Ladies and gentlemen, thank you for standing by, and welcome to Avery Dennison's Earnings Conference Call for the Fourth Quarter and Full Year Ended December 31, 2011. This call is being recorded and will be available for replay from 1:00 p.m. Pacific time today through midnight Pacific time, February 3. To access the replay, please dial 1 (800) 633-8284 or 1 (402) 977-9140 for international callers. The conference ID number is 21543229. I'd now like to turn the call over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may proceed, sir.

Thank you. Welcome, everyone. Today, we'll discuss our preliminary, unaudited fourth quarter and full year 2011 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. Despite the challenges of over $200 million of raw material inflation and a sudden downshift in volume in the second quarter that lasted the rest of the year, the businesses delivered more operating income than last year before restructuring costs, as well as nearly $300 million in free cash flow. Our ability to raise prices and to accelerate productivity enabled us to hold our margins in difficult market conditions. We further reduced our leverage, increased our dividend and contributed $70 million to our pension plan. Our intention was to return even more cash to shareholders last year, but we were restricted due to the Office and Consumer Products divestiture plan. Net sales increased 4% for the full year, mainly due to pricing and currency, which offset sluggish unit volumes caused by lower market demand in many of the vertical end markets we serve. We took a significant step forward with the agreement to sell our Office and Consumer Products business consistent with our strategy to maximize its value for shareholders. Now turning to the businesses. In 2011, sales for the Pressure-sensitive Materials segment grew about 4% in local currency due to the pricing actions we took. We held segment operating margin, excluding restructuring, roughly flat year-over-year. I'd like to note that in challenging market conditions, Pressure-sensitive Materials operating income, excluding restructuring, is roughly $80 million higher than it was 2 years ago at the low point of the recession. Our Label and Packaging Materials business, which is by far the largest component of the segment, is a market leader with strong competitive advantages. We have differentiated products, especially in the faster growing film categories. We have scale, which enables us to run more efficiently and buy raw materials more effectively than competitors. Label and Packaging Materials is an…

Thanks, Dean. Starting with Slide 6 and talking through to Slide 8 of our financial review and analysis. Sales in the fourth quarter were up about 0.5% organically as the impact of our price increases was partially offset by lower volume. Volume for the company was down approximately 1.5% and in line with our most recent expectations. Volume was flat in PSM and declined in RBIS and in our Other Specialty Converting businesses. The negative volume trend that we began to experience in Q2 lessened again, but we continue to experience soft end-market demand and uncertainty, particularly in Europe. Fourth quarter operating margin was down 80 basis points compared to last year due to the impact of restructuring costs and other items. The biggest increase in restructuring costs was in RBIS as we've accelerated our productivity measures in that business. I'll comment more on that in a moment. Adjusted operating margin was roughly flat to last year as pricing and productivity initiatives offset increased raw material costs. While we are seeing inflation in some of the commodities we use, raw material costs in the aggregate have stabilized. But they still remain high. As we discussed last quarter, we've successfully offset the raw material inflation that we began to experience in mid-2010 by implementing price increases and productivity initiatives. Our fourth quarter effective tax rate on continuing operations was 22%, and our full year tax rate on continuing operations increased from negative 1% last year to 34%. You may recall that in the fourth quarter of 2010 we had a significant tax benefit due to a discrete funding event. The difference in discrete events was a gain last year and charges this year is the primary reason for the major swing in the full year and fourth quarter tax rates. The…

[Operator Instructions] Our first question from the line of George Staphos from Bank of America Merrill Lynch.

I guess the first question I had is on Pressure-sensitive Materials. The margins that you posted in the quarter, obviously, as you reported were impacted by input cost, raw materials that you've not offset yet. If you had 100% caught up to those raw materials in the quarter -- at the beginning of the quarter, I should say, what do you think your percentage margin would have looked like as opposed to what you posted?

Actually, we caught up on the price inflation GAAP in the quarter.

Okay. So you were totally caught up. So is that margin then a normal margin going forward?

No. Overall, I think, George, there's a couple of things changing with several -- because of several factors that are putting pressure on the actual margin. One is, because we've broken out and discontinued ops, the sales from Pressure-sensitive to Office and Consumer Products are now reported as sales for Pressure-sensitive, but that doesn't change the earnings because that was already in the baseline. But that does have a permanent adjustment overall to the margins within the business. We also, since the beginning of the whole inflation cycle about 6 quarters ago, raised prices about 5%. That puts about a 50 basis point headwind on the margin itself. So protecting margin dollars, but the margin percent goes down somewhat because of the higher sales prices. So those 2 effects, overall, have an impact on your normal base on how you'll be thinking about it. If you look within the quarter, just on the restated basis, you can see that the operating income in Pressure-sensitive was lowest in Q4. That's just because of the timing of certain costs, as well as the volume was a little bit lower on a sequential basis in Q4 than, say, it was in Q3. The average for the full year came out to 8.3%. And so mid-8% is what it was for 2011.

Okay. One last question, I'll turn it over. I realize that the free cash flow, if you will, will be somewhat interrelated with ultimately what you receive net for OCP. But could you tell us, as of December 31, what the basis is for OCP. And even if you can't tell us that, what tax rate will be applied to that net difference between proceeds and basis when you finally do close on the transaction?

George, it's a complicated question because there's a number of moving factors. Let me comment on a couple of the key moving parts. Our basis in this business can move quite a bit throughout the year. Because it's a seasonal business, as you know, we build inventories and then it's transferred to receivables in the second and early parts of the third quarter, raising our basis which would reduce our tax charge, if you will, when we sell this thing. But at the same time, that consumes free cash flow to be able to build those -- that working capital down. So the reason that we're looking at it and just talking about one number because it really depends on if this were to not go to second review and close sometime in March or close in June or July or close in September, October. It has a significant impact on the individual components while not having a significant impact on the overall net proceeds. To your question about the tax rate, a big part of the proceeds, the value will be signed to the U.S. We have a normal tax rate you'd expect within the U.S., 35%, actually 37.5% when you consider the state taxes and so forth. And the element signed outside the U.S., there's quite a few different jurisdictions with different tax rates.

Our following question will be from the line of Ghansham Panjabi from Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Can you help us reconcile the difference on the earnings guidance and also free cash flow guidance? At the midpoint, you're roughly $2 per share on EPS and $2.90 for free cash flow. I understand the CapEx to D&A is spread. But how should we think about working capital also in there?

Working capital, you should assume we're going to keep the productivity at the level that we had in 2011. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay. And what is the D&A estimate for 2012 post the sale of OCP?

Well, there is about $50 million of D&A in OCP. So it's about $230 million is what it was in 2011. They'll trend down modestly -- obviously because we're -- our reinvestment ratio is below 100%. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay, because I'm still having trouble with the price between earnings and free cash flow.

Yes, there's a number of moving parts between free cash flow from continuing ops versus disc ops. And are you talking about from 2011 to '12? Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: No, just looking at the earnings guidance for '12 which excludes...

I think -- Ghansham, this is Dean. I think probably the reason is that we're not paying out very much management bonuses here, if any. So that's why the number would look as large as it would for 2012. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay, all right, all right, okay. So maybe $250 million is a more sustainable number for free cash flow, is that fair?

No. I mean, I -- we would certainly say that we expect our earnings to increase, especially as our business -- hopefully, the economy and our businesses continue to improve. So our goal is to continue to drive free cash flow at a level close to $300 million. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay. But wouldn't that also imply, Dean, based on what you just said that CapEx would go up in that scenario also?

Right now, we don't see a need to increase CapEx. Certainly, if business improves dramatically, yes, we would have to make some more investments. But we're really getting more and more productivity out of our existing assets. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay, all right. And just finally, just sort of a bigger picture question. The vision for the company post the Office Products business, do you see yourselves purely focused on the 2 existing businesses and returning more cash flow to shareholders over time? Or should we expect some sort of a growth focus by M&A on the existing businesses, both RBIS and PSM?

Certainly, for the short term, our focus is returning more cash to shareholders. We think we've got 2 strong businesses, both which throw off good free cash flow. We are making investments on organic growth, so beefing up a little bit of marketing spend and some of the R&D and innovation spend, which I think will certainly help us for the long term. We don't have any plans for, certainly, any large acquisitions on a go-forward basis.

The next question from the line of John McNulty with Credit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: Just a few quick questions. In RBIS, with the restructuring and the kind of focus on deeper cost cuts and also it seems like maybe a little bit lower CapEx spend, should we be thinking about this business more as a cash cow type business going forward? I don't think when you bought Paxar that was what you were thinking. But I guess I'm wondering how you're thinking about that business going forward.

Well, it throws off great free cash flow. And what we've been able -- we've always said there have been 2 paths to getting to the margin. One is through growth, which is, frankly, an easier path because we've got high variable net margin from the business. And -- but given the volatility that we've seen in the marketplace in terms of unit volumes, the other path, frankly, is to drive accelerated productivity. And I think the other thing we've learned over the last -- especially over the last 18 months or so, and this is very similar to the -- to what we've learned in the Pressure-sensitive Materials business, we have released a lot of capacity through our work in Lean Six Sigma. And that will allow us to shrink the amount of manufacturing footprint in terms of square footage. So we can get a lot more out of our existing asset base on a go-forward basis. We've made investments in digital printing and workflow, that will pay off. And we've also figured out to invest in information technology instead of investing in a big ERP system, which would take years and years to get a payback. We're really focused on more of the high-value and quick turnaround payback. So we've got both growth and productivity baked into the business. I don't expect apparel unit volumes to decline forever. I mean, I just don't think that's going to happen. Well, we just got a different path forward so we're going to execute against that. In any case, we will have positive free cash flow out of this business. John P. McNulty - Crédit Suisse AG, Research Division: Okay, fair enough. On the -- and then with regard to the Pressure-sensitive business, I guess I'm wondering if you're comfortable right now with how the pricing environment is. Like, are we starting to see kind of the pricing discipline? That -- I know a few weeks ago we've been -- we'd really been kind of focusing on and hoping for -- when I look at the margins, it doesn't seem like it's really coming through. So is the industry acting discipline? And how should we think about that going forward?

It's hard for me to speak for our competition. But my sense is that the players in the market are focused on making money. And so the other thing that we're doing, frankly, is we've got a lot better information about how pricing works in the market. So our own strategy, kind of regardless the way competitors behave, seems to be working out pretty well. So I think, especially given this last round of inflation, we are seeing a good market here. And there hasn't been a lot of additional capacity added to the business in a number of years, so that's helpful as well. John P. McNulty - Crédit Suisse AG, Research Division: Okay, great. And just one quick housekeeping. Your tax rate guidance, I'm a little bit surprised that we're not seeing it down a little bit given the sale of Office Products. So what's driving that? Or what's kind of holding the tax rate up where it is?

What's holding the tax rate up is the sale of Office Products given that it's more weighted to the U.S. I think intuitively, I would say selling that business would reduce the tax rate otherwise. But it also requires further additional repatriation of cash and so forth into the U.S. And while we don't -- we've got a number of things in place to keep the cash tax rate into the 20s consistent where it's been for the last 5 years, the GAAP tax rate will actually go up. So a nuance of the -- just the geographic mix of income on a pretax basis with the sale of Office and Consumer Products but it's actually not having the effect that you probably think it would.

Our following question will be from the line of Jeffrey Zekauskas from JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Will you begin your share repurchase program in 2012 when you receive the proceeds from the sale of the Office Products business? Or would you begin it before then?

Jeff, we don't comment on the timing or amounts of share repurchase. I'll remind you though that we have about 6 million shares, I think, currently authorized for repurchase and that we are well below our target debt rating right now. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. The second thing is the -- I mean it looks like your Pressure-sensitive adhesives business has about $70 million in revenues, which I assume are sales of adhesives to office products. Is there a long-term agreement or some kind of agreement in place with 3M so that we might view those as ongoing sales? Or once the business goes, then those incremental revenues also go?

So we have, as part of the deal, a 3-year supply agreement in which they will buy roughly those amounts over the next 3 years. And in return, we give them exclusivity and that agreement could be extended for another couple of years. And our goal in Pressure-sensitive will be to make ourselves just like we are with any other customer, viable and attractive, and 3M will make a decision whether or not they want to make it or buy it. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: In the quarter, how much overhead was reallocated to the ongoing businesses?

There was about 20 -- for the full year, there's about $20 million of overhead once we sell Office and Consumer Products for now that's being reallocated. You'll recall though, Jeff, at the middle of 2011, we announced an acceleration of restructuring to reduce some overhead costs, a portion of that was at the corporate office, if you will, in anticipation of the sale of OCP. So $20 million is the allocation impact, but our goal was actually to reduce the total amount of overhead allocated to reduce the actual margin head, if you will, to the remaining businesses. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. How much are the cash restructuring charges next year, Dean, for 2012?

It's about $25 million. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Those are cash, okay. And then I guess lastly, did your raw materials in Pressure-sensitive come down sequentially in the fourth quarter as propylene came down? And do you have additional price increases in Pressure-sensitive planned for next year, for 2012?

What we saw was a flattening out of the inflation. We obviously were still in somewhat of our catch-up mode in the back half of the year. There are price increases that are currently being implemented in Pressure-sensitive Materials today in some segments and in some geographies. And yes, so that's where we stand. I expect -- our expectation next year is there won't be a big impact in our earnings from either pricing or raw material inflation. In other words, they'll net out.

The following question will be from the line of John Roberts from Buckingham Research Group.

The high tax rate, back to the question earlier, implied flat low or flattish global volumes in 2012, up in some areas but down maybe in Europe and offsetting so that we're flat?

The tax rate assumes a range of the growth of 1% to 4% total. So it's different by geography, obviously, growing faster in both ends of the range in emerging markets and slower than that in the material markets. The assumption is Europe will be a little bit slower than North America.

The share -- average shares outstanding guidance of $103 million, that's actually down, I think, 3.5% from the average that you had in 2011, is that correct?

Yes.

All right. So you are going to buy back stock in the second half of the year, I would guess, that went to proceeds. You got the question earlier on it.

Yes, that's the expectation. We built that. While we don't comment on the timing or amount, we wanted to give some clarity as to what we estimate the full year average will be.

And if the full year was down, say, 3.5%, you'd have to buy back double that, really, in the back half of the year to move the full year average down, right?

Yes. That will be the math.

And how does the forward orders look in RBIS? I mean, are we going to see any restocking effect? Your volume numbers would imply, although I didn't ask your RBIS separate from PSM, but the volume numbers would imply, I think, that you're not going to expect any restocking activity in 2012 by customers.

We expect -- if you look at last year, you'll notice that our -- we had volume declines of about 7 -- 6% to 7% in the second and third quarter. In the fourth quarter, it was down about 3.5%. What we saw was actually improvements in the U.S. trajectory, and some deprovement in the European trajectory. Right now, it's Chinese New Year so we have 0 visibility on those forward orders for the fall season. And we'll start to see those in March, April, May. So we'll have some visibility. We're not expecting, certainly at the low end of our guidance range, a massive restocking. And we expect some moderate improvement at the high end of our guidance range. This is the one element I think that is probably the most difficult for us to predict, especially in Europe where we just don't know how retailers are going to respond.

[Operator Instructions] We do have a follow-up question from the line of George Staphos.

I guess first question I had, back to Pressure-sensitive materials. If I look at the incremental margin for the year which would include the effect of your pricing action and the reduction in percentage margins that you'd get from raising prices, I think the incremental I got was something around 6% or so, a little bit above that. Obviously, lower than the 8%, 8.5% range you showed for many of the quarters in your restated financials. How much of that do you think is lost operating leverage? How much of that is perhaps pricing that you didn't recapture? And I ask that because I think in answering John's question, you said you don't expect much net pricing in 2012. So help me understand that 6%?

Sorry, George, I just wanted to understand. Are you trying to understand what the movers are on the Pressure-sensitive operating margin from '10 to '11?

I guess maybe more just very basically your incremental margin Pressure-sensitive was like 6% in 2011, if I did it correctly. Yet you said you already caught up to raw material pricing. That seems low to me. Is there any impact from pricing competition despite the market being somewhat balanced and rational? Is there anything that would lead to a higher margin in 2012 since you said that net pricing versus inflation will have limited effect in '12?

Right. So the overall impact -- if you look first of all from '10 and '11, volume was actually down for Pressure-sensitive, so that actually -- we had less fixed cost leverage, if you will. So that put some pressure on the margins overall. And then that was also largely offset by productivity and other lower costs. As you go forward to 2012, the biggest single factor in 2012 versus '11 is going to be volume, given the variable margins of this business. So if we're at low end of our range, Pressure-sensitive is the largest business, then that 1% volume growth is really, all other things being equal, just enough to offset inflation, if you will. I'm talking about nonmaterial towards the higher end of that range, then it starts dropping through to the bottom line much faster.

The 1% to 4% organic sales growth that you're guiding to, I realize it's your best estimate, its bottoms up driven by your teams. How comfortable are you about the low end of that range being achieved given what's obviously a very difficult environment to call relative to Europe in particular?

Well, here's the way, it's a really good question. At the bottom end of the range, George, let me step back for a second. So we tend to be an early cycle business. So when we saw conservatism in our end-use market supply chains where we saw price increases driving lower unit volume, we really got hit in the second quarter. I mean, we were driving 7% or 8% volume growth in the first quarter. Everything looked great. And then Q2 happened and we slowed down dramatically. We have seen some stabilization in that trend throughout the year. The U.S. has gotten sequentially better. Europe has gotten sequentially worse. And for me, if we see just a relatively stable economy, that should be a benefit to us because we won't see the inventory destocking that obviously happened to us in the second quarter. That should help certainly on a comp basis. If Europe gets hit hard because of financial crisis or the economy there just doesn't respond very well, that's going to hurt us because now we have even higher percentage of our sales and volumes driven by Europe than we did without Office Products. I hope that helps.

Okay. It does. And look, I realize it's a difficult situation trying to call the rest of the year being that we're end of January here. Next question I have, when I look at the severance in RBIS, for example, $6 million in fourth quarter and at least actually more than that in the third quarter. Can you comment how many -- what's the impact of headcount reduction behind that amount of severance? It's a fairly large number.

The impact to headcount reductions, it's...

How many people are no longer at Avery considering that severance impact?

So the biggest single impact from the most recent round of restructuring was around reducing the overhead or operating expenses across the business. And so those tend to be, on average, higher cost employees. When you look at this business, it's dangerous to talk about the averages of headcount because you have some really low-cost employees in emerging markets. Then you also have some employees with higher costs in the SG&A. So overall, if you look at the percent of headcount, it's lower than you would expect relative to the amount of savings on average, because most of it was SG&A reductions. We talked about reducing the SG&A within this business by a few percent.

Okay, that answered my question. A couple of others and I'll turn it over. Again on RBIS, Dean, we've talked about before, either at one point in time, you'd look at a 12% operating margin as being realistic. In other times, when we've added all the profitability of the business acquired, what you started with the restructuring, EBIT would be something like $200 million. How much do you think you've lost to the market from competition? Or do you think all of the margin degradation has been purely decremental margin because of volume?

I think it's volume because, I mean, if you look at U.S. import data for the fourth quarter, unit volumes were down 12% and our sales which -- and that would've really been a second, third quarter sales trajectory for us, we were down 6% to 7%. So I don't think we're losing share. I would certainly didn't expect unit volumes in apparel to drop like they have in 2011. Okay. So on the margin comment, remember that there are almost 2 full points of margin on RBIS that come from amortization of intangibles. That goes away in 2015. So from my perspective, certainly from a cash perspective, we've got 2 full margin points there. And if this kind of more volatile environment continues, we'll get our cost and our footprint in shape to achieve the margin objectives. That's the goal. We'll get there using a different formula.

George, I think in RBIS, the sales in 2011 were roughly flat with where they were in '08 because of the volatility there. As you know, a good portion of the cost base of this business as an emerging market which was wage inflation and so forth, that's the comp and headwind. If you have flat sales, it makes it more challenging to expand margins which is why we talked about continuing to focus on growth but redoubling our efforts around productivity both to reduce costs, as well as reduce the capital base of the business.

We're not getting up on growth, George, so that shouldn't be the headline.

Okay. I'll turn it over. I have a last question after everybody else goes.

Mr. Staphos, you may continue, sir.

Okay. When I look at the fourth quarter tax rate and I add back the $0.03 for the discrete item that was attributable to the continuing ops, I get a rough operating, if you will, tax rate of around 22%, which matches what you said the effective rate is. Maybe I missed it before, how do you reconcile that with what you think your ongoing tax rate of low to mid-30s is going to be?

Well, in the fourth quarter, overall you should be focusing on the full year because the fourth quarter is a squeeze, if you will. When we were giving our full year guidance for 2011, we're considering Office Products not being a discontinued operation. If you want to bridge the -- our 2011 tax rate, if you will, to what we're guiding in 2012 from continuing ops, overall just the impact of a couple events that we had, discrete items which were some modest benefits in 2011 that we don't expect to be there in 2012.

What's the effect of the divestiture in Other Specialty Converting? And what's your normalized CapEx cash?

Was that 2 -- I think that was -- there were 2 questions there. I think one was around CapEx, which was about $150 million, is what we're planning for the year. And we sold the product line in Other Specialty Converting back in the early part of the fourth quarter so that definitely had an impact on the sales and earnings.

Sales were only about $20 million in that business and proceeds were about $20 million as well. And the EBIT, George, in that business was just a few million.

Mr. Scarborough, there are no further questions at this time. I will now turn the call back to you, sir.

Thanks. And I just like to make 2 final points about the company. First is that we have strong businesses with many competitive advantages. Our emerging market footprint, now approximately 40% of sales without Office and Consumer Products, positions us for higher revenue growth. We're making modest investments in organic innovation in our core businesses to strengthen competitive advantage and modestly improve our growth trajectory. Second, we have a strong culture of productivity embedded in the company, which has enabled us to become more efficient and allows us to invest at less than the rate of depreciation. Working capital productivity is another focus. And together, that enables us to generate strong free cash flow. We intend to significantly improve the amount of cash returned to shareholders now that we've met our debt reduction and leverage targets. Thanks, everyone, for joining, and we look forward to speaking with you again.

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