Avery Dennison Corporation (AVY) Q2 2012 Earnings Report, Transcript and Summary

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.

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.

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. After the office products sale, we'll be focused on 2 core businesses: Pressure-Sensitive Materials in RBIS, and a group of smaller specialty converting businesses. Our core businesses are market leaders in their respective industries with great competitive advantages. We are going to build our niche advantages and further strengthen our ability to deliver on our long-term targets for double-digit earnings growth and improve returns by accelerating our restructuring initiatives to achieve more than $100 million of savings by mid-2013, with most of the savings coming next year. First, we are going to continue the streamlining of the corporate organization that we began last year to eliminate the stranded class from the OCP divestiture. Over the past few years, our core businesses have developed scale in support functions, moving their organizations from small regional teams to globally managed functions. This enables us to reduce the amount of corporate support and better align these functions with the specific needs of each business. The streamlining will include the disposition of our headquarter's building in Pasadena, California, and a move to a lower-cost, smaller, leased location here in the San Gabriel Valley. Second, we are fully integrating Graphics and Reflective Solutions into Label and Packaging Materials. We've already integrated the GRS supply chain procurement and operations into LPM, and so now we are integrating marketing, sales and R&D functions to help Graphics and Reflective become more competitive as well as improving returns. Third, as you know, we've been investing in marketing an innovation to get more external and to drive faster growth rates. We know from our experience so far that having technical people co-located with marketing professionals makes innovation faster and more efficient. To that end, we are consolidating our corporate R&D resources into Pressure-Sensitive Materials research centers in Ohio, the Netherlands, China and India. We want to move innovation closer to customers, accelerate time-to-market and focus activity on clearly defined opportunities. This will save us some money and enhance our innovation capability. Fourth, now that we're past RBIS' peak quarter, we'll move forward with lowering its breakeven to improve its returns in a slower growth environment. As I said before, we have a 20% reduction in the RBIS footprint underway, and we're also identifying further opportunities to take cost out of this business. We're moving quickly to achieve more than $100 million of annualized savings in a little under 12 months. This leaner cost structure will make us more competitive and enable higher returns despite an uncertain economic environment. We have terrific core businesses with strong free cash flow, the ability to drive productivity, great capital discipline and innovation leadership. We have a high sense of urgency to achieve the targets we committed to in the investor meetings in May and thus are moving quickly and decisively to accelerate productivity. So to sum up, with the first half behind us, we are tightening guidance ranges for full year EPS and free cash flow, and we are on track for the year. We're moving aggressively to deliver on our long-term targets, and at the same time we continue to increase cash returns to shareholders. And now Mitch will provide more detail on the quarter and our initiatives.

Thanks, Dean. Starting with Slide 4 and talking through to Slide 7 of our financial review and analysis. Overall results for the quarter were consistent with our expectations with adjusted earnings per share at $0.56, as strong performance in Pressure-Sensitive Materials was offset by lower than expected results in RBIS. Net sales in the second quarter of 2012 grew approximately 4% on an organic basis as the Pressure-Sensitive Materials business recovered from the slowdown in volume that we experienced in the second quarter of last year. RBIS sales were flat, and Other specialty converting delivered modest growth. While we delivered solid organic sales growth, adjusted operating margin declined 30 basis points as higher employee-related expenses more than offset the benefit of higher volume and productivity. The higher employee-related expenses relate in large part to higher bonus expense versus last year. We had unusually low bonus expense last year, particularly Q2, due to poor business performance. The net impact from raw material inflation and price increases was relatively modest in the quarter as commodity costs continue to be relatively stable for us. Our second quarter effective tax rate on continuing operations was 33%. The year-to-date adjusted tax rate increased from 29% to 34%. We continue to anticipate a full year tax rate in the low- to mid-30% range, similar to the full year rate for 2011. Our year-to-date free cash flow in 2012 is significantly improved from last year due to the lower bonus payments in the first quarter of 2012 versus Q1 2011 and the continued strong management of working capital. I'm pleased with the capital discipline we've demonstrated over the past few years and where we are on achieving our free cash flow objectives for the year. Net debt is down by approximately $150 million from last year but higher sequentially from March levels due to the seasonality of our cash flow. We are committed to maintaining our strong balance sheet and expect to keep our net debt-to-EBITDA less than 2x for the year. With the strength of our cash flow and balance sheet, we continued to repurchase shares in the second quarter, 2.4 million shares at a cost of $70 million. Year-to-date through the end of the second quarter, the company repurchased 4.8 million shares at an aggregate cost of $142 million. Now Dean talked about our restructuring program earlier. These actions will structurally reduce our overhead cost and save more than $100 million. These actions will add to our ability to achieve our financial targets even with uncertain market conditions. Now turning to Slide 8. Pressure-Sensitive sales were up 6% on an organic basis, an improvement in the year-on-year growth rate versus recent quarters as we have now lapsed the slowdown that began in the second quarter of last year. Label and Packaging Materials volume improved in all regions, with mid-single-digit growth in North America, high-single-digit growth in Europe, where we had the biggest decline last year, and double-digit growth in emerging markets. While the sales growth benefited from easier comps to the prior year, the volume was good in absolute terms as well, particularly in the emerging markets and North America. Sales in Graphics and Reflective Solutions declined low-single digits. The market of this business is more discretionary in nature and a disproportionate amount of this business' sales are in Europe. PSM's adjusted operating margin was slightly -- up slightly year-over-year as the benefit from higher volume and productivity was largely offset by higher employee-related expenses including incentive compensation. Retail Branding and Information Solutions sales were flat on an organic basis. As you know, we were hoping for growth in RBIS, but the market just isn't there right now. We saw improvement in all segments in the U.S., with the exception of the mass-market channel, while we experienced a general decline in Europe. RBIS' adjusted operating margin declined 160 basis points due to wage inflation, partially offset by productivity initiatives. As you've heard us say, given RBIS' current cost structure and manufacturing footprint in markets with rapidly rising labor costs, this business needs between 1.5 and 2 points of growth in order to deliver incremental margin. As you can see, in this quarter we didn't have that, hence the margin compression and our strong push to reduce cost in this business. Sales in our Other specialty converting businesses grew 2% on an organic basis, due primarily to a strong showing in performance tapes. Adjusted operating margin improved 80 basis points as the impact of higher volume and productivity initiatives more than offset higher employee-related expenses and other items. The productivity savings in Other specialty converting were largely driven by the vertical integration between our RFID division and RBIS. Moving on to the outlook for 2012. On Slide 10, we've highlighted the key factors that we think will contribute to our P&L and cash flow in 2012. Slide 11 has our EPS and free cash flow guidance. While there remains uncertainty in the macro environment and limited forward visibility, now that we're halfway through the year, we've tightened our sales, earnings per share and free cash flow estimates. Our estimate for organic sales growth is between 2% and 3%. Based on recent exchange rates, the impact from currency on EBIT is now estimated to have approximately $19 million negative impact versus 2011. Our estimates for the tax rate, capital expenditures, pension costs and average shares outstanding remains unchanged for 2012 from what we shared with you just last quarter. We also continue to expect that the combination of free cash flow and net proceeds from the sale of OCP will total approximately $400 million. Now for the big changes to our near-term financial outlook this quarter relate to the cost-reduction actions that we described earlier. We anticipate more than $100 million in annualized savings from this restructuring program, with approximately $15 million realized this year and most of the remainder to be realized in 2013. To implement these actions, we estimate that we will incur approximately $80 million in restructuring costs: $55 million in 2012 and $25 million in 2013. Based on estimated sales as well as other assumptions, including the listed factors, we expect adjusted 2012 earnings per share from continuing operations of $1.90 to $2.05 and free cash flow from continuing operations of $280 million to $310 million. Note that the midpoint of our free cash flow guidance has only changed modestly despite the incremental cost of the restructuring program. This is because we expect to offset most of the incremental 2012 restructuring cost with continued tight management of working capital. Earnings in the third quarter are expected to be between 20% and 25% of our full year guidance. In summary, the second quarter was in line with expectations. We've demonstrated our commitment to maintaining financial strength while returning more cash to shareholders. And the next phase of our cost-reduction program will save more than $100 million, adding to our ability to effectively manage through an uncertain macroenvironment and giving us greater upside when conditions improve. These actions reflect our continued cost and capital discipline and our commitment to delivering better returns. Now we'd be happy to take your questions.

[Operator Instructions] Our first question, from the line of John McNulty with Credit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: Just to maybe flesh out the cost-cutting a little bit. You highlighted 4 major buckets where you expect the bulk of the savings to come from. Can you quantify how we should be thinking about each bucket in terms of what those savings might be roughly give or take a little bit in each of the segments?

John, yes. This is Dean. Good question. I don't think we want to do that at this time, because we haven't announced all the actions in terms of different parts of the company. I will tell you that about 80% of the actions we're taking don't impact SG&A versus the balance obviously coming above the gross profit line. John P. McNulty - Crédit Suisse AG, Research Division: Okay. Fair enough. And then with regard to the timing of when they hit, I know you'd said you were hoping by the end of '13 to be at a run rate of $100 million. How should we think about, incrementally, in '13 versus '12 what the cost saves should be looking out to 2013?

Well, we want to get to the $100 million run rate savings by mid-2013. So a lot of the actions we'll be taking between now and the end of the year. I do expect some actions will take a little bit longer and bleed over into the first quarter of 2013.

And so of the $100 million, we're expecting $15 million net to hit this year and the following $85 million to mostly hit 2013, with a little bit blending into '14 for things that are implemented in Q1. John P. McNulty - Crédit Suisse AG, Research Division: Okay. Great. And then just one last question, just on your guidance for the full year. Looking at your -- the 2 remaining core businesses. Normally your first half of the year seems to be a little bit stronger in terms of earnings than the second half, and yet your guidance isn't really implying that. So I guess I'm wondering what you're thinking starts to improve in the second half of the year, so that you kind of have it more even balance this year compared to normal years.

I think, John, the biggest difference is last year in the second quarter, we basically reversed out our bonuses for the whole first half of the year. So the comps, frankly, just get a bit easier in the back half of the year, both on the top and the bottom line.

Our next question, from the line of George Staphos with Bank of America Merrill Lynch.

I just wanted to come back to the restructuring relative to the environment. If I was tallying correctly, I think you mentioned an uncertain economic environment being the environment you've got around 7x or 8x on the call. So did anything change over the course of the year that prompted these actions? Or were these actions, Dean and Mitch, that you had been more or less planning on once OCP was done? And if you could provide a little bit more color on that, that would be great.

Well, certainly the thinking about eliminating stranded cost after OCP, that -- we took some actions in the back half of last year. But frankly, as we look forward and realize that the economic environment is probably, in the near term, not going to get much better, that we needed to take actions that would accelerate our earnings power now, and not just simply wait for a rebound in the economy. On the corporate overhead part, one of the things that we've realized is that we've added a lot of capability to the businesses. And we can eliminate activities that formerly were done at the center that can now be done in the businesses. And at the same time, the needs of the businesses are different, so that they can choose much better to how to or what to invest in and at what level. And I think it will get us definitely a better end result. There's one other factor here, and that is for some -- for example of our businesses, a good example is Graphics and Reflective Solutions. We had decided a couple of years ago after we had integrated the supply chains that we would leave additional infrastructure in the front end of the business to try to accelerate growth. And we had set an internal milestone of 2012 being the key when we would be able to demonstrate our ability to grow faster in that business. Now the near-term prospects, given the economy don't look good, so we simply triggered a milestone and decided to integrate that business and improve the returns immediately. So I think a number of factors have played into this. And I would attribute that to frankly just disciplined management and looking for opportunities for us to hit our commitments to shareholders as fast as we can even given potentially uncertain economic environment.

Yes, our goal with this, just to add to Dean's points, as we both mentioned, is to ensure we can hit the earnings and free cash flow targets that we laid out in May, even if we come in a little bit on the low end of the sales growth. And these are -- we're always looking for opportunities to reduce cost, and these things have been on our radar, and we just, as what Dean said, triggered a few milestones in the works of implementing these things and finalizing the planning in Q2. We're now in a position to announce most of it.

That's very helpful. Appreciate the color on that. I guess one question I had regarding the goal. In terms of hitting your goals despite the environment, you're purely referring to what you laid out for 2012. You weren't putting any kind of stake in the ground for '13, i.e. you still expect to be able to grow earnings despite the environment because of the savings that you'll generate here. Would that be fair that you're only looking at '12 right now in terms of promising on your goals?

We're committed to hitting 10% to 15% net income growth and 15% to 20% EPS growth. We're not giving 2013 guidance here, and we certainly don't have any insight at this point about what 2013 is going to look like. Again, it just comes back to us achieving those targets, even if the economy looks worse. And let's face it, if it doesn't get worse or it gets somewhat better, there's upside for the business.

George, those are the targets we discussed in May at the Investor [indiscernible].

Understand. Just was not sure whether you were laying it out for '13 yet. Doesn't sound like you are, but certainly...

No, we're not.

Okay. And how much of the savings will be actual cash? Will it all be cash, the $100 million, or it will be there as a non-cash expense that you avoid here? What might those be?

Those are pretax cash savings.

Okay. And then the last thing. As you're integrating the labels and Graphics and Reflective businesses, what are the obstacles, if any, to integrating? What thought have you put into that you can share here about areas that you may eliminate that are key points of connection between the 2 areas that if it's now eliminated might hamper your ability to integrate those groups? And more broadly, are there any areas that you may be looking to eliminate that again are key focal points in terms of how the organization communicates from one end to another that are challenges during the integration?

I'll take a shot at your question, George. I'm not sure I understand it 100%. I don't see any challenges in integrating Graphics and Reflective Solutions into the business. We still will have a separate sales teams going after specific markets in Reflective and the Graphics business. What we've basically taken out is a lot of the overhead or we will take out the overhead in infrastructure and some of the G&A costs associated with that activity and will continue to leverage the scale of the Label and Packaging Materials supply chain and procurement operations. If you are referring to linkages between, let's say, RBIS and the materials businesses, there really aren't very many. So actually, potentially, I think what we have is dis-synergy trying to manage somethings at the center that should be more appropriately managed in the businesses with a focus on what's really driving value there. In other words, RBIS, obviously, is a different business situation than Label and Packaging Materials, and therefore may choose not to invest in some things at this point in their evolution.

Our next question, from the line of Ghansham Panjabi with Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Maybe this is a good one for you, Dean. The 3.5% sales growth that you saw in the core basis for the quarter, just kind of thinking 2Q '12 versus last year, is this just purely a function of easier comparisons from the volume inflection you saw last year or is it some encouraging signs on underlying volume growth?

Yes. It's better than just the comparisons. When I look back to 2010, I don't have the numbers here in front of me, I am feeling pretty good about where we sit today. First of all, as you know, we've lost some share in the second half -- in the second quarter last year in Europe. In the Label and Packaging Materials business, as we pushed prices up. And over this last 12 months, we've recovered some of that market share. But interestingly enough, we don't have the market data yet, but market conditions still remain stronger than maybe I would have expected, especially in Europe. Emerging market growth has also rebounded quite nicely. We saw double-digit growth in Asia, we saw double-digit growth in Latin America, so I'm pleased with how the businesses are tracking there. So far, we haven't seen maybe early warning signs of economic slowdowns in emerging markets like we've all been reading about in the newspapers. In RBIS is a different story though. I mean, RBIS, we did expect to get a better rebound in the second quarter. Now it turned out that April was negative, May was flat, and June we saw some sales growth, and that sales growth has continued for at least the first 3 weeks of the third quarter. And so it's modestly looking a little more positive, but we're not taking that to the bank just yet. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: And so just sort of continue that thought on RBIS. Why would -- what do you anticipate or what do you allocate that improvement in the inter-quarter trajectory to, because it seems like the economy is worse, generally speaking, June versus back in April. So why would RBIS improve and continuing into the third quarter?

Again, the sales that we capture in the second quarter are really for the fall and winter programs. So it really relates to retailer -- focus on their inventory, on what their prospects are for the coming season. We saw modest improvement in U.S. sourced apparel items, so we saw a plus figure. In Europe, it was down very low-single digit, and the 2 sort of offset each other. I do think we're gaining share in some of our key market segments. It's just not happening fast enough, and we're getting 0 help from the market. So it's really up to us to reconstruct this business model, so we can drive earnings growth with a -- in a very conservative market, which I don't believe retailers are going to invest a lot in inventories at least for not the foreseeable future. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just one final question on PSM. Mitch, I think you mentioned labor inflation as it relates to the operating margin variance year-over-year. Not a lot of your peers are talking about labor inflation. Just curious as to what's driving that for Avery specifically.

Yes. So my comment on labor inflation was more focused within RBIS given the high labor content of that business. I commented on PSM about higher employee-related expenses, but specifically calling out most of that for PSM was around bonus expense. Last year, Q2, we had very poor performance in PSM and basically reversed out all the bonus accruals that we had from the first quarter as well as the second.

Our next question, from the line of Scott Gaffner with Barclays Capital.

Just wondering, is there any benefit on the tax rate for moving some of these corporate functions overseas into the businesses?

There is not much benefit on the tax rate. There is a modest amount, but most of this activity is not, with the exception of some of the R&D activities and so forth, is not moving overseas. It's migrating within the U.S. or actually being eliminated.

Okay. And then just moving to PSM. Obviously, a strong result out of the Label and Packaging Materials, but can you talk a little bit more about which end markets were strong? Was it more in the package goods end markets? Or was it more in variable information end markets? Can you sort of parse that out a little bit for us?

I don't have the details here. My sense is that we saw kind of strong growth across -- in most of our product categories. Certainly in emerging markets, we definitely saw that. We generally have good strength in the films product categories, which tend to be more consumer packaged goods related.

Okay. What was -- how much did price cost help you out in PSM in the quarter? Was there any big lift from lower resin cost in the quarter? And do you expect any lift in the third quarter from the drop in resin cost so far?

Commodity prices have really just stabilized for us for us the last couple of quarters as we've been saying. We're seeing the continuation of the same. And the year-over-year organic growth we've talked about in this business, and it holds true for all the regions, is basically driven by volume. Small puts and takes on price were the carryover for some price increase that happened last year in some regions or rolling back of some of the surcharges we implemented, but very modest. So overall, all the organic growth is largely attributed to volume.

We are actually still raising prices in some economies, especially where currency -- certain currencies have devalued, and so we're -- still some pricing activity going on again in some geographies with declining currency.

Okay. And then I think in RBIS you mentioned that mass-market was weak in the quarter. Was there any strength, any particular strength in any of the other end market channels that is noteworthy?

Yes. I think for us the global retail, global brands has continued to be an area of strength for us. In the U.S., the premier in mid-market was also a strong driver for us. We're definitely seeing some lift because RFID uptick as well as some of the new embellishments we're selling. So we are gaining some traction there.

Okay. And just lastly, on the sale of OCP. I think you said before you thought it would close in 3Q early in the third quarter. You still anticipate that early in 3Q? And how are you thinking about the proceeds at this point from the sale, the net proceeds?

Well, we said in the back half of the year, so that's -- we'll continue to say that. It's in the hands of the government right now, and they have their process. So when they get done with their process, we'll proceed. In terms of the use of proceeds, I think it's exactly the same as we've said before.

Yes, essentially, if you look at the $300 million just using for simplicity of free cash flow we're expecting from continuing ops plus the $400 million of the net proceeds in free cash flow from OCP, $700 million in total, $100 million will go towards dividends, of course. We said we'd pay down some debt commensurate with the amount of EBITDA we're losing in office products, and then the remainder for focus on share repurchases. So no change from what we said before.

[Operator Instructions] Our next question, from the line of John Roberts with Buckingham Research Group.

When you take that footprint of RBIS down 20%, is that taking the machines out of the customer site locations that install the ticket tags? And what happens to those when they're pulled out, if that's what's going to happen here?

No. These are our own facilities that we're talking about. So we have equipment, printers located at, I would say, probably several thousand customers today. So that doesn't get impacted at all.

That's not [indiscernible].

In fact, we're encouraging customers to use more in-plant printing because it provides the best response capability for certain market segments.

Okay. So the in-plant printing footprint doesn't come down at all?

That's correct.

Okay. And then secondly on the updated guidance, the $4 million increase in the foreign exchange headwind, how much of that was in the second quarter just reported? And how much is that in the second half of the year?

Very little of it was in the second quarter given that where the rates were at that time because for the second quarter, most of it was driven by the euro. Our average FX rate at that time that we use was 1.3. It's now -- what's baked into our second half is roughly 1.25 knowing rates are slightly lower than that now. So of the extra $4 million, I think it's like $1 million or so was Q2, the rest of it is for second half.

Okay. Is there any hedge below the EBIT line?

Hedge below the -- no, there's no hedge below the EBIT line.

That incremental 4 flows all the way down to EPS?

Yes.

Our next question, from the line of Rosemarie Morbelli with Gabelli & Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Raw materials costs, you said, have stabilized for you, but they seem to be coming down particularly on the adhesive side of your Pressure-Sensitive. Have you seen some customers kind of waiting to see where the low-end is going to be and holding off on placing orders? Or is that not a factor in your business?

It's generally not a factor, Rosemarie, because the label converting business is -- tends to be a custom on-demand business. So customers order when they need the products. So literally, we ship out about 80% of our orders within 2 days. So it's very unusual for customers to -- or they literally just don't have the physical ability to store a lot of our products, so we don't generally see that kind of activity. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. That is very helpful. And I was wondering if you could talk a little bit about the different businesses in your other specialty converting, what you saw for each one in the quarter and your expectations for the second half in 2013?

So the largest business in Other specialty converting is our performance tapes business. It's a business that serves 2 primary markets: one is tapes for diapers, frankly, and the other one is tapes used for bonding in a number of industrial applications, including things like automotive and electronics. We saw -- we've seen a decent growth in the business the last couple of quarters and expect that to continue going forward as we've been able to capture some new business that's going to roll out now over the next couple of quarters. The second largest business is Designed and Engineered Solutions, which is a specialty label converting business that serves a diverse set of markets, including things like pressure sensitive postage stamps, battery labels, labels for automotive and other functional products, things like valves [ph] for coffee bags or for food products. That business showed as well decent results for the first half. And then we have a small medical converting business, which has been an investment business for us, good top line growth. It's kind of still an investment, so it doesn't have that much profitability at this point. And then finally, our RFID division is in that category, and we've had a pretty significant year-over-year EBIT improvement in that business. That's now been profitable for 2 quarters in a row. Rosemarie J. Morbelli - Gabelli & Company, Inc.: And the RFID is closely linked to RBIS, isn't it?

It is. Much of the sales of that division are sold to RBIS, correct. Rosemarie J. Morbelli - Gabelli & Company, Inc.: So if we see RBIS sales growing, then we can assume safely that it is the same case for RFID?

We're growing both externally with other markets, and the RBIS RFID sales went up about 35% in the second quarter, so we continue to see growth there. Rosemarie J. Morbelli - Gabelli & Company, Inc.: And if I may ask one last question. Have you seen any change in the Chinese demand for their own domestic consumption on either the Pressure-Sensitive or the retail business, RBIS?

So for Pressure-Sensitive, probably 80% to 90% of the products we sell in China stay in China on consumer goods. So we've seen a rebound since the first quarter, and we expect continued double-digit growth there. RBIS is completely the opposite story. Most of the products that we sell in China are attached to soft goods, apparel and shoes, that are exported to Western countries. So we have actually a small but growing domestic business for China's retailers and brand owners.

Our last question is a follow-up question from the line of George Staphos of Bank of America Merrill Lynch.

The embellishments business is an interesting business and certainly it's leveraging what you have in RBIS, but it seems like it would be an even more difficult supply chain model than even what you do with tags and tickets. Do you agree with that assessment or disagree? And what challenges are you finding there? You mentioned I think 60% growth in the business from a bottom line revenue standpoint, what that contributed in the quarter.

Yes. It's pretty small. I mean, it's sub $100 million in terms of revenue. And it's actually, I think, fairly easy to execute. We're selling to the same customers, and we're also using existing assets to do it. So I actually think it's a nice add. It tends to be sold -- the product tends to be sold more to designers, and therefore it has a slightly longer selling cycle, because you've got to get the designers to basically specify the product a couple of seasons ahead when they're planning their work. So we are pleased with the traction so far.

Okay. I appreciate that. Back to the question of linkages, I guess what I was getting at, within Pressure-Sensitive Materials to the extent that you are eliminating much of what was the corporate infrastructure, a lot of that was in R&D, are there any areas where you're going to be particularly concerned about sharing of R&D, sharing of best practices since you are now driving a lot of that to the divisions and to the field as opposed to having it in Pasadena?

Yes. I actually think it's a real positive. Our learnings had been that the more you can get your technical people and your marketing people together, you really accelerate the innovation process. And while we have a number of great people here at the research center, frankly it's isolated. It's a bit of a silo. We don't have any businesses, especially now with office products being sold, located anywhere close to here. So we are relocating some people to some of these other locations. And there is a small group of engineers that will also stay here at the corporate center, because in this case it tends to be more for the manufacturing engineering part of the business, so they don't need to be co-located necessarily. So I'm not all that -- I actually think this will enhance our effectiveness.

Okay. And to your point earlier that maybe having the corporate create some -- dis-synergies, I guess this is what you were referring to as well.

Yes, I think the needs of the businesses, George, are sufficiently different enough. And if you try to manage things at the center, you're trying to average things. In that case, are probably wrong. We're going to get down to a smaller holding company structure that's very small. And we will still have some shared services where it makes sense, where scale really matters like buying things like IT, data, management, health and welfare, pension, et cetera, will still be managed by the center. But fundamentally, the businesses are going to drive what services they want and what investments they want to make.

Okay. Well, makes a lot of sense. I guess the last question I had, just housekeeping. You're again expecting proceeds on OCP of I think north of $400 million is how you phrased it. When I look at the balance sheet, when I look at the assets and liabilities held for sales, the net of those 2 is roughly around $350 million. So does that simplistically when you do ultimately collect those proceeds, should we assume there's a gain of whatever $50 million or more that hits you across those 3 figures or from those 3 figures? And then remind me initially when you announced the deal, I think there were proceeds that you talked about of $550 million, but the net of that is the working capital when all is said and done?

So the net of the $550 million down to the $400 million, it'll vary depending on when this deal closes. If it were to go all the way to December obviously since it includes free cash flow as well as the net proceeds, that number would go north. So it's sensitive to when the deal actually closes. The difference between the $550 million and the $400 million is due to deal cost and taxes, essentially the 2 largest components, to answer the last part of your question, George. And so that's overall what we're expecting from the transaction. We said approximately $400 million, but it can vary depending on the timing of the close. As far as the gain question that you asked, yes, we do -- are expecting a gain, and just depends again if it were to close today, the cost base of that business will be a little bit higher given the working capital investments you have due to BTS, whereas if it were later the working cap will be lower and so you'd have a slightly higher gain. So it will move quite a bit through the year given the seasonality of the business.

Mr. Scarborough, I will turn the call back over to you now for your closing remarks.

Great. Well, I just like to say that we're on track for the year. We're pleased with the performance in our Pressure-Sensitive Materials business, and we realize we need to accelerate the performance improvement in RBIS. We have a real urgency to deliver on our long-term targets. And that $100 million plus restructuring improvement plan really enables us to enhance our returns, deliver on those margin targets in an uncertain economy, but frankly give us some really nice upside when the economy improves. And we continue to be committed to capital discipline and returning more cash to shareholders. Thank you.

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.