Ladies and gentlemen, thank you for standing by. [Operator Instructions] Welcome to Avery Dennison's Earnings Conference Call for the second quarter ended July 2, 2011. This call is being recorded and will be available for replay from 1:00 p.m. Pacific Time today through midnight Pacific Time, July 29. To access the replay, please dial (800) 633-8284 or (402) 977-9140 for international callers. The conference ID number is 21496535. I'd now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. Please go ahead, sir.

Thank you. Welcome, everyone. Our discussion today will reference the earnings release that we issued earlier along with the slide presentation titled Second Quarter 2011 Financial Review and Analysis. Both documents were furnished today with our 8-K and posted at the Investors section of our website at www.investors.averydennison.com. We remind you that these unaudited results are preliminary as we've not yet filed our 10-Q. Our news release references GAAP operating margin, which includes interest expense, restructuring charges and other items included in the other expense line of our P&L. These items tend to be fairly disparate in amount, frequency and timing. In light of the nature of these items, we'll focus our margin commentary on non-GAAP operating margin, which reflects pretax results before their effect and before interest expense. 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 also 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 based on certain assumptions and expectations of future events that are subject to uncertainty. The Safe Harbor statement included in the documents that we provided today, along with our 2010 Form 10-K and 2011 Form 10-Q, address certain risk factors that could cause actual results to differ from our expectations. 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. I want to start to say that I recognize the news we gave you last week was both unexpected and unpleasant. Organic growth x currency was down about 2% for the second quarter compared to the 6.5% growth we saw in the first quarter. We experienced unexpected slowdowns in all geographies, and as well most of our businesses, with the exception of our Office and Consumer Products business. Starting with Retail Branding and Information Solutions, sales decreased 6% on an abrupt decline in unit volumes across all customer groups and geographies, which pressured profits in this high variable-margin business. A major factor in the order decline was the dramatic run-up in material and labor cost for apparel, which impacted retailers in 2 ways. First, it caused them to be very cautious about ordering garments with higher unit costs with correspondingly higher prices, especially in an environment of uncertain consumer demand. Cotton prices and other material inputs peaked and then dropped rapidly in the quarter. This should cause unit costs for apparel to drop later this year. But because of that, our customers delayed or canceled orders to make sure they did not end up with large inventories of higher-cost goods. Combined, these dynamics had the most impact on apparel, destined for the mass-market channel in the U.S., with unit volumes down significantly due to the magnitude of price increases on lower-priced garments, as well as the lack of consumer buying power at lower-income levels. While we expected a somewhat softer season this year due to the anticipated higher costs, we did not expect a rapid reduction in cotton and other input prices. We expect the softness to continue until later this year, and that's when retailers place their orders for the 2012 season. Turning to Pressure-sensitive Materials, it…

Thanks, Dean. Starting with Slide 6 and talking through to Slide 9. Sales in the second quarter were up as reported by 3% but down about 2% organically. As Dean discussed, volume was the driver of the organic sales decline, particularly in our Pressure-sensitive Materials and Retail Branding and Information Solutions segments. Volumes for the company were down approximately 5%, dropping off dramatically in June, historically the largest month in the quarter. The volume declines, of course, impacted our second quarter consolidated operating margin. Our operating margin of 8.2% was down 80 basis points from last year, as the negative impact of lower volume was partially offset by a reduction in employee-related costs, including lower expense for incentive compensation. We've talked a lot about rising raw material cost over the last few quarters and they remain high. We've made great progress in offsetting inflation by implementing the productivity initiatives and price increases that we've been talking about during our past few earnings reports. As for marketing, general and administrative expense, it declined versus last year due to lower employee-related costs. Last quarter, we talked about stepping up growth in IT infrastructure-related investments. We're still making investments in our most promising and critical initiatives while we reduce costs across the rest of the company, both through structural changes and general belt-tightening. Before getting into the segments, I want to point out that our year-to-date adjusted tax rate increased from 23% to 29%, largely reflecting an increased portion of our profit now expected to be in higher tax rate jurisdiction. I also want to comment on our year-to-date free cash flow, which included a net outflow in the second quarter, very atypical for us. This net outflow is largely due to the combination of lower operating results, an additional $25 million pension…

[Operator Instructions] And our first question comes from the line of Peter Ruschmeier with Barclays Capital.

I was curious, Dean, perhaps if you could help us to break down a 5% organic volume decline into attributable factors and maybe you can help us to rule some out. Do you think there was any demand in the first quarter that borrowed strength from the second quarter? And do you think there's demand in the second quarter that is perhaps being shifted to the third quarter? And I think you did mention there may have been some competitive behavior, was that as much as 100 or 200 basis points? Any more color you can offer on kind of the variances and the factors would be really helpful.

Sure, Peter. So I'd say there might have been a very small amount of shifting, and I can't really quantify it because most of the evidence we have is anecdotal at this point. So in Retail Branding and Information Services, the first -- some of the first quarter sales, I think, were stronger than we had anticipated in the quarter because frankly, people were just trying to get ahead of some of the unit costs that were coming in. Because people at that point expected input costs to keep going up at the time. So they were kind of buying early in the inflationary environment. That, of course, shifted pretty dramatically in the second quarter once cotton prices started to collapse. We may have had a little bit of pre-buying in the Pressure-sensitive Materials business, but it would have been very small as a percentage of the total, so not really meaningful. And as part of the share position, we did see, in Europe, typically June is a pretty strong month for the Labeling and Packaging Materials business there because people are doing a lot of work before the summer holidays. The Food business tends to be very strong at that point of view and we just didn't see the surge that we normally saw. And some competitors, I think, in a weakening environment, could have deferred or delayed some price increases. The problem is we don't have any market share data and we won't have it for a few weeks. I wish I could be more precise on that, but we just can't at this point.

No, that's helpful. In RBIS, it sounds like it was perhaps more abrupt than the other businesses. Is it possible that, that was down as much as double digit in terms of organic volumes?

No, it wasn't.

Not that much?

No, it really wasn't that much. There...

I think they're comparable to what you see on organic growth for RBIS.

Okay, and if I'm understanding what happened, would it be logical that if cotton were to bottom and turn the other direction that, that would bring buyers off the sidelines?

Well, I think, it's actually -- you've seen some articles about this lately in the trade press, but also in places like the Wall Street Journal. So cotton prices are already down. The problem is that cotton has not yet been turned into gray goods, which can be put into yarn and fabrics, and that really won't happen until later this year. So most companies are anticipating lower cotton costs and unit costs from a material perspective for 2012. They won't start ordering those products from us until very late in the third and in the fourth quarter. That's when we really start to see our fourth quarter surge in that business. So, yes -- I do see that, and I think there was actually, even in an article in the Wall Street Journal, about some people trying to keep their prices up by just adding units to their packs as a way of giving more to the consumer instead of giving it in price, giving it in unit volumes, which would be okay with us by the way. That would be a good trend.

And our next question comes from the line of George Leon Staphos with Bank of America, Merrill Lynch.

I wanted to get into volume again a little bit. Can you say that both RBIS and Pressure-sensitive Material volumes were down 5% in the quarter? Was there any variation around that corporate average? And what was the run rate -- what's been the run rate early in the third quarter for both businesses?

So RBIS was down a little bit more than the 5%. The 5% is a company number. And the RBIS organic growth was down 6% and their volumes were down slightly more than that, and pressure sensitive was around 5% as well.

Okay, so RBIS volumes were -- unit volumes for RBIS were down more like 7%, 8%, would that be fair?

6%, 7%.

No, 6%, 7%.

Okay, and Pressure-sensitive, a little bit less in terms of rate of decline?

Right.

Okay, and what's the run rate then, thus far in the third quarter?

Then the trends when you look at during the quarter, they were sliding through the quarter with June being the worst performance, particularly on a year-over-year basis. And we finally got a few weeks of orders in for July and things can be spiky at times. But right now, the order trend is similar to June, a little bit better, but similar to June.

So it would be fair to say that June for both was probably down double digits, even if it wasn't that -- that wasn't the case for the quarter, would that be fair?

June was worse. So on the -- we have -- it's a 5-week month for us, so it definitely was lower than the average for June.

Yes, Pressure-sensitive, not down quite double digits and RBIS down a little bit more. But again, a few weeks doesn't really tell too much about the business, but we're definitely seeing a continuing trend, slight softening from what we saw in June.

Understand. In terms of...

Softening of the trend that is, not further softening.

What's that, Mitch, I'm sorry?

Softening of the trend, not further softening beyond what we saw in June.

I understand. In emerging markets, I think you suggested volumes were down there as well. Could you confirm that and discuss what types of trends you've seen there?

Yes. So we -- one of the factors I look at is the purchasing managers' manufacturing index or the ISM, I guess, it's called now. And we saw declines in that index in all geographies including China. So we definitely saw a slowdown even in emerging markets. So we did have a little bit of pre-buy in the first quarter in the LPM business, but emerging market growth was also not good in the quarter. So thus the comment about it. We sort of see this in all geographies.

The Asia emerging markets fared better than the others, but they were also down and one of the reasons -- particularly, in Asia is where we did see a little bit of pre-buy in Q1. But if you adjust for that, Asia emerging markets were up very modestly. So significant reduction in the trend everywhere.

Okay. So Asia, China, up a little bit and everything else was down then in unit terms?

Yes.

Okay. A couple others, and I'll turn it over. Can you explain a little bit more in terms of what drove the tax rate change? And specifically, what's the discrete tax event in the tax rate change? And should we now be using 29% on a go-forward basis?

Yes, so the primary reason for the change in the tax rate is related to the geographic income mix. So we now have -- when we lowered our income projections for the year, it was lowered disproportionately in low tax rate jurisdiction. So that's what caused the increase in the tax rate. The discrete event, what we commented there and that was just about 20% or so of the change. So a very small component of the overall change on the tax rate was around some planning matters that we were looking at for later in the year that we're not going to implement, given the current environment. So primarily geographic mix. When you ask about going forward, it depends on -- if you're talking about for the near term, it really depends on what the geographic mix is going to be and really what kind of environment we're in. But I'd say, it's still mid- to perhaps a high-20% range.

And our next question comes from the line of Ghansham Panjabi with Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: Going back to the pre-announcement from last week and the guidance back for the year, you never actually gave explicit guidance on a quarterly basis. So just to clarify, what did you assume the 2Q EPS would be initially? Roughly $1 a share, is that in the ballpark?

We had something less than that, actually. It's around $0.90. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: $0.90, all right. And just based on what you're saying on the macro side. Thinking back to Office Products, 1Q took a big hit just from a pre-buying 4Q, if I remember correctly. And you're also supporting some new product launches, et cetera. Just given the weakness on the macro that you seem to be cautious on, are you scaling back some of those product launches?

No, we're not. In fact, Office Products, the current back-to-school view is still where we talked about in the last quarter. I think it will be flat, flattish, maybe down 1% for us this year. But most of the new product launches, we've got orders for and placed and again, some -- only a few products have hit the stores so far. We'll start to see a lot more in late third quarter and during the fourth quarter. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: Okay, and then going back to...

We pretty much already -- we've got the plan. We're executing, manufacturing, et cetera. So we're all locked and loaded, ready to go. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: Okay, and then moving onto your comments in the press release on returning cash to shareholders, on the share buyback issue, specifically. Even in what seems like a subpar year now, you're still going to generate a healthy amount of cash flow close to your dividend. You have a share buyback authorization out there. Should we expect any sort of meaningful purchase in 2011, and if not, why not?

As you know Ghansham -- we never comment on the timing or amount of share repurchases, but I'll reemphasize that we're committed to returning more cash to shareholders. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: Well, let me put that around, are you comfortable with where your balance sheet is right now?

We're comfortable overall with where our balance sheet is. One of the things you got to look at, we commented that in Q4 we achieved the target leverage position that we were seeking. Because of the seasonality of our cash flow, debt will go up during the year, did more so than usual this year. But when you look at the second half cash flow, we'll be looking to get back again to those leverage ratios and leverage position and then return more cash to shareholders. Your point, there's enough -- if you look at the free cash flow and you triangulate how much debt reduction we need from our current position, there would be sufficient in our current guidance for share repurchases.

And our next question comes from the line of John P. McNulty with Credit Suisse. John McNulty - Crédit Suisse AG: Just a couple of quick questions. On the raw material front, did you say you were 100% caught up at this point, or are you still working to catch up throughout the rest of the year?

We've got a little bit of a gap left and we still have some price increases planned for going forward. But they're very either product line or geography specific. So they're relatively minor. I think this is the first quarter now over the last 5 quarters where we haven't announced additional inflation expectations over and above what we've had. So the environment we're in is more flattened out. And again, there are still just a couple of areas where we need to execute price increases to fill in that gap. John McNulty - Crédit Suisse AG: Okay, and then as best you can tell in the Pressure-sensitive area, I mean, it sounds like there has been some increased kind of competitive pressure. Have you seen your, I guess, major competitor or competitors raise price yet? Or is it -- was it just a function that they were delayed? Or are they just not actively going that way and they're actually pushing more for share?

I think we've had -- every one of our competitors has felt the same inflation pressure that we’ve felt. And so, what we've seen is competitors following and raising prices in their markets. We just had heard an announcement earlier -- I'm sorry, late last week where one of our competitors in Europe has announced price increases again for certain geographies. So I still think that the competitors in this industry want to make money and they know they've got to get prices up in a time of rising raw material costs. So I think it was kind of a little sloppy in June in Europe, specifically, when the volume shortfalls -- we had a market volume shortfall, so some folks sometimes on the margins -- some competitors feel that they're better off trying to protect volume in the short term rather than raise prices. So we've seen this before. I do want to point out though that sequentially, we improved margins again in this sector. I mean, that was a priority for us to fill that gap. And all we've been talking about the last 4 quarters has been inflation. Unfortunately, now we're talking about volume. So I think we've done a reasonable job of executing. And the team has done good job of executing, getting prices up in our key markets. John McNulty - Crédit Suisse AG: Okay, and then just one last question. Just in terms of your customer base, I know -- I guess, in certain areas where you've seen a lot of inflation and then when prices started to rollover, you saw a de-stocking around that. Do your customers typically de-stock and try to play that pricing game, or is that something that we really don't see like in the Pressure-sensitive area?

For label printers and converters, it's tough for them to do because they're in a custom business. They don't always know what their customers are going to order, so they don't hold a lot of finished goods inventory and most of these customers are relatively small. So and they don't have a lot of space, so it's really tough for them to stock up either on a lot of our product or go through reduction. So we don't really see that kind of behavior. You see it again on the fringe.

And our next question comes from the line of John E. Roberts with Buckingham Research.

Can your apparel customers wait to see back-to-school sales before deciding what to do for the holiday season?

Sure, they'll -- I mean, they are always looking forward. They're already planning the 2012 season. And in their mix will go things like, what will apparel cost look like on a go-forward basis, what's the consumer appetite for spending and certainly the back-to-school apparel season for them will be an indicator of how confident the consumer will be and how much discounting they have to do during that specific season. So it's one of the inputs they look at to judge what they're open to buy numbers will be for 2012.

Yes, because John, just to clarify, the late Q3 and Q4 spend is usually -- or purchases from us are for the spring season next year. I think if you were asking -- [indiscernible] for holiday? The answer is no, not so much.

Okay, but they're likely to be sitting on their hands at least until Labor Day period, I guess, to get some sense or clarity on their visibility?

This typically is not a high ordering season for us anyway, okay? So what's in the stores now for back-to-school is already there. And we might get a few chase orders, that type of thing, but the activity level is actually relatively low in the third quarter.

I'm just trying to think of when you might have some visibility yourself in the trend, whether things pick up or not, you sound like you wouldn't expect it for a while.

Late third quarter. By the next earnings call, we'll have a decent feel for what apparel and retail open to buy and sentiment is. John McNulty - Crédit Suisse AG: Okay, did you make all your compensation accruals adjustments in the second quarter for your lower budget now? Or will you wait closer to year end to reduce bonus accruals and things like that, that you'd have to do if you don't make plan?

We adjust them each quarter based on our forecast for the year. And so in Q2, it was -- we did not accrue as much the normal amount you'd expect for Q2. We also reduced some of the accruals that we made in Q1.

Okay, you reversed them in Q1?

No, we reversed them -- no, I'm sorry, we reversed them in Q2, the one that we...

In Q2, right, for Q1 being over-accrued.

Yes.

And then lastly, the converter market, did they have any financial health issues? Is this a pretty severe correction for them? I know a lot of them are private, smaller, the debt markets haven't -- or bank credit markets haven't probably opened up to them that much. Is this going to put that customer base under financial pressure like they were back in 2009 or something like that?

I don't anticipate that. This is, again, and the real question is how protracted will this market slowdown be. It could be just a pause. We had a bit of this in the fourth quarter when things slowed down and then things picked up very robustly in the first quarter and so what I see is some relative choppiness out there. And so I am not anticipating any dramatic financial issues for our customers.

And our next question comes from the line of Thomas Mullarkey with Morningstar.

First question I have is regarding the reduction of your CapEx guidance by the $25 million. Is this going to be a timing issue where that $25 million reduction gets added into 2012, or do you probably permanently scale back any of your growth or IT infrastructure spending?

Well, it is a delay of projects that we had planned. We won't automatically add it back to next year's capital expense budget. We haven't even really done our planning yet for 2012, and we'll look at 2012 in terms of what we expect our markets to look like, what our free cash flows will be and we'll prioritize around that. So and with business being slower, it makes sense to soften up a little bit on the CapEx.

Okay. And then, I'm curious to get an update on your RFID business. Is it performing as expected, or is that likewise slowing down?

Well, because apparel unit sales weren't as robust as they were in the second quarter, it's not quite -- it certainly wasn't at our expectation, but I think it's up by 50% over last year or so, still growth there.

[Operator Instructions] And our next question comes from the line of George Leon Staphos with Bank of America Merrill Lynch.

Dean, I know you said at this juncture you don't know whether this is a shorter-term correction or the beginning of something larger. When you've seen this type of reduction to whatever high single digit, maybe low double-digit declines at the end of a quarter, are there any precedence for what has then followed in terms of the macro environment that you could remind us about, or is it not clear?

Now I'm starting to feel like Ben Bernanke. Yes, so the last time -- I did go back -- we did go back and review a lot of the trends over the last couple of years. And I don't think we should draw any conclusions from this, but the rate of decline was similar to what it looked like in early 2008. You'll recall that we were -- our sales started to drop off in 2008 and we have unfortunately a series of profit warnings during that year prior to people kind of recognizing the general economy had been slowing down. And so that being said, I just -- that still doesn't really tell me what's going to happen on a go-forward basis. And it's something we're going to watch very closely over the next few quarters.

Okay, I appreciate that. Second question, could you tell us what's the pre- and post-tax amount for the restructuring and also the other item that was taken out of, if you will, the GAAP numbers for an adjusted basis? And what was in that other item if you could disclose it, if you could relay that now?

Well, if you're asking for the full year, what our charges are going to be and anticipated to be or?

No, what was that other [indiscernible]

The tax rate on those items -- sorry, go ahead, George.

The other item, I think, was $5 million that you took out of earnings on a pretax basis. What was that, and what was the tax effect on that?

The tax effect on all of those things is a high 30% because the charges tend to come in high tax rate jurisdictions. To answer the question on the tax rate, as far as what the item is, a number of costs that we've been incurring in the second quarter and we're not going to comment at this time as to what that is.

Okay, all right. I appreciate that. Two last ones, I'll turn it over. One, just geographically, again, on the tax mix issue. I mean, it sounded like and perhaps incorrectly so on my part, but it sounded like your developed markets slowed or declined more than emerging markets. I would imagine that would actually help you from a tax standpoint. But if you could provide any more color on that, it would be helpful. And from a restructuring standpoint, obviously, the company has done a lot of this over the years, where are the next areas where perhaps you can further improve and optimize your cost structure, given that you've already done a fair amount of this over the last number of years?

Sure, I'll take the tax one first. As far as the taxes, I can understand why you'd think that our lower tax jurisdictions are in the emerging markets predominantly, but we actually have tax, some low tax jurisdictions in certain areas in mature markets as well. And so you can't necessarily draw the conclusion that when I talk about high versus low tax jurisdictions, that it's mature versus emerging market.

Got it. On the restructuring?

Yes, on the restructuring, George, so it's been -- it is part of our DNA. We're not doing a massive acceleration of the restructuring we're doing. I think that our Lean Six Sigma teams around the company do a really a good job of finding lots of productivity. And frankly, we did some restructuring in the end part of the quarter and early part of this quarter at the corporate level. That really has not much to do with the economy, the current economic situation, but had more to do with eliminating some functions and activities that we had traditionally done at the corporate office that we believe our business units can more than easily handle it on their own. So it's just working differently, eliminating complexity, et cetera, et cetera. Those types of things and so we went ahead and did that.

Thank you. And there are no further questions from the phone lines at this time.

Okay, well, I want to thank everyone for joining the call today. And I want to emphasize that while the second quarter was tough, it doesn't change any of our fundamentals. Our key businesses are still market leaders with significant competitive advantages. We've managed effectively through slowdowns before and we'll come through this one well positioned to grow earnings and increase returns and provide more free cash flow and return cash to shareholders. Thank you.

Thank you. And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.