Avery Dennison (AVY)

Q3 2011 Earnings Call

October 26, 2011 1:00 pm ET


Dean A. Scarborough - Chairman, Chief Executive Officer and President

Eric Leeds - Investor Relations

Mitchell R. Butier - Chief Financial Officer and Senior Vice President


George L. Staphos - BofA Merrill Lynch, Research Division

John E. Roberts - Buckingham Research Group, Inc.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division



Ladies and gentlemen, thank you for standing by. And welcome to Avery Dennison's Earnings Conference Call for the third quarter ended, October 1, 2011. This call is being recorded and will be available for replay from 1:00 p.m. Pacific time today, through midnight Pacific time, October 30. To access the replay, please dial 1(800) 633 8284 or for international callers, 1(402) 977-9140. The conference ID number is 21496536. [Operator Instructions]

I would now like to turn the call over to Eric Leeds, Avery Dennison's head of Investor Relations. You may go ahead, sir.

Eric Leeds


Thank you. Welcome, everyone. Our discussion today will reference the earnings release that we issued earlier, along with the slide presentation entitled Third Quarter Financial Review and Analysis. Both documents were furnished today with our 8-K and posted at the Investors section of our website at www.investors.averydennison.com. Let me remind you that these unaudited results are preliminary as we have not yet filed our 10-Q.

Our news release references GAAP operating margin, which includes the interest expense, restructuring charges and other items included in the other expense line of our P&L. These items tend to be fairly disparate in amount, frequency and timing. In light of the nature of these items, we'll focus our margin commentary on non-GAAP operating margin, which reflects pretax results before their effect and before interest expense.

The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP in schedules A-2 to A-5 of the financial statements accompanying today's earnings release. We also want to remind you that we'll make certain predictive statements that reflect our current views and estimates about future performance and financial results.

These forward-looking statements are based on certain assumptions and expectations of future events that are subject to uncertainty.

The Safe Harbor statement included in the documents that we provided today, along with our 2010 Form 10-K and 2011 Forms 10-Q, address certain risk factors that could cause the actual results to differ from our expectations.

On the call today are Dean Scarborough, Chairman, President and CEO; and Mitch Butier, Senior Vice President and CFO.

I'll now turn the call over to Dean.

Dean A. Scarborough

Thanks, Eric. The soft volume trends we saw in the second quarter continued into the third quarter and caused sales, ex-currency to decline 2%. Unit demand in all key markets continues to reflect both consumer confidence, which is translating into tight inventory management throughout the supply chain. And we expect this trend to continue into the fourth quarter.

I am pleased that despite the lower volume and ongoing high raw material costs, operating results were in line with the third quarter of last year. The combination of continued pricing discipline, accelerated productivity and lower employee related costs essentially offset the impact of lower unit volume at the EBIT line. At the net income level, the change in our tax rate had a significant impact, which Mitch will discuss in more detail.

We made solid progress in generating free cash flow in the third quarter as well. Our teams did a good job of tightening expenses while at the same time protecting investments in innovation and new products.

As the past quarter demonstrated, we are launching an increasing number of new products to enhance our competitive advantage and enable faster growth once the economic situation improves.

Turning to the businesses. Organic sales growth for the pressure-sensitive materials segment was 2%. Volume in the quarter was still soft, but we did see a slight improvement in the trend over the second quarter. Margins expanded year-over-year as the impact of price increases and higher productivity offset the impact of inflation.

The recent Labelexpo show in Brussels was well attended and customers were very enthusiastic about all the new products we had in our stand. However, European customers were understandably concerned about the next few quarters due to the uncertain economic conditions in that region. But even in a slowdown, or maybe even because of it, converters were very interested in our new technology and products, and that's because they see innovation as a way to grow faster.

Our Labeling and Packaging Materials business introduced 16 new products with some significant innovations. We're especially excited about ThinStream, a new line of material that is 50% thinner than anything else on the market, and which enables better economics to penetrate high volume food and beverage segments.

We also introduced a new phase film with lower caliper and greater conformability to better meet the needs for more sustainable, lower-cost materials in the household and personal care segment.

Now wrapping up this segment, sales at Graphics and Reflective Solutions were flat compared with last year ex-currency, but lower than in the second quarter, which indicates a downturn in advertising and promotional spending.

Retail Branding and Information Solutions continue to feel the impact of unit volume decline and as high apparel input costs, which is cotton work their way through this retail supply chain. We do expect unit volumes to gradually improve as lower input cost begin to come into play subject, of course, to retailers gaining confidence in consumer spending. We are projecting an improvement in volume trends in Q4 as retailers begin to order for the spring season.

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