艾利丹尼森 (AVY) 2014 Q4 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 fourth quarter and full year ended January 3, 2015. This call is being recorded, and will be available for replay from 10:00 AM Pacific time today through 12:00 AM Pacific time February 5. To access the replay, please dial 1-800-633-8284, or 402-977-9140 for international callers. The conference ID number is 21734744.

(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 un-audited fourth-quarter and full-year 2014 results. Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The non-GAAP 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 will 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 and CEO; and Mitch Butier, President, COO and CFO. I'll now turn the call over to Dean.

Thanks, Eric, and good day everyone. 2014 represented another year of solid progress toward our strategic and long-term financial goals. We delivered 3% growth in organic sales, and 16% growth in adjusted earnings per share, while boosting return on capital by nearly 3 points.

We maintained our strong capital discipline, returning over $480 million to investors through dividends and share repurchase. We raised the dividend by 21% in 2014 and repurchased 7.4 million shares.

Free cash flow came in below our original expectations for the year, due largely to the combined effects of currency and actions we took to reduce the volatility associated with year-end changes in working capital levels. Going forward, we expect to see a return to our consistent pattern of delivering solid free cash flow.

We remain highly confident in our strategy, and in our ability to achieve the long-term financial goals we communicated last May. We will grow through innovation and differentiated quality and service.

Our significant exposure to faster growing emerging markets, global share gain opportunities in Performance Tapes and Graphics, and our leadership position in RFID will continue to be key catalysts of long-term growth for the Company. We will further expand margins through productivity and leveraging our global scale, as reflected in the increase to 2014 and 2015 restructuring investments.

We'll continue to optimize our use of capital in terms of both investment strategy and our disciplined approach to shareholder distribution. Any long-term strategy requires some mid-course corrections, and we're in the process of executing some of those now. We are strengthening the long-term competitive positions of all of our segments, including actions to adapt to recent challenges in RBIS.

What continues to guide our actions is our commitment to achieving our long-term financial objectives, which we set with a view to delivering above average returns for our shareholders. In this regard, 2015 represents an important milestone for us, as the final year of measurement for the four-year financial targets we first communicated in 2012.

I'm very pleased to report that we are well on track to meeting those objectives. We included our scorecard in the supplemental materials we distributed earlier this morning. Without walking you through all the metrics, I'll just highlight that anticipated compound annual growth in adjusted EPS over this four-year period is expected to be roughly 20%.

Last year, we established aggressive new five-year targets through 2018, and we're already making progress towards achieving them. We've had a slower start on the organic growth front, but are taking actions to strengthen our competitive position in all of our key market segments to ensure that we stay on track for both mid-teens compound annual growth and adjusted EPS, as well as a 4 point plus improvement in return on total capital by 2018. Achievement of these goals will deliver strong growth in EVA for both of our core businesses and, of course, for the Company overall.

So let me just touch briefly on our three businesses. Pressure-Sensitive Materials delivered its third consecutive year of strong volume growth, while maintaining its profitability and high return on capital. This is a great business, but we believe it can be even better.

I'm really pleased to see our already high-performance team demonstrating a heightened sense of urgency. The team has made good progress addressing the product mix challenges we faced last year and in the first half of 2014, by accelerating growth and higher return segments. We are continuing to invest in growth, while reducing fixed cost to ensure we can win and grow in all key market segments.

I know everyone is keenly focused on the raw material outlook for PSM. Now, recall that over the long run, the material input costs and pricing rise and fall together in this business, albeit with some lag. It's very difficult to predict the overall impact to the full year though, while we may see some short-term benefits, the cost outlook for the second half is highly uncertain, as is the timing of any pass-through.

Retail branding and information solutions faced top line growth challenges this year, reflecting share loss in the value and contemporary segments of the market, offset by solid growth in RFID and the performance segment. To address the recent top line challenges, we are focusing our sales efforts to recapture share, while reducing fixed costs and aligning resources to better serve all segments of the market.

We expect an improvement in our growth trajectory by midyear, and to resume our strong pace for margin expansion. We continue to see significant opportunities for top line growth.

RFID remains a key growth catalyst. Unfortunately, the sales trajectory can be somewhat choppy in this relatively early adoption phase for the industry, as evidenced by a year-on-year decline for RFID sales in the fourth quarter.

With a few customers driving a significant share of our total volume today, we do expect some continued volatility. But our customers remain fully committed to the technology and our partnership. And we're seeing quite a bit of new interest in pilots and rollouts, and we continue to expect RFID to grow 15% to 20% through 2018.

As far as the core market is concerned, I'm confident in the team's ability to adapt to recent challenges. Underlying demand for apparel hasn't changed, and our value proposition for the performance of premium segments of the market remains strong. Admittedly, we were not as focused as we should have been on meeting the needs of the value and contemporary segments, but we know what we have to do here, and we have the will and the proven capability to get it done.

Finally, Vancive, our medical products business, delivered 8% organic growth for the year, at the high end of our long-term target. We expect to significantly reduce the operating loss of this business in 2015, and are still investing here ahead of growth. We remain focused on achieving a sustainable breakeven run rate in 2015.

Wrapping up, we expect this year to be a year of strong operational improvement for the Company. Adjusting for a roughly $0.25 hit from currency translation, our EPS guidance reflects a growth rate of about 15%, at the high end of our long-term target, with further expansion of our return on capital, and a continued commitment to returning cash to shareholders.

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

Thanks, Dean, and hello everyone. As Dean mentioned, we are focused on driving profitable growth through differentiated quality, service and innovation, with a specific focus on opportunities with greater growth and margin potential, such as tapes, graphics RFID and, of course, emerging markets. We have, and will continue to, invest in these key opportunities.

We're adding new coating capabilities to support growth for LTM and industrial tapes in Asia. We've recapitalized the graphics business as part of our restructuring program in Europe. And we're expanding our commercial capabilities in a number of these important market segments.

We will also continue to improve our cost structure, and maintain our capital discipline. This has been a strength of ours over the years, and is something we will continue to focus on, as evidenced by our increased level of restructuring savings estimated for 2015.

And I want to highlight that our productivity focus is not just about lowering costs and expanding margins, which are both obviously very crucial. But also about becoming more competitive, so we can grow profitably and better serve the less differentiated segments of our markets.

This is the right overall strategy, but I can tell you, after my first 90 days as COO, that we will be making some adjustments to the execution of this strategy that I believe will make us more competitive further improve returns in both of our core businesses. Let me just touch on some of these course corrections.

In the near-term, we face three key challenges; rebalancing the dynamics between price, volume and mix in Pressure-Sensitive Materials; expanding margin in the last differentiated segments of this business; and winning in the value and contemporary segments and RBIS. In terms of PSM's price, volume, mix balance we've, already seen some progress, with product mix actually being a modest positive to EBIT in the fourth quarter. We will continue to drive for improved mix by focusing on the higher growth in margin potential segments of the market.

In terms of the other two challenges, the course corrections actually share a common theme. Both PSM and RBIS are in the process of further reducing their fixed cost structures to be more competitive in the less differentiated segments of their markets. As I said earlier, these aren't just short-term cost plays, it's part of our long-term strategy to win in the marketplace, expand margins and improve returns.

With these refinements underway we are confident in our ability to achieve our long-term goals. My focus here is the same as it has always been, to deliver exceptional values for our customers, our employees and our shareholders.

Now, I'll provide some color on the quarter. In Q4, we delivered a 30% increase in adjusted earnings per share on 1% organic sales growth, with modest top line growth in PSM, offsetting a decline in RBIS.

The impact of currency translation and the extra week were significant. Currency translation reduced reported sales by 3.7% in the fourth quarter, and the extra week added 4.5%.

Adjusted operating margin in the fourth quarter improved 70 basis points to 8.1%, as the benefit of productivity initiatives and higher volume more than offset the net impact of raw material input cost and pricing. Restructuring savings in the quarter were $8 million, and approximately $35 million for the year. And our adjusted tax rate for the fourth quarter was 26% and 31% for the full year, better than expected, due to the benefit of tax planning in the fourth quarter.

The difference in our tax rate compared to the prior year contributed about $0.07 of EPS to the year, all of which came in Q4. And the extra week provided a modest benefit to EPS for the year, approximately $0.05 per share, all of which also benefited Q4.

Free cash flow was $122 million in the fourth quarter, and $204 million for the year. Full-year free cash flow fell well short of our usual 100% plus conversion of net income, reflecting a combination of currency effects and higher working capital.

As Dean mentioned, those higher working capital levels were due in large part to steps we took to reduce the volatility associated with year-end customer receipts and vendor payments. We have begun to see the impact of those actions in 2015, with a roughly $40 million favorable swing in cash flow in the first weeks of January. Going forward, we expect to resume our pattern of delivering free cash flow above the level of net income.

We repurchased 7.4 million shares in 2014, at a cost of $356 million, and ended the year with roughly 92.5 million shares outstanding, including dilution. We remain committed to returning cash to shareholders, and have sufficient capacity to continue our share buyback program in a disciplined manner.

But we're not as under-leveraged as we look, based on the simple net debt-to-EBITDA calculation of 1.4 at year end. As we have said in the past, this ratio serves as a simple proxy for the rating agency measures that guide our policies for maintaining a solid balance sheet and optimal long-term cost of capital.

The rating agency measures include a number of adjustments to debt that are excluded from our simple metric, such as the addition of under-funded pension liabilities. The change in discount rates in 2014, among other factors, increased our under-funded pension liability by $170 million, reducing our near-term leverage capacity. But again, we have sufficient capacity to continue our disciplined share buyback program.

Looking at the segments. Pressure-Sensitive Material sales in the fourth quarter were up approximately 2% on an organic basis, due in part to tough comps against the prior year. Label and Packaging Materials sales were up low single digits, while combined sales for Performance Tapes and Graphics were up mid-single digits, with graphics back on track as the service issues in Europe are now largely behind us.

On a regional basis, sales in North America declined modestly, due to a combination of weak end market demand, as well as the loss of some low-margin business. Western Europe was up low single digits, slower than the pace we had seen earlier in the year. And emerging regions grew mid-single digits, with a continuation of the softer growth we saw in Q3 for Asia-Pacific, continued strong growth in Latin America, and a modest decline in Eastern Europe.

PSM's adjusted operating margin of 10.6% in the fourth quarter was up 100 basis points compared to last year, as the benefits from productivity and higher volume were partially offset by the net impact of pricing and raw material input costs. Results for retail branding and information solutions were disappointing. Sales declined 5% on an organic basis, and operating margin contracted, as the benefit of productivity initiatives and lower cost for incentive compensation were insufficient to overcome the impact of lower volume and other factors.

We commented during previous earnings calls on the share loss we have been experiencing within the value and contemporary segments in the US. While the rate of decline lessened in the fourth quarter for these segments, demand by European-based retailers and brand owners, which have been relatively strong for the better part of the year, slowed in Q4.

A large part of the slowdown among European customers reflects lower than expected sales of RFID products. RFID revenue was down by more than 10% on an organic basis in the fourth quarter, due to the choppy demand that Dean discussed earlier.

Outside of RFID, as I have said, we are focused on recapturing share in the less differentiated segments of the market, by redirecting efforts of our sales and customer service teams who serve factories in Asia, particularly in China. At the same time, we're reducing our cost structure to improve competitiveness and continue to expand margins.

Sales in Vancive medical technologies grew over 30% in the fourth quarter, partly reflecting a delay in orders that negatively impacted the third quarter. The segment's operating loss declined to nearly breakeven, due largely to volume growth. In 2015, we will continue to focus on the milestones needed to drive long-term growth of this platform, with the objective of achieving positive contribution to earnings by year end.

Turning now to the outlook for 2015. All things considered, we anticipate adjusted earnings per share to be in the range of $3.20 to $3.40. Now, I have to admit that this is one of the more challenging years we've had to call in a while, due to the extreme volatility in currency exchange rates and commodities markets. Having said that, we are focused on accelerating our cost reduction initiatives to position ourselves to achieve our long-term goals, regardless of the macro environment.

We have outlined some of the key contributing factors to this guidance on slide 9 of our supplemental presentation materials. We estimate between 3% and 4% organic sales growth, which is adjusted for the loss of the extra week of sales in 2014.

While we are optimistic that the commercial actions we are taking will bolster organic growth in the back half of 2015, we are cautious about the near-term outlook, given the weaker volumes we saw in Q4. Certainly in RBIS, and also for Label and Packaging Materials in North America and Asia.

At current exchange rates, we estimate that currency translation will reduce net sales by approximately 6.5%, and pretax earnings by roughly $35 million, or $0.25 a share. Combining carry-over benefits from 2014 with new actions taken this year, we estimate that restructuring initiatives will contribute roughly $60 million pretax, or about $0.45 a share.

We expect the 2015 tax rate back in the normal range we've seen over the past few years, in the low to mid 30% range. We estimate average shares outstanding assuming dilution of roughly 91 million shares, reflecting our continued return of capital to shareholders. And our outlook for free cash flow includes fixed and IP capital expenditures of approximately $175 million, and cash restructuring costs of approximately $35 million. Importantly, our guidance for 2015 is consistent with the progress necessary to achieve our long-term financial goals.

Slide 10 of the supplemental materials highlights our progress against our 2012 and 2015 targets, while slide 11 shows progress against the new 2018 targets we provided this past year. We are pleased with what we expect to accomplish through the end of 2015, a roughly 20% compound annual growth in adjusted earnings per share over four years, and ROTC well on its way to the 16% plus target we have set for 2018.

We are confident that we will achieve the new set of objectives we've laid out through 2018, and we'll continue to adjust course, as necessary, to ensure we do so. As we've said before, while we may be pleased, we won't be satisfied until we achieve all of our goals.

In summary, we delivered another quarter and year of strong earnings per share growth, despite a number of challenges. Our two market-leading core businesses are well positioned for profitable growth, which, combined with our continued focus on productivity and capital discipline, will enable us to expand margins and increase returns, and achieve our 2015 and 2018 targets.

I would be happy to open it up to questions.

(Operator Instructions)

Ghansham Panjabi, Robert W. Baird.

Hi, good morning. It's actual Mehul Dalia sitting in for Ghansham. How are you doing?

Hello.

What are you expecting, in terms of free cash flow, for 2015? Any range that you can give us?

Just that we are basically converting [that thing]. We're going to get more than 100% of net income in free cash flow, going forward

Okay, great. And with working capital lower raw material cost in 2015? Is there any reason that shouldn't be the case for the year?

I'm sorry can you repeat your question? Someone walked over your first part of your question.

Mehul, my apologies. Can you just repeat your second question?

George Staphos, Bank of America Merrill Lynch.

Hi, maybe out of a question of fairness, you want to put Mehul back in the queue, and then I will go next?

We will put Mehul after you, George. Thanks

Okay, understood. Thanks, and good day everybody. I guess the question I have to start was on strategy. So if we rewind the tape -- and correct me where I'm not phrasing it correctly. In the last couple of years, you have been trying to grow more aggressively, potentially even in markets where there was maybe lower margin, because you thought it was positive for EVA. And if we fast-forward to the current time --and this isn't a shocker. You've talked about this evolving based on the last few quarters.

It sounds like you need to further reduce cost to be able to grow in some of the markets that you would like to grow into. So the question is, did you initially as an enterprise, misgauge your cost competitiveness versus peers, in some of these markets that you wanted to grow at? And if that is the case, how do you know that you still have got the correct bead now on where your cost position needs to be going forward?

George, this is Dean. It's a good question. I -- in PSM specifically, our strategy has been pretty much the same, in terms of growing in the higher-return segments, so that's graphics, performance tapes, our specialty products, et cetera. I think where we got a little bit out of balance was in some of the more paper-based segments, especially in Asia. While it was clear that we had room to grow on a positive EVA basis last year, and we just overshot the mark. I think the teams were a little too aggressive, and the mix started to deteriorate somewhat.

And we didn't need to do it. And then the course corrections actually helped us. And you can see the numbers, certainly in the fourth quarter, I think, are a good indication of that. That being said, I think now, with new management in materials, we're just taking another look and saying, if we want to be even more competitive in those segments, are there things we can do to tweak the strategy and accelerate our growth a little bit more? So some of that is around innovation in some of those lower-margin segments. It's material cost out. And it's also a reflection of, on a cost to serve basis, I think we have a more precise view on what it takes to compete in those segments. So, we're going to continue to grow our share in those segments. We're confident that we can hit our 2018 goals for growth, as well as deliver the margin targets that we've had for PSM in 2018.

Okay. I guess two questions, and then I will go back in queue. If we think about RFID, everything that we've heard from the Company, and our contacts, over the last couple of years is, the price points have become even more competitive for somebody wanting to explore RFID, making payback periods even that much more attractive to a retailer looking to roll this out.

Recognizing that it's very lumpy, it's driven by a couple of customers at a time, why do you think the rollout for RFID has maybe slowed a bit, despite what you would advertise as a really good return to your customer, if they adopt this? So that would be question number one. And then on the restructuring and other savings that you expect for this year, I think you said $60 million. Correct me if I'm wrong. I thought the last goal on that was $35 million. So an incremental amount here. Where are you finding, where should we find, if we had visibility into this, those incremental savings would come from? Thanks, I'll jump back in.

Okay, George, I'll handle the first question on RFID. I'd liken RFID to EAS, electronic article security, which also has a good payback for retailers. And I would say it took probably 25 years for it to become 80% penetrated in the retail market. The fact is that retailers, because of the complexity of the number of stores they have, because of the opportunities they have to invest in a lot of different things, that technology investments by retailer simply take a long time to roll out.

So as I look at RFID, I think that's reflective of why we think this business, which is nicely profitable for us, will continue to grow at a nice rate. In the fourth quarter, we had a large customer, who is big in RFID, that expanded the number of items that they had in their stores last year. And then this year, reduced their inventories. They probably weren't as competitive as they wanted to be in the marketplace. Interestingly enough, they didn't cut back on the percentage of items that are tagged with RFID, but they simply lowered their inventories, and that did have an impact on us.

I will say that at the National Retail Federation show early in January, we probably heard more excitement and enthusiasm by US and Asian retailers than we've ever seen before. So we remain highly confident that this product line is going to continue to expand.

Yes, I guess the only thing to add on that is, Dean said earlier, demand has been choppy over the years. And this decline isn't similar to the decline we had a couple years ago, when one major retailer was pulling back. There's nobody really pulling back, from what we're seeing. It's just because it's concentrated with a relatively few number of retailers. It will be choppy for a while as they roll out their programs.

So as far as the restructuring, you're asking, did the number increase? So we're basically accelerating restructuring initiatives for -- going forward, for all the reasons we've laid out. And $60 million is the anticipated level of savings for what we're planning on right now. And roughly half of that is carryover from actions that we implemented in 2015. And the rest of it is from new actions, as well, which will obviously, have a carryover benefit going into 2016, as well.

All right, I'll come back and follow on that. Thank you.

You're welcome.

Ghansham Ranjabi, Robert W. Baird.

Hi it's actually Mehul Dalia still in. And thanks for getting me back in. My second question is also free cash flow related. Working capital, it seems like it should benefit from the timing of vendor payments, and also lower raw material costs. Is there any reason not to assume that?

Free cash flow will benefit from the timing of payments, and the year-end timing that we talked through earlier. And that had about a -- we estimate about a $40 million swing, which is how much free cash flow we saw in the first few weeks of the year improve in 2015. As far as the lower raw material cost, that will have lower inventory, but it will also have lower payables. So it's really the question how much sticks through on the bottom line, which we commented on. It's pretty hard to predict overall, and over the long run, as Dean commented earlier, raw material and RN pricing end up matching over the long run.

Okay, great.

So now, the materials impact the free cash flow.

Okay, great. And just one last one. How much do you think the working capital initiatives that you talked about in 2014, how much do you think that cost you in free cash flow for 2014?

How much it cost us for 2015?

For 2014. So the working capital initiatives that you talked about, just trying to see what normalized free cash flow in 2014 would've been without those (inaudible) initiatives?

So impact is about $40 million.

$40 million? Great. Thank you so much.

Scott Gaffner, Barclays Capital.

Good morning.

Good morning, Scott.

Dean, in your -- I'm sorry. Mitch, in your commentary on the guidance, you mentioned it was one of the more challenging years to call in some time. So I was just wondering if you could walk us through the level of conservatism you've baked into the guidance? How you thought about it, as you were coming into the year? Did you approach it any differently than you have in the past? Thanks.

Sure. So we approached it a little bit differently, because you can see that our guidance range is narrower than we've given at this time of the year, which implies more certainty. When actually, that's not what we're trying to communicate here. So the reason why it was more challenging is just, as you saw, what was going on with the currency exchange rates between December and January. The euro was just in free fall for a while. And so that's one of the things that made it more difficult, as we were going through just the month of January, continued to update our outlook on that.

And then two is just the whole impact of raw material deflation that we are seeing. And how long -- if there's any gap, how long that can hold onto, and so forth. So that's what made it more challenging, if you will. The other key question is on the top line. So we've got 3% to 4% organic growth baked in. And we said things slowed down, as you heard, in Q4 for RBIS. As well as, we had, in North America, for the material business, some declines. So that obviously impacts our thinking, as well. We expect the growth to come back, and it's going to be a little bit more second-half weighted, from the -- on the top line perspective, given our starting point.

Okay. And would you say it's slightly more conservative than usual? Or how would you feel about that?

No. I think over the last few years, we've actually called it pretty well, as far as setting guidance overall. And if you look at where we started off with guidance at the beginning of this year, it was at $3.05. We ended up at $3.11. And that was largely due to the lower tax rates. A lot of factors going back and forth. And so what we're trying to say is, we've got -- at the high end, a number of things have to go for us. And at the low end, a number of things go against us. But we've got, also, some countermeasures to go against those, as well. So no, I'd say it's pretty consistent with our methodology. It's definitely not more conservative

Okay. And then going back to George's question on the restructuring actions, or the incremental savings of $60 million. When I look back at last year, the cash restructuring cost that you guided to was about $55 million. The cash restructuring this year, 2015, looks like it's going down to $35 million. And yet the restructuring savings are increasing. Can you kind of walk us through how that is flowing through?

Yes. The biggest reason just has to do with the large restructuring we did of our graphics business in Europe. Europe re-structurings tend to be more costly, relative to the payback. And a lot of those costs were incurred in 2014. Some will still be in 2015. So that's a little bit for the reason of the disconnect.

Okay. Last question on working capital 2014. You talked about these working capital initiatives to reduce volatility. So it sounds like you actually took some sort of corrective action, whether that was securitizing some of your receivables, or something along those actions. Can you talk a little bit more about what the initiatives were that you took, that caused the working capital changes?

It was just operational measures, nothing securitization or anything else specifically being done. So we had seen, if you recall, last year and the years before, we had seen significant free cash flow in Q4, and had large declines in Q1. And we're down over $150 million of Q1 of 2014 negative cash flow. What we saw is that there was, from a number of terms and so forth that we had set up, that there was just more cash being pulled into the previous year.

And we had commented on that at the end of 2013, that would look like $30 million had been pulled into 2013. And we basically took some actions to make sure that wasn't happening. We have free cash flow measures across the business, and it looked like there was just more cash getting pulled into Q4, at the detriment of Q1. And we wanted to normalize that.

Thank you

Scott, this is Dean. Just one more question -- one more comment on the guidance. And that is, the other thing that's in our mind is, how do we predict things like currency or raw material inputs for the back half of the year? And I think, given the volatility that we saw in the first -- in the -- this recently, we're basically pegging our guidance based on the current rate for the euro. And a lot of the commodities that we buy are forecasting cost increases for the back half of the year.

Now, whether or not you choose to believe that, it just makes it difficult. Because we just don't have that great a forward visibility. So I think we've been fairly conservative, in the sense that we're taking today's state. And clearly, if things change, if the euro does something much different, or raw material prices do something much different, I think, from an investor point of view, you have to realize we'll be agile, and we'll shift as need be.

I appreciate that, thanks

Rosemarie Morbelli, Gabelli & Company.

Good morning, all.

Morning.

I was just wondering, either Dean or Mitch, when you talk about raw materials and pricing, are you expecting to give back all of the benefit on the raw materials side that you maybe expect that you may get? Or are there some of your operations where you can actually hang on to some?

Rosemarie, typically what happens over the cycle is that pricing levels in our industry tend to track, over time, when raw material prices are up, our costs are up, prices go up. When raw material costs go down, prices tend to trend down over time. And there's always a lag time in the business. And there's a lot of other, obviously, strategies that go in, in terms of pricing and cost outs. And we're constantly looking for ways to thin out our materials, get more productivity in our operations, et cetera. So it's actually very difficult, I think, for us to predict and project exactly what that looks like, especially over a 12-month period.

And the only thing I'd add is, we've talked about, over the last couple years, about a net headwind, if you will, from pricing and raw material costs. Paper prices have gone up from where they were a couple years ago, and that's over half of our spend, is paper-based. And so we're seeing the drop in oil that everybody's focused on. And we buy a number of raw material inputs that are based on oil, but not highly linked to it. So we are seeing a little bit of deflation right now, but we've actually been seeing a headwind on the net price. And our objective here, and what you see in the guidance, is to stem that tide, if you will.

And just making sure I understood properly what Dean said in answer to a previous -- actually, additional comment. Did you say, Dean, that you -- there is talk about raw material cost increases in the second half? And if I understood that properly, then you probably should be able to have more of a tailwind? No, for over the short-term?

I -- yes. If the IHS forecast that we look at for, again, some of the either derivatives, or close to the commodities that we buy. If they go up in the back half, we would expect to see a short-term benefit. And then in the second half, we could expect a bit of a headwind. So again, the notes, I would say those forecasts are just -- they're a forecast. And we don't really know what's going to happen in the back half of the year. And we'll adjust our pricing, and our approach, as we see changes in the raw material market.

Okay, sure. So now, still on the cost side, but not sure, necessarily. But because gasoline prices -- I mean fuel prices are down, I guess that's the same as gasoline. Consumers are ending up with more money. Are you expecting, or are you seeing sign or hearing anything, about retailers actually getting ready for that? Which would be a net benefit on your RBIS and RFID, possibly?

I think RFID is not so much impacted by that. I do think that the hope is that consumers with more money in their pockets will buy more things. I think I read that, just recently, though, that many consumers are just saving the money, and putting in their pocket right now. So I would say our forecast doesn't really consider a broad increase in, and demand in, our markets

Yes, and I think it's important to think about the different dynamics regionally, as well. So in Europe, things are different, obviously, with what's going on there. And where the currency is moving, there's not actually as much deflation as we would be seeing here in the US. And when you look at, despite the economy having grown in the US, and consumption on the unit level of consumer packaged goods and so forth have been relatively flat. So would expect there to be an improvement here in the US, if things continue where they are, sometime over 2015. But by and large, we are not expecting a large, broad pickup.

Okay, thanks. And if I may ask one last question. In your assumptions in your guidance on the top line, do you already -- have you included the impact from FX? And then on the bottom line, have you included the potential impact from lower share count? And is that 7.4 million share buyback you did in 2014, could you duplicate that in 2015?

So, as far as the top line, our guidance is based on organic growth, the 3% -- the 4% that we've laid out there. So -- and as far as the share buyback, the implied amount of shares outstanding, on average, that we have for 2015 of 91 million, you assume 1.5 million to 2 million of dilution. It implies a level (technical difficulty) than what we did in 2014. We really stepped up our share buybacks in the third and fourth quarter, given where the stock price was.

And so this is just an estimate, but really, one of the biggest factor that dictates the level of share buyback is really how the stock is trading. And we look to opportunistically take advantage of market dislocation. So that is our estimate. But as we've proven this past year, we estimated at the beginning of the year, we thought we would have 97 million shares outstanding, on average. We ended up with less than 96 million. So we'll continue to monitor and adjust accordingly

Thank you.

Jeff Zekauskas, JPMorgan.

Hi, thanks very much. Can you speak to the utilization rate in PSM industry-wide, meaning, in the United States and Europe currently? Are we in the high 70%s or low 80%s or high 80%s? Where do we sit?

I think it's a very difficult number to put your finger on, as we've said before. You don't have to run your coating lines 24/7, 365. They're not like paper machines. And they -- some of these assets run different product lines. I think the way I look at it, is in Europe, there has not been a lot of additional capacity added over the last few years. If anything, there's probably been a little bit of takeout.

In the US, we do have a competitor, small, privately held competitor, that is adding capacity. But I think, as we've said before, my guess is that they will not utilize some of their other lower productive capacity, as we go forward. So, people are expanding capacity in Asia, as you might expect given decent growth there, including ourselves. But I don't see, fundamentally, any big disruptions to the marketplace from capacity adds or reductions, anywhere in the world. It's not a big factor in our thinking.

So I think this year, if I remember previous calls correctly, volume growth in North America, and pressure sensitive adhesives, is maybe flat or flat to up for the four quarters. And that's a slower rate of growth in GDP. And in the old days, Pressure-Sensitive Materials used to be sort of a GDP grower, or a GDP plus. Is it fair to say that the industry now is GDP minus? Or was there something peculiar about 2014? And are utilization rates, in general, tight, or snug? Or are they loose?

Certainly, we were -- we'd been disappointed by the market growth in North America. I think it's too early to make a call to say it's a GDP minus business. We've had, I think, over the average, if you look over a multi-year period, it's probably around a GDP business in North America. When you juxtapose that with Europe, actually, we've had a -- definitely, a GDP plus business over the past couple of years. So all in all, I think in mature markets, I look at it as a GDP business. And then the business growth at a multiple GDP in emerging markets.

We don't really see a change to that trajectory. I think, as I said before, in North America, have a little bit of a net increase to capacity this year. Again, we've had a small competitor add capacity. And in Europe, I don't think there's been any real big changes. I know one of our competitors bought a company, and ended up shutting down the factory. So I guess technically, there will be a net reduction. It is a very difficult thing to get any kind of precision on it, Jeff.

So going into 2015, do you feel that demand conditions in PSM are strengthening or weakening? And with raw materials coming down, is it the case that your customers are maybe delaying purchases, hoping to get better price realizations a little bit later in the year? So how do you see the demand trajectory in PSM over the coming couple of quarters?

That's a great question. We definitely saw a slowdown in the fourth quarter, in terms of organic growth. Customers don't try to either build inventories, or reduce inventories, in anticipation of raw material pricing, mainly because most of them are small. They don't have a lot of place to store inventory. It tends to be a very customized business, where they have to respond quickly to their customers. So most customers are reluctant to bet that their customer is going to actually order something.

So we tend not to see those kinds of shifts. Definitely, we saw Europe slow down in the fourth quarter. We had been -- I'd been anticipating that for two years, and it's finally happened. So we've actually had much better buying demand in Europe, over the past couple of years, than I would have expected. North America continues to be relatively soft. We did see growth in the third quarter in the market.

We haven't seen the fourth-quarter numbers yet. I -- it was interesting to hear the fourth-quarter GDP wasn't as strong as everyone expected. So I think overall, this year, we're expecting, maybe, a little slower growth than normal. And you can see it reflected in our guidance range for organic growth for the year.

So in the quarter, I think you said that PSM prices maybe edged down. And if that's true, why did they edge down? Or what was the source of the pricing pressure?

This is a theme we've been talking about for a number of quarters now, Jeff. And so a big -- good portion of that was actually carryover, because the comments were year-over-year price impact. But it's basically just looking at the net impact in some of the less differentiated categories. There's been more pricing pressure. And one of the things we're looking to focus on is to make sure our pricing strategies ensure we had the right long-term profitable growth to remain competitive, and continue to invest over the long run. So that's a key area of focus right now.

And then lastly, how much was your pension funding in 2014? And what do you expect it to be in 2015?

So it's over $400 million, about $430 million of under-funded pension liability, across all of our plans. The biggest one, obviously, being in the US. But we have a number of overseas plans. So that's the large adjustment, just from the discount rates and everything else. So, and it's not considered -- expected to change that much between the end of 2015.

Right. But when you funded it, in other words, your pension contribution in 2014, what was that? And what might it be in 2015?

We have -- so we do not have pension funding requirements in the US. It was nothing in 2014. And we don't have another pension funding requirement for the next couple of years in the US.

Okay, great. Thank you so much.

Chris Kapsch, Topeka Capital Markets.

Yes, I had a follow-up on the FX headwind for 2015. Just wondering, is that -- how much of that is Europe? It sounded like a lot of it. And then just on FX, are there any instances where the change in currency rates have actually changed the competitiveness of your local businesses overseas? Or is this truly just a translation issue?

This is, by and large, translation. Us, as well as our competitors, manufacture the products in the regions where we do business. So this is essentially all translation, and it was essentially all Europe. Now one of the things in the past, the tail winds that we've had, was the fact that the [renman v] was appreciating over the years. That did not happen in 2014.

So we lost that tailwind, and then had the new headwind of FX, and are expecting to have that going into this year, as well. That will continue. And the other thing is just, give a rough rule of thumb for the euro, is very simple on a high level. But for every $0.01 movement in the euro to the US dollar, we have a $0.01 movement on EPS, as well. So $0.01 equals $0.01, roughly.

Okay. And just to follow up on Pressure Sensitive, the margin improvement year over year in the quarter, 100 basis points. Just wondering, was that fairly consistent across the regions. Or where was the improvement most pronounced?

Improvement was pretty broad-based, but we saw it in Latin America a little more than we saw it elsewhere. But we've seen it in Europe and Asia, as well. So we've seen it pretty broad-based. I'd say North America was the place that we saw the least amount of overall improvement, if you look at just pure operational standpoint. Which, in a lower-volume environment, makes that challenging, of course

And then just on the lower volume that you saw, and a lower demand you saw in North America. Was that -- and I know you haven't gotten the industry data yet. But your sense, at this point, is it -- was that more market-driven? Or was it intentional -- intentionally rationalizing some of your lower margin, maybe your paper-based roll stock grades? Or was it just a competitor taking share? If you could just provide a little bit more color on why the demand being down?

So we don't (multiple speakers) right now. Yes, so we don't have the data right now, as you highlighted. So we don't know, is the short answer. But we think that a big chunk of it was just, the market continued to be rather anemic. But there was a couple specific opportunities that were extremely low margin that we let walk, if you will. They were extremely low variable margin.

So that -- the impact -- I will say, things can be choppy in this industry, given where we are in the overall value chain. And top line growth in the first few weeks of this year, in North America, have actually picked up. Whereas all the other regions, the trends basically continued with what we saw in Q4. So things picked up a little bit in North America. So whether that's end demand or just broad inventory movements throughout the entire value chain and so forth, it's hard to predict.

I see. And then I had also a follow-up on the RBIS business. And this issue with having lost share in the value and contemporary segment. I think Dean had talked about, when we were out there visiting, and possibly when he was in New York late last year, about one of the tactical things that might address this was focusing on conveying to the customers that they should -- in that particular value and contemporary segment, that they should shift more towards nominated tags and ticketing programs versus open. And I think there was some initial success with a big customer there. I'm just wondering, is that something that you still see as a way to recapture share in that segment? And how is that going?

That is part of our strategy, which is to convince our customers to use nominated programs. Because we, at the end of the day, believe that they will get the best economics there. Now, not every customer chooses to go with that strategy. And frankly, the mistake we made was not listening to customers who weren't in those programs, and deciding to be competitive. Now we changed the strategy in the fourth quarter. And I would say the decline -- the amount of decline was arrested. Unfortunately, the business in Europe slowed down. So it made, certainly, the trend of the business look worse.

I think, from my perspective, the team is -- we're doing a lot better job of listening to customers, and we're getting a lot more competitive in winning the battles in Asia. Fortunately for us, in some of those types of programs, customers don't insist on using a global raw material spec, so the opportunity to use local materials, which are lower cost. We still believe we can be competitive in that business. We have in the past. And frankly, I think we just lost our focus. So, we are taking additional actions, though, as Mitch talked about, to ensure that we're more competitive in those segments. And that's part of the acceleration in our restructuring.

Because frankly, we're really disappointed about our performance in RBIS for the year. And we don't have a good excuse for it, frankly. We're going to be more competitive. We likely won't see a huge change in trajectory, really, until the second quarter, when we have a seasonally strong quarter. But the team is focused. We've got a renewed sense of energy there. We've got (technical difficulty) aggressive sales program, as well as a focus on further reducing costs, and our material cost, in that portion of the market. So, we feel bad about our performance last year, again, but we're focused on delivering in 2015.

Yes, I think one of the key overall things is, we're looking to provide a value proposition that's fit for purpose for what each segment and each customer values overall. And some -- most of the market wants the global consistency of product. And so of course, others are less concerned about it. And so we need to adjust accordingly.

And I'd say it's too broad-based. We've been talking about the value and contemporary segments. You actually can't make comments about each segment, broad based, what the customer behaviors are. Each customer is in a different level cycle, and has different needs. And so we're basically adjusting our approach to be able to win successfully in those -- with those customers in those spaces.

Got you. I appreciate the color, guys. Thanks.

John McNulty, Credit Suisse.

Good morning, guys. This is [Rob Vets] in for John. Just a quick one on your 2015 targets. At your most recent investor day, you highlighted that you guys think you can hit the low end of your RBIS adjusted EBIT margin rates that you put out in 2012. Is that still realistic, given some of the recent challenges in that business? Thanks.

I think hitting the 2015 margin target, given the end of the year, is going to be extremely difficult. We'll make good progress, and we'll get back on -- our goal is to get back on track in the rate of performance improvement that we've shown in the previous few years. And we're still focused on delivering the 2018 target.

Great. Thanks for the color

All the targets we laid out for 2015, we're confident we're going to basically hit all of them, with the exception (multiple speakers) of the RBIS margin target. But we -- when you consider we've got a few years ahead of us, and some of the adjustments we're making, we're confident we will hit the 2018 margin targets.

Great, thanks.

Anthony Pettinari, Citigroup.

Good morning. I just had a couple follow-ups on RBIS. I guess first, if you strip out the value and contemporary segments, would you describe your market share, outside of those categories, as stable or growing? Or are you seeing any incremental pressure, if you were to look at fast or premium or performance segments? And the second question, do you have a sense of what overall apparel industry volumes grew at in 2014, versus your organic growth in RBIS?

Yes. So in the performance and the premium segments, I would say we're taking market share. There, our strategies of global consistency, of innovation, really good, focused sales efforts, are helping us win business. That's the good news in the story. And we're quite pleased about that, as well as RFID. We had more than 50% market share in that category, and I think it reflects a successful execution of our strategy there. Actually, apparel unit growth, importing into the US, was pretty -- was quite robust this year.

Low to mid single digits.

Low to mid single digits. So the disappointing point to me is that we should have had a terrific year, because the market is there. And that's the real good news there, is that the market demand for apparel, and the imports, actually, for both Europe and North America, was quite robust. So it's really up to us to tweak our strategy, and get more competitive, and I actually expect that trend to continue. The trend of market growth for apparel, I should say, to be clear on it.

Okay, that's helpful. And then just one last follow-up, on the $60 million cost savings. Apology if I missed this earlier. But do you have a sense of the timing of the realization of those cost savings, as we move through the year?

They'll be coming throughout the year, more weighted towards the last three quarters.

Okay. I'll turn it over. Thanks.

Mr. Scarborough, I will return the call back to you. You may continue with your presentation or closing remarks.

Just to quickly recap, our playbook is the same. We're continuing to pursue the broad strategic priorities that we've communicated in the past. And we're making some fine tuning right now, where appropriate. And we look forward to seeing that strategy and execution translate into superior total shareholder return, over the long-term. Thank you for joining us, and goodbye.

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