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Avery RIS to deliver strong growth with rapidly expanding margins

22 Oct '08
5 min read

The decline in operating margin reflects reduced fixed-cost leverage and inflation, partially offset by price increases and increased productivity. Additional price increases are scheduled to take effect January 1, 2009.

The decline in revenue in these businesses, which comprise less than 10 percent of Company revenue, is primarily attributable to lower volume in automotive and housing construction, partially offset by growth in RFID inlays. RFID revenue nearly tripled in the quarter. The decline in operating margin reflects reduced fixed-cost leverage and inflation, partially offset by productivity improvements and reduced RFID losses.

The Company's effective tax rate for 2008 is expected to be in the range of 8 percent to 10 percent, subject to changes in geographic income mix, with the ongoing annual tax rate expected to be in the 17 percent to 19 percent range for the foreseeable future. The effective tax rate for the quarter was 6.8 percent.

The Company's access to capital has been uninterrupted through the market turmoil. To fund short term needs, the Company utilizes commercial paper and its credit lines.

The Company's debt-to-total-capital ratio was 51.9 percent at quarter-end. The Company targets 40 to 45 percent debt to total capital.

Outlook - The Company announced on September 8, 2008, that results in July and August were below forecast due to deteriorating market conditions. The Company expects this trend, which worsened in September, to weaken further in the fourth quarter.

The Company is reducing 2008 guidance due to increased market uncertainty and a slowing economy in the U.S., which is extending to Europe and Asia. Additionally, the Company anticipates that customer inventory reductions will negatively affect sales in the fourth quarter.

The Company expects that margins will continue to be pressured by raw material inflation. The Company increased its estimate of raw material inflation in 2008 to approximately $125 million from its July estimate of approximately $110 million. While the Company intends to pass on these higher costs through price increases, the benefit of these increases will not be fully realized until the first quarter of 2009. This will result in an expected price/inflation gap of approximately $20 million in the fourth quarter of 2008.

The Company now expects reported (GAAP) earnings for 2008 to be in the range of $2.65 to $2.85 per share, including an estimated $0.50 per share in restructuring and asset impairment charges and acquisition integration costs. Excluding these items, the Company now expects full year earnings per share for 2008 to be in the range of $3.15 to $3.35 per share. Consistent with this range of earnings guidance, the Company expects record 2008 free cash flow of approximately $375 million.

"We expect to deliver record free cash flow in 2008, reflecting the strength of our company and our aggressive management through the near term market challenges. Our leading market positions and competitive advantages are expected to drive strong revenue growth with accelerated margin expansion when the economy recovers," said Scarborough.

Avery Dennison Corporation

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