艾利丹尼森 (AVY) 2015 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, full ended year.

(Operator instructions)

This call is being recorded and it will be available for replay from 9 AM Pacific time today through midnight Pacific time February 6. To access the replay, please dial 1-800-633-8284, or 402-977-9140 for international callers. The conference ID number is 21782905.

I would now like to turn the conference over to Cindy Guenther, Avery Dennison's Vice President of Finance and Investor Relations. You may begin.

Thank you, France, and welcome, everyone. Today we will discuss our preliminary un-audited fourth-quarter and full-year 2015 results, as well as our outlook for 2016. The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP on schedules A-2 through A-5 of the financial statements accompany today's 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.

Making formal remarks today will be Dean Scarborough, Chairman and CEO; and Anne Bramman, Senior Vice President and Chief Financial Officer. Mitch Butier, President and Chief Operating Officer, is also with us today to participate in the Q&A portion of the call. Now I will turn the call over to Dean.

Thanks, Cindy, and good day, everyone.

I am very pleased to report another year of excellent progress toward our long-term goals. We delivered strong organic sales growth and double-digit growth and adjusted earnings per share above the high end of our original guidance range. We continued our disciplined execution of our long-term capital allocation strategy, yielding free cash flow of over $325 million and a more than 3.5 point improvement in return on total capital relative to our 2013 baseline. We also distributed $365 million of cash to shareholders in the form of share buyback and dividend.

Given challenging economic conditions in many parts of the world and significant headwinds from currency translation, these results speak not only to the resilience of our businesses, but to the creativity and commitment of our associates worldwide. I would really like to thank the team for delivering such a great year. What continues to guide our actions is a drive to achieve our long-term financial objectives, delight our customers and fully engage our talented workforce. I am confident that the achievement of these goals will result in continued above-average returns for our shareholders. This past year represented an important milestone for us as the final year of measurement for the four-year financial targets we first communicated in 2012. I am very pleased to report that we substantially met or exceeded all of these targets.

If you turn to slide 6 in the supplemental materials we distributed today, you can see our final scorecard. On a compound annual basis, sales grew 4% organically and adjusted EPS grew 20%. We came in just slightly under our target for average annual free cash flow, due to the one-time impact in 2014 of our decision to reduce the volatility of working capital at year-end.

Our balance sheet remains very healthy. While net debt to adjusted EBITDA is still below our long-term target, we will continue to exercise discipline in the execution of our long-term capital allocation strategy. In May of 2014, we communicated a new set of targets extending our planning horizon to 2018 and raising the bar for both organic sales growth and operating margin.

You can see the total Company's scorecard on slide 7 and, if you turn to slide 8, the progress against the long-term targets for our two core segments. As the chart on the left shows, 2015 marked the fourth consecutive year of strong organic growth of pressure-sensitive materials, above the high end of its long-term target. Performance was solid across all key products events and regions, with above-average growth in targeted higher-value segments. While sales growth in emerging markets was slower than usual this year, in the fourth quarter we gained momentum in Asia. We exceeded our long-term operating margin target by 70 basis points in 2015. The vast majority of PSM's margin expansion last year was driven by productivity and fixed cost leverage on the strong volume growth, so we do expect to sustain margin in this segment at 11%, or possibly higher.

In contrast to the strength in PSM, RBIS has had a slow start against this five-year goals. Growth has been too volatile and we have been behind on the pace we set for margin expansion. We began executing a new strategy in 2015 to accelerate growth in the core business through more competitive, faster and simpler business model. The team made good progress against its financial targets in the second half of the year, delivering both top-line growth and margin improvement, with particular strength in radio frequency identification products, or RFID.

We also saw improvement in the underlying trend from the less-differentiated segments of our core business in the back half of the year. We continue to see significant opportunity for top-line growth in this business. RFID, of course, remains a key growth catalyst with a five-year compound annual growth target through 2018 of 15% to 20%-plus. Sales of RFID products increased by more than 20% this year, and we expect that momentum to continue through 2016.

Likewise, external embellishments grew more than 25% last year. While this category is still a small share of the total business, about $50 million in sales, we expect continued rapid growth of this highly differentiated, high-value category through 2018. We also expect to gain share in the less differentiated segments through faster service and a more competitive product offering, enabled by our business transformation. In short, I am confident that our strategic shift will get us back on track to accelerate growth and achieve our operating margin target by 2018.

We didn't include Vancive medical technologies on slide 8 because of its size, but let me touch quickly on this business. Though small today, Vancive continues to offer potential for sales and profit growth. In 2016, we expect to accelerate growth in Vancive's core product line as well as in our new antimicrobial wound dressing while delivering continued margin expansion. Vancive continues to represent one of several very promising opportunities for us to gain share in a fragmented market that offers above-average growth with attractive margins.

Returning to the total Company view, we remain highly confident in our ability to achieve our long-term financial goals, based on our ability to execute against a few key strategies. We will grow through innovation and differentiated quality and service. In particular, 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. Emerging markets, while slower in 2015, will continue to be an important part of our growth story over the long term.

Productivity-driven margin improvements has been a hallmark for the Company for many years now, and will continue to be a major strategic focus. We will drive capital efficiency while continuing to invest to support growth in the high-value segments of our core businesses. To this end, we anticipate a large increase in capital spending in 2016 compared to last year, partly due to carryover from projects we began in 2015 but also to support our strategy to accelerate growth in high-value segments.

On the PSM side, we are investing in capacity to support growth in the graphics business while optimizing our manufacturing footprint. We're adding coding capacity in Asia to support still-solid growth in that region and we are investing in information systems to drive supply chain productivity by upgrading systems in our North American materials business. In RBIS, major investments include capacity additions to support rapid growth of RFID and heat transfer technology, as well as projects to support a more cost-effective footprint. Finally, we will continue to pursue a disciplined approach to returning excess cash to shareholders.

Looking 2016, given the lack of forward visibility in our markets, our guidance reflects a number of significant uncertainties, including emerging market growth, the net impact of deflation and pricing, a challenging environment for apparel retailers, and of course, currency rates. Despite these challenges, we expect to deliver another year of solid progress against our long-term strategic and financial goals in 2016. Adjusting for a roughly $0.18 hit from currency translation, the midpoint of our adjusted EPS guidance reflects a [15]% growth rate, with further expansion of our return on capital.

Our solid free cash flow, combined with a strong balance sheet, gives us ample capacity to invest in our existing businesses while continuing to grow the dividend, repurchase shares, and pursue value-enhancing bolt-on acquisitions. From a balance sheet perspective, while below our targeted leverage range today, we'll remain a disciplined investor. In short, we're committed to hitting our 2018 targets and I remain confident that the consistent execution of our strategy will enable us to meet our long-term goals for superior value creation.

Now I will turn the call over to Anne.

Thanks, Dean, and hello, everyone.

I will provide some additional color on the quarter and then I will walk you through our outlook for 2016. In Q4 adjusted earnings per share declined 6% compared to the prior year, reflecting an extra week in the 2014 fiscal year as well as the effect of currency translation. EPS was above our expectations in October due to higher than expected sales and a lower tax rate. The lower tax rate contributed $0.06 to the quarter and year.

Organic sales growth, which adjusts for the extra week as well as currency translation and a small product line divestiture, was 7% overall and was strong for both core businesses. The impact of currency translations and the extra week were significant. Currency translation reduced reported sales by 8%, while the impact of the extra week represented an additional headwind of approximately 7.5%. Together, these factors had a roughly $0.20 negative impact to EPS compared to last year's fourth quarter.

Adjusted operating margin in the fourth quarter improved 60 basis points to 8.7%, as the benefit of productivity initiatives more than offset higher employee-related costs. Restructuring savings, net of transition expenses, were $22 million in the quarter, and $71 million for the year, in line with our expectations. Our adjusted tax rate for the fourth quarter was 29% and 33% for the full year, better than expected due to the resolution of foreign tax examinations during the quarter.

Free cash flow was $138 million in the quarter. For the full year, free cash flow was $329 million, representing 103% conversions of adjusted net income. Combined spending on capital projects and restructuring were roughly in line with our expectations for the year, albeit with a different mix than originally planned. As Dean mentioned, we anticipate a significant increase in capital spending in 2016, partly due to carryover from projects initiated in 2015. Importantly, we have not revised our outlook for cumulative investments in capital and restructuring through 2018.

As Dean indicated, we are committed to returning cash to shareholders. We repurchased 3.9 million shares in 2015 at a cost of $232 million and paid $133 million in dividends. We ended the year with roughly 91.7 million shares outstanding, including dilution, representing a 700,000 share decline compared to the end of 2014. We did pick up the pace of share buyback in the fourth quarter, in part to cover above-average dilution resulting from the rapid rise in our stock price over the course of the year. We have sufficient debt capacity to continue our share buyback program in a disciplined manner.

Now looking at the segments, pressure-sensitive material sales in the fourth quarter were up approximately 7% on an organic basis, above expectations due to volume improvements in emerging markets, particularly in China. Sales in both label and packaging materials and combined graphics and performance tape increased mid-single digits organically. On a regional basis, sales in North America increased at a low single-digit rate, while Western Europe was up mid-single digits.

As Dean mentioned, organic sales growth in emerging markets ticked up in the fourth quarter. China was up mid-single digits, a meaningful improvement from the low single-digit pace we have seen in the country over the previous five quarters. We saw a surge in demand for e-commerce labels as well as continued momentum in specialty products. Both India and the [Auzion] regions continued to be strong, posting double-digit organic growth rates for the quarter.

PSM's adjusted operating margin increased by 40 basis points to 11% as the impact of productivity initiatives more than offset higher employee-related costs. Given the headwind from the extra week last year, higher volumes did not contribute materially to volume expansion as it had done in the previous three quarters. Similar to the past couple quarters, we experienced a modest benefit from deflation, net of price. This benefit tends to net out over the long term, so it is reasonable to assume that we will see some offset to these gains over a full business cycle.

Switching over to RBIS, sales increased by approximately 8% on an organic basis, with significant contributions from both RFID products and external embellishments. Consistent with recent quarters, sales growth among US-based retailers and brand owners out paced their European counterparts. Adjusting for the impact of RFID sales, we once again saw strong growth in the performance segment globally and the underlying trend for the less differentiated segments improved a positive sign that we are beginning to gain traction with our strategy change.

Adjusted operating margin improved 160 basis points to 8.4% as the impact of productivity initiatives more than offset higher employee-related costs. Sales in Vancive medical technologies declined by 13% on an organic basis due in part to difficult comparisons against the prior year related to a shift in orders from the third to the fourth quarter in 2014. As we said before, given the application-specific nature of orders in this business, we do expect sales growth to be somewhat volatile quarter to quarter. The business was profitable for the quarter, in line with expectations.

Turning now to our outlook for consolidated top-line growth and earnings in 2016, we anticipate adjusted earnings per share to be in the range of $3.65 to $3.85. We have outlined some of the key contributing factors to this guidance on slide 13 of our supplemental presentation materials. We estimate between 3% and 4.5% organic sales growth.

Included in this estimate is an assumed slowdown of the 2015 pace of growth for PSM, due largely to the loss of a large customer program in the personal care sector of the performance tapes business. Changes to the customer's technology drove the decision to bring this program to a close. The program lost represents a roughly 1 point headwind to PSM's growth in 2016, largely impacting the second half of the year. Note that while the total performance tapes business will show a decline in sales on an organic basis in 2016, we continue to expect high single-digit growth for the industrial side of the business, reflecting progress against our share gains strategy in this high-value segment.

At recent exchange rates, we estimate that currency translation will reduce net sales by approximately 3.5%, representing a pretax earnings headwind of approximately $25 million, or roughly $0.18 per share. We estimate that incremental pretax savings from restructuring actions will contribute roughly $75 million in 2016, about one-third of which represents the carryover benefit from actions taken in 2015. Approximately two-thirds of the total savings relates to actions taken in RBIS to drive a more competitive business model. Combined with the other cost reductions and the anticipated benefit of volume growth, we expect these actions will more than offset pricing adjustments and inflationary pressures in the business, getting us back on the trajectory needed to meet our 2018 adjusted operating margins of 10% to 11%.

We continue to expect a tax rate in the low- to mid-30% range. We estimate average shares outstanding, assuming dilutions, of roughly 90 million shares, reflecting our continued return of cash to shareholders. We anticipate significantly higher than usual adjustments to GAAP net income this year due to non-cash charges associated with the lump sum settlement of certain pension obligations. This relates to an offer we made to former employees to receive their benefits immediately, as either a lump sum payment or an annuity, rather than waiting until they become retirement eligible. The purpose of this program is to reduce the financial volatility associated with our frozen defined benefit plan. You can pick up more details in today's press release, but the short story is that we reduced pension liability by about $70 million with no increase in required cash contributions to the plan.

We anticipate spending approximately $200 million on fixed capital and IT projects in 2016 and expect to incur about $25 million in cash restructuring charges, which together represent a $20 million increase over our level of spending last year. In light of the higher CapEx spending, we expect free cash flow conversion of roughly 100% of adjusted net income. We do, however, continue to expect cumulative free cash flow conversions over the coming years to exceed 100%. Importantly, while the continued currency headwinds pull our 2016 EPS growth rates lower on long-term targets, our guidance for the year is consistent with the progress we believe is necessary to achieve our key long-term financial targets.

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

Now we will open the call up for your questions.

(Operator instructions)

Ghansham Panjabi, Robert W Baird.

Hey, guys, good morning.

Maybe just first off on the macro. Obviously, you fell into many different end markets on a global basis. Can you just first off give us your view of what the global macro looks like from Avery's perspective? The US, Europe, Latin America and also Asia?

Ghansham, this is Dean.

It's always hard to put ourselves in that position, given our lack of forward visibility. I think last year we experienced reasonably strong growth in Europe; again, probably a little bit better than our expectations, but I kind of relate that back to a reasonable amount of consumer spending there. The US was not as strong as Europe but stronger than we expected going into the year. So I would say those two economies are relatively stable. I don't think any big -- we aren't expecting any big surprises in mature markets, and feel good about the economies there and prospects.

Latin America has been a challenge, but also good for us. I would say -- because we're a stable player in the region, we have been able to protect our dollar-based profits in that region through a lot of price increases, given the challenges there. And then Asia has been strong. India/[Auzion] very strong throughout the year; and China was the one area where I think we were continuously disappointed for four of the last five quarters. Our hypothesis is that inventories in that market were kind of full and we had customers telling us anecdotally that they just didn't have the sales.

We did see some shift in that trend, but we also are tapping into a pretty high growth area in China, something called the logistics label: it's a little more sophisticated than a barcode label, but fundamentally its growth driver is the rapid acceleration of online ordering and having things delivered to your home. That's as we do here in the US.

In the long run, we're still bullish on China because that materials business there is really linked to consumer spending, and as that economy begins to shift toward more services-based and consumer spending model, that should bode well for us in the long term. However, I wouldn't be surprised if we see continued volatility in China. But I don't have any specific note on that.

Okay. That's helpful.

And then on RBIS, it sounds like RFID came in ahead of your expectations for Q4 specifically. Was there any new contract that drove upside for the quarter? Was it a comps issue? Just trying to understand if there's actually a change in the momentum trajectory as it has been over the last few quarters.

A couple of our customers did accelerate their programs; and as I had said last spring, I noticed a big change in mentality from retailers that I hadn't seen before. I would say almost every major retailer is in some stage of piloting right now, certainly in the US. We also saw some nice growth from European retailers at the same time in the quarter, so I anticipate we're going to go through a period of time where we will continue to see accelerated growth above that 15% to 20%. That's why we added the plus to the 20%.

Mitch was just at the National Retail Federation show. Mitch, maybe you have some insights on there as well.

It just really reinforces what we've said before and what you started talking about this spring, last spring. A lot of discussion around RFID; and I would say every retailer we talked to in brand, the big discussion is not really if, but when and how they are going to adopt RFID. And the team has done a phenomenal job -- our team. We are the recognized leaders within the space and not just what we provide but actually helping retailers and brands adopt the new technology.

Perfect. Thanks so much, guys.

George Staphos, Bank of America Merrill Lynch.

Morning. It's actually Alex Wong sitting in for George. Thanks for taking our question.

First question -- can you just remind us in RBIS how much D&A rolls off, I believe, related to accounting from a few years ago? And when the timing of that -- how that progresses?

Yes, so good morning.

Really, we are going to see the biggest benefit coming through in 2017. It's modest in 2016. It's around $4 million to $5 million, but you should see that ramp up starting 2017.

Understood.

And then just as a follow-on, I know you mentioned in the slide deck, relatively immaterial, but I spoke or alluded to some product line divestitures. If you could just provide some color around that, that would be helpful. Thank you.

We had a very small product line divestiture back in the spring timeframe in Europe. It was in the RBIS segments and it didn't really impact EBIT on very small sales dollars.

Okay. I will jump back in the queue. Thank you.

Scott Gaffner, Barclays Capital.

Thanks, good morning.

Morning, Scott.

Just looking at the CapEx for a minute -- the $200 million, Dean -- I think you mentioned some growth projects as the main reason why the CapEx is ramping up year over year. Can you talk about those projects, and why the investment in 2016?

Sure. I think typically the way we've characterized our CapEx is, 1/3 growth, 1/3 productivity, 1/3 IT/maintenance capital. It's actually is going to move to about 50% of growth in capital spending. We started a number of projects later in the year. We need some new graphics capacity in the US, so we are going be investing in some new capability there. We're also going to get a productivity benefit from that investment. It's going to take us a while to plan out. It's a fairly decent-sized investment.

We need new coating capacity in Asia, and so we are going to be in the process of building a new water-based coating line there. And then we've got some IT projects in North America. We've got a fairly old system in the US that we are going to upgrade and replace. Those are some of the key investments in pressure-sensitive materials.

In RBIS, clearly RFID with its rapid growth, we're continuing to invest there as well as some of the heat transfer technology. We are also are spending capital on automation in that business to continue to drive better labor productivity. It's a more labor-intense business than material, as well as to help us facilitate a more efficient footprint.

Okay. And the return on invested capital in these projects -- return on total capital, how do you look at it?

Well above our hurdle rate.

Okay. Dean, on pressure-sensitive materials, I think if I heard you correctly, the long-term operating margin target was 11%, and then --

Or greater.

Or greater. We were at -- I think, if I have the number right, we were up well above that in 2015. I think Anne mentioned some raw material price cost benefits in 2015, and then the comment was around over the business cycle, expect that to normalize. So as we move to 2016, how difficult is it to get margins up in pressure-sensitive materials in 2016, given that commentary?

I think, as you might guess, most operating plans for businesses always look for improvement every single year. We are not really different than anybody else. We're not going to get specific guidance for operating margins by segment. I think the team has done a good job driving mix, growing faster in high-value segments, and at the same time getting more competitive in some of the more competitive segments, frankly, and driving improvement there.

For us, pressure-sensitive materials is a high-return business. It is at a multiple of our cost to capital, and driving growth. Top-line growth is also an important goal for us, so I feel good about the position of the business. Again it's -- right now, with oil prices low, I know a lot of people are saying, that should really help you. To be honest, we haven't seen that much change in the commodities we buy over the last 90 to 120 days. A lot of the things we buy are several steps down from crude oil. And then there is still some economies where we are seeing inflation.

I think the team has done a good job. We are continuing to pursue our strategy of driving productivity, driving top-line growth and mix, and we have the expectation to continue to drive for more improvement. Those targets that we had set for 2018 are not a cap. They are simply a long-term guidance range. But we feel confident today that we can operate at 11% or over.

Okay. Congrats on the quarter, but more importantly, congratulations on hitting the targets from 2012 to 2015. Not that many companies put out these long-term targets and actually hit the numbers, and you guys did a great job. So good luck on the next five-year plan.

Thank you.

Thank you.

Anthony Pettinari, Citigroup.

Good morning.

Regarding the organic sales growth guidance, you referenced the loss of a large customer in PSM. Understanding that you may be limited in what you can say, can you help us understand -- is that customer going to a different technology? Or a different -- to a competitor? Or are there any read-throughs for the rest of your business? If you could give us any color there, it would be helpful.

Anthony, I will answer the last part of your question first. There is no knock-on effects or implications to the rest of the business in PSM. This is specifically within the performance tapes business, which is an application business. And one application -- it's not losing share, if you will, to another competitor. There's a technology change, as Anne said. Our focus, when we've talked about investing in this business, it's really been focused on the industrial tape side, where we did continue to see growth in Q4. And it is going to be a key focus for us going forward. We look at this as an application we got a few years ago. The team did a great job in driving value and achieving our objectives on this application, and we knew eventually we would have a sunset and it's coming in 2016.

Okay, that's helpful.

And then just a follow-up on Scott's question on PSM margins. I guess last year you saw PSM margins up 150 basis points. Is it possible to bucket that roughly between productivity versus variable flow through on volumes versus price cost? And then, thinking about PSM margins in 2016 maybe potentially being down a bit, asking the same question backwards. Where are you giving up the margin versus productivity, volumes, price cost?

When we look at PSM for 2015, by and large by a multiple of two and three times, the benefit in margin came from net productivity in restructuring. So that really was driving the margin improvement that we saw for the year.

Your question, going into 2016 -- when we laid out this business, if you look at 2012 when we laid out long-term targets, we said 9% to 10% operating margin target. We've passed and exceeded that. We've now said 10% to 11% as the operating margin for this business. And it's really, what we said is, those are proxies for what would make a high return on capital business here. That is our focus and we have been testing and getting, achieving new heights. We don't, as Dean said earlier, see this as a cap in any way. We all have operating plans to look to see how can we test even further new heights. But the reason that we are saying we're confident we can hold 11% or more in this business is, one, we feel that it's a very high return business and we've got to focus on growing it, then, as we've done a great job over the last few years. Two, is just macro uncertainty as far as what's out there within the economy and all the headlines that everybody's reading.

Okay, that's helpful. I will turn it over.

Adam Josephson with KeyBanc Capital Markets.

Good morning. It's actually Marc Solecitto on for Adam. Thanks for taking our questions.

First question we had: you are projecting a modest slowdown in organic growth. I know you talked about the customer loss in your tape business, but were there any other factors in that modest slowdown?

No, there really wasn't. That was a component when we looked at the total guidance.

Okay. Thanks.

Second question: as far as FX rates, what FX rates are you assuming in your 2016 guidance?

Right now, we've got the euro pegged slightly under $1.09.

Okay, great. Thank you. I will turn it over.

Jeff Zekauskas, JPMorgan.

Good morning. How are you?

Good.

How large is your RFID business now?

About $150 million in 2015.

Okay. In the RBIS segment, you took about a $16 million charge. Where is that geographically? That is, what part of the RBIS operation are you restructuring? Can you describe that a little bit more closely?

The charge is primarily in the SG&A line. There is a portion that goes through the gross profit line, but I would say it's probably an 80%/20%, 75% to 80% going through SG&A. There's a number of initiatives going on. First we're looking at footprint consolidation to get efficiency in the business. And then secondly we also, as we talked about in the prior quarter, looking at driving more efficiency in the regional basis, getting out some of the layers of management in the business; and so that's a big component of the SG&A line as well.

Just to add onto that, Jeff -- the footprint consolidation, as Anne talked about, we've announced in eastern US as well as western Europe; and then one of the overall objectives here is to lower costs so we can be more competitive in all segments. We're cutting SG&A across the board, if you will, on a number of areas. It's not just about lowering costs. It's actually about streamlining the management structure to move decision points closer to the customer and close to the market so we can be faster and more nimble in the market. That's what we are doing. The SG&A is broad based, but it's again not just on cost reduction -- it's also around getting quicker in the marketplace.

Okay. Could you talk a little bit about pressure-sensitive material pricing trends? Are prices up year over year, or down, or up a little bit, or down a little bit?

We talked about this generally in a net basis. When you look at the net impact of pricing and deflation, as we commented, we saw modest benefit in Q4 again as we've seen the previous couple quarters. If you look at where we fit now flowing into 2016, it's essentially neutral -- the net impact between pricing and raw materials. It's hard to give a very broad comment on those trends globally, because it depends region by region. In some regions we're raising prices quite dramatically, double digits to offset inflation. Other regions, clearly in some regions we have some deflation and it's a competitive environment, and we're working through that.

One thing I do want to say is, we talked last year about a couple course corrections we were making and one of them was rebalancing the dynamics between price volume and mix within PSM. I think largely what you are seeing is, we've done a good job in doing that, of rebalancing those dynamics. And we talked about getting more disciplined in the less-differentiated segments within PSM, and we have done that as well. And the focus is, how do we continue to drive growth profitably across all the segments?

I mean, not on a net basis -- on an absolute basis, how are your local prices?

We don't provide commentary on that.

Okay. How much did you contribute to your pension plan this year?

We didn't make any contributions to the plan.

Is there any inflation in paper prices in PSM?

We are seeing some pressure in Europe because -- generally because of the currency shifts that you are seeing there, but that's the only place we're really seeing pressure.

Last question is, once you get through the big spending in 2016 on capital, what happens in 2017? Where is your more normalized level of CapEx?

When you look at our long-term goals, we really have set the target around $175 million to $200 million a year for CapEx spending on average.

Okay, great. Thank you so much.

Chris Kapsch, BB&T Capital Markets.

I had a follow-up on the margin discussion in pressure sensitive. I think your formal comments were that, despite the organic volume growth, that, that did not benefit mix because of the absence of the week of sales. I am just trying to understand why that would matter? And also if there's some mix effect here, maybe becoming more pronounced on a seasonal basis, with the e-commerce being concentrated in the December quarters? Or any adverse effect from stronger demand in e-commerce-related labels on mix in this quarter? And if so, would that inflect starting in the first quarter?

Yes, so there were several questions in there. Let me try to take a couple of them.

One is, if you look at our margins -- you asked about the 53rd week impact and what's the variable flow through from volumes. We did see what you would typically expect from a volume flow through from the growth, but if you think about the lack of the extra week that we had, that was pure variable flow through last year, and we commented about it the benefit that it gave us to 2014's earnings. And we expect that to come back down more than $0.10 in Q4.

Because there's more shipping days then, than really just running the coders. Got it. Okay.

You've got your fixed cost structure which stays solid for the quarter, and you've got an extra shipping week. That was what that item was about. But no shift on the volume variable flow through. As far as the mix -- typically Q4, the mix is lower if you're looking sequentially versus Q2, Q3, because we have more graphic sales, for example, in Q2 and Q3 than we had in Q4; so that you would typically seek Q4 be somewhat lower than if you're looking on a sequential basis. As far as the -- go ahead.

Is that mix shift becoming more pronounced as e-commerce just continues to boom?

No, because those are very different markets. Graphics are more for the durables market. They're long-lived labels, if you will, so they're not -- nothing to do with the e-commerce trend. The e-commerce we talked about was a key point of growth, particularly in Asia; and that is, while it's not just classic variable information labels, like Dean said earlier, and actually within China, with this growth that we've achieved, we've actually gotten margins back to where they were before the slips we saw them in 2014.

Okay. If I could follow-up also just on the capital allocation. And notwithstanding your continued healthy return of capital to shareholders, you have a good problem here. You are below your targeted leverage. That's a function of EBITDA growth as well as your continued strong free cash flow generation. But it sounds like you do have more of an appetite because of this situation for bolt-on acquisitions. And I just want to understand the nature of potential targets. Is it still focused in the graphics and tapes portion of PSM? Or would there also be potential bolt-ons, say, to augment your RFID platform? Or even in advance of medical?

I would say, yes, we have an active pipeline going for M&A. We talked about it. I would say it definitely includes the materials businesses -- all the material businesses. Vancive is also is an area that we are looking in. RFID is an interesting question. I would say the answer is yes, but I would say there's not just a lot out there. We are one of the biggest entities out there for RFID and really our focus there, other than driving the great growth that we had, is looking for applications outside of the core apparel business because we have a really unique capability in the marketplace. And I think, in the long run, that will bode well.

If I could just follow up on that point, your unique capability, and you have sort of a turnkey approach to retailers, I think, that are adopting RFID. You mentioned capital investment in that business. Is the investment you're making upstream, like in inlay capability? Or is it more downstream, perhaps to augment the part of the turnkey solution that you are offering those retail customers? Thanks.

Chris, from a capital point of view, it's basically in the equipment to make, not what I would characterize as integrated inlays. One of the advantages that we have is being able to offer the retailer form factors that are very similar to what they use today and then make the incremental costs of adopting RFID even lower than it was before. I think the team has been very innovative and creative, driving both lower costs for inlay production, but also at the same time giving the retailer almost a seamless and lower-cost transition. We're really changing the game there.

We have invested a little more in the front end, but that's actually been in place for quite a while. We have a really experienced team that understands -- I would say we don't have so much a turnkey approach. I think we have probably the most knowledge in the business on how to effectively execute a program and we can help guide retailers in a number of areas as they roll out their programs.

Okay, thanks for the context.

Scott Gaffner, Barclays.

Thanks. Just a couple quick follow-ups.

On the RFID acceleration you mentioned, Dean, can you just walk us through that a little bit? Was there anything in the fourth quarter -- obviously, when we look at the retail data, e-commerce grew a lot faster than brick-and-mortar. Did the pace of inquiries increase in Q4? Or has this just been a steady increase throughout the year around interest in RFID?

I would characterize it this way: the folks that have invested in RFID are accelerating what they're doing. We had a couple of large customers ask us, can we go even faster? I think the team did a great job of accommodating that pretty seamlessly. Our growth in the quarter was almost 90%. That's a lot for any operation's supply chain team to execute. As retailers continue to understand the need for really accurate inventories to play in the omni-channel world, I think it is becoming -- I won't say a no-brainer -- but it's becoming an essential part of being competitive. And that's the discussion that's going on. Retailers are talking mainly about how, and not if. I think this will be a great growth platform for us for the next few years.

How do you see your ability to continue to reduce the cost structure in the business as RFID grows? Can you take a significant cost out of the chips? Where would the cost savings come from, I guess, maybe is a better question as you ramp this business up?

It comes from a combination -- so it's sort of at all -- what I would characterize as all levels, right? We have scale in purchasing chips. We have an ability to integrate the manufacturing of the antenna, the making of the inlay and integrating that into the final tag in a seamless process, which reduces materials and reduces process steps.

I was literally just in Asia a couple of weeks ago looking at our operations and talking to the team, and they have already figured out a way to double the productivity that we're getting on our newly installed equipment. I get pretty excited about that. So far, I don't see a limit to what we are doing.

We also have some longer-term programs -- and I mean the next two to four years -- where I do think there is an ability to take another step change in the cost reduction of an inlay. I can't, due to confidentiality, get into the details. But we are all in on this business and I feel really good about both our short-term and our long-term prospects.

Great, thanks again.

Mr. Scarborough, there are no further questions at this time. I'll return the call back to you for your closing remarks.

Thanks, France.

Our focus in 2016 will be the same as it's been for the last four years: to deliver exceptional value for customers, our employees, and our shareholders. We're going to continue to pursue the broad strategic priorities that we communicated, fine-tuning where appropriate. And we look forward to seeing that strategy and execution translate into superior total shareholder return over the long term. Thanks for joining us and we will talk to you at the end of the next quarter.

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