Avery Dennison Management Discusses Q2 2012 Results - Earnings Call Transcript

Avery Dennison (AVY)

Q2 2012 Earnings Call

July 24, 2012 1:00 pm ET


Eric Leeds

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

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


John P. McNulty - Crédit Suisse AG, Research Division

George L. Staphos - BofA Merrill Lynch, Research Division

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

Scott Gaffner - Barclays Capital, Research Division

John E. Roberts - The Buckingham Research Group Incorporated

Rosemarie J. Morbelli - Gabelli & Company, Inc.



Ladies and gentlemen, thank you for standing by, and welcome to Avery Dennison's Earnings Conference Call for the second quarter ended June 30, 2012. This call is being recorded and will be available for replay from 1:00 p.m. Pacific time today through midnight Pacific time, July 27. To access the replay, please dial 1 (800) 633-8284 or 1 (402) 977-9140 for international callers. The conference ID number is 21543231. [Operator Instructions] I'd now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may begin, sir.

Eric Leeds

Thank you. Welcome, everyone. Today we'll discuss our preliminary unaudited second quarter 2012 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. The quarter came in just about as expected. Sales were up nearly 4% on an organic basis, and adjusted operating profit was down modestly. We're pleased with where we are on our free cash flow year-to-date, and we're on track to deliver earnings growth and free cash flow within the ranges of our guidance for the year. We are committed to returning more cash to investors, and we bought back an additional 2.4 million shares during the quarter to meet that commitment. As noted in our press release, we are accelerating our productivity and cost out plans to improve our competitive position and meet commitments to shareholders in an uncertain economic environment. The $100 million plus restructuring program announced today will enable us to deliver earnings growth in this unpredictable economy and provide nice upside when conditions improve. I'm also glad to say that we can fund this restructuring, while meeting our free cash flow targets as well. I'll provide additional color in a few minutes.

Turning to the segments. Pressure-Sensitive Materials had a solid quarter, both on the top line and the bottom line. Despite uncertain economic conditions in North America and Europe, Label and Packaging Materials had good sales growth in both regions, and we've gained back the share we lost in Europe a year ago. And, as we expected, emerging markets returned to double-digit sales growth.

Graphics and Reflective Solutions top line results were significantly weaker than LPM's. GRS is more economically sensitive, and the larger proportion of this business is in Europe, where it was especially hard-hit.

As you know, we've been investing in marketing and innovation in Label and Packaging Materials. We are gaining traction with a number of the new products we launched late last year, and we have a pipeline of new products that we'll introduce at Labelexpo in September. At the same time, LPM has been improving its already good service delivery time. And the combination of innovation and improved service are enabling us to gain share, and we're seeing this in our top line.

Retail Branding and Information Solutions results were disappointing in what has always been the seasonally largest sales quarter for this business. The retail apparel market is rebounding more slowly than we had expected. The second quarter did end positively after starting off with sales declines, and that positive trend is continuing into July. Despite sluggish market conditions, we made progress on our growth initiatives and believe we are continuing to gain share in our target segments. Sales of external embellishments were up nearly 60% over last year, and item-level RFID sales were up 35%. And our RFID division, which was integrated into RBIS at the beginning of the year, had a second profitable quarter in a row. Now recall that the RFID division results are reported in Other specialty converting. The RBIS team has done a great job improving both the RFID top and bottom line.

RBIS margins were down more than expected due to lower volumes and higher employee-related costs. We did raise prices, and we will see the full impact of the price increase in the third quarter. At the same time, as we noted in the May investor meeting, RBIS is focused on reducing its fixed cost structure, and has an objective to organize manufacturing more efficiently and reduce its footprint by 20%. Now that the second quarter is over, we are accelerating our cost-out actions.

Office and Consumer Products is reported as a discontinued operation. We still anticipate closing the transaction in the second half. In the business, net sales and operating profit declined from second quarter last year. As you know, the back-to-school season is spread over the second and third quarters, so it's hard to measure the full season's impact today. But based on what we've seen so far, we expect modest growth in back-to-school products this year. Also, OCP's new products, including the Martha Stewart line, are being well-received by consumers.

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