Ladies and gentlemen, thank you for standing by, and welcome to Avery Dennison's Earnings Conference Call for the second quarter ended June 29, 2013. This call is being recorded and will be available for replay from 1:00 P.M. Pacific Time today through midnight Pacific Time, July 26. To access the replay, please dial 1 (800) 633-8284 or 1 (402) 977-9140 for international callers. The conference ID number is 21610813. [Operator Instructions] I would now like to turn the conference over to Eric Leeds, Avery Dennison's Head of Investor Relations. You may go ahead, sir.

Thank you. Welcome, everyone. Today, we'll discuss our preliminary unaudited second quarter 2013 results. Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The company's Office and Consumer Products and Designed and Engineered Solutions businesses are classified on our income statement as discontinued operations. 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, and good day, everyone. I'm happy to report our fourth consecutive quarter of better than 30% growth in earnings per share, reflecting the successful execution of our productivity initiatives. We delivered sales growth ahead of our expectations, with solid volume increases in both core businesses. We're on track to deliver our free cash flow target for the year, distributing most of that cash to shareholders. In the first half, we returned over $200 million to shareholders including the repurchase of approximately 3.5 million shares. We also raised the dividend by 7%, which we announced shortly after our last earnings conference call. Both of our core business segments delivered strong results for the quarter. Pressure-sensitive Materials generated solid top line growth, driven by high single-digit organic growth in emerging markets and the successful execution of our innovation strategies. We anticipate beating our target for sales from new products this year, and this is one of the factors driving the strong top line growth in PSM. As you know, the industry's annual trade event, Labelexpo, takes place in September. I'm looking forward to another standout performance. Part of our innovation strategy is to continually identify new ways to drive cost up. This type of innovation has 2 key benefits. The first is evident in our bottom line performance. These initiatives, combined with last year's restructuring actions, drove operating margin for the quarter above the high end of our long-term target range. This capability also enhances our competitiveness in lower margin product categories, enabling us to take share and maintain our high return on capital. Retail Branding and Information Solutions also delivered outstanding results, with its fourth consecutive quarter of strong sales growth and continued margin expansion. We are gaining share in this market through growth in most key segments, driven…

Thanks, Dean. We delivered another solid quarter with 5% organic sales growth and adjusted earnings per share in line with our expectations of $0.71. This 34% increase in earnings was driven by productivity, as well as continued solid top line growth, particularly in RBIS and emerging markets for Pressure-sensitive Materials. Adjusted operating margin in the quarter grew 110 basis points to 8% as the benefit of our productivity initiatives and higher volume more than offset higher employee-related expenses and the impact of product mix in Pressure-sensitive Materials. The productivity improvements were primarily the result of the success of the restructuring program we initiated last year. As Dean mentioned, we've achieved our target, realizing $105 million of annualized savings through the end of the second quarter. The net impact of raw material input cost and pricing was again negligible in the quarter. Free cash flow from continuing operations was roughly $100 million in the quarter, bringing our year-to-date free cash flow to just over $40 million. This was $20 million more than last year due to the improved operating results and the sale of assets, including our corporate headquarters building in Pasadena. With our strong balance sheet and consistent solid free cash flow, we repurchased an additional 2 million shares for $87 million in the second quarter. In the first half, we returned a total of $205 million of cash to shareholders through a combination of dividend and the repurchase of 3.5 million shares. With the completion of the sale of OCP and DES, we expect net proceeds of approximately $400 million, which includes the negative $40 million of free cash flow in discontinued operations in the first half. We intend to use these proceeds to repurchase shares and reduce indebtedness, including an additional pension contribution. In the meantime, we've reused…

[Operator Instructions] Our first question, from the line of Scott Gaffner from Barclays Capital.

Good quarter, a little surprised by the growth in PSM, and you made some initial comments on that. Just wanted to follow up a little bit. You mentioned the growth in the emerging product -- emerging markets. Can you talk a little bit about where, which product offerings you're seeing the most growth in emerging markets? Is it around variable information? Is it around the personal care products? Where are you seeing the growth in emerging markets?

Pretty much across the board, Scott. We saw excellent growth in South America, as well as the emerging markets of Asia. We -- again, it's really in every product category. So we feel really good about our position in emerging markets, and the team delivered an excellent quarter.

And the margin on the emerging markets, how do those compare to the overall segment average?

So it's accretive. They're above the average for the sector.

Okay. And you mentioned the -- you had a target for new product introductions this year for PSM. Could you go back and remind us of what the target was and sort of how far above that you actually are this year?

Yes, I don't think we gave a specific number. I think in the past, we talked about the vitality index, which is our metric of products that -- our percent of sales that have been introduced -- percent of new products introduced within the last 3 years, and that number has been pretty consistently in the 20% to 25% range. So we're feeling really good about the innovation. We really started down this path in Pressure-sensitive Materials about 3 or 4 years ago, and it's really a cumulative effect. A lot of the products that we launch take time for customers and end-users to adapt to, and so we're really starting to see some acceleration. And it's a good trend.

Our next question, from the line of Ghansham Panjabi from Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Kind of sticking with PSM. Looks like a record quarter for that business from a margin perspective. Dean, I think last quarter, you called out some unfavorable mix weighing on the margins on a year-over-year basis for PSM. Did that reverse during the second quarter? And is it time to start thinking about revisiting those targets that you outlined for PSM? At your analyst meeting last year, I think it was 8.5% to 9.5% for 2015.

We -- it's actually 9% to 10%. We restated the targets once we changed the way we reported the operating segments. And also, we had the impact there of disc ops. The mix sequentially was pretty much the same as it was in the previous quarters, so we didn't really see a reversal of the mix. I think the team has done a great job of helping us be more competitive, especially in emerging markets. We've done a great job of being more competitive in lower margin product categories, so we're taking some market share there, and the productivity's enabled us to do so. So it's a combination of volume, of the productivity that we deliver in the business, and certainly, the sales growth at 4% really made a big difference. As far as changing the targets, I think we're going to stick with these for a while. We -- those are 2015 targets. It's one quarter where we broke through the average so we'd like to really understand that on a go-forward basis. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay, makes sense. And then on RBIS, was there a big difference in terms of sales distribution between the U.S. and Europe? And if you could just touch on whether European retailers are getting maybe a little bit more confident on the outlook?

Yes, we had -- actually, the growth in Europe on European-based retailers and brand owners was higher than the U.S. retailers as a percentage. Much of that was due to RFID growth. If you strip out the impact of RFID growth, it was roughly the same. As you know, we have lower relative market share in Europe, and -- so we have been successful in taking market share there, and the RFID programs, again, have really helped us.

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

I wanted to come back to the question of margins for both segments. Now if I look at PSM, if I did my math correctly, you had incremental margins of roughly 50%, which is -- I mean, it's not the only time you've ever done something that large, but generally speaking, it's a relatively rare level of incremental profit performance for this segment. Clearly, you had volume growth and you called out, a number of times, productivity. Is there a way to parse that out between the 2 sources? And as Ghansham was mentioning earlier, your mix is lower so it even further sort of supports what a great quarter it was from an incremental margin standpoint. And how sustainable is that incremental margin on a going forward basis?

Sure. George, as far as the increase, a significant contributor, the biggest contributor was the productivity in the restructuring year-over-year. And so the incremental margin that you're seeing, you got to layer in the restructuring savings that we have within this business, and we haven't parsed it out business-by-business, but total company saw $20 million year-over-year in the quarter of restructuring savings. And PSM, if you recall, a number of the restructuring actions we took were accretive to both businesses, but particularly to PSM if you think about the integration of Graphics with LPM, the reduction of the research center and so forth. So the reason we're talking about if you combine all the restructuring savings, we're talking about the lower variable margin from product mix. It's basically just to lay out that it's a little bit lower than we've traditionally seen, still profitable. And we say going forward, what kind of variable margins would you expect. They've been a little bit less than we have traditionally talked about within this business, but as Dean said, sequentially from Q1 to Q2, the pressure from product mix has definitely eased a bit. And so a lot of what we're seeing from a negative product mix, if you will, is year-over-year comps, and it is starting to ease a bit.

Okay. Mitch, if I'm reading you right though, obviously, you're starting to then lapse some of the restructuring benefits. So whatever your revenue or volume growth might be on a going forward basis, if I'm hearing you correctly, I don't want to put words into your mouth, it would suggest that maybe the incremental margin will probably be at a more normal rate on a going forward basis in these next couple of quarters?

Exactly. We pretty much lapped all of the productivity restructuring savings year-over-year as of now. A little bit more in Q3, but then we fully lap it.

Okay. Two related questions and I'll turn it over. RBIS, again, you're pleased with progress, and certainly, it's nice to see the revenue growth and the margin expansion. Having said that, I kind of remember that the incremental margin that you've targeted for this segment is roughly around 40% after the first 2% or so of revenue growth that you have at any quarter. And so if I go through that math, I would have wound up with earnings performance a little bit ahead of what you ultimately reported. So were you pleased with the incremental margin RBIS? Have we correctly remembered what the relationships are generally? And what might have caused some of that decremental margin if we correctly analyze what the traditional relationship is?

George, this is Dean. We're very pleased with the progress in RBIS. Contribution margins are actually up a bit year-over-year, so very pleased with that. The biggest single impact was last year, in the second quarter, you recall, we had a tough first half in RBIS, so we eliminated almost all the bonus accruals for the first half of the year in the second quarter. This year, the team's on track, so we had a pretty big headwind. So for the team to deliver 100 basis point improvement in margins was, I think, actually pretty impressive. So I think this baseline is actually a better baseline, and the incremental margins that you're talking about are definitely doable on a go-forward basis.

The math doesn't change at all. In the second half, we still have a headwind year-over-year for the same reason Dean just laid out, a little bit less than Q2.

Okay. And that makes sense. My last question, I'll turn it over, and I appreciate your patience. If I look at the uptick in your organic revenue growth rate very mechanically, it's 50 basis points versus your prior guidance. Yet the EPS guidance, and certainly, again, it's great that it's moving up, not lower, going -- only goes up about $0.02. So when you do some rough math around that, the incremental margin off of that increase in revenue is only about 10%, even though both your segments seem to be doing better than that. So help us understand if there's any elements of -- caution is not the right term, but anything that you want to keep as -- remind us about in terms of gauging how EPS can move relative to your revenue growth, that would be appreciated.

Sure, George. So the -- you're absolutely right, sales moved up more than what you'd expect. It was a pure variable falling flow through to the bottom line, and that's essentially due to the lower variable margin, lower mix within Pressure-sensitive Materials is the overall reason for that.

Our next question, from the line of Rosemarie Morbelli with Gabelli & Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Actually, George just asked my question, but if I can ask it in another way. You increased your top line growth by 1% and yet, you lowered the high end of the range. So I was wondering, in addition to your answer to George, if there was any other reason why the impact is kind of downward on the EPS while it was upward on the top line growth.

Yes, Rosemarie, we raised the midpoint of our guidance. I think we feel good about our progress, and we do think -- growth, certainly in the first half, was better than we expected in the beginning of the year when we first gave our annual guidance. I think we're just being prudent. There's still quite a bit of, I think, of uncertainty out there especially some markets like Western Europe. So we're being -- we're focused on executing against our plan and hitting our numbers like we did in the second quarter. And so we just don't -- we don't want to get out ahead of ourselves.

And we're basically translating what we saw in the second quarter, whereas, as Dean mentioned, we hit our expectations for earnings, but we were slightly ahead of our expectations on sales. So it's basically just a continuation of the current mix that we're seeing. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. And then you talked about the retailers doing quite well. Do you have a feel or is it too early to see what is happening with the back-to-school activity so to speak? I just got a call saying that everything is in the store. Is it too early to see what is happening in terms of the sale of those particular items?

I think it is too early. Seems in the U.S., the apparel market's actually doing okay. You can see it in both the import trends and some of the same-store sales figures. I think Europe is less robust. I think the point that we're making is that we're doing very well in this environment. And we believe that we are taking market share, we're capturing a good number of the new RFID programs. Our external embellishment products are also growing, I think, in excess of 30%, so we have some new innovations out there that we're offering to the apparel market. So I think we're definitely growing faster than the market. Rosemarie J. Morbelli - Gabelli & Company, Inc.: And if I may ask one last quick question, what did you see in terms of your medical, whatever you call it, medical films outlook? Is that something that will remain? Do you have high growth expectations? Could you give us a feel for what license is still on the books?

So we have a number of -- well, first of all, we believe this is our -- this is our carve [ph] out from our Tapes business. We did in the medical tapes and wound care business for a number of years. We've invested some money in it. We have quite a few new products that are launching mainly in the second half of the year. So we do expect higher growth rates. In fact, we did achieve our first shipment of our medical sensor, our brand-new medical sensor product in June. It was pretty small, but we do expect revenues to accelerate and the EBIT loss to decline over the next couple of quarters.

Our next question, from the line of Anthony Pettinari from Citigroup.

In PSM, you have a major competitor that's recently discussed plans to reduce label stock capacity in Europe and a few other lower growth markets. And I'm just wondering, when you look at your footprint, following your restructuring efforts, are you comfortable with it? Are there regions where you might have further opportunities to rationalize capacity? Or generally, how do you think about the right footprint to get you to your long-term growth and margin targets in the segment?

We have a very consistent philosophy about driving productivity in all of our businesses using Lean Six Sigma principles. So it's something that we look at on a continuous basis. And what we find is the best way to crystallize a lot of the productivity we get at individual plants is actually consolidating operations, closing down facilities, et cetera, et cetera. So we've just been through a major set of restructuring actions that -- we've completed most of those. So far, at least in Pressure-sensitive Materials, RBIS is going to be a continuing story. But we're -- as we start to build our plans for 2014, it's always a subject that we're reviewing in terms of our planning process. So I never ever say that we're done because our teams are incredibly creative in finding new ways to drive productivity in the business.

Okay, that's helpful. And then maybe just a follow-up on the specialty converting business. Would you expect -- as a follow-up to Rosemarie's question, would you expect that business to basically be breakeven in 2014 or breakeven as we exit the year? Or how should we think about getting to 5% margins in 2015, which I think was the guidance?

Our target is to get to 5% by 2015, and we don't provide segment guidance especially on a kind of quarterly basis.

Our next question, from the line of John McNulty with Crédit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: Just a quick question. Mitch, with regard to your pension, I know your plans, right now, are to make a pretty significant contribution to pension given some of the proceeds from the office sale. With rates having moved where they are, it's looking like your fund status is probably somewhere in the mid to upper 80% range. So any thoughts in terms of maybe dialing back how much gets contributed and maybe increasing the share repurchases or the dividends maybe sooner than you expected?

Sure. So we've -- part of our deleveraging is going to be the pension. And when we've evaluated the whole time what the size of that pension contribution ought to be, the excess comp pension contribution, and we've never commented specifically on the amount, it's been around, thinking over the long horizon, when discount rates and so forth moves back more to what I will call a normal -- what would be the excess contribution that would still be worthwhile in that environment. So we are not, we've always said, planning to fully fund or even come close to fully fund with this pension contribution. But it is a pretty, relatively high level cost of debt that we have that we can top up. So not commenting right now. Once we make the extra pension contribution, we'll communicate that. But that is going to be one of the sources of deleveraging, the primary resource.

Mr. Scarborough, there are no further questions at this time. I will turn the call back to you. You may resume with your presentation or closing remarks.

Thanks, Brenda. I am pleased with the excellent progress we've made so far this year. Business conditions remain challenging, of course, but I'm confident in both our commercial and operational strategies, as well as the ability of our teams to execute those strategies. With our strong leadership positions and competitive advantages in large growing markets, I'm likewise confident in our ability to deliver on our long-term targets of solid top line growth, double-digit EPS growth and superior capital efficiency. Thanks for joining us today, and we'll speak with you all in October.

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.