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Avery continues to invest in RFID & emerging markets

23 Jul '08
6 min read

The Company remains on track to realize annualized acquisition synergies of approximately $120 million. Looking ahead, the Company expects that margins will normalize with improved volume as the apparel market rebounds, incremental synergies are realized, and price actions take effect.

Office and Consumer Products Segment (OCP):
The decline in Segment revenue, which comprises approximately 15 percent of Company revenue, is primarily attributable to end-market softness reflecting the U.S. economic environment. Second quarter year-over-year comparisons were also impacted by the timing of back-to-school shipments, a portion of which shifted to the third quarter this year. Net of currency translation, organic revenue declined 6 percent.

The expansion in operating margin in the second quarter primarily reflected product mix related to the timing of back-to-school shipments and productivity improvements, partially offset by accelerated inflation and reduced fixed cost leverage associated with lower volume. The Company is moving forward with additional price increases to help offset inflation.

While OCP continues to face difficult market conditions, its powerful consumer brand, proprietary products, and low requirement for capital expenditures result in significant contributions to free cash flow, reflected in second quarter results.

Other Specialty Converting Businesses and RFID:
The decline in revenue from these businesses, which comprises less than 10 percent of Company revenue, is primarily attributable to lower volumes in automotive and housing construction, partially offset by growth in RFID inlays. Revenue declined 9 percent, net of currency translation. RFID revenue quadrupled in the quarter, in line with expectations. The decline in operating margin reflects reduced fixed cost leverage and inflation, partially offset by productivity improvements and reduced RFID losses.

Consolidated Items:
The Company's annual effective tax rate for 2008 is expected to be in the 14 percent to 16 percent range, with the ongoing annual tax rate expected to be in the 17 percent to 19 percent range for the foreseeable future, subject to significant volatility from quarter to quarter. The effective tax rate for the quarter was 19 percent.

The Company's debt-to-total-capital ratio improved to 52 percent at quarter-end. The Company targets 40 to 45 percent debt to total capital.

Outlook:
The Company is reducing its 2008 guidance primarily due to a significant increase in inflation expectations coupled with greater economic weakness. To help offset the impact of inflation, the Company accelerated productivity efforts and is raising prices.

However, expectations for raw material inflation in 2008 have risen to approximately $110 million, representing a 60 percent increase since April. Because the majority of the benefit from pricing actions is expected to materialize later in the year, raw material inflation will significantly outpace price increases realized in the full year.

The Company's earnings expectations reflect revenue flat to slightly down on an organic basis for 2008. Slowing in European and Asian markets is expected, in addition to the slower U.S. market.

The Company now expects reported (GAAP) earnings for 2008 in a range of $3.35 to $3.55 per share, including an estimated $0.40 per share in restructuring and asset impairment charges and acquisition integration costs. These charges and costs are subject to revision, as plans have not been finalized. Excluding these items, the Company now expects full year earnings per share for 2008 to be in the range of $3.75 to $3.95 per share. The Company continues to expect 2008 free cash flow of at least $400 million.

Avery Dennison Corporation

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