelli & Company. Please go ahead.

Thank you. And congratulations to Mitch, as well.

Thank you.

If we look at Europe and Russia, Ukraine -- you have a new distribution center in Ukraine. Can you give us a feel for how that is doing?

It was doing quite well last quarter. I understand it is small.

And when you look at October, do you see continuation of the decline or a continuation at this particular lower level?

I think from, Rosemarie, from a European perspective, we've definitely seen a slowdown in Russia, which is probably not a surprise to most folks. And, really, all of Eastern Europe. I don't have any specifics on Ukraine. So it is awfully small.

I will say, though, that the rate of growth that we had forecast as part of our guidance range for the quarter -- we're at or a little bit above for the whole Company after three weeks into the quarter. So I've still got my fingers crossed.

We've got a long way to go. And when things slow down, they tend to slow down near the end of the quarter rather than -- especially at the end of the year -- rather than in the beginning. So I'm cautiously optimistic.

I think Europe, again, we're concerned about the economics -- like everyone else -- in Germany and in France. But I think that some of that will be offset by the improvement in our graphics business as we drive down the backlog. So we may not be indicative -- our numbers for Q4 may not be indicative of what exactly is happening in the market because we do have this large backlog of orders that we're processing now.

Okay.

And if we look at the issues on PMS, the manufacturing consolidation, could you give us a little more details? And as you were unable to deliver products to your customers, when did you have any loss of customers because of that? And, second, more related to the European slowdown, any increase in bad debt potential customer bankruptcy filing?

I think on the order side, we definitely lost some business during the quarter. When you can't fulfill customer orders, they generally look for other places to go.

I will say, though, that the sales rate, as we're driving down the backlog, has continued -- the order rate, I should say -- has continued to improve. So that, I think, is good.

I think customers are always disappointed when you do that. But once we get back into a normal service position, they like our products. We've got a number of new products that we'll be launching in graphics in the beginning of the year.

And we've got to execute, obviously. So we did lose some business in the quarter, for sure.

And--

As for the collectability of receivables and so forth, Rosemarie, we haven't seen anything abnormal in the change. And actually, if you look at our measures we have for quality of receivables, they've actually improved from where they were last year.

But we do have small adjustments and so forth and hits, periodically. But nothing outside the norm right now.

Okay. Thank you.

Our next question is from the line of John McNulty with Credit Suisse. Please go ahead.

Yes. Good morning, and thanks for taking my questions. And Mitch, again, congratulations.

Thank you.

So can you give us an update or remind us as to what percent of your raw materials are petroleum or petrochemical based?

Well, so it's about half of our raw material base is driven by paper stocks. And then the balance -- I'd say 35% are film, and then 15% are monomers, resins, other chemicals that we use in the manufacturing of adhesives.

One thing I will note, though, and that is there's probably more of the decoupling between oil prices and some of the feed stocks that we buy, mainly because of the -- especially in the US. When you have a lot more shale gas and oil being produced, they don't have the same derivatives as oil, let's say, from the Middle East. And, therefore, it doesn't have the same linkage. In other words, there are some products that we would buy that there are less of in the marketplace because of those -- because of that change.

Okay. Fair enough.

So basically, what it sounds like is the big drop in oil, while you may see some benefits, it may not be necessarily the link that we've seen in, say, the last ten years or so? Is that the way you're thinking about it?

That's correct. We haven't seen a big change now.

Obviously, we're interested in making that happen, if we can. So that's an area of focus for our procurement team.

Okay. Fair enough.

And then with regard to corporate and other, it definitely took a noticeable leg down. It's actually the lowest level we've seen in five or six quarters, at least.

Is this all the compensation accrual adjustment, or is there something else? And how should we be thinking about what that level is going forward?

So that's -- a portion comp reduction is there, but only the portion that relates to corporate employees. There's always variation in this line. There's a number of things that can impact that. The right number to be thinking about is roughly $80 million per year.

Okay. Fair enough.

And just a last question on the RBIS side. In terms of the business that you lost -- so maybe not necessary where you were betting on the wrong horse, but just some of the pricing issues you had mentioned -- when you think about the type of competitor that took the business, is it typically a small regional competitor there, where, once you adjust your pricing, it's pretty easy to take that business back? Or are they maybe slightly larger, where you're going to have to scrap for it? If you could give us some color as to maybe where you think you lost the business, that would be helpful.

Yes, I don't have that much detail, John. But typically, it does tend to be smaller regional competitors. That's still the bulk of the marketplace, especially for those types of customers.

Okay. Great. Thanks very much for the color, guys.

Our next question from the line of Chris Kapsch with Topeka Capital Markets. You may begin.

Good morning. I had a few follow-ups on this strategy to selectively adjust your pricing in Pressure-sensitive.

First just wondering which geography is this issue most acute? And then, second, you mentioned adjusting pricing, maybe reducing rebates -- just wondering, also, if there's the willingness to walk away from businesses that you have gained that you previously viewed as EVA positive, but you may no longer view it that way. So are you willing to cede share as you adjust your strategy here?

And then also, just wondering if there's any sense for competitive response? Maybe it's too early to gauge.

Yes. I think in places like Asia, that's where we're doing some of the rebate adjustments. And we have -- we're constantly managing the mix of our product portfolio.

So there is business that we have, quote, walked away from. And the focus there is growing faster in higher-margin product categories. So that's the balance that you're always trying to achieve.

Which geography, generally, have you -- do you feel like this issue is most acute? I mean, you mentioned the reducing rebates in Asia. But is this -- is it across the board, or is it more in Western markets?

It's actually, Chris, this is fairly typical of the way the business works everywhere. I don't think there's one place where it's worse or better, et cetera, et cetera.

I mean, this is a constant -- I won't call it a balancing act. But I've -- we've done a -- I think the team has done a really good job of improving margins very successfully over the past few years. Part of it's the renovation.

So that's where we get a lot of the margin increase. Newer products, either with lower costs, and therefore, we can substitute products with higher margins. Or brand new products that just have higher margins.

And then again, growing in product categories like durables or specialty products or graphics, where we have higher variable margins and flow-through. So this has always been part of our formula on a go-forward basis.

Okay.

And if I could just follow up with sort of a bigger picture one -- if you think about the Pressure-sensitive industry, notwithstanding the recent slowdown it sounds like in China, obviously emerging markets are pretty good growth. Europe has been growing, certainly doing better than the broader European economy most recently. And then, that leaves North America.

It appears as though -- and I think the industry data even suggests this -- that the Pressure-sensitive industry, broadly, is no longer a GDP plus industry. In fact, maybe, this year it may have grown less than GDP.

So I'm a just wondering, is there -- can you just comment about the North American Pressure-sensitive industry and its growth, vis-a-vis the broader economy in North America? Has something changed where it's just not as growthy as it once was? Or how do you see that?

Yes. It's a little perplexing. You're right.

Europe has -- the market in Europe has grown nicely, actually, above GDP for the last 18 months. Whereas the US has been, I think for the last three or four quarters, been pretty flat.

I try not to draw too many conclusions from that. We had growth in North America in the third quarter, and that was nice to see. We don't have the market data, so it's difficult for us to calibrate on that.

So I am actually perplexed by it. I still think there's growth in both geographies. And certainly for us -- whether it's in graphics or durables or some of these other, more specialized niche markets.

So I wouldn't declare that the business is sub GDP, especially with Europe growing above. So I think it's just too early to make a call like that.

Thanks for the color.

Our next question is from the line of Silke Kueck from JPMorgan Securities. Please go ahead.

Good morning. How are you?

Good morning.

I have a question on your cost-saving targets. So I think, year-to-date, your cost savings were something like $27 million. So it looks like maybe for the year, by the end of the fourth quarter, maybe you will get to $34 million, $35 million.

And the restructuring spending last year was something like $35 million or $36 million. So my intuition is that whatever cost savings you are -- you'll be pulled out from the $55 million you're spending this year -- would be higher than the $35 million you're indicating. Essentially what I'm asking is -- is the $35 million in cost savings for next year conservative, given the level of restructuring spending this year?

You're right to call this out, Silke. Usually, we get savings roughly equal to the amount of costs that we incur.

Right.

Exception of a large European restructuring. Just restructurings in Europe are more costly, relative to the savings.

So that is why you see a little bit of a differential here. Higher costs this year, relative to the amount of savings we are expecting. And given the timing of the implementation of the European restructuring, there is actually also a further about $5 million that will come in 2016 from the actions this year.

But you're right to call it out. But it is a little bit different from the norm, and I wouldn't call it conservative.

Now, we do expect to have further restructuring next year, which we'd have further savings, as well. Some that would impact next year, and some that would impact the year after, as well.

Okay. That's helpful.

And in terms of the roll-back of the corporate costs accruals -- maybe that was like $9 million or $10 million this quarter. Is there a similar order of magnitude in the fourth quarter, or is everything adjusted now?

No. So a couple things. It's not hitting just the corporate line. Those numbers that I quoted, the 60 basis points, was across the Company. So it's --

Yes. I apologize. I just meant the overall comp accruals. Yes.

Yes. So it was about 60 basis points in the quarter. Year-to-date, it's about 30 basis points. So you'd expect it to be -- assuming everything plays out like we are planning -- it would be roughly the 30 basis points.

So it means that no further adjustments in the fourth quarter? Is that what you said?

You would not be further adjusting down. But you'd be accruing less than you had in the prior year Q4. That's how that works.

Okay. Can you quantify the magnitude? What would that maybe be on a year-on-year basis?

About 30 basis points.

Oh, okay. So that's the 30 basis points.

Okay. I understand. Sorry for being thick.

No, I understand.

And the last question I had is this. Even though -- it seems that propane prices haven't really moved yet because we had all these refinery outages. But it looks like the raw material basket may be less sensitive to oil.

But once activities starts up again, I would expect that probably all the propane-based derivatives that you purchase will probably begin to come down. In that environment, it seems that it may be difficult to raise price.

How do you argue for a better price with your customers if it turns out that your raw material basket may not -- maybe it won't step down. Maybe it will be flat. How do you think you'll get to higher prices in an environment like that?

Yes. I think the decision on prices is driven not just by raw material costs, Silke. It's driven by what we're trying to do with the business as well as raw material costs and prices.

And propylene is one factor for us in a whole range of factors, whether it be pulp -- remember, pulp and paper is half of what we do. So I mean, I hope you're right about propylene.

And if that happens, our goal would be, obviously, to take advantage of that. And, yes, customers will probably be aware of those factors as well.

But I think, if this is -- I think in this environment, we're constantly taking pricing actions, whether it's being driven by currency or new products that we launch or a number of factors. And there are changes in raw materials all over the place. So I'm not concerned about that.

And as a very last question on capital allocations. Do you [have vision] that you can continue the magnitude of the share buyback next year? Or do you have other plans for the free cash flow that you generate?

Well, we have a very disciplined strategy for the use of our cash -- a good model. We said, back in May at the investor meetings, that we were looking at potentially some small bolt-on acquisitions.

And we have a pipeline of deals. As you can tell so far, we haven't found anything that makes sense. But if we find the right opportunities, we'll do that.

We're pretty -- we're well below our targeted range for our -- on our balance sheet -- for debt to EBITDA. And so we've got plenty of capacity to do both, frankly. So we're in a pretty good position, actually.

Okay. That's clear. Thanks very much. I'll get back into the queue.

Our next question is a follow-up question from the line of George Staphos. Please go ahead, sir.

Hi, guys. I'll try to ask these in sequence. I know we are getting late in the call, here.

I guess, first of all, can you help us map out the savings of $35 million -- how you expect it to fall over the next few quarters? Is it pretty even, or do you think it will be back-end loaded?

And given what you know right now -- recognizing that things can change, obviously -- do you anticipate much additional restructuring next year? I think to answering Silke's question, you said there may be a little bit. Could there be other endeavors that you need to do for getting the cost structure right in either RBIS or PSM?

And then lastly, at least in the sequence, Vancive -- what's the long-term strategy here? It's obviously a drag on the P&L. I know you've got some products that will hopefully come out.

But it's still a burden on the P&L. So what's the long-term strategy there?

So George, as far as your first question about the timing of savings for next year, using roughly -- evenly distributing that throughout the year is the right rule of thumb to start with. What you'll see is, on the carryover front -- not talking about the new initiatives -- on the carryover front, more of the savings will be front loaded to RBIS in the first part of the year. As you go out to the later part of year, more of those savings would be in PSM, as this European restructuring project comes to completion.

Yes. On the -- George, this is Dean.

On the additional restructuring, we're going through our operating plan reviews in a few weeks. And our goal is to continue on our path of delivering against our long-term financial targets.

So I think we'll have a lot better visibility on what we want to do on productivity and cost out and restructuring, et cetera, et cetera, in a few weeks. And we'll certainly let investors know when we do the fourth quarter call and provide guidance for next year.

I think we have, hopefully, a good track record for identifying good productivity gains and executing them well. I think, maybe, in the third quarter, we had probably the first hiccup that we've had, and we're committed to crisping that up and having better execution.

But I think our teams are really good at finding additional sources of productivity. And that's going to be one of the areas -- just like we always do -- to focus on the AOP.

I think, at Vancive, our goal is to have that business at break-even next year. The new product that we've launched are what's -- are causing the losses. And the -- you know, we are investing in the future.

And the products are fine. We have had a couple of commercial partners that haven't, frankly, delivered what they said they would do. And so it's taking a little longer for us to ramp up some of those new product launches.

So this is an area I'm confident in. We've got a good team and good products. But we're going to be very disciplined about how we move that forward.

Okay. Thanks for that.

And maybe lastly -- in 30 seconds -- why should we be comfortable that the transitional manufacturing cost issues in PSM are now behind you in Europe? Thanks, and good luck in the quarter.

Yes. Mainly, George, I was just there, again, last week. And we're now hitting the metrics that we need to drive down the backlog to improve our inventory and service levels to customers.

So through the first three weeks of October, anyway, we're making the progress that we -- that the team has committed to. So I'm pretty confident that we'll get everything squared away by year-end.

And with that, Mr. Scarborough, I'll return the call back to you for your closing remarks.

Yes. Thank you, France.

Just to quickly recap, our play book hasn't changed. We're continuing to pursue the broad, strategic priorities that we've communicated in the past, fine tuning where appropriate, and tightening up the execution of our commercial and operational initiatives.

I know Mitch will continue to be an outstanding partner in driving our value creation agenda, and I look forward to working with him and the rest of the organization to achieve our strategic vision and financial goals. Thank you, and we'll talk to you all in the new year.

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