Avery Dennison's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Avery Dennison (AVY)

Q4 2011 Earnings Call

January 31, 2012 1:00 pm ET

Executives

Eric Leeds -

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

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

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

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

John P. McNulty - Crédit Suisse AG, Research Division

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

John E. Roberts - Buckingham Research Group, Inc.

Presentation

Operator

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 December 31, 2011. This call is being recorded and will be available for replay from 1:00 p.m. Pacific time today through midnight Pacific time, February 3. To access the replay, please dial 1 (800) 633-8284 or 1 (402) 977-9140 for international callers. The conference ID number is 21543229. I'd now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may proceed, sir.

Eric Leeds

Thank you. Welcome, everyone. Today, we'll discuss our preliminary, unaudited fourth quarter and full year 2011 results. Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The company's Office and Consumer Products business is classified on our income statement as a discontinued operation. 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 remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement, included in today's earnings release. On the call today are Dean Scarborough, Chairman, President and CEO; and Mitch Butier, Senior Vice President and CFO.

I'll now turn the call over to Dean.

Dean A. Scarborough

Thanks, Eric. Despite the challenges of over $200 million of raw material inflation and a sudden downshift in volume in the second quarter that lasted the rest of the year, the businesses delivered more operating income than last year before restructuring costs, as well as nearly $300 million in free cash flow. Our ability to raise prices and to accelerate productivity enabled us to hold our margins in difficult market conditions. We further reduced our leverage, increased our dividend and contributed $70 million to our pension plan. Our intention was to return even more cash to shareholders last year, but we were restricted due to the Office and Consumer Products divestiture plans.

Net sales increased 4% for the full year, mainly due to pricing and currency, which offset sluggish unit volumes caused by lower market demand in many of the vertical end markets we serve. We took a significant step forward with the agreement to sell our Office and Consumer Products business consistent with our strategy to maximize its value for shareholders.

Now turning to the businesses. In 2011, sales for the Pressure-sensitive Materials segment grew about 4% in local currency due to the pricing actions we took. We held segment operating margin, excluding restructuring, roughly flat year-over-year. I'd like to note that in challenging market conditions, Pressure-sensitive Materials operating income, excluding restructuring, is roughly $80 million higher than it was 2 years ago at the low point of the recession.

Our Label and Packaging Materials business, which is by far the largest component of the segment, is a market leader with strong competitive advantages. We have differentiated products, especially in the faster growing film categories. We have scale, which enables us to run more efficiently and buy raw materials more effectively than competitors. Label and Packaging Materials is an innovation leader as well. Last year, with relatively modest investments, we introduced nearly 20 product innovations that will help us accelerate profitable growth and extend our leadership position in key markets over the mid to long term.

Retail Branding and Information Solutions was impacted by volume declines more than Pressure-sensitive Materials. Full year sales were down 3% in local currency. Record high cotton prices caused retailers and brand owners to raise prices dramatically, which caused unit volumes to decline. In the fourth quarter, for example, apparel unit imports to the United States dropped more than 12%. Despite this drop, we successfully held RBIS operating margin through a combination of productivity actions and lower employee-related costs. This was a major accomplishment in this high variable margin business.

The major challenge for RBIS has been achieving our margin improvement objectives with almost no sales growth since 2008. We made major progress in 2010 as sales rebounded from the 2009 recession, but last year's challenging unit volume environment stalled our progress. Given the more unpredictable market environment going forward, especially with challenges in Europe, we're accelerating our efforts to reduce fixed costs in RBIS. We enjoy competitive advantages in apparel branded and Information Solutions. No one else has the global reach that matches the scale of the apparel supply chain, but we can be more efficient while preserving these advantages.

During 2011, we accelerated productivity actions by consolidating production and making our factories more efficient. The benefit of lowering our breakeven point enabled us to maintain margins x structuring in a slower volume environment. Over the next few years, we'll continue to shrink our square footage in manufacturing as the benefits of Lean Six Sigma and new manufacturing and information technology enable us to serve customers more efficiently.

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